雷蒙詹姆斯金融 (RJF) 2013 Q4 法說會逐字稿

Good morning my name is Brooke and I will be your conference operator today.

At this time I would like to welcome everyone to the Raymond James Financial quarterly analyst conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

To the extent that Raymond James makes forward-looking statements regarding Management expectation, strategic objective, 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 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 sec.gov.

In addition to those 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 that Raymond James discusses non-GAAP results the reconciliation to GAAP is available on raymondjames.com in the earnings release issued yesterday.

This call is being webcast and will be available on raymondjames.com for a period of time after the call.

Thank you I would now like to turn the call over to your speaker for this morning, Mr. Paul Reilly.

Chief Executive Officer of Raymond James.

Please go answer sir.

Thank you Brooke.

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 have a good group for your questions.

First, obviously it was a good quarter for us.

I caution you against multiplying it times four, as a run rate, as you know, we have a number of unusual items.

We recorded net revenue of $4.5 billion for the year, up 18% year-over-year, a 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 diluted non-GAAP of $295 up18% year-over-year.

I start with the year because we know this is been a good year for us with the Morgan Keegan combination.

I am really proud of our group having comes to the combination.

You can see the synergy results showing up in the numbers this quarter as we talked about a year ago.

All four of our operating segments really had record years, given the market, the uncertainty and the combination, which the integration is essentially over.

It was quite a year for us.

On the quarter, revenues of $1.5 billion we were up 1% sequentially, net income was $117.5 million up 40% sequentially and there is a very good operating quarter but there is a number of unusual items in that.

If I roughly record on these are rough numbers, with a net income of $117.5 million, roughly $35 million to $40 million over estimates, GAAP or non-GAAP.

$15 million of that number was really tax driven, I will let Jeff get into that, I will go through the segments and I'll get into some of the [deal] details.

Almost up to $10 million was Bank driven, and then $10 million to $15 million were really operating results which from the back of record investing banking revenue driven by great M&A activity.

Trading profit, recovery in fixed income, not only a recovery, but a very solid quarter.

Operating cost in synergies you can see flowing through the P&L.

For the private client group year-over-year revenue was up 18% but the pre-tax only 7%, and that really has to do with the IT spend and integration costs that were flowing through.

You can see now that, that is reversing now that we are through the integration, the quarter revenue was flat but the pre-tax was up 7%.

As you can see the IT costs coming down and the integration costs really are getting through.

We are in solid shape, our private client group assets under administration under $402.6 billion or total for the firm of $425.4 billion, there's a record.

I will talk about that little more when we get into outlook.

Capital markets drove much of the beat this quarter under stronger equity underwritings and fixed income, investments banking revenues were both up.

The real driver was M&A up 65% sequentially.

In fact, if you take the December month, the December quarter as we report in September month, but September quarter, this quarter's report, much of that activity is very concentrated in those two periods.

Trading profits and fixed income went from a negative $1.5 million last quarter to $18 million-plus this.

That was a positive surprise given the environment and lower inventory levels that we have historically operated, so very good performance from both capital market divisions.

Capital markets revenue was up 15% year-over-year and 35% up on pre-tax, revenue up 7% for the quarter and 152% sequentially.

So a very strong capital market quarter, we know that business tends to be lumpy and I will talk about outlook a little later on.

Our asset management division as of 23% year-over-year and pre-tax up 43% year-over-year, driven by market appreciation inflows and MKS, that [switch] have migrated onto our platform.

Our revenue is up 5% sequentially and our pre-tax up 28%.

But that pre-tax number and margins were aided by a million-dollar comp adjustment as we look to outlook and some of the comp going forward.

So a little higher margin and profit than you would look at normalized rate.

We did have record assets under administration of $56 million.

RJ Bank revenue up 3% year-and-year, and pre-tax up 11%.

Revenues up 10%, sequentially, pre-tax up 15%.

Now the Bank was aided by a negative credit provision of $2 million, the good news is that criticize 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 run off your good loans.

That certainly had an impact on some other items that Jeff will get into.

Loans continue to grow, and have done a great job, spreads continue to stay under pressure, Jeff and or Steve will get into that as we go.

You can see the synergies as promised in this quarter are coming through the P&L.

In fact, one of the good things as CEO is I get to declare arbitrary things, and one of those is [to indicate] MK integration is really over.

And that we are now going to focus on just moving forward with our business, and you will see that line item, disappear as we move forward.

Even with the adjustments, a good quarter, some of that driven by -- a lot of that driven by capital markets and I will talk about the outlook for our business segment after Jeff goes into a little more detail.

Jeff?

Paul, to add some color to some to of the figures.

This quarter was record earnings for the firm, but it was interesting not our best ever net revenue quarter.

We trailed a quarter in March this year, which had the large private equity transaction that -- you remember a large part of, which the profits came through the non-controlling interest, but still a record on the earnings side.

Pre-tax margin, a number of you have already written reports and have noticed, on the base of it appears, we have reached our margin target already.

That we cited at Analyst Day, and I would say, it is somewhat driven by some of these factors that Paul is talking about and I will talk about in the future.

Again, I won't necessarily think we would conclude that we have reached our targets on a sustainable basis yet.

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 is still a little bit more to come between now and, say, the end of fiscal 2014.

Some of that is going to come through as we project is revenue growth with some scale built into it.

But this is largely reflective of most of the synergies that we expected to get out of the integration of Morgan Keegan, a large part of the headcount reduction happening in the June and September quarters.

The tax rate obviously bears a little explanation.

We have a -- had a very low rate for the quarter, 27.5% really driven by two major factors.

One is that we have been providing taxes for future dividends from our Canadian subsidiary, but we have now altered our strategy on that and no longer have to provide those taxes.

So even though that reversal which, in fairness, to quantify, was $10.7 million, occurred in this quarter, obviously it relates to a cumulative vision we have made over time for the earnings in Canada.

So really, you could say it is not really this period, but the current entry relay to the cumulative effect.

And the other piece in this quarter, about $4 million related to the gains in our corporate-owned life insurance.

I am not sure we will call that a nonrecurring or one-time event, obviously we have COLI fluctuations every quarter and generally they have been more positive than negative to our provision for the year -- for every year.

But they are about $4 million tax benefit for this quarter and about $8.7 million for the year.

Just because of the appreciation in the corporate life insurance investments.

GAAP ROE was 13%, non-GAAP ROE was 14.7%.

I think I agree with one of the comments, that we've got that we got that said, you know, arguably we could have put this nonrecurring tax benefit into the calculation of a non-GAAP earnings because we certainly view that as a nonrecurring type item, but at some point we don't know where you stop.

There is 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 the reports that I have seen so far.

Book value closed $26.40, tangible $23.86, and shareholders equity $3.663 billion (sic - see press release "$3.663 million"), of course all records.

Paul has talked about assets under administration's an asset under management both hitting records as well.

For the year, we obviously have record revenues and earnings for the year, again, 12 months of Morgan Keegan this year, 6 months last year, pre-tax margin for the year on a GAAP basis of about [12.6%] and non-GAAP [14.4%].

Just because we achieved at this quarter, Paul talked a little bit about the outlook and maybe why that is not the right thing to do, but I will 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, before I give it back to Paul for next year -- I need to talk about the Bank just for a second also.

A number of you commented that net interest was relatively flat, but they showed a pretty dramatic are improvement in results sequentially in the other revenue line at the Bank.

Our number of items which, were negative last quarter and flipped to positive this quarter, the two biggest ones, where we do have some 4X gain and loss at the Bank.

We have about $35 million or $40 million of loans at RJ Bank US that are not hedged, and the 4X was a negative $2 million in the June quarter, it was a positive $1 million 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 later package and sell.

We had a negative mark because state of fixed income market in the June quarter, so we had a negative $2.5 million mark on those loans at the end of June.

When those loans were subsequently sold in the current quarter, that mark substantially went away.

So we ended up with a $2 million riding it back up by over $2 million, a $4.5 million swing on that.

Sequentially it look 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, I have a little take, I call it adjustments to reality.

If you look at our year and try to forecast next year, in my opinion, the things I would certainly take into consideration are, the low tax rate for the year.

COLI's not necessarily, nonrecurring, but it depends on which your outlook for the market is.

If you have a flat market outlook it really won't have much impact, but we certainly won't have that credit against us.

Certainly, if you adjust the tax rate for the year to a more normalized rate, adjust the Bank loan loss provision, a $2.5 million loan loss provision for the year, given the loan growth and the amount of turnover we had in the portfolio is really abnormally low.

We are happy to have experienced it, but not sure we would forecast that to continue.

Then the third thing for the year, if you remember, two quarters ago, we had a very significant private equity transaction -- which again, a large part went out to non controlling interests, 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, pre-tax profits hitting our books.

There wasn't much activity in private equity in the fourth quarter, which now is consolidated into the other segment.

So I would say, if I would just try to normalize again, I would probably look at the June proprietary capital segments and discount that to some extent.

So when you do all of 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 a be reality.

But, Paul have some thoughts on that, that he would like to share as well.

Thank you Jeff.

Let me give you a little color by segment, and like Jeff, I would caution anyone using this quarter for a base, any quarter that is capital market-driven always has some risk.

In the private client group, we have had, the numbers in commissions with the MK integration and some of the changes and people leaving and you know, through all that have been a little less steady.

But I think if you look forward now, we are steady.

The billable assets are up 6%, going into the coming quarter, which should bode well for that part of the business, and of course the commission part is yet to come.

Recruiting has picked up substantially in both businesses over this last quarter.

I think we are going to start seeing better results, both by some market movement as the market gets choppy, we see more recruiting activity.

The up market we had in the beginning of the year, I think, put a downward impact on that, and secondly we are a lot more focused now.

We are focused outside versus inside.

We are recruiting is up substantially and retention is holding very, very well.

The capital markets at as you all know is volatile.

EC and ECM, the underwriting window is still open.

But that is always a hard one to tell and it does close.

M&A had a very big year and a very good record but that is lumpy business.

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.

Another sequential drop in institutional commissions in this interest rate environment.

As we said we didn't see that picking up until there is a change in the rate structure which has seemed to settled back down after the government reopened.

And the trading profits for the quarter were very good on half of the inventories we used to carry.

And we don't think that is where we really -- we size our inventory for our business and they have 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, our margin this year was inflated based on, if you look at, on a normal run rate because of the comp reversal.

We still expect good performance and the target of 30% margin we think is there, not the margin that appeared in the quarter, but 30% is a solid margin, I wish all of our business had that.

The Bank is going to stay under pressure.

Loan growth is very competitive, the Bank has done a good job of growing in a very competitive market, and the loans and credit range that we want to take, and we are sticking to our credit discipline.

But they're still spreads in interest compressions, I think until interest rates really move and loans stay competitive we will stay under that compression threat.

And the loan provision of $2 million negative is not 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 negative credit at all of your portfolios are more normalized.

Although the credit right now seems very, very good so the trends are good.

I think that is not a normalized environment.

We still expect -- we are still trying to get our 15% target, but 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.

We want our businesses to increase their margins to hit their target and if you take out the exceptional items we are not there yet.

We are still focused, like we told you, to meet that margin, that run rate by the fourth quarter 2014.

Our integration is complete only because I guess I declared it.

The cost synergies are showing up so that you can see them.

Now we're focused really on organic growth, niche acquisitions and running our business, and any cost adjustments we do going forward will be based on our business and a strategy.

So given the uncertain environment, I am with Jeff.

The consensus earning outlook is probably in a ballpark that is reasonable given where the markets are today.

We just can't predict the capital markets.

If I might 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 consolidations that we are either in the process of or plan to do in the near future and several of the big cities, mainly institutional offices.

Secondly, we had some lingering IT expenses that we had not recognized that hit this quarter.

So overall, from start to finish, where we have predicted from the beginning of this exercise, $110 million over the 2-year period -- or 18 month period of integration expenses, we actually ended up with a little over $130.

So we actually did miss estimate that particular figure, but on the other side, we probably underestimated the synergies as well.

Some of those are starting to come home to roost, and there will 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.

So, I think they're good operating results, got a lot of work ahead of us this quarter driven largely by capital markets, and that environment continues that would be nice, but it was an awfully good quarter.

So I would take a times 4 if someone would give it to me, instantly, but I don't think it is that easy.

It tends to be lumpy.

A very strong quarter, and great performance by our equity capital and fixed income colleagues within the market.

With that Brooke, let's open up for questions.

(Operator Instructions)

Your first question comes from Joe Jeffrey with KBW.

Good morning, guys.

Just a follow-up, Paul, on your comments about the integration.

In the comments there it is 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 integration costs?

Or are those still in place?

And if they are, how quickly do you think you can run those down?

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 going to take some time.

So we think we can give more synergy in the operating.

We did do a number -- in our two-risk-plus restructuring, we have a management risk and operations last quarter.

So we think, you have seen some of that in the quarter; we don't see a lot of changing there going forward.

We do think as we get into some of these technology enhancements that we're putting in that we can hold the operation costs steady as we grow.

But IT -- we have brought the cost down and it may come down a little bit more.

So you will see it a little bit in the IT line, but in our overall ops, I don't think the dollar amount is going to change much.

Part of that is the synergy in the operating part.

I will tell you, the biggest increase in our operations support is all been around regulation.

It has been around cost basis.

We went from 2 to 75 people in order to support it, so until we get all that automated, that is 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 are added to support levels, and as we automate that, we think we can get some synergy.

But I wouldn't look for them in this year.

I think we are pretty well, with the small decrease in IT coming, we are pretty well where we are going to be at an operating level for the near term.

Okay.

Great.

In terms of just the M&A markets of late -- if you look at the industry-wide data, it would tend to indicate that the markets have been pretty weak.

But if you're looking at some the results in some of your competitors, a lot have posted pretty strong quarters.

Are we at a point in time where it's really just that the market that is very driven by specific transactions that people are involved in?

It is not as important to take a look at the broader picture in terms of what is going on in the market?

That has been a weird segment, because backlog has stayed good, even through these cycles.

What we have had is a backlog and then a rush to close everything in December.

But then you had the first quarter, maybe into the second quarter that was down, and now we're seeing deals close again, and still a good backlog.

You know, the feeling is that M&A activity should be good.

They are driven by specific transactions.

I think the small to middle market business has probably been more active.

If you look at the indicators for the big deals, it looks weakening; yet I can see that the middle market has tended to follow the big deal trends.

We don't see that right now.

We had an exceptional quarter and they were deal-specific and good-sized deals for us.

I think we will continue to do okay on that.

I read the commentary like you, that it is going down; but it seems like the people in middle-market business had a pretty good quarter and they are experiencing what we are experiencing.

Which is good backlog and good activity for those companies.

It seems like the overall environment is still good.

People still have a lot of cash and they don't, financing is still available at a very reasonable cost.

The targets are still reasonably priced in the marketplace in several sectors.

Pieces are in place.

I think what is holding it down, if anything, are people's outlooks for the near term in terms of the economic environment, et cetera.

Some day, someone will write a Harvard Business School case on what happened in M&A in this environment with cash that costs -- and what drives it, because I think everyone expected more activity than we got this year.

And it seems to have been picking back up, at least in the area that we compete in.

Okay.

Great.

Then just lastly for me, I apologize if I missed this earlier.

In terms of the quarter-on-quarter decline in the comp ratio, is that primarily attributed to better revenues come out of the lower comp capital markets business?

Or is there something else all factoring into that?

You had revenue both in the bank and the adjustments, and capital markets.

And lot of that is M&A which is less costly than banking overall, usually.

And commissions are even cheaper, but they weren't (inaudible).

I think it is just volume over the fixed costs in that business, and in our equity capital markets business, we have -- research is a big fixed-cost number, researched-based firm.

Revenue certainly expands the margin, so you had a big improvement there.

Fixed income trading profits -- again, we make more money off of trading profits than commissions and we lose more money.

And we don't get the benefit (multiple speakers).

So I think it is the capital market's activity and volume that really drove the drop in comp ratio.

Great.

Thank you for taking questions.

Your next question comes from Hugh Miller with Sidoti.

Good morning.

Hey, Hugh.

Following on the capital markets theme, I was wondering -- obviously you guys have talked about doing some cost rationalizations 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?

There may be some.

We took a lot of those actions, certainly at the mid-Morgan Keegan integration, and we have been quarterly looking at the rationalization of bankers and we have also made some investments last year; our technology practices have done very well from a standing start.

So we got a lot of factors that I think will help the comp ratio.

So you may see some more, but a lot of that is through, unless revenues start trailing back down.

But right now, if we can keep this kind of market, our cost seems pretty good.

If it trends back down, then we will have to adjust it.

Sure, and looking at that, too, it seems like obviously you guys are cautious about the potential for these levels to continue for the ECM business.

But that I think you also mentioned that the backlog still seems like it's strong.

You are not really drawing down on it, is the way I took it.

Is that a good way of looking at it, though?

It's not as though you are seeing it pull forward and draw down on the backlog in this particular quarter?

I would say that, yes, that M&A, yes.

But it's lumpy.

If you looked at just, we publish by quarter, but if you looked at the actual monthly activity in September and December, it's an awful lot of the business.

I think that just falls when it gets closed.

It doesn't always make sense.

But, if you look at the underwriting business, it is harder; the window is open, but it seems like the month after every quarter business is slower.

So we just finished a very strong September; October traditionally would be slower.

Same in December, tends to be strong; January seems to be slower.

So it is harder to get insight.

But if look at the market, underwriting window's open, there's activity, but it is awfully hard to project that business because it is up and down.

For us, too, there is a good flow of deals, but whether we are the lead or are 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 has ever been, traditionally.

It is just very hard to predict.

I would say the markets, if you asked me for a snapshot right now, look good.

But they are certainly lumpy, and just any change in the market hits that business pretty hard.

Sure.

We look at it as a very strong quarter and probably look at it as a better than average quarter as a base.

Okay.

Looking at the fixed income commissions for the institutional segments, 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 the 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?

No, not really.

I think commissions have been challenged.

Where we really did well is because we're-- we weren't taking bets.

I think other people that were taking bets in the inventory, some dislocations happened.

We were in the market, and profited from that.

So really, the trading profits really drove the quarter; commissions still stay soft.

I think an awful lot of people -- we benefited in the quarter by repositioning the books.

If you look at overall market commissions, and what everyone else has reported, everyone is reporting a lot of softness, and we are still seeing that softness.

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 right-sizing the business.

Our comp and almost all of our fixed income business is very variable.

And the guys actually did a great job -- the salespeople on the desk -- of not really taking risks and in generating good trading profits.

But I can't tell you that we see any surge in commissions right now.

I wish we did, but I don't see it yet.

Okay.

Just a question or two, at the bank, for Steve.

Can you just provide us a little more insight into the dramatic drop that we saw in the criticized loans, and what is fostering that?

Should we be expecting to see charge-off reversals in future periods?

Or the trends there from an asset quality standpoint?

Yes -- hey, Hugh, good morning.

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 a few upgrades as well.

But most of it was just [ledded] to payoffs and -- or a [loaner] to be sold.

We will continue to be proactively managing that number.

Out of that number that was disclosed, Hugh, 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.

Our criticized residential loans peaked at about $125 million, so we whittled 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 can have a large loan go criticized, or a couple loans go criticized in a quarter.

That can influence that number upwards also, by $40 million or $50 million.

But we have been on a nice trend for the last 2 1/2 years, 3 years of improved credit metrics, and enjoying that environment.

All right, 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 US?

One or the other or both?

A couple of comments.

That was a little bit unique in that we had a lot of activity in the CNR and 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 want to continue to focus in that arena.

There's a lot of activity in backlog, particularly in Canada right now.

We have 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 have been adding to loan balances.

That product has now been in place for about 18 months.

Our residential loan business continues to grow.

We grew that business quarter-over-quarter as well.

Activity levels are good.

You did see some of the margin compression materialize that resulted from loans going on 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.

Thank you.

Very helpful.

Okay.

Our next question comes from Chris Allen with Evercore.

Good morning, guys.

Morning, Chris.

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 it in legacy Morgan Keegan region opportunities or the different business, different FA buckets?

If you could give us more color that would be great.

First the recruiting from both sides tends to be wirehouse brokers, especially fed 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 had before.

And I think we are one of the last of those private client group firms that grew up with that regional feel that have full-service that are really around.

That's been the attraction.

If you look at the independent channel, wasn't as slow; they had a better year, but it has picked up.

Where you are seeing a real increase is in RJA activity, and that's both, some at the Morgan Keegan branches and some at just other branches.

We tend to designate less.

What I think you are seeing is a focus on re-recruiting people.

When you go through an integration like that now, to looking outside as people are on the platform, they are on the systems, they are productive again.

They know how to use the systems.

It's one thing to put them on, and we had an almost flawless conversion, but everything they did is new and that takes a while to get used to.

I think now they're focused more outside, growing the business and recruiting.

So, we have seen a significant pickup on the 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, and our focus being much more outside than it was before.

Got it.

Just following up on that a little bit, on the productivity side you talked about the legacy Morgan Keegan advisors closing the gap as they utilize Raymond James product.

Any idea what inning you're in, from that perspective?

We're a few innings in.

I think you are seeing good asset management flows, as they get more into managed product to certainly help our asset management group.

The reason I think it is early, so we are seeing good moves on that, and the recurring revenue has been good shape of the firm.

But you are also getting that period where people are getting used to the system.

We do have some [where] seasonality in the business.

If you look at the numbers that shows, we have an awful lot of our Chairman's council, President council, leader council, Treas, meetings.

So we're getting through all that season.

I think we are back down to business.

As I said before, the productivity thing, I thought, was a two-year project.

And they joined us in February, so we have made a lot of ground, we still have a lot more we can accomplish, and I think we will.

Thanks a lot, guys.

(Operator Instructions)

Your next question comes from Chris Harris with Wells Fargo Securities.

Thanks; hey guys.

So a few questions around the margins and the sustainability we may expect here.

What is really interesting when I look at the performance this quarter is that capital markets revenues were actually down from last year, but you had 85%-plus growth in pre-tax income.

I just want to make sure I am catching all the variables here, but was that big drop expenses primarily driven by comp and sales commissions?

Or was there something else in the expenses and cap markets that contributed to that phenomenon?

There are two things.

The biggest piece is the business mix.

This quarter -- are you talking about this quarter, or was it last year's quarter?

Right, yes, exactly.

Last year's.

This year's quarter, obviously, was heavily M&A-driven and trading profit-driven.

As Paul mentioned earlier, those are generally higher-margin segments of the business for us, the way it's structured, than the commission revenues and fixed income, which were very large, almost $100 million in last year's September quarter, and in the investment banking revenues.

So it has probably to do with the business mix.

And the second piece is, fixed income, as we have talked about, has been an endeavor to right-size their business; and that is one 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 costs in that operation.

They have done a good job, and [I say] that work through the Morgan Keegan integration, we're really through the risks and changes.

Anything we're doing now are tweaks that we've made, and we will continue to tweak and try to become more efficient.

We had not even really begun that process in the fixed income side a year ago.

Integration of those businesses really started on October 1, this past fiscal year.

October 1 of 2012.

Okay.

Good.

Sounds like a couple of good things happening there.

In PCG then, I'm just wondering if -- follow my logic here, and see if this makes sense -- it seems like you guys are going to get some revenue uplift heading into Q4, assuming markets continue to stay robust as billings catch up with asset growth.

And if we are assuming a steady state on non-interest expense, it just seems to me that you guys have so much momentum happening there that you get well above your 9% margin hurdle in that segment next year if those assumptions are correct.

Is that a good way to look at it?

Or am I missing something there?

Should we expect some cost inflation on the non-comp expense line?

There can be, particularly if recruiting's active.

That engenders a lot of costs.

Not just the cost of hiring transition assistance to the hired financial advisors, but there is a lot of recruiting costs involved in that.

I don't think there will 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 -- IT and Ops.

Rather than the part that serves capital markets, IT and Ops is included in the Private Client Group segment, where they should continue this with.

I think we are optimistic when we get to that margin, certainly by the end of the year, if not for the whole year.

Yes, okay.

It definitely seems like you guys can get there.

In asset management -- and you guys have called this out, and sorry if I didn't quite understand it fully.

The comp catch-up you had, or comp adjustment, excuse me -- is that just a one-time item that affected this quarter?

Or should we expect a higher level of margin at this segment going forward?

I think the 30% target is still a good target for that business.

This quarter we made it by an unusual adjustment --

It was even that big of a of number, it just, it has a big impact on the margin -- (multiple speakers).

And a million bucks drives a margin a lot for a quarter.

I would call that a non-recurring -- even in the annual comp adjustment it was an unusual item, based on a number of things.

But I would shoot towards the 30%.

I think we will continue to have good growth.

Again, I wish all of our businesses were at 30% margins; my job would be a lot easier.

The organic growth looks really strong that segment.

Last question from me, specifically on the bank -- any update on where you guys think NIM might shake out for fiscal 2014?

Chris, with continued pressure, there is a lot of variability, and a lot of market factors that will contribute to that.

Once again, I think that the rate by which we have seen the decline in net interest margins is slowing somewhat.

But I would say that 20 to 25 basis point compression for fiscal 2014 over fiscal 2013 is a good number to be using at this point.

Okay.

Thanks a lot, guys.

That was our final question.

I will now turn it back to the presenters for closing remarks.

Okay, guys.

I appreciate you being on the call; you adjusted the numbers we were trying to communicate as clearly as we can.

The book's bigger, but it seems like you picked up most of it on your own.

But I hope we supplied more clarity on the call.

We are back to work and we will talk to you soon.

Thank you.

This concludes the conference.

You may now disconnect.