Business context and reporting period
Raymond James Financial, Inc. (RJF) filed this Form 10-K for the fiscal year ended September 30, 2012. The company provides wealth management, capital markets, asset management, banking and related financial services, primarily in the U.S. and Canada.
RJF completed its acquisition of Morgan Keegan on April 2, 2012; fiscal 2012 results include approximately six months of its operations. Accordingly, many year-over-year comparisons are not fully comparable.
Financial and operating results
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Total revenue | $3.898 billion | $3.400 billion |
| Net revenue | $3.807 billion | $3.334 billion |
| Net income attributable to RJF | $295.9 million | $278.4 million |
| Diluted earnings per share | $2.20 | $2.19 |
| Pre-tax income, including noncontrolling interests | $467.9 million | $450.7 million |
| Operating cash flow | $391.3 million | $1.558 billion |
Fiscal fourth-quarter revenue was $1.093 billion, net revenue was $1.066 billion, net income attributable to RJF was $83.3 million and diluted EPS was $0.60. The prior-year fourth quarter reported revenue of $834.6 million, net income of $68.9 million and diluted EPS of $0.54.
- Non-interest expenses rose 16% to $3.339 billion, including $59.3 million of Morgan Keegan acquisition and integration costs. Fiscal 2011 included a $41.4 million auction-rate-securities (ARS) repurchase loss.
- Net interest income increased 11% to $361.9 million. The bank loan-loss provision fell 23% to $25.9 million.
- Private Client Group (PCG) revenue increased 13% to $2.475 billion, but pre-tax income fell 4% to $210.4 million; its pre-tax margin on net revenue declined to 8.5% from 10.0%.
- Capital Markets revenue increased 20% to $796.9 million and pre-tax income rose 6% to $82.8 million. Asset Management pre-tax income was $67.2 million, up 2%.
- RJ Bank pre-tax income rose 39% to $240.2 million. Its net interest margin was 3.50%, versus 3.43%; average interest-earning banking assets increased to $9.1 billion.
- Emerging Markets reported a $7.1 million pre-tax loss, compared with $4.5 million income. Proprietary Capital pre-tax income increased to $15.2 million, partly reflecting valuation gains.
Balance sheet, liquidity and capital
- Total assets were $21.16 billion, up 18% from $18.01 billion; total liabilities were $17.48 billion, up 16%. RJF-attributable equity was $3.269 billion, compared with $2.588 billion.
- Cash and cash equivalents were $1.980 billion. The filing identified approximately $539 million of cash or marketable securities as available without restrictions.
- Cash flow from operations was $391 million; investing activities used $2.731 billion, including $1.074 billion net cash used for the Morgan Keegan acquisition and $1.451 billion for loan growth. Financing activities provided $1.879 billion.
- Corporate debt was $1.329 billion, compared with $612.0 million a year earlier. The increase included debt issued to finance Morgan Keegan. At September 30, 2012, the Regions Credit Agreement balance was $128.3 million; RJF reported it repaid this balance and entered a replacement revolving agreement in November 2012.
- RJF and RJ Bank met the disclosed “well capitalized” thresholds. Their total risk-based capital ratios were 18.9% and 13.4%, respectively.
- Annual cash dividends declared were $0.52 per share. Management said it expected to continue paying dividends, subject to operating results, available subsidiary funds and regulatory or contractual restrictions.
Changes, outlook, risks and unusual items
- Management reported record annual net revenue and net income. Excluding estimated Morgan Keegan revenue, net revenue increased 2%; management cautioned that acquisition effects limit comparability.
- RJF planned to move Morgan Keegan private-client advisors and accounts onto the RJ&A platform in fiscal Q2 2013 and expected approximately $40 million of additional acquisition-related costs in fiscal 2013. It also expected to complete the broader integration by the end of that quarter.
- RJF announced a definitive agreement to acquire a substantial minority interest in ClariVest Asset Management, then managing more than $3 billion in client assets; closing was expected around the end of calendar 2012. The filing provides no earnings guidance.
- Hurricane Sandy occurred after year-end. RJF was assessing possible effects on RJ Bank loans and said it could not yet reasonably estimate any loss.
- Key risks include market and interest-rate sensitivity, pricing pressure, credit quality and real-estate exposure, liquidity and regulatory-capital constraints, operational and cybersecurity risks, and the execution and retention risks of the Morgan Keegan integration. Proposed Basel III and Dodd-Frank rules were not final; management considered their effects uncertain.
- Morgan Keegan’s pre-acquisition legal matters were subject to Regions’ indemnification, but RJF noted the risk that Regions might not fulfill its obligations. Management estimated potential liabilities on these matters of $30 million to $400 million; the balance sheet included a $198 million indemnification asset and a $221 million liability. The SEC’s Morgan Keegan ARS case had been remanded for trial scheduled to begin November 26, 2012, as of the filing date. Other litigation had an estimated possible-loss range of $0 to $7 million above any accrued liability.
- Valuation uncertainty remains relevant: recurring Level 3 fair-value assets were $581 million, including $337 million of private-equity investments and $234 million of ARS. The auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Track Morgan Keegan integration progress, advisor retention, realized synergies and remaining integration spending.
- Assess RJ Bank loan growth, nonperforming loans, allowance adequacy and any eventual Hurricane Sandy impact.
- Review the liquidity available to the parent after subsidiary capital requirements, debt service and other commitments.
- Monitor Regions’ indemnification performance and developments in Morgan Keegan ARS and other litigation.
- Evaluate the assumptions and potential valuation sensitivity of Level 3 ARS and private-equity assets.
- Check subsequent filings for the ClariVest transaction, the replacement Regions credit facility and any final outcome of the scheduled SEC trial.