Business context and reporting period
Raymond James Financial, Inc. (RJF) filed this unaudited Form 10-Q for its fiscal first quarter ended December 31, 2011, comparing results with the quarter ended December 31, 2010. Its businesses include wealth management and brokerage, capital markets, asset management, banking, securities lending and other activities. Interim results are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Q1 FY2012 | Prior-year quarter / comparison |
|---|---|---|
| Total revenue | $798.8 million | $830.3 million; down 4% |
| Net revenue | $782.8 million | $813.8 million; down 4% |
| Income before tax, including noncontrolling interests | $104.6 million | $126.7 million; down 17% |
| Net income attributable to RJF | $67.3 million | $81.7 million; down 18% |
| Diluted earnings per share | $0.53 | $0.65 |
| Net interest income | $86.1 million | $87.9 million; down 2% |
| Bank loan-loss provision | $7.5 million | $11.2 million |
Non-interest expenses declined 1% to $678.1 million, mainly reflecting lower compensation and loan-loss provision, partly offset by higher communications and business development costs. The effective tax rate rose to 39.3% from 37.4%. RJ Bank’s net interest margin was 3.21%, down from 3.70%; management said excess client deposits invested in low-yield short-term assets weighed on the measure.
Operating cash flow was a use of $20.0 million, versus cash provided of $1.212 billion a year earlier. Investing activities used $444.3 million, principally reflecting $490.0 million of net loan growth. Financing activities used $57.9 million. Cash and cash equivalents were $1.917 billion at quarter-end, down $522.7 million from September 30, 2011; this includes cash that may be restricted or held for subsidiary purposes. Management identified approximately $472 million as available cash and cash equivalents.
At December 31, 2011, total assets were $17.892 billion, total liabilities $14.929 billion and total equity $2.963 billion. Corporate debt was $607.4 million, including $550 million of senior notes and approximately $51 million of home-office mortgage debt. The company reported no outstanding borrowings on secured or unsecured lines of credit, and RJ Bank had no Federal Home Loan Bank advances. Bank deposits were $7.705 billion; these are bank funding liabilities, not corporate debt. RJ Bank was categorized as well capitalized, with total risk-based capital of 14.3% and Tier 1 risk-based capital of 13.0%.
Material changes and business drivers
- Capital Markets revenue fell 21% and pre-tax income fell 59%, largely due to lower underwriting fees and institutional equity and fixed-income commissions amid unsettled markets.
- Private Client Group revenue increased 2%, but pre-tax income declined 11% as expenses grew faster than revenue. Client assets under administration were $270 billion, up 3% year over year; fee-based account assets rose 10% to $75 billion.
- RJ Bank pre-tax income increased 14% to $53.0 million. Nonperforming assets declined to $123.8 million from $147.9 million at September 30, and quarterly net charge-offs fell 54% year over year to $5.7 million.
- Asset Management revenue increased 2% and pre-tax income was broadly flat. Assets under management were $38.6 billion, up from $36.9 billion a year earlier; management attributed growth primarily to net client inflows.
- Emerging Markets revenue declined 46%, and the segment moved to a $2.5 million pre-tax loss, reflecting market volatility and the absence of prior-year investment-banking revenue.
Outlook, risks, contingencies and unusual items
No quantified earnings or revenue guidance was provided. Management said most businesses performed relatively well despite unsettled and challenging market conditions, and believed existing assets, operating cash generation and financing sources would be adequate to support operations at current activity levels. Results remain sensitive to economic conditions, equity markets, interest rates, underwriting activity and investor participation.
On January 11, 2012, RJF agreed to acquire Morgan Keegan for $930 million in cash, subject to adjustments and regulatory approval, with closing expected around April 1, 2012. RJF anticipated additional employee-retention payments and integration costs. A $900 million bridge facility was committed; the company anticipated refinancing with $300 million of equity and $600 million of long-term notes, with the remaining approximately $220 million of cash consideration funded from available cash. S&P and Moody’s placed RJF on review for possible downgrade after the announcement. Risks include integration challenges, employee or client departures, failure to realize benefits, financing and regulatory conditions, and execution costs.
Other notable exposures include $56.4 million of gross unrealized losses on available-for-sale securities, chiefly non-agency mortgage securities; management warned weaker collateral performance could produce further impairment. Jefferson County, Alabama filed for Chapter 9 bankruptcy; RJF recorded credit-related impairment on its sewer-revenue auction-rate securities. The company also disclosed Level 3 assets of $344.1 million, including auction-rate securities and private equity investments. Legal proceedings were estimated to involve a possible loss range of $0 to as much as $10 million above accrued liabilities; management did not expect an overall material adverse impact on financial position, while noting a future-period earnings effect was possible. RJ Bank’s residential mortgage delinquencies and broader exposure to economic and real-estate deterioration remain risks. The bank’s planned purchase of a Canadian corporate loan portfolio, with approximately $440 million outstanding under about $505 million of commitments, was expected to close in February 2012.
Most important facts for investors to verify
- Whether the Morgan Keegan acquisition closed as expected, its final purchase-price adjustments and retention or integration costs, and the resulting capital structure and credit ratings.
- Whether revenue and earnings weakness in Capital Markets and other market-sensitive businesses continued, and how recurring wealth-management fees and client assets evolved.
- Whether RJ Bank maintained asset quality and capital strength as its loan portfolio expanded; monitor nonperforming loans, charge-offs, delinquencies and allowance adequacy.
- Changes in available liquidity, cash flow, funding and the planned acquisition financing, including the effect of using cash and issuing equity or debt.
- Future valuation changes, redemptions and impairment risk in auction-rate securities, non-agency mortgage securities and other Level 3 assets, plus developments in legal and regulatory matters.