Business context and reporting period
Raymond James Financial, Inc. is a financial holding company with brokerage, investment banking and asset management businesses, as well as a bank. This unaudited Form 10-Q covers the three and nine months ended June 30, 2013 (fiscal third quarter and year to date). The prior-year nine-month comparison is not fully like-for-like: fiscal 2013 includes nine months of Morgan Keegan results, versus three months in fiscal 2012.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenues | $1.138 billion, up 2% year over year | $3.446 billion, up 23% |
| Net revenues | $1.110 billion, up 2% | $3.362 billion, up 23% |
| Pre-tax income, including noncontrolling interests | $128.9 million, down from $138.0 million | $435.4 million, up from $350.5 million |
| Net income attributable to Raymond James | $83.9 million, up from $76.4 million | $249.7 million, up from $212.5 million |
| Diluted EPS | $0.59, versus $0.55 | $1.76, versus $1.60 |
Quarterly pre-tax income was approximately 11.6% of net revenues; management reported adjusted pre-tax income of $146 million for the quarter, excluding acquisition-related expenses (a non-GAAP measure). Total non-interest expenses were $980.6 million for the quarter, up 3%, and $2.927 billion year to date, up 22%. Quarterly net interest income was $89.2 million, down 3%; year-to-date net interest income was $275.1 million, up 2%.
For the nine months, operating cash flow was $413.2 million, investing cash outflow $276.3 million and financing cash inflow $477.2 million. Cash and cash equivalents were $2.586 billion at June 30, including approximately $758 million available without restrictions. Total assets were $22.214 billion and total liabilities $18.339 billion. Bank loans, net, were $8.689 billion; bank deposits were $9.130 billion. Corporate debt was $1.195 billion, and other borrowings were $93.7 million. RJF and RJ Bank met the filing’s “well capitalized” criteria; RJF’s total risk-based capital ratio was 19.2% and RJ Bank’s was 13.4%.
Changes versus comparable periods
- Quarterly revenue growth was led by the Private Client Group and Asset Management, while Capital Markets revenue fell 15% and pre-tax income fell 44% year over year.
- Management attributed fixed-income weakness to a sharp rise in longer-term interest rates late in the quarter, which hurt municipal trading and institutional commissions. The firm reduced municipal securities inventories to limit risk.
- Asset Management pre-tax income rose 41% for the quarter; managed-program assets reached $52.2 billion, up 28% year over year. Private Client Group client assets under administration were $387 billion, up 9%.
- RJ Bank pre-tax income increased 5% for the quarter, helped by a $2.1 million loan-loss provision benefit. Its loan portfolio grew, while net interest margin declined to 3.20% from 3.69%.
- Year-to-date results benefited from Morgan Keegan’s inclusion for a longer period, stronger asset-management and bank results, and a gain associated with the Albion investment sale. The Morgan Keegan client-account transfer to RJ&A was completed in February 2013.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management said Morgan Keegan integration was substantially complete and estimated at least $5 million of further acquisition and integration expense for the remainder of fiscal 2013. It described results as sensitive to economic conditions, equity and fixed-income markets, interest rates, credit trends, competition and regulation. Management said a gradual rise in short-term rates could benefit earnings overall, particularly Private Client Group and RJ Bank; actual effects depend on the pace and magnitude of rate changes and deposit pricing.
Unusual items include a $6.9 million goodwill impairment for the European RJES reporting unit (approximately $4.6 million attributable to RJF after noncontrolling interests) and an approximately $23 million after-noncontrolling-interest pre-tax gain associated with Albion. Level 3 assets measured at fair value totaled about $470 million, including auction-rate securities and private equity investments; these valuations rely partly on significant unobservable inputs. The bank allowance for loan losses was $142.4 million, or 1.61% of amortized loan cost. Nonperforming assets were $109.6 million; nonperforming CRE loans increased from September 2012.
Pre-closing Morgan Keegan legal matters are subject to Regions indemnification. Management estimated potential liability for those matters at $30 million to $270 million and reported related liabilities of about $173 million and an indemnification asset of about $172 million. Other litigation had an estimated possible loss range of $0 to $20 million above accrued amounts. In August 2013, after quarter end, a court approved $68 million in settlements concerning certain Regions Morgan Keegan funds; the filing states these matters are subject to indemnification. The filing also describes a pending Alabama ARS regulatory matter and early-stage municipal-bond investigations and claims.
RJ Bank’s allowance depends on estimates that could prove inadequate if economic, real-estate or borrower conditions worsen. The company also noted that a downgrade below investment grade could raise financing costs and could trigger collateral or payment demands under certain derivative contracts. The Federal Reserve approved a Basel III implementation rule in July 2013; the company was evaluating its impact.
Most important facts for investors to verify
- Whether recurring brokerage and advisory growth can offset fixed-income market volatility and the decline in quarterly Capital Markets results.
- How much of year-to-date growth reflects Morgan Keegan’s expanded consolidation period, acquisition synergies, or nonrecurring Albion and valuation gains.
- Credit quality trends in RJ Bank’s growing loan portfolio, particularly CRE nonperforming loans, residential delinquencies and allowance adequacy.
- The valuation assumptions and liquidity of Level 3 investments, auction-rate securities and private equity holdings.
- Final costs, indemnification recoveries and remaining exposure related to Morgan Keegan litigation and the post-quarter fund settlements.
- Available parent-company liquidity, subsidiary dividend restrictions, debt-rating developments and the eventual regulatory-capital impact of Basel III.