RAYMOND JAMES FINANCIAL INC quarterly report, Q2 FY2013

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Raymond James Financial, Inc. — Form 10-Q Summary

Business context and reporting period

Financial holding company with brokerage, capital markets, asset management, banking and related businesses. This unaudited Form 10-Q covers the quarter and six months ended March 31, 2013; comparisons are with the corresponding 2012 periods unless noted. The Morgan Keegan acquisition closed April 2, 2012, so its results are included prospectively from that date.

Financial performance and position

  • Quarter: Net revenues were $1.143 billion, up 31%; pre-tax income including noncontrolling interests was $159.3 million, up 48%; net income attributable to Raymond James was $80.0 million, up 16%. Diluted EPS was $0.56, versus $0.52.
  • Six months: Net revenues were $2.253 billion, up 36%; pre-tax income including noncontrolling interests was $306.5 million, up 44%; net income attributable to Raymond James was $165.8 million, up 22%. Diluted EPS was $1.17, versus $1.05.
  • Margins and returns: Quarterly pre-tax income was 13.9% of net revenues, compared with 12.4% a year earlier. Reported quarterly ROE was 9.3%, versus 9.6%; management’s non-GAAP quarterly ROE was 11.2%, versus 11.6%.
  • Cash flow: Six-month operating cash flow was $176 million, investing cash outflow was $491 million, and financing cash inflow was $514 million. Cash and equivalents were $2.174 billion at March 31, 2013. Operating cash flow included substantial client-balance movements; investment outflows mainly reflected $443 million of bank loan growth.
  • Balance sheet and debt: Total assets were $22.735 billion, up from $21.160 billion at September 30, 2012; total equity was $3.912 billion. Corporate debt was $1.199 billion, down from $1.329 billion, while other borrowings were $180 million. Bank deposits totaled $9.074 billion.
  • Liquidity and capital: Management reported $719 million of cash available without restrictions and said existing assets, operating cash flows and financing facilities should support operations at current activity levels. RJF and RJ Bank exceeded regulatory “well capitalized” thresholds; their total risk-based capital ratios were 18.1% and 13.4%, respectively.

Material changes versus the prior comparable period

  • Morgan Keegan materially expanded the Private Client Group and Capital Markets businesses. In February 2013, its client accounts and financial advisors were transferred to the RJ&A platform; management reported strong advisor retention.
  • Quarterly client assets under administration reached a record $406.8 billion, 39% above the prior year; Private Client Group assets were $388 billion. Asset-management assets in managed programs reached $51.0 billion.
  • Quarterly revenue growth was broad across the four primary businesses, but expenses also rose: non-interest expenses increased 29% year over year, primarily reflecting Morgan Keegan, and the Private Client Group pre-tax margin declined to 7.3% from 8.2%.
  • RJ Bank pre-tax income rose 12% for the quarter as larger average loan balances and lower loan-loss provision more than offset lower asset yields. Its quarterly net interest margin fell to 3.28% from 3.55%.

Outlook, commentary, risks and unusual items

  • No specific earnings or revenue guidance is provided. Management expects an additional approximately $10 million of Morgan Keegan acquisition and integration expense in the remaining two quarters of fiscal 2013, following $38 million in the first six months.
  • A private-equity investment’s fair value increased following an agreement to sell Albion Medical Holdings. The adjustment contributed $65 million of revenue and approximately $22 million to Raymond James pre-tax income after noncontrolling interests; the sale closed April 29, 2013. The company cautions that the valuation depends on estimates and unobservable inputs.
  • The company recorded $6.9 million of goodwill impairment for its European RJES reporting unit; approximately $4.6 million affected Raymond James pre-tax income after noncontrolling interests. It acquired the remaining RJES ownership in April 2013.
  • Key exposures include market and interest-rate changes, credit deterioration and loan-loss estimates, illiquid or Level 3 asset valuations, regulatory requirements, and integration execution. The filing notes adverse municipal fixed-income trading conditions and continued uncertainty around future regulation. Management stated it did not expect Dodd-Frank to have a significant overall impact, while acknowledging that effects remain uncertain.
  • Bank credit indicators were mixed: nonperforming assets were $118.3 million, or 1.14% of RJ Bank assets, versus $114.9 million at September 30, 2012; six-month net charge-offs fell to $3.7 million from $13.7 million. Management warns that weaker economic or real-estate conditions could make the $150.3 million loan-loss allowance insufficient.
  • Pre-closing Morgan Keegan legal matters are subject to Regions indemnification. Management estimated potential liabilities for those matters at $30 million to $380 million and recorded approximately $180 million of indemnification assets and $181 million of related liabilities. Separately, other matters had an estimated possible loss of up to $10 million above accrued amounts. The SEC-related auction-rate securities case resulted in an order to repurchase securities from 17 clients and a $100,500 fine; other claims were dismissed.

Important facts for investors to verify

  • How much of earnings growth reflects sustainable operating performance versus the Albion valuation gain, Morgan Keegan acquisition effects, and other nonrecurring adjustments.
  • Progress and remaining costs of Morgan Keegan integration, including the expected $10 million of additional fiscal 2013 expense and realized expense savings.
  • Trends in bank loan quality, criticized and nonperforming loans, charge-offs, reserves, and the concentration and performance of residential and commercial lending.
  • Liquidity availability at the parent and regulated subsidiaries, financing-facility conditions, debt ratings, and potential collateral demands under derivatives.
  • Resolution and indemnification coverage of Morgan Keegan litigation, along with the valuation assumptions and eventual proceeds associated with private-equity and other Level 3 assets.