Raymond James Financial, Inc. — Form 10-Q summary
Business context and period. This is the fiscal first quarter of 2013, the three months ended December 31, 2012, compared principally with the three months ended December 31, 2011. Raymond James is a diversified financial services and bank holding company. The year-over-year comparison is materially affected by Morgan Keegan, acquired April 2, 2012; its results are included prospectively from the acquisition date. The statements are unaudited.
Key financial results
| Metric | Quarter ended Dec. 31, 2012 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenues | $1.138 billion | $798.8 million | +42% |
| Net revenues | $1.109 billion | $782.8 million | +42% |
| Income before tax, including noncontrolling interests | $147.2 million | $104.6 million | +41% |
| Net income attributable to Raymond James | $85.9 million | $67.3 million | +28% |
| Diluted EPS | $0.61 | $0.53 | +15% |
| Net interest income | $95.1 million | $86.1 million | +11% |
GAAP pre-tax income excluding noncontrolling interests was $139.1 million, up 26%. Management’s non-GAAP adjusted net income was $96.6 million, or $0.69 diluted EPS, excluding $17.4 million of acquisition-related expenses after tax effects. The filing reports annualized GAAP return on equity of 10.3%, unchanged year over year; adjusted annualized ROE was 11.6% versus 10.3%.
Total non-interest expenses rose 42% to $962.3 million, primarily reflecting Morgan Keegan. Compensation and benefits were $762.5 million. Acquisition-related expenses were $17.4 million, mostly integration costs. The filing does not provide a consolidated operating-margin measure; segment margins varied, including a 7.5% PCG margin on net revenues versus 9.4% a year earlier.
Balance sheet, cash flow and capital
- At December 31, 2012, total assets were $22.28 billion, liabilities $18.47 billion and total equity $3.81 billion. Compared with September 30, assets increased 5%, chiefly reflecting client-related segregated assets and bank loan growth.
- Cash and cash equivalents were $2.19 billion, up $208 million from September 30. Of the quarter-end cash balance, approximately $581 million was available without restrictions; substantial other cash and segregated assets support client and regulatory requirements.
- Operating cash flow was positive $238.0 million, versus negative $20.0 million in the prior-year quarter. Investing used $382.6 million, largely to fund bank loan growth; financing provided $354.4 million, including a $347.0 million increase in bank deposits.
- Bank loans, net, were $8.46 billion, up $468 million since September 30. The allowance for loan losses was $148.0 million, or 1.72% of amortized loan cost, versus 2.06% a year earlier. Nonperforming loans increased to $110.6 million from $106.7 million at September 30; nonperforming assets were $114.3 million.
- Corporate debt was $1.20 billion, down from $1.33 billion at September 30, principally after repayment of the prior Regions borrowing. A new secured revolving facility was established; $5 million was outstanding under it at quarter-end. Bank deposits totaled $8.95 billion.
- RJF and RJ Bank exceeded regulatory capital minimums. RJ Bank remained categorized as well capitalized; its ratios declined from September 30 amid loan growth and a $25 million dividend to the parent.
Material changes and management commentary
- Management reported record net revenues and record client assets under administration of $392 billion, up 45% year over year. PCG client assets were $370 billion; approximately $66 billion of the increase related to Morgan Keegan branches.
- All segments except Securities Lending recorded higher revenue than the prior-year quarter. Capital Markets pre-tax income increased to $31.6 million from $10.0 million, supported by Morgan Keegan scale and stronger equity underwriting and M&A activity. RJ Bank pre-tax income rose 28% to $67.9 million, reflecting loan growth, improved net interest margin and lower loan-loss provision.
- RJ Bank net interest margin increased to 3.52% from 3.21%. Management attributed the lower loan-loss provision and reduced net charge-offs to improved credit conditions. Residential mortgage delinquency remained elevated by historical standards, though the reported 30-day-plus rate of 3.58% was below the cited national average.
- On December 24, 2012, the company acquired a 45% interest in ClariVest Asset Management for approximately $8.8 million, consolidating it under the agreement’s protective rights. ClariVest managed more than $3 billion in client assets; a put-and-call arrangement provides possible paths to majority ownership.
- Management planned to complete migration of Morgan Keegan PCG accounts and advisors to the Raymond James platform in fiscal Q2 2013, and expected Morgan Keegan Capital Markets integration by the end of that quarter. It estimated approximately $40 million of fiscal 2013 acquisition and integration costs, with about $23 million remaining after the quarter.
- No specific earnings or revenue guidance was provided. Management said results are sensitive to economic conditions, equity and fixed-income markets, interest rates, credit trends, asset valuations and competition. It did not expect Dodd-Frank to have a significant overall operating impact, while noting that the effect of pending regulations remained uncertain.
Risks, contingencies and unusual items
- Pre-closing Morgan Keegan legal matters are subject to indemnification by Regions. Management estimated potential liabilities on those matters, including defense costs, at $30 million to $400 million; the balance sheet included approximately $193 million of related liabilities and a $190 million indemnification asset. A settlement of certain fund-related actions received preliminary court approval in January 2013 for $62 million and $6 million. The SEC’s auction-rate-securities case had been tried, but no verdict had been issued by the filing date; related Alabama proceedings were also disclosed.
- For other litigation not covered by the Regions indemnity, management estimated a possible loss range of $0 to $7 million in excess of any accrued liability. Management cautioned that resolution of individual matters could materially affect results in a future period.
- Available-for-sale securities included $238.3 million of auction-rate securities and $144.8 million of non-agency CMOs, with significant unrealized losses and Level 3 valuation exposure. Management said expected cash flows supported recovery of unrecognized losses, but weaker underlying mortgage performance could lead to future impairment. Jefferson County, Alabama bankruptcy proceedings remained ongoing and affected certain auction-rate holdings.
- Hurricane Sandy had not, based on the company’s review to date, indicated a significant loan-portfolio impact; management said it could not estimate a loss range at that time and did not expect a material adverse fiscal 2013 impact.
- Interest-rate, market, credit, liquidity, operational, regulatory and legal risks remain relevant. A below-investment-grade downgrade could raise financing costs and trigger collateral demands under certain derivatives. S&P’s disclosed rating was BBB with a negative outlook; Moody’s was Baa2 with a stable outlook.
Most important facts for investors to verify
- How much reported growth and future profitability reflect Morgan Keegan additions versus organic growth, and whether planned integration milestones and cost estimates are achieved.
- Whether client-asset growth, advisor retention and recurring PCG revenues continue to support margins as acquisition-related expense subsides.
- Whether bank loan growth is accompanied by stable credit quality, particularly in residential mortgages, and whether the $148 million allowance remains adequate.
- Valuations, recoverability and liquidity of Level 3 investments, auction-rate securities and non-agency mortgage securities, including any developments in Jefferson County.
- Outcomes and collectability of Regions-indemnified Morgan Keegan matters, the SEC ARS case and other litigation; compare ultimate exposure with recorded liabilities and indemnification assets.
- Availability of parent-company liquidity and subsidiary dividend capacity, and the effects of interest rates, funding costs, regulatory capital requirements and any credit-rating changes.