RAYMOND JAMES FINANCIAL INC annual report, FY2014

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Raymond James Financial, Inc. — FY2014 Form 10-K

Business context and reporting period. Diversified financial services and bank holding company with Private Client Group (PCG), Capital Markets, Asset Management, RJ Bank and Other segments. Fiscal year ended September 30, 2014; quarterly data include the three months ended that date. The financial statements received an unqualified audit opinion.

Financial performance

  • Revenue: Total revenue was $4.965 billion, up 8% year over year; net revenue was $4.861 billion, also up 8%. Management said underlying growth was stronger after excluding $74 million of prior-year revenue from the Albion investment.
  • Profit and margins: Net income attributable to RJF was $480.2 million, up 31%; diluted EPS was $3.32, up 29%. Pre-tax income excluding noncontrolling interests was $748.0 million, up 33%, and the pre-tax margin on net revenue was 15.4%. The effective tax rate was 35.8%, versus 34.9% in FY2013. Fourth-quarter net income attributable to RJF was $136.4 million and diluted EPS was $0.94.
  • Operating segments: PCG net revenue rose 12% to $3.267 billion and pre-tax income rose 43% to $330.3 million. Capital Markets net revenue rose 3% to $966.2 million and pre-tax income rose 28% to $130.6 million. Asset Management net revenue rose 26% to $369.7 million and pre-tax income rose 33% to $128.3 million. RJ Bank net revenue rose 1% to $351.8 million, while pre-tax income fell 9% to $242.8 million. Other recorded a pre-tax loss of $83.9 million, improved from $132.3 million.
  • Assets and client activity: Total assets were $23.326 billion, up 1%. Total client assets under administration reached $475 billion, up 12%; PCG assets were $450.6 billion. Asset Management assets under management were $64.6 billion, up 15%.
  • Cash flow: Operating activities provided $507.6 million, investing activities used $2.097 billion (primarily to fund bank loan growth), and financing activities provided $1.224 billion. Cash and cash equivalents ended the year at $2.199 billion, down from $2.597 billion.
  • Debt and liquidity: Corporate debt was $1.191 billion. Other borrowings were $654.9 million, including $500 million of RJ Bank FHLB advances; $43.9 million of consolidated VIE loans were non-recourse. Total liabilities were $18.892 billion and equity was $4.433 billion. Management reported $1.21 billion of cash available without restrictions and said existing assets, operating cash generation and financing facilities should support operations at current activity levels.
  • Capital and shareholder returns: RJF and RJ Bank met the regulatory definition of “well capitalized”; RJF’s total capital ratio was 20.6% and RJ Bank’s was 12.5%. FY2014 dividends declared were $0.64 per share. The board later declared a quarterly dividend of $0.18 per share, payable January 2015.

Material changes versus FY2013

  • All four operating segments achieved record net revenue; three of the four achieved record profitability. PCG’s improvement reflected growth in fee-based accounts and recurring fees; PCG recurring revenue was approximately 72% of segment revenue, up from 68%.
  • Capital Markets benefited from stronger equity underwriting, M&A fees and trading results, which offset a 25% decline in fixed-income institutional sales commissions amid low rates and reduced client trading.
  • Asset Management benefited from asset growth, net inflows and nearly $10 million in performance fees, compared with nearly $2 million a year earlier.
  • RJ Bank’s loan portfolio grew substantially, supporting higher net interest income but reducing its net interest margin to 2.98% from 3.25%. Loan-loss provision rose to $13.6 million from $2.6 million, while net charge-offs fell 87% to $1.7 million and nonperforming loans declined to $80.7 million.
  • Non-interest expense rose 7% to $4.145 billion, principally due to compensation and commissions. Morgan Keegan integration was substantially complete; separately reported acquisition and integration expense was no longer material, versus $73.5 million in FY2013.
  • Prior-year Other-segment results included Albion investment gains that did not recur. FY2013’s effective tax rate also benefited from a nonrecurring change in the treatment of certain foreign earnings.

Outlook, risks and contingencies

  • The filing provides no quantified earnings or revenue guidance. Management described results as dependent on economic conditions, equity and fixed-income markets, lending and credit trends, interest rates, competition and regulatory developments.
  • Management estimated that an instantaneous 100-basis-point rise in short-term rates could increase pre-tax income by approximately $150 million over 12 months, based on static September 30 balances and stated assumptions; actual results could differ materially.
  • Key risks include market volatility and prolonged low rates, credit and real-estate deterioration, liquidity or funding constraints, advisor retention and recruiting costs, fee and trading-margin pressure, operational and cyber-security failures, litigation, and expanding regulatory and capital requirements. Basel III rules were scheduled to take effect beginning January 2015; the company said it was evaluating their impact and believed it would meet the requirements.
  • Morgan Keegan pre-acquisition legal matters are subject to Regions’ indemnification, with management estimating potential liability, including defense costs, of $15 million to $210 million. The company recorded approximately $154.4 million of related liabilities and a $154.7 million indemnification asset. Other legal matters were estimated to involve possible losses of up to $9 million in excess of accrued liabilities; management did not expect an overall material adverse impact, but noted individual matters could affect future-period results.
  • Unusual or judgment-sensitive items include Level 3 assets of $417 million, primarily private-equity investments and auction-rate securities, and the bank’s allowance for loan losses of $147.6 million. The filing highlights significant estimation uncertainty in these valuations and reserves.

Important facts for investors to verify

  • Whether client-asset inflows and fee-based revenue growth continue, and how much growth depends on market appreciation.
  • Whether RJ Bank can sustain loan growth without further margin compression, credit deterioration or higher provisions.
  • The effect of interest-rate changes on sweep fees, client cash rates and net interest income compared with management’s modeled estimate.
  • Progress and outcomes in the Regions-indemnified Morgan Keegan cases, and Regions’ ability to meet its indemnification obligations.
  • Liquidity, regulatory capital and funding conditions, including the scheduled April 2016 maturity of $250 million of 4.25% senior notes.
  • Changes in Level 3 valuations, auction-rate securities redemptions and private-equity gains, which can make reported earnings less predictable.