Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2012. The unaudited filing was signed August 8, 2012. Raymond James provides wealth management, capital markets, asset management, banking and related financial services.
Business context
Raymond James completed its acquisition of Morgan Keegan on April 2, 2012. The quarter is the first to include Morgan Keegan’s results; accordingly, year-over-year comparisons are affected by the acquisition and are not fully comparable. The company said integration of the acquired businesses was underway.
Financial performance
| Metric | Three months ended June 30, 2012 | Prior-year quarter | Nine months ended June 30, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Total revenues | $1.116 billion | $868.2 million | $2.804 billion | $2.565 billion |
| Net revenues | $1.086 billion | $850.4 million | $2.741 billion | $2.516 billion |
| Income before tax, including noncontrolling interests | $138.0 million | $81.1 million | $350.5 million | $332.1 million |
| Net income attributable to Raymond James | $76.4 million | $46.8 million | $212.5 million | $209.4 million |
| Diluted earnings per share | $0.55 | $0.37 | $1.60 | $1.65 |
| Net interest income | $91.6 million | $78.0 million | $268.6 million | $248.0 million |
- Quarterly net revenues rose 28% and attributable net income rose 63% year over year; diluted EPS increased despite a larger weighted-average share count. Management reported adjusted quarterly pre-tax income of $145 million and adjusted net income of $89 million, both non-GAAP measures.
- For the nine months, net revenues increased 9%, while attributable net income increased about 1% and diluted EPS declined from $1.65 to $1.60. Management’s adjusted pre-tax income was $389 million, up 2% from its adjusted prior-year comparison; these are non-GAAP measures.
- Quarterly business highlights: Private Client Group pre-tax income was $64.3 million, up 21%; Capital Markets was $27.8 million, up 96%; and RJ Bank was $59.8 million, up 42%. Emerging Markets recorded a $2.2 million pre-tax loss. For the nine months, Capital Markets pre-tax income fell 18% and Emerging Markets moved to a $5.7 million loss.
- Management cited Morgan Keegan as a principal driver of growth in Private Client Group and Capital Markets. RJ Bank’s quarterly improvement reflected higher average loan balances and net interest spread. Equity capital markets remained challenging.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $215.8 million, versus $1.090 billion a year earlier. Investing activities used $2.509 billion, including $1.097 billion net cash for Morgan Keegan and substantial loan growth; financing activities provided $1.583 billion.
- Cash and cash equivalents were $1.729 billion at June 30, down $710.7 million from September 30, 2011. Management identified approximately $616 million as available without restrictions; much of the company’s broader cash and segregated balances supports client and regulatory requirements.
- Total assets were $21.171 billion, up from $18.007 billion at September 30, 2011; total liabilities were $17.589 billion, up from $15.095 billion. Bank loans, net, were $7.839 billion, compared with $6.548 billion; bank deposits were $8.277 billion, compared with $7.739 billion.
- Corporate debt rose to $1.334 billion from $612.0 million, primarily reflecting financing for the acquisition. This included $600 million of senior notes issued in March 2012 and $129.6 million outstanding under a Regions credit agreement. No borrowings were outstanding on secured or unsecured lines of credit at quarter-end.
- RJ Bank’s allowance for loan losses was $149.1 million, or 1.87% of amortized loan cost. Nonperforming loans were $99.9 million, down from $133.3 million at September 30, 2011; nonperforming assets were $109.0 million, or 1.16% of RJ Bank total assets.
- RJF and RJ Bank exceeded stated regulatory capital minimums. RJ Bank was categorized as “well capitalized”; its total risk-based capital ratio was 12.8% and Tier 1 risk-based ratio was 11.5% at June 30, 2012.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management expected further Morgan Keegan acquisition and integration expenses in the fourth quarter of fiscal 2012 and during fiscal 2013. The company’s stated integration plan was to migrate Morgan Keegan private-client advisors and accounts to the RJ&A platform and complete integration of legacy Capital Markets businesses by the end of fiscal Q2 2013.
- Morgan Keegan acquisition accounting remained preliminary: estimated net purchase consideration was $1.188 billion, acquired goodwill was preliminarily valued at $214 million, and acquired identifiable intangible assets at $84 million. Final valuations could change.
- Acquisition-related expenses were $21.0 million for the quarter and $40.6 million for the nine months. The prior-year comparable periods included a $45 million auction-rate-securities (ARS) loss provision, which did not recur in 2012.
- Market, interest-rate, credit, regulatory and integration risks remain material. Management noted that investment-business results are sensitive to equity markets and economic conditions. It also warned that loan-loss estimates depend on assumptions that could prove inaccurate. A gradual rise in short-term rates was expected to benefit net earnings, subject to balances, rate changes and deposit costs.
- Unresolved exposures include Morgan Keegan pre-acquisition litigation, for which Regions agreed to indemnify Raymond James. The filing recorded approximately $198 million of indemnification assets and $236 million of related potential-loss liabilities. The Fairfax case had a jury trial scheduled for September 10, 2012; other ARS-related litigation was pending after an appellate reversal and remand. Management estimated possible losses on other, non-indemnified matters at up to $10 million above any accrued liability, while noting an individual matter could affect a future period.
- Fair-value uncertainty is notable: $586 million of recurring fair-value assets were Level 3, including $335 million in private equity investments and $240 million in ARS. Jefferson County, Alabama’s Chapter 9 proceeding remained ongoing, affecting certain ARS holdings.
Most important facts for investors to verify
- How much of reported growth and future earnings is attributable to Morgan Keegan, and whether planned integration and cost savings are achieved.
- The final purchase-price allocation, including goodwill and intangible-asset valuations, and the timing and amount of remaining integration costs.
- Whether operating cash generation improves after the acquisition-related investment outflows and loan growth; also distinguish unrestricted cash from segregated or otherwise restricted balances.
- Credit performance and reserve adequacy as RJ Bank’s loan portfolio expands, especially corporate-loan concentrations, residential mortgage delinquencies and the Canadian portfolio.
- Developments in ARS valuations and Jefferson County exposure, Morgan Keegan litigation and Regions’ ability to meet its indemnification obligations.
- Debt ratings and refinancing terms: S&P rated the company BBB with a negative outlook, while Moody’s rated it Baa2 with a stable outlook.