Business context and reporting period
Raymond James Financial, Inc. is a diversified financial services firm spanning wealth management, capital markets, asset management, banking and related businesses. This unaudited Form 10-Q covers its fiscal second quarter and six months ended March 31, 2012; comparisons are to the corresponding 2011 periods unless noted. The Morgan Keegan acquisition closed on April 2, 2012, after quarter-end, and is not included in these results.
Financial performance and position
Unless otherwise indicated, amounts are in U.S. dollars.
| Metric | Three months ended March 31, 2012 | Six months ended March 31, 2012 |
|---|---|---|
| Total revenue | $889.9 million, up 3% | $1.689 billion, down 0.5% |
| Net revenue | $871.9 million, up 2% | $1.655 billion, down 0.7% |
| Pre-tax income including noncontrolling interests | $107.9 million, down 13% | $212.6 million, down 15% |
| Net income attributable to Raymond James | $68.9 million, down 15%; diluted EPS $0.52 versus $0.64 | $136.2 million, down 16%; diluted EPS $1.05 versus $1.29 |
| Operating cash flow | Not presented quarterly in the supplied filing text | $69.1 million versus $1.133 billion |
- Quarterly non-interest expenses rose 5% to $764.0 million, including $19.6 million of Morgan Keegan acquisition costs. Management also cited $1.7 million of incremental interest expense related to acquisition financing. Excluding these items, management reported adjusted pre-tax income of $133 million, up 5%, and adjusted net income of $82 million, up 1%; these are non-GAAP measures.
- Six-month net interest income was $177.0 million, up 4%. The bank’s reported net interest margin was 3.38% for the six-month period, down from 3.65%; management said the prior-year period included a $6 million correction of previously understated interest income. The second-quarter bank net interest margin was 3.55%.
- At March 31, total assets were $19.28 billion, liabilities $15.86 billion and total equity $3.42 billion. Cash and cash equivalents were $2.88 billion, including approximately $1.6 billion raised in anticipation of the acquisition. Bank loans, net, were $7.45 billion, versus $6.55 billion at September 30, 2011.
- Corporate debt rose to $1.206 billion from $612.0 million at September 30, 2011, following new senior note offerings. Bank deposits were $7.91 billion. The company also reported $349.6 million of short-term borrowings. Its March 31 cash balance should not be viewed as post-acquisition liquidity: the April 2 transaction reduced available cash by a net $761 million, before approximately $136 million of retention payments made during April.
- For the six months, investing activities used $1.053 billion, primarily reflecting $961.7 million of net loan growth; financing activities provided $1.420 billion, including equity-offering proceeds and debt financing. Common dividends declared were $0.26 per share for the six months.
Material changes versus the prior comparable period
- Quarterly net revenue reached a record, but reported pre-tax and net income declined, primarily reflecting acquisition costs, higher compensation and operating expenses, and weaker Capital Markets results.
- Private Client Group quarterly revenue rose 2% and pre-tax income was broadly flat. Its reported margin on net revenue was 8.2%, versus 8.3%. Client assets under administration were $292 billion, up 6.2% year over year.
- Capital Markets quarterly revenue fell 7% and pre-tax income fell 35%; for six months, pre-tax income declined 45%. Management cited weaker equity commissions, underwriting and advisory activity, partly offset by stronger fixed-income commissions.
- RJ Bank quarterly pre-tax income increased 36% to $57.3 million; six-month pre-tax income increased 24% to $110.3 million. Loan growth, improved credit measures and lower loan-loss provisions contributed. Nonperforming assets fell to $116.8 million from $147.9 million at September 30, 2011; the allowance for loan losses was $144.7 million, or 1.91% of loans.
- Asset Management quarterly pre-tax income rose 9%. Management attributed higher advisory revenue to client-asset inflows and reported record assets under management in the segment.
Outlook, commentary, risks and contingencies
- Management said available assets, operating cash generation and financing facilities should support ongoing operations, including the acquired Morgan Keegan businesses. No quantified earnings or revenue guidance was provided in the supplied filing text.
- Morgan Keegan’s purchase price was approximately $1.211 billion, subject to final tangible-book-value determination and a possible downward adjustment if specified 90-day revenue-retention hurdles are not met. The company anticipated additional transaction and integration costs and identified integration, client or employee losses, and failure to realize expected benefits as risks.
- Management described results as sensitive to equity markets, interest rates, economic and political conditions, competition, trading and underwriting activity, and asset valuations. It noted that rising short-term rates could benefit net earnings given the company’s interest-sensitive asset position, but actual effects depend on rates, balances and deposit costs.
- Credit risk remains material: residential mortgage delinquencies were elevated by historical standards, and management cautioned that weaker real estate or economic conditions could make the loan-loss allowance insufficient. Non-agency mortgage securities and auction-rate securities also depend on estimated cash flows and fair values; adverse collateral performance or market changes could lead to further impairment.
- At March 31, recurring Level 3 fair-value assets totaled approximately $365 million, including $181 million of private equity investments and $174 million of auction-rate securities. Jefferson County, Alabama’s Chapter 9 filing affected certain auction-rate holdings.
- Legal proceedings are ongoing. Management estimated the aggregate possible loss at up to $10 million above any accrued liability, while noting that resolution could materially affect results in a future period. The filing also describes substantial lending commitments, guarantees and other off-balance-sheet exposures.
- RJF and RJ Bank reported regulatory capital levels above applicable well-capitalized thresholds; RJ Bank’s total risk-based capital ratio was 13.3%. The company’s debt ratings were BBB with a negative outlook from S&P and Baa2 with a stable outlook from Moody’s. S&P cited Morgan Keegan integration risk; a downgrade could increase financing costs and affect counterparties or market perception.
Important facts for investors to verify
- Post-acquisition liquidity, leverage and integration costs, including final purchase-price adjustments, retention payments and any revenue-retention adjustment.
- Whether Morgan Keegan integration delivers expected client retention, cost or revenue benefits without disrupting existing businesses.
- Trends in Capital Markets activity and whether recurring wealth-management and asset-management revenue can offset market-sensitive declines.
- RJ Bank loan growth, credit quality, delinquencies, charge-offs and adequacy of its $144.7 million allowance, particularly for residential and corporate exposures.
- Valuation assumptions and subsequent performance of Level 3 investments, auction-rate securities and non-agency mortgage securities.
- Debt-rating developments, financing availability, capital restrictions on subsidiary distributions, and the scale and timing of legal or guarantee-related payments.