RAYMOND JAMES FINANCIAL INC annual report, FY2013

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Raymond James Financial, Inc. — FY2013 Form 10-K

Reporting period: Fiscal year ended September 30, 2013. This is an annual filing, not a Q4-only report; selected fourth-quarter results are shown below. Raymond James is a diversified financial-services and bank holding company operating across brokerage, capital markets, asset management and banking.

Financial performance

  • FY2013: Total revenue was $4.596 billion, up 18%; net revenue was $4.485 billion, up 18%. Net income attributable to Raymond James was $367.2 million, up 24%. Diluted EPS was $2.58, up 17%.
  • Pre-tax income excluding noncontrolling interests was $564.2 million, up 20%; the corresponding margin on net revenue was approximately 12.6%, versus 12.4% in FY2012. Reported ROE was 10.6% (12.0% on the company’s non-GAAP basis).
  • FY2013 Q4: Revenue was $1.150 billion; net revenue was $1.123 billion; income before tax including noncontrolling interests was $158.5 million; net income attributable to Raymond James was $117.5 million; diluted EPS was $0.82.
  • Cash flow and liquidity: Operating cash flow was $659.8 million; investing activities used $652.0 million; financing activities provided $615.4 million. Cash and cash equivalents increased $616.6 million to $2.597 billion. About $1.02 billion was identified as available without restrictions; additional cash was segregated for regulatory and client purposes.
  • Debt and capital: Corporate debt was $1.195 billion, down from $1.329 billion. RJF’s total capital ratio was 19.8% and RJ Bank’s was 13.0%; both were categorized as well capitalized. Senior debt ratings were BBB/Negative from S&P and Baa2/Stable from Moody’s.
  • Bank credit: RJ Bank loans were $8.96 billion; its allowance for loan losses was $136.5 million, or 1.52% of loans. Net charge-offs fell to $13.3 million from $24.2 million, and nonperforming assets declined to $104.4 million from $114.9 million.

Segments and changes versus FY2012

  • Private Client Group: Revenue was $2.931 billion, up 18%; pre-tax income was $230.3 million, up 7%. Client assets under administration reached $402.6 billion. Segment pre-tax margin on net revenue declined to 7.9% from 8.7%.
  • Capital Markets: Revenue was $945.5 million, up 15%; pre-tax income was $102.2 million, up 35%. Fixed-income commissions, M&A fees and fixed-income investment banking improved; trading profits fell 44%, reflecting adverse municipal-bond market conditions.
  • Asset Management: Revenue was $292.8 million, up 23%; pre-tax income was $96.3 million, up 43%. Managed-program assets under management reached $56.0 billion, with growth from net inflows, market appreciation, ClariVest and Morgan Keegan client-account integration.
  • RJ Bank: Pre-tax income rose 11% to $267.7 million, principally due to lower loan-loss provisions and higher net interest income. Net interest margin nevertheless declined to 3.25% from 3.50% as asset yields fell.
  • Results include a full year of Morgan Keegan operations, compared with six months in FY2012, limiting direct year-over-year comparability. Morgan Keegan client accounts and advisors moved to RJ&A’s platform in February 2013; management said integration was substantially complete by year-end. The company also changed its reportable segments, reclassifying prior periods for comparability.

Management commentary, outlook and risks

  • Management reported record net revenue and pre-tax earnings across the four operating segments, and record total client assets under administration of $425.4 billion, up 10%. It attributed growth to the Morgan Keegan contribution, stronger markets and business activity, and asset inflows.
  • FY2013 results included a $65 million gain on a proprietary-capital investment; the after-noncontrolling-interest contribution to Raymond James was $22.7 million. The Other segment also recorded $73.5 million of acquisition-related expenses, while Capital Markets recorded a $6.9 million RJES goodwill impairment. The effective tax rate fell to 34.9% from 37.3%, including nonrecurring benefits related to foreign-earnings repatriation strategy and company-owned life insurance.
  • No specific earnings or revenue guidance was provided. Management estimated that an instantaneous 100-basis-point rise in short-term rates could increase pre-tax income by approximately $140–$170 million over 12 months, based on static balances and stated assumptions; actual effects may differ.
  • Key risks include market and interest-rate volatility, low rates pressuring spreads, credit deterioration and real-estate weakness, competition and pricing pressure, recruiting and retention costs, operational and cybersecurity disruptions, litigation, and evolving regulation. Basel III capital rules were scheduled to take effect beginning in 2015; the company was evaluating their impact.
  • Pre-acquisition Morgan Keegan legal matters are subject to Regions’ indemnification. Management estimated potential liability of $30–$250 million for those matters and recorded related liabilities and an indemnification asset. Separate litigation not covered by that indemnity had an estimated possible loss range of up to $6 million above accrued amounts. Management said resolution was not expected to materially affect financial position or cumulative results, though individual matters could affect a future period.

Important facts for investors to verify

  • How much of FY2013 growth and earnings improvement is repeatable after accounting for the full-year Morgan Keegan contribution and the $65 million investment gain?
  • Whether integration savings materialize and whether Private Client Group margins recover from the FY2013 decline.
  • How asset yields, deposit costs and client cash-sweep economics respond to changing interest rates, versus management’s modeled rate sensitivity.
  • Whether RJ Bank’s improving credit metrics persist, especially given loan growth, commercial-real-estate exposures and remaining nonperforming residential loans.
  • Regions’ ability to meet its Morgan Keegan indemnification obligations, and developments in the disclosed litigation and contingencies.
  • Whether capital, liquidity and dividend capacity remain adequate as regulatory requirements, loan commitments and other contractual obligations evolve.