RAYMOND JAMES FINANCIAL INC quarterly report, Q1 FY2014

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Raymond James Financial, Inc. — Q1 FY2014 Form 10-Q

Business context and reporting period. The filing covers the three months ended December 31, 2013, compared with the three months ended December 31, 2012. Raymond James is a financial services and bank holding company with private client, capital markets, asset management and banking businesses. The interim statements are unaudited; results for the quarter are not necessarily indicative of full-year results.

Key financial results

  • Revenue: Total revenue was $1.209 billion, up 6%; net revenue was $1.183 billion, up 7%.
  • Profit and margins: Pretax income including noncontrolling interests was $178.8 million, up 22%; pretax income excluding noncontrolling interests was $178.9 million, up 29%. Net income attributable to Raymond James was $116.6 million, up 36%. Diluted EPS was $0.81 versus $0.61. Management reported a 15% pretax margin on net revenues. The effective tax rate fell to 34.8% from 38.3%.
  • Revenue mix: Securities commissions and fees rose to $782.2 million from $738.6 million; investment advisory fees rose to $93.4 million from $62.1 million. Investment banking revenue declined to $79.8 million from $84.9 million, and interest revenue declined to $117.1 million from $123.1 million.
  • Expenses and net interest: Non-interest expenses increased 4% to $1.005 billion, with compensation and benefits up 6% to $804.9 million. Net interest income declined 4% to $91.7 million; the bank loan-loss provision was $1.6 million, versus $2.9 million.
  • Cash flow: Operating activities provided $16.5 million, compared with $238.0 million a year earlier; investing activities used $505.3 million, primarily for $585.9 million of net bank-loan growth; financing activities provided $695.7 million, including a $710.1 million increase in bank deposits. Cash and equivalents ended at $2.802 billion. Operating cash flow was substantially affected by changes in client and segregated balances.
  • Balance sheet and liquidity: Total assets were $21.924 billion, down from $23.186 billion at September 30, 2013; total liabilities were $17.799 billion and total equity was $4.126 billion. The asset decline primarily reflected client cash being redeposited through the bank-sweep program, not simply a reduction in business activity. Approximately $1.07 billion of cash and equivalents was available without restrictions, although liquidity and capital are held across regulated subsidiaries.
  • Debt and capital: Corporate debt was $1.194 billion; other borrowings were $78.8 million, and repurchase-agreement liabilities were $345.7 million. RJF and RJ Bank remained classified as well capitalized. RJF’s total risk-based capital ratio was 20.4%; RJ Bank’s was 12.7%. Long-term debt ratings were BBB (S&P) and Baa2 (Moody’s), both with stable outlooks.
  • Credit: Net bank loans were $9.313 billion, up from $8.821 billion at fiscal year-end. The allowance for loan losses was $138.1 million, or 1.46% of loans. Nonperforming assets were $100.5 million, down from $104.4 million.

Material changes and segment performance

  • Private Client Group: Revenue increased 9% to $779.2 million and pretax income increased 34% to $71.5 million. Client assets under administration reached $422.9 billion, up 14% year over year; fee-based account assets were $151.2 billion, up 27%.
  • Capital Markets: Revenue fell 4% to $245.0 million, while pretax income rose 14% to $33.4 million. Higher equity commissions and trading profits partly offset a 29% decline in fixed-income institutional commissions.
  • Asset Management: Revenue rose 46% to $96.0 million and pretax income rose 52% to $31.8 million, supported by asset growth, net inflows, market appreciation and performance fees. Discretionary assets under management were $60.5 billion, up 30% year over year.
  • RJ Bank: Pretax income declined 16% to $57.1 million. Lower loan yields and net interest margin outweighed loan growth; the bank’s net interest margin was 3.04%, versus 3.52%.
  • Other: Pretax loss narrowed to $14.9 million from $32.4 million, chiefly because Morgan Keegan integration expenses were no longer material; the prior-year quarter included $17.4 million of acquisition-related costs.

Outlook, risks and unusual items

  • No specific earnings or revenue guidance was provided. Management said stronger markets, client activity and asset growth support results, but performance remains sensitive to economic conditions, equity and fixed-income markets, interest rates, lending markets and competition.
  • Based on an analysis using September 30, 2013 balances and assumptions, management estimated that an instantaneous 100-basis-point rise in short-term rates could increase company pretax income by approximately $140 million to $170 million over 12 months. This is a sensitivity estimate, not formal guidance; actual results depend on rates, balances, competition and deposit pricing.
  • The final Volcker Rule was issued in December 2013. Management did not expect a significant adverse impact overall, but said the effect on certain activities remained under review.
  • The quarter included a $5.5 million gain from redemption of Jefferson County, Alabama sewer-revenue auction-rate securities following resolution of the county’s bankruptcy matter.
  • For pre-acquisition Morgan Keegan legal matters, Regions indemnifies Raymond James. The estimated gross potential liability range was $30 million to $220 million; the balance sheet included approximately $165 million of indemnification assets and $164 million of related liabilities. Other litigation was estimated to involve up to $6 million in possible losses above accrued liabilities; management did not expect a material adverse effect on financial position, though outcomes could affect results in a future period.
  • Key risks include loan-credit deterioration, valuation uncertainty in Level 3 assets (including auction-rate securities and private equity), market and interest-rate movements, regulatory changes, litigation, and operational or cybersecurity events. Management reported disclosure controls were effective and no material change in internal controls during the quarter.

Most important facts for investors to verify

  • Whether revenue and earnings growth persist without the prior-year acquisition-cost comparison benefit and the current-period ARS redemption gain.
  • Whether RJ Bank’s loan growth can offset continued pressure on loan yields and net interest margin, and whether credit quality and reserves remain adequate.
  • How the client cash sweep changes affect reported assets, liabilities, operating cash flow and available liquidity.
  • Whether the interest-rate sensitivity estimate remains relevant as balances, deposit pricing and market conditions change.
  • Developments in indemnified Morgan Keegan litigation, other legal matters, Volcker Rule implementation and Level 3 investment valuations.