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RJF > SEC Filings for RJF > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for RAYMOND JAMES FINANCIAL INC

Form 10-Q for RAYMOND JAMES FINANCIAL INC


8-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the results of our operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and accompanying notes to condensed consolidated financial statements. Where "NM" is used in various percentage change computations, the computed percentage change has been determined not to be meaningful.

Factors Affecting "Forward-Looking Statements"

Certain statements made in this report on Form 10-Q may constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning future strategic objectives, business prospects, anticipated savings, financial results (including expenses, earnings, liquidity, cash flow and capital expenditures), industry or market conditions, demand for and pricing of our products, acquisitions and divestitures, anticipated results of litigation and regulatory developments or general economic conditions. In addition, words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects," "forecasts," and future or conditional verbs such as "will," "may," "could," "should," and "would," as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our filings with the Securities and Exchange Commission (the "SEC") from time to time, including our most recent Annual Report on Form 10-K and subsequent Forms 10-Q, which are available on www.raymondjames.com and the SEC's website at www.sec.gov. We expressly disclaim any obligation to update any forward-looking statement in the event it later turns out to be inaccurate, whether as a result of new information, future events or otherwise.

Executive overview

We operate as a financial services and bank holding company. Results in the businesses in which we operate are highly correlated to the general overall strength of U.S. economic conditions and, more specifically, to the direction of the U.S. equity and fixed income markets, the corporate and mortgage lending markets and commercial and residential credit trends. Overall market conditions, interest rates, economic, political and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control. These factors affect the financial decisions made by market participants which include investors, borrowers, and competitors, impacting their level of participation in the financial markets. These factors also impact the level of public offerings, trading profits, interest rate volatility and asset valuations, or a combination thereof. In turn, these decisions affect our business results.

Quarter ended June 30, 2014

We achieved record net revenues of $1.21 billion for the quarter, a $105 million, or 9%, increase compared to the prior year quarter, and a 3% increase compared to the preceding quarter. Total client assets under administration were a record $479 billion at June 30, 2014, an 18% increase over the prior year level and up nearly 5% compared to the preceding quarter. The increase in assets under administration is attributable to both market appreciation and net inflows of client assets. Non-interest expenses increased $55 million, or 6%, compared to the prior year quarter, and $10 million, or 1%, compared to the preceding quarter. The increase from the prior year quarter primarily results from increases in compensation, commissions and benefits, the bank loan loss provision, and business development expenses offset by decreases in acquisition related expenses and communications and information processing expense. The increases from the preceding quarter are primarily due to an increase in compensation, commissions and benefits expenses offset by a decrease in communications and information processing expenses. Acquisition and integration related expenses in the current year quarter are no longer material for separate reporting since our integration of Morgan Keegan was substantially complete as of September 30, 2013.


Index

Our record net income of $123 million represents an increase of $39 million, or 46%, compared to the prior year quarter, and an increase of $18 million, or 17%, compared to the preceding quarter. After excluding the acquisition related and other one-time expenses we incurred in the prior year quarter, our adjusted net income increased $30 million, or 33% (a non-GAAP measure).(1)

A summary of the most significant matters impacting our segment results as compared to the prior year quarter, are as follows:

Our Private Client Group segment generated record net revenues of $817 million, a 10% increase, while pre-tax income increased 39% to a record $81 million. The increase in revenues is primarily attributable to increased securities commissions and fee revenues, predominately arising from fee-based accounts, as well as an increase in mutual fund and annuity service fee revenues. Commission expenses increased in proportion to the increase in corresponding commission revenues while all other components of non-interest expenses increased in total by less than 1%. Client assets under administration of the Private Client Group increased 17% over the prior year, to a record $454.1 billion at June 30, 2014. Net inflows of client assets have been positively impacted by successful recruiting of financial advisors, among other favorable factors.

The Capital Markets segment generated net revenues of $237 million, a 7% increase, while pre-tax income increased $12 million, or 75%, to $28 million. The primary driver of the increase in pre-tax income is an $18 million increase in trading profits, which result primarily from fixed income securities. Current period trading profits continued at a steady level, approximating the two preceding quarters, and result in a substantially favorable comparison to the prior year quarter when we experienced a trading loss, primarily in our municipal fixed income securities portfolio. Favorable levels of equity underwriting fees and tax credit funds syndication fees offset a significant decrease in institutional fixed income commission revenues. The decline in institutional fixed income commission revenues results from challenging fixed income market conditions due to economic uncertainty, historically low interest rates, the relatively low volatility of benchmark interest rates and decreased customer trading volumes. Despite these fixed income market conditions, we continued to generate a reasonable level of trading profits in our fixed income operations.

Our Asset Management segment generated a 19% increase in net revenues to $91 million and a $7 million, or 31%, increase in pre-tax income. Financial assets under management increased 25% from the prior year, to a record $65.3 billion as of June 30, 2014. Both strong net inflows of client assets and market appreciation contributed to the increase in revenues and pre-tax income.

RJ Bank generated $65 million in pre-tax income, a $2 million, or 3% increase, resulting from increases in net interest income and other revenues, offset by an increase in the provision for loan losses. Net interest income increased due to growth in the average loans outstanding, offset somewhat by a lower net interest margin. Other revenues increased due to a positive variance in foreign exchange associated with a few remaining unhedged Canadian dollar denominated loans. The credit characteristics of the loan portfolio continued to reflect the positive impact of improved economic conditions, however comparisons to the prior year are impacted by the prior period provision for loan loss which was a net benefit.

Activities in our Other segment reflect a pre-tax loss that is $15 million, or 51%, less than the prior year quarter. Net revenues in the segment decreased $9 million. While current period increases in the valuations of certain investments in our private equity portfolio were favorable overall, the increases were not as robust as those in the prior year period. However, our non-interest expenses have decreased substantially as we no longer separately report acquisition and integration related costs (which were included in the other segment) since our integration of Morgan Keegan was substantially complete as of September 30, 2013.

(1) Refer to the discussion and reconciliation of the GAAP results to the non-GAAP results in the "Reconciliation of the GAAP results to the non-GAAP measures" section of this MD&A.


Index

Nine months ended June 30, 2014

Our net revenues of $3.6 billion represent a 6% increase compared to the prior year period. Total client assets under administration increased to a record $479 billion at June 30, 2014, an 18% increase over the prior year level. Non-interest expenses increased $139 million, or 5%, compared to the prior year period. The increases are primarily due to the increase in compensation, commissions and benefits expenses which were partially offset by the decrease in acquisition related expenses. Acquisition and integration related expenses in the current year are no longer material for separate reporting since our integration of Morgan Keegan was substantially complete as of September 30, 2013. The combination of increasing net revenues and overall expense control has helped us achieve a 15% pre-tax margin on net revenues in the current year period.

Our net income increased $94 million, or 38%, compared to the prior year period. After excluding the acquisition related and other one-time expenses we incurred in the prior year, our adjusted net income increased $58 million, or 20%, compared to the prior year period (a non-GAAP measure).(1) Net income in the prior year period also included $14 million (after the attribution to noncontrolling interests) arising from our indirect investment in Albion, a private equity holding which was sold in April, 2013.

Our segment results during the nine month period were most significantly impacted by the factors described above for the quarter, unless otherwise noted:

Our Private Client Group segment generated an increase of 39% in pre-tax income, to $230 million.

The Capital Markets segment has realized a $29 million, or 48%, increase in pre-tax income to $91 million.

Our Asset Management segment has generated a $27 million, or 41%, increase in pre-tax income to $93 million. In addition to the factors described above, we earned a higher amount of performance fees in the current year which result from positive net performance from certain of our managed funds (a portion of which are attributable to noncontrolling interests), which have contributed to the increase in revenues and pre-tax income.

RJ Bank has realized a $16 million, or 8% decrease in pre-tax income, to $179 million, as net interest margin contraction more than offset net interest earned on net loan growth.

Activities in our Other segment have resulted in a pre-tax loss that is $29 million less than the prior year. In addition to the factors described above, the prior year included significant revenues associated with our indirect investment in Albion, which was subsequently sold in April 2013, thus have a significant impact on comparisons to the prior year period.

Our effective tax rate for the current year period is 35.8%, a decrease from the 37.9% effective tax rate in the prior year period. The current year-to-date effective tax rate has benefited from strong year-to-date gains in our Company Owned Life Insurance portfolio compared to the prior year period (such gains are not subject to tax and thus benefit the effective tax rate), state tax credits, the recognition of prior year state tax refunds resulting from a change in state tax filing position, and a projected increase in low income housing tax credits .

(1) Refer to the discussion and reconciliation of the GAAP results to the non-GAAP results in the "Reconciliation of the GAAP results to the non-GAAP measures" section of this MD&A.


Index

Segments

We currently operate through the following five business segments: Private Client Group (or "PCG"); Capital Markets; Asset Management; RJ Bank; and Other (which consists of our principal capital and private equity activities as well as various corporate overhead costs of RJF including the interest cost on our public debt and the acquisition and integration costs associated with our acquisitions, most significantly Morgan Keegan).

As more fully described in Note 2 on page 104, and Note 28 on page 187, of our 2013 Form 10-K, effective September 30, 2013 we implemented changes in our reportable segments. These segment changes had no effect on the historical financial results of operations. Prior period segment balances impacted by this change have been reclassified to conform to the current presentation.

The following table presents our consolidated and segment gross revenues, net revenues, and pre-tax income (loss), the latter excluding noncontrolling interests, for the periods indicated:

                                Three months ended June 30,                   Nine months ended June 30,
                            2014            2013         % change         2014            2013         % change
                                                            ($ in thousands)
Total company
Revenues                $ 1,241,283     $ 1,137,728            9  %   $ 3,654,682     $ 3,445,535            6  %
Net revenues              1,214,231       1,109,536            9  %     3,576,278       3,362,119            6  %
Pre-tax income
excluding
noncontrolling
interests                   191,243         132,054           45  %       535,631         402,218           33  %

Private Client Group
Revenues                    819,436         744,990           10  %     2,413,300       2,188,114           10  %
Net revenues                816,918         742,547           10  %     2,405,826       2,178,814           10  %
Pre-tax income               81,473          58,664           39  %       230,098         165,698           39  %

Capital Markets
Revenues                    241,013         227,321            6  %       714,145         711,375            -
Net revenues                236,509         221,610            7  %       702,594         696,862            1  %
Pre-tax income               28,009          16,047           75  %        91,025          61,689           48  %

Asset Management
Revenues                     91,222          76,805           19  %       274,772         211,975           30  %
Net revenues                 91,216          76,802           19  %       274,753         211,968           30  %
Pre-tax income               31,306          23,928           31  %        93,006          65,731           41  %

RJ Bank
Revenues                     93,740          83,068           13  %       264,770         264,939            -
Net revenues                 91,556          80,877           13  %       258,702         257,696            -
Pre-tax income               64,921          62,881            3  %       178,777         195,100           (8 )%

Other
Revenues                     12,984          22,982          (44 )%        37,055         118,503          (69 )%
Net revenues                 (6,541 )         2,684         (344 )%       (21,347 )        58,756         (136 )%
Pre-tax loss                (14,466 )       (29,466 )         51  %       (57,275 )       (86,000 )         33  %

Intersegment
eliminations
Revenues                    (17,112 )       (17,438 )          2  %       (49,360 )       (49,371 )          -
Net revenues                (15,427 )       (14,984 )         (3 )%       (44,250 )       (41,977 )          5  %

Reconciliation of the GAAP results to the non-GAAP measures

We believe that the non-GAAP measures provide useful information by excluding material items that may not be indicative of our core operating results and that the GAAP and the non-GAAP measures should be considered together. There are no non-GAAP adjustments in either the current quarter or the year-to-date period ended June 30, 2014, as we no longer separately report acquisition and integration related costs since our integration of Morgan Keegan was substantially complete as of September 30,


Index

2013. The non-GAAP adjustments impacting the prior year periods presented are comprised of one-time acquisition and integration costs (primarily associated with our Morgan Keegan acquisition) and other non-recurring expenses, net of applicable taxes. Refer to the footnotes to the table below for further explanation of each non-recurring item.

The following table provides a reconciliation of the GAAP basis to the non-GAAP measures for the prior year periods which included non-GAAP adjustments:

                                                      Three months ended     Nine months ended
                                                        June 30, 2013          June 30, 2013
                                                     ($ in thousands, except per share amounts)
Net income attributable to RJF, Inc. - GAAP basis    $         83,862       $       249,696
Non-GAAP adjustments:
Acquisition related expenses (1)                               13,449                51,753
RJF's share of RJES goodwill impairment expense (2)                 -                 4,564
RJES restructuring expense (3)                                      -                 1,600
Pre-tax non-GAAP adjustments                                   13,449                57,917
Tax effect of non-GAAP adjustment (4)                          (4,789 )             (21,962 )
Adjusted net income attributable to RJF, Inc. -
Non-GAAP basis                                       $         92,522       $       285,651
Non-GAAP earnings per common share:
Non-GAAP basic                                       $           0.66       $          2.05
Non-GAAP diluted                                     $           0.65       $          2.01
Average equity - GAAP basis (5)                      $      3,507,475       $     3,415,923
Average equity - non-GAAP basis (6)                  $      3,532,111       $     3,427,428
Return on equity for the quarter (annualized)                     9.6 %                 N/A
Return on equity for the quarter - non-GAAP basis
(annualized) (7)                                                 10.5 %                 N/A
Return on equity year-to-date (annualized)                        N/A                   9.7 %
Return on equity year-to-date - non-GAAP basis
(annualized) (7)                                                  N/A                  11.1 %

(1) The non-GAAP adjustment adds back to pre-tax income one-time acquisition and integration expenses associated with acquisitions that were incurred during the period.

(2) The non-GAAP adjustment adds back to pre-tax income RJF's share of the total goodwill impairment expense associated with our RJES reporting unit.

(3) The non-GAAP adjustment adds back to pre-tax income a one-time restructuring expense associated with our RJES operations.

(4) The non-GAAP adjustment reduces net income for the income tax effect of the pre-tax non-GAAP adjustments, utilizing the effective tax rate in such periods to determine the current tax expense.

(5) For the quarter, computed by adding the total equity attributable to RJF, Inc. as of the date indicated plus the prior quarter-end total, divided by two. For the year-to-date period, computed by adding the total equity attributable to RJF, Inc. as of each quarter-end date during the indicated year-to-date period, plus the beginning of the year total, divided by four.

(6) The calculation of non-GAAP average equity includes the impact on equity of the non-GAAP adjustments described in the table above, as applicable for each respective period.

(7) Computed by utilizing the net income attributable to RJF, Inc.-non-GAAP basis and the average equity-non-GAAP basis, for each respective period. See footnotes (5) and (6) above for the calculation of average equity-non-GAAP basis.


Index

Net interest analysis

We have certain assets and liabilities, not only held in our RJ Bank segment but also held in our PCG and Capital Markets segments, which are subject to changes in interest rates; these changes in interest rates have an impact on our overall financial performance. Given the relationship of our interest sensitive assets to liabilities held in each of these segments, an increase in short-term interest rates would result in an overall increase in our net earnings (we currently have more assets than liabilities with a yield that would be affected by a change in short-term interest rates). A gradual increase in short-term interest rates would have the most significant favorable impact on our PCG and RJ Bank segments (refer to the table in Item 3 - Interest Rate Risk in this Form 10-Q, which presents an analysis of RJ Bank's estimated net interest income over a 12 month period based on instantaneous shifts in interest rates using the asset/liability model applied by RJ Bank).

Based upon our latest analysis performed as of September 30, 2013, we estimate that a 100 basis point instantaneous rise in short-term interest rates would result in an increase in our pre-tax income of approximately $150 million over a twelve month period. Approximately half of such an increase would be attributable to account and service fee revenues (resulting from an increase in the fees generated in lieu of interest income from our multi-bank sweep program with unaffiliated banks and the discontinuance of money market fee waivers) which are reported in the PCG segment, and the remaining portion of the increase would be attributable to net interest income reported in both our PCG and RJ Bank segments. This estimate is based on static balances as of September 30, 2013 and conservative assumptions related to interest rates credited to our clients on their cash balances in various interest rate environments. The actual amount of any increase we would realize in the future will ultimately be based on a number of factors including, but not limited to, the actual change in balances, the rapidity and magnitude of the increase in interest rates, the competitive landscape at such time, and the returns on comparable investments which will factor into the interest rates we pay on client cash balances. The vast majority of any incremental benefit to pre-tax income from a rise in short-term interest rates would be expected to arise from the first 100 basis point increase, as we presume that a significant portion of any further incremental increase in short-term interest rates would be passed along to clients, and thus such additional interest revenues and interest sensitive fees would be offset by increases of similar amounts in our interest expense.


Index

Quarter ended June 30, 2014 compared with the quarter ended June 30, 2013 - Net interest

The following table presents our consolidated average interest-earning asset and liability balances, interest income and expense balances, and the average yield/cost, for the periods indicated:

                                                            Three months ended June 30,
                                                2014                                          2013
                                Average         Interest       Average        Average         Interest       Average
                               balance(1)      inc./exp.     yield/cost      balance(1)      inc./exp.     yield/cost
                                                                 ($ in thousands)
Interest-earning assets:
Margin balances              $  1,760,373     $   16,894         3.84 %    $  1,783,205     $   14,935         3.35 %
Assets segregated pursuant
to regulations and other
segregated assets               2,392,151          3,666         0.61 %       3,534,615          4,206         0.48 %
Bank loans, net of unearned
income(2)                      10,419,768         86,231         3.29 %       8,572,162         82,508         3.81 %
Available for sale
securities                        643,797          1,598         0.99 %         749,235          1,937         1.03 %
Trading instruments(3)            668,527          4,750         2.84 %         699,477          5,225         2.99 %
Stock loan                        557,243          2,200         1.58 %         371,978          3,222         3.46 %
Loans to financial
advisors(3)                       420,113          1,528         1.45 %         418,896          1,699         1.62 %
Corporate cash and all
other(3)                        1,971,488          2,524         0.51 %       3,431,133          3,644         0.42 %
Total                        $ 18,833,460     $  119,391         2.54 %    $ 19,560,701     $  117,376         2.40 %

Interest-bearing
liabilities:
Brokerage client liabilities $  3,473,301            273         0.03 %    $  4,872,946     $      511         0.04 %
Bank deposits(2)               10,400,037          1,980         0.08 %       9,055,628          2,191         0.10 %
Trading instruments sold but
not yet purchased(3)              266,655          1,075         1.61 %         248,443            994         1.60 %
Stock borrow                      143,869            900         2.50 %         125,407            619         1.97 %
Borrowed funds                    342,187          1,128         1.32 %         413,881          1,149         1.11 %
Senior notes                    1,148,971         19,010         6.62 %       1,148,783         19,010         6.62 %
Loans payable of
consolidated variable
interest entities(3)               50,085            653         5.22 %          68,959            917         5.32 %
Other(3)                          365,718          2,033         2.22 %         336,975          2,801         3.32 %
Total                        $ 16,190,823     $   27,052         0.67 %    $ 16,271,022     $   28,192         0.69 %
Net interest income                           $   92,339                                    $   89,184

(1) Represents average daily balance, unless otherwise noted.

(2) See Results of Operations - RJ Bank in this MD&A for further information.

(3) Average balance is calculated based on the average of the end of month balances for each month within the period.

Net interest income increased $3 million, or 4%, compared to the prior year quarter. Net interest income is earned primarily by our PCG and RJ Bank segments, which are discussed separately below.

Net interest income in the PCG segment approximated the prior year quarter level. An increase in net interest income resulting from the increase in margin . . .

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