Dear Fellow Shareholder,
Raymond James Financial celebrated its 50th Anniversary in 2012. It was gratifying to celebrate our growth from a start-up to an annual run rate of almost $4.5 billion in revenues at the end of the year and reminisce about the challenges which we survived, the innovations that we initiated and the culture that we created. Our success was and is all about the people, both past and present, who have been part of the Raymond James family, without whom we wouldn’t have achieved this much. They remain steadfast in the pursuit of our mission.
It is befitting that we attained many new records in 2012 in celebration of our 50th Anniversary. Net revenues were a record $3.8 billion, up 14% from last year’s prior record, which relates principally to the addition of Morgan Keegan for the second half of the year. Net expenses grew 16%, as costs of the merger dampened the net growth of the overall company. Thus, net income grew only 6% to a record $296 million. Net income per fully diluted share grew to $2.20, contrasted to $2.19 in fiscal 2011. On a non-GAAP basis, 2012 net income, adjusted for costs of the merger, was $334 million, up 10% from last year’s non-GAAP net income of $303 million, which excluded the pretax loss of $41 million arising from the repurchase of ARS securities. Consequently, adjusted earnings per fully diluted share were $2.51 compared to $2.39 last year. On a non-GAAP basis, the after-tax operating margin on net revenues was 8.6% and the after-tax rate of return on average equity was 11.0%. Shareholders’ equity increased to $3.27 billion, or $24.02 per share, on September 30, 2012. The growth in shareholders’ equity is primarily related to earnings and the public offering of common shares issued in conjunction with the acquisition of Morgan Keegan.
Although segment results are informative with respect to understanding what’s happening in the business, the results were materially impacted by continued market volatility arising from the election, European economic instability, persistent unemployment and nominal GDP growth in the U.S., and continuing uncertainty about tax law and impending fiscal policy. Furthermore, the addition of Morgan Keegan in the second half of the fiscal year contributed over $400 million in revenues and over $50 million in related pretax profits (before acquisition and integration costs) for the two quarters that it has been included in consolidated results.
Subject to those caveats, the Private Client Group generated $2.48 billion in revenues, up 13% over last year, and $210 million of pretax profit contribution, down 4% from last year as much time, effort and retention dollars were expended in welcoming Morgan Keegan advisors to the Raymond James family. The count of financial advisors grew from 5,350 at the beginning of the year to 6,330 at year-end. Total client assets under administration grew from $256 billion to $390 billion. The financial advisor desktop technology has gone and is going through a comprehensive software and hardware upgrade as a result of the efforts of Bella Allaire and her entire team, aided by other departmental and operational business input. Morgan Keegan is scheduled to be fully integrated onto our platform in the second fiscal quarter of 2013.
The Capital Markets segment produced $797 million in revenues in 2012, up 20%. The pretax profit contribution was $83 million, an increase of only 6%, largely due to anemic results in the Equity Capital Markets part of the business. We are in the process of reducing expenses in this sector to improve financial results and are hopeful that revenues will increase as U.S. corporate growth accelerates. Fixed Income and Public Finance are doing reasonably well in light of the pressure on state and local governments to reduce costs. Raymond James Tax Credit Funds, which is included in this segment, had another excellent year. On January 1, Ron Diner is becoming executive chairman of RJTCF and Steve Kropf will assume the president and CEO role.
The Asset Management Group recorded a 5% increase in revenues to $237 million in 2012. The pretax profit contribution grew 2% to $67 million, as revenues and profits can lag somewhat behind asset growth, and Eagle has added portfolio managers to provide some new products, as is described in more detail in the asset management section of this report. Total firm fee-based assets increased to over $100 billion at year-end, of which $43 billion were managed by Eagle, AMS Freedom or outside asset management companies.
We saved the best for last again as Raymond James Bank’s revenues grew by 23% to $346 million and its pretax profit contribution increased by 39% to $240 million. Total loans grew 22% to $8.1 billion and loan performance continued to improve. Total assets were $9.7 billion at year-end. We expect the bank to grow approximately at the rate supportable by its net earnings, if conditions in the market permit.
In consonance with the importance of our 50th Anniversary, the year was filled with a long list of accomplishments, awards and significant events, some of which are enumerated below:
- We acquired Morgan Keegan for $930 million (net of a $250 million cash dividend at closing) from Regions Financial, which was the largest acquisition in our history. Thereby, we expanded our Raymond James financial advisor count by approximately 890, added a premier fixed income/public finance department and generally integrated additional experienced professionals throughout the firm. A number of operations have been combined already, and we plan to complete the movement of the remainder of operations to the Raymond James platform in February 2013.
- Raymond James Financial raised $950 million net to us from one equity and two bond offerings to fund the acquisition, without reducing the excellent liquidity position of the holding company.
- We acquired the minority 25% interest in our London-based UK private-client subsidiary, Raymond James Investment Services, Ltd., from Killik, our partner since inception, for $3.8 million. That subsidiary is growing at a moderate pace in spite of Europe’s economic problems and, more importantly, appears to have reached critical mass to become a consistent profit contributor.
- In December 2011, Paul Reilly re-aligned his senior management team. He appointed Dennis Zank chief operating officer of Raymond James Financial. Dennis has been instrumental in guiding the Morgan Keegan integration. Tash Elwyn was appointed president of Raymond James & Associates Private Client Group to fill Dennis Zank’s prior position. Scott Curtis was promoted to president of Raymond James Financial Services to become successor to Dick Averitt, who retired as CEO of that subsidiary at 2012 year-end. Both report now to Chet Helck, CEO of the Global Private Client Group. Chet is also currently serving as chairman of the Securities Industry and Financial Markets Association (SIFMA). After closing the Morgan Keegan transaction in April, John Carson, Morgan Keegan’s CEO, became president of Raymond James Financial and has been leading the Morgan Keegan integration from the Morgan Keegan side as the point man for an excellent team of managers in Memphis. Kevin Giddis, another member of the Morgan Keegan team, has become head of Fixed Income, and Rob Baird was named head of Public Finance, with both reporting to John Carson. We believe we have one of the strongest leadership teams in the industry.
- For the second year in a row, Raymond James & Associates finished first in 2011 in Registered Rep. magazine’s annual Broker Report Card competition. Financial advisors rated us 9.3 on a 10 point scale, and 98% reported that Raymond James is the best firm for which to work.
- In January, Raymond James Bank received approval to convert to a national bank. RJF became a bank holding company and financial holding company with the Federal Reserve Bank as a new regulator.
- In February, Raymond James Bank completed the acquisition of Allied Irish Banks’ $400 million Canadian loan portfolio.
- Following Richard Riess’ retirement, Jeff Dowdle was appointed the Asset Management Group’s representative on the Executive Committee, while Richard Rossi and Cooper Abbott, co-presidents of Eagle Asset Management, assumed the leadership role of our proprietary asset management business. Indeed, in addition to Richard Riess’ legacy of growing a first-class asset management company, his crowning achievement was to build an excellent successor management team.
- For the second year in a row, Raymond James was selected as the fourth most admired securities firm by Fortune magazine.
- In February, our real estate investment banking team was named the best real estate investment banking team by Global Finance magazine’s World’s Best Investment 2012 list. Furthermore, the Raymond James Investment Banking department also received four awards from the M&A Advisor for transactions completed in 2011. Three of those deals were designated “Deals of the Decade.”
- During the third quarter, Computerworld magazine named Raymond James one of the Top 100 Best Places to Work in IT for the seventh consecutive year.
- Utilizing the advice of numerous financial advisors and operations personnel, Raymond James released a new version of our Advisor Access platform, which fully integrates all client data and new financial software on the desktop, to enable financial advisors to better serve their clients.
- To avoid natural disasters like hurricanes and earthquakes, Tim Eitel and Raymond LaCour led an effort that selected Denver as a new home for our data center. Construction is now underway on a 40,000-square-foot facility that will house our primary IT hardware. Operations and IT development will still be located in St. Petersburg, Southfield and Memphis.
- Eagle recruited an experienced, highly rated team of small- and mid-cap portfolio managers to provide more capacity in those disciplines. Moreover, subsequent to the end of fiscal 2012, Eagle completed the purchase of a 45% interest in ClariVest Asset Management LLC, which offers a number of asset management products, utilizing quantitative selection screens.
- Raymond James Bank completed the purchase of $185 million of securities-based loans from Regions Bank in July, pursuant to the Morgan Keegan acquisition agreement.
- For the third time in the last four years, our Canadian subsidiary, Raymond James Ltd., ranked highest in investor satisfaction among Canadian full-service brokerage firms in the J.D. Power and Associates 2012 Full Service Investor Satisfaction Survey.
- In July 2012, Thomson Reuters named Raymond James a top 10 municipal bond underwriter nationally in the first half of 2012.
In preparation for the 2012 annual report, we both read the last few annual reports. As might be expected, the 2008 and 2009 reports were replete with risk management issues surrounding the fiscal crisis. However, 2010 and 2011 shifted to a focus on recovery, which we correctly described as slow and erratic, and on the need for government to deal with the deficit, i.e., increase revenues, materially reduce expenses in all areas and address entitlement reform for the purpose of mitigating off-balance sheet obligations. Essentially nothing substantive has been done in the last three years. Now, at the last minute, the administration and Congress are conducting another fire drill at year-end to extend tax benefits to taxpayers below an undefined income level and cause those above that level to have a higher rate. At the same time, the parties are attempting to craft an agreement on other tax issues as well as agree, at least generally, on some expenditure cuts. This is not a very professional approach to dealing with the government’s financial challenges. By the way, expenditure cuts are described over a 10-year time frame with back-end loading, when we know there will be a high probability that actions could be further delayed. Moreover, even if something is done, it’s still a small piece of the requisite final fiscal puzzle. If something isn’t completed, the “fiscal cliff” will be dealt with early next year and hopefully throughout 2013, as numerous actions will be necessary to put the United States’ financial ship on a proper course.
Fortunately, the private, free enterprise segment of our economy continues to make slow progress. Housing is showing signs of recovery, the United States is moving toward energy independence, and employment levels have improved in spite of the lack of progress on structural improvement in the United States’ fiscal architecture. Although the long-term issues must be resolved, we still believe the private sector will muddle through while our legislators procrastinate. In the meantime, our challenges are to complete the platform integration with Morgan Keegan, reduce redundant expenses and generate some additional organic growth. Since we continue to enjoy excellent recruiting activity, vibrant loan growth in our bank and there are some signs of improvement in Equity Capital Markets, we are encouraged about the prospects for 2013.
Best wishes for a happy, healthy and prosperous New Year!
Paul C. Reilly
Thomas A. James
*Descriptions of awards and criteria are available upon request.
We, the associates of Raymond James, commit our energies, intellect and knowledge to attaining the financial objectives of our clients by providing the highest possible level of service and delivering superior investment alternatives. We believe that putting the financial well-being of our clients first ultimately serves the best interests of our shareholders, our communities and ourselves. Remaining responsive to the needs of our clients in a financial environment characterized by constant change is our continuing challenge.
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