Raymond James Financial, Inc. — Form 10-Q Summary
Business context and reporting period. Raymond James is a diversified financial-services and bank holding company, with businesses in private client services, capital markets, asset management and banking. This unaudited filing covers the fiscal quarter and six months ended March 31, 2018; comparisons are with the corresponding 2017 periods. Unless otherwise stated, amounts below are in U.S. dollars.
Key financial results
| Metric | Three months ended March 31, 2018 | Year-over-year change | Six months ended March 31, 2018 | Year-over-year change |
|---|---|---|---|---|
| Net revenues | $1.813 billion | +16% | $3.539 billion | +16% |
| Income before tax, including noncontrolling interests | $331 million | +100% | $643 million | +74% |
| Net income attributable to Raymond James | $243 million | +115% | $362 million | +40% |
| Diluted earnings per share | $1.63 | +112% | $2.43 | +37% |
| Net interest income | $204 million | +31% | $397 million | +31% |
| Operating cash flow | Not separately presented for the quarter | — | $987 million | Down from $1.035 billion |
Quarterly pretax margin was approximately 18.3% of net revenues, compared with 10.3% a year earlier. The year-over-year comparison is affected by a $100 million Jay Peak legal charge in the prior-year quarter; that matter was settled in fiscal 2017. For the six-month period, the company reported a 43.7% effective tax rate, including an estimated $117 million discrete Tax Act charge. Excluding that charge, management reported adjusted net income of $482 million and adjusted diluted EPS of $3.24, both non-GAAP measures.
Balance sheet, debt and liquidity
- At March 31, 2018, total assets were $36.03 billion, up 3% from September 30, 2017; total equity was $6.04 billion.
- Cash and cash equivalents were $3.14 billion, down $530 million from fiscal year-end. Six-month cash flows were $987 million provided by operations, $1.815 billion used in investing and $312 million provided by financing.
- Bank loans, net, were $18.15 billion, up $1.14 billion from September 30, 2017. The allowance for loan losses was $195 million, or 1.07% of the loan portfolio. Nonperforming loans were $35 million, or 0.19% of RJ Bank loans.
- Bank deposits were $18.71 billion, up $980 million. Other borrowings were $902 million, down $612 million; this included $875 million of Federal Home Loan Bank advances. Senior notes payable were $1.55 billion.
- Management said liquid assets, operating cash flows and available financing facilities were adequate for continuing operations at current activity levels. The $300 million committed RJF Credit Facility had no balance outstanding at March 31; RJ Bank also reported $1.58 billion of immediate additional FHLB credit availability.
- RJF and RJ Bank were categorized as well capitalized. RJF’s CET1 ratio was 23.3%; RJ Bank’s was 12.5%.
Material changes and segment performance
- Private Client Group: Quarterly net revenues rose 17% to $1.27 billion. Fee-based account assets and financial-advisor recruiting and retention supported growth; assets under administration reached $694.8 billion in PCG and $729.5 billion firmwide.
- Asset Management: Quarterly net revenues increased 40% to $163 million. The November 2017 Scout Group acquisition added approximately $27 billion in assets under management and contributed to higher revenue and expenses.
- RJ Bank: Quarterly net revenues increased 26% to $179 million and pretax income rose 28% to $118 million, driven by loan and securities growth and a higher net interest margin. The margin was 3.21%, versus 3.08% in the prior-year quarter.
- Capital Markets: Quarterly net revenues decreased 10% to $231 million and pretax income fell 61% to $16 million. Lower institutional equity and fixed-income commissions and equity underwriting fees were partly offset by stronger M&A advisory fees.
- Compensation, technology and support costs increased with revenue growth, higher staffing and regulatory/compliance needs. The prior-year comparison also benefited from the absence of Jay Peak expenses and debt-extinguishment losses.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management estimated an effective tax rate of approximately 27%–28% for the remainder of fiscal 2018 and 24%–25% for fiscal 2019; these estimates may change as Tax Act analysis is completed.
- Management said rising short-term interest rates had generally benefited net interest income and cash-sweep fees, but higher rates paid on client deposits may reduce or reverse those benefits. RJ Bank’s interest-rate sensitivity analysis showed estimated net interest income changes of +1.91% for a 100-basis-point increase, −1.69% for a 200-basis-point increase, and −11.75% for a 100-basis-point decrease under its specified instantaneous-shift scenarios.
- Credit risks include exposure to commercial and residential real estate, corporate lending and securities-backed loans. Management noted that a significant economic downturn, declining property values or sector-specific stress could increase provisions and charge-offs. Interest-only residential mortgages totaled $805 million, approximately 25% of that portfolio.
- For legal and regulatory matters with estimable loss ranges, the company estimated the upper end of reasonably possible aggregate losses at approximately $75 million in excess of reserves. The Fairfax/Morgan Keegan litigation remained pending, with trial scheduled for June 2018; Regions Financial was responsible for covered losses under the acquisition indemnity, subject to contractual terms.
- Other risks discussed include market and valuation risk, liquidity and funding conditions, foreign exchange exposure, regulatory developments, cyber and operational risk, and potential credit-rating downgrades. The filing reported no material control deficiencies; disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of the reported earnings improvement reflects underlying growth versus the prior-year Jay Peak charge and other unusual items; review the company’s non-GAAP reconciliations.
- Whether the estimated $117 million Tax Act impact, including deferred-tax remeasurement and transition-tax estimates, changes as the company completes its accounting.
- Whether RJ Bank can sustain loan growth and net interest margin as funding and client deposit costs rise, and how credit quality and reserves evolve.
- The contribution, integration costs and performance of the Scout Group acquisition, including its effect on Asset Management results and assets under management.
- Developments in the Fairfax litigation, the estimated aggregate legal exposure and the scope and collectability of applicable Regions indemnification.
- Liquidity and capital availability at the parent and regulated subsidiaries, including any restrictions on subsidiary dividends or access to funding.