Raymond James Financial, Inc. — Q3 fiscal 2015 Form 10-Q
Business context and reporting period. The unaudited filing covers the quarter and nine months ended June 30, 2015; the comparable periods ended June 30, 2014. Raymond James is a diversified financial services and bank holding company operating through Private Client Group, Capital Markets, Asset Management, RJ Bank and Other.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $1.349B | $1.241B | $3.941B | $3.655B |
| Net revenue | $1.321B | $1.214B | $3.859B | $3.576B |
| Net income attributable to RJF | $133.2M | $122.7M | $373.0M | $343.9M |
| Diluted EPS | $0.91 | $0.85 | $2.55 | $2.38 |
| Net interest income | $109.4M | $92.3M | $321.7M | $276.5M |
Q3 net revenue rose 9% year over year and attributable net income rose 9%. Nine-month net revenue increased 8% and attributable net income increased 8%. Q3 pretax income including noncontrolling interests was $201.3M; its margin on net revenue was approximately 15.2%, versus 14.7% a year earlier (calculated). Compensation and benefits remained the largest expense: $901.3M in Q3, up from $825.5M.
Segments, Q3 year over year: Private Client Group revenue increased 9% to $894.7M and pretax income increased 6% to $86.4M. Capital Markets revenue was essentially flat at $237.7M, while pretax income fell 35% to $18.3M. Asset Management revenue rose 8% to $98.9M, with pretax income up 1% to $31.6M. RJ Bank revenue increased 14% to $107.2M and pretax income rose 20% to $78.0M. Other reported a $6.1M pretax loss, improved from a $14.5M loss.
Balance sheet and liquidity at June 30, 2015: Total assets were $24.81B, up 6.4% from September 30, 2014; total equity was $4.75B. Cash and cash equivalents totaled $2.58B, of which approximately $1.24B was available without restrictions. Assets segregated for regulatory and other purposes were $2.51B. Bank loans, net, rose to $12.05B from $10.96B; bank deposits were $11.01B, up $982M. Corporate debt was $1.19B; other borrowings were $679.2M, including $550M of FHLB advances. Repurchase-agreement liabilities were $251.8M.
For the nine months, operating cash flow was $464.8M, investing cash flow was negative $934.4M, and financing cash flow was positive $909.3M. Cash increased $383.0M to $2.58B. RJF reported Basel III common equity Tier 1 and total capital ratios of 21.3% and 22.2%, respectively; RJ Bank reported 13.6% and 14.8%. Both were categorized as well capitalized.
Material changes, outlook and risks
- Management reported record quarterly net revenue of $1.32B, record total client assets under administration of $499.8B, and second-highest quarterly net income in company history. Private Client Group assets were $475.4B; managed assets in Asset Management were $70.2B.
- Growth reflected higher fee-based account activity, asset inflows and recruiting, higher RJ Bank loan balances and margin, public finance activity, and gains on securities and private equity investments. Q3 included an approximately $11M gain from selling Jefferson County auction-rate securities and private-equity valuation gains. Management said expense growth reflected compensation, benefits, recruiting and investment in personnel; RJ Bank’s Q3 loan-loss provision was a $3.0M benefit, versus a $4.5M provision a year earlier.
- Management estimated that an instantaneous 100-basis-point rise in short-term rates would increase company pretax income by about $135M over 12 months, based on static balances and stated assumptions; actual benefit may differ. RJ Bank’s modeled 12-month net interest income rose 5.99% in a +100-basis-point scenario.
- No specific earnings guidance was provided. Management said existing assets, operating cash generation and financing sources should support operations at current activity levels. It cautioned that results depend on markets, interest rates, economic conditions, credit trends, competition and regulation.
- Credit indicators improved: nonperforming loans were $59.2M versus $80.7M at September 2014, and allowance for loan losses was $160.6M, or 1.33% of bank loans. The filing nevertheless warns that economic deterioration, real-estate declines or concentrated borrower/industry stress could increase losses. Residential mortgage delinquencies were 1.85% of balances over 30 days past due.
- Fair-value estimation remains a judgment-sensitive area: Level 3 assets were $352M, mainly private equity investments and auction-rate securities. Potential litigation losses on matters not covered by Regions indemnification were estimated at $0–$10M above accrued liabilities. Morgan Keegan pre-acquisition matters were subject to Regions indemnification; related estimated exposure and indemnification balances were substantial.
- Cougar Global Investments was acquired April 30, 2015; The Producers Choice acquisition closed July 31, after quarter-end. RJF also entered into a new $300M revolving credit facility on August 6, after quarter-end. A $250M 4.25% senior note matures in April 2016; management said it did not then intend to refinance it.
- The DOL proposed retirement-advice rule’s impact was undetermined. The company expected no material direct impact from the Volcker Rule, while continuing to assess covered-fund holdings. Management reported that 2015 stress tests showed RJF and RJ Bank maintained capital above regulatory requirements in the severely adverse scenario.
Important facts for investors to verify
- Whether revenue and profit growth persist after the securities-sale and private-equity valuation gains, and how compensation and other expenses trend.
- Whether RJ Bank’s rapid loan growth, portfolio mix, loss allowance and credit quality remain consistent with management’s assumptions.
- How changes in interest rates, client deposit pricing and competitive conditions affect the stated rate-sensitivity estimate and bank margin.
- Availability and restrictions on liquidity, funding costs, the April 2016 debt maturity, and the effect of any credit-rating changes.
- Outcomes and potential cash exposure from litigation, guarantees, unfunded commitments and regulatory changes, including the planned accounting-guidance changes affecting consolidation of certain tax-credit funds.