Raymond James Financial, Inc. — Q1 FY2015 10-Q
Business context and period: Financial services and bank holding company operating in brokerage, capital markets, asset management and banking. The unaudited quarter ended December 31, 2014; comparisons are with the three months ended December 31, 2013 unless otherwise stated.
Key financial results
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenues | $1.280 billion | $1.209 billion | +6% |
| Net revenues | $1.252 billion | $1.183 billion | +6% |
| Pre-tax income, including noncontrolling interests | $198.6 million | $178.8 million | +11% |
| Net income attributable to Raymond James | $126.3 million | $116.6 million | +8% |
| Diluted earnings per share | $0.87 | $0.81 | +7% |
| Net interest income | $104.7 million | $91.7 million | +14% |
| Bank loan loss provision | $9.4 million | $1.6 million | Increased |
Consolidated pre-tax income was approximately 16.2% of net revenues. PCG’s pre-tax margin on net revenues rose to 11.0% from 9.2%. The effective tax rate was 37.8%; management cited lower nontaxable corporate-owned life insurance income and the prior year’s nonrecurring state tax refund benefit.
Cash flow and liquidity: Operating activities provided $239.6 million; investing activities used $765.4 million, principally reflecting growth in bank loans; financing activities provided $989.5 million, largely from a $1.060 billion increase in bank deposits. Cash and cash equivalents rose by $450.3 million to $2.649 billion. Management identified approximately $1.17 billion of cash as available without restrictions and said existing assets, operating cash flow and financing facilities should provide adequate funding at current activity levels.
Balance sheet and capital: Total assets were $24.253 billion at December 31, 2014, up 4% from September 30, 2014. Bank loans, net, were $11.810 billion; bank deposits were $11.089 billion. Corporate debt was $1.190 billion and other borrowings were $605.2 million. RJF reported total equity of $4.558 billion. RJF and RJ Bank were categorized as well capitalized; their total risk-based capital ratios were 20.9% and 12.6%, respectively.
Material changes and business drivers
- Private Client Group: Net revenues rose 8% to $845.2 million and pre-tax income rose 30% to $92.7 million. Fee-based account revenue increased 21%; client assets under administration reached a record $459.1 billion, up 9% year over year.
- Capital Markets: Net revenues declined 3% to $231.8 million and pre-tax income declined 17% to $27.7 million. Trading profit fell 52%, mainly reflecting challenging fixed-income conditions and lower customer trading volumes. M&A and advisory fees increased 15%.
- Asset Management: Net revenues increased 4% to $99.6 million and pre-tax income increased 25% to $39.8 million. Managed-program assets under management reached $66.7 billion, up 10% year over year.
- RJ Bank: Net revenues increased 23% to $100.5 million and pre-tax income increased 13% to $64.4 million, primarily due to loan growth. Net interest margin remained 3.04%. The allowance for loan losses was $156.8 million, or 1.33% of loans, versus 1.46% a year earlier; nonperforming loans were 0.64% of total loans.
- Overall client assets under administration reached a record $483 billion, up 8% year over year. Management attributed growth to market appreciation, advisor retention and recruiting, and net client inflows.
Outlook, risks, contingencies and unusual items
- The filing provides no formal earnings or revenue guidance. Management estimated that an instantaneous 100-basis-point increase in short-term rates could add about $150 million to annual pre-tax income across RJF, based on September 30, 2014 balances and stated assumptions; actual effects depend on rates, balances, competition and client deposit pricing. RJ Bank’s model projected a 6.06% increase in 12-month net interest income under a 100-basis-point increase.
- Management was evaluating the effect of sharply lower oil prices on energy-sector borrowers. It did not then anticipate a significant portfolio impact, but warned that prolonged price declines could adversely affect some credits.
- RJ Bank’s loan-loss provision rose with substantial loan growth. Management cited improved credit conditions, fewer criticized corporate loans and declining residential delinquencies, while noting that loss estimates are judgmental and could prove insufficient.
- A nonrecurring adjustment reduced PCG mutual fund commission revenue by approximately $10 million, with a related approximately $6 million reduction in commission expense. Prior-year results included a $5.5 million gain from an auction-rate security redemption that did not recur.
- Pre-closing Morgan Keegan legal matters are subject to Regions indemnification. Management estimated the potential liability, including defense costs, at $38 million to $215 million; a roughly $151 million liability and matching indemnification asset were recorded. For other legal matters, management estimated possible losses of $0 to $10 million above accrued liabilities, if any, and said resolution could affect results in a future period.
- Other exposures include $51.7 million of unfunded recruiting-related advisor loans, $56 million of unfunded private equity and venture capital commitments, and bank credit commitments including $1.765 billion of open-end consumer lines and $1.752 billion of commercial lines. These commitment amounts are not estimates of expected funding or loss.
- Basel III capital rules became effective January 1, 2015. Management expected RJF and RJ Bank to continue meeting capital requirements, while noting higher future requirements could constrain growth or require additional capital. Management did not expect a material overall impact from the Volcker Rule, but continued assessing covered-fund investments.
- Management noted that it did not intend to refinance the $250 million 4.25% senior notes due April 2016 at that time. The Regions Credit Facility was scheduled to expire in April 2015, and RJF did not then intend to renew or replace it.
Most important facts for investors to verify
- Whether revenue and earnings growth persist after accounting for the unusual mutual fund revenue adjustment and the prior-year ARS redemption gain.
- How continued bank loan growth affects credit quality, provisions, concentration risks and capital ratios, particularly if oil prices remain low.
- Whether record client assets and advisor inflows translate into sustained recurring fee revenue and improved profitability.
- Actual sensitivity of earnings and deposit costs to interest-rate changes versus management’s modeled estimates.
- Developments in Morgan Keegan and other litigation, Regions indemnification coverage, and the timing or size of any cash requirements.
- Availability of replacement funding after the Regions facility expires and the company’s plans for the 2016 note maturity.