RAYMOND JAMES FINANCIAL INC annual report, FY2015

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Raymond James Financial, Inc. — FY2015 Form 10-K

Reporting period: Fiscal year ended September 30, 2015. This is an annual report, not a calendar-year fourth-quarter filing; the filing separately provides unaudited fiscal Q4 data. Raymond James is a diversified financial services and bank holding company operating primarily in the U.S. and Canada, across Private Client Group, Capital Markets, Asset Management, RJ Bank and Other.

Financial results and condition

  • Full-year results: Total revenue was $5.308 billion, up 7%; net revenue was $5.200 billion, up 7%. Net income attributable to Raymond James was $502.1 million, up 5%, and diluted EPS was $3.43, up 3% from $3.32.
  • Margins and expenses: Pre-tax income excluding noncontrolling interests was $798.2 million, up 7%; pre-tax margin on net revenue was 15.3%, versus 15.4% in FY2014. Non-interest expenses increased 7% to $4.423 billion, mainly reflecting higher compensation and commissions, business development, technology and compliance costs. The effective tax rate rose to 37.1% from 35.8%.
  • Cash flow: Operating activities provided $899.2 million; investing activities used $2.168 billion, principally to fund bank loan growth; financing activities provided $1.726 billion, largely from increased bank deposits. Cash and cash equivalents ended the year at $2.601 billion, up $401.9 million. About $1.22 billion was available without restrictions.
  • Balance sheet and debt: Total assets were $26.480 billion, up 14%; equity attributable to RJF was $4.522 billion. Reported long-term debt was $1.496 billion; the company also had $249.9 million of senior notes due in April 2016. Senior notes payable totaled $1.149 billion, and other borrowings totaled $703.1 million. The filing says RJF and RJ Bank met capital requirements and were categorized as well capitalized.
  • Liquidity: Available facilities included a new $300 million unsecured revolving credit facility maturing in 2020, with no year-end borrowings. RJ Bank had $878 million of immediate additional FHLB credit available, subject to collateral requirements. Management considered available assets, operating cash generation and financing facilities adequate for current operations.
  • Interest and credit: Net interest income rose 16% to $435.3 million; the bank loan-loss provision increased to $23.6 million from $13.6 million. RJ Bank loans were $13.2 billion and its allowance was $172.3 million, or 1.32% of loans. Nonperforming assets fell to $57.3 million from $86.0 million.

Material changes and segment performance

  • Private Client Group: Net revenue rose 7% to $3.508 billion and pre-tax income rose 4% to $342.2 million. Client assets under administration increased 1% to $453.3 billion; fee-based account assets rose 7% to $179.4 billion. The advisor count increased by 331 to 6,596.
  • Capital Markets: Net revenue increased 1% to $960.0 million, while pre-tax income fell 18% to $107.0 million. Lower equity underwriting and equity commissions, Canadian market weakness and higher investment costs offset growth in fixed-income commissions, M&A advisory and tax-credit fund syndication.
  • Asset Management: Net revenue rose 6% to $392.3 million and pre-tax income rose 5% to $135.1 million. Managed assets were $65.2 billion, up 1%; non-discretionary fee-billable assets were $91.0 billion, up 12%. Market depreciation in the fourth quarter partly offset inflows.
  • RJ Bank: Net revenue grew 18% to $414.3 million and pre-tax income grew 15% to $278.7 million. Loan growth and a modestly higher net interest margin drove the improvement; higher provision and operating costs were offsets.
  • Other: Pre-tax loss narrowed to $64.8 million from $83.9 million, supported by higher private-equity revenue and gains from auction-rate securities sales and redemptions.
  • Fiscal Q4 comparison: Revenue was $1.367 billion and net revenue was $1.341 billion, versus $1.311 billion and $1.285 billion, respectively, in FY2014 Q4. Net income attributable to RJF was $129.2 million versus $136.4 million; diluted EPS was $0.88 versus $0.94.

Outlook, commentary, risks and unusual items

  • Outlook: The filing gives no specific earnings or revenue guidance. Management emphasized continued growth, advisor recruiting and retention, technology and business investment, and disciplined acquisitions. It reported that the 2015 stress-test results showed RJF and RJ Bank maintaining capital above regulatory requirements and management thresholds in the severely adverse scenario. Management estimated an instantaneous 100-basis-point increase in short-term rates could add approximately $150 million to pre-tax income over the following 12 months, based on static balances and stated assumptions; actual results could differ materially.
  • Acquisitions and notable items: Raymond James acquired Cougar Global Investments on April 30, 2015 and The Producers Choice on July 31, 2015. FY2015 included an approximately $7 million mutual-fund commission reduction related to a share-class issue and an $11 million gain from sale of Jefferson County auction-rate securities. No material acquisition and integration expenses were reported for FY2015; Morgan Keegan integration was substantially complete in FY2013.
  • Principal risks: Results are sensitive to securities-market levels and volatility, interest rates, client activity and asset values, loan growth and credit quality, funding and liquidity access, competition and pricing pressure, advisor retention, operational and cyber incidents, litigation, and evolving regulation. Management specifically noted Dodd-Frank, Basel III, the Volcker Rule and the proposed Department of Labor retirement-advice rule as regulatory considerations.
  • Contingencies: The company disclosed ongoing litigation and regulatory matters. It estimated possible loss on matters not covered by Regions indemnification at $0 to as much as $22 million above accrued liabilities. Certain Morgan Keegan pre-acquisition matters were subject to Regions indemnification; related recorded liability and indemnification asset were each approximately $143 million. Management cautioned that resolution of individual matters could materially affect results in a future period.
  • Unusual valuation exposure: Recurring fair-value Level 3 assets totaled $355.5 million, primarily private-equity investments and auction-rate securities, whose valuations rely on significant unobservable inputs and management estimates.

Important facts for investors to verify

  • Review whether growth in advisor count, client assets and recurring fee revenue continues to offset market-driven declines and expense growth.
  • Monitor Capital Markets profitability, especially equity underwriting, Canadian activity and the returns from increased sector staffing.
  • Assess RJ Bank’s rapid loan growth, criticized corporate loans, allowance adequacy, residential mortgage exposure and funding concentration in swept client deposits.
  • Evaluate refinancing or repayment plans for the $249.9 million senior notes due April 2016, and the availability and terms of committed and uncommitted liquidity.
  • Track Level 3 valuations, auction-rate securities recoveries, private-equity marks, Regions indemnification collection and the outcomes of outstanding legal matters.
  • Confirm the impact and compliance costs of new regulatory requirements, including the DOL proposal and Basel III capital-buffer phase-in.

Audit: KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of September 30, 2015.