Raymond James Financial, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing also reports fourth-quarter results. Amounts are U.S. dollars unless noted.
Business context
Raymond James is a diversified financial services firm operating through Private Client Group, Capital Markets, Asset Management, RJ Bank and Other. Results depend on client assets and activity, market conditions, interest rates, investment banking activity and lending performance.
Financial results and liquidity
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenues | $6.525 billion | $5.521 billion | +18% |
| Net revenues | $6.371 billion | $5.405 billion | +18% |
| Pre-tax income | $925 million | $801 million | +16% |
| Net income attributable to RJF | $636 million | $529 million | +20% |
| Diluted EPS | $4.33 | $3.65 | +19% |
| Pre-tax margin on net revenues | 14.5% | 14.8% | Down 0.3 percentage points |
| Adjusted pre-tax margin | 17.6% | 15.9% | Non-GAAP |
Management’s adjusted FY2017 results excluded $194 million of pre-tax acquisition costs, debt-extinguishment losses and Jay Peak settlement expense: adjusted pre-tax income was $1.119 billion, adjusted net income $768 million and adjusted diluted EPS $5.23. These are non-GAAP measures.
Fourth-quarter FY2017 revenue was $1.733 billion, net revenue $1.690 billion, net income attributable to RJF $193 million and diluted EPS $1.31. In Q4 FY2016, the corresponding figures were $1.492 billion, $1.460 billion, $172 million and $1.19.
Cash provided by operating activities was $1.306 billion, versus cash used of $573 million in FY2016. Investing activities used $3.376 billion; financing activities provided $4.065 billion. Cash and cash equivalents were $3.670 billion at year-end, of which approximately $1.29 billion was available without restrictions.
Total assets were $34.883 billion, up 11%. Senior notes payable were $1.549 billion and other borrowings $1.514 billion. Bank deposits totaled $17.732 billion. RJF reported a 23.0% CET1 ratio and RJ Bank 12.5%; both were categorized as well capitalized. RJF’s long-term ratings were BBB+ (S&P) and Baa1 (Moody’s), both with stable outlooks.
Material changes versus FY2016
- Net revenues rose in all four operating segments. PCG net revenue increased 22% to $4.422 billion; Asset Management increased 21% to $488 million; RJ Bank increased 20% to $593 million; Capital Markets increased 1% to $1.014 billion.
- PCG growth reflected recruiting, acquisitions completed in FY2016, stronger markets and higher sweep-program fees. Client assets under administration reached $692.9 billion, up 15%.
- Asset Management benefited from higher fee-based assets; managed-program assets rose 25% and non-discretionary program assets 32%.
- RJ Bank net interest income rose 20% to $575 million, supported by loan and securities growth and a net interest margin increase to 3.10% from 3.04%.
- Capital Markets investment banking improved, while institutional sales commissions and trading profits weakened amid low volatility.
- Non-interest expenses rose 19%, including higher compensation and growth-related staffing, regulatory and compliance costs, the Jay Peak settlement, and debt-extinguishment losses. The effective tax rate fell to 31.2% from 33.9%, substantially reflecting new stock-compensation accounting.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management described results as sensitive to economic conditions, equity and fixed-income markets, volatility, interest rates, lending markets and regulation.
- Higher short-term rates supported FY2017 net interest income and RJBDP fees. Management cautioned that future rate increases could have a smaller or adverse effect if client deposit rates rise and reduce spreads.
- The Jay Peak matter resulted in an aggregate $150 million settlement payment; $130 million was recorded as FY2017 expense and $20 million in FY2016. A court approved a comprehensive settlement in June 2017.
- RJF recognized $45.7 million of losses on early extinguishment of senior notes, including a $37 million make-whole premium. It redeemed $350 million of 6.90% notes and $300 million of 8.60% notes, and issued an additional $500 million of 4.95% notes due 2046.
- RJ Bank’s provision for loan losses declined to $13 million from $28 million, but net charge-offs increased to $20.7 million, mainly due to one C&I loan. Nonperforming loans fell to $39 million from $81 million; the allowance was $190 million, or 1.11% of loans.
- Key risks include market and interest-rate exposure, credit losses, liquidity and subsidiary dividend restrictions, litigation and regulation, advisor retention, competition, cybersecurity and operational disruptions. The filing estimates reasonably possible aggregate legal losses up to $65 million above reserves, excluding Regions-indemnified matters.
- The DOL fiduciary rule and other regulatory changes were expected to add compliance, legal and technology costs. Covered-fund investments received a Volcker Rule holding extension through July 2022; management said it was focused on divestiture.
- Scout Group was acquired on November 17, 2017, after year-end, for $173 million in cash. It had approximately $27 billion of assets under management and advisement at December 31, 2016.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether organic client and advisor growth, recurring-fee assets and the Scout acquisition sustain revenue growth.
- How much future earnings benefit from higher rates, particularly after deposit pricing changes and sweep-program spread effects.
- RJ Bank credit trends, including C&I exposures, charge-offs, reserve adequacy and loan portfolio growth.
- The ongoing costs and legal exposure from the DOL fiduciary requirements and other regulatory changes.
- Debt costs, refinancing needs, unrestricted parent liquidity and regulatory limits on capital distributions.
- Performance of adjusted results relative to GAAP results and the recurrence of acquisition, legal and debt-related charges.