Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023; filed May 8, 2023. The company provides wealth management, capital markets, asset management, banking and trust services. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended March 31, 2023 | Change vs. prior year | Six months ended March 31, 2023 | Change vs. prior year |
|---|---|---|---|---|
| Total revenues | $3.16 billion | +16% | $6.18 billion | +12% |
| Net revenues | $2.87 billion | +7% | $5.66 billion | +4% |
| Pre-tax income | $557 million | +29% | $1.21 billion | +22% |
| Net income available to common shareholders | $425 million | +32% | $932 million | +21% |
| Diluted EPS | $1.93 | +27% | $4.23 | +17% |
| Net interest income | $631 million | +$427 million | $1.22 billion | +$825 million |
Higher short-term rates and the TriState Capital acquisition materially increased interest income. For the quarter, interest income rose to $915 million from $242 million, while interest expense rose to $284 million from $38 million. Net interest margin was 3.59% firmwide and 3.63% for the Bank segment, versus 1.25% and 2.01%, respectively, a year earlier.
The quarterly compensation ratio improved to 63.3% from 69.3%, mainly because net interest income and cash-sweep fees increased without similar direct compensation costs. Annualized return on common equity was 17.3%; return on tangible common equity was 21.3% (non-GAAP). Adjusted diluted EPS was $2.03 for the quarter and $4.31 year to date (non-GAAP).
Segments and material changes
- Private Client Group: Quarterly net revenues increased 12% to $2.14 billion and pre-tax income rose to $441 million from $213 million. Higher cash-sweep fees and interest income more than offset lower asset-management and brokerage revenues.
- Capital Markets: Quarterly net revenues fell 27% to $302 million, producing a $34 million pre-tax loss versus $87 million income a year earlier. Investment banking revenue fell 36%; management cited market volatility and macroeconomic uncertainty.
- Asset Management: Net revenues declined 8% to $216 million and pre-tax income fell 20% to $82 million, primarily due to lower fee-generating asset balances. Financial assets under management were $194.4 billion, up from $173.8 billion at September 30, 2022.
- Bank: Quarterly net revenues rose 174% to $540 million and pre-tax income increased 10% to $91 million. Higher rates, loan growth and TriState Capital contributed; the credit-loss provision also increased.
For the six-month period, the company recorded $57 million of prior-acquisition-related expenses and a favorable $32 million insurance settlement related to a previously settled litigation matter. The quarter included $28 million of acquisition-related expenses and an unfavorable arbitration award that contributed to higher legal and regulatory costs; the award amount is not stated here.
Financial position, cash flow and capital
- Balance sheet at March 31, 2023: Total assets were $79.18 billion, liabilities $69.21 billion and shareholders’ equity $9.97 billion. Bank loans, net, were $43.68 billion; bank deposits were $54.23 billion.
- Cash and liquidity: Cash and cash equivalents were $8.66 billion, with another $4.70 billion segregated or restricted. Parent-company cash was approximately $1.83 billion, including cash loaned to RJ&A. Management said it maintained higher Bank-segment cash balances amid market volatility.
- Cash flows, six months: Operating activities used $3.76 billion; investing activities used $319 million; financing activities provided $2.52 billion. Total cash, including segregated and restricted amounts, decreased $1.30 billion. Operating cash flow included a $4.89 billion net decline in brokerage client and other payables, reflecting balance-sheet movements.
- Borrowings: Senior notes payable were $2.04 billion and other borrowings were $1.65 billion, primarily FHLB advances. In April, the revolving credit facility capacity was increased from $500 million to $750 million and extended through April 2028. The company reported more than $9 billion of FHLB borrowing capacity.
- Capital: RJF reported a 19.9% CET1 ratio, 11.5% Tier 1 leverage ratio and 21.4% total capital ratio; RJF and its two banks were categorized as well-capitalized. The company repurchased 5.04 million shares for $488 million during the six months and declared common dividends of $0.84 per share.
Outlook, risks and contingencies
- Management expected fiscal Q3 asset-management and administrative fees to benefit from a 5% sequential increase in PCG fee-based assets and financial assets under management at March 31.
- Management expected combined net interest income and third-party-bank cash-sweep fees to decline in Q3, citing lower average sweep balances, a lower Bank net interest margin, higher planned cash balances and higher-cost funding, including the Enhanced Savings Program.
- Management anticipated continued macroeconomic uncertainty and possible pressure on brokerage and investment banking revenues. It also warned that economic deterioration or weaker credit outlooks could increase future loan-loss provisions.
- Bank loans, net, increased to $43.68 billion; the allowance for credit losses was $415 million, or 0.94% of held-for-investment loans. Nonperforming loans were $99 million, up from $74 million at September 30, 2022. Management cited CRE and C&I loan downgrades and charge-offs; a downside recession scenario would increase the modeled loan allowance by approximately $200 million before qualitative adjustments.
- Available-for-sale securities had a $9.77 billion fair value and $1.01 billion of gross unrealized losses. Management reported no sales of these securities in the periods presented. Potential changes to regulatory capital rules, including the AOCI opt-out, could affect capital ratios.
- The company was cooperating with an SEC investigation concerning records preservation and business communications sent through unapproved electronic messaging channels. For matters with estimated loss ranges, the upper end of reasonably possible aggregate losses was approximately $100 million above accruals; other matters could not be reliably estimated. The company said outcomes could affect a future period’s results or cash flows, although it did not expect a material adverse effect on consolidated financial condition.
- After quarter-end, the company redeemed all Series A preferred stock for $40 million on April 3, 2023. The Fed also raised its target rate by 25 basis points on May 4, to 5.00%–5.25%.
Important facts for investors to verify
- Whether Q3 net interest income and cash-sweep fee declines match management’s expectations, and how deposit pricing and the Enhanced Savings Program affect margins.
- Subsequent trends in client cash-sweep balances, deposit mix, deposit costs and uninsured deposits; 88% of Bank-segment deposits were FDIC-insured at quarter-end.
- Credit quality, especially C&I and commercial real estate exposures, loan downgrades, charge-offs, loan sales and allowance adequacy under changing economic assumptions.
- Capital Markets pipeline conversion and whether investment banking and fixed-income activity recover or remain constrained by market conditions.
- Developments in the SEC records-preservation investigation, legal matters and potential losses beyond recorded accruals.
- Reported GAAP results alongside non-GAAP adjusted measures, including the effects of acquisition expenses and the insurance settlement.