Raymond James Financial, Inc. — Form 10-Q Summary
Business context and reporting period
Financial holding company with brokerage, investment banking, asset management, banking and related businesses. This is fiscal 2017 first-quarter reporting for the three months ended December 31, 2016; comparisons are with the three months ended December 31, 2015 unless noted. Interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Quarter ended Dec. 31, 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $1.529 billion | $1.301 billion | +18% |
| Net revenue | $1.493 billion | $1.274 billion | +17% |
| Pre-tax income, excluding noncontrolling interests | $206.4 million | $168.3 million | +23% |
| Net income attributable to RJF | $146.6 million | $106.3 million | +38% |
| Diluted EPS | $1.00 | $0.73 | +37% |
| Pre-tax margin on net revenue | 13.8% | 13.2% | +0.6 percentage points |
| Operating cash flow | $807.8 million | $248.0 million | Higher |
Net interest income was $146.8 million, up 27%; the bank loan-loss provision was a $1.0 million benefit, versus a $13.9 million provision in the prior-year quarter. Adjusted, non-GAAP diluted EPS was $1.07, excluding $12.7 million of acquisition-related expenses (net income adjusted to $155.6 million). The reported effective tax rate was 29.0%, versus 36.8%; adoption of stock-compensation guidance favorably affected tax expense by approximately $18 million.
At December 31, 2016, total assets were $31.67 billion, liabilities $26.46 billion and total equity $5.20 billion. Cash and cash equivalents were $2.53 billion, of which approximately $1.16 billion was available without restrictions. Senior notes payable were $1.68 billion carrying value (approximately $1.70 billion principal); other borrowings were $915.9 million. RJF and RJ Bank reported regulatory capital ratios above applicable “well capitalized” thresholds.
Cash provided by operating activities was $807.8 million; investing activities used $1.105 billion, chiefly reflecting bank loan growth and securities purchases; financing activities provided $1.201 billion, including $927 million of increased bank deposits. Cash and cash equivalents increased $877.8 million during the quarter.
Material changes and segment performance
- Private Client Group revenue rose 19% to $1.04 billion, but pre-tax income rose only 6% to $73.4 million; its net-revenue margin declined to 7.1% from 7.9%. Client assets under administration grew 24% year over year to $585.6 billion, aided by acquisitions, recruiting, retention and market appreciation.
- Capital Markets revenue rose 3% to $237.0 million, while pre-tax income fell 15% to $21.4 million, reflecting higher expenses and weaker M&A/advisory fees.
- Asset Management revenue rose 14% to $114.1 million and pre-tax income rose 26% to $41.9 million. Managed-program assets under management were $84.5 billion before affiliated assets, up from $71.8 billion.
- RJ Bank revenue rose 28% to $144.5 million and pre-tax income rose 58% to $104.1 million. Net interest margin increased to 3.06% from 2.90%; total loans reached $16.03 billion. Nonperforming loans declined to $64.5 million from $81.2 million at September 30, 2016.
- Other-segment pre-tax loss widened to $34.5 million from $25.2 million, including $12.7 million in acquisition-related expenses and higher public-debt interest costs.
Client assets under administration company-wide were $616.9 billion, up 23% year over year. The company completed acquisitions of Alex. Brown, 3Macs and Mummert in fiscal 2016; their results are included prospectively from their respective closing dates.
Outlook, risks and unusual items
- Management gave no specific company-wide earnings or revenue guidance in the provided filing text. It estimated the December 2016 25-basis-point rate increase could add a further $15–$20 million to quarterly pre-tax income, subject to assumptions about client cash rates and balances, competition, earning assets and RJ Bank margins; a rate reversal would reverse the benefit.
- On February 6, 2017, after quarter-end, the company announced plans to redeem $350 million of 6.90% senior notes due 2042 on March 15, 2017, using available cash. Management said this would reduce excess liquidity.
- Management identified sensitivity to equity and fixed-income markets, interest rates, lending and credit conditions, competition, regulation, litigation and economic conditions. A significant downturn or deterioration in real-estate values or concentrated sectors could increase bank loan losses.
- The allowance for bank loan losses was $197.7 million, or 1.25% of amortized-cost loans. The quarter’s provision benefit reflected recoveries and resolutions of criticized corporate loans; actual credit losses could exceed estimates.
- For specified legal and regulatory matters, management estimated the upper end of reasonably possible aggregate losses at approximately $55 million above reserves. The company disclosed multiple lawsuits concerning the alleged Jay Peak EB-5 fraud scheme and stated that litigation outcomes are uncertain.
- Volcker Rule requirements may require sales of certain private-equity fund interests; limited secondary markets could mean proceeds below carrying value. The company requested an extension for certain illiquid investments. Management also continued preparations for the DOL fiduciary rule, whose impact was described as uncertain.
- Acquisition-related expenses rose to $12.7 million. The stock-compensation accounting change increased income-tax volatility and produced a favorable tax impact this quarter.
Important facts for investors to verify
- How much of earnings growth persists after the approximately $18 million favorable tax impact and the quarter’s loan-loss benefit?
- Whether acquisition integration costs, client-asset growth and the lower Private Client Group margin develop as management expects.
- How the planned $350 million note redemption affects excess liquidity, and whether deposit and short-term borrowing trends continue.
- Whether loan quality and reserves remain adequate as the bank’s loan portfolio grows, particularly in corporate, energy and residential lending.
- Developments in the Jay Peak and other legal matters, the Volcker Rule extension request, and potential costs or asset sales arising from regulatory changes.