Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended June 30, 2017, in fiscal 2017. Comparisons are to the three and nine months ended June 30, 2016, unless otherwise noted. Amounts below are in U.S. dollars.
Business context and financial performance
Raymond James is a diversified financial services holding company with businesses in private client services, capital markets, asset management, and banking. Results are sensitive to financial-market activity, interest rates, client assets and cash balances, credit conditions, and regulation.
| Metric | Quarter | Nine months |
|---|---|---|
| Total revenue | $1.663 billion, up 20% | $4.792 billion, up 19% |
| Net revenue | $1.625 billion, up 20% | $4.681 billion, up 19% |
| Pre-tax income, excluding noncontrolling interests | $275 million, up 39% | $647 million, up 15% |
| Net income attributable to RJF | $183 million, up 46% | $443 million, up 24% |
| Diluted EPS | $1.24, up 43% | $3.02, up 22% |
| Pre-tax margin on net revenue | 16.9%, versus 14.6% | 13.8%, versus 14.3% |
| Net interest income | $166 million, up 22% | $468 million, up 22% |
For the nine-month period, management also reported adjusted pre-tax income of $802 million, adjusted net income of $551 million, and adjusted diluted EPS of $3.76, increases of 35%, 47%, and 45%, respectively. These are non-GAAP measures that exclude specified unusual costs, including the Jay Peak settlement expense, acquisition-related expenses, and debt-extinguishment costs.
Cash flow, balance sheet, debt, and liquidity
- Cash flow, nine months: Operating activities provided $1.414 billion, compared with $40 million used in the prior-year period; investing activities used $2.729 billion; financing activities provided $2.302 billion. Cash and cash equivalents rose $965 million to $2.615 billion.
- Balance sheet at June 30, 2017: Total assets were $33.433 billion, up 6% from September 30, 2016; total liabilities were $27.933 billion; total equity was $5.501 billion.
- Funding and debt: Bank deposits were $16.311 billion, other borrowings $805 million, and senior notes payable $1.848 billion. The company issued $500 million of 4.95% notes due 2046 and redeemed $350 million of 6.90% notes due 2042 during the period. RJ Bank had $775 million in Federal Home Loan Bank advances.
- Liquidity: Approximately $1.47 billion of cash and cash equivalents was available without restrictions. Management said existing liquid assets, operating cash flow, and financing facilities were adequate for current activity. The company also had a $300 million committed unsecured revolving facility with no borrowings outstanding at quarter-end.
- Capital: RJF and RJ Bank were categorized as well capitalized. RJF’s CET1 ratio was 22.3%; RJ Bank’s was 12.4%. RJ Bank’s total capital ratio declined from 14.0% at September 30, 2016 to 13.7%, primarily reflecting asset growth.
Material changes and segment trends
- Private Client Group: Quarterly net revenue rose 25% to $1.127 billion and pre-tax income rose 56% to $128 million. Client assets under administration reached $631.5 billion, up 25% year over year; fee-based assets rose 34% to $276.9 billion. For nine months, segment pre-tax income fell 2% to $231 million, weighed down by Jay Peak-related legal expense; the pre-tax margin declined to 7.1% from 8.8%.
- Capital Markets: Quarterly net revenue increased 3% to $259 million and pre-tax income increased 6% to $35 million. M&A advisory and equity underwriting improved, while institutional fixed-income commissions and trading profit were lower.
- Asset Management: Quarterly net revenue increased 24% to $126 million and pre-tax income increased 33% to $43 million. Managed-program assets reached $91.0 billion, up from $71.7 billion a year earlier, supported by net inflows and market appreciation.
- RJ Bank: Quarterly net revenue increased 19% to $150 million and pre-tax income increased 12% to $100 million. Growth in earning assets and a higher net interest margin supported results. Bank loans, net, were $16.630 billion, up from $15.211 billion at fiscal year-end.
- Costs and earnings quality: Nine-month non-interest expenses increased 20%, including higher compensation, growth-related staffing, Jay Peak legal expense, and unusual items. The company’s effective tax rate was 31.6% for the nine months, versus 36.6%, helped by adoption of share-based compensation tax guidance and nontaxable gains.
Outlook, risks, contingencies, and unusual items
- Compensation changes: Sales-commission rate changes scheduled for October 1, 2017 were expected to reduce the PCG sales-commission expense ratio by approximately 80–100 basis points and the overall compensation ratio by 30–50 basis points; actual results may be affected by other factors.
- Interest rates: Management estimated that the June 2017 25-basis-point rate increase could add approximately $15 million to quarterly pre-tax income for at least the remainder of fiscal 2017, subject to assumptions about cash balances, deposit rates, and bank margins. The filing also cautions that rate decreases would reverse some benefit. RJ Bank’s model projected a 9.2% decline in 12-month net interest income under an instantaneous 300-basis-point increase, illustrating different sensitivities across the company and bank.
- Acquisition: The company agreed to acquire Scout Investments and Reams for $172.5 million, subject to closing adjustments, and expected completion before December 31, 2017. Scout and Reams had approximately $27 billion in assets under management and advisement at December 31, 2016.
- Jay Peak matter: A court approved a $150 million settlement covering investor claims, including $4.5 million previously paid to Vermont. The remaining $145.5 million was payable to the receiver; $91.7 million was paid in July 2017, with the balance expected before September 30, 2017. The order barred existing and future private claims, subject to the stated appeal period. The settlement was a major nine-month expense.
- Other legal exposure: Excluding Jay Peak and amounts subject to Regions indemnification, management estimated the upper end of reasonably possible aggregate losses in estimable legal and regulatory matters at approximately $65 million above recorded reserves. A Morgan Keegan matter was remanded on certain claims; Regions indemnification applied to covered losses. Management cautioned outcomes could affect a particular future period.
- Credit risk: RJ Bank’s allowance for loan losses was $192 million, or 1.15% of the loan portfolio; nonperforming loans were 0.26% of total loans, down from 0.53% at September 30, 2016. Nine-month net charge-offs were $19 million, including a significant C&I loan charge-off. Management noted that economic deterioration, real-estate declines, or stress in concentrated sectors could increase losses.
- Regulatory and operational risks: The DOL fiduciary rule’s implementation and timing remained uncertain. The Federal Reserve extended the holding period for most qualifying covered-fund investments to July 2022. The filing also identifies market, interest-rate, foreign-exchange, liquidity, legal, regulatory, and cybersecurity risks.
- Other unusual events: The company accelerated $8 million of unamortized debt-issuance costs after redeeming the 6.90% notes. Adoption of new consolidation guidance deconsolidated certain tax-credit fund entities retrospectively; management reported no net effect on prior-period income statements.
Important facts for investors to verify
- Final settlement payments, appeal status, and any recoveries related to the Jay Peak matter.
- Whether client-asset and fee-based account growth persists, and how the October 2017 commission changes affect margins.
- Loan-portfolio growth and credit quality, especially C&I charge-offs, criticized exposures, and the adequacy of the allowance.
- Scout Group acquisition closing, purchase-price adjustments, and integration costs.
- The effect of changing interest rates on cash-sweep economics, deposit costs, and RJ Bank net interest income.
- Regulatory developments, including the fiduciary rule, and remaining litigation or contingent-loss exposure.