Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017. The interim financial statements are unaudited. Comparisons below are with the corresponding 2016 periods unless otherwise noted.
Business context and financial results
Raymond James is a financial holding company operating in private client services, capital markets, asset management and banking. Results are sensitive to equity and fixed-income markets, interest rates, lending conditions and regulatory developments.
| Metric | Three months ended Mar. 31, 2017 | Six months ended Mar. 31, 2017 |
|---|---|---|
| Total revenues | $1.600 billion, up 19% | $3.129 billion, up 18% |
| Net revenues | $1.564 billion, up 19% | $3.056 billion, up 18% |
| Pre-tax income, including noncontrolling interests | $161.3 million, down 17% | $368.8 million, up 1% |
| Net income attributable to Raymond James | $112.8 million, down 10% | $259.3 million, up 12% |
| Diluted earnings per share | $0.77, down 11% | $1.77, up 11% |
| Net interest income | $155.9 million, up 18% | $302.7 million, up 22% |
Quarterly GAAP pre-tax margin on net revenues was 10.6%, versus 15.1% a year earlier; the six-month margin was 12.2%, versus 14.2%. Management’s adjusted measures exclude specified items: adjusted diluted EPS was $1.28 for the quarter and $2.49 for the six months. These are non-GAAP figures.
Balance sheet, liquidity and capital
- At March 31, 2017, total assets were $32.9 billion, liabilities $27.6 billion and total equity $5.3 billion.
- Cash and cash equivalents were $2.64 billion, but only about $924 million was identified as available without restriction. Regulatory-segregated assets were $3.83 billion.
- Bank loans, net, were $15.99 billion; the allowance for loan losses was $186.2 million, or 1.17% of the loan portfolio. Nonperforming assets were $51.1 million, down from $85.7 million at September 30, 2016.
- Bank deposits were $16.38 billion. Other borrowings were $756.4 million, including $675 million of Federal Home Loan Bank advances. Senior notes payable were $1.34 billion at carrying value after the company redeemed $350 million principal amount of 6.90% notes in March.
- For the six months, operating cash flow was $1.09 billion, investing cash flow was negative $1.94 billion and financing cash flow was positive $1.86 billion. Cash increased $985.9 million to $2.64 billion.
- RJF and RJ Bank were reported as “well capitalized.” Their March 31 CET1 ratios were 21.8% and 12.4%, respectively. RJF’s net capital was also above regulatory requirements.
Material changes and segment performance
- Quarterly revenue growth was broad-based, led by Private Client Group (PCG) revenue up 23%, Asset Management up 20%, RJ Bank up 13% and Capital Markets up 8%.
- PCG’s quarterly pre-tax income fell 65% to $29.4 million, primarily because of the Jay Peak legal reserve and higher operating costs, despite growth in fee-based business and client assets. PCG assets under administration were $611 billion, up 26% year over year.
- Capital Markets quarterly pre-tax income rose 47% to $41.3 million, supported by M&A advisory and equity underwriting, partly offset by lower institutional fixed-income commissions.
- Asset Management quarterly pre-tax income rose 21% to $37.8 million. Managed-program assets under management were $85.6 billion, up from $68.8 billion a year earlier.
- RJ Bank quarterly pre-tax income rose 8% to $91.9 million. Six-month pre-tax income rose 30% to $196.0 million, mainly reflecting higher net interest income and lower loan-loss provision. Its net interest margin was 3.08% for the quarter and 3.07% for the six months.
Outlook, commentary, risks and unusual items
- Jay Peak: The company recorded a $100 million quarterly and $130 million six-month pre-tax adjustment relating to the matter. An April 13, 2017 proposed settlement calls for $150 million in total, including $4.5 million previously paid; court approval and other conditions remain outstanding. The company also disclosed that, for estimable legal matters overall, the upper end of reasonably possible aggregate losses was approximately $50 million above reserves, excluding specified Regions-indemnified matters.
- Other unusual costs: Quarterly results included an $8.3 million charge for accelerated debt issuance costs following the March redemption, plus acquisition-related costs. Management’s adjusted results exclude these and the Jay Peak adjustment.
- Interest rates: Management estimated that the March 2017 25-basis-point rate increase could add $15–$20 million to quarterly pre-tax income for the remaining half of fiscal 2017, subject to assumptions about deposit rates, earning assets and bank margins. A rate reversal could reduce net interest income. RJ Bank’s modeled results show sensitivity to rate shocks.
- Acquisition and financing after quarter-end: On April 20, the company agreed to acquire the Scout Group for $172.5 million, subject to adjustments, and expected completion before December 31, 2017. On May 5, it announced a $500 million reopening of its 4.95% senior notes due 2046. S&P upgraded its senior debt rating to BBB+ with a stable outlook in May; Moody’s had placed its rating on review for upgrade.
- Other risks: Disclosed exposures include market and interest-rate risk, loan credit risk, foreign exchange, legal and regulatory proceedings, operational and cybersecurity risks, and evolving fiduciary regulations. Management noted that DOL fiduciary-rule implementation was delayed, with the initial phase scheduled for June 2017 and full implementation then scheduled for January 2018.
- Accounting and credit: Early adoption of stock-compensation guidance lowered the six-month effective tax rate to 30.3% and increased tax-expense volatility. The company also adopted revised consolidation guidance, deconsolidating certain tax-credit-fund entities retrospectively.
Most important facts for investors to verify
- Whether the Jay Peak settlement receives court approval, is completed as proposed, and results in any recoveries or additional costs.
- Whether reported operating trends and margins improve after excluding the unusually large legal and debt-extinguishment charges, and whether management’s adjusted measures reconcile to GAAP as presented.
- How loan growth, C&I charge-offs, criticized loans and the 1.17% allowance develop, particularly as the bank expands its residential, corporate and securities-based lending.
- Whether the estimated $15–$20 million quarterly rate benefit materializes and how deposit pricing and interest-rate sensitivity affect margins.
- The final cost, closing timing and integration results of the Scout acquisition, as well as the use of proceeds from the subsequent $500 million debt issuance.