Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2014; comparative periods ended March 31, 2013. Unaudited consolidated results. Raymond James provides brokerage, investment management, banking and related financial services.
Financial results and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $1.205 billion | $1.170 billion | $2.413 billion | $2.308 billion |
| Net revenue | $1.179 billion | $1.143 billion | $2.362 billion | $2.253 billion |
| Pre-tax income, excluding noncontrolling interests | $165.5 million | $131.0 million | $344.4 million | $270.2 million |
| Net income attributable to Raymond James | $104.6 million | $80.0 million | $221.2 million | $165.8 million |
| Diluted EPS | $0.72 | $0.56 | $1.54 | $1.17 |
| Operating cash flow | Not separately reported for the quarter | $133.1 million | $176.0 million |
Q2 net revenue rose 3%; attributable net income rose 31%. Six-month net revenue rose 5% and attributable net income rose 33%. Pre-tax margin on net revenue was approximately 14.0% in Q2 and 14.6% for the six-month period, using segment pre-tax income excluding noncontrolling interests.
At March 31, 2014, total assets were $22.9 billion, liabilities $18.7 billion and total equity $4.2 billion. Cash and cash equivalents were $2.64 billion, of which approximately $1.07 billion was available without restrictions. Bank loans, net, were $10.03 billion; bank deposits were $10.41 billion. Corporate debt was $1.19 billion. The company reported $133.1 million of operating cash flow, $1.16 billion used in investing activities—primarily to fund bank loan growth—and $1.09 billion provided by financing activities, mainly from increased bank deposits. Cash increased $45.3 million over the six months.
Declared and paid dividends were $0.16 per share for Q2; $0.32 per share was declared for the six months. RJF and RJ Bank were classified as well capitalized. RJF’s total risk-based capital ratio was 20.0%; RJ Bank’s was 12.5%.
Performance changes and business drivers
- Private Client Group: Q2 revenue increased 12% to $814.7 million and pre-tax income rose 44% to $77.1 million. Record client assets under administration were $434 billion, up 12% year over year. Growth reflected fee-based accounts, mutual fund and service fees, and asset appreciation/inflows; fixed-income commissions declined.
- Capital Markets: Q2 revenue was essentially flat at $228.1 million, while pre-tax income increased 80% to $29.6 million. Higher M&A/advisory revenue and trading profits, and the absence of a prior-year $6.9 million goodwill impairment, offset a 29% decline in institutional fixed-income commissions amid low rates and lower client trading volumes.
- Asset Management: Q2 revenue increased 26% to $87.5 million and pre-tax income rose 43% to $29.9 million. Managed assets were $62.3 billion, up 22% year over year, supported by net inflows and market appreciation.
- RJ Bank: Q2 pre-tax income fell 12% to $56.8 million. Net interest margin declined to 2.97% from 3.28%, as loan yields fell despite loan growth. Management cited improved credit trends; nonperforming assets declined to $97.4 million from $104.4 million at September 30, 2013.
- Other: Q2 pre-tax loss was $27.9 million versus $24.1 million. Comparisons were affected by prior-year Albion investment gains that did not recur. Six-month losses improved to $42.8 million from $56.5 million, partly because Morgan Keegan integration costs were no longer material and current-period ARS redemptions/sales generated gains.
Outlook, risks and unusual items
No specific earnings or revenue guidance was provided. Management said results depend on economic conditions, equity and fixed-income markets, interest rates, lending markets, credit trends, regulation and competition. Its September 2013 sensitivity analysis estimated that a 100-basis-point instantaneous increase in short-term rates could raise RJF pre-tax income by approximately $140 million to $170 million over 12 months; the estimate relies on static balances and assumptions and actual outcomes may differ. RJ Bank’s separate model estimated a 9.28% increase in 12-month net interest income under a 100-basis-point rise.
The prior-year comparison includes approximately $65 million of Q2 Albion-related revenue before noncontrolling interests; Albion was sold in April 2013. Prior-year periods also included Morgan Keegan acquisition/integration costs and a goodwill impairment, neither of which recurred materially in the current period. Current six-month results benefited from $5.6 million of gains on ARS redemptions or sales, including a gain following Jefferson County’s redemption of sewer revenue ARS.
Credit, valuation and legal matters warrant attention. The $138 million loan-loss allowance was 1.37% of amortized loan cost; management cautioned that adverse economic or real-estate conditions could make reserves insufficient. Level 3 recurring fair-value assets totaled $418 million, including $222 million of auction-rate securities and $191 million of private equity, where values depend in part on unobservable assumptions. Regions indemnifies specified pre-acquisition Morgan Keegan legal matters; management estimated potential liability of $25 million to $200 million, with a $159 million liability and $161 million indemnification asset recorded. For other matters, management estimated possible losses of up to $7 million beyond accrued amounts and said resolution could affect a future period. The Missouri municipal-bond class action was scheduled for trial in September 2014 and is subject to Regions indemnification.
The filing reported no material changes to previously disclosed risk factors. It noted the Volcker Rule became effective April 1, 2014; the company was evaluating its impact and did not then anticipate a material effect. Disclosure controls were deemed effective, with no material internal-control changes reported for the quarter.
Investor facts to verify
- Whether growth in fee-based revenue, client assets and asset-management inflows continues, and how much reflects markets versus net inflows.
- Whether RJ Bank can stabilize net interest margin as its loan portfolio expands, and whether credit quality and loss reserves remain adequate.
- How much reported earnings comparisons are affected by prior-period Albion gains, noncontrolling interests, integration costs and current ARS gains.
- Valuation assumptions and liquidity of Level 3 assets, especially auction-rate securities and private equity investments.
- Developments in indemnified Morgan Keegan litigation, other contingencies, and the company’s assessment of Volcker Rule compliance and interest-rate sensitivity.