RAYMOND JAMES FINANCIAL INC quarterly report, Q3 FY2014

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Raymond James Financial, Inc. — Form 10-Q Summary

Business context and reporting period

Financial services and bank holding company operating through Private Client Group, Capital Markets, Asset Management, RJ Bank and Other. This fiscal third-quarter report covers the three and nine months ended June 30, 2014; financial statements are unaudited. Comparisons are with the periods ended June 30, 2013, except balance-sheet comparisons, which are with September 30, 2013.

Financial performance and position

  • Quarter: Revenue was $1.241 billion and net revenue was $1.214 billion, up 9% year over year. Income before tax and noncontrolling interests was $178.9 million, up 39%; net income attributable to Raymond James was $122.7 million, up 46%. Diluted EPS was $0.85 versus $0.59. Pre-tax margin on net revenue was approximately 14.7%, compared with 11.6% a year earlier.
  • Nine months: Revenue was $3.655 billion and net revenue was $3.576 billion, up 6%. Net income attributable to Raymond James was $343.9 million, up 38%; diluted EPS was $2.38 versus $1.76. Management reported a 15% pre-tax margin on net revenue.
  • Cash flow: Operating activities provided $450.9 million in the nine-month period; investing activities used $1.567 billion, chiefly reflecting bank loan growth; financing activities provided $1.387 billion. Cash and cash equivalents increased $249.1 million to $2.846 billion. Approximately $1.11 billion was available without restrictions.
  • Balance sheet and funding: Total assets were $23.070 billion, liabilities $18.757 billion and total equity $4.313 billion. Bank loans, net, were $10.374 billion, up from $8.821 billion at September 30, 2013. Bank deposits were $10.268 billion. Corporate debt was $1.192 billion; other borrowings were $559.2 million, including $500 million of Federal Home Loan Bank advances.
  • Margins and credit: RJ Bank’s net interest margin fell to 2.88% for the quarter from 3.20% a year earlier, and to 2.96% for nine months from 3.32%. Its loan-loss allowance was $142.3 million, or 1.36% of loans. Nonperforming assets were $94.2 million, down from $104.4 million at September 30, 2013.
  • Capital and shareholder returns: Raymond James and RJ Bank both met the regulatory “well capitalized” standard. Raymond James’s total risk-based capital ratio was 20.5%; RJ Bank’s was 12.6%. The company declared quarterly dividends of $0.16 per common share and paid $65.4 million in dividends during the nine months.

Changes versus the prior comparable period

  • Private Client Group and Asset Management benefited from higher client assets, net inflows and market appreciation. Client assets under administration reached a record $479 billion, up 18% year over year; Private Client Group assets were $454.1 billion, and Asset Management assets were $65.3 billion.
  • Private Client Group quarterly pre-tax income rose 39% to $81.5 million, supported especially by fee-based account revenue. Asset Management pre-tax income rose 31% to $31.3 million for the quarter and 41% to $93.0 million for nine months.
  • Capital Markets quarterly pre-tax income rose 75% to $28.0 million, helped by improved fixed-income trading results versus a prior-year trading loss. Institutional fixed-income commissions remained weak; nine-month revenue was down 27%.
  • RJ Bank quarterly pre-tax income increased 3% to $64.9 million, while nine-month pre-tax income declined 8% to $178.8 million. Loan growth was offset by lower yields and margin compression.
  • Acquisition and integration costs were no longer material as Morgan Keegan integration was substantially complete. The prior-year period also included goodwill impairment and gains from the Albion investment, which was sold in April 2013; these items affect comparisons.

Outlook, risks, contingencies and unusual items

  • No specific earnings or revenue guidance is provided. Management says results are sensitive to economic conditions, equity and fixed-income markets, interest rates, lending activity, credit trends and competition. It estimated that a 100-basis-point instantaneous rise in short-term rates could add approximately $150 million to pre-tax income over 12 months, based on September 30, 2013 balances and assumptions; actual results would depend on rates, balances, competition and client cash pricing.
  • Management expects existing liquid assets, operating cash flows and financing facilities to provide adequate funding for operations at current activity levels. The company had $590 million of immediate FHLB credit available to RJ Bank, subject to collateral, and $2.625 billion of domestic financing arrangements, including uncommitted facilities not contractually assured.
  • Credit risks include loan growth, real-estate and economic deterioration, and possible insufficiency of loan-loss reserves. Market risks include rate changes, trading inventory and foreign exchange exposure. Level 3 assets measured at fair value totaled $438.7 million, largely auction-rate securities and private equity investments, whose valuations rely on significant unobservable inputs.
  • The Volcker Rule’s conformance deadline was July 21, 2015, subject to possible extensions. The company was assessing the effect on some private-equity investments and did not anticipate a material effect based on its then-current analysis. New municipal-advisor rules could temporarily affect public-finance activity; management did not expect a material adverse effect.
  • Regions indemnifies specified pre-acquisition Morgan Keegan legal matters. Management estimated potential liability for those matters at $20 million to $185 million, with a related $155 million liability and $157 million indemnification asset recorded. Other litigation had an estimated possible loss range of up to $8 million above accrued liabilities; management did not expect a material adverse impact on financial position or cumulative results, though individual matters could affect future-period earnings.
  • The company identified no material changes to its reported risk factors. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.

Investor facts to verify

  • Confirm the strong earnings comparison after accounting for prior-year acquisition costs, goodwill impairment and Albion gains, and review the company’s non-GAAP reconciliation.
  • Track RJ Bank’s loan growth, net interest margin, criticized loans, nonperforming assets and allowance coverage.
  • Assess how sustained low rates or a rate increase could affect client cash economics, bank yields, deposit costs and reported fee revenue.
  • Review Level 3 valuation assumptions and the liquidity, credit and concentration risks in auction-rate securities and private equity holdings.
  • Monitor Regions-indemnified Morgan Keegan litigation, other legal contingencies, regulatory changes and the availability of subsidiary capital and financing.