Business context and reporting period
Raymond James Financial, Inc. is a diversified financial services and bank holding company with brokerage, capital markets, asset management, banking and related businesses. This Form 10-Q covers fiscal first-quarter 2016, the three months ended December 31, 2015, and compares results with the three months ended December 31, 2014, except balance-sheet comparisons, which are to September 30, 2015.
Key financial results and position
Amounts below are in U.S. dollars; quarterly income and cash-flow figures are for the three months ended December 31.
| Metric | Q1 FY2016 | Prior comparable period / change |
|---|---|---|
| Total revenues | $1.302 billion | $1.280 billion; up 2% |
| Net revenues | $1.275 billion | $1.252 billion; up 2% |
| Pre-tax income, excluding noncontrolling interests | $168.3 million | $202.9 million; down 17% |
| Net income attributable to Raymond James Financial | $106.3 million | $126.3 million; down 16% |
| Diluted earnings per share | $0.73 | $0.87 |
| Net interest income | $115.5 million | $104.7 million; up 10% |
| Net cash from operating activities | $227.4 million | $239.6 million |
Non-interest expenses rose 6% to $1.112 billion, with compensation and benefits of $866.4 million. The income-tax provision was $62.0 million and the effective tax rate was 36.8% (37.8% in the prior-year quarter). Total comprehensive income was $96.2 million, including a $10.1 million other comprehensive loss.
At December 31, 2015, total assets were $26.91 billion, liabilities $21.99 billion and total equity $4.92 billion. Cash and cash equivalents were $2.60 billion; the company reported approximately $1.24 billion as available without restrictions. Client-protection and other segregated assets were $3.08 billion. Bank loans, net, totaled $13.73 billion, against an allowance for loan losses of $185.5 million (1.35% of the loan portfolio). Bank deposits were $12.66 billion.
Quarterly cash flows were $227.4 million provided by operations, $856.7 million used in investing and $649.4 million provided by financing; cash decreased $4.6 million after currency effects. RJF had $1.149 billion of senior notes payable and $612.0 million of other borrowings, including $575 million of Federal Home Loan Bank advances. A $250 million senior-note principal maturity was scheduled for April 2016.
Capital remained above regulatory well-capitalized thresholds: RJF’s Common Equity Tier 1 ratio was 22.6%, and RJ Bank’s was 12.9%. RJF and RJ Bank were each categorized as well capitalized.
Material changes versus the prior comparable period
- Revenue growth did not translate into higher earnings: net revenues increased 2%, while pre-tax income excluding noncontrolling interests fell 17% and attributable net income fell 16%, as expenses rose and some capital-markets and asset-management revenue streams weakened.
- Private Client Group net revenues increased 3% to $872.3 million, but pre-tax income declined 25% to $69.1 million; its net-revenue margin fell to 7.9% from 11.0%. Client assets under administration rose 3% year over year to $473.1 billion.
- Capital Markets net revenues declined 2% to $226.5 million and pre-tax income declined 9% to $25.2 million. M&A/advisory fees fell 35% and equity underwriting fees fell 47%; net trading profit increased 160% to $20.8 million.
- Asset Management net revenues increased 1% to $100.2 million, while pre-tax income fell 16% to $33.4 million, partly reflecting lower performance fees and higher expenses. Assets under management were $67.8 billion, up 2% year over year.
- RJ Bank net revenues increased 8% to $108.4 million and pre-tax income increased 2% to $65.9 million. Loan growth lifted net interest income, but net interest margin narrowed to 2.90% from 3.04%; the loan-loss provision rose 49% to $13.9 million.
- Total loans grew to $13.92 billion from $13.16 billion at September 30, 2015; bank deposits increased $738 million over the same period. Nonperforming loans declined to $50.1 million from $52.6 million.
Outlook, commentary, risks and unusual items
- Management said results are sensitive to economic conditions, equity and fixed-income markets, interest rates, lending conditions, credit trends, competition and regulation. It reported record total client assets under administration of $500.4 billion at quarter-end, attributing growth to advisor recruiting and retention.
- Management estimated that the December 2015 25-basis-point Federal Reserve rate increase could add as much as approximately $40 million in annual pre-tax income, or $8–$10 million per quarter. It estimated a cumulative 100-basis-point increase could add approximately $150–$160 million annually, subject to assumptions about balances, rate changes and client cash-rate pass-through. These are estimates, not formal earnings guidance; a rate decrease could reverse the benefit.
- RJ Bank recorded a $4.5 million qualitative reserve related to criticized energy-sector loans. Its energy portfolio was $444 million, including $81 million of criticized loans; management said much of the portfolio was to midstream and other borrowers not directly exposed to commodity prices.
- The company announced a planned acquisition of Deutsche Asset & Wealth Management’s U.S. Private Client Services unit, expected to close in fiscal Q4 2016. Based on the announced advisor count, estimated total investment, including advisor retention incentives, was approximately $420 million; final cost depends on advisor participation and retention. Q1 included $1.9 million of acquisition-related expenses.
- Management cited a $10 million charge to certain legal and regulatory reserves in the current quarter; this contributed to the year-over-year increase in other expenses. For non-Morgan Keegan matters, management estimated possible losses of $0–$26 million beyond any accrued liability. Certain Morgan Keegan pre-acquisition matters were subject to Regions indemnification; the balance sheet included a $142 million indemnification asset and a corresponding liability.
- The company reported ongoing regulatory and litigation exposure. It was evaluating the potential impact of a proposed Department of Labor investment-advice rule, which it said was unknown. It also highlighted market, credit, liquidity, foreign-exchange, operational and cybersecurity risks. Management said it had not experienced material cyberattack or information-security losses to date, but could not assure against future losses.
- Management believed existing assets, operating cash flows and financing facilities would adequately fund operations at current activity levels. The $250 million April 2016 note maturity and the planned acquisition are relevant liquidity uses. The company had a $300 million committed unsecured revolving facility with no borrowings outstanding at quarter-end.
Important facts for investors to verify
- Whether earnings and segment margins recover, particularly in Private Client Group and Capital Markets, and how expense growth compares with revenue growth.
- Whether the Federal Reserve rate-sensitivity estimates are realized as client deposit rates, cash balances and competitive conditions change.
- Loan growth, energy-sector credit quality, criticized and nonperforming loans, and adequacy of RJ Bank’s $185.5 million loan-loss allowance.
- The acquisition’s closing, actual advisor participation and retention, total investment, integration costs and contribution to results.
- Cash available for corporate purposes after considering segregated client assets, the April 2016 note repayment and acquisition funding needs.
- Developments in legal, regulatory and other contingencies, including the limits and timing of Regions’ indemnification and potential losses beyond recorded accruals.