Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022. Financial statements are unaudited. Comparisons are with the corresponding 2021 periods unless noted.
Business context
Raymond James provides wealth management, capital markets, asset management, banking and trust services. On June 1, 2022, it acquired TriState Capital Holdings for approximately $1.408 billion; its results are included from the closing date. Charles Stanley, acquired January 21, 2022, is also included from closing. The July 1, 2022 acquisition of SumRidge Partners occurred after quarter-end.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net revenues | $2.718 billion, up 10% | $8.172 billion, up 16% |
| Pre-tax income | $415 million, up 8% | $1.406 billion, up 14% |
| Net income available to common shareholders | $299 million, down 3% | $1.068 billion, up 10% |
| Diluted EPS | $1.38, down 5% | $4.99, up 8% |
| Return on common equity | 13.3%, versus 15.9% | 16.3%, versus 17.4% |
| Compensation ratio | 67.5%, versus 67.2% | 68.2%, versus 68.1% |
Management reported adjusted diluted EPS of $1.61 for the quarter and $5.41 year to date, excluding specified acquisition-related expenses and, in 2021, debt-extinguishment losses. These are non-GAAP measures and are not substitutes for GAAP results.
- Quarterly net interest income rose to $314 million from $165 million; nine-month net interest income was $706 million versus $493 million. Higher rates, loan growth and acquired balances contributed.
- Quarterly Private Client Group revenue rose 15% and pre-tax income rose 29%. Capital Markets revenue fell 14% and pre-tax income fell 47%, reflecting weaker brokerage and investment banking activity. Bank revenue rose 63%, but pre-tax income fell 29%, in part due to credit provisions and acquisition-related costs.
- For the quarter, a $56 million bank-loan credit-loss provision compared with a $19 million benefit a year earlier. The current-period provision included $26 million for acquired TriState non-PCD loans; an additional $5 million provision related to acquired unfunded lending commitments.
Financial position, cash flow and capital
- Total assets were $86.111 billion at June 30, up from $61.891 billion at September 30, 2021; total liabilities were $76.619 billion and shareholders’ equity was $9.492 billion.
- Cash and cash equivalents were $5.958 billion. Including cash segregated for regulatory purposes and restricted cash, the total was $20.209 billion. Management reported approximately $2.03 billion of cash at the parent, including cash loaned to RJ&A.
- Bank loans, net, increased to $41.843 billion from $24.994 billion, and bank deposits increased to $49.887 billion from $32.495 billion, principally reflecting TriState and loan growth. The allowance was $377 million, or 0.90% of held-for-investment loans, versus 1.27% at September 30, 2021.
- For the nine months, operating cash flow was $4.570 billion, investing cash flow was negative $5.119 billion, and financing cash flow was positive $4.598 billion. Cash including segregated and restricted amounts increased $3.760 billion.
- Senior notes payable were $2.038 billion; other borrowings were $1.353 billion, including $1.250 billion of FHLB advances and $100 million of subordinated notes. No borrowings were outstanding under the $500 million committed revolving credit facility.
- RJF reported a 10.8% Tier 1 leverage ratio and 21.5% total capital ratio and said RJF, Raymond James Bank and TriState Capital Bank exceeded well-capitalized requirements. A $1 billion share-repurchase authorization had approximately $900 million remaining at quarter-end; the company repurchased about $100 million of shares following the TriState closing.
Material changes versus prior periods
- Acquisitions materially expanded the balance sheet and added revenue, deposits, loans, goodwill and intangible assets. TriState contributed $29 million of net revenue and a $16 million pre-tax loss for June; the loss included initial acquired-credit provisions.
- Rising short-term rates boosted net interest income and cash-sweep fees. Interest expense also increased, including deposit expense.
- Market weakness reduced asset values: PCG assets in fee-based accounts were down 11% from March 31, 2022, while financial assets under management were $182.4 billion, down from $193.7 billion at March 31. Available-for-sale securities had $727 million of gross unrealized losses at June 30, versus $69 million at September 30, 2021; year-to-date other comprehensive loss was $535 million.
- Quarterly investment banking revenue declined 18%; nine-month investment banking revenue increased 15%, primarily reflecting strong first-quarter M&A activity. The prior-year period included $98 million of debt-extinguishment losses that did not recur.
Outlook, risks and contingencies
- Management expected fourth-quarter results to benefit from the full-quarter effect of May and June rate increases, two months of the July increase, a full quarter of TriState results and SumRidge. It estimated fourth-quarter third-party RJBDP yield at approximately 1.7% and Bank segment net interest margin at approximately 2.7%; actual outcomes depend on rates, deposit pricing and other factors.
- Management cautioned that market and macroeconomic uncertainty could weigh on investment banking, brokerage and asset-management revenues. It expected lower fee-based assets to pressure near-term asset-management fees, while loan growth and economic deterioration could raise future credit provisions. Inflation, travel and technology investment were expected to continue increasing expenses.
- Credit risks include economic weakening, real-estate values and borrower concentration or sector pressures. Nonperforming loans were $90 million; management warned prolonged market deterioration could increase nonperforming assets, provisions and charge-offs. Interest-rate, market, foreign-exchange, liquidity, operational, cybersecurity, model and compliance risks also apply.
- Management estimated the upper end of reasonably possible aggregate legal and regulatory losses at approximately $80 million above recorded accruals for matters where a range could be estimated. It could not estimate an upper bound for certain other matters. Management did not expect pending matters to materially adversely affect consolidated financial condition, but results or cash flows in a particular period could be affected.
- TriState acquisition fair values remained provisional at quarter-end. Management expected to finalize the valuation in fiscal fourth quarter 2022. The company excluded TriState from its June 30 internal-control effectiveness assessment while integration was in progress; disclosure controls were concluded to be effective.
Most important facts for investors to verify
- Whether acquired TriState and Charles Stanley operations deliver expected integration benefits and whether provisional acquisition valuations change.
- Actual fourth-quarter net interest income, deposit costs, RJBDP yield and Bank segment margin versus management’s estimates.
- Trends in fee-based assets, assets under management, client cash balances, investment banking pipelines and market-sensitive revenues.
- Loan growth, criticized and nonperforming exposures, credit-loss allowances and provisions as economic conditions evolve.
- Available-for-sale securities losses, capital and liquidity levels, and legal or regulatory developments, including the estimated loss exposure.