Raymond James Financial, Inc. — Form 10-Q Summary
Business context and reporting period
Financial holding company with brokerage, investment management, banking and trust operations. This unaudited filing covers the fiscal quarter and six months ended March 31, 2016; comparisons are to the periods ended March 31, 2015. Unless stated otherwise, amounts below are in U.S. dollars.
Key financial metrics
| Metric | Quarter | Six months |
|---|---|---|
| Total revenue | $1.341 billion, up 2% | $2.642 billion, up 2% |
| Net revenue | $1.311 billion, up 2% | $2.586 billion, up 2% |
| Pre-tax income, including noncontrolling interests | $190.2 million, up 8% | $352.4 million, down 6% |
| Net income attributable to Raymond James | $125.8 million, up 11% | $232.2 million, down 3% |
| Diluted EPS | $0.87, up 13% | $1.60, down 2% |
| Pre-tax margin on net revenues | 15.1%; 15.6% adjusted | 14.2%; 14.5% adjusted |
| Net interest income | $132.1 million, up 23% | $247.6 million, up 17% |
| Operating cash flow | Six-month use of $67.9 million, versus $380.7 million provided in the prior-year period |
Adjusted results are non-GAAP and exclude Deutsche Bank Wealth Management acquisition-related costs. Adjusted diluted EPS was $0.90 for the quarter and $1.63 year to date.
- Balance sheet at March 31: Assets were $27.75 billion, up 5% from September 30, 2015; total equity was $4.88 billion. Cash and cash equivalents were $1.48 billion, including approximately $929 million described as available without restrictions.
- Loans and credit: Bank loans, net, were $14.35 billion, up $1.36 billion since September 30. The loan-loss allowance was $194.2 million, or 1.35% of loans. Nonperforming loans were $59.4 million versus $52.6 million at fiscal year-end.
- Debt and funding: Senior notes payable totaled $1.149 billion; other borrowings were $610.9 million, including $575 million of Federal Home Loan Bank advances. Repurchase-agreement liabilities were $190.7 million. The $250 million 4.25% senior notes matured and were repaid in April 2016. RJ Bank reported $1 billion of immediate additional FHLB credit availability.
- Capital and shareholder returns: RJF and RJ Bank remained “well capitalized”; their CET1 ratios were 20.9% and 12.7%, respectively. The company repurchased approximately 3.16 million shares under its authorization for $144.5 million during the quarter and declared dividends of $0.20 per share.
Material changes and segment performance
- Quarterly results improved, but six-month net income and diluted EPS declined. The quarter benefited from higher net interest income and stronger RJ Bank results; the year-to-date comparison also reflected lower private-equity gains and challenging equity-market activity.
- Private Client Group: Quarterly pre-tax income rose 10% to $83.2 million; year-to-date it fell 9% to $152.4 million. Quarter-end client assets under administration were a record $485.6 billion. Higher fee-based-account and cash-sweep fees helped offset declines in equity, mutual-fund and new-issue commissions.
- Capital Markets: Quarterly pre-tax income rose 35% to $28.1 million, while six-month income rose 10% to $53.3 million. Equity underwriting and M&A/advisory fees weakened, partly offset by fixed-income activity, tax-credit fund syndication and lower expenses.
- Asset Management: Quarterly pre-tax income was approximately flat at $31.1 million; six-month income declined 9% to $64.5 million. Non-discretionary asset-based program assets reached $100.0 billion; managed-program assets under management were $73.1 billion before affiliated assets.
- RJ Bank: Quarterly net revenue rose 22% to $125.3 million and pre-tax income rose 19% to $85.1 million. Six-month net revenue increased 15% to $233.7 million and pre-tax income increased 11% to $151.0 million. Growth in average loans drove higher net interest income; higher credit-loss provisions partly offset the benefit.
- Other segment: Pre-tax loss increased to $29.5 million for the quarter and $54.7 million for six months, primarily reflecting lower private-equity gains and acquisition costs.
Outlook, risks, contingencies and unusual items
- Management estimated that the December 2015 25-basis-point rate increase contributed approximately $16–$20 million to quarterly pre-tax income. Its estimated annual pre-tax benefit from a 100-basis-point increase remained $150–$160 million, subject to assumptions about client cash balances, deposit pricing, earning assets and bank margins. A further 75-basis-point increase was estimated to add about $80 million in annual pre-tax income; a rate reversal would reverse favorable effects.
- The company expected to close its acquisition of Deutsche WM’s U.S. Private Client Services business in fiscal Q4 2016. Based on the announced advisor count, the estimated total investment, including advisor retention incentives, was approximately $420 million. Quarter and year-to-date acquisition-related costs were $6.0 million and $7.9 million.
- Loan-loss provisions increased to $9.6 million for the quarter and $23.5 million for six months. Management cited energy-sector exposures, the Shared National Credit review and corporate loan growth. Energy loans had $452 million outstanding; $123 million was classified as criticized, with a $31 million allowance.
- The Department of Labor’s final fiduciary rule, issued April 8, 2016, was expected to increase compliance, legal and technology costs and expand potential legal exposure. The filing notes phased implementation beginning in 2017.
- Legal and regulatory matters included a $20 million reserve for regulatory matters and a separate approximately $36 million liability, matched by an indemnification asset, for certain Morgan Keegan matters covered by Regions. Management said resolution was not expected to materially harm financial position or cumulative results, but could materially affect a future period. Possible losses beyond recorded liabilities were estimated at up to $4 million for other litigation and regulatory matters.
- Unrestricted Level 3 valuation judgments included private equity and auction-rate securities. Management reported no goodwill impairment, but the Canadian RJ Ltd. Capital Markets reporting unit had estimated fair value only about 10% above carrying value; continued weak Canadian markets or underperformance could result in impairment.
- Cash fell by $1.12 billion during the six months, largely reflecting the $1.43 billion net increase in bank loans and higher segregated client assets. Management stated existing assets, operating cash generation and available financing should provide adequate funding for operations at current activity levels.
Important facts for investors to verify
- Whether loan growth—especially corporate and energy lending—continues to outpace deposit and capital growth, and whether credit provisions or nonperforming loans rise further.
- Whether the Deutsche WM acquisition closes on schedule and whether its final purchase and retention costs, advisor retention and revenue contribution match current expectations.
- How changes in interest rates, client cash balances and deposit pricing affect the estimated earnings sensitivity.
- Whether the DOL fiduciary rule leads to significant compliance costs, changes in products or services, or increased litigation exposure.
- Whether cash generation, available liquidity and regulatory capital remain adequate after the senior-note repayment, share repurchases and planned acquisition spending.
- Whether the Canadian RJ Ltd. Capital Markets unit’s performance creates pressure for a goodwill impairment, and how legal and regulatory contingencies ultimately resolve.