RAYMOND JAMES FINANCIAL INC quarterly report, Q2 FY2015

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

Reporting period: Fiscal second quarter and six months ended March 31, 2015. Financial statements are unaudited. Raymond James is a diversified financial services and bank holding company, with private client, capital markets, asset management, and banking operations.

Financial performance and position

Metric	Quarter ended Mar. 31, 2015	Prior-year quarter	Six months ended Mar. 31, 2015	Prior-year six months
Total revenues	$1.313 billion	$1.205 billion	$2.592 billion	$2.413 billion
Net revenues	$1.286 billion	$1.179 billion	$2.538 billion	$2.362 billion
Pre-tax income, including noncontrolling interests	$175.6 million	$153.0 million	$374.3 million	$331.8 million
Net income attributable to Raymond James	$113.5 million	$104.6 million	$239.8 million	$221.2 million
Diluted EPS	$0.77	$0.72	$1.64	$1.54

Quarterly net revenues rose 9% and attributable net income rose 9% year over year. Six-month net revenues increased 7% and attributable net income increased 8%.
Quarterly non-interest expenses increased 8% year over year to $1.110 billion; compensation and benefits were the largest expense. The quarterly bank loan-loss provision was $3.9 million, versus $2.0 million.
Six-month operating cash flow was $380.7 million; investing activities used $1.266 billion, mainly to fund bank-loan growth; financing activities provided $1.276 billion, primarily from increased bank deposits. Cash and cash equivalents ended at $2.540 billion, up from $2.199 billion at September 30, 2014.
At March 31, total assets were $24.968 billion, total liabilities $20.316 billion, and total equity $4.652 billion. Bank loans, net, were $12.061 billion; bank deposits were $11.272 billion.
Corporate debt was $1.189 billion and other borrowings were $721.7 million. Separately, securities sold under repurchase agreements totaled $277.4 million. The company reported approximately $1.21 billion of cash available without restrictions.
RJF and RJ Bank met the regulatory definition of “well capitalized.” RJF reported Basel III common equity Tier 1 of 19.2% and total capital of 20.1%; RJ Bank reported 11.5% and 12.8%, respectively.

Material changes and business drivers

Private Client Group: Quarterly revenue increased 7%, but pre-tax income fell 2% to $75.4 million. Client assets under administration reached $471.1 billion, up 9% year over year. Growth in fee-based accounts and related fees was partly offset by higher expenses and a $6 million mutual-fund share-class remediation expense.
Capital Markets: Quarterly revenue rose 6%, while pre-tax income declined 29% to $20.8 million. M&A and advisory fees increased 48% and institutional fixed-income commissions increased 21%; equity underwriting revenue fell 30%. Management cited costs of investment-banking expansion and difficult Canadian market conditions.
Asset Management: Quarterly revenue rose 7% and pre-tax income 4%. Managed-program assets were $69.4 billion, up 11% year over year.
RJ Bank: Quarterly pre-tax income increased 25% to $71.3 million, primarily on higher net interest income from loan growth and improved net interest margin. The bank-loan portfolio grew to $12.2 billion; the allowance was $160.0 million, or 1.32% of loans. Nonperforming loans declined to $69.6 million from $80.7 million at September 30, 2014.
Client assets under administration reached a company record of $496 billion. Management attributed inflows to advisor retention and recruiting, alongside market appreciation.

Outlook, commentary, risks and unusual items

No specific earnings or revenue guidance was provided. Management said a 100-basis-point instantaneous rise in short-term rates was estimated to add approximately $130 million to pre-tax income over 12 months, based on static balances and assumptions about rates credited to client cash; actual results could differ materially.
Management described market conditions, interest rates, regulatory developments, competition, credit trends, and client participation in financial markets as important uncertainties. A proposed Department of Labor fiduciary rule was under review; its eventual business impact was unknown. Basel III reporting began in January 2015, with no significant effect on reported capital ratios.
RJF agreed to acquire Cougar Global Investments in March and completed the acquisition on April 30, 2015. Cougar had more than $1 billion of assets under management at December 31, 2014; the filing said the acquisition was not material to RJF’s overall financial condition.
RJF recognized approximately $17 million of private-equity valuation gains in the quarter’s Other segment; the segment’s pre-tax loss narrowed to $18.3 million. Level 3 assets included $220.9 million of private equity and $202.1 million of auction-rate securities, requiring significant unobservable valuation inputs.
The mutual-fund share-class issue resulted in a $6 million quarterly expense; the firm decided to bear the full refund cost rather than seek a portion from advisors. Refunds were to begin in April 2015.
A $250 million senior-note issuance matures in April 2016; management stated it did not then intend to refinance it. A Regions credit facility expired and was repaid on April 2, 2015.
Pre-closing Morgan Keegan legal matters are subject to Regions indemnification; management estimated potential liabilities of $37 million to $205 million and recorded related indemnification assets and liabilities. Other legal matters had an estimated possible loss range of $0 to $9 million above accrued amounts; management said resolution could affect results in a future period.
Other risks include loan growth and credit-loss estimates, interest-rate and foreign-exchange movements, valuation uncertainty, regulatory and legal proceedings, and technology or cybersecurity disruption. Management reported no material changes to its previously disclosed risk factors.

Important facts for investors to verify

Whether client-asset inflows and fee-based revenue growth continue, and whether expense growth permits margins to recover.
Credit quality and allowance adequacy as RJ Bank’s loan portfolio expands, including commercial and residential mortgage exposures.
Realization of private-equity and auction-rate-security valuations, and the sensitivity of reported earnings to Level 3 assumptions.
Actual impact of interest-rate changes, deposit pricing, and the planned 2016 senior-note repayment on earnings and liquidity.
Costs and outcomes of the mutual-fund share-class remediation and outstanding litigation, including the scope and timing of Regions indemnification.
Integration and contribution of Cougar Global following its April 2015 closing, as well as the final impact of proposed regulatory changes.