Raymond James Financial, Inc. — Form 10-Q Summary
Business context and period. Unaudited results for the fiscal third quarter and nine months ended June 30, 2019. Raymond James provides investment, brokerage, capital markets, asset management, banking and trust services. All dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Quarter 2019 | Quarter 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $2,000 | $1,891 | $5,938 | $5,514 |
| Net revenue | $1,927 | $1,837 | $5,717 | $5,375 |
| Pre-tax income | $340 | $318 | $1,005 | $961 |
| Net income attributable to Raymond James | $259 | $232 | $769 | $594 |
| Diluted earnings per share | $1.80 | $1.55 | $5.30 | $3.99 |
- Quarterly net revenue rose 5%, pre-tax income 8%, net income 12% and diluted EPS 16%. Annualized return on equity was 16.1%, versus 15.4%.
- Nine-month net revenue increased 6% and pre-tax income 6%. Net income rose 29%, partly because the prior-year period included a $117 million Tax Act-related loss. Excluding the $15 million European equities business sale loss in 2019 and the Tax Act impact in 2018, adjusted net income increased 10% to $784 million and adjusted diluted EPS rose 13% to $5.41. These are non-GAAP measures.
- Quarterly growth was led by asset management fees and net interest income; brokerage revenue declined. Nine-month growth also reflected higher investment banking revenue. Compensation and benefits were the largest expense category and increased with revenue and staffing.
- Segment highlights for the quarter: Private Client Group pre-tax income $140 (up 6%); Capital Markets $24 (up 9%); Asset Management $65 (up 12%); RJ Bank $138 (up 6%). For nine months, Private Client Group pre-tax income fell 2% to $436, while Capital Markets rose 79% to $77, Asset Management rose 8% to $184, and RJ Bank rose 6% to $384.
- RJ Bank’s quarterly net interest margin increased to 3.37% from 3.30%; nine-month margin rose to 3.32% from 3.20%. Consolidated nine-month net interest income was $740, versus $613.
Cash flow, balance sheet and capital
- At June 30, cash and cash equivalents were $3,596; regulatory-segregated cash was $2,356, making combined cash $5,952. Total assets were $38,677, up 3% from September 30, 2018; total equity was $6,564.
- For the nine months, operating cash flow was negative $101, compared with positive $224 a year earlier; investing cash outflow was $1,386 and financing cash inflow was $1,510. Operating cash flow included a $1,300 decrease in brokerage client payables and other accounts payable. Cash, cash equivalents and segregated cash increased $11 overall.
- Bank loans, net increased to $20,691 from $19,518; bank deposits increased to $22,166 from $19,942. Senior notes were $1,550 and other borrowings $945. The company reported no borrowings on its $500 million committed revolving credit facility; $215 million was outstanding under uncommitted secured arrangements.
- RJF and RJ Bank were categorized as well capitalized. RJF’s CET1 ratio was 24.2%; RJ Bank’s was 12.8%. RJ&A reported $1,036 of excess net capital.
- The bank loan-loss allowance was $215, or 1.03% of held-for-investment loans. Nonperforming loans rose to $53 (0.25% of total RJ Bank loans) from $25 (0.12%) at September 30, 2018. The filing attributes the quarter’s $5 loan-loss benefit to a decline in criticized loans following payoffs; the nine-month provision was $16.
Changes, outlook and risks
- Management estimated a fiscal 2019 effective tax rate of approximately 25%–26%; the nine-month effective rate was 25.1%. No specific revenue or earnings guidance was provided.
- Management said results are sensitive to equity and fixed-income markets, interest rates, lending and credit trends, and economic, political and regulatory conditions. A July 2019 Federal Reserve rate decrease could weigh on earnings; the effect of future rate changes depends in part on rates paid on client cash.
- Client assets under administration were $824.2 billion, up 9% year over year; assets in fee-based accounts were $398.0 billion. Financial assets under management were $143.1 billion, up 6% year over year. Management cited advisor recruiting, retention, market appreciation and client movement toward fee-based accounts.
- The $15 million settlement-in-principle for the Brink and Wistar class actions was accrued, but remained subject to final court approval. For other legal and regulatory matters with estimable losses, the upper end of reasonably possible aggregate losses was approximately $85 million above reserves.
- Off-balance-sheet commitments include $214 million of formal recruiting loan offers, $8,766 million of open-end consumer credit lines, $1,567 million of commercial credit lines and $628 million of unfunded loan commitments. Contract amounts do not represent expected funding or actual future exposure.
- Regulation Best Interest takes effect June 30, 2020; management anticipated policy, supervision and compliance changes and possible additional costs. Lease accounting adoption was scheduled for fiscal 2020 and expected to increase assets and liabilities; the company did not expect a material effect on operating results.
- Other notable items: the firm repurchased 7.70 million shares for $591 million during the nine months, with $373 million remaining under authorization at June 30. Revenue-recognition presentation changes grossed up certain revenue and expense lines without affecting pre-tax or net income. Silver Lane Advisors was acquired in April; ClariVest became wholly owned.
Important facts for investors to verify
- Whether fee-based asset growth and market levels sustain asset-management revenue, and how lower markets or client outflows affect fees.
- How deposit costs and any further interest-rate changes affect RJ Bank’s margin and firm-wide net interest income.
- Whether rising nonperforming loans and criticized credits lead to larger provisions or charge-offs, particularly across commercial and residential lending.
- Final approval and payment of the $15 million class-action settlement, and developments in other legal and regulatory matters.
- Execution and financial impact of regulatory changes, including Regulation Best Interest, and the eventual balance-sheet effect of lease-accounting adoption.
- Cash-flow movements tied to client balances, continued bank-loan growth, share repurchases and available liquidity under committed facilities.