Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; filed August 7, 2018. Financial statements are unaudited. The company provides brokerage, investment banking, asset management, banking and trust services.
Financial performance
| Metric | Three months ended June 30, 2018 | Year over year | Nine months ended June 30, 2018 | Year over year |
|---|---|---|---|---|
| Net revenues | $1.837 billion | +13% | $5.375 billion | +15% |
| Pre-tax income | $318 million | +16% | $961 million | +49% |
| Net income attributable to RJF | $232 million | +27% | $594 million | +34% |
| Diluted EPS | $1.55 | +25% | $3.99 | +32% |
| Net interest income | $217 million | +31% | $614 million | +31% |
| Operating cash flow | Not presented for quarter | — | $989 million | Down from $1.328 billion |
Quarterly pre-tax margin was approximately 17.3% of net revenues, compared with 16.9% a year earlier. Nine-month pre-tax margin was approximately 17.9%, versus 13.8%; the comparison reflects prior-year legal costs and current-year tax effects. Nine-month adjusted net income, excluding specified items, was $714 million, and adjusted diluted EPS was $4.79; these are non-GAAP measures.
Balance sheet, liquidity and capital
- At June 30, 2018, total assets were $36.36 billion, total liabilities $30.11 billion and total equity $6.25 billion.
- Cash and cash equivalents were $3.18 billion, down $490 million from September 30, 2017. Cash from operations was $989 million; investing activities used $2.50 billion, primarily reflecting bank loan growth, securities purchases and the Scout acquisition. Financing activities provided $1.04 billion, including $1.75 billion of growth in bank deposits.
- Bank loans, net, were $18.99 billion, up from $17.01 billion. The allowance for loan losses was $196 million, or 1.03% of loans; nonperforming loans were 0.18% of RJ Bank loans.
- Bank deposits were $19.48 billion. Other borrowings totaled $900 million, including $875 million of FHLB advances; senior notes payable were $1.55 billion.
- RJF and RJ Bank were categorized as well capitalized and exceeded fully phased-in capital conservation buffer requirements. RJF’s CET1 ratio was 23.8%; RJ Bank’s was 12.5%. The company reported $721 million of excess net capital at RJ&A and $200 million of RJ Bank capital above its targeted ratios.
Material changes and business drivers
- Growth was supported by higher client assets, advisor recruiting and retention, higher short-term interest rates, and bank loan and securities growth. Total client assets under administration reached $754.3 billion, up 14% year over year.
- Private Client Group net revenues rose 13% in the quarter and 16% year to date; quarterly pre-tax income increased 3%. Recurring revenues were 82% of segment revenues in the quarter.
- Capital Markets net revenues fell 7% in the quarter and 8% year to date, with lower institutional commissions and trading profit, partly offset by higher merger and acquisition advisory fees.
- Asset Management net revenues increased 34% in the quarter and 35% year to date. The November 2017 Scout Group acquisition added approximately $27 billion of assets under management; acquisition-related goodwill was $69 million.
- RJ Bank net revenues increased 25% in the quarter and 24% year to date, primarily from loan growth and improved net interest margin. The nine-month bank margin was 3.20%, compared with 3.09%.
- Prior-year nine-month results included a $130 million Jay Peak legal expense and $8 million of debt extinguishment losses. The current nine-month period included $4 million of acquisition-related expenses.
Outlook, risks and unusual items
- The company estimated an effective tax rate of approximately 27% for the remainder of fiscal 2018 and approximately 24% for fiscal 2019. The nine-month 2018 tax provision included an estimated $117 million discrete Tax Act impact, mainly from remeasuring deferred tax assets; the estimate could change.
- Management said higher short-term rates had benefited net interest income and fees on third-party bank sweep balances, but future benefit may lessen as rates paid to clients rise. A rate reversal or reduced sweep spreads could reverse some benefit.
- Management cited market, credit, liquidity, operational, model, regulatory and legal risks. Fixed-income institutional activity remained challenging amid a flattening yield curve and low rate volatility. The bank’s loan growth, interest-rate sensitivity and credit performance warrant monitoring.
- For legal and regulatory matters where loss ranges could be estimated, the upper end of reasonably possible aggregate loss was approximately $75 million above reserves, excluding matters subject to Regions indemnification. A Morgan Keegan matter remains subject to Regions indemnification; trial was scheduled for late 2018.
- RJ Bank had $6.80 billion of open-end consumer credit lines, primarily securities-based lending, and $1.65 billion of commercial lines. These commitments are not expected to be fully drawn. The company also reported $132 million of unfunded recruiting offers and $401 million of unsettled syndicated loan purchases.
- Management expected adoption of new revenue-recognition guidance in fiscal 2019 to change the gross-versus-net presentation of certain transaction costs; the financial impact was still under evaluation. It also identified cybersecurity, market volatility, potential loan losses and credit-rating changes as risks.
- The company increased its share repurchase authorization to $250 million in May 2018. It reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile reported and adjusted earnings, particularly the $117 million Tax Act charge, prior-year Jay Peak expense and non-GAAP adjustments.
- Track whether client asset growth, advisor recruiting and recurring fee revenue continue, and whether Scout acquisition growth translates into sustained profitability.
- Assess Capital Markets’ recovery prospects and the sensitivity of bank and sweep-program earnings to rates and deposit pricing.
- Monitor bank loan growth, criticized and nonperforming loans, allowance adequacy, and concentrations in commercial real estate and residential interest-only loans.
- Review liquidity and funding as deposits, bank loans and available-for-sale securities grow, including the use and availability of FHLB and other facilities.
- Follow developments in legal matters, tax estimates, regulatory proposals and the implementation effects of new accounting standards.