RAYMOND JAMES FINANCIAL INC annual report, FY2018

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Raymond James Financial, Inc. — FY2018 Form 10-K

Reporting period: Fiscal year ended September 30, 2018. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Raymond James is a diversified financial services firm operating through Private Client Group, Capital Markets, Asset Management, RJ Bank and Other.

Financial performance

  • Revenue and earnings: Net revenues were $7.274 billion, up 14% year over year. Pre-tax income was $1.311 billion, up 42%; net income attributable to Raymond James was $856.7 million, up 35%; diluted EPS was $5.75, up 33%.
  • Adjusted results: Adjusted net income, a non-GAAP measure, was $964.8 million, up 26%, and adjusted diluted EPS was $6.47, up 24%. These exclude the $105.3 million Tax Act impact and specified acquisition-related items; prior-year adjustments also excluded Jay Peak expenses and debt-extinguishment losses.
  • Margins and interest: Net interest income increased 30% to $842.5 million. RJ Bank’s net interest margin rose to 3.22% from 3.10%. The reported effective tax rate was 34.8%, including the Tax Act impact; excluding that impact, it was 26.7%.
  • Cash flow and liquidity: Operating activities provided $1.903 billion; investing activities used $3.476 billion; financing activities provided $1.420 billion. Cash and cash equivalents fell $169 million to $3.500 billion. Management said liquid assets, operating cash generation and financing facilities were adequate for current activity. Some cash is restricted or held within regulated subsidiaries.
  • Balance sheet and debt: Total assets were $37.413 billion and total equity was $6.452 billion. Long-term debt was $2.444 billion, including $1.550 billion of senior notes and $893.8 million of other borrowings. The firm reported $19.942 billion in bank deposits, primarily client sweep balances. RJF and RJ Bank were categorized as well capitalized.
  • Credit quality: RJ Bank loans, net, were $19.518 billion. Its allowance for loan losses was $202.8 million, or 1.04% of loans; nonperforming loans were $24.5 million, or 0.12% of total loans.
  • Q4 indicators: Fiscal fourth-quarter net revenues were $1.899 billion, net income attributable to Raymond James was $262.7 million, and diluted EPS was $1.76.

Material changes versus FY2017

  • Private Client Group net revenues increased 15% to $5.093 billion and pre-tax income rose 54% to $576.1 million. Client assets under administration reached $755.7 billion, up 15%; recurring revenue represented 82% of PCG net revenues, versus 79%.
  • Asset Management net revenues rose 34% to $654.4 million and pre-tax income increased 37% to $235.3 million. Growth included the November 2017 Scout Group acquisition, which added approximately $27.1 billion of assets under management.
  • RJ Bank net revenues increased 23% to $726.7 million and pre-tax income rose 20% to $491.8 million, supported by loan growth and a higher net interest margin.
  • Capital Markets net revenues declined 5% to $963.8 million and pre-tax income fell 36% to $90.6 million. Lower institutional commissions and trading profits more than offset stronger M&A and advisory revenues.
  • The Other segment’s pre-tax loss narrowed to $83.2 million from $169.9 million, principally because FY2017 included a $45.7 million debt-extinguishment loss and higher acquisition costs.

Outlook, commentary, risks and unusual items

  • Management estimated an FY2019 effective tax rate of approximately 24%–25%, reflecting the 21% federal corporate rate for the full year.
  • Management said rising short-term rates had generally benefited net interest earnings, but further increases may provide less benefit as deposit rates paid to clients rise. Lower rates or higher client deposit costs could pressure earnings.
  • The $105.3 million Tax Act charge primarily reflected remeasurement of deferred tax assets; it included $93 million from remeasurement, $10 million of transition tax and $2 million related to executive compensation.
  • Key risks include market and interest-rate changes, client asset flows and valuations, credit losses, competition and pricing pressure, advisor retention, regulation, cybersecurity and technology disruptions, and reliance on client sweep deposits. Management reported no material cyber losses to date.
  • Legal contingencies remain uncertain. The company estimated the upper end of reasonably possible aggregate losses, in excess of recorded reserves, at approximately $150 million. A Passport account-fee class action was certified in October 2018 and scheduled for trial in April 2019; a related case was also pending. The company disputes the claims. The $20 million Fairfax settlement was paid by Regions under Morgan Keegan acquisition indemnification. FY2017 included a $130 million Jay Peak charge.
  • The DOL fiduciary rule was vacated in June 2018; the SEC had proposed Regulation Best Interest, which could require compliance changes and added costs. The company also identified potential impacts from CECL adoption and lease accounting; CECL was scheduled to take effect for the company in FY2021.

Important facts for investors to verify

  • Reconcile reported and adjusted earnings, especially the Tax Act adjustment and the non-GAAP exclusions.
  • Review the sustainability of PCG asset growth and sweep-program fees, including the effect of higher client deposit rates and changes in cash allocations.
  • Track Capital Markets commissions, trading results and investment banking activity, and assess whether the segment’s profit decline reverses.
  • Review RJ Bank loan growth, concentrations, delinquencies, allowance adequacy and sensitivity to rates and economic conditions.
  • Monitor the Passport class actions, other legal contingencies and the estimated $150 million excess-loss range.
  • Assess parent-company liquidity and capital access in light of regulatory limits on transfers from subsidiaries, debt maturities and share repurchases.