Raymond James Financial, Inc. — fiscal 2019 first-quarter 10-Q
Business context and reporting period. Raymond James is a diversified financial services firm offering wealth management, capital markets, asset management, banking and trust services. This unaudited filing covers the three months ended December 31, 2018; comparisons are with the three months ended December 31, 2017, unless otherwise noted. Amounts are in U.S. dollars.
Financial performance and position
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total revenue | $2.004 billion | $1.766 billion | +13% |
| Net revenue | $1.931 billion | $1.726 billion | +12% |
| Pre-tax income | $332 million | $311 million | +7% |
| Net income attributable to Raymond James | $249 million | $119 million | +109% |
| Diluted earnings per share | $1.69 | $0.80 | +111% |
| Net interest income | $243 million | $192 million | +27% |
| Bank loan loss provision | $16 million | $1 million | +$15 million |
GAAP pre-tax margin on net revenue was approximately 17.2%, versus 18.0% in the prior-year quarter. Reported return on equity was 15.9%, compared with 8.4%; adjusted return on equity was 16.9% versus 16.8%. Adjusted net income was $264 million and adjusted diluted EPS was $1.79, excluding the current-quarter $15 million European equities business-sale loss; prior-year adjusted results excluded the $117 million Tax Act charge. These adjusted measures are non-GAAP.
Cash flow and liquidity. Operating activities provided $225 million of cash, compared with $422 million; investing activities used $533 million versus $1.074 billion; financing activities provided $1.526 billion versus $980 million. Cash and cash equivalents were $4.322 billion at December 31, while cash, cash equivalents and regulatory-segregated cash totaled $7.104 billion. The company cited liquid assets, operating cash generation and financing facilities as adequate for current operating needs.
Balance sheet and capital. Total assets were $38.544 billion and total liabilities $32.319 billion at December 31, 2018. Bank loans, net, were $19.887 billion, with a $219 million allowance for loan losses (1.10% of the loan portfolio). Bank deposits were $21.673 billion. Other borrowings totaled $1.198 billion, including $875 million of Federal Home Loan Bank advances and $300 million drawn on the unsecured revolving credit facility; the latter was repaid in January 2019. Senior notes payable were $1.550 billion. RJF and RJ Bank were categorized as well capitalized; RJF’s CET1 ratio was 23.6% and RJ Bank’s was 12.7%.
Material changes and segment performance
- Revenue growth reflected higher asset-management fees, net interest income and investment banking revenue. Brokerage revenue fell to $464 million from $513 million, with market-driven fixed-income weakness and clients’ shift to fee-based accounts among the cited factors.
- Asset management and related administrative fees rose to $865 million from $729 million. Investment banking revenue increased to $137 million from $88 million, including stronger merger-and-acquisition advisory and equity underwriting activity.
- PCG net revenue increased 10% to $1.356 billion and pre-tax income rose 6% to $164 million. Capital Markets net revenue increased 17% to $253 million and pre-tax income was $12 million. Asset Management net revenue rose 15% to $174 million and pre-tax income increased 12% to $64 million.
- RJ Bank net revenue rose 23% to $203 million, but pre-tax income declined 4% to $110 million. Net interest margin increased to 3.25% from 3.08%; higher loan-loss provision and deposit servicing fees weighed on income.
- Total assets under administration were $725.4 billion, essentially unchanged year over year. Market declines during the quarter reduced PCG assets under administration to $690.7 billion from $755.7 billion at September 30. Client domestic cash sweep balances increased to $46.829 billion from $41.057 billion at September 30.
- Share repurchases were substantial: the company repurchased 6.1 million shares for approximately $458 million, at an average price of about $75.70 per share, according to management. Common dividends declared were $0.34 per share, up from $0.25.
Outlook, management commentary, risks and unusual items
- Management estimated an effective tax rate of approximately 25% for the remainder of fiscal 2019. No specific revenue or earnings guidance was provided.
- Management said future short-term rate increases may have less positive effect on sweep-program fees, depending on deposit rates paid to clients; falling rates, higher client deposit rates or declining client cash balances could adversely affect earnings. A decline in fee-based account balances was expected to pressure PCG asset-management fees in the next quarter.
- The $15 million loss on the sale of European equities research, sales and trading operations reduced current-quarter results. The prior-year comparison includes a $117 million Tax Act-related charge, contributing to the sharp reported net-income and EPS increases.
- Bank credit risks include economic downturns, deterioration in real-estate values and sector or borrower concentration. Nonperforming loans increased to $48 million from $25 million at September 30, 2018; the allowance rose to $219 million from $203 million. The quarter’s provision increase reflected loan growth and certain downgraded credits.
- For legal and regulatory matters where loss ranges could be estimated, the upper end of reasonably possible aggregate losses was approximately $125 million in excess of recorded reserves. The company said outcomes could affect results or cash flows in a particular period, although it did not expect the matters to materially adversely affect consolidated financial condition.
- Passport-account fee class actions continued: a class was certified in the Brink matter and an appeal was allowed; the Wistar complaint’s motion to dismiss was denied and trial was scheduled for September 2019. The company disputes the claims and is defending them.
- New revenue accounting presentation changes increased certain revenue and expense line items but had no effect on pre-tax or net income. Management identified market, credit, liquidity, operational, model and compliance risks; it also noted cybersecurity incidents could disrupt operations or compromise information.
Important facts for investors to verify
- How much of earnings growth is attributable to ongoing operating performance versus the prior-year Tax Act comparison and the current-quarter sale loss; review GAAP and adjusted reconciliations.
- Whether fee-based asset balances recover after the quarter-end market decline and how asset values, client flows and cash sweep balances affect recurring fee revenue.
- Whether bank loan growth, rising funding costs, criticized/nonperforming credits and the larger loan-loss provision affect RJ Bank margins and future credit losses.
- The progress and potential financial exposure from the Brink and Wistar cases, alongside the disclosed $125 million reasonably possible loss estimate above reserves.
- The effect of share repurchases and dividends on regulatory capital, liquidity and per-share results; also confirm the revolving facility repayment and ongoing funding needs.