Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. The quarter’s year-over-year comparison is with the three months ended March 31, 2018; balance-sheet comparisons are primarily with September 30, 2018. Raymond James provides wealth management, capital markets, banking and asset management services.
Financial results and key metrics
| Metric | Quarter ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Net revenues | $1.859 billion, up 3% | $3.790 billion, up 7% |
| Pre-tax income, excluding noncontrolling interests | $347 million, up 5% | $679 million, up 6% |
| Net income attributable to Raymond James | $261 million, up 7% | $510 million, up 41% |
| Diluted earnings per share | $1.81, up 11% | $3.51, up 44% |
| Annualized return on equity | 16.7%, flat year over year | 16.2%, versus 12.6% |
The quarter’s $1.934 billion of total revenues less $75 million of interest expense produced $1.859 billion of net revenues. The income statement reports $335 million of income before taxes including noncontrolling interests; management’s $347 million pre-tax figure excludes them. Six-month adjusted net income was $525 million and adjusted diluted EPS was $3.61, excluding a $15 million European-equities business disposal loss. The prior-year comparison included a $117 million Tax Act-related loss; excluding specified items, adjusted net income rose 9% and adjusted diluted EPS rose 11%.
- Revenue drivers: Quarterly investment banking revenue increased to $163 million from $116 million, led by merger-and-acquisition advisory activity. Interest income rose to $324 million from $249 million, while securities commissions fell to $349 million from $425 million. For the six months, asset management fees, investment banking and net interest income increased; brokerage revenue declined.
- Costs and margins: Quarterly non-interest expenses were $1.524 billion, up 3%; six-month expenses were $3.125 billion, up 8%. Higher compensation, staffing and regulatory-support costs were significant factors. RJ Bank’s quarterly net interest margin increased to 3.35% from 3.21%; higher deposit costs partly offset improved asset yields.
- Cash flow: Six-month operating cash flow was $20 million, versus $606 million in the comparable period; investing cash use was $910 million and financing cash provided was $1.099 billion. The cash-flow comparison reflects adoption of restricted-cash presentation guidance, which reclassified $381 million of prior-year operating cash flow.
- Balance sheet and funding: At March 31, total assets were $38.176 billion, total liabilities $31.741 billion and total equity $6.435 billion. Cash and cash equivalents were $3.831 billion, with an additional $2.288 billion segregated for regulatory purposes. Bank loans, net, were $20.135 billion; bank deposits were $21.618 billion, up $1.676 billion since fiscal year-end. Senior notes were $1.550 billion and other borrowings $896 million, including $875 million of FHLB advances.
- Credit and capital: RJ Bank’s allowance for loan losses was $218 million, or 1.08% of held-for-investment loans; nonperforming loans rose to $56 million from $25 million at September 30, 2018. Raymond James and RJ Bank were described as well capitalized, with CET1 ratios of 24.3% and 12.8%, respectively.
- Shareholder returns: The company repurchased 6.7 million shares for $505 million during the six months and declared dividends of $0.68 per share. $458 million remained under the repurchase authorization at March 31.
Material changes, outlook and risks
- Capital Markets and RJ Bank were major sources of growth: six-month segment net revenues increased 19% and 21%, respectively. Capital Markets benefited from M&A fees; RJ Bank benefited from loan growth and higher interest rates. Private Client Group pre-tax income declined 5% for the six months as lower brokerage revenue and higher expenses offset revenue growth.
- Management estimated a fiscal 2019 effective tax rate of approximately 25%–26%. The filing provides no specific earnings or revenue guidance. Management noted that falling short-term rates, higher rates paid on client cash, or lower client cash balances could pressure earnings. Client domestic cash-sweep balances declined during the quarter as clients shifted toward other investments and for seasonal tax-related reasons.
- Loan loss provision was $21 million for the six months, versus $9 million a year earlier, reflecting certain credit downgrades. Nonperforming loans increased, notably in commercial and industrial and commercial real estate lending. Management cited economic, real-estate and industry-sector deterioration as potential sources of higher losses.
- The company estimated the upper end of reasonably possible aggregate legal and regulatory losses at approximately $110 million in excess of reserves. Two Passport Account fee class actions reached agreements in principle to settle after quarter-end; settlement amounts were accrued, but court approval and final settlement documentation remained outstanding.
- Other notable items: a $15 million loss on the sale of European equities research, sales and trading operations; tax-credit-fund losses largely offset by noncontrolling interests; and revenue-accounting changes that increased certain revenues and expenses presented gross, with no effect on pre-tax or net income. The filing states disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether fee-based asset growth and market performance sustain management-fee revenue, and whether brokerage commission declines continue.
- Whether bank deposit pricing, client sweep balances and interest rates support or weaken net interest income and RJBDP fees.
- Loan portfolio performance, especially the rise in nonperforming commercial loans, and whether the $218 million allowance remains adequate.
- Final terms and court approval of the two class-action settlements, and developments in the broader legal and regulatory matters.
- Repurchase pace and liquidity: operating cash flow was low relative to the prior-year period, while lending growth and securities purchases used cash.