Raymond James Financial, Inc.

Good morning, and thank you all for joining us on the call today. We appreciate your time and interest in Raymond James Financial. With us today are Paul Riley, Chairman and Chief Executive Officer, and Jeff Julian, Chief Financial Officer. Following their prepared remarks, the operator will open the line for questions. Please note, certain statements made during this call may constitute forward-looking statements. Forward-looking statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated results of litigation and regulatory developments, or general economic conditions. In addition, words such as believes, expects, could, and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. we urge you to consider the risks described in our most recent Form 10-K and subsequent Form 10-Q, which are available on our website. During today's call, we may also use certain non-GAAP financial measures to provide information pertinent to our management's view of ongoing business performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures may be found in the schedule accompanying our press release. With that, I would like to turn it over to Paul Reilly, Chairman and CEO of Raymond James Financial. Paul?

Great. Thanks, Christy, and good morning, everyone. Today marks the 90th anniversary of Black Thursday, the beginning of the Great Depression. It's amazing if we look back and look at the development of the financial markets and the resiliency of the U.S. economy over that period of time. Today, you're also going to be witnessing another momentous event, And that the longest serving CFO in the S&P 500 is going to have his last official quarterly earnings call. So after I talk about our results for the fourth quarter in the fiscal year, I'll turn it over to our legendary CFO to provide more details on the financials before I discuss the outlook and open it up for questions. First, I want to remind everybody of the backdrop going into this fiscal year. We came off a record year in 2018 in almost all measures and entered very, very strong. We entered the year thinking interest rates would be on their way up. Feds gave us stress tests of rates going up into the future, and we thought the markets could be challenging. They were in the first quarter as rates rose, and it was a very soft, tough quarter. Interest rates went up, which drove a lot of momentum, then interest rates came down. The market went down, but the market went up. We had tariffs on, we had tariffs off. We had increased competition both in the recruiting market and transition assistance, and through that we really delivered another record year. Overall, I'm pleased with our results in the fiscal fourth quarter and the fiscal year. Business metrics were strong. And I'm encouraged by the solid performance in a number of key areas during the quarter, which included record quarterly net revenue of $2.02 billion. We crossed the $2 billion mark for the first time, which increased 70% over prior year's fiscal quarter and increased 5% over the preceding quarter. Revenue growth this quarter was driven largely by higher private client group assets and fee-based accounts, strong quarterly investment banking revenues, and a solid performance for both our fixed income capital markets business and tax credit fund business. We generated record quarterly earnings per diluted share of $1.86 or $2 on a non-GAAP adjusted basis for the $19 million goodwill impairment associated with our Canadian capital markets business. Despite this impairment, which was due to challenging market environments in Canada, we remain fully committed to growing our capital markets business in Canada. Thanks to our strong financial advisor retention and recruiting results, we ended the fiscal year with records for client assets under administration of $838.3 billion, private client group fee-based assets under administration of $409.1 billion, total private client group financial advisors of $8,011, and net loans of Raymond James Bank of $20.9 billion, all key fundamental drivers of our business. Annualized return on total equity for the quarter was 16.2% or 17.3% on a non-GAAP basis adjusted for the aforementioned goodwill impairment. And while it isn't a metric that we've historically used, starting in the first quarter of fiscal 2020, we'll begin reporting the return on tangible common equity or ROTCE, whether we agree with the metric or not. even though we don't have preferred equity, but it seems that all other financial companies are now reporting that metric as well. If you look at what we discussed at our Analyst and Investor Day in June, adjusted return on tangible equity on an annualized basis at that time was about 180 basis points higher than our adjusted return on equity, which should be in the range of what the impact would be this During the fiscal year, we had record net revenue of $7.74 billion increased 6%, net income of $103 billion increasing 21%, and adjusted net income of $1.07 billion increased 11% over fiscal 2018. Earnings per diluted share of $17.17 increased 25%, and adjusted earnings per diluted share of $7.40 increased 14%, over fiscal 2018. Notably, and really an accomplishment, all four of our core business generated record net revenues, and three of the four generated record pre-tax income during the fiscal year. And if you adjust for the non-GAAP items during the year, the capital market segments would have also generated an annual pre-tax income record. So really a strong performance for all four of our core businesses. The return on equity for the year was 16.2% or 16.7 on an adjusted basis, which is near the top of our range between 16 and 17%, and a really fantastic result given the tough start to the fiscal year and our very strong capital position. Speaking of capital, we are active in deploying capital this year. repurchasing 9.83 million shares for 752 million at an average price of $76.50 per share. This represents just over 6.5% of the shares outstanding at the beginning of the year, and combined with dividends, we returned approximately 945 million to shareholders during the fiscal year. Even with these actions, our capital ratios remain healthy, with total capital ratio of 25.8% and Tier 1 leverage ratio of 15.7% at the end of the year, giving us ample flexibility in the future. Now, let me briefly describe the segment results. In the private client group, we generated record net revenue of $1.38 billion for the quarter and $5.36 billion for the fiscal year. We had another fantastic year of retaining and recruiting advisors. On a net basis, we added nearly 200 advisors during the fiscal year. which includes those advisors recruited, none of the ones lost due to retirements or regrettable or non-regrettable basis. On a gross recruited basis, our private client group domestic had its second best year just behind 2018 with advisors joining the fiscal year with nearly $300 million of trailing 12 production and $43.5 billion of assets under administration at the prior firms. This is an excellent result, especially given the slow start to the year and the increasing competitive environment. While many firms increased their transition assistance and bet on cash balances at the beginning of the year, we remained disciplined and still had an outstanding recruiting year. While higher short-term net interest rates and cash threats were a tailwind during most of the fiscal year, that benefit was partially offset by a decline in total client domestic cash suite balances during the fiscal year as clients increased their allocations to other investments. As you know, the two rate cuts in our fourth quarter will likely be a significant headwind as they work through during fiscal 2020, which Jeff will explain more in detail. Capital markets finished the fiscal year with strong fourth quarter, given investment banking results in a strong quarter for fixed income capital markets and the tax credit business, which offset the continued weakness in equity brokerage revenue. The segment finished the year with record net revenues of $1.8 billion, up 12% from fiscal 2018. The segment's pre-tax income of $110 million was up 21%. percent over fiscal 2018, despite a $19 million goodwill impairment in the fourth quarter and a $15 million loss associated with the sale related to our research, sales, and trading of European equities in the first quarter. As I said, we remain committed to the Canadian capital markets business and continue making long-term investments to expand and sales and trading capabilities in Canada. Last year, we operated in a very small portion of the Canadian life sciences space and chose not to participate in the underwriting of cannabis firms. Whereas the underwriting of cannabis space was very strong in the most significant part of the market last year, the subsequent market performance has been weak as the associated market index is down close to 40% over the last six months. Once again, we kept a long-term view and our decision-making process. In the asset management segment, we generated record net revenues and pre-tax income for both fourth quarter and fiscal year. Financial assets under management into the fiscal year at $143.1 billion, an increase of 2% over September 2018, and flat compared to June 2019. Overall, the growth in financial assets under management continues to be largely driven by equity market appreciations and positive inflows associated with the increased utilization of fee-based accounts in the private client group segment, which has more than offset the net outflows experienced by Caroline Towers' advisors, given the extremely challenging market environment for actively managed products. And last, but certainly not least, Raymond James Bank generated record net revenues and pre-tax income for the fiscal year. Record net loans of $20.9 billion grew 7% over last year's September, and the growth of loans continues to be focused heavily on residential mortgages and security-based loans to the private client group, as well as C&I and other sections. While the bank's net interest margin for the fiscal year was 3.32%, improved 10 basis points of the fiscal 2018, lower short-term interest rates, including the two rate cuts during the quarter, caused net interest margin decline during the quarter. Most importantly, the credit quality of the loan portfolio remains solid, and we remain extremely diligent with any new loans we add to our balance sheet. So overall, I believe a very strong quarter and fiscal year. Now I'll turn it over to Jeff to provide some more color on the financial results, and then I will provide some more comments on the outlook. Jeff?

Thanks, Paul. On the revenue side, most of the trends this quarter were fairly self-explanatory or have been covered by Paul, so my comments on that side of the P&L will be somewhat limited. I will comment on asset management and related admin fees. However, they're up 5% sequentially, which happens to be directly in line with the consensus model. So not unusual there. The only reason I really bring it up is it happens to correlate directly with the increase in the prior quarter in fee-based assets of 5%. And it's nice just to see something work like it should sometimes. And that's our biggest revenue item by far. So the 3% growth in fee-based assets in the most recent quarter should be an indicator of this line item for the December quarter here, as you are aware, a large percentage of these accounts are billed in advance and have already been billed. The investment banking line was a slight beat relative to the consensus model, as both M&A and fixed income investment banking contributed to the quarter, and you can see that in detail on page 12 of the release, which is the investment banking P&L for the quarter. Further on that same page, you'll see other revenues, which were well ahead of expectations. In our current revenue format, that is where the tax credit fund revenues fall. And they, as they did last year, had a very, very strong September quarter. So you can see that also in detail on page 12. Turning to a couple of the expense items, let's talk about compensation for a second. We had a higher absolute number than consensus, as you would expect, because of some of the higher compensable revenues, notably investment banking and in the tax credit fund world. But the comp ratio for the quarter of 65.2 was actually better than expectations and well under our 66.5% target. Looking forward in the very short term, like at least about a quarter, we're really not going to change that target in the near term. You have to remember that as revenues from client cash suite balances decline, a higher proportion of our revenues are going to be compensable in nature, which is going to put some pressure on the margin. In addition, successful recruiting, which we've had two years in a row of near record levels, You know, it's going to create a drag in the short term through amortization of hiring dollars. At the end of the day, the 2020 budgeting process is still being tweaked a little bit. We're looking very hard at some of the controllable expense items given the potential headwinds here, but we anticipate being in a position to give a little better guidance on some of these items next quarter. On non-comp expenses, although there was a large sequential increase of 13%, you know, that includes the $19 million goodwill impairment charge, which hit in the other expense line item. There was a small spike in occupancy and equipment. It's a number of factors in there. There's some recurring rental increases. We're actually incurring some double rent on Our significant office space in Memphis, which we are relocating from downtown Memphis out to east Memphis. And on a portion of that new space, we're paying rent as we're still in the old space as well. So there's a double rent that will haunt us for the next couple quarters as well. There's some additional equipment amortization that kicked in that will not go away. But one of the lumpy items that won't necessarily recur has to do with what we call PC refresh. We have a policy here of refreshing, i.e., changing out to the newest and latest and greatest models, our laptops and desktops, on a three-year rotational basis. And we try to spread that somewhat ratably over the course of the year, over the course of three years, really, so it doesn't have lumpiness to it. But in this particular quarter, it did. And those are just expensed given the relatively low cost of individual PCs. I do want to talk about the bank loan loss provision as well. Even though it came in near consensus, it was certainly a turnaround from last quarter's credit. and actually it may appear high relative to the $200 million of net loan growth as you can see shown on page 17 of the release. But that was really caused by some downgrades during the quarter. We did get the semiannual SNCC exam results at the end of September. That led to three downgrades of Some credits we had fairly sizable hold positions in, and that also was what primarily caused the $88 million jump in criticized loans that you can also see on the same page. No pattern to it or anything else. Different industries, different types of credits, and I don't really think indicative of any upcoming credit issues. It's just our policy to... accept the lower ratings by the SNCC and if we have something low rated say substandard or special mention and they come in with a pass we leave it at our rating. So the SNCC exam can only mean bad news to us in terms of a charge. So we stuck with that policy and it caused a couple million dollars in additional credit charges this quarter. Some other items I'd like to talk about, you may have noticed we don't have a non-controlling interest line anymore. We have collapsed that into other expenses to simplify the disclosure and presentation for what's become a really immaterial line item for us. If and when there's reason to that it becomes material again in the future. That line item may reappear, but for the foreseeable future, that'll just be collapsed into the other expenses. Let me talk about net interest for a moment. At the firm level, net interest held up pretty well following the Fed rate cut in July. First, I'll talk about RJ Bank's NIM. That actually fell seven basis points sequentially from 337 to 330. And page 18 gives you all the detail you could want on how that happened. But the bottom line is it was primarily a result of the rate cut in July, which caused some spread compression. And you can see RJ Bank's earning assets fell 19 basis points in yield while the cost of funds fell only 13 basis points. So that's indicative of the spread compression that we saw there. However, the loan growth for the quarter did allow them to have an increase in that interest earnings quarter over quarter. So going forward, you know, First of all, I guess I should point out that the July rate cut by the Fed was about two-thirds of that was reflected in this quarter. And of that, with respect to client sweep balances, we had a deposit beta of about 55%. We passed through 13 of the 25. The September rate cut, very little of it was actually reflected in the September quarter, of course, and we passed through 60%, 15 basis points to clients. The other change that we made before that first Fed rate cut where we switched in May from aggregate asset balances to aggregate cash balances also was a seven basis point weighted average impact to clients. So when you add all those things together over the last six months, there's been basically a 70% beta on these first two rate cuts. If there are additional rate cuts next week and possibly in December as the forward curve would suggest, it's certainly highly likely that the deposit beta will be significantly lower than it was in these first couple cuts, which will have a more dramatic impact on our results going forward. One wild card I should have pointed out on the bank's net interest margin, the reason it's not as easy to correlate to Fed movements is that most of their earning assets side, their loan portfolio, is based on LIBOR, which doesn't always move in lockstep with Fed funds. Generally, it's been a leading indicator. So it's been going down ahead of the Fed rate cuts. And when the Fed indicates that it's finished or skips a cut or whatever, then maybe we'll see LIBOR rebound and we may actually see NIM react much differently than you would think with no Fed movement. So it's a little bit difficult to pinpoint the NIM, but for guidance purposes, I guess we've done some work and the bank also has some fixed rate assets in its portfolio that aren't impacted by rate cuts that aren't necessarily prepayable. So, when you – the work we've done would say for each of the next couple rate cuts, it looks like the NIM at the bank could be impacted negatively by somewhere between 8 and 10 basis points. It's about as close as we can get given the LIBOR dynamic and some of the other things I've mentioned. With respect to client cash sweep balances, they've somewhat stabilized here at the $37 to $38 billion range. The simple math here would say that every basis point of spread change will impact us by about $3.8 million annually or just under $1 million per quarter. Most of that is reflected in account and service fee revenues as opposed to interest earnings as we've talked about in the past. That's about as close as we can get. What we do with the next couple rate cuts from a holding company basis obviously will depend on the competitive landscape. We have tried to stay at or near the top of each client's strata with our peer groups. I say groups because they're regional firms, national firms, custodial firms. There are a number of different competitive groups that we look at. So it's going to be largely dependent on what the competitive landscape is. On page 7 of the release, I think we really do need to look at the annual results, which is obviously a compendium of all the quarterly explanations we've given you over the year. But for the year, a 6% increase in net revenues. A comp ratio of 65.7%, which we are happy to see below our target. Non-comp expense growth of 9%, but remember that includes the non-GAAP adjusted items in our schedules in the press release. And it also includes some what we'll call accounting gross-ups. in the expense side because of the revenue recognition adoption early in the year that were previously netted out of some of the revenues. Obviously, that impacted both sides to some extent. I would refer you to page five to look at the annual non-GAAP results if you really want to see what we'll call a good apples to apples type comparison of operating results where you can see pre-tax up 7% for the year on a non-GAAP basis. And non-GAAP net income up 11%. The reason that's higher than the pre-tax, we had a full year of the lower tax rate this year. Last year, we had the last quarter of phase-in of the tax rate cut. So that's probably more indicative of our tax rate going forward. And then dilute EPS, you can see up even a higher percentage at 14, obviously reflecting the share buybacks that we had during the year. You know, that's a wonderful page to look at, and all in all, a great quarter to end a great year. So I'll turn it back to Paul. Great.