Raymond James Financial, Inc.

Good morning, everyone, and thank you for joining us. We appreciate your time and interest in Raymond James Financial. With us on the call today are Paul Reilly, Chair and Chief Executive Officer, and Paul Sugri, Chief Financial Officer. The presentation being reviewed this morning is available on Raymond James Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to slide two. Please note certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, anticipated timing, and benefits of our acquisition, including acquisition of Charles Stanley Group PLC, completed on January 21, 2022, as well as our announced acquisitions of Tri-State Capital Holdings and Sunridge Partners. and our level of success in integrating acquired businesses, divestitures, anticipated results of litigation and regulatory developments, impacts of the COVID-19 pandemic, or general economic conditions. In addition, words such as may, will, should, could, scheduled, plans, intends, anticipates, expects, believes, estimates, potential or continue, or a negative of such terms, or other comparable terminology, as well as any other statement 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 Forms 10-Q and Forms 8-K, which are available on our investor relations website. During today's call, we will 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 schedules accompanying our press release and presentation. Now, I'm happy to turn the call over to Chair and CEO, Paul Reilly. Paul?

Good morning. Thank you for joining us today. I'm going to begin on slide four. I am very pleased with our results for the fiscal second quarter and the first half of the fiscal year, especially given the challenging market conditions. We continue to invest in growth across all of our businesses. In the private client group, excellent retention and recruiting of financial advisors contributed to best-in-class growth with domestic net new assets of 11 percent over the 12-month period. Furthermore, the Charles Stanley acquisition, which closed during the quarter, significantly expanded our presence in the UK, which is a very attractive market for wealth management. In the capital markets business, while investment banking revenues were negatively impacted by the heightened market volatility during the quarter, we continue to see strong pipelines. As the expertise we have both added organically and through niche acquisitions has been performing extremely well. In the fixed income business, we announced the pending acquisition of Sumridge Partners during the quarter, which will enhance our platform with technology-driven capabilities and a fantastic team with extensive experience in dealing with corporates. Raymond James Bank grew loans an impressive 7% during the quarter, reflecting attractive growth across all of the loan categories. The tri-state capital acquisition, which is expected to close by the end of our fiscal third quarter, will add a best-in-class third-party securities-based lending capability while also diversifying our funding sources. They will also bring a diversified asset manager in Chartwell, which will be a great addition to our multi-boutique model in asset management. So as we always do in any market cycle, we continue to invest for the long term, always put in clients first. It's in uncertain market conditions such as these that remind us the importance of focusing on and making decisions for the long term. While our strategy may not always be popular over short-term periods, today I believe we are well positioned for the expected increases in short-term rates with record clients' domestic cash suite balances, strong loan growth at Raymond James Bank, high concentration of floating assets, and an ample balance sheet flexibility given solid capital ratios, which are all well in excess of regulatory requirements. Turning to results, in the fiscal second quarter, the firm reported net revenues of $2.67 billion and net income of $323 million, or earnings per diluted share of $1.52. Despite higher asset management and related administrative fees reflecting the strong year-over-year growth in PCG assets and fee-based accounts, diluted EPS declined 10 percent compared to the prior quarter, primarily due to bank loan loss provisions for credit losses during the current quarter to support the strong loan growth compared to a benefit in the prior year quarter. This quarter also had a higher effective tax rate which Paul Shukri will explain later on the call. Excluding $11 million of acquisition-related expenses, quarterly adjusted net income was $331 million, or earnings per diluted share of $1.55. Annualized return on equity for the quarter was 15%. And adjusted annualized return on tangible common equity was 17.2%. An impressive result, especially in this very low-rate environment and given our strong capital position. Moving to slide five, we ended the quarter with total assets under administration of $1.26 trillion and record PCG assets and fee-based accounts of $678 billion. These figures include the assets from the acquisition of Charles Stanley, which was completed on January 21st. Excluding the impact of the acquisition, total client assets under administration declined 2.8 percent compared to the immediately preceding quarter. Financial assets under management of $194 billion decreased 5 percent sequentially as net inflows were more than offset by declines in equity markets during the quarter. We ended the quarter with a record 8,730 financial advisors a net increase of 403 over the prior year period and 266 over the preceding quarter, which includes the 200 Charles Stanley financial advisors. Our focus on supporting advisors and their clients has led us to strong results in terms of advisor retention as well as recruiting experienced advisors to the Raymond James platform throughout our multiple affiliation options. Over the trailing 12-month period ending March 31, 2022, we recruited to our domestic independent contractor and employee channels financial advisors with approximately $340 million of trailing 12 production and approximately $53 billion of client assets at their previous firms. And highlighting our industry-leading growth, we generated domestic PCG net new assets of approximately $106 billion over the four quarters ending March 31st, 2022, representing approximately 11% of domestic PCG assets at the beginning of the period. Second quarter domestic PCG net new asset growth was nearly 9% annualized. Client domestic cash suite balances grew 4% sequentially to a record $76.5 billion. Raymond James Bank continued to generate impressive loan growth, up 22% year-over-year and 7% during the quarter, to a record $27.9 billion. This growth was driven by securities-based loans and residential mortgages, largely to PCG clients, as well as strong corporate loan growth. Now moving on to the results on slide six. The private client group generated quarterly net revenues of $1.92 billion and pre-tax income of $213 million. On a year-over-year basis, revenues grew 17 percent and pre-tax income grew 11 percent, primarily driven by higher assets and fee-based accounts. The capital market segment generated quarterly net revenues of $413 million and pre-tax income of $87 million. Capital markets revenues declined 5% over the prior year period, primarily driven by lower fixed income brokerage revenue and equity underwriting revenues. Sequentially, quarterly net revenues decreased 33%, driven by lower investment banking revenues, primarily due to the impact of increased geopolitical and macroeconomic uncertainties. As I referenced earlier, in March, we announced the acquisition of Sumridge Partners, a technology-driven fixed income market maker specializing in investment-grade and high-yield corporate bonds, municipal bonds, and institutional preferred securities. This acquisition is further evidence of our continued commitment to providing cutting-edge technology to advisors, clients, and stakeholders. We currently anticipate the acquisition to close in the fourth quarter of 2022, subject to regulatory approval. The asset management segment generated net revenues of $234 million and pre-tax income of $103 million. On a year-over-year basis, revenues grew 12% and pre-tax income grew 18% over the fiscal second quarter of 2021, primarily as a result of higher assets under management. Raymond James Bank generated quarterly net revenues of $197 million and pre-tax income of $83 million. Net revenue growth was primarily due to higher asset balances as the bank generated attractive growth in its loan portfolio along with net interest margin expansion. Despite revenue growth, pre-tax income declined 25% compared to a year-ago quarter caused by the bank's loan loss provision for credit losses in the current quarter, reflecting strong loan growth compared to the bank's loan benefit for credit losses in comparative periods. Looking to the fiscal year-to-date results on slide seven, we generated record net revenues of $5.45 billion during the first six months of fiscal 2022, up 19% over the same period a year ago. Record earnings per diluted share of $3.61 increased 14% compared to the first six months of fiscal 2021. Additionally, we generated strong annualized return on equity of 18.1% and annualized adjusted return on tangible common equity of 20.6% for the six-month period. Moving to the fiscal year-to-date segment results on slide eight, The private client group, capital markets, and asset management segments all generated record net revenues and record pre-tax income during the first six months of the fiscal year, again, reinforcing the value of our diverse and complementary businesses. Now, for a detailed review of our second quarter financial results, I will turn the call over to Paul Shoukry. Paul?

Paul Shoukry Thanks, Paul. Starting with consolidated revenues on slide 10, quarterly net revenues of $2.67 billion grew 13% year-over-year and declined 4% sequentially. Record asset management fees grew 25% over the prior year's fiscal second quarter and 6% over the preceding quarter. Private client group assets and fee-based accounts ended the quarter relatively unchanged compared to December 2021. However, adjusting for the acquired assets of Charles Stanley PCG assets and fee-based accounts declined approximately 3%, creating a headwind for asset management revenues in the fiscal third quarter. So I would expect somewhere around a 3% sequential decline in this line item in the upcoming fiscal third quarter. I'll discuss account and service fees and net interest income shortly. Skipping ahead to investment banking revenues, as Paul described, this line item declined significantly compared to the preceding quarter. But at $235 million, it was still a very strong quarter compared to our results prior to fiscal 2021. Given the heightened market volatility, we would not be surprised to match this quarter's results for the next two quarters, which would result in the investment banking revenues ending fiscal 2022 close to the record set in fiscal 2021. While our pipelines are strong, there's a lot of uncertainty over the next two quarters that could impact investment banking revenues positively or negatively for the rest of the fiscal year. Other revenues of $27 million were down 47% compared to the preceding quarter, primarily due to lower revenues from affordable housing investments, previously known as tax credit funds. The pipeline for the business is very strong, but the timing of closings is more uncertain given the rapid cost increases impacting affordable housing developers. Moving to slide 11, clients' domestic cash suite balances ended the quarter at a record $76.5 billion, up $3 billion, or 4%, over the preceding quarter and representing 7% of domestic PCG client assets. Notably, $17 billion, or 22% of total cash suite balances, are held in the client interest program, the vast majority of which are invested in very short-term treasuries and could be redeployed to generate much higher yields over time, either at our own bank or with third-party banks as interest rates increase and demand for cash balances recover. Turning to slide 12. combined net interest income and BDP fees from third-party banks was $224 million, up a robust 9% from the preceding quarter. This growth is largely a result of strong asset growth in the higher net interest margin at Raymond James Bank, which increased nine basis points to 2.01% for the quarter. The increase of the bank's NIM during the quarter was attributable to a higher yielding asset mix given the strong loan growth, as the March interest rate increase really won't start benefiting the bank's NIM until the fiscal third quarter. For example, following the March rate increase, the bank's current spot NIM is around 2.15 percent. The average yield on RJBDP balances with third-party banks increased to 32 basis points in the quarter, and the spot rate is just over 50 basis points, reflecting the March rate increase. Both the NIM and the average yield from third-party banks are expected to increase further with additional rate increases as less than 25% of the firm's interest-earning assets have fixed rates, and those assets have an average effective duration of less than four years. And all of the deposit sweep relationships with third-party banks are floating-rate contracts, so we should have significant upside from rising short-term interest rates. To that point, let me walk through how we are positioned to rising short-term interest rates. Based on current clients' domestic cash suite balances, which decreased by over $2 billion to $74 billion thus far in April, largely due to the quarterly fee billings and income tax payments, using static balances and an instantaneous 100 basis point increase in short-term interest rates, which includes the 25 basis point rate increase in March, we would expect incremental pre-tax income of nearly $600 million per year, with approximately 65% of that reflected as net interest income and 35% reflected as accountant service fees. This estimate assumes a blended deposit beta of around 15% for the first 100 basis point increase, commensurate with what we experienced in the last rate cycle. Importantly, this analysis does not incorporate the tri-state capital acquisition, which should provide incremental upside to higher short-term interest rates, as the vast majority of their $13 billion of balance sheet assets are also floating rate assets, as they have always shared a similar approach to limiting duration risk. Moving to consolidated expenses on slide 13, starting with our largest expense, compensation, The compensation ratio for the quarter was 69.3%, which increased from 67.7% in the preceding quarter but remained below the year-ago period compensation ratio of 69.5% and below our 70% target in a low interest rate environment. The sequential increase was mainly the result of lower capital markets revenues which led to the revenue mix shift towards higher compensable revenues in the PCG segment as advisor payouts, particularly to independent advisors who cover their own overhead expenses, are typically higher than the associated compensation of our other businesses. On a sequential basis, the compensation ratio was also impacted by the reset of payroll taxes that occurs in the first calendar quarter of each year as well as annual salary increases and continued hiring to support our growth. Non-compensation expenses of $388 million increased 14% sequentially, predominantly driven by the bank loan provision for credit losses compared to a loan loss release in the preceding quarter, as well as higher communication and information processing expenses. Excluding the bank loan provision and acquisition-related expenses, which creates some noise in the comparison, non-compensation expenses of $356 million grew 3% over the preceding quarter. Also keep in mind, expenses included just over two months of results for Charles Stanley, which closed on January 21st. So overall, we have remained focused on the discipline management of all compensation and non-compensation related expenses while still investing in growth and ensuring high service levels for advisors and their clients. Slide 14 shows the pre-tax margin trend over the past five quarters. In the fiscal second quarter, we generated a pre-tax margin of 16.2% and an adjusted pre-tax margin of 16.6%. in line with our 16 percent target in this low interest rate environment. Based on the expectation for the additional increases in short-term interest rates, we will revisit our pre-tax margin and compensation ratio targets at our upcoming Analyst and Investor Day scheduled for May 25th. Hopefully, by then, we will have more clarity on other important variables, such as the outlook for investment banking revenues, the level of business development expenses as conferences and travel continue to ramp up, and the impact of recently closed and pending acquisitions. On slide 15, at the end of the quarter, total assets were $73.1 billion, a 7% sequential increase, reflecting the addition of approximately $3 billion in assets, mostly segregated client cash balances from Charles Stanley, as well as solid growth of loans at Raymond James Bank. Liquidity and capital remain very strong. RGF corporate cash at the parent ended the quarter at $2.2 billion, increasing 59% during the quarter, primarily due to significant special dividends from our well-capitalized subsidiaries during the quarter. The total capital ratio of 25% and a Tier 1 leverage ratio of 11.1% are both more than double the regulatory requirements to be well capitalized, providing significant flexibility to continue being opportunistic and invest in growth. The effective tax rate for the quarter did increase to 25.4%, up from 20.1% in the preceding quarter. The primary drivers of the sequential increase are the favorable impact from share-based compensation that vested in the preceding quarter and non-deductible losses on our corporate-owned life insurance portfolio due to equity markets that are used to fund our non-qualified benefit plans compared to non-taxable gains on these portfolios in the preceding quarter. Slide 16 provides a summary of our capital actions over the past five quarters. As of April 27, 2022, $1 billion remains available under the Board-approved share repurchase authorization. Due to regulatory restrictions, we do not expect to repurchase common shares until after closing the tri-state capital holdings acquisition, currently expected to occur by the end of the fiscal third quarter. As we explained on prior calls, Our current plan is to offset the share issuances associated with the transaction after closing. But given the heightened market volatility, we'll obviously keep a watchful eye on market conditions between now and then. Lastly, on slide 17, we provide key credit metrics for Raymond James Bank. The credit quality of the bank's loan portfolio remains healthy, with most trends continuing to improve. The bank loan loss provision of $21 million was primarily driven by strong loan growth during the quarter. The bank loan allowance for credit losses as a percentage of loans held for investment ended the quarter at 1.17%, down from 1.5% at March 2021, and essentially unchanged from 1.18% at December 2021. Now, I'll turn the call back over to Paul Reilly to discuss our outlook. Paul? Paul Reilly Thank you, Paul.