RAYMOND JAMES FINANCIAL INC quarterly report, Q3 FY2016

Raymond James Financial, Inc. — Form 10-Q Summary

Reporting period: Fiscal third quarter and nine months ended June 30, 2016; filed August 8, 2016. Unaudited. Comparisons are with the periods ended June 30, 2015, except balance-sheet comparisons, which are with September 30, 2015. Amounts below are U.S. dollars.

Business context and reporting period

Raymond James is a financial holding company operating through brokerage and advisory businesses, capital markets, asset management, and RJ Bank. Its results are sensitive to financial-market activity, interest rates, lending and credit conditions, and regulation. The company reported record quarter-end client assets under administration of $534.5 billion, up 7% year over year, citing advisor recruiting and retention and a modest increase in equity markets.

Key financial metrics

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Total revenues	$1.387 billion	$1.349 billion	$4.029 billion	$3.941 billion
Net revenues	$1.358 billion	$1.321 billion	$3.944 billion	$3.859 billion
Income before taxes, including noncontrolling interests	$191.5 million	$201.3 million	$543.8 million	$575.6 million
Net income attributable to Raymond James	$125.5 million	$133.2 million	$357.7 million	$373.0 million
Diluted EPS	$0.87	$0.91	$2.47	$2.55
Net interest income	$135.6 million	$109.4 million	$383.2 million	$321.7 million

Quarterly change: Net revenues rose 3%, while attributable net income fell 6% and diluted EPS fell 4%. Excluding $13.4 million of acquisition-related expenses, adjusted diluted EPS was $0.93, up 2%; adjusted measures are non-GAAP.
Nine-month change: Net revenues rose 2%, while attributable net income fell 4% and diluted EPS fell 3%. Adjusted diluted EPS was $2.56 versus $2.55 in the prior period.
Margins: PCG pre-tax margin on net revenues declined to 9.1% from 9.7% for the quarter and to 8.8% from 9.8% for nine months. RJ Bank’s quarterly net interest margin was 3.10%, roughly unchanged year over year; nine-month margin was 3.04%, versus 3.08%.
Cash flow, nine months: Operating activities used $87 million, compared with $465 million provided in the prior year; investing activities used $2.039 billion, primarily reflecting $1.86 billion of growth in bank loans; financing activities provided $1.518 billion, largely from increased bank deposits. Cash and cash equivalents declined $623 million to $1.978 billion.
Balance sheet and funding: Total assets were $28.843 billion and liabilities $23.849 billion at June 30. Bank loans, net, were $14.800 billion, up $1.812 billion from September 30; bank deposits were $13.732 billion, up $1.812 billion. Senior notes payable were $899 million and other borrowings $848 million.
Liquidity and capital: Approximately $951 million of cash and cash equivalents was available without restriction. RJF and RJ Bank were categorized as well capitalized; their CET1 ratios were 21.3% and 12.7%, respectively.

Material changes and segment performance

Private Client Group: Quarterly net revenues increased 1% to $901 million, but pre-tax income declined 5% to $82 million. Higher account and service fees, including cash-sweep fees, were partly offset by weaker mutual fund, equity and new-issue commissions and higher legal and regulatory expense.
Capital Markets: Quarterly net revenues increased 8% to $252 million and pre-tax income rose 79% to $33 million. Fixed-income trading profits benefited from market volatility, including around the Brexit vote. For nine months, equity underwriting and M&A/advisory revenues were weaker than the prior year.
Asset Management: Quarterly revenues increased 2% to $101 million and pre-tax income increased 3% to $33 million. For nine months, pre-tax income declined 5% to $97 million, with higher expenses and lower managed-program advisory fees weighing on results. Managed-program assets were $71.7 billion; non-discretionary program assets were $106.0 billion.
RJ Bank: Quarterly net revenues rose 22% to a record $127 million and pre-tax income rose 14% to $89 million, driven mainly by loan growth. The nine-month provision for loan losses increased to $27.0 million from $10.3 million, including energy-sector charges and effects of loan growth.
Other segment: Pre-tax loss widened to $38.4 million for the quarter and $93.0 million for nine months. Results included acquisition costs and lower revenues; the prior-year periods included gains from ARS sales and stronger private-equity gains.

Outlook, risks, contingencies and unusual items

Outlook: The filing provides no company-wide earnings guidance. Management estimated that the December 2015 25-basis-point rate increase added about $20 million of quarterly pre-tax income; an additional 75-basis-point instantaneous increase was estimated to add about $80 million of pre-tax income over 12 months, subject to assumptions about client cash, deposit rates, earning assets and bank margins. A rate decrease could reverse favorable effects.
Acquisitions and capital actions: Mummert, a German M&A advisory firm, was acquired June 1. The company expected to close the Deutsche Bank U.S. Private Client Services and 3Macs acquisitions in fiscal Q4; estimated Deutsche WM consideration and advisor retention incentives were about $420 million, with the 3Macs amount dependent on closing details. On July 12, after quarter-end, RJF issued $800 million of senior notes, netting approximately $791 million for working capital and general corporate purposes. It repaid $250 million of 4.25% notes at maturity in April and repurchased approximately 3.2 million shares for $144.5 million during the nine months.
Credit and market risks: The loan-loss allowance was $196.9 million, or 1.33% of loans. Nonperforming loans increased to $81.3 million from $52.6 million at September 30, including $36.3 million of nonperforming C&I loans. Energy loans outstanding were $432 million, including $108 million classified as criticized; the related allowance was $30 million. Management warned that economic, market, interest-rate, credit, regulatory and legal developments could affect results.
Regulatory and legal matters: The new DOL fiduciary rule was expected to raise compliance, legal and technology costs and expand potential liability; key phase-in dates begin in 2017. RJ&A agreed to a $17 million FINRA AML settlement, with the related expense accrued in earlier periods, and a $5.95 million Vermont regulatory settlement, including $4.5 million for a receiver for potential Jay Peak-related investor claims. The company disclosed Jay Peak-related litigation and other proceedings. Excluding matters indemnified by Regions, estimated possible legal or regulatory losses were up to $7 million above accrued liabilities. A court approved $125 million of settlements in Morgan Keegan fund litigation in August 2016; the company stated it paid none of that amount.
Other notable exposure: The company reported $106 million of unfunded recruiting-loan offers, $42 million of unfunded venture/private-equity commitments and substantial bank off-balance-sheet lending commitments. RJ Ltd. Canadian ECM goodwill had an estimated fair-value cushion of about 10%; continued weak Canadian markets or performance below projections could result in impairment. Management also identified operational and cybersecurity risks, though it reported no material cyber-related losses to date.

Important facts for investors to verify

Whether loan growth, particularly in corporate and energy exposures, continues to outpace credit deterioration and provisions.
Whether client cash balances, sweep-program economics and interest-rate changes sustain net interest income and fee growth.
The final cost, closing timing and integration results for Deutsche WM and 3Macs, and the effect of acquisition expenses on reported earnings.
Progress on DOL fiduciary-rule implementation, AML remediation and Jay Peak-related litigation, including any additional costs or reserves.
How the July 2016 debt issuance and continued bank-loan growth affect liquidity, funding costs and regulatory capital.