Raymond James Financial, Inc. — Q1 FY2011 10-Q
Reporting period: Three months ended December 31, 2010; comparisons are with the three months ended December 31, 2009 unless noted. The filing is unaudited. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise stated.
Business context and results
Raymond James operates across private client services, capital markets, asset management, banking, emerging markets, securities lending and proprietary investing. Management said results are sensitive to equity markets, economic conditions, interest rates, underwriting and trading activity.
| Metric | Q1 FY2011 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenues | $830.3 | $702.7 | +18% |
| Net revenues | $813.8 | $687.0 | +18% |
| Income before tax, including noncontrolling interests | $126.7 | $67.1 | +89% |
| Net income attributable to Raymond James | $81.7 | $42.9 | +90% |
| Diluted earnings per share | $0.65 | $0.35 | +$0.30 |
| Operating cash flow | $1,212.4 | $(138.5) | Improved |
Net income was about 10.0% of net revenues, versus 6.2% in the prior-year quarter. Non-interest expenses rose 11% to $687.1 million, principally reflecting higher compensation and commissions; the bank loan-loss provision fell 51% to $11.2 million. Net interest income increased 16% to $87.9 million.
Segment performance and material changes
- Private Client Group: Revenue rose 14% to $519.4 million and pretax income rose 76% to $55.7 million. Management cited stronger markets, greater advisor productivity and benefits from earlier recruiting. Fee-based account assets were $69 billion, compared with $58 billion a year earlier.
- Capital Markets: Revenue increased 29% to $173.0 million and pretax income rose 116% to $24.6 million, supported by higher underwriting and M&A fees; trading profits declined 57%, largely amid difficult municipal-bond markets.
- Asset Management: Revenue increased 11% to $55.6 million and pretax income rose 29% to $15.6 million. Net assets under management were $33.4 billion, up from $30.3 billion a year earlier; management cited market appreciation and approximately $2 billion of net inflows.
- RJ Bank: Pretax income increased 89% to $46.5 million, with a lower loan-loss provision and higher net interest income. The latter included a one-time $6 million correction of prior-period interest income understatement.
- Other: The pretax loss widened to $12.6 million from $8.9 million, reflecting higher incentive compensation and advertising costs.
Financial position, cash flow and liquidity
- At December 31, 2010, total assets were $14.85 billion, liabilities $12.13 billion and total equity $2.72 billion. Total assets declined 17% from September 30, 2010; management attributed the major balance-sheet movements to reversal of temporary, quarter-end regulatory balance-sheet positioning at RJ Bank. Excluding those transactions, assets were described as flat and liabilities slightly lower.
- Cash and cash equivalents were $1.20 billion, down from $2.94 billion at September 30. Operating cash flow was $1.21 billion, investing activities used $22.0 million and financing activities used $2.93 billion. The operating inflow largely reflected reduced segregated assets; financing outflows principally reflected repayment of borrowings and lower bank deposits associated with the prior quarter-end positioning.
- Bank loans, net, were $6.10 billion; bank deposits were $6.68 billion. Other borrowings fell to $30 million from $2.56 billion, primarily following repayment of a temporary $2.4 billion FHLB advance. Corporate debt was $355.2 million, including $300 million of senior notes due August 2019 and approximately $55 million of mortgage debt.
- RJ Bank reported capital ratios of 13.2% total risk-based capital, 12.0% Tier I risk-based capital and 11.1% Tier I leverage, and was categorized as well capitalized. RJ&A reported $332.9 million of excess net capital, of which management said approximately $145 million was available for dividends after restrictions and its internal capital policy.
- The board-authorized repurchase capacity remaining was $56.6 million. The company paid $16.4 million in common dividends during the quarter and said it expected to continue paying dividends, subject to operating results, funding and regulatory restrictions.
Outlook, commentary, risks and unusual items
- Management described the quarter as a continued improvement and reported record quarterly net revenues and net income. It provided no specific numerical earnings or revenue guidance in the supplied filing text.
- The announced acquisition of Howe Barnes Hoefer & Arnett was expected to close around March 31, 2011, subject to regulatory approval and customary conditions. Management expected no material impact on consolidated financial position or results of operations.
- Management expected Dodd-Frank implementation to raise compliance costs, while stating the overall operational impact was not expected to be significant; specific effects remained uncertain pending rulemaking. RJ Bank’s anticipated change in federal regulator and conversion to a commercial bank were expected in mid-2011.
- Approximately $550 million of auction-rate securities (ARS) remained with clients at December 31, 2010; management reported approximately $440 million by January 31, 2011. Ongoing investigations and related legal matters continued. The company said it lacked sufficient cash on hand to repurchase all or a significant portion of client ARS and would need financing or a capital raise; the amount of any potential loss could not be estimated.
- RJ Bank’s allowance for loan losses was $146.0 million, or 2.34% of loans. Nonperforming assets were $157.4 million, or 2.57% of loans plus other real estate owned, down from $181.9 million and 2.97% at September 30. Management cautioned that nonperforming loans remained elevated by historical standards and that worsening real-estate or credit conditions could make reserves inadequate.
- Available-for-sale securities included non-agency mortgage obligations with $43.7 million of gross unrealized losses; most had been in a loss position for at least 12 months. Management expected recovery of unrealized losses not already recognized, but worse collateral performance could lead to future impairment losses.
- Other exposures include guarantees related to tax-credit funds, including stated maximum exposures of approximately $51.6 million and $57.1 million for separate Fund 34 arrangements; management did not anticipate payments under those guarantees based on its projections. The filing also describes litigation and regulatory risks, including an unresolved Turkish settlement-line guarantee matter.
Most important facts for investors to verify
- Whether earnings growth persists after considering the $6 million one-time RJ Bank interest correction and the sharply lower loan-loss provision.
- Subsequent ARS redemptions, any regulatory or litigation developments, and the company’s potential funding needs if a repurchase is required.
- RJ Bank credit trends, including nonperforming loans, delinquencies, charge-offs, allowance adequacy and exposure to residential and commercial real estate.
- Progress and final terms of the Howe Barnes acquisition, and timing and costs of the anticipated bank-regulatory transition.
- Liquidity and capital available at the parent after subsidiary dividend restrictions, as well as the effect of market, interest-rate and regulatory changes.