Raymond James Financial, Inc. — FY2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2011. Raymond James is a diversified financial-services holding company with brokerage, capital markets, asset management, banking and related businesses. Its Private Client Group (PCG) and RJ Bank were its largest earnings contributors.
Financial performance and position
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Total revenues | $3.400 billion | $2.980 billion | +14% |
| Net revenues | $3.334 billion | $2.917 billion | +14% |
| Net income attributable to RJF | $278.4 million | $228.3 million | +22% |
| Diluted EPS | $2.19 | $1.83 | +20% |
| Net interest income | $326.5 million | $308.0 million | +6% |
| Operating cash flow | $1.558 billion | $(1.021) billion | Improved |
Non-interest expenses rose 13% to $2.883 billion, mainly from higher compensation and a $41.4 million pre-tax loss on auction-rate securities (ARS) repurchased. The reported effective tax rate was 39.7%, versus 36.9%. Net income was approximately 8.3% of net revenues; pre-tax income excluding noncontrolling interests was $461.2 million.
At September 30, 2011, total assets were $18.007 billion, total liabilities $15.095 billion and RJF-attributable shareholders’ equity $2.588 billion. Corporate debt was $612.0 million, including $300 million of 8.60% notes due 2019 and $250 million of 4.25% notes due 2016. Cash and cash equivalents totaled $2.440 billion, while approximately $474 million was identified as available parent-company cash and cash equivalents. The company reported $425 million of committed secured facilities, in addition to uncommitted facilities; uncommitted lenders were not obligated to provide funds.
RJ Bank reported $173.0 million of pre-tax income, up 54%, and $271.3 million of net interest income. It was categorized as well capitalized, with a 13.7% total risk-based capital ratio and a 10.3% Tier I leverage ratio. The bank’s $145.7 million loan-loss allowance equaled 2.18% of loans; nonperforming loans were $133.3 million.
Material changes versus comparable periods
- PCG pre-tax income rose 36% to $218.8 million; client assets under administration increased 3% to $256 billion, and average advisor productivity increased 15%.
- Capital Markets pre-tax income fell 7% to $78.0 million despite higher revenues: increased equity commissions, underwriting and M&A fees were offset by lower fixed-income commissions and trading profits.
- Asset Management pre-tax income increased 41% to $66.2 million; net assets under management grew 7% to $32.1 billion. Management cited net client inflows, partly offset by fourth-quarter market declines.
- RJ Bank’s lower loan-loss provision—$33.7 million versus $80.4 million—was the principal driver of its earnings improvement. Net charge-offs declined 58% to $35.0 million.
- Operating cash flow benefited substantially from a $1.312 billion increase in brokerage client and other payables. Investing activities used $400 million, principally for loan growth and ARS purchases; financing activities used $1.679 billion, including repayments of borrowings.
Quarterly results, outlook and unusual items
In fiscal Q4 2011, revenue was $834.6 million, net revenue $817.8 million and net income attributable to RJF $68.9 million, compared with $763.2 million, $747.9 million and $69.1 million, respectively, in fiscal Q4 2010. Quarterly diluted EPS was $0.54 versus $0.55. Management said October and November 2011 market conditions pointed to a more difficult December 2011 quarter; no quantified full-year guidance was provided.
- ARS settlement: Regulatory settlements were finalized June 29, 2011. The company repurchased $245 million par value from eligible clients; the repurchased securities had $205 million fair value at year-end. The associated reported pre-tax loss was $41.4 million. A $1.75 million state-regulator fine was imposed; the SEC imposed no fine. The related class action’s remaining claims were dismissed with prejudice in September 2011.
- Acquisitions and financing: Raymond James acquired Howe Barnes in April 2011 and obtained a controlling interest in Raymond James European Securities. It also issued $250 million of 4.25% senior notes due 2016.
- Bank growth commitment: RJ Bank agreed to acquire a Canadian corporate loan portfolio with approximately $500 million outstanding, subject to regulatory approval.
- Regulatory transition: RJF became subject to Federal Reserve oversight in July 2011. RJ Bank’s national-bank charter conversion and RJF’s bank-holding-company application were pending; management anticipated approval before year-end 2011. The filing describes Dodd-Frank implementation effects as uncertain.
- Other risks: Management highlighted volatile markets, interest-rate and credit exposures, persistent residential real-estate weakness, liquidity and counterparty risks, competition, litigation, operational and technology risks, and the judgment involved in fair-value estimates and loan-loss reserves. Management estimated possible losses on other pending legal matters at up to $10 million beyond any accrued liability, if any.
Investor verification priorities
- Track subsequent RJ Bank credit performance, especially residential mortgage delinquencies, C&I nonperforming loans and allowance adequacy.
- Verify the timing, regulatory conditions and funding of the Canadian loan-portfolio purchase and bank-charter transition.
- Assess whether the difficult near-term market outlook affected client assets, trading, underwriting and advisory-fee revenue.
- Review the valuation, redemption pace and credit exposure of the remaining $196 million fair value of ARS, including Jefferson County securities following its Chapter 9 filing.
- Reconcile reported operating cash flow with large changes in brokerage payables and other working-capital balances; distinguish parent-company liquidity from client-segregated and subsidiary-restricted funds.
- Review debt-service capacity, subsidiary dividend restrictions, legal contingencies and the assumptions underlying Level 3 asset valuations.
The consolidated financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting as of September 30, 2011.