Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2011. Filing dated August 9, 2011; financial statements are unaudited. Raymond James operates in wealth management, capital markets, asset management, banking and related financial services.
Key financial results
| Metric | Three months ended June 30, 2011 | Prior-year quarter | Nine months ended June 30, 2011 | Prior-year period |
|---|---|---|---|---|
| Total revenues | $868.2 million | $763.6 million | $2,565.3 million | $2,216.3 million |
| Net revenues | $850.4 million | $747.4 million | $2,516.3 million | $2,168.8 million |
| Pre-tax income, including noncontrolling interests | $81.1 million | $95.3 million | $332.1 million | $256.7 million |
| Net income attributable to Raymond James | $46.8 million | $60.7 million | $209.4 million | $159.2 million |
| Diluted earnings per share | $0.37 | $0.48 | $1.65 | $1.28 |
Quarterly revenues rose 14%, but reported pre-tax income fell 15% and attributable net income fell 23%. Nine-month revenues increased 16% and attributable net income increased 32%. The quarter included a $45 million pre-tax provision for the auction-rate-securities (ARS) settlement; management said that excluding this charge and its tax effect, quarterly net income would have been approximately $75 million, up 23% year over year. This is a company-presented non-GAAP comparison.
Quarterly operating costs increased: non-interest expenses were $769.3 million versus $652.0 million, including the ARS provision. Compensation, commissions and benefits were $575.7 million versus $513.7 million. The effective tax rate was approximately 40.5% for the quarter, compared with 37.8%, with the increase attributed mainly to repatriated foreign earnings and a nondeductible ARS-related fine.
Cash flow, balance sheet and capital
- Cash flows, nine months: $1.090 billion provided by operations, $3.9 million used in investing, and $2.451 billion used in financing. Cash and cash equivalents ended at $1.599 billion, down from $2.943 billion at September 30, 2010. Management attributed much of the balance-sheet and cash-flow movement to the unwind of temporary, point-in-time bank regulatory funding and balance-sheet measures from September 2010.
- Balance sheet at June 30: total assets were $16.117 billion, down from $17.883 billion at September 30, 2010; total liabilities were $13.252 billion, down from $15.286 billion; and total equity was $2.865 billion, up from $2.597 billion.
- Debt and funding: corporate debt was $612.6 million, up from $356.0 million, following issuance of $250 million of 4.25% senior notes due 2016. The $2.557 billion of other borrowings outstanding at September 2010 had been repaid; none remained at June 30. Bank deposits were $6.944 billion versus $7.080 billion. The company reported $655 million of parent-company cash and cash equivalents.
- Liquidity and regulatory capital: management stated available assets, operating cash generation and financing facilities should support operations, including the expected ARS purchases. RJ&A reported $349.6 million of excess net capital; RJ Bank was classified as well capitalized, with total risk-based capital of 13.7% and Tier I leverage capital of 11.3%.
- Dividends: common dividends were $0.13 per share in the quarter and $0.37 per share for the nine months, compared with $0.11 and $0.33, respectively, in the prior-year periods.
Material changes and business performance
- Private Client Group quarterly pre-tax income rose 19% to $53.3 million, supported by higher client activity, increased client assets and advisor productivity. Client assets under administration were $278 billion, 20% above June 30, 2010.
- RJ Bank quarterly pre-tax income rose 44% to $42.1 million, mainly because of lower loan-loss provisioning and improved credit quality. Net charge-offs fell 53% year over year to $8.7 million; nonperforming assets were $158.9 million, or 2.53% of loans and OREO, versus 2.97% at September 30, 2010.
- Asset Management quarterly pre-tax income rose 45% to $17.6 million. Net assets under management were $36.6 billion, up from $29.9 billion a year earlier; growth reflected client inflows and market appreciation.
- Capital Markets quarterly pre-tax income declined 28% to $14.2 million despite revenue growth, reflecting lower institutional equity and fixed-income commissions and higher compensation and other costs. For the nine months, segment pre-tax income rose 37%.
- The company completed its Howe Barnes acquisition on April 1, issuing shares valued at $8.3 million, and acquired a controlling interest in Raymond James European Securities in April. Results include these businesses prospectively from the acquisition dates.
Outlook, risks and unusual items
- ARS settlement: regulatory settlements finalized June 29 require an offer to buy eligible client securities at par. The company estimated up to $300 million of securities could be eligible and recorded a $45 million loss provision. The offer was to remain open through September 29, 2011, with purchases expected by October 6. Actual losses could differ materially with tenders, market values, issuer redemptions and client make-whole claims. Management expected the ultimate loss to be below the provision, but gave no assurance.
- Canadian loan portfolio: RJ Bank agreed to acquire a Canadian corporate loan portfolio with approximately $615 million in commitments and $500 million outstanding. Closing was expected before September 30, 2011, subject to Canadian and U.S. regulatory approvals; the U.S. approval was pending. Management estimated an approximately $7 million increase to the loan-loss allowance on completion.
- Credit and market exposure: management said nonperforming loans remained elevated by historical standards. Residential and consumer delinquencies, unemployment, real-estate conditions and possible deterioration in collateral values could lead to additional losses. Non-agency mortgage securities had $40.0 million of unrealized losses; management warned worse-than-expected collateral performance could cause future impairment charges.
- Regulation and macroeconomic conditions: market volatility, interest rates, economic conditions, competition and regulatory changes may affect activity, asset values and earnings. Management anticipated increased compliance costs from Dodd-Frank, while stating the overall operational impact remained uncertain and was not expected to be significant. RJ Bank’s conversion to a national bank was anticipated during calendar 2011.
- Subsequent event: the filing reports that Standard & Poor’s downgraded the U.S. sovereign rating on August 5, 2011, after quarter-end. The company warned that potential financial-market, economic and liquidity effects were uncertain and could be adverse.
- No formal numeric earnings or revenue guidance is provided. Management said most businesses performed well despite unsettled markets and described growth strategies as supported by available liquidity. It also cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Actual ARS tenders, repurchase cost, recoveries and any additional client compensation compared with the $45 million provision.
- Regulatory approval, closing terms and subsequent credit performance of the Canadian loan portfolio, including the expected allowance increase.
- RJ Bank loan delinquency and nonperforming trends, allowance adequacy, residential mortgage exposures and performance of non-agency mortgage securities.
- Whether growth in recurring client and advisory assets continues to offset market sensitivity and higher compensation and operating costs.
- Liquidity and capital availability at regulated subsidiaries, including any effects from the U.S. sovereign downgrade, debt ratings or bank-charter transition.