Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2010. Unaudited; dollar amounts below are in millions unless stated otherwise. The filing compares quarterly results with the three months ended June 30, 2009, and year-to-date results with the nine months ended June 30, 2009.
Business context and results
Raymond James operates brokerage, capital markets, asset management, banking, and other financial businesses. Management said results remained sensitive to equity markets, interest rates, financial-instrument valuations, economic conditions, and competition. Improved markets helped brokerage and advisory activity, while the bank’s smaller loan balances and weaker fixed-income trading weighed on results.
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Nine months ended June 30, 2010 | Nine months ended June 30, 2009 |
|---|---|---|---|---|
| Total revenue | $763.6 | $636.9 | $2,216.3 | $1,924.5 |
| Net revenue | $747.4 | $629.5 | $2,168.8 | $1,878.4 |
| Income before tax, including noncontrolling interests | $95.3 | $76.7 | $256.7 | $179.6 |
| Net income attributable to Raymond James | $60.7 | $42.6 | $159.2 | $109.8 |
| Diluted earnings per share | $0.48 | $0.35 | $1.28 | $0.90 |
| Bank loan-loss provision | $17.1 | $29.8 | $59.9 | $129.6 |
Quarterly net revenue rose 19% and attributable net income increased 42%; nine-month net revenue rose 15% and attributable net income increased 45%. Approximate attributable net-income margin on net revenue was 8.1% for the quarter versus 6.8% a year earlier, and 7.3% year to date versus 5.8%. The effective tax rate was approximately 38%, compared with approximately 41% in the prior-year periods.
Cash flow, balance sheet, debt, and liquidity
- Cash flows, nine months: Operating activities provided $8.8; investing activities provided $2,424.7; financing activities used $3,875.1. Cash and cash equivalents declined $1,439.9 to $866.2.
- Balance sheet: Total assets were $14,880.2 at June 30, 2010, down 18% from $18,226.7 at September 30, 2009. Total equity was $2,465.9, including $2,219.4 attributable to Raymond James.
- Funding and debt: Bank deposits were $6,469.7, down from $9,423.4; corporate debt was $356.7, including $300 of senior notes due 2019 and a $56.8 headquarters mortgage. Other borrowings were $64.8, compared with $980.0 at September 30, 2009; the prior balance included a $900 overnight FHLB advance repaid in October 2009.
- Available liquidity: The company reported $159 of excess parent-company cash. It said approximately $3.1 billion of cash and segregated assets were available to meet client obligations; segregated assets are not equivalent to unrestricted corporate cash. RJ Bank had $124 of capital above the amount needed to meet the company’s internal 12% total risk-based capital target, and reported a 13.8% ratio and “well capitalized” status.
Material changes and management commentary
- Private Client Group revenue increased 31% in the quarter and 24% year to date, supported by improved markets, advisor productivity, and client assets. Its quarterly pretax income rose 144%.
- Capital Markets revenue increased, but quarterly pretax income fell 3%. Equity commissions, underwriting, and M&A fees improved; fixed-income commissions and trading profits declined. Management attributed weak quarterly fixed-income trading partly to a “flight to quality” and European credit concerns.
- RJ Bank quarterly pretax income rose 6% despite a 17% decline in net interest income, as the loan-loss provision fell. Year-to-date pretax income increased 22%; net interest income declined 23%. Management linked lower interest income to reduced average loan balances and lower spreads.
- Nonperforming assets were $176.5, or 2.85% of loans net and other real estate owned, versus $167.1 and 2.53% at September 30, 2009. Residential and consumer delinquencies increased; the allowance for loan losses was $147.1, or 2.33% of loan amortized cost.
- Cash and total assets fell largely as the company unwound temporary transactions related to RJ Bank’s September 2009 thrift-regulatory balance-sheet test, rather than solely from operating contraction.
- The CEO succession plan was implemented in May 2010. The company said it expected no significant operational impact from recently enacted financial-services reform, but acknowledged that effects were uncertain pending implementing regulations.
Outlook, risks, contingencies, and unusual items
- No consolidated earnings or revenue guidance was provided. Management said RJ Bank intended to increase lending opportunistically while maintaining well-capitalized status and an internal total capital ratio target of at least 12%.
- Management expected money-market fee waivers to cease in fiscal fourth quarter following the planned outsourcing of money-market funds.
- Clients held approximately $629 of auction-rate securities (ARS) at June 30, 2010, down from approximately $1.9 billion in April 2008. Nuveen had paused refinancing efforts in April and said in July it was reconsidering further refinancing. The company stated it lacked sufficient cash to repurchase all or a significant portion of outstanding client ARS; a large repurchase could require new borrowing or capital raising and might create losses.
- RJ&A and RJFS remained subject to ARS-related investigations. The company said it would contest any action compelling repurchases and believed it had meritorious defenses. Management did not expect pending litigation overall to materially affect financial position or results, but said resolution of one or more matters could materially affect a future period.
- Non-agency mortgage securities had $59.4 of gross unrealized losses at June 30. Management reported $7.9 of credit-related OTTI recognized in other revenue for the nine months and warned that weaker-than-expected collateral performance could result in further impairment.
- Other notable items included $2.5 of OTTI recognized in the quarter, private-equity valuation gains contributing to Proprietary Capital results, and a FINRA arbitration matter against RJ&A that was subsequently settled and affected year-to-date PCG expenses; the settlement amount is not clearly stated in the filing text provided.
Important facts for investors to verify
- Whether residential delinquencies and commercial-real-estate credit performance stabilize, and whether the $147.1 loan-loss allowance remains adequate.
- Progress and potential costs of ARS investigations, client claims, and any issuer refinancing or company repurchase proposal; assess funding needs and possible losses against liquidity.
- Whether brokerage and advisory growth persists if market conditions weaken, and whether compensation and other expenses remain aligned with revenue.
- RJ Bank’s net interest income, lending growth, capital ratios, and progress on its pending charter-conversion application.
- Valuations and recoverability of non-agency mortgage securities and Level 3 private-equity investments, which rely partly on management estimates and unobservable inputs.
- Any changes in credit ratings, financing availability, regulatory requirements, or litigation outcomes that could affect capital, liquidity, or future results.