Business Context and Reporting Period
Company: Raymond James Financial, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company is a holding company for financial service businesses, including a retail brokerage (Private Client Group), institutional sales and trading (Capital Markets), asset management, and a federally chartered savings bank (Raymond James Bank). The reporting period reflects operations during a challenging economic environment characterized by a recession, credit market disruption, and declining equity markets, though the Company noted signs of recovery in equity markets and improved recruiting results.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Nine Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $632.3 million | $1,924.5 million |
| Net Revenues (Revenues less Interest Expense) | $624.8 million | $1,878.4 million |
| Net Income | $42.6 million | $109.8 million |
| Diluted EPS | $0.36 | $0.93 |
| Cash and Cash Equivalents (End of Period) | $539.3 million | N/A |
| Net Cash Provided by Operating Activities | N/A | $438.3 million |
| Total Assets | $17.8 billion | N/A |
| Shareholders' Equity | $1.96 billion | N/A |
| Loans Payable | $110.3 million | N/A |
Material Changes vs. Prior Comparable Period
- Revenue Decline: Total revenues decreased 22% for the quarter and 21% for the nine-month period compared to the prior year, driven by lower securities commissions, investment advisory fees, and investment banking revenues due to market conditions.
- Net Income Decline: Net income fell 39% for the quarter and 41% for the nine-month period year-over-year.
- Loan Loss Provision: The Bank Loan Loss Provision increased significantly to $29.8 million for the quarter (up 141% year-over-year) and $129.6 million for the nine months (up 257% year-over-year), reflecting deteriorating credit markets and commercial real estate values.
- Net Interest Income: Despite lower rates, Net Interest Income at RJ Bank increased 18% for the quarter and 73% for the nine months year-over-year due to a lower cost of funds and growth in loan balances.
- Nonperforming Assets: Total nonperforming assets at RJ Bank rose to $159.7 million (2.25% of total loans) from $62.3 million (0.88%) at the prior fiscal year-end.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook: Management noted that while the environment remains challenging, most business segments showed improvement from the preceding quarter. RJ Bank's net interest spreads are expected to gradually decline toward sustainable levels. The Company expects loan balances to remain flat or decline in the near term to build capital levels. The Company withdrew its application to participate in the U.S. Treasury's TARP Capital Purchase Program in May 2009.
Risks and Contingencies:
- Auction Rate Securities (ARS): The Company faces ongoing investigations by the SEC, NY Attorney General, and Florida regulators regarding ARS. Client holdings declined to approximately $832.5 million. The Company stated it currently lacks the regulatory capital or cash to repurchase all ARS at par if compelled.
- Legal Proceedings: A class action lawsuit (Woodard vs. Raymond James Financial, Inc.) was filed in June 2009 alleging misstatements regarding loan losses at RJ Bank. Additionally, the Company's Turkish joint venture (RJ MKY) ceased operations and filed for bankruptcy protection; the Company has fully reserved its equity interest.
- Continental Airlines Lease: The Company holds a leveraged lease with Continental Airlines ($8.2 million carrying value). While current on payments, a default could result in a write-down of the investment.
- FDIC Assessment: A special FDIC assessment of $4.0 million was expensed in the quarter, payable in September 2009.
Investor Verification Checklist
- Loan Loss Reserves: Verify the adequacy of the $137.0 million Allowance for Loan Losses given the 1.90% ratio to total loans and the significant increase in nonperforming assets.
- ARS Exposure: Monitor the status of regulatory investigations and the potential financial impact of any forced repurchase of Auction Rate Securities held by clients.
- Capital Adequacy: Confirm RJ Bank's "well capitalized" status and the Company's ability to provide additional capital if required, noting the $120 million available liquidity identified for this purpose.
- Continental Airlines Lease: Track the financial health of Continental Airlines to assess the risk of impairment on the $8.2 million leveraged lease asset.
- Interest Rate Sensitivity: Review the impact of potential interest rate increases on RJ Bank's net interest income, which management estimates could decrease by 4.07% in the first year following a 100 basis point rise.