Raymond James Financial, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2011. Financial statements are unaudited. Comparisons are with the corresponding 2010 periods unless noted.
Business context
Raymond James is a diversified financial-services firm operating in Private Client Group, Capital Markets, Asset Management, banking and other businesses. Management attributed improved results mainly to stronger equity markets, increased client activity, higher investment-banking activity and improving bank credit quality.
Key financial results
| Metric | Quarter ended March 31, 2011 | Six months ended March 31, 2011 |
|---|---|---|
| Total revenue | $866.7 million, up 16% | $1.697 billion, up 17% |
| Net revenue | $852.1 million, up 16% | $1.666 billion, up 17% |
| Pre-tax income, excluding noncontrolling interests | $126.2 million, up 41% | $256.8 million, up 61% |
| Net income attributable to Raymond James | $80.9 million, versus $55.6 million | $162.6 million, versus $98.5 million |
| Diluted EPS | $0.64, versus $0.45 | $1.29, versus $0.79 |
| Net interest income | $82.1 million, up 6% | $170.0 million, up 11% |
| Operating cash flow | Not presented quarterly | $1.133 billion provided, versus $52.2 million used |
Quarterly non-interest expenses rose 14% to $727.8 million, primarily due to higher compensation linked to commission and investment-banking revenues; the bank loan-loss provision fell 57% to $8.6 million. The quarter’s net income was approximately 9.5% of net revenue, calculated from reported figures.
By segment, quarterly pre-tax income rose 26% in Private Client Group to $46.0 million, 53% in Capital Markets to $33.7 million, 36% in Asset Management to $15.2 million, and 37% in RJ Bank to $42.3 million. Proprietary Capital reported a $4.0 million pre-tax loss.
Financial position, liquidity and debt
- At March 31, 2011, total assets were $15.284 billion, liabilities $12.465 billion, and total equity $2.819 billion. Assets and liabilities declined from September 30, 2010, largely because of temporary, point-in-time bank regulatory balance-sheet requirements at that prior date.
- Cash and cash equivalents were $1.255 billion, down from $2.943 billion at September 30, 2010. Cash fell by $1.688 billion over the six-month period. Financing activities used $2.924 billion, principally reflecting repayment of borrowings and lower bank deposits associated with those prior-period regulatory transactions.
- Corporate debt was $354.4 million at quarter-end, comprising approximately $54 million of mortgage debt and $300 million of senior notes. There were no other borrowings outstanding; repurchase-agreement liabilities were $62.3 million. On April 11, after quarter-end, the company issued $250 million of 4.25% senior notes due 2016.
- Management said existing liquid assets, operating cash generation, financing facilities and the subsequent debt issuance should provide adequate funding for continuing operations at current activity levels. Parent-company cash held through a subsidiary was $425 million at quarter-end. RJ Bank had $1.1 billion of immediate Federal Home Loan Bank credit available.
- RJ Bank’s allowance for loan losses was $146.1 million, or 2.37% of loans. Nonperforming assets were $152.8 million, 2.53% of loans and other real estate owned, down from $181.9 million and 2.97% at September 30, 2010. Six-month net charge-offs declined to $20.8 million from $44.7 million.
- RJ Bank was categorized as well capitalized. Its reported total risk-based capital ratio was 13.2% and Tier 1 leverage ratio 11.1% at March 31, 2011. The company reported excess net capital of $339.5 million at RJ&A.
Material changes and unusual items
- Growth in Private Client Group, Capital Markets and Asset Management reflected improved market conditions and client activity. Capital Markets benefited from stronger equity commissions, underwriting and M&A fees; fixed-income commissions declined.
- RJ Bank’s improvement was principally driven by lower loan-loss provisions and fewer charge-offs. Six-month bank net interest income included a $6 million correction of an accumulated prior-period interest-income understatement related to purchased residential mortgage loan pools.
- Assets under management were $39.3 billion at March 31, 2011, versus $35.2 billion a year earlier; net assets under management were $35.6 billion. Management cited market appreciation and net client inflows.
- Proprietary Capital’s results included a $3 million write-down of an investment in a forensic-supplies company and approximately $0.4 million of other write-downs.
- The company adopted revised variable-interest-entity consolidation guidance on October 1, 2010, deconsolidating two low-income housing tax-credit funds and consolidating two others. Management said the accounting changes did not materially affect results of operations.
- Howe Barnes Hoefer & Arnett was acquired effective April 1, 2011, with 222,655 shares issued as consideration; management expected no material consolidated financial impact.
Outlook, risks and contingencies
- Management provided no specific earnings or revenue guidance. It said investment-business results depend substantially on equity markets and economic conditions, and identified interest rates, regulation, competition, underwriting activity and asset valuations as factors that could affect results.
- Management expected Dodd-Frank implementation to increase compliance costs, while stating the overall operational impact was not expected to be significant; the details remained uncertain. A change in RJ Bank’s federal regulator and conversion to a commercial bank were anticipated in mid-2011.
- Approximately $370 million of auction-rate securities (ARS) remained with clients at March 31, 2011. If the company repurchased the portfolio, estimated fair value could be $25 million to $50 million below par. Regulatory investigations were ongoing; management said it would contest any compelled repurchase. Certain proposed issuer refinancings were not assured.
- Management warned that residential and real-estate credit conditions, unemployment, collateral performance and market illiquidity could lead to additional loan or securities impairment losses. Non-agency mortgage securities had $39.9 million of gross unrealized losses; management said expected cash flows supported recovery of losses not already recognized, but worse collateral performance could result in future impairment.
- Other exposures include lending commitments, guarantees and litigation. The filing discloses a maximum potential exposure of approximately $51.6 million under certain Fund 34 performance guarantees and $57.1 million under a guaranteed-return arrangement; management did not expect payments under either based on current projections. Management said pending litigation was not expected to have a material adverse effect on financial position or results, although outcomes could materially affect results in a future period.
- Standard & Poor’s rating was BBB with a negative outlook; Moody’s rating was Baa2 with a stable outlook. Management noted that a downgrade could raise future financing costs.
Most important facts for investors to verify
- Whether revenue and earnings growth persist if market-driven client activity, underwriting and M&A fees weaken.
- Whether RJ Bank’s lower provisions and improving nonperforming assets continue, and whether the $146.1 million loan-loss allowance adequately covers future losses.
- How the $370 million client ARS balance, regulatory proceedings and any potential repurchase could affect liquidity and earnings.
- The sustainability of liquidity after substantial cash outflows, including the effect of the April 2011 notes issuance and debt service.
- Whether the $6 million prior-period bank interest-income correction and other unusual investment gains or losses affect comparisons with future periods.
- Progress on RJ Bank’s planned regulatory transition, Dodd-Frank rulemaking, and the financial impact of the Howe Barnes acquisition.