RJF

Business Context and Reporting Period

Company: Raymond James Financial, Inc. (RJF)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
Overview: RJF is a holding company for financial services businesses, primarily in the U.S. and Canada. Its principal subsidiaries include Raymond James & Associates (RJ&A), a full-service broker-dealer; Raymond James Financial Services (RJFS), an independent contractor brokerage firm; and Raymond James Bank (RJ Bank). The company operates through eight segments: Private Client Group, Capital Markets, Asset Management, RJ Bank, Emerging Markets, Stock Loan/Borrow, Proprietary Capital, and Other.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 9% to $2.5 billion, driven by a 22% drop in Private Client Group revenues and a 27% drop in Asset Management revenues due to market declines and lower asset values.
• Profitability: Net income fell 35% to $153 million. Pre-tax income declined from $387 million to $249 million.
• Bank Segment Performance: RJ Bank net interest income increased 50% due to lower deposit rates, but pre-tax income dropped 29% because the provision for loan losses surged 209% to $169.3 million. Net loan charge-offs increased to $107.2 million from $13.6 million.
• Capital Markets: This segment saw a 68% increase in pre-tax income to $73.5 million, driven by record trading profits in fixed income, offsetting declines in equity underwriting.
• Debt Issuance: In August 2009, the company issued $300 million in senior notes due 2019, its first public debt offering in 23 years, to strengthen liquidity.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management anticipates continued volatility due to the economic recession. The company is positioned for future growth by increasing the number of financial advisors during the downturn.
• Succession Planning: A succession plan for the CEO was implemented, with a transition scheduled for May 2010.
• Key Risks:
  • Credit Risk: Significant exposure to commercial real estate and residential mortgage loans at RJ Bank, leading to elevated loan loss provisions.
  • Auction Rate Securities (ARS): Ongoing investigations by the SEC and state regulators regarding ARS sales. The company holds approximately $800 million of ARS for clients and faces potential litigation and repurchase obligations, though it currently lacks the capacity to repurchase all holdings at par.
  • Liquidity: While liquidity is adequate, access to traditional credit markets remains constrained. The company maintains $920 million in committed and uncommitted financing arrangements.
• Regulatory Changes: RJ Bank is in the process of converting from a federal savings bank to a national bank, which would change its regulator from the OTS to the OCC and eliminate Qualified Thrift Lender (QTL) requirements.

Investor Verification Checklist

• Loan Loss Provisions: Verify the adequacy of the $150.3 million allowance for loan losses at RJ Bank given the 209% increase in provisions and the concentration in commercial real estate.
• ARS Exposure: Monitor the status of regulatory investigations and potential financial impact of repurchasing $800 million in client-held Auction Rate Securities.
• Capital Adequacy: Confirm RJ Bank's "well capitalized" status and the impact of the $300 million senior note issuance on the parent company's leverage.
• Asset Management Flows: Track net inflows/outflows in the Asset Management segment, as revenue is highly correlated with asset values which declined significantly in 2009.
• Regulatory Conversion: Follow the progress of RJ Bank's conversion to a national bank charter and the associated regulatory approvals.