Raymond James Financial, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended September 30, 2010; fourth-quarter figures are for the three months ended September 30, 2010. The company is a diversified financial-services holding company, with brokerage, capital markets, asset management, banking and related businesses. Figures are in U.S. dollars.
Financial performance
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Total revenue | $2.980 billion | $2.603 billion | +14% |
| Net revenue | $2.917 billion | $2.546 billion | +15% |
| Pre-tax income, excluding noncontrolling interests | $361.9 million | $248.8 million | +46% |
| Net income attributable to Raymond James | $228.3 million | $152.8 million | +49% |
| Diluted EPS | $1.83 | $1.25 | +46% |
| Net interest income | $308.0 million | $386.6 million | −20% |
| Bank loan-loss provision | $80.4 million | $169.3 million | −53% |
The effective tax rate was 37%, down from 38.6%. Compensation, commissions and benefits totaled $1.994 billion; total non-interest expenses were $2.561 billion, up 11% year over year.
FY2010 fourth quarter: Revenue was $763.2 million, net revenue $747.9 million, pre-tax income including noncontrolling interests $99.5 million, and net income attributable to Raymond James $69.1 million. Basic and diluted EPS were each $0.55. In FY2009’s fourth quarter, revenue was $678.0 million, attributable net income $43.0 million and EPS $0.35.
Segment results and material changes
- Private Client Group: Revenue rose 22% to $1.903 billion; pre-tax income increased 89% to $160.5 million. The segment’s margin on net revenue improved to 8.5% from 5.5%, led by stronger markets, higher commissions and benefits from earlier advisor recruiting.
- Capital Markets: Revenue rose 11% to $591.9 million and pre-tax income increased 15% to $84.2 million. Underwriting fees doubled to $104.2 million and M&A fees rose 42%; fixed-income commissions and trading profits declined.
- Asset Management: Revenue increased 11% to $196.8 million and pre-tax income rose 54% to $47.0 million. Net assets under management reached $30.0 billion, up 4%; non-managed fee-based assets grew 24% to $35.2 billion.
- RJ Bank: Pre-tax income rose 40% to $112.0 million despite a 19% decline in net revenue, primarily because the loan-loss provision fell. Average loans and net interest spreads declined. Year-end nonperforming assets were $181.9 million, up from $167.1 million, including higher other real estate owned.
- Other: Pre-tax loss widened to $40.8 million from $19.8 million, principally due to a full year of interest expense on the 8.60% senior notes issued in August 2009.
Cash flow, balance sheet and liquidity
- Cash flow: Operating activities used $1.021 billion; investing activities provided $2.366 billion; financing activities used $712 million. The company attributed the operating cash use primarily to increased segregated assets connected with RJ Bank’s year-end thrift qualification requirements, along with movements in brokerage and trading balances.
- Balance sheet: Total assets were $17.883 billion, down 2% from $18.227 billion. Cash and cash equivalents were $2.943 billion; assets segregated under regulations and other segregated assets were $3.431 billion. Total liabilities were $15.286 billion. Raymond James-attributable equity was $2.303 billion; book value per share was $19.03.
- Debt and funding: Corporate debt was $356.0 million, including $300 million of senior notes due 2019 and a $56.0 million headquarters mortgage. Other borrowings were $2.557 billion at year-end, largely a $2.4 billion overnight Federal Home Loan Bank advance used for a point-in-time regulatory test; it was repaid October 1, 2010. The company also reported $233.3 million of repurchase-agreement financing outstanding.
- Liquidity: Parent-company cash was $286.9 million. The filing reported $795.1 million in aggregate domestic financing arrangements, including committed and uncommitted facilities; $112 million was outstanding on domestic uncommitted facilities. Management said existing assets, operating cash generation and financing facilities should provide adequate funding for operations at current activity levels, while noting that subsidiary capital is subject to regulatory limits on distributions.
- Capital and shareholder returns: RJ Bank was classified as well capitalized, with a 13.0% total risk-based capital ratio and an 8.2% Tier I leverage ratio. The company paid $0.44 per share in dividends during FY2010; after year-end, the board declared a quarterly dividend of $0.13 per share.
Outlook, risks and unusual items
- Management linked results to financial-market conditions, investor activity, interest rates, underwriting activity and asset valuations. The filing provides no quantified earnings or revenue guidance.
- Management did not expect Dodd-Frank to have a significant direct effect on operations, but said the impact was uncertain pending implementing rules. The company anticipated a change in RJ Bank’s regulator and bank-holding-company status around mid-2011; related applications remained pending.
- RJ Bank’s $147.1 million loan-loss allowance equaled 2.36% of total loans, compared with 2.23% a year earlier. Residential delinquencies remained elevated, and management cited real-estate values, unemployment and possible foreclosure delays as risks to provisions, charge-offs and regulatory capital.
- Clients held approximately $600 million of auction-rate securities at September 30, 2010, down from approximately $800 million a year earlier. Regulatory investigations and litigation continued. The company said it lacked sufficient cash on hand to repurchase all or a significant portion and could not estimate a related loss.
- Other matters included a class action concerning auction-rate securities, which was narrowed by a September 2010 dismissal ruling, and a shareholder class action concerning RJ Bank loan-loss disclosures, dismissed without prejudice in August 2010. Management believed resolution of pending matters would not materially affect current financial position or results, but said a matter could materially affect a future period.
- Unusual items included the $2.4 billion overnight FHLB advance and related deposits/assets used to meet RJ Bank’s point-in-time thrift test, reversed shortly after year-end; a $12.0 million OTTI expense on available-for-sale securities; and a $3.6 million loss on a low-income housing tax-credit fund transaction. Fair-value estimates for certain illiquid investments rely on significant management judgment.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether RJ Bank’s credit quality, delinquencies, foreclosures and allowance remain adequate as housing and economic conditions evolve.
- How the remaining auction-rate securities investigations and litigation are resolved, and whether any resolution requires financing or repurchases.
- The post-year-end effect of repaying the overnight FHLB advance and redirecting RJBDP deposits on bank liquidity, capital and earnings.
- Whether market-sensitive brokerage, capital-markets and asset-management revenues sustain FY2010’s recovery, given the absence of quantified company guidance.
- Final regulatory requirements and timing for RJ Bank’s charter conversion and the parent company’s anticipated bank-holding-company oversight.