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| RJF > SEC Filings for RJF > Form 10-K on 28-Nov-2008 | All Recent SEC Filings |
28-Nov-2008
Annual Report
Overview
The following Management's Discussion and Analysis is intended to help the reader understand the results of operations and the financial condition of the Company. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, the Company's consolidated financial statements and accompanying notes to the consolidated financial statements.
The Company's results continue to be correlated to the direction of the U.S. equity markets and are subject to volatility due to changes in interest rates, valuation of financial instruments, economic and political trends and industry competition. During 2008, the market was impacted by volatile energy prices, a housing market slowdown, the subprime lending collapse that led to an overall credit crisis, a weakening U.S. dollar and declining interest rates. The Company's Private Client Group's recruitment and retention of Financial Advisors was positively impacted by industry consolidation. RJBank benefited from the widening interest rate spreads and what management feels are quality loans available for purchase that resulted from a desire for liquidity in the markets in response to the credit crisis.
Results of Operations - Total Company
The Company currently operates through the following eight business segments:
Private Client Group; Capital Markets; Asset Management; RJBank; Emerging
Markets; Stock Loan/Borrow; Proprietary Capital and certain corporate activities
in the Other segment.
The following table presents consolidated and segment financial information for the Company for the years indicated:
Year Ended
September 30, September 30, September 30,
2008 2007 2006
(in 000's)
Total Company
Revenues $ 3,204,932 $ 3,109,579 $ 2,645,578
Pre-tax Earnings 386,854 392,224 342,066
Private Client Group
Revenues 1,950,292 1,938,154 1,679,813
Pre-tax Earnings 177,696 219,864 168,519
Capital Markets
Revenues 506,007 506,498 487,419
Pre-tax Earnings 50,169 68,966 78,221
Asset Management
Revenues 236,928 234,875 207,821
Pre-tax Earnings 58,865 60,517 48,749
RJBank
Revenues 405,304 279,572 114,692
Pre-tax Earnings 112,282 27,005 16,003
Emerging Markets
Revenues 41,269 59,083 55,263
Pre-tax (Loss) Earnings (3,260) 3,640 2,857
Stock Loan/Borrow
Revenues 36,843 68,685 59,947
Pre-tax Earnings 7,034 5,003 8,001
Proprietary Capital
Revenues 22,775 8,280 17,312
Pre-tax Earnings 7,341 3,577 8,468
Other
Revenues 5,514 14,432 23,311
Pre-tax (Loss) Earnings (23,273) 3,652 11,248
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Year ended September 30, 2008 Compared with the Year ended September 30, 2007 - Total Company
The Company had record annual gross and net revenues for the year, exceeding the prior year by 3% and 8%, respectively. Gross revenues were fueled by strong institutional sales commissions offset by trading losses, while net revenues also benefited from record net interest earnings. Non-interest expenses grew by 9%, thus net income declined 6% from the prior year. Three of the Company's four major segments experienced increases in revenues, but only RJBank generated an increase in pre-tax income.
Year ended September 30, 2007 Compared with the Year ended September 30, 2006 - Total Company
The Company had record earnings for the fourth consecutive year, with 2007 total revenues surpassing $3 billion and net income surpassing $250 million. Revenues exceeded the prior year by 18% while net income exceeded the prior year by 17%. Net revenues were $2.6 billion, or up 11% over the prior year, thus positive operating leverage was realized. Non-interest expenses also rose by 11%. Once again, results were driven by an increase in net interest earnings, which were up 31%. All of the Company's four major segments had higher revenues and three of the four had higher pre-tax income than in the prior year.
Net Interest Analysis
The following table presents average balance data and interest income and
expense data for the Company, as well as the related net interest income:
Year Ended
September 30, 2008 September 30, 2007 September 30, 2006
Operating Average Operating Average Operating Average
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance Inc./Exp. Cost Balance Inc./Exp. Cost Balance Inc./Exp. Cost
($ in 000's)
Interest-Earning
Assets:
Margin Balances $1,559,305 $ 83,856 5.38% $1,401,931 $ 108,368 7.73% $1,327,121 $ 98,417 7.42%
Assets Segregated
Pursuant
to Regulations
and Other
Segregated Assets 4,264,868 126,556 2.97% 3,738,106 195,356 5.23% 2,983,853 141,741 4.75%
Interest-Earning
Assets
of RJBank (1) 7,740,036 407,123 5.26% 4,544,875 278,248 6.12% 1,967,225 114,065 5.80%
Stock Borrow 36,843 68,685 59,947
Interest Earnings
of Variable
Interest Entities 657 955 1,008
Other 69,028 75,380 54,803
Total Interest
Income 724,063 726,992 469,981
Interest-Bearing
Liabilities:
Client Interest
Program $5,412,303 137,511 2.54% $4,619,292 204,158 4.42% $3,793,570 143,428 3.78%
Interest-Bearing
Liabilities
of RJBank (1) 7,279,182 191,537 2.63% 4,187,365 193,747 4.63% 1,796,481 73,529 4.09%
Stock Loan 26,552 59,276 47,593
Interest Expense
of Variable
Interest Entities 5,604 6,972 8,368
Other 31,025 35,511 23,752
Total Interest
Expense 392,229 499,664 296,670
Net Interest
Income $ 331,834 $ 227,328 $ 173,311
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(1) See Results of Operations - RJBank in Item 7 of Part II for details.
Net interest income at RJBank increased over 155%, representing greater than 100% all of the $105 million increase in the Company's net interest earnings. Average interest-earning assets at RJBank increased 70% over the prior year. Average bank loan balances increased 93% from $3.2 billion to $6.1 billion. This increase was funded by the growth in new client cash balances which are a result of the positive recruiting results and the third bulk transfer of client cash deposits of $550 million in March 2008 as well as clients raising cash to historically high levels in their accounts.
Average customer margin balances grew only modestly during 2008, thus the increased client cash balances in the firm's Client Interest Program led to an increase in assets segregated pursuant to regulations. Net interest on the stock loan/borrow business increased 9%, due to increased spreads primarily on hard-to-locate securities. Other interest revenue and expense include earnings on corporate cash, inventory balances, interest on overnight borrowings and the mortgage on the headquarters facility.
Results of Operations - Private Client Group
The following table presents consolidated financial information for the Private
Client Group segment for the years indicated:
Year Ended
September 30, % Incr. September 30, % Incr. September 30,
2008 (Decr.) 2007 (Decr.) 2006
($ in 000's)
Revenues:
Securities Commissions 5% 15%
And Fees $ 1,520,337 $ 1,451,899 $ 1,262,751
Interest 233,796 (26%) 317,378 28% 248,709
Financial Service Fees 91,042 7% 85,018 (9%) 93,421
Other 105,117 25% 83,859 12% 74,932
Total Revenues 1,950,292 1% 1,938,154 15% 1,679,813
Interest Expense 140,952 (27%) 192,722 38% 139,593
Net Revenues 1,809,340 4% 1,745,432 13% 1,540,220
Non-Interest Expenses:
Sales Commissions 1,132,191 6% 1,070,479 14% 940,567
Admin & Incentive Comp 12% 13%
and Benefit Costs 295,851 265,038 233,684
Communications and 7% 4%
Information Processing 59,150 55,224 53,064
Occupancy and Equipment 69,503 21% 57,310 12% 51,101
Business Development 64,391 13% 57,216 13% 50,555
Clearance and Other 10,434 (49%) 20,449 (52%) 42,836
Total Non-Interest 7% 11%
Expenses 1,631,520 1,525,716 1,371,807
Income Before Taxes and (19%) 30%
Minority Interest 177,820 219,716 168,413
Minority Interest 124 (148) (106)
Pre-tax Earnings $ 177,696 (19%) $ 219,864 30% $ 168,519
Margin on Net Revenues 9.8% 12.6% 10.9%
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The following table presents a summary of Private Client Group Financial Advisors as of the periods indicated:
Independent 2008 2007
Employee Contractors Total Total
Private Client Group - Financial Advisors:
RJA 1,180 - 1,180 1,087
RJFS - 3,149 3,149 3,068
RJ Ltd 202 189 391 325
RJIS - 89 89 81
Total Financial Advisors 1,382 3,427 4,809 4,561
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Year ended September 30, 2008 Compared with the Year ended September 30, 2007 - Private Client Group
The Private Client Group ("PCG") revenues continue to benefit from the successful recruiting of employee Financial Advisors, however this has been offset by the impact of the uncertain market conditions on investor confidence. As a result, commission revenue increased $68 million, only 5% over the prior year, with $56 million of that increase in RJA due to the recruitment of 184 employee Financial Advisors in fiscal 2008 (for a net increase of 93) and 153 in fiscal 2007 (for a net increase of 59). It generally takes newly recruited Financial Advisors two years to reach their previous production levels. Average production per employee Financial Advisor increased to $515,000 in fiscal 2008 driven by the recruiting of above-average producers.
RJFS recruited 398 independent contractor Financial Advisors in fiscal 2008 (for a net increase of 81). Independent contractor Financial Advisor average production increased from $316,000 in fiscal 2007 to $330,000 in fiscal 2008, again driven by recruiting above average producers. As a result of these two factors, RJFS's securities commissions and fees increased $10 million despite the difficult market environment.
Offsetting this modest increase in securities commissions and fees was a 26% decrease in gross and net interest from the prior year as interest rates declined and spreads narrowed. Sales commission expense increased 6% in comparison to the 5% increase in commission revenue as it includes the increased expenses associated with recruiting such as hiring bonuses and guaranteed payout amounts. Total non-interest expenses increased 7% as a result of company growth. Administrative expense includes the compensation for additional support personnel, primarily in branch offices. Business development expense includes transition expense (i.e. account transfer fees) and the direct expenses associated with recruiting such as bringing Financial Advisors to the corporate headquarters. Occupancy expense includes the expenses associated with the opening of new branch offices. RJA added 19 offices during fiscal 2008 and 14 during fiscal 2007.
The 7% increase in non-interest expense exceeded the 4% increase in net revenues, resulting in a 19% decline in pre-tax earnings from the prior year. Overall PCG margins decreased from 12.6% to 9.8%. While over half of the Private Client Group's revenues are recurring in nature, much of that is asset based. With the decline in the equity markets, client assets have declined and revenues based on these balances will be lower until the market values recover. Historically, in uncertain markets individual investors within PCG execute fewer transactions as they often prefer to wait and see, hoping for positive market movement. Both of these factors will have a negative impact on PCG revenues in the near term. Meanwhile the turmoil within the financial services industry has led to increased opportunities to recruit successful Financial Advisors.
Year ended September 30, 2007 Compared with the Year ended September 30, 2006 - Private Client Group
The Private Client Group was significantly impacted by the successful recruiting of employee Financial Advisors and increased productivity throughout domestic PCG. RJA added a net 59 employee Financial Advisors and increased average production per Financial Advisor 22% to $493,000, resulting in a 31% increase in RJA PCG securities commissions and fees. Average assets under management per RJA Financial Advisor increased 24% to $72 million. RJA continues to benefit from the industry consolidation and the resultant unrest and Financial Advisor turnover. Securities commissions and fees increased 10% in RJFS despite a 6% decline in the number of Financial Advisors, most of which was by design in the strategic upgrading initiative. The increased commission and fee revenue is the result of a 16% increase in average production to $316,000 per Financial Advisor. RJ Ltd's 4% increase in number of Financial Advisors generated a 6.5% increase in securities commissions and fees.
Financial service fees in the prior year included a one-time adjustment of approximately $10 million related to the change in accounting for IRA fees. Excluding this adjustment, financial service fees increased modestly over the prior year. Other revenue increased $9 million, or 12% over the prior year, as a result of increased mutual fund networking and educational and marketing support fees from mutual fund companies.
Commission expense within PCG was up 14%, relatively proportional to the increase in commission revenues and fees of 15%. Administrative compensation, occupancy and business development expenses increased proportionately to net revenues. These increases include expenses associated with new branches, sales support staff, home office visits and account transfer fees. Information processing expenses rose only 4% and reflect the benefit of operating leverage despite continued investment in systems upgrades. The decrease in other expense is the result of lower legal costs and settlements as the last of the outstanding large cases related to the 2000 - 2002 market decline were settled in the prior year.
Overall PCG margins increased by 16% over the prior year, reaching 12.6%.
Results of Operations - Capital Markets
The following table presents consolidated financial information for the Capital Markets segment for the years indicated:
Year Ended
September 30, % Incr. September 30, % Incr. September 30,
2008 (Decr.) 2007 (Decr.) 2006
($ in 000's)
Revenues:
Institutional Sales
Commissions:
Equity $ 237,920 13% $ 210,343 (3%) $ 217,840
Fixed Income 99,870 125% 44,454 6% 41,830
Underwriting Fees 80,400 (33%) 120,205 14% 105,429
Mergers & Acquisitions
Fees 38,385 (36%) 59,929 34% 44,693
Private Placement Fees 2,536 12% 2,262 (3%) 2,334
Trading Profits (3,503) (138%) 9,262 (58%) 21,876
Interest 33,032 (32%) 48,275 27% 38,090
Other 17,367 48% 11,768 (23%) 15,327
Total Revenue 506,007 - 506,498 4% 487,419
Interest Expense 31,692 (44%) 56,841 23% 46,126
Net Revenues 474,315 5% 449,657 2% 441,293
Non-Interest Expenses
Sales Commissions 111,448 13% 98,903 2% 96,649
Admin & Incentive Comp
and Benefit Costs 221,905 9% 204,512 2% 200,453
Communications and
Information Processing 35,981 11% 32,366 20% 27,084
Occupancy and Equipment 18,271 38% 13,196 9% 12,073
Business Development 23,511 - 23,468 6% 22,177
Clearance and Other 26,605 15% 23,054 16% 19,907
Total Non-Interest
Expense 437,721 11% 395,499 5% 378,343
Income Before Taxes and
Minority Interest 36,594 (32%) 54,158 (14%) 62,950
Minority Interest (13,575) (14,808) (15,271)
Pre-tax Earnings $ 50,169 (27%) $ 68,966 (12%) $ 78,221
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Year ended September 30, 2008 Compared with the Year ended September 30, 2007 - Capital Markets
Capital Markets net revenues increased 5% compared to the prior year due to record equity and fixed income institutional sales commissions, which increased 13% and 125%, respectively, compared to the prior year. Equity institutional sales commissions were higher both domestically and in Canada as volatile market conditions generated increased activity. The equally volatile fixed income markets produced an even greater increase in commission revenue as institutions sought expertise on various products, and many altered their weighting in fixed income products.
These increases were offset by reduced investment banking fee revenue compared to the prior year. Equity underwriting fees were $26 million and $3 million below the prior year in the U.S. and Canada, respectively. This was attributable to the lack of underwritings due to the uncertain market conditions. During the year Capital Markets managed or co-managed 82 transactions in the U.S. and Canada, compared to 108 transactions in the prior year. In addition, the prior year was a record year for mergers and acquisition fees. RJTCF saw a dramatic decrease of $15 million in deal related fee revenue (included in underwriting fees) as several of its major clients are no longer in the market.
Total Company trading profits declined $18 million (over 100%) with $12.8 million of that decline in the Capital Markets segment. While domestic equity facilitation losses remained consistent at $8 million, overall fixed income trading profits increased from $11 million in fiscal 2007 to $15 million in fiscal 2008. This included a particularly difficult fixed income trading environment due to a flight to quality, especially during the fourth quarter. RJ Ltd.'s trading profits reversed from a $2.8 million profit in fiscal 2007 to a $6 million loss in fiscal 2008. This was a combined result of an increase in facilitation losses of $6.6 million and a $2.6 million decline in proprietary trading gains.
Gross revenues were flat with the prior year and net revenues were up 5%. However, due to the $42 million increase in non-interest expense, pre-tax earnings were down 27% from the prior year. Commission expense increased in line with commission revenues. The other compensation expenses, occupancy and communications and information processing expenses increased due to growth as the Company has taken advantage of the opportunity to add quality Capital Markets teams. Equity Capital Markets has added a net seven professionals in Investment Banking over the past year, as well as additional Sales and Research personnel. This segment moved or substantially renovated several of its larger offices this year, including offices in New York, Atlanta and Chicago, and opened one new office in San Francisco. Fixed Income has taken advantage of market conditions in the taxable fixed income institutional sales area and in Public Finance to recruit a combined 49 additional professionals, representing a 20% increase in its producing professionals. These hires were accomplished at lower costs than possible in recent years.
Year ended September 30, 2007 Compared with the Year ended September 30, 2006 - Capital Markets
The Capital Markets segment pre-tax earnings declined 12% despite a 2% increase in net revenues. Commission revenue was down slightly, the net of a decline in equity commissions related to the decline in commissions generated by underwriting transactions, and an increase in fixed income commissions, a result of the increased volatility. Commissions generated by underwriting transactions reached a record $41 million in the prior year and were only $22 million in the current year.
The increase in underwriting fees included increases of $3 million at RJA, despite a decline in the number of deals from 97 to 78, and $3 million at RJ Ltd. on 30 deals versus 29 in the prior year. Merger and acquisition fees were up $15 million, reaching an all time record level of $60 million for the year. During fiscal 2007, RJA closed 15 individual merger and acquisition transactions with fees in excess of $1 million. Trading profits were down 58% from the prior year, reflecting a particularly difficult fixed income trading environment during the fourth quarter. As credit issues drove fixed income product values down there was a flight to quality and the firm's economic hedges (short positions in US Treasuries) contributed additional losses. Meanwhile, there were also increased losses in equity customer facilitations and OTC market making. Raymond James Tax Credit Fund ("RJTCF") revenues increased 11% as they invested $375 million for institutional investors versus $277 million in the prior year. Interest revenue increased related to higher average fixed income inventory levels.
Expenses were generally in line with revenue growth with two exceptions. Communications and information processing increased predominantly due to increased costs associated with market information systems and software development costs. Other expense reflects a shift to the use of electronic and other non-exchange clearing methods and includes transaction related underwriting expenses incurred by RJTCF.
Results of Operations - Asset Management
The following table presents consolidated financial information for the Asset
Management segment for the years indicated:
Year Ended
September 30, % Incr. September 30, % Incr. September 30,
2008 (Decr.) 2007 (Decr.) 2006
($ in 000's)
Revenues
Investment Advisory Fees $ 195,884 2% $ 192,763 14% $ 169,055
Other 41,044 (3%) 42,112 9% 38,766
Total Revenues 236,928 1% 234,875 13% 207,821
Expenses
Admin & Incentive Comp
and Benefit Costs 74,392 2% 72,887 9% 66,689
Communications and
Information Processing 18,902 3% 18,360 11% 16,523
Occupancy and Equipment 4,228 (2%) 4,296 3% 4,163
Business Development 8,898 - 8,876 6% 8,379
Investment Advisory Fees 46,788 1% 46,368 18% 39,281
Other 24,435 6% 22,945 (3%) 23,588
Total Expenses 177,643 2% 173,732 10% 158,623
Income Before Taxes And
Minority Interest 59,285 (3%) 61,143 24% 49,198
Minority Interest 420 626 449
Pre-tax Earnings $ 58,865 (3%) $ 60,517 24% $ 48,749
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The following table presents assets under management and a portion of the Company's non-managed fee based assets at the dates indicated:
September 30, % Incr. September 30, % Incr. September 30,
2008 (Decr.) 2007 (Decr.) 2006
Assets Under Management: ($ in 000's)
Eagle Asset Mgmt., Inc.
Retail $ 5,852,904 (15%) $ 6,925,930 24% $ 5,600,806
Institutional 6,753,282 (11%) 7,601,374 11% 6,862,611
Total Eagle 12,606,186 (13%) 14,527,304 17% 12,463,417
Heritage Family of Mutual Funds
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