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| RJF > SEC Filings for RJF > Form 10-K on 27-Nov-2009 | All Recent SEC Filings |
27-Nov-2009
Annual Report
The following Management's Discussion and Analysis is intended to help the reader understand the results of our operations and financial condition. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and accompanying notes to the consolidated financial statements.
Executive Overview
Year ended September 30, 2009 Compared with the Year ended September 30, 2008 - Total Company
The economic recession in 2009 provided the backdrop for what was an extremely challenging environment in which to operate for the better part of this fiscal year. Our financial results continue to be positively 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. As a result of the challenging markets, our net revenues decreased by 9% to $2.5 billion, and we generated net income of $153 million, a 35% decline from the prior year. Our financial results were most dramatically impacted by a decrease in revenue from our Private Client Group and Asset Management segments, two of our operations that are highly dependent upon the health of the financial markets. The Fixed Income portion of our Capital Markets segment had a record year by far, while equity underwriting activity was moribund for much of the year. Our bank subsidiary, Raymond James Bank, was not able to achieve the operating results we had anticipated due to unprecedented problems in the commercial real estate sector which arose in 2009 and negatively impacted the year's provision for loan losses. During the year we have opportunistically increased the number of financial advisors, a strategy that positions us well for future growth as the markets improve. In order to fuel additional growth opportunities, we accessed the capital markets for the first time in 23 years through a $300 million, ten year senior note offering. Finally, in 2009 we implemented a succession plan for our Chief Executive Officer that will take effect in May 2010, providing an orderly transition for our executive leadership.
Year ended September 30, 2008 Compared with the Year ended September 30, 2007 - Total Company
We 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 our four major segments experienced increases in revenues, but only RJ Bank generated an increase in pre-tax income.
Results of Operations - Total Company
We currently operate through the following eight business segments: Private Client Group; Capital Markets; Asset Management; RJ Bank; 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 years indicated:
Year Ended
September 30, September 30, September 30,
2009 2008 2007
(in 000's)
Total Company
Revenues $ 2,602,519 $ 3,204,932 $ 3,109,579
Pre-tax Income 248,774 386,854 392,224
Private Client Group
Revenues 1,557,462 1,999,775 1,987,482
Pre-tax Income 84,873 178,146 222,370
Capital Markets
Revenues 533,254 506,158 506,062
Pre-tax Income 73,481 43,627 62,587
Asset Management
Revenues 177,359 243,609 241,304
Pre-tax Income 30,411 61,501 62,898
RJ Bank
Revenues 343,366 405,304 279,572
Pre-tax Income 80,011 112,282 27,005
Emerging Markets
Revenues 14,891 41,607 59,204
Pre-tax (Loss) Income (4,886) (3,426) 3,619
Stock Loan/Borrow
Revenues 10,269 36,843 68,685
Pre-tax Income 3,651 7,034 5,003
Proprietary Capital
Revenues 12,742 22,869 8,328
Pre-tax Income 1,035 7,361 3,489
Other
Revenues 7,153 21,302 37,174
Pre-tax (Loss) Income (19,802) (19,671) 5,253
Intersegment Eliminations
Revenues (53,977) (72,535) (78,232)
Pre-tax Income - - -
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Net Interest Analysis
The following table presents average balance data and interest income and
expense data, as well as the related net interest income:
Year Ended
September 30, 2009 September 30, 2008 September 30, 2007
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 $ 1,185,086 $ 37,617 3.17% $1,559,305 $ 83,856 5.38% $1,401,931 $ 108,368 7.73%
Assets Segregated
Pursuant
to Regulations and
Other
Segregated Assets 4,572,808 14,786 0.32% 4,264,868 126,556 2.97% 3,738,106 195,356 5.23%
Bank Loans, Net
of Unearned Income (1) 7,497,674 320,167 4.27% 6,144,131 346,560 5.64% 3,180,331 204,959 6.44%
Available for Sale
Securities 516,977 24,373 4.71% 605,914 31,700 5.23% 428,622 23,894 5.57%
Trading Instruments 13,112 31,865 46,182
Stock Borrow 10,269 36,843 68,685
Interest Earnings of
Variable
Interest Entities 71 657 955
Other 23,189 66,026 78,593
Total Interest Income 443,584 724,063 726,992
Interest-Bearing
Liabilities:
Brokerage Client
Liabilities $ 5,788,338 10,958 0.19% $5,412,303 137,511 2.54% $4,619,292 204,158 4.42%
Retail Bank Accounts
(1) 8,331,432 24,023 0.29% 7,137,843 185,032 2.59% 4,130,433 190,762 4.62%
Stock Loan 3,838 26,552 59,276
Borrowed Funds 10,845 15,685 13,835
Interest Expense of
Variable
Interest Entities 4,853 5,604 6,972
Other 2,436 21,845 24,661
Total Interest Expense 56,953 392,229 499,664
Net Interest Income $ 386,631 $ 331,834 $ 227,328
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(1) See Results of Operations - RJ Bank in Item 7 of Part II for details.
Net interest income at RJ Bank increased $106.8 million, or 50%, representing more than all of the $55 million increase in our total net interest earnings. This increase in net interest income at RJ Bank resulted from the significant decline in market rates that occurred early in the fiscal year, leading to lower interest rates being paid on RJ Bank's retail deposit accounts throughout the year. RJ Bank benefited as the rates on interest earning assets declined at a much slower pace than rates paid on deposits.
The decline in interest rates had a dramatic impact on net interest in the Private Client Group ("PCG") segment, which declined $42 million, or 45%. Interest earned on assets segregated declined $112 million, or 88%, as rates dropped as low as 0.20% for a portion of the year. Average customer margin balances declined $374 million, or 24%, during 2009, contributing to the decline in interest revenue in the PCG segment.
Net interest earnings in the PCG segment will be negatively affected by our recently introduced multi-bank sweep program. Begun in mid-September 2009, this program spreads clients' cash deposits incrementally across a network of unaffiliated banks in amounts less than the single-bank FDIC insurance limits, thereby extending full insurance coverage on client balances of up to $2.5 million, or $5 million if jointly held. While the program continues to generate competitive interest earnings for clients, it generates fee income for the PCG segment instead of interest earnings.
Net interest on the stock loan/borrow business decreased 38% due to decreased rates and balances despite a focus on hard-to-locate securities.
Other interest revenue and expense include earnings on corporate cash and inventory balances, and interest expense on overnight borrowings, our senior notes issued in August, 2009 and the mortgage on our headquarters facility.
Results of Operations - Private Client Group
The following table presents consolidated financial information for our PCG
segment for the years indicated:
Year Ended
September 30, % Incr. September 30, % Incr. September 30,
2009 (Decr.) 2008 (Decr.) 2007
($ in 000's)
Revenues:
Securities Commissions and Fees $ 1,262,810 (18%) $ 1,532,290 5% $ 1,462,323
Interest 65,589 (72%) 233,801 (28%) 326,601
Financial Service Fees 125,038 (2%) 127,304 16% 110,056
Other 104,025 (2%) 106,380 20% 88,502
Total Revenues 1,557,462 (22%) 1,999,775 1% 1,987,482
Interest Expense 14,891 (89%) 141,474 (32%) 208,537
Net Revenues 1,542,570 (17%) 1,858,301 4% 1,778,945
Non-Interest Expenses:
Sales Commissions 929,202 (19%) 1,144,727 6% 1,082,457
Admin & Incentive Comp and 279,666 (4%) 15%
Benefit Costs 289,937 251,684
Communications and Information 58,607 (2%) 7%
Processing 59,753 55,822
Occupancy and Equipment 79,072 8% 73,253 18% 61,961
Business Development 55,488 (15%) 64,992 12% 57,816
Clearance and Other 55,951 18% 47,369 1% 46,983
Total Non-Interest Expenses 1,457,986 (13%) 1,680,031 8% 1,556,723
Income Before Taxes and Minority 84,584 (53%) (20%)
Interest 178,270 222,222
Minority Interest (289) 124 (148)
Pre-tax Income $ 84,873 (52%) $ 178,146 (20%) $ 222,370
Margin on Net Revenues 5.5% 9.6% 12.5%
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Year ended September 30, 2009 Compared with the Year ended September 30, 2008 - Private Client Group
PCG revenues were 22% below the prior year, reflecting the impact of the extremely challenging economic and market conditions. Commission revenue decreased $269 million, or 18%, from the prior year, with the majority of that decrease experienced by our domestic independent contractor operation. Commissions in RJ&A PCG declined only $45 million, or 9%, due to the recruitment of 219 employee financial advisors in fiscal 2009 (for a net increase of 94) and 184 in fiscal 2008 (for a net increase of 114). It generally takes newly recruited financial advisors up to two years to reach their previous production levels. Average production per employee financial advisor decreased to $417,000 in fiscal 2009, down 19% from the $515,000 attained in fiscal 2008. The recruitment of above-average producers did not overcome the negative impact that the steep market decline had on our private clients' investing activities.
RJFS and RJFSA recruited 559 independent contractor financial advisors in fiscal 2009 (for a net increase of 129). Independent contractor financial advisor average production decreased from $330,000 in fiscal 2008 to $273,000 in fiscal 2009, impacted, like RJ&A, by the challenging economic and market conditions.
Net interest declined $42 million, or 45%, from the prior year as interest rates declined and spreads narrowed. As rates reached historic lows, earning asset yields continued to fall while there was no room to further lower rates on client deposits, thus compressing the spread earned. Sales commission expense decreased 19%, comparable to the 18% decrease in commission revenue. Total non-interest expenses decreased 13% as a result of our focus on expense control. Administrative expense was tightly controlled despite compensation for additional support personnel, primarily in new branch offices. Business development expense decreased $10 million. These expenses include transition expense, account transfer fees, direct expenses associated with recruiting such as bringing financial advisors to the corporate headquarters, conference expenses and travel expenses, which we minimized as much as possible given the market environment. Occupancy expense includes the expenses associated with the opening of new branch offices and expansion of others. RJ&A added 16 new offices during fiscal 2009 and 19 during fiscal 2008 and as a result, occupancy expenses increased 8%.
Given the 17% decline in net revenues and the 13% decrease in non-interest expense, there was a 52% decline in pre-tax earnings. Overall PCG margins decreased from 9.6% to 5.5%. As over half of the PCG revenues are recurring or asset based in nature, the decline in the equity markets (and therefore in the market values of client assets) had a significant impact on revenue. Financial service fees were also lower as these include transaction fees on certain fee-based accounts.
Year ended September 30, 2008 Compared with the Year ended September 30, 2007 - Private Client Group
PCG revenues benefited from the successful recruiting of employee financial advisors, however, this was offset by the impact of uncertain market conditions on investor confidence. As a result, commission revenue increased $70 million, only 5% over the fiscal 2007 year, with $56 million of that increase in RJ&A due to the recruitment of 184 employee financial advisors in fiscal 2008 (for a net increase of 114) 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 securities commissions and fees increased $10 million in fiscal 2008 versus fiscal 2007 despite the difficult market environment.
Offsetting this modest increase in securities commissions and fees was a 22% decrease in net interest from the 2007 year as interest rates declined and spreads narrowed. Sales commission expense increased 6% in comparison to the 5% increase in commission revenue as it includes the increased expenses associated with recruiting such as hiring bonuses and guaranteed payout amounts. Total non-interest expenses increased 8% as a result of company growth. Administrative expense includes the compensation for additional support personnel, primarily in branch offices. Business development expense includes transition expense, account transfer fees, and the direct expenses associated with recruiting such as bringing financial advisors to the corporate headquarters. Occupancy expense includes the expenses associated with the opening of new branch offices. RJ&A added 19 offices during fiscal 2008 and 14 during fiscal 2007. The 8% increase in non-interest expense exceeded the 4% increase in net revenues, resulting in a 20% decline in pre-tax earnings in fiscal 2008 versus fiscal 2007. Overall PCG margins decreased from 12.5% to 9.6%. While over half of the PCG revenues are recurring in nature, much of that is asset based. With the decline in the equity markets in fiscal 2008, client assets declined and revenues based on these balances will be lower until the market values recover. Historically, in uncertain markets individual investors within PCG execute fewer transactions as they often prefer to wait and see, hoping for positive market movement.
Results of Operations - Capital Markets
The following table presents consolidated financial information for our Capital
Markets segment for the years indicated:
Year Ended
September 30, % Incr. September 30, % Incr. September 30,
2009 (Decr.) 2008 (Decr.) 2007
($ in 000's)
Revenues:
Institutional Sales Commissions:
Equity $ 212,322 (11%) $ 237,920 13% $ 210,343
Fixed Income 160,211 60% 99,870 125% 44,454
Underwriting Fees 52,015 (35%) 80,400 (33%) 120,205
Mergers & Acquisitions Fees 40,607 6% 38,385 (36%) 59,929
Private Placement Fees 1,025 (60%) 2,536 12% 2,262
Trading Profits 41,407 1,282% (3,503) (138%) 9,262
Interest 13,608 (59%) 33,183 (32%) 48,710
Other 12,059 (31%) 17,367 59% 10,897
Total Revenue 533,254 5% 506,158 - 506,062
Interest Expense 10,808 (68%) 33,337 (44%) 59,113
Net Revenues 522,446 10% 472,821 6% 446,949
Non-Interest Expenses
Sales Commissions 130,463 17% 111,448 13% 98,903
Admin & Incentive Comp and 220,030
Benefit Costs (3%) 226,052 9% 208,192
Communications and Information 35,350
Processing (2%) 35,981 11% 32,366
Occupancy and Equipment 19,565 7% 18,271 38% 13,196
Business Development 22,500 (4%) 23,511 - 23,468
Clearance and Other 39,013 42% 27,506 19% 23,045
Total Non-Interest Expense 466,921 5% 442,769 11% 399,170
Income Before Taxes and Minority 55,525
Interest 85% 30,052 (37%) 47,779
Minority Interest (17,956) (13,575) (14,808)
Pre-tax Income $ 73,481 68% $ 43,627 (30%) $ 62,587
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Year ended September 30, 2009 Compared with the Year ended September 30, 2008 - Capital Markets
Capital Markets net revenues increased 10% compared to the prior year due to record trading profits, which increased $45 million from the prior year's $3.5 million loss. These profits were almost entirely generated on domestic fixed income products, 76% on municipal and 37% on taxable products. In addition, fixed income institutional sales commissions were 60% higher, as the volatile fixed income markets led many institutions to seek expertise on mortgage-backed products, and many increased their overall weighting in fixed income products. At the same time, institutions decreased their weighting in equities and equity institutional sales commissions declined 11%. This decline was magnified by a lack of new issue activity.
The steep equity market decline early in the year led to lower investment banking fee revenue. Equity underwriting fees were $5.3 million and $10.4 million below the prior year in the U.S. and Canada, respectively. This was attributable to the lack of underwritings due to the declining equity markets during the first two quarters. Capital markets activity increased during the third quarter, with 82% of our deals occurring in the last two quarters of the fiscal year, actually generating nine more deals than in the prior year. However, the deals were smaller and we were generally allotted a smaller portion of the deals than in the prior year, resulting in lower revenues. Merger and acquisition fees, which are included in investment banking revenue, were $40.6 million, up 6% from the prior year.
Gross revenues were up 5% from the prior year and net revenues were up 10%. Coupled with a 5% increase in non-interest expense, pre-tax earnings were up 68% from the prior year as the impact of increased trading profits is significant to our pre-tax profits. Commission expense increased with a greater percentage (17%) than commission revenues (10%) due to the big increase in fixed income institutional sales commissions which have a higher payout than equity institutional sales commissions. The other compensation expenses, communications and information processing and business development expenses decreased slightly as a result of expense control. Occupancy expense increased 7% due to growth. We have taken advantage of the opportunities to add quality Capital Markets teams. Equity Capital Markets acquired the investment banking firm of Lane Berry International, Inc. The acquisition added 21 investment banking professionals and new offices in Boston and Denver. In total, Investment Banking added a net 26 professionals over the past year. Fixed Income has taken advantage of market conditions in the taxable fixed income institutional sales area to recruit 23 additional professionals, representing a 21% increase in its producing professionals.
Year ended September 30, 2008 Compared with the Year ended September 30, 2007 - Capital Markets
Capital Markets net revenues increased 6% in fiscal 2008 compared to fiscal 2007 due to record equity and fixed income institutional sales commissions, which increased 13% and 125%, respectively, compared to fiscal 2007. 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 securities, and many altered their weighting in fixed income securities.
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 fiscal 2007 year in the U.S. and Canada, respectively. This was attributable to the lack of underwritings due to the uncertain market conditions. During fiscal 2008, Capital Markets managed or co-managed 82 transactions in the U.S. and Canada, compared to 108 transactions in fiscal 2007. In addition, fiscal 2007 was a record year for merger and acquisition fees. RJTCF saw a dramatic decrease of $15 million in deal related fee revenue (included in underwriting fees) in fiscal 2008 as several of its major clients were 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 in fiscal 2008 compared with the prior year and net revenues were up 6%. However, due to the $42 million increase in non-interest expense, pre-tax earnings were down 30% in fiscal 2008 from the prior year. Commission expense increased in line with commission revenues. The other compensation expenses, occupancy and communications and information processing expenses increased in fiscal 2008 due to growth as we took advantage of the opportunity to add quality Capital Markets teams. Equity Capital Markets added a net seven professionals in Investment Banking in fiscal 2008, as well as additional Sales and Research personnel. This segment moved or substantially renovated several of its larger offices during fiscal 2008, including offices in New York, Atlanta and Chicago, and opened one new office in San Francisco. Fixed Income took advantage of market conditions in the taxable fixed income institutional sales area and in Public Finance during fiscal 2008 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.
Results of Operations - Asset Management
The following table presents consolidated financial information for the Asset
Management segment for the years indicated:
Year Ended
. . .
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