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RJF > SEC Filings for RJF > Form 10-Q on 10-May-2011All Recent SEC Filings

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Form 10-Q for RAYMOND JAMES FINANCIAL INC


10-May-2011

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand our results of operations and our financial condition. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and unaudited accompanying notes to the condensed consolidated financial statements.

Factors Affecting "Forward-Looking Statements"

From time to time, Raymond James Financial, Inc. ("RJF"), together with its subsidiaries hereinafter collectively referred to as "our," "we" or "us," may publish "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, allowance for loan loss levels at Raymond James Bank, FSB ("RJ Bank"), projected ventures, new products, anticipated market performance, recruiting efforts, regulatory approvals, auction rate securities ("ARS"), and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, we caution readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These risks and uncertainties, many of which are beyond our control, are discussed in the section entitled "Risk Factors" of Item 1A of Part I included in our Annual Report on Form 10-K for the year ended September 30, 2010, as filed with the United States of America ("U.S.") Securities and Exchange Commission (the "2010 Form 10-K") and in Item 1A of Part II of this report on Form 10-Q. We do not undertake any obligation to publicly update or revise any forward-looking statements.

Executive Overview

Results in the investment businesses in which we operate are highly correlated to the direction of the U.S. equity markets specifically and more generally to the overall strength of economic conditions. Overall market conditions, interest rates, economic, political and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control. These factors may affect the financial decisions made by investors, including their level of participation in the financial markets. They may also impact the level of underwriting activity, trading profits and asset valuations. In turn, these decisions may affect our business results.

Quarter ended March 31, 2011 compared with the quarter ended March 31, 2010

Our overall financial results reflected a continued trend of improvement during the March 31, 2011 quarter as compared to the prior year quarter. Our net revenues improved by $118 million, or 16%, to a record quarterly level of $852 million. This improvement was led by revenue increases in our Private Client Group ("PCG"), Capital Markets, and Asset Management segments driven primarily by improved equity market conditions. Non-interest expenses increased $88 million, or 14%, driven primarily by higher compensation costs resulting from the increases in commissions and investment banking revenues, partially offset by a $11 million, or 57%, decrease in the bank loan loss provision. We generated net income of $81 million, a $25 million, or 45%, improvement over the prior year quarter.

Our financial results during the quarter were most significantly impacted by:

A $12 million, or 53%, increase in the pre-tax income of our Capital Markets segment. The increase resulted from a number of positive factors including increased equity commissions, significant increases in underwriting fees and merger and acquisition fees in both the U.S. and in our Canadian operations, and strong trading profits primarily generated within our municipal bond portfolio. Offsetting these positive factors, fixed income commissions declined as a result of a shift to equity securities as the markets continue to reflect some level of stability.

An $11 million, or 37%, increase in the pre-tax income generated by RJ Bank. This increase resulted from a significantly lower loan loss provision resulting from improved credit quality. Revenues declined slightly as loan production was more than offset by loan repayments.

A $9 million, or 26%, increase in the pre-tax income of our PCG segment. This increase resulted from a combination of favorable factors including the increased activity levels of our private clients due to renewed confidence in the equity markets and our continued realization of the benefits of our active recruiting over the past two years evidenced by increased financial advisor productivity.


A $4 million, or 36%, increase in pre-tax income generated by our Asset Management segment. This increase resulted primarily from the increase in our assets under management arising from both increased valuations in the equity markets and the net inflows of client assets.

On April 1, 2011 we completed our previously announced acquisition of Howe Barnes Hoefer and Arnett, Inc. ("Howe Barnes"). This acquisition reflects our growth strategy to expand both our capital markets and our private client presence in strategic markets. Our acquisition of Howe Barnes will not have a material impact on our consolidated financial position.

On April 11, 2011, we completed a sale of $250 million aggregate principal amount of 4.25% senior notes, due April 2016. Coupled with our existing liquidity, we believe we are well positioned to execute our growth strategies in each of our core businesses.

As we anticipated, regulations that will arise under the Dodd-Frank Wall Street Reform & Consumer Protection Act ("Dodd-Frank") have yet to be adopted by various regulatory agencies. We are closely monitoring this rule making process and while the exact impact of new rules on our business is still uncertain, our expectation remains that the legislation will not have a significant impact on our operations. We do anticipate an increase in compliance costs once any new rules are adopted. There has been no change in our expectations regarding how this new legislation will impact the regulation and oversight of RJ Bank by the Office of the Comptroller of the Currency. We continue to anticipate a change in our federal bank regulator to become effective in mid-2011, to be followed by the conversion of RJ Bank to a commercial bank, at which time we will become a Bank Holding Company subject to the supervision of the Federal Reserve Board.

The balance of ARS held by our clients of approximately $370 million as of March 31, 2011 continues to decline through redemptions and refinancings by certain issuers. Refer to the update on this matter in Item 1 of Part II of this Form 10-Q.

Six months ended March 31, 2011 compared with the six months ended March 31, 2010

Our net revenues improved by $244 million, or 17%, to $1.67 billion for the six month period ended March 31, 2011 as compared to the prior year period. Non-interest expenses increased $155 million, or 12%, to $1.4 billion, driven primarily by higher compensation costs resulting from the increase in commissions, investment banking revenues, and overall firm profitability, partially offset by a $23 million, or 54%, decrease in the bank loan loss provision. We generated net income of $163 million, a $64 million, or 65%, improvement over the prior year period.

Our financial results during the six month period were most significantly impacted by the factors described for the three month period unless otherwise noted:

A $33 million, or 49%, increase in the pre-tax income of our PCG segment.

A $33 million, or 60%, increase in the pre-tax income generated by RJ Bank. This increase resulted from the factors described above and an increase in net interest income ($6 million arising from a one-time adjustment recorded during the first quarter of fiscal year 2011).

A $25 million, or 75%, increase in the pre-tax income of our Capital Markets segment. Our trading profits were equivalent in the two six month periods.

An $8 million, or 32%, increase in pre-tax income generated by our Asset Management segment.


Segments

We currently operate through the following eight business segments: PCG; Capital
Markets; Asset Management; RJ Bank; Emerging Markets; Securities Lending
(formerly named "Stock Loan/Borrow"); Proprietary Capital and certain corporate
activities in the Other segment.

The following table presents our consolidated and segment gross revenues and
pre-tax income excluding noncontrolling interests for the periods indicated:

                                 Three Months Ended March 31,                     Six Months Ended March 31,
                              2011            2010         % Change          2011            2010          % Change
                                                               ($ in thousands)
Total company
Revenues                  $    866,744      $ 749,987             16 %    $ 1,697,077     $ 1,452,656             17 %
Pre-tax income
excluding
noncontrolling
interests                      126,237         89,656             41 %        256,751         159,044             61 %

Private Client Group
Revenues                  $    556,632      $ 469,264             19 %    $ 1,076,063     $   923,195             17 %
Pre-tax income                  45,990         36,543             26 %        101,730          68,255             49 %

Capital Markets
Revenues                       177,409        149,770             18 %        350,435         283,543             24 %
Pre-tax income                  33,689         21,999             53 %         58,335          33,393             75 %

Asset Management
Revenues                        55,341         48,616             14 %        110,928          98,614             12 %
Pre-tax income                  15,227         11,235             36 %         30,821          23,301             32 %

RJ Bank
Revenues                        69,099         71,530             (3 )%       146,540         140,452              4 %
Pre-tax income                  42,256         30,822             37 %         88,720          55,459             60 %

Emerging Markets
Revenues                        11,962          3,884            208 %         20,551           7,602            170 %
Pre-tax income (loss)            1,192         (1,570 )          176 %          1,513          (2,982 )          151 %

Securities Lending
Revenues                         1,479          2,218            (33 )%         3,229           4,093            (21 )%
Pre-tax income                     330            646            (49 )%           854           1,333            (36 )%

Proprietary Capital
Revenues                          (275 )       12,683             NM              395          12,648            (97 %)
Pre-tax loss                    (4,032 )          (42 )           NM           (4,174 )          (854 )           NM

Other
Revenues                         3,574          2,038             75 %          6,977           3,796             84 %
Pre-tax loss                    (8,415 )       (9,977 )           16 %        (21,048 )       (18,861 )          (12 )%

Intersegment
eliminations
Revenues                        (8,477 )      (10,016 )           15 %        (18,041 )       (21,287 )           15 %
Pre-tax income                       -              -              -                -               -              -


Net Interest Analysis

We have certain assets and liabilities that are subject to changes in interest rates; these changes in interest rates have an impact on our overall financial performance. Given the relationship of our interest-sensitive assets to liabilities, an increase in short-term interest rates would result in an increase in our net earnings (we currently have more assets than liabilities with a yield that would be affected by a change in short-term interest rates). The amount of benefit would be dependent upon a variety of factors, including, but not limited to, the change in balances, the rapidity and magnitude of the increase in rates, and the interest rates paid on client cash balances.

Quarter ended March 31, 2011 compared with the quarter ended March 31, 2010 - Net Interest Analysis

The following table presents average balance data and interest income and expense data, as well as the related net interest income:

                                                          Three Months Ended March 31,
                                              2011                                            2010
                             Average        Interest         Average         Average        Interest         Average
                             Balance        Inc./Exp.      Yield/Cost        Balance        Inc./Exp.      Yield/Cost
                                                                ($ in thousands)
Interest-earning assets:
Margin balances            $ 1,475,124     $    12,648            3.48 %   $ 1,361,297     $    11,342            3.38 %
Assets segregated
pursuant to regulations
and other segregated
assets                       1,987,364           2,089            0.43 %     1,802,450           1,820            0.41 %
Bank loans, net of
unearned income (1)          6,227,876          66,381            4.26 %     6,543,525          66,539            4.07 %
Available for sale
securities                     410,061           2,890            2.86 %       543,557           4,644            3.46 %
Trading instruments                              5,985                                           4,089
Stock borrow                                     1,369                                           2,143
Interest-earning assets
of variable interest
entities                                             1                                               6
Other                                            5,448                                           2,692

Total interest income                      $    96,811                                     $    93,275

Interest-bearing
liabilities:
Brokerage client
liabilities                $ 3,352,592     $       840            0.10 %   $ 2,865,515     $       866            0.12 %
Bank deposits (1)            6,727,510           3,340            0.20 %     6,811,837           3,997            0.24 %
Stock loan                                         400                                             927
Borrowed funds                                     924                                           1,512
Senior notes                   299,957           6,523            8.60 %       299,952           6,523            8.60 %
Interest expense of
variable interest
entities                                         1,578                                           1,112
Other                                            1,082                                             611

Total interest expense                          14,687                                          15,548

Net interest income                        $    82,124                                     $    77,727

(1) See Results of Operations - RJ Bank in this MD&A for further information.

Net interest income increased $4 million, or 6%, as compared to the same quarter in the prior year. Net interest income is earned primarily by our PCG and RJ Bank segments, which are discussed separately below.

RJ Bank's net interest income was relatively flat, decreasing $400,000, or 1%. The net decrease resulted from lower average loan balances offset by: (i) the increased yield on RJ Bank's loan portfolio and (ii) an increase in cash balances as a percentage of total interest-earning banking assets. Refer to the discussion of the specific components of RJ Bank's net interest income in the RJ Bank section of this MD&A.


Net interest income in the PCG segment increased approximately $3 million, resulting primarily from increased client margin balances and slightly higher interest rates thereon.

Six months ended March 31, 2011 compared with the six months ended March 31, 2010 - Net Interest Analysis

The following table presents average balance data and interest income and expense data, as well as the related net interest income:

                                                          Six Months Ended March 31,
                                              2011                                           2010
                             Average        Interest        Average         Average        Interest        Average
                             Balance       Inc./Exp.      Yield/Cost        Balance       Inc./Exp.      Yield/Cost
                                                               ($ in thousands)
Interest-earning assets:
Margin balances            $ 1,471,132     $   25,407            3.46 %   $ 1,321,908     $   22,390            3.40 %
Assets segregated
pursuant to regulations
and other segregated
assets                       1,881,697          4,075            0.43 %     1,830,643          3,577            0.39 %
Bank loans, net of
unearned income (1)          6,201,056        140,585            4.40 %     6,604,700        131,395            3.95 %
Available for sale
securities                     432,318          6,446            2.99 %       563,703          9,558            3.40 %
Trading instruments                            11,313                                          8,047
Stock borrow                                    2,965                                          3,909
Interest-earning assets
of variable interest
entities                                            1                                             12
Other                                          10,405                                          5,759

Total interest income                      $  201,197                                     $  184,647

Interest-bearing
liabilities:
Brokerage client
liabilities                $ 3,171,554          1,734            0.11 %   $ 2,984,899     $    1,828            0.12 %
Bank deposits (1)            6,635,251          6,757            0.20 %     7,295,860          8,258            0.23 %
Stock loan                                        909                                          1,476
Borrowed Funds                                  2,294                                          3,045
Senior notes                   299,957         13,046            8.60 %       299,952         13,045            8.60 %
Interest expense of
variable interest
entities                                        3,133                                          2,225
Other                                           3,318                                          1,373

Total interest expense                         31,191                                         31,250

Net interest income                        $  170,006                                     $  153,397

(1) See Results of Operations - RJ Bank in this MD&A for further information.

Net interest income for the six months ended March 31, 2011 increased by $17 million, or 11%, as compared to the same period in the prior year. Net interest income is earned primarily by our PCG and RJ Bank segments, which are discussed separately below.

RJ Bank's net interest income for the six month period increased $8 million, or 6%, primarily resulting from a $6 million first quarter of fiscal 2011 correction of an accumulated interest income understatement in prior periods related to purchased residential mortgage loan pools. The remaining increase is the result of increased rates on the corporate loan portfolio. Refer to the discussion of the specific components of RJ Bank's net interest income in the RJ Bank section of this MD&A.

Net interest income in the PCG segment increased approximately $6 million, resulting primarily from increased client margin balances and slightly higher interest rates thereon.


Results of Operations - Private Client Group

The following table presents consolidated financial information for our PCG
segment for the periods indicated:


                                  Three Months Ended March 31,                     Six Months Ended March 31,
                              2011            % Change         2010           2011          % Change          2010
                                                               ($ in thousands)
Revenues:
Securities commissions
and fees                  $    465,670                19 %   $ 390,782     $   896,601              17 %    $ 769,299
Interest                        18,413                19 %      15,484          36,644              22 %       30,142
Financial service fees          36,610                 3 %      35,663          75,368               6 %       71,308
Other                           35,939                31 %      27,335          67,450              29 %       52,446
Total revenues                 556,632                19 %     469,264       1,076,063              17 %      923,195

Interest expense                 1,837                12 %       1,635           4,479              28 %        3,510
Net revenues                   554,795                19 %     467,629       1,071,584              17 %      919,685

Non-interest expenses:
Sales commissions              345,271                19 %     291,142         660,210              16 %      569,200
Admin & incentive comp
and benefit costs               87,996                12 %      78,251         169,866              15 %      148,329
Communications and
information processing          19,216                16 %      16,539          34,762              17 %       29,630
Occupancy and equipment         19,467                 2 %      19,051          38,250              (2 )%      38,933
Business development            13,259                 4 %      12,719          27,065               2 %       26,454
Clearance and other             23,746                76 %      13,528          39,923               2 %       39,119
Total non-interest
expenses                       508,955                18 %     431,230         970,076              14 %      851,665
Income before taxes and
including
noncontrolling
interests                       45,840                26 %      36,399         101,508              49 %       68,020
Noncontrolling
interests                         (150 )                          (144 )          (222 )                         (235 )
Pre-tax income
excluding
noncontrolling
interests                 $     45,990                26 %   $  36,543     $   101,730              49 %    $  68,255
Margin on net revenues             8.3 %                           7.8 %           9.5 %                          7.4 %

Through our PCG segment, we provide securities transaction and financial planning services to client accounts through branch office systems of our broker-dealer subsidiaries located throughout the United States, Canada and the United Kingdom. Our financial advisors offer a broad range of investments and services, including both third-party and proprietary products, and a variety of financial planning services. We charge sales commissions or asset-based fees for investment services we provide to our PCG clients based on established schedules. Our financial advisors offer a number of professionally managed load mutual funds, as well as a selection of no-load funds. Net interest revenue in the PCG segment is generated by customer balances, predominately the earnings on margin loans and assets segregated pursuant to regulations, less interest paid on customer cash balances ("Client Interest Program"). The PCG segment earns a fee (in lieu of interest revenue) from the Raymond James Bank Deposit Program ("RJBDP"), a program where clients' cash deposits in their brokerage accounts are re-deposited through a third-party service into interest-bearing deposit accounts at a number of banks. The RJBDP program enables clients to obtain up to $2.5 million in individual Federal Deposit Insurance Corporation ("FDIC") deposit insurance coverage ($5 million for joint accounts) in addition to competitive rates for their cash balances.

The success of the PCG segment is dependent upon the quality of our products, services, financial advisors and support personnel including our ability to attract, retain and motivate a sufficient number of these associates. We face competition for qualified associates from major financial services companies, including other brokerage firms, insurance companies, banking institutions and discount brokerage firms. We currently offer several affiliation alternatives for financial advisors ranging from the traditional branch setting, under which the financial advisors are our employees and we incur the costs associated with operating the branch, to the independent contractor model, under which the independent contractor financial advisor is responsible for all of their own direct costs. Accordingly, the independent contractor financial advisors are paid a larger percentage of commissions. By offering alternative models to potential and existing financial advisors, we are able to effectively compete with a wide variety of other brokerage firms for qualified financial advisors, as financial advisors can choose the model that best suits their practice and profile.


The following table presents the number of PCG financial advisors as of the periods indicated:

                                      Independent March 31, 2011 March 31, 2010
                             Employee Contractors     Total          Total
Private Client Group -
financial advisors:
Raymond James & Associates
("RJ&A")                      1,276          -           1,276         1,266
Raymond James Financial
Services, Inc. ("RJFS")           -      3,196           3,196         3,265
Raymond James Limited ("RJ
Ltd.")                          197        246            443             444
Raymond James Investment
Services Limited ("RJIS")         -        151            151             133
Total financial advisors      1,473      3,593           5,066         5,108

Pre-tax income in the PCG segment increased approximately $9 million, or 26%, as compared to the same quarter in the prior year.

Net revenues increased $87 million, or 19%. PCG's pre-tax margins were 8.3% of net revenues, a 0.5% improvement over the prior year quarter. Securities commissions and fees increased $75 million, or 19%, resulting from a number of favorable factors. Equity market conditions improved as compared to the prior year quarter resulting in increased confidence and investment by our retail clients. Improved markets also drove an increase in asset values, favorably impacting fees arising from client assets under administration. Additionally, we continue to realize benefits in the form of increased commission and fee revenue from the successful financial advisors recruited during fiscal 2008 and 2009. These favorable factors are evidenced in part by a 17% increase in . . .

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