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RJF > SEC Filings for RJF > Form 10-Q on 9-Aug-2011All Recent SEC Filings

Show all filings for RAYMOND JAMES FINANCIAL INC

Form 10-Q for RAYMOND JAMES FINANCIAL INC


9-Aug-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. Where "NM" is used in various percentage change computations presented in this Item 2, the computed percentage change has been determined not to be meaningful.

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 June 30, 2011 compared with the quarter ended June 30, 2010

Notwithstanding the unsettled market conditions during the quarter, most of our businesses performed well. Our net revenues of $850 million approximated the prior quarter, and represented a 14% improvement over the prior year quarter. This improvement over the prior year quarter was led by revenue increases in most of our primary segments driven by successful execution of our growth strategies in each of these businesses. Non-interest expenses increased $117 million, or 18%, from the prior year quarter. Included in such expenses is a one-time $45 million loss provision for auction rate securities (see further discussion below). Excluding this one-time charge, non-interest expenses would have increased $72 million, or 11%, primarily due to higher variable compensation costs resulting from the increases in commissions and investment banking revenues, partially offset by a $9 million, or 51%, decrease in the bank loan loss provision.

Our pre-tax income decreased $19 million, or 19%, as compared to the prior year quarter. Excluding the $45 million one-time loss provision for ARS, pre-tax income would have increased 27%. We generated net income of nearly $47 million in the current quarter, a $14 million, or 23%, decrease as compared to the prior year quarter. Excluding the one-time charge and its associated income tax effect, net income would have been nearly $75 million (a non-GAAP measure), an increase of 23% over the prior year quarter.


As compared to the prior year quarter, our financial results were most significantly impacted by:

An $8.5 million, or 19%, increase in the pre-tax income of our Private Client Group ("PCG") segment. This increase resulted from a combination of favorable factors including the increased activity levels of our private clients due to an improved level of 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 $12.9 million, or 44%, increase in the pre-tax income generated by RJ Bank. This increase primarily resulted from a significantly lower loan loss provision resulting from improved credit quality.

A $5.4 million, or 45%, increase in pre-tax income generated by our Asset Management segment. Assets under management increased resulting from both increased valuations in the equity markets and the net inflows of client assets.

A $5.4 million, or 28%, decrease in the pre-tax income of our Capital Markets segment. Investment banking revenues in the current quarter increased over the prior year quarter; however, results were significantly impacted by decreases in both equity and fixed income institutional sales commissions resulting from this quarter's unsettled financial markets.

A one-time, pre-tax $45 million loss provision for ARS.

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 operating results for the current quarter include certain one-time expenses related to this acquisition.

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

On June 29, 2011, we settled the ARS matter with various regulatory agencies by offering to repurchase certain ARS from our clients, or former clients. We believe that even though the one-time $45 million pre-tax loss provision for auction rate securities was significant, the resolution of the ARS matter was in the best interests of our clients and the firm. Although there can be no assurances, we anticipate that our ultimate loss, which will be the difference between the ARS repurchased at par and the amount we ultimately receive over time from either future issuer redemptions, maturities, or sales, will be lower than the loss provision. We anticipate the great majority of the ARS repurchases subject to the offer will have occurred prior to September 30, 2011.

As we anticipated, regulations continue to arise under the Dodd-Frank Wall Street Reform & Consumer Protection Act ("Dodd-Frank") many of which have yet to be adopted by various regulatory agencies. We continue to closely monitor 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. Effective July 21, 2011, the Office of Thrift Supervision ("OTS") was merged into the Office of the Comptroller of the Currency ("OCC"), at which time RJF became subject to the supervision of the Board of Governors of the Federal Reserve System ("FRB"). We continue to anticipate a change in RJ Bank's federal charter to become effective some time during calendar year 2011, upon the conversion of RJ Bank to a national bank.

Nine months ended June 30, 2011 compared with the nine months ended June 30, 2010

Our net revenues improved by $347 million, or 16%, to $2.52 billion for the nine month period ended June 30, 2011 as compared to the prior year period. Non-interest expenses increased $272.1 million, or 14%, to $2.2 billion, driven primarily by higher variable compensation costs resulting from the increase in commissions, investment banking revenues, and overall firm profitability and the one-time $45 million loss provision for ARS, partially offset by a $31.6 million, or 53%, decrease in the bank loan loss provision. We generated net income of $209.4 million, a $50.2 million, or 32%, improvement over the prior year period. Excluding the $45 million loss provision for ARS and its associated income tax effect, net income would have increased 49% (a non-GAAP measure).


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

A $42 million, or 37%, increase in the pre-tax income of our PCG segment.

A $46.2 million, or 55%, 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 $19.5 million, or 37%, increase in the pre-tax income of our Capital Markets segment.

A $13 million, or 37%, 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 June 30,                      Nine months ended June 30,
                             2011             2010         % Change          2011               2010          % Change
                                                                 ($ in thousands)
Total company
Revenues                   $ 868,212        $ 763,612             14 %    $ 2,565,289        $ 2,216,268             16 %
Pre-tax income excluding
noncontrolling
interests                     78,667           97,511            (19 )%       335,418            256,555             31 %

Private Client Group
Revenues                   $ 557,017        $ 486,566             14 %    $ 1,633,080        $ 1,409,761             16 %
Pre-tax income                53,317           44,792             19 %        155,047            113,047             37 %

Capital Markets
Revenues                     162,695          154,077              6 %        513,130            437,620             17 %
Pre-tax income                14,191           19,623            (28 )%        72,526             53,016             37 %

Asset Management
Revenues                      58,458           49,296             19 %        169,386            147,910             15 %
Pre-tax income                17,593           12,152             45 %         48,414             35,453             37 %

RJ Bank
Revenues                      67,836           69,647             (3 )%       214,376            210,099              2 %
Pre-tax income                42,093           29,185             44 %        130,813             84,644             55 %

Emerging Markets
Revenues                      14,449            4,391            229 %         35,000             11,993            192 %
Pre-tax income (loss)          2,710           (1,109 )          344 %          4,223             (4,091 )          203 %

Securities Lending
Revenues                       1,502            2,573            (42 )%         4,731              6,666            (29 )%
Pre-tax income                   323              720            (55 )%         1,177              2,053            (43 )%

Proprietary Capital
Revenues                      13,716            4,445            209 %         14,111             17,093            (17 )%
Pre-tax income                 6,616            3,090            114 %          2,442              2,236              9 %

Other
Revenues                       1,286            2,217            (42 )%         8,263              6,013             37 %
Pre-tax loss                 (58,176 )(1)     (10,942 )         (432 )%       (79,224 )(1)       (29,803 )         (166 )%

Intersegment
eliminations
Revenues                      (8,747 )         (9,600 )            9 %        (26,788 )          (30,887 )           13 %

(1) The Other segment for the period ended June 30, 2011 includes a $45 million pre-tax loss provision for auction rate securities (see further discussion of this matter in Note 13 in the Notes to Condensed Consolidated Financial Statements).


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 nature and relationship of our interest-sensitive assets to liabilities, an increase in short-term interest rates would result in an increase in our net earnings primarily resulting from interest revenues increasing more than our interest expense (reflecting an increase in our spreads). 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 June 30, 2011 compared with the quarter ended June 30, 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 June 30,
                                              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            $ 1,520,849     $    13,341            3.52 %   $ 1,385,893     $    11,910            3.45 %
Assets segregated
pursuant to regulations
and other segregated
assets                       2,047,121           2,043            0.40 %     1,906,967           2,049            0.43 %
Bank loans, net of
unearned income (1)          6,265,346          64,824            4.11 %     6,306,762          62,168            3.92 %
Available for sale
securities (1)                 379,875           2,382            2.52 %       502,521           4,349            3.47 %
Trading instruments                              5,067                                           5,125
Stock borrow                                     1,420                                           2,492
Interest-earning assets
of variable interest
entities                                             -                                               -
Other                                            6,755                                           4,687

Total interest income                           95,832                                          92,780

Interest-bearing
liabilities:
Brokerage client
liabilities                  3,464,879             829            0.10 %     2,918,811             896            0.12 %
Bank deposits (1)            6,591,275           2,804            0.17 %     6,561,555           3,938            0.24 %
Stock loan                                         489                                           1,175
Borrowed funds                                     804                                           1,516
Senior notes                   549,478           8,968            6.62 %       299,953           6,523            8.60 %
Interest expense of
variable interest
entities                                         1,430                                           1,026
Other                                            2,501                                           1,165

Total interest expense                          17,825                                          16,239

Net interest income                        $    78,007                                     $    76,541

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

Net interest income increased $1.5 million, or 2%, 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. In addition to the activity in those segments, our net interest income in the current quarter was negatively impacted by $2.3 million of interest expense associated with our April 2011 issuance of $250 million of 4.25% senior notes.

RJ Bank's net interest income increased $2.6 million, or 4%. The net increase resulted from an increase in the yield on interest-earning assets and a decrease in the cost of funds. 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 $3.4 million, resulting primarily from increased client margin balances combined with slightly higher spreads.

Nine months ended June 30, 2011 compared with the nine months ended June 30, 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:

                                                          Nine months ended June 30,
                                              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            $ 1,487,812     $   38,748            3.48 %   $ 1,342,882     $   34,300            3.41 %
Assets segregated
pursuant to regulations
and other segregated
assets                       1,936,838          6,118            0.42 %     1,856,291          5,626            0.41 %
Bank loans, net of
unearned income (1)          6,222,486        205,410            4.33 %     6,505,387        193,564            3.94 %
Available for sale
securities (1)                 414,837          8,819            2.84 %       543,456         13,906            3.42 %
Trading instruments                            16,379                                         13,172
Stock borrow                                    4,384                                          6,401
Interest-earning assets
of variable interest
entities                                            1                                             13
Other                                          17,170                                         10,445

Total interest income                         297,029                                        277,427

Interest-bearing
liabilities:
Brokerage client
liabilities                  3,269,044          2,564            0.10 %     2,963,781          2,724            0.12 %
Bank deposits (1)            6,620,592          9,561            0.19 %     7,051,091         12,196            0.23 %
Stock loan                                      1,398                                          2,651
Borrowed Funds                                  3,098                                          4,561
Senior notes                   549,478         22,014            6.62 %       299,952         19,568            8.60 %
Interest expense of
variable interest
entities                                        4,563                                          3,252
Other                                           5,818                                          2,537

Total interest expense                         49,016                                         47,489

Net interest income                        $  248,013                                     $  229,938

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

Net interest income for the nine months ended June 30, 2011 increased by $18.1 million, or 8%, 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. In addition to the activity in those segments, our net interest income was negatively impacted during the current period by $2.3 million of interest expense associated with our April 2011 issuance of $250 million of 4.25% senior notes.

RJ Bank's net interest income for the nine month period increased $11 million, or 6%, primarily resulting from the $6 million first quarter of fiscal 2011 correction of an accumulated interest income understatement in prior years related to purchased residential mortgage loan pools and an increase in net interest margin. 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 $8.9 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 June 30,                      Nine months ended June 30,
                             2011           % Change          2010           2011          % Change           2010
                                                                ($ in thousands)
Revenues:
Securities commissions
and fees                  $   463,072               14 %    $ 404,767     $ 1,359,673              16 %    $ 1,174,066
Interest                       19,818               22 %       16,229          56,462              22 %         46,370
Financial service fees         34,981               (9 )%      38,328         110,349               1 %        109,637
Other                          39,146               44 %       27,242         106,596              34 %         79,688
Total revenues                557,017               14 %      486,566       1,633,080              16 %      1,409,761

Interest expense                2,078                9 %        1,904           6,557              21 %          5,413
Net revenues                  554,939               15 %      484,662       1,626,523              16 %      1,404,348

Non-interest expenses:
Sales commissions             337,958               14 %      296,606         998,168              15 %        865,807
Admin & incentive comp
and benefit costs              89,236               10 %       81,163         259,102              13 %        229,493
Communications and
information processing         19,158               32 %       14,496          53,920              22 %         44,126
Occupancy and equipment        19,006               (5 )%      19,919          57,256              (3 )%        58,852
Business development           13,754               13 %       12,130          40,819               6 %         38,583
Clearance and other            22,585               44 %       15,688          62,508              14 %         54,806
Total non-interest
expenses                      501,697               14 %      440,002       1,471,773              14 %      1,291,667
Income before taxes and
including
noncontrolling
interests                      53,242               19 %       44,660         154,750              37 %        112,681
Noncontrolling
interests                         (75 )                          (132 )          (297 )                           (366 )
Pre-tax income
excluding
noncontrolling
interests                 $    53,317               19 %    $  44,792     $   155,047              37 %    $   113,047
Margin on net revenues            9.6 %                           9.2 %           9.5 %                            8.0 %

Through our PCG segment, we provide securities transaction and financial planning services to client accounts through the 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 earning 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.

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