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RJF > SEC Filings for RJF > Form 10-K on 23-Nov-2011All Recent SEC Filings

Show all filings for RAYMOND JAMES FINANCIAL INC

Form 10-K for RAYMOND JAMES FINANCIAL INC


23-Nov-2011

Annual Report


ITEM 7. 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 the results of our operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and accompanying notes to consolidated financial statements. Where "NM" is used in various percentage change computations, the computed percentage change has been determined not to be meaningful.

Executive overview

Results in the 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 affect the financial decisions made by investors, including their level of participation in the financial markets. They also impact the level of underwriting activity, trading profits and asset valuations. In turn, these decisions affect our business results.

Year ended September 30, 2011 compared with the year ended September 30, 2010

Our net revenues improved by $417 million, or 14%, to a record $3.3 billion for the year ended September 30, 2011 as compared to the prior year. Non-interest expenses increased $323 million, or 13%, to $2.9 billion, driven primarily by higher variable compensation costs resulting from the increase in commissions, investment banking revenues, and overall firm profitability and the $41 million loss on ARS repurchased, partially offset by a $47 million, or 58%, decrease in the bank loan loss provision. We generated record net income of $278 million, a $50 million, or 22%, improvement over the prior year period. Excluding the loss on ARS repurchased, net of its associated income tax effect, net income would have been $303 million, a 33% increase over the prior year level (a non-GAAP measure).

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

A $58 million, or 36%, 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 an improved level of confidence in the equity markets for the first three quarters of the fiscal year, and our continued realization of the benefits of our active recruiting in recent years as evidenced by record financial advisor productivity.

A $61 million, or 54%, increase in the pre-tax income generated by RJ Bank. This increase primarily resulted from a significantly lower loan loss provision related to the improved credit quality of our loan portfolio.

A $19 million, or 41%, increase in pre-tax income generated by our Asset Management segment. Assets under management increased steadily during the first three quarters of the fiscal year resulting from both increased valuations in the equity markets and the net inflows of client assets. During the fourth quarter, equity markets declined which impacted year end asset levels. However, net inflows for the year were strong, and even though the 4th quarter equity market decline led to a flat twelve month equity market, year over year assets under management increased 7%.

A $6 million, or 7%, decrease in the pre-tax income of our Capital Markets segment. Investment banking revenues in the current fiscal year increased over the prior year; however, results were significantly impacted by decreases in trading profits primarily associated with fixed income securities, decreases in fixed income institutional sales commissions resulting from the unsettled financial markets, especially during the last two quarters of this fiscal year. Further, expenses increased as we made efforts to expand our capital markets business, including the acquisition of Howe Barnes Hoefer and Arnett, Inc. ("Howe Barnes").

Our effective tax rate increased to 39.7% from the prior year rate of 36.9%, primarily resulting from an increase in the average state tax rate component of this blended rate, an increase in certain expenses during the fiscal year which are not deductible for tax purposes, including losses on our company-owned life insurance, and a decrease in the amount of tax credits we realized from our ownership interest in certain low-income housing tax credit partnerships.

A pre-tax $41 million loss on ARS repurchased.


Based on our review of the Dodd-Frank Act, and because of the nature of our businesses and our business practices, we presently do not expect the legislation to have a significant impact on our operations. However, because many of the regulations will result from further studies and are yet to be adopted by various regulatory agencies, the impact is uncertain. Under the legislation, the OTS was merged into the OCC effective on July 21, 2011, at which time RJF, as the holding company of RJ Bank, became subject to the regulation and oversight of the FRB.

RJ Bank's application to the OCC to convert its charter to a national bank is still pending. RJF re-filed its application to become a bank holding company at the request of the FRB in November, 2011. We anticipate approval of these applications prior to the end of the calendar year. Upon conversion, RJ Bank will become a national bank and RJF will become a bank holding company. Subsequent to conversion, RJF will elect to become a financial holding company. We have been planning for the change in RJ Bank's regulator that occurred during the year, and the upcoming change in RJ Bank's charter, for some time.

In April, 2011 we completed our acquisition of Howe Barnes. This acquisition reflects our growth strategy to expand both our capital markets and our private client presence in strategic markets. As of the end of our fiscal year the successful integration of the primary businesses of Howe Barnes into our operations has been completed.

In April, 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.

In June, 2011 we settled the ARS matter with various regulatory agencies by offering to repurchase certain ARS from our clients, or former clients. As of September 30, 2011, we had purchased $245 million par value ARS from current or former clients as a result of this settlement. Prior to September 30, 2011, $16 million of the repurchased ARS were redeemed at par by their issuer. We believe that even though the $41 million pre-tax loss on auction rate securities repurchased was significant, the resolution of the ARS matter was in the best interest of our clients and the firm.

With respect to the very near term outlook, we anticipate that market conditions in October and November, 2011 will lead to a more difficult December 2011 quarter.

Year ended September 30, 2010 compared with the year ended September 30, 2009

As a result of the improved markets during the year ended September 30, 2010 as compared to the prior year, our net revenues increased by $371 million, or 15%, to $2.9 billion. Non-interest expenses increased by $251 million, or 11%, to $2.6 billion, primarily from higher compensation costs resulting from the increase in commission revenue compared to the prior year, and partially offset by an $89 million, or 53%, decrease in the bank loan loss provision. We generated net income of $228 million, a 49% increase compared to the prior year.

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

A 23% increase in net revenue in our Private Client Group. This increase results primarily from the improved equity markets combined with realization of the benefits of the strong recruiting results in the previous two years.

Net interest earnings decreased $79 million, or 20%, resulting predominately from the lower loan balances and lower interest spreads at RJ Bank, coupled with a full year's interest expense on our public debt which was issued in August, 2009.

Our Asset Management operating results increased as a result of the increase in assets under management from both asset appreciation and net sales.

Investment banking activity in our capital markets segment increased significantly, reflecting an increase in the number of underwritings resulting in a $52 million, or 100%, increase in underwriting fees. As a result of the improved equity market conditions, we also realized significantly increased commissions from institutional clients on equity securities which were partially offset by declines in commissions on fixed income products. Trading profits were strong, although did not reach the record level achieved in the prior year.

The RJ Bank pre-tax earnings of $112 million reflect a $32 million, or 40%, improvement as compared to the prior year, the net result of lower net interest income and a significantly lower loan loss provision.


Our effective tax rate decreased to 37% from the prior year rate of 38.6%, resulting from tax credits we realized from our ownership interest in certain low-income housing tax credit partnerships, certain state and federal tax credits arising from charitable education contributions, and gains on our company-owned life insurance which are non-taxable.

Segments

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

                                                              Year ended September 30,
                                                        2011            2010            2009
                                                                   (in thousands)
Total company
Revenues                                             $ 3,399,886     $ 2,979,516     $ 2,602,519
Pre-tax income excluding noncontrolling interests        461,247         361,908         248,774

PCG
Revenues                                               2,185,990       1,903,101       1,557,462
Pre-tax income                                           218,811         160,470          84,873

Capital Markets
Revenues                                                 664,276         591,949         533,254
Pre-tax income                                            77,990          84,236          73,481

Asset Management
Revenues                                                 226,511         196,817         177,359
Pre-tax income                                            66,176          46,981          30,411

RJ Bank
Revenues                                                 281,992         276,770         343,366
Pre-tax income                                           172,993         112,009          80,011

Emerging Markets
Revenues                                                  43,184          16,639          14,891
Pre-tax income (loss)                                      4,531          (5,446 )        (4,886 )

Securities Lending
Revenues                                                   6,432           8,837          10,269
Pre-tax income                                             1,488           2,721           3,651

Proprietary Capital
Revenues                                                  16,805          17,029          12,742
Pre-tax income                                             4,391           1,728           1,035

Other
Revenues                                                  10,524           8,056           7,153
Pre-tax loss                                             (85,133 )       (40,791 )       (19,802 )

Intersegment eliminations
Revenues                                                 (35,828 )       (39,682 )       (53,977 )
Pre-tax income                                                 -               -               -


Net interest analysis

We have certain assets and liabilities, not only held in our RJ Bank segment but also held in our PCG and Capital Markets segments, which 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 held in each of these segments, an increase in short-term interest rates would result in an overall 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). Such an increase in short-term interest rates would have the most significant favorable impact on our RJ Bank and PCG segments. 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.

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,
                                           2011                                                     2010                                                     2009
                                           Interest          Average                                Interest          Average                                Interest          Average
                    Average balance       inc./exp.        yield/cost        Average balance       inc./exp.        yield/cost        Average balance       inc./exp.        yield/cost
                                                                                              ($ in thousands)
Interest-earning
assets:
Margin balances    $       1,495,931     $     52,361              3.50 %   $       1,355,665     $     46,650              3.44 %   $       1,185,086     $     37,617              3.17 %
Assets
segregated
pursuant to
regulations and
other segregated
assets                     2,099,190            8,424              0.40 %           1,861,977            7,685              0.41 %           4,572,808           14,786              0.32 %
Bank loans, net
of unearned
income (1)                 6,291,748          270,057              4.25 %           6,439,827          257,988              3.97 %           7,497,579          320,167              4.24 %
Available for
sale securities              402,229           10,815              2.69 %             529,056           17,846              3.37 %             650,777           24,373              3.75 %
Trading
instruments                                    20,549                                                   18,146                                                   13,112
Stock borrow                                    6,035                                                    8,448                                                   10,269
Interest-earning
assets of
consolidated
variable
interest
entities                                            2                                                       13                                                       71
Other                                          24,075                                                   14,116                                                   23,189

Total interest
income                                        392,318                                                  370,892                                                  443,584

Interest-bearing
liabilities:
Brokerage client
liabilities                3,456,009            3,422              0.10 %           2,958,026            3,688              0.12 %           5,788,338           10,958              0.19 %
Bank deposits
(1)                        6,967,727           12,543              0.18 %           6,882,537           16,053              0.23 %           8,331,432           24,023              0.29 %
Stock loan                                      1,807                                                    3,530                                                    3,838
Borrowed funds                                  3,969                                                    6,099                                                    7,946
Senior notes                 473,112           31,320              6.62 %             299,953           26,091              8.60 %              33,709            2,899              8.60 %
Loans payable of
consolidated
variable
interest
entities                                        6,049                                                    4,457                                                    4,853
Other                                           6,720                                                    2,933                                                    2,436

Total interest
expense                                        65,830                                                   62,851                                                   56,953

Net interest
income                                   $    326,488                                             $    308,041                                             $    386,631

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


Year ended September 30, 2011 compared with the year ended September 30, 2010 - Net interest analysis

Net interest income for the year ended September 30, 2011 increased by $18 million, or 6%, as compared to 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 year ended September 30, 2011 by the $5 million of interest expense associated with our April 2011 issuance of $250 million of 4.25% senior notes.

Net interest income in the PCG segment increased $12 million, or 21%, resulting primarily from increased client margin balances and slightly higher interest rates thereon. Interest earned in our Canadian operations increased due to an increase in both interest rates and the balance of segregated assets.

RJ Bank's net interest income for the year increased $12 million, or 5%, primarily resulting from an increase in net interest margin inclusive of the $6 million first quarter correction of an accumulated interest income understatement in prior years related to purchased residential mortgage loan pools. Refer to the discussion of the specific components of RJ Bank's net interest income in the RJ Bank section of this MD&A.

Year ended September 30, 2010 compared with the year ended September 30, 2009 - Net interest analysis

Net interest income decreased $79 million, or 20%, as compared to the prior year. Net interest income is earned primarily by our PCG and RJ Bank segments, which are discussed separately below. In addition, our net interest income was negatively impacted by the $23 million increase in interest expense associated with an entire year of interest on our senior notes, which were issued in August, 2009.

RJ Bank's net interest income decreased $63 million, or 19%, resulting from a decline in both average interest earning assets and net interest spreads. Refer to the discussion of the specific components of RJ Bank's net interest income in the RJ Bank section of this MD&A.

Complementing the impact of the implementation of the multi-bank sweep aspect of the RJBDP, which replaced a portion of the foregone interest earnings in the PCG segment with fee income, net interest income in the PCG segment increased $5 million, or 10%, versus the prior year due to higher margin balances and increased net interest spreads on segregated cash. In addition to this increase in net interest income, the PCG segment realized a $33 million increase in fee income generated by the multi-bank sweep aspect of the RJBDP during the year.


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,
                                     2011          % change           2010          % change          2009
                                                                ($ in thousands)
Revenues:
Securities commissions and fees   $ 1,817,617              15 %    $ 1,585,371             26 %    $ 1,262,810
Interest                               76,237              21 %         63,128             (4 )%        65,589
Account and service fees:
Client account and service fees       123,277               4 %        118,233             38 %         85,957
Mutual fund and annuity service
fees                                  110,281              35 %         81,990              5 %         78,086
Client transaction fees                34,162              (9 )%        37,440              -           37,596
Correspondent clearing fees             3,454               2 %          3,390            (12 )%         3,831
Account and service fees - all
other                                     215              26 %            170            795 %             19
Sub-total account and service
fees                                  271,389              13 %        241,223             17 %        205,489
Other                                  20,747              55 %         13,379            (43 )%        23,574
Total revenues                      2,185,990              15 %      1,903,101             22 %      1,557,462

Interest expense                        8,741              22 %          7,194            (52 )%        14,891
Net revenues                        2,177,249              15 %      1,895,907             23 %      1,542,571

Non-interest expenses:
Sales commissions                   1,332,207              14 %      1,168,055             26 %        929,202
Admin & incentive compensation
and benefit costs                     343,097              11 %        310,184             11 %        279,666
Communications and information
processing                             70,369              17 %         59,974              2 %         58,607
Occupancy and equipment                77,099               -           77,349             (2 )%        79,072
Business development                   55,538              13 %         49,126            (11 )%        55,488
Clearance and other                    80,468              13 %         71,263             27 %         55,952
Total non-interest expenses         1,958,778              13 %      1,735,951             19 %      1,457,987
Income before taxes and
including noncontrolling
interests                             218,471              37 %        159,956             89 %         84,584
Noncontrolling interests                 (340 )                           (514 )                          (289 )
Pre-tax income excluding
noncontrolling interests          $   218,811              36 %    $   160,470             89 %    $    84,873
Margin on net revenues                   10.0 %                            8.5 %                           5.5 %

Year ended September 30, 2011 compared with the year ended September 30, 2010- Private Client Group

Pre-tax income in the PCG segment increased $58 million, or 36%, for the year as compared to the prior year.

Net revenues increased $281 million, or 15%. PCG's margins were 10% of net revenues compared to 8.5% in the prior year. Securities commissions and fees increased $232 million, or 15%, resulting from a number of favorable factors. Equity market conditions for the first ten months of fiscal year 2011 were improved as compared to the prior year. Asset values increased for most of the year and prior to the decline in the markets commencing in August, 2011, favorably impacting fees arising from client assets in fee-based accounts. Total client assets under administration increased 3% as compared to the prior year end level, to $256 billion. While our number of financial advisors increased only slightly year over year, average financial advisor productivity reached record levels, increasing 15% over the prior year. Average financial advisor productivity increased in both our employee and our independent contractor business models. We are realizing the benefits both from improved market conditions and from the financial advisors that joined us during our very active 2008-2009 recruiting period.

Mutual fund and annuity service fees increased $28 million, or 35%, primarily as a result of an increase in mutual fund networking and omnibus fees as well as education and marketing fees, both of which are earned from mutual fund and insurance companies whose products we distribute. During the current year, we have been in the process of changing our data sharing arrangements with many mutual fund companies from networking to an omnibus arrangement. The fees earned from omnibus arrangements are greater than those under networking arrangements in order to compensate us for the additional reporting requirements performed by the broker-dealer under omnibus arrangements.


Client transaction fees decreased $3 million, or 9%, primarily as a result of certain mutual fund relationships converting during the current year to a no-transaction fee program. Under this program, we receive increased fees from mutual fund companies which are included within mutual fund and annuity service fee revenue described above, but our clients no longer pay us transaction fees on mutual fund trades within certain of our managed programs.

While total segment revenues increased 15%, the portion that we consider to be recurring was consistent with the prior year at 61%. Assets in fee-based accounts at September 30, 2011 increased 11% to $67.5 billion as compared to $60.9 billion in the prior year. Recurring commission and fee revenues include trailing commissions from mutual funds, variable annuities and insurance products, mutual fund service fees and interest.

PCG interest revenues increased by $13 million, or 21%, resulting from an increase in client margin balances and a slight increase in the interest rate earned on both customer reserve (segregated assets) balances and client margin balances. Interest earned in our Canadian operations increased due to an increase in both interest rates and customer reserve balances.

Other revenues increased by $7 million, or 55%, primarily resulting from a $3 million increase in certain investments held by our Canadian subsidiary and a $2 million increase in foreign currency gains resulting from an increase in cross currency trades executed by our Canadian operation during the year.

Sales commission expense increased by $164 million, or 14%, directly related to the 15% increase in commission and fee revenues. Administrative and incentive compensation expenses increased $33 million, or 11%. The increase primarily results from annual increases in salaries and benefits and increases in incentive compensation related to the higher level of profitability. Clearance and other expenses increased $9 million, or 12%, as compared to the prior year. The increase is primarily due to clearance expense which is generally correlated with the increase in securities commissions and fees revenues.

Year ended September 30, 2010 compared with the year ended September 30, 2009 - Private Client Group

PCG pre-tax results increased $76 million, or 89%, as compared to the prior year on an increase of $353 million, or 23%, in net revenues. PCG's margins increased to 8.5% of net revenues, a 55% improvement over the prior year. While primarily . . .

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