01—Abstract
Summary
Summary of the 10-K filed December 14, 2006. Cited figures are marked; the original filing is the authoritative source.
Raymond James Financial, Inc. reported record annual revenues and earnings for the fiscal year ended September 30, 2006, its third consecutive record year.
Total revenues were $2.63 billiona and net revenues were $2.34 billion, up from $2.04 billion in fiscal 2005. Net income exceeded $200 million for the first time in the company's history, reaching $214.3 million, or $1.85 per diluted share, compared with $151.0 million in fiscal 2005. Pretax earnings rose to $342.1 million from $248.0 million.
Growth was broad-based across the four major segments. Net interest income rose to $173.3 millionb from $127.8 million, and about 39% of the increase came from RJBank, the company's savings bank, which benefited from a new cash sweep option for brokerage clients. Total assets grew to $11.52 billion from $8.37 billion, largely reflecting brokerage client cash deposits and RJBank loan growth.
Bank deposits rose to $2.81 billionc. Assets under management reached $35.8 billion at September 30, 2006, and the company's Private Client Group segment had 1.5 million client accounts. The filing also flags risks for investors.
Interest rate sensitivity is material for RJBank, where a 100 basis point rise is estimated to reduce net interest income by 13.82% in the first year. Legal proceedings have declined to more historic levels, though the company disclosed an assessed Turkish tax liability of approximately US$6.8 milliond that it is contesting. Two leveraged aircraft leases with Delta and Continental carry potential write-down risk, and management expects to infuse an estimated $200 to $300 million into RJBank over several years to support the new sweep program.
02—Key points
Key Highlights
- Record fiscal 2006 results: total revenues of $2.63 billion (up from $2.16 billion) and net revenues of $2.34 billion (up from $2.04 billion).
- Net income rose to $214.3 million from $151.0 million, the first year above $200 million; diluted EPS was $1.85 versus $1.33.
- Net interest income more than doubled to $173.3 million from $127.8 million, with 39% of the increase generated by RJBank.
- Private Client Group pretax earnings increased to $168.5 million from $102.2 million, with segment margin at 10.9% versus 7.6%.
- Total assets grew to $11.52 billion from $8.37 billion, and bank deposits at RJBank reached $2.81 billion from $1.08 billion.
- Assets under management totaled $35.8 billion at September 30, 2006, up from $30.4 billion, driven by Eagle, Heritage and Raymond James Consulting Services programs.
- Key risks include RJBank interest rate sensitivity (a 100 basis point rise would reduce net interest income by 13.82%), the Turkish tax assessment, and aircraft lease exposure to Delta and Continental.
03—Questions
Frequently Asked Questions
What drove the increase in Raymond James's net income in fiscal 2006?
Net income rose to $214.3 million from $151.0 million. The company attributed the growth mainly to a 36% increase in net interest earnings, solid gains in investment advisory fees and securities commissions, and a rise in financial service fees. Private Client Group pretax earnings improved to $168.5 million from $102.2 million, and all four major segments posted higher revenues and pretax income.
How much did RJBank contribute to the company's growth?
RJBank's net revenues rose to $41.2 million from $23.4 million, and its pretax earnings increased to $16.0 million from $14.2 million. The filing states that 39% of the increase in net interest earnings was generated by RJBank, following the introduction of a new cash sweep option for certain brokerage clients. RJBank's total assets reached $3.1 billion, with deposits of $2.8 billion, 90% of which were cash balances swept from RJA and RJFS client accounts.
What are the main risks disclosed in the filing?
The filing highlights market and interest rate risk, including that a 100 basis point upward shift would decrease RJBank's net interest income by 13.82% in the first year. It also discloses exposure to two leveraged aircraft leases with Delta and Continental, a Turkish tax assessment of approximately US$6.8 million that the affiliate is contesting, and the company's dependence on fees from distributed financial products and on the U.S. equity markets. Management stated that the outcome of pending litigation is not expected to have a material adverse impact on financial position or results of operations.
How much capital will Raymond James need to support its RJBank cash sweep program?
The company stated that the new cash sweep option will require substantial capital to be contributed to RJBank to meet regulatory requirements, and it may need to infuse an estimated $200 to $300 million over the next several years for this purpose. The company also intends to transfer an additional $2 to $4 billion of deposits to the offering over the next several years.
How did the company's legal claims and litigation trend during the year?
The filing states that the number of claims against the company declined during the past year to more historic levels, after a significant increase related to portfolio losses in the early 2000s. The Premiere 72 litigation was largely resolved through settlements totaling approximately $24 million in July 2005 and $18 million in additional settlements, leaving one remaining lawsuit in federal court involving one claimant family group.
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