UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended September 30, 2015
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission file number 1-9109
RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Florida | No. 59-1517485 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
880 Carillon Parkway, St. Petersburg, Florida | 33716 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code | (727) 567-1000 |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $.01 Par Value | New York Stock Exchange | |
6.90% Senior Notes Due 2042 | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: | None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of March 31, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold was $7,216,031,146.
The number of shares outstanding of the registrant’s common stock as of November 20, 2015 was 143,148,705.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held February 18, 2016 are incorporated by reference into Part III.
RAYMOND JAMES FINANCIAL, INC.
TABLE OF CONTENTS
PAGE | |||
PART I. | |||
Item 1. | Business | ||
Item 1A. | Risk factors | ||
Item 1B. | Unresolved staff comments | ||
Item 2. | Properties | ||
Item 3. | Legal proceedings | ||
PART II. | |||
Item 5. | Market for registrant’s common equity, related shareholder matters and issuer purchases of equity securities | ||
Item 6. | Selected financial data | ||
Item 7. | Management’s discussion and analysis of financial condition and results of operations | ||
Item 7A. | Quantitative and qualitative disclosures about market risk | ||
Item 8. | Financial statements and supplementary data | ||
Item 9. | Changes in and disagreements with accountants on accounting and financial disclosure | ||
Item 9A. | Controls and procedures | ||
Item 9B. | Other information | ||
PART III. | |||
Item 10. | Directors, executive officers and corporate governance | ||
Item 11. | Executive compensation | ||
Item 12. | Security ownership of certain beneficial owners and management and related shareholder matters | ||
Item 13. | Certain relationships and related transactions, and director independence | ||
Item 14. | Principal accountant fees and services | ||
PART IV. | |||
Item 15. | Exhibits and financial statement schedules | ||
Signatures | |||
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PART I
Item 1. | BUSINESS |
Raymond James Financial, Inc. (“RJF” or the “Company”) is a financial holding company whose broker-dealer subsidiaries are engaged in various financial services businesses, including the underwriting, distribution, trading and brokerage of equity and debt securities and the sale of mutual funds and other investment products. In addition, other subsidiaries of RJF provide investment management services for retail and institutional clients, corporate and retail banking, and trust services.
Established in 1962 and public since 1983, RJF has been listed on the New York Stock Exchange (the “NYSE”) since 1986 under the symbol “RJF”. As a financial holding company, RJF is subject to the oversight and periodic examination of the Board of Governors of the Federal Reserve System (the “Fed”).
Through its operations which are predominately conducted in the United States of America (the “U.S.”) and Canada, RJF’s principal subsidiaries include Raymond James & Associates, Inc. (“RJ&A”), Raymond James Financial Services, Inc. (“RJFS”), Raymond James Financial Services Advisors, Inc. (“RJFSA”), Raymond James Ltd. (“RJ Ltd.”), Eagle Asset Management, Inc. (“Eagle”), and Raymond James Bank, N.A. (“RJ Bank”). All of these subsidiaries are wholly owned by RJF. RJF and its subsidiaries are hereinafter collectively referred to as “our,” “we” or “us.”
Among the keys to our historical and continued success, our emphasis on putting the client first is at the core of our corporate values. We also believe in maintaining a conservative, long-term focus in our decision making. We believe that this disciplined decision-making approach translates to a strong, stable financial services firm for clients, advisors, associates and shareholders.
REPORTABLE SEGMENTS
We currently operate through four operating segments and our “Other” segment. The four operating segments include “Private Client Group” (or “PCG”), “Capital Markets,” “Asset Management,” and RJ Bank. The Other segment captures principal capital and private equity activities as well as certain corporate overhead costs of RJF.
The graphic below provides an indication of the relative net revenue contribution associated with each of our operating segments in the most recent fiscal year.
*Chart above does not include intersegment eliminations or the Other segment.
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PRIVATE CLIENT GROUP
We provide financial planning and securities transaction services to more than 2.7 million client accounts through the branch office systems of RJ&A, RJFS, RJFSA, RJ Ltd. and in the United Kingdom (“UK”) through Raymond James Investment Services Limited (“RJIS”). Financial advisors have multiple affiliation options, which we refer to as AdvisorChoice.
Experienced financial advisors are recruited from a wide variety of competitors. As a part of their agreement to join us, we may make loans to financial advisors and to certain key revenue producers, primarily for recruiting, transitional cost assistance, and retention purposes.
Our two primary affiliation options are either the employee or an independent contractor financial advisor option.
Total assets under administration in the PCG segment as of September 30, 2015 amount to $453.3 billion. We have 6,596 financial advisors affiliated with us as of September 30, 2015.
Employee Financial Advisors
Traditional employee financial advisors work in a traditional branch setting supported by local management and administrative staff. They provide services predominately to individual clients. These financial advisors are employees and their compensation primarily includes commission payments and participation in the firm’s benefit plans.
Independent Contractors
Independent contractors are responsible for all of their direct costs and, accordingly, are paid a larger percentage of commissions and fees than employee financial advisors. Our independent contractor financial advisor option is designed to help our advisors build their businesses with as much or as little of our support as they determine they need. With specific approval, they are permitted to conduct, on a limited basis, certain other approved business activities such as offering insurance products, independent registered investment advisory services, and accounting and tax services.
Over the past several fiscal years, the mix of securities commissions and fees revenues originating from the employee versus the independent contractor affiliation option has become more balanced, partially due to our fiscal year 2012 acquisition of Morgan Keegan (as hereinafter defined) which operated an employee financial advisor business model. Irrespective of the affiliation choice, 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. Revenues of this segment are typically driven by total client assets under administration, and are generally either recurring fee-based or transactional in nature.
Securities commissions and fees revenues by affiliation, as well as the portion of total segment revenues that are recurring versus transactional in nature, for the twelve months ended September 30, 2015, respectively, are presented below:
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A summary of the services we provide that are captured in this segment include the following:
• | We provide investment services for which we charge sales commissions or asset-based fees based on established schedules. |
• | We offer investment advisory services under various financial advisor affiliation options. Fee revenues for such services are computed as either a percentage of the assets in the client account, or a flat periodic fee charged to the client for investment advice. |
• | The majority of our U.S. financial advisors are licensed to sell insurance and annuity products through our general insurance agency, Raymond James Insurance Group, Inc. (“RJIG”). |
• | Our U.S. financial advisors offer a number of professionally managed load mutual funds, as well as a selection of no-load mutual funds. |
• | Clients’ transactions in securities are affected on either a cash or margin basis. These margin loans to clients are collateralized by the securities purchased or by other securities owned by the client. Interest is charged to clients on the amount borrowed. The interest rate charged to a client on a margin loan is based on current interest rates and on the outstanding amount of the loan. |
• | We provide certain custodial, trading, research and other back office support and services (including access to clients’ account information and the services of the Asset Management segment) to the independent contractor registered investment advisors with whom we are affiliated. |
• | We conduct securities lending activities through our RJ&A subsidiary, where we borrow and lend securities from and to other broker-dealers, financial institutions, and other counterparties. Generally, we conduct these activities as an intermediary (referred to as “Matched Book”). However, RJ&A will also loan client marginable securities held in a margin account containing a debit (referred to as lending from the “Box”) to counterparties. The borrower of the securities puts up a cash deposit on which interest is earned. The lender in turn receives cash and pays interest. The net revenues of the securities lending business are the interest spreads generated on these activities. |
• | Through our Alternative Investments Group, we provide diversification strategies and products to qualified clients of our affiliated financial advisors. The Alternative Investments Group provides strategies and products for portfolio investment allocation opportunities where a selective addition of alternative investments that have historically demonstrated lower correlation to traditional market indices may reduce overall portfolio volatility through diversification and increase long-term portfolio performance through a variety of market conditions. |
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CAPITAL MARKETS
Activities conducted in our capital markets segment include: institutional sales, securities trading, equity research, investment banking, syndicate, and the syndication of investments that qualify for tax credits under Section 42 of the Internal Revenue Code. Within our management structure, we distinguish between activities that support equity and fixed income products and services. We primarily conduct these activities in the U.S., Canada, and Europe.
The graphic below provides an indication of the relative portion of this segment’s revenues that are associated with equity securities and products, fixed income securities and products, and our tax credit fund syndication activities.
A summary of the services we provide that are captured in this segment include the following:
Equity Capital Markets activities
• | Institutional sales commissions are earned on equity products fueled by a combination of general market activity and the Capital Markets group’s ability to identify and promote attractive investment opportunities for our institutional clients. Commission amounts on equity transactions are based on trade size and the amount of business conducted annually with each institution. |
• | We provide various investment banking services through activities including public and private equity financing for corporate clients, and merger and acquisition advisory services. Our investment banking activities provide a comprehensive range of strategic and financial advisory services tailored to our clients’ business life cycles and backed by our strategic industry focus. |
• | In our syndicate operations, professionals coordinate the marketing, distribution, pricing and stabilization of lead and co-managed equity underwritings. In addition to lead and co-managed offerings, this department coordinates the firm’s syndicate and selling group activities in transactions managed by other investment banking firms. |
• | Analysts in our domestic research department support our institutional and retail sales efforts and publish research on certain companies. This research primarily focuses on U.S. and Canadian companies in specific industries including agricultural, consumer, energy, clean energy, energy services, financial services, healthcare, industrial, mining and natural resources, forest products, real estate, technology, and communication and transportation. Proprietary industry studies and company-specific research reports are made available to both institutional and individual clients. |
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Fixed Income activities
• | Institutional sales commissions are earned on fixed income products from institutional clients who purchase both taxable and tax-exempt fixed income products, primarily municipal, corporate, government agency and mortgage-backed bonds. Commission amounts on fixed income products are based on trade size and the characteristics of the specific security involved. |
• | We carry inventories of taxable and tax-exempt securities to facilitate institutional sales activities. We trade both taxable and tax-exempt fixed income securities primarily for the purpose of facilitating such sales. The taxable and tax-exempt fixed income traders purchase and sell corporate, municipal, government, government agency, and mortgage-backed bonds, asset-backed securities, preferred stock, and certificates of deposit from and to our clients or other dealers. |
• | Our fixed income investment banking services include public finance and debt underwriting activities where we serve as a financial advisor, placement agent or underwriter to various issuers who include municipal agencies (including political subdivisions), housing developers, and non-profit health care institutions. We may also act as a consultant, underwriter, or selling group member for corporate bonds, mortgage-backed securities (“MBS”), whole loans, agency bonds, preferred stock and unit investment trusts. When underwriting new issue securities, we may agree to purchase the issue through a negotiated sale or submit a competitive bid. |
• | To facilitate client transactions, hedge a portion of our fixed income securities inventories, or to a limited extent for our own account, we enter into interest rate swaps, futures contracts, and forward foreign exchange contracts as part of our fixed income business activities. In addition, we conduct a “matched book” derivatives business where we may enter into derivative transactions, including interest rate swaps, options, and combinations of those instruments, primarily with government entities and not-for-profit counterparties. In this matched book business, for every derivative transaction we enter into with a client, we enter into an offsetting derivative transaction with a credit support provider who is a third party financial institution. |
• | Through our fixed income public finance operations, we enter into forward commitments to purchase Government National Mortgage Association (“GNMA”), or Federal National Mortgage Association (“FNMA”), MBS. The MBS securities are issued on behalf of various state and local housing finance agencies (“HFA”) clients and consist of the mortgages originated through their lending programs. |
Tax Credit Fund investment syndication activities
• | In our syndication of tax credit investments, one of our subsidiaries is the general partner or managing member in partnerships and limited liability companies that invest in real estate project entities which qualify for tax credits under Section 42 of the Internal Revenue Code. We earn fees for the origination and sale of these investment products to investors as well as for oversight and management of the investments over the statutory tax credit compliance period. |
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ASSET MANAGEMENT
Our Asset Management segment operations include Eagle, the Eagle Family of Funds (“Eagle Funds”), asset management operations conducted within our asset management services division for the benefit of our PCG clients (referred to as “AMS”), Raymond James Trust, National Association (“RJ Trust”) a wholly owned subsidiary of RJF, and other fee-based programs. We generate revenues in this segment by providing investment advisory and asset management services to either individual or institutional investment portfolios, along with mutual funds. Investment advisory fee revenues are earned on the assets held in either managed or non-discretionary asset-based programs. As of September 30, 2015, there were $65.2 billion in financial assets held in managed programs and $91.0 billion in financial assets held in non-discretionary asset-based programs.
In managed programs, we are making decisions, in accordance with such programs objectives, about how to invest the assets held in such programs. In non-discretionary asset-based programs, we are providing administrative support to each plan, providing as an example, trade execution, record-keeping, and periodic investor reporting, for assets held in such programs. We generally earn higher fees for managed programs than we do for non-discretionary asset-based programs, which is to be expected given that additional services are provided to managed programs, most notably investment advice.
The graphic below provides the financial assets under management in managed programs by objective.
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RJ BANK
RJ Bank provides corporate, securities based loans (“SBL”) and residential loans, as well as Federal Deposit Insurance Corporation (“FDIC”) insured deposit accounts, to clients of our broker-dealer subsidiaries and to the general public. RJ Bank is active in corporate loan syndications and participations. RJ Bank generates net interest revenue principally through the interest income earned on loans and investments, which is offset by the interest expense it pays on client deposits and on its borrowings.
RJ Bank operates primarily from a branch location adjacent to RJF’s corporate office complex in St. Petersburg, Florida. Access to RJ Bank’s products and services is available nationwide through the offices of our affiliated broker-dealers as well as through electronic banking services. RJ Bank’s assets include commercial and industrial (“C&I”) loans, commercial and residential real estate loans, tax-exempt loans, as well as loans fully collateralized by marketable securities. Corporate loans represent approximately 75% of RJ Bank’s loan portfolio of which 90% are U.S. and Canadian syndicated loans. Residential mortgage loans are originated and held for investment or sold in the secondary market. RJ Bank’s liabilities primarily consist of deposits that are cash balances swept from the investment accounts of PCG clients.
RJ Bank has total assets of $14.2 billion at September 30, 2015, which are comprised of the following:
OTHER
Our other segment includes our principal capital and private equity activities as well as certain corporate overhead costs of RJF including the interest cost on our public debt, and the acquisition and integration costs associated with our material acquisitions including, most significantly in fiscal years 2013 and 2012, Morgan Keegan (as hereinafter defined).
Our principal capital and private equity activities include various direct and third party private equity investments; employee investment funds (the “Employee Funds”); and various private equity funds which we sponsor.
On April 2, 2012 (the “Closing Date”), RJF completed its acquisition of all of the issued and outstanding shares of Morgan Keegan & Company, Inc. (“MK & Co.”), and MK Holding, Inc. and certain of its affiliates (collectively referred to hereinafter as “Morgan Keegan”) from Regions Financial Corporation (“Regions”). In mid-February 2013, we completed the transfer of all of the active businesses of MK & Co. to RJ&A.
EMPLOYEES AND INDEPENDENT CONTRACTORS
Our employees and independent contractors (collectively referred to hereinafter as “associates”), are vital to our success in the financial services industry. As of September 30, 2015, we had approximately 11,000 employees, and more than 3,850 independent contractor financial advisors with whom we are affiliated.
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OPERATIONS AND INFORMATION PROCESSING
We have operations personnel who are responsible for the processing of securities transactions, custody of client securities, support of client accounts, receipt, identification and delivery of funds and securities, and compliance with certain regulatory and legal requirements for most of our U.S. securities brokerage operations through locations throughout the United States. RJ Ltd. operations personnel have similar responsibilities at our Canadian brokerage operations located in Vancouver, British Columbia.
The information technology department develops and supports the integrated solutions that provide a differentiated platform for our business. This platform is designed to allow our financial advisors to spend more time with their clients and enhance and grow their business.
In the area of information security, we have developed and implemented a framework of principles, policies and technology to protect both our own information assets as well as those we have pertaining to our clients. Safeguards are applied to maintain the confidentiality, integrity and availability of both client and Company information.
Our business continuity program has been developed to provide reasonable assurance of business continuity in the event of disruptions at our critical facilities. Business departments have developed operational plans for such disruptions, and we have a staff which devotes their full time to monitoring and facilitating those plans. Our business continuity plan continues to be enhanced and tested to allow for continuous business processing in the event of weather-related or other interruptions of operations at our corporate headquarters in Florida, or one of our operations processing or data center sites in Florida, Colorado, Tennessee and Michigan.
We have also developed a business continuity plan for each of our PCG retail branches in the event any of these branches are impacted by severe weather.
COMPETITION
We are engaged in intensely competitive businesses. We compete with many financial services firms, including a number of larger securities firms, most of which are affiliated with major financial services companies, insurance companies, banking institutions and other organizations. We also compete with a number of firms offering web-based financial services and discount brokerage services, usually with lower levels of service, to individual clients. We compete principally on the basis of the quality of our associates, service, product selection, location and reputation in local markets.
In the financial services industry, there is significant competition for qualified associates. Our ability to compete effectively in these businesses is substantially dependent on our continuing ability to attract, retain and motivate qualified associates, including successful financial advisors, investment bankers, trading professionals, portfolio managers and other revenue producing or specialized personnel.
REGULATION
RJF is subject to the oversight and periodic examination of the Fed. RJ Bank is a national bank regulated by the Office of the Comptroller of the Currency (“OCC”), the Fed, the FDIC, and the Consumer Financial Protection Bureau (“CFPB”). Our broker-dealer subsidiaries are subject to various regulatory authorities which are discussed in the “other regulations applicable to our operations” portion of this section.
The following discussion sets forth some of the material elements of the regulatory framework applicable to the financial services industry and provides some specific information relevant to us. The regulatory framework is intended primarily for the protection of our clients, customers, the securities markets, our depositors and the Federal Deposit Insurance Fund and not for the protection of our creditors or shareholders. Under certain circumstances, these rules may limit our ability to make capital withdrawals from RJ Bank or our broker-dealer subsidiaries.
To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business.
The financial services industry in the United States is subject to extensive regulation under U.S. federal and state laws.
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New rules and regulations resulting from the Dodd-Frank Act
In July 2010, the U.S. government enacted financial services reform legislation known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act enacted sweeping changes in the supervision and regulation of the financial industry designed to provide for greater oversight of financial industry participants, reduce risk in banking practices and in securities and derivatives trading, enhance public company corporate governance practices and executive compensation disclosures, and provide greater protections to individual consumers and investors. Certain elements of the Dodd-Frank Act became effective immediately; however, the details of some provisions remain subject to implementing regulations that are yet to be adopted by various applicable regulatory agencies. Furthermore, many provisions of the Dodd-Frank Act are still subject to further rule making procedures and studies and will take effect over several years.
The Dodd-Frank Act instructs U.S. federal banking and other regulatory agencies to conduct hundreds of rule-makings, studies and reports. These regulatory agencies include: the Commodity Futures Trading Commission (the “CFTC”); the Securities and Exchange Commission (the “SEC”); the Fed; the OCC; the FDIC; the CFPB; and the Financial Stability Oversight Council (the “FSOC”). As a result of Dodd-Frank Act rule-making and other regulatory reforms, we are currently experiencing a period of unprecedented change in financial regulation and these changes could have a significant impact on how we conduct certain aspects of our business. Given that much of this regulatory development remains in a state of flux, we cannot specifically quantify the potential impact that such regulations will have on our business and operations (see Item 1A, “Risk Factors,” within this report for further discussion of the potential future impact on our operations). Some of the changes that have been enacted under the Dodd-Frank Act thus far include the following:
• | Since RJ Bank provides deposits covered by FDIC insurance, generally up to $250,000 per account ownership type, RJ Bank is subject to the Federal Deposit Insurance Act. In February 2011, under the provisions of the Dodd-Frank Act, the FDIC issued a final rule changing its assessment base in addition to other minor adjustments. For banks with more than $10 billion in assets, the FDIC’s new rule changed the assessment rate calculation, which relies on a scorecard designed to measure financial performance and ability to withstand stress in addition to measuring the FDIC’s exposure should the bank fail. This new rule became effective for RJ Bank beginning with the December 2013 assessment period. |
• | In July 2011, pursuant to the Dodd-Frank Act, the CFPB began operations and was given rulemaking authority for a wide range of consumer protection laws that would apply to all banks and provide broad powers to supervise and enforce federal consumer protection laws. The CFPB has supervisory and enforcement powers under the following consumer protection laws: the Equal Credit Opportunity Act; the Truth in Lending Act; Real Estate Settlement Procedures Act; Fair Credit Reporting Act; Fair Debt Collection Act; the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. At the beginning of fiscal year 2014, the CFPB assumed regulatory authority over RJ Bank for its compliance with various federal consumer protection laws. The CFPB has proposed and finalized many rules since its establishment; the majority of those became effective in early fiscal year 2014. The CFPB has authority to promulgate regulations, issue orders, draft policy statements, conduct examinations, and bring enforcement actions. The creation of the CFPB has led to enhanced enforcement of consumer protection laws. Although the ultimate impact of this heightened scrutiny is uncertain, it could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, remediation efforts and possible penalties. |
• | Moreover, in October 2012, under the provisions of the Dodd-Frank Act, the Fed, FDIC and OCC jointly issued final rules requiring certain bank holding companies, state member banks, and savings and loan companies with total assets between $10 billion and $50 billion to conduct annual company-prepared stress tests, report the results to their primary regulator and the Fed, and publish a summary of the results. Under the rules, stress tests must be conducted using certain scenarios (baseline, adverse, and severely adverse), which the Fed provides each year. RJF was required to conduct its first stress test by March 31, 2014. We submitted our initial stress testing results, utilizing data as of September 30, 2013, to the Fed on March 31, 2014. The Dodd-Frank Act also required that RJF begin publicly disclosing a summary of certain stress test results no later than June 30, 2015 for the stress test cycle beginning on October 1, 2014. RJF publicly disclosed the required summary of its stress test results on June 29, 2015, in accordance with the abovementioned stress testing requirements. |
• | The Volcker Rule: |
Under the provisions of the Dodd-Frank Act, Congress adopted the “Volcker Rule,” which generally prohibits, subject to exceptions, insured depository institutions, bank holding companies and their affiliates (together, “Banking Entities”) from engaging in “proprietary trading” or acquiring or retaining an ownership interest in a hedge fund or private equity fund (“covered funds”). In December 2013, the CFTC, the OCC, the Fed, the FDIC, and the SEC adopted a final version
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of the Volcker Rule. Certain elements of the final rule provide for phasing-in over time. However, based upon our latest analysis and understandings of these regulations, we do not anticipate that the Volcker Rule will have a material impact on our results of operations. Nevertheless, due to its complexity and scope, we continue to review the details contained in the Volcker Rule to assess its impact on our operations.
The Volcker Rule prohibits Banking Entities from engaging in proprietary trading, and imposes limitations on the extent to which Banking Entities are permitted to invest in certain “covered funds” (e.g., hedge funds and private equity funds, among others) and requires that such investments be fully deducted from Tier 1 capital. “Proprietary trading” is defined as engaging as principal for the trading account of the banking entity in the purchase or sale of a financial instrument. Under the Volcker Rule’s per-fund limits, a Banking Entity’s aggregate ownership in hedge funds and private equity funds cannot exceed three percent of Tier 1 capital, although the impact of such limit to RJF’s investment portfolio is subject to further analysis. Additionally, Banking Entities engaged in proprietary trading and/or covered fund investments must establish a Volcker Rule-specific compliance program. Congress provided an exemption for certain permitted activities of Banking Entities, such as underwriting, market making, hedging, and risk management.
The Volcker Rule became effective as of April 1, 2014 and all covered entities, including RJF, were required to conform to the Volcker Rule’s provisions on July 21, 2015 (the “conformance period”). However, on December 18, 2014, the Fed issued an order extending for an additional year the Volcker Rule conformance period for Banking Entities to conform their investments in and relationships with covered funds that may be subject to the Volcker Rule, and were in place prior to December 31, 2014 (“Legacy Funds”). The order also announced the Fed’s intention to grant an additional one-year extension of the conformance period until July 21, 2017. This extension, however, only applies to Legacy Funds. No extension was granted for the conformance period for proprietary trading activities. Banking Entities may still apply for an additional five-year extension for continued investments with respect to an illiquid fund. Such an extension will only be granted after a demonstration that the investment is necessary to fulfill a contractual commitment effective on May 1, 2010.
We currently maintain a number of private equity investments, some of which meet the definition of “covered funds” and therefore are subject to certain limitations under the covered funds provisions of the Volcker Rule. The amount of future investments of this nature that we may make may be limited in order to maintain compliance levels specified by the Volcker Rule. Further, subsequent interpretations of what constitutes “covered funds” under the final Volcker Rule may adversely impact our operations. The recent extension of the conformance deadline provides us additional time to assess our holdings in the context of the new regulations and execute appropriate strategies to be in conformance with the Volcker Rule.
• | In July 2013, the OCC, the Fed and the FDIC released final United States Basel III regulatory capital rules implementing the global regulatory capital reforms of Basel III and certain changes required by the Dodd-Frank Act. The rule increases the quantity and quality of regulatory capital, establishes a capital conservation buffer, and makes selected changes to the calculation of risk-weighted assets. The rule became effective for RJF on January 1, 2015, subject to a phase-in period for several aspects of the rule, including the new minimum capital ratio requirements, the capital conservation buffer, and certain regulatory capital adjustments and deductions. While we continue to evaluate the impact of these rules on both RJF and RJ Bank, based on our current analyses, we believe that both RJF and RJ Bank meet all capital adequacy requirements under the final rules. However, the increased capital requirements could restrict our ability to grow during favorable market conditions or require us to raise additional capital. As a result, our business, results of operations, financial condition and prospects could be adversely affected. See Item 1A, “Risk Factors,” within this report for more information. |
• | In July 2014, the SEC adopted amendments to the rules that govern money market mutual funds. The amendments make structural and operational reforms to address risks of excessive withdrawals over relatively short time frames by investors from money market funds, while preserving the benefits of the funds. We do not sponsor any money market funds. We utilize such funds in limited circumstances for our own investment purposes, and offer to our clients money market funds that are sponsored by third parties as one of several cash sweep alternatives. |
• | In September 2013, the SEC issued final rules regarding the mandatory registration of “municipal advisors” as required under the Dodd-Frank Act. These rules, which became effective on July 1, 2014 impose a fiduciary duty on municipal advisors when advising municipal entities, may result in the need for new written representations by issuers, and may limit the manner in which we, in our capacity as an underwriter or in our other professional roles, interact with municipal issuers. We registered as a municipal advisor with the SEC in 2014; by virtue of such registration our municipal finance business is now subject to additional regulation and oversight by the SEC. In August 2014, the SEC also announced that it will undertake a two-year review of municipal advisors as part of an exam initiative. Moreover, forthcoming rulemaking |
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by the Municipal Securities Rulemaking Board may cause further changes to the manner in which state and local government are able to interact with outside finance professionals. These new rules may impact the nature of our interactions with public finance clients, and may also have a negative short-term impact on the volume of public finance financing transactions while the industry attempts to adapt to the new regulatory landscape. However, we do not expect these new rules to have a materially adverse impact on our public finance results of operations (which are included in our Capital Markets segment).
Other regulations applicable to our operations
The SEC is the federal agency charged with administration of the federal securities laws. Financial services firms are also subject to regulation by state securities commissions in those states in which they conduct business. RJ&A and RJFS are currently registered as broker-dealers in all 50 states. The SEC recently adopted amendments, most of which were effective October 2013, to its financial responsibility rules, including changes to the net capital rule, the customer protection rule, the record-keeping rules and the notification rules applicable to our broker-dealer subsidiaries. We are currently evaluating the impact of these amendments on our broker-dealer subsidiaries; however, based on our current analyses, we do not believe they will have a material adverse effect on any of our broker-dealer subsidiaries. Pursuant to the Dodd-Frank Act, the SEC was charged with considering whether broker-dealers should be subject to a standard of care similar to the fiduciary standard applicable to registered investment advisors. It is not clear whether the SEC will determine that a heightened standard of conduct should be applicable to broker-dealers. Financial services firms are subject to regulation by various foreign governments, securities exchanges, central banks and regulatory bodies, particularly in those countries where they have established offices. Outside of the United States, we have additional offices in Europe, Canada and Latin America that are subject to local regulatory bodies in these territories.
Much of the regulation of broker-dealers in the United States and Canada, however, has been delegated to self-regulatory organizations (“SROs”), the Financial Industry Regulatory Authority (“FINRA”), the Investment Industry Regulatory Organization of Canada (“IIROC”) and securities exchanges. These SROs adopt and amend rules for regulating the industry, subject to the approval of government agencies. These SROs also conduct periodic examinations of member broker-dealers.
The SEC, SROs and state securities commissions may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees. Such administrative proceedings, whether or not resulting in adverse findings, can require substantial expenditures and may adversely impact the reputation of a broker-dealer.
Our U.S. broker-dealer subsidiaries are required by federal law to be members of the Securities Investors Protection Corporation (“SIPC”). The SIPC was established under the Securities Investor Protection Act, and oversees the liquidation of broker-dealers during liquidation or financial distress. The SIPC fund provides protection for cash and securities held in client accounts up to $500,000 per client, with a limitation of $250,000 on claims for cash balances. We have purchased excess SIPC coverage through various syndicates of Lloyd’s, a London-based firm that holds an “A+” rating from Standard and Poor’s, and an “AA-” rating from Fitch Ratings. Excess SIPC insurance is fully protected by the Lloyd’s trust funds and Lloyd’s Central Fund (the “Excess SIPC Insurer”). For RJ&A, the additional protection currently provided has an aggregate firm limit of $750 million for cash and securities, including a sub-limit of $1.9 million per client for cash above basic SIPC coverage. Account protection applies when a SIPC member fails financially and is unable to meet obligations to clients. This coverage does not protect against market fluctuations. RJF has provided an indemnity to the Excess SIPC Insurer against any and all losses they may incur associated with the excess SIPC insurance policies.
During fiscal year 2015, the Department of Labor (the “DOL”) proposed a new rule enhancing standards for individuals providing investment advice to retirement plans, their participants, or beneficiaries. We are continuing our study and evaluation of the proposal. The total impact of the standard, once finalized and implemented, on our business is unknown at this time.
RJ Ltd. is currently registered in all provinces and territories in Canada. The financial services industry in Canada is subject to comprehensive regulation under both federal and provincial laws. Securities commissions have been established in all provinces and territorial jurisdictions, which are charged with the administration of securities laws. Investment dealers in Canada are also subject to regulation by SROs, which are responsible for the enforcement of, and conformity with, securities legislation for their members and have been granted the powers to prescribe their own rules of conduct and financial requirements of members. RJ Ltd. is regulated by each of the securities commissions in the jurisdictions of registration, as well as by the SROs and IIROC.
IIROC requires that RJ Ltd. be a member of the Canadian Investors Protection Fund (the “CIPF”). The primary role of the CIPF is investor protection. The CIPF Board of Directors determines the fund size required to meet its coverage obligations and sets a quarterly assessment rate. Dealer members are assessed the lesser of 1% of revenue or a risk-based assessment. The CIPF provides protection for securities and cash held in client accounts up to $1 million Canadian currency (“CDN”) per client, with separate coverage of CDN $1 million for certain types of accounts. This coverage does not protect against market fluctuations.
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See Note 26 of the Notes to Consolidated Financial Statements in this Form 10-K for further information on SEC, FINRA and IIROC regulations pertaining to broker-dealer regulatory minimum net capital requirements.
Our investment advisory operations, including the mutual funds that we sponsor, are also subject to extensive regulation in the United States. Our U.S. asset managers are registered as investment advisors with the SEC under the Investment Advisers Act of 1940, and are also required to make notice filings in certain states. Virtually all aspects of our asset management business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to benefit the asset management clients.
RJF is under the supervision of, and subject to the rules, regulations, and periodic examination by the Fed. Additionally, RJ Bank is subject to the rules and regulations of the OCC, the Fed, the FDIC and the CFPB. Collectively, these rules and regulations cover all aspects of the banking business, including lending practices, safeguarding deposits, capital structure, transactions with affiliates, and conduct and qualifications of personnel.
RJ Bank is also subject to the Community Reinvestment Act (the “CRA”). The CRA is intended to encourage banks to help meet the credit needs of their communities, including low and moderate income neighborhoods, consistent with safe and sound bank operations. Under the CRA, the federal banking agencies (i.e., the Fed, the FDIC and the OCC) are required to periodically examine and assign to each bank a public CRA rating (“outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance”). Members of the public may submit comments on a bank’s performance, which will be considered as part of its performance evaluation. The results of the evaluation, together with the bank’s CRA rating, are also taken into consideration when evaluating mergers, acquisitions, and applications to open a branch or facility. RJ Bank could face additional requirements and limitations should it fail to adequately meet the criteria stipulated under the CRA.
Both RJF as a financial holding company, and RJ Bank, are subject to various capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the financial results of RJF and RJ Bank. Under capital adequacy guidelines, RJF and RJ Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification for RJF and RJ Bank are also subject to the qualitative judgments of U.S. regulators based on components of capital, risk-weightings of assets, off-balance sheet transactions, and other factors. Quantitative measures established by regulation to ensure capital adequacy require RJF, as a financial holding company, and RJ Bank, to maintain minimum amounts and ratios of Common equity Tier 1, Tier 1 and Total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). See Item 7, “Regulatory” in this report and Note 26 of the Notes to Consolidated Financial Statements in this Form 10-K, for further information.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of the registrant (which includes officers of certain significant subsidiaries) are as follows:
Jennifer C. Ackart | 51 | Senior Vice President since August, 2009 and Controller since February, 1995 |
Bella Loykhter Allaire | 62 | Executive Vice President - Technology and Operations - Raymond James & Associates, Inc. since June, 2011; Managing Director and Chief Information Officer, UBS Wealth Management Americas, November, 2006 - January, 2011 |
Paul D. Allison | 59 | Chairman, President and CEO - Raymond James Ltd. since January, 2009; Co-President and Co-CEO - Raymond James Ltd., August, 2008 - January, 2009 |
John C. Carson, Jr. | 59 | President since April, 2012; President - Morgan Keegan & Company, LLC, formerly known as Morgan Keegan & Company, Inc., since July, 2013; Chief Executive Officer and Executive Managing Director - Morgan Keegan & Company, Inc., March, 2008 - July, 2013 |
George Catanese | 56 | Senior Vice President since October, 2005 and Chief Risk Officer since February, 2006 |
Scott A. Curtis | 53 | President - Raymond James Financial Services, Inc., since January, 2012; Senior Vice President - Private Client Group - Raymond James & Associates, Inc., July, 2005 - December 2011 |
Jeffrey A. Dowdle | 51 | Executive Vice President - Asset Management Group, since February, 2014; President - Asset Management Services - Raymond James & Associates, Inc., January, 2005 - February 2014; Senior Vice President - Raymond James & Associates, Inc., January, 2005 - February, 2014 |
Tashtego S. Elwyn | 44 | President - Private Client Group - Raymond James & Associates, Inc., since January, 2012; Regional Director - Raymond James & Associates, Inc., October, 2006 - December, 2011 |
Jeffrey P. Julien | 59 | Executive Vice President - Finance since August, 2009, Chief Financial Officer since April, 1987 and Treasurer since February, 2011; Director and/or officer of several RJF subsidiaries |
Paul L. Matecki | 59 | Senior Vice President since February, 2000, General Counsel since February, 2005 and Secretary since February, 2006 |
Steven M. Raney | 50 | President and CEO - Raymond James Bank, N.A. since January, 2006 |
Paul C. Reilly | 61 | Chief Executive Officer since May, 2010; Director since January, 2006; President, May, 2009 - April, 2010 |
Jeffrey E. Trocin | 56 | President - Global Equities and Investment Banking - Raymond James & Associates, Inc. since July, 2013; Executive Vice President - Equity Capital Markets - Raymond James & Associates, Inc., February 2001 - July, 2013 |
Dennis W. Zank | 61 | Chief Operating Officer since January, 2012; Chief Executive Officer - Raymond James & Associates, Inc. since January, 2012; President - Raymond James & Associates, Inc., December, 2002 - December, 2011 |
Except where otherwise indicated, the executive officer has held his or her current position for more than five years.
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OTHER INFORMATION
Our Internet address is www.raymondjames.com. We make available on our website, free of charge and in printer-friendly format including “.pdf” file extensions, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Factors affecting “forward-looking statements”
Certain statements made in this report on Form 10-K may constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning future strategic objectives, business prospects, anticipated savings, financial results (including expenses, earnings, liquidity, cash flow and capital expenditures), industry or market conditions, demand for and pricing of our products, acquisitions and divestitures, anticipated results of litigation and regulatory developments or general economic conditions. In addition, words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “projects,” “forecasts,” and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would,” as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in Item 1A, “Risk Factors,” in this report. We expressly disclaim any obligation to update any forward-looking statement in the event it later turns out to be inaccurate, whether as a result of new information, future events or otherwise.
Item 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, liquidity and the trading price of our common stock or our senior notes which are listed on the NYSE. The list of risk factors provided below is not exhaustive; there may be factors not discussed below or in this Form 10-K that adversely impact our results of operations, harm our reputation or inhibit our ability to generate new business prospects.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Damage to our reputation could damage our businesses.
Maintaining our reputation is critical to attracting and maintaining clients, customers, investors and associates. If we fail to deal with, or appear to fail to deal with, issues that may give rise to reputational risk, we could significantly harm our business prospects. These issues include, but are not limited to, any of the risks discussed in this Item 1A, appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money laundering, cybersecurity and privacy, recordkeeping, sales and trading practices, failure to sell securities we have underwritten at the anticipated price levels, and the proper identification of the legal, reputational, credit, liquidity, and market risks inherent in our products. A failure to maintain appropriate standards of service and quality, or a failure or perceived failure to treat customers and clients fairly, can result in client dissatisfaction, litigation and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and harm to our reputation. Further, negative publicity regarding us, whether or not true, may also harm our future business prospects.
We are affected by domestic and international macroeconomic conditions that impact the global financial markets.
We are engaged in various financial services businesses. As such, we are generally affected by domestic and international macroeconomic and political conditions, including levels of economic output, interest and inflation rates, employment levels, consumer confidence levels, and fiscal and monetary policy. These conditions may directly and indirectly impact a number of factors in the global financial markets that may be detrimental to our operating results, including trading levels, investing, and origination activity in the securities markets, security valuations, the absolute and relative level and volatility of interest and currency rates, real estate values, the actual and perceived quality of issuers and borrowers, and the supply of and demand for loans and deposits.
At times over the last several years we have experienced operating cycles during weak and uncertain U.S. and global economic conditions, including low levels of economic output, artificially maintained levels of historically low interest rates, relatively high rates of unemployment, and significant uncertainty with regards to fiscal and monetary policy both domestically and abroad. These
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conditions led to several changes in the global financial markets that from time to time negatively impacted our net revenue and profitability. While the global financial markets have showed general signs of improvement, uncertainty remains. A period of sustained downturns and/or volatility in the securities markets, prolonged continuation of the artificially low level of short term interest rates, a return to increased dislocations in the credit markets, reductions in the value of real estate, and other negative market factors could significantly impair our revenues and profitability. We could experience a decline in commission revenue from a lower volume of trades we execute for our clients, a decline in fees from reduced portfolio values of securities managed on behalf of our clients, a reduction in revenue from the number and size of transactions in which we provide underwriting, financial advisory and other services, increased credit provisions and charge-offs, losses sustained from our customers’ and market participants’ failure to fulfill their settlement obligations, reduced net interest earnings, and other losses. These periods of reduced revenue and other losses could be accompanied by periods of reduced profitability because certain of our expenses including but not limited to our interest expense on debt, rent, facilities and salary expenses are fixed and, our ability to reduce them over short periods of time is limited.
U.S. markets may also be impacted by political and civil unrest occurring in the Middle East and in Eastern Europe and Russia. Concerns about the European Union’s (“EU”) sovereign debt in recent years, including the Greek government bailout, has caused uncertainty and disruption for financial markets globally. Continued uncertainties loom over the outcome of the EU’s financial support programs and the possibility exists that other EU member states may experience similar financial troubles in the future. Any negative impact on economic conditions and global markets from these matters could adversely affect our business, financial condition and liquidity.
Our businesses and earnings are affected by the fiscal and other policies adopted by various regulatory authorities of the United States, foreign governments, and domestic and international agencies. The Fed regulates the supply of money and credit in the United States. Fed policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments. The market impact from such policies can also materially decrease the value of certain of our financial assets, most notably debt securities. Changes in Fed policies are beyond our control and, consequently, the impact of these changes on our activities and results of our operations are difficult to predict. We may also be indirectly impacted by fiscal and monetary policy enacted in various global markets.
U.S. state and local governments also continue to struggle with budget pressures caused by the ongoing less than optimal economic environment and ongoing concerns regarding municipal issuer credit quality. If these trends continue or worsen, investor concerns could potentially reduce the number and size of transactions in which we participate and, in turn, reduce investment banking revenues. In addition, such factors could adversely affect the value of the municipal securities we hold in our trading securities portfolio.
RJ Bank is particularly affected by economic conditions in North America. Market conditions in the United States and Canada can be assessed through the following metrics: the level and volatility of interest rates; the rates of unemployment and under-employment; real estate prices; the level of consumer confidence; changes in consumer spending; and the number of personal bankruptcies, among others. The deterioration of these factors can diminish loan demand, lead to an increase in mortgage and other loan delinquencies, affect loan repayment performance and result in higher reserves and net charge-offs, which can adversely affect our earnings.
Lack of liquidity or access to capital could impair our business and financial condition.
Maintaining an appropriate level of liquidity, or the amount of capital that is readily available for investment, spending, or to meet our contractual obligations, is essential to our business. Our inability to maintain adequate levels of capital in the form of cash and readily available access to the credit and capital markets could have a significant negative effect on our financial condition. If liquidity from our brokerage or banking operations is inadequate or unavailable, we may be required to scale back or curtail our operations, including limiting our efforts to recruit additional financial advisors, selling assets at prices that may be less favorable to us, and cutting or eliminating the dividends we pay to our shareholders. Some potential conditions that could negatively affect our liquidity include the inability of our subsidiaries to generate cash in the form of dividends from earnings, changes imposed by regulators to our liquidity or capital requirements in our subsidiaries that may prevent the upstream of dividends in the form of cash to the parent company, limited or no accessibility to credit markets for secured and unsecured borrowings by our subsidiaries, diminished access to the capital markets for our company, and other commitments or restrictions on capital as a result of adverse legal settlements, judgments, or regulatory sanctions.
The availability of outside financing, including access to the credit and capital markets, depends on a variety of factors, such as conditions in the debt and equity markets, the general availability of credit, the volume of securities trading activity, the overall availability of credit to the financial services sector, and our credit ratings. Our cost and availability of funding may be adversely
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affected by illiquid credit markets and wider credit spreads. Additionally, lenders may from time to time curtail, or even cease to provide, funding to borrowers as a result of future concerns over the strength of specific counterparties, as well as the stability of markets generally.
If our credit ratings were downgraded, or if rating agencies indicate that a downgrade may occur, our business, financial position, and results of operations could be adversely affected, perceptions of our financial strength could be damaged, and as a result, adversely affect our relationships with clients. Such a reduction in our credit ratings could also adversely affect our liquidity and competitive position, increase our incremental borrowing costs, limit our access to the capital markets, trigger obligations under certain financial agreements, or decrease the number of investors, clients and counterparties willing or permitted to do business with or lend to us, thereby curtailing our business operations and reducing profitability.
We may not be able to successfully obtain additional outside financing to fund our operations on favorable terms, or at all. The impact of a credit rating downgrade to a level below investment grade would result in our breaching provisions in certain of our derivative instruments, and may result in a request for immediate payment and/or ongoing overnight collateralization on our derivative instruments in liability positions (see Note 18 of the Notes to Consolidated Financial Statements in this Form 10-K for such information as of September 30, 2015). A credit downgrade would also result in RJF incurring a higher commitment fee on any unused balance on its $300 million revolving credit facility executed on August 6, 2015, in addition to triggering a higher interest rate applicable to any borrowings outstanding on the line as of and subsequent to such downgrade (see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Sources of Liquidity” for information on this revolving credit facility).
Furthermore, as a bank holding company, we may become subject to a prohibition or to limitations on our ability to pay dividends or repurchase our stock. The OCC, the Fed, the FDIC, and the SEC (through FINRA) have the authority, and under certain circumstances the duty, to prohibit or to limit the payment of dividends by the subsidiaries to their parent, for the subsidiaries they supervise.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in this report for additional information on liquidity and how we manage our liquidity risk.
We are exposed to market risk.
We are, directly and indirectly, affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. For example, changes in interest rates could adversely affect our net interest spread, the difference between the yield we earn on our assets and the interest rate we pay for deposits and other sources of funding, which in turn impacts our net interest income and earnings. Changes in interest rates could affect the interest earned on assets differently than interest paid on liabilities. In our brokerage operations, a rising interest rate environment generally results in our earning a larger net interest spread. Conversely in those operations, a falling interest rate environment generally results in our earning a smaller net interest spread. If we are unable to effectively manage our interest rate risk, changes in interest rates could have a material adverse effect on our profitability.
Market risk is inherent in the financial instruments associated with our operations and activities, including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, derivatives, and venture capital and private equity investments. Market conditions that change from time to time, thereby exposing us to market risk, include fluctuations in interest rates, equity prices, relative exchange rates, and price deterioration or changes in value due to changes in market perception or actual credit quality of an issuer.
In addition, disruptions in the liquidity or transparency of the financial markets may result in our inability to sell, syndicate or realize the value of security positions, thereby leading to increased concentrations. The inability to reduce our positions in specific securities may not only increase the market and credit risks associated with such positions, but also increase the level of risk-weighted assets on our balance sheet, thereby increasing capital requirements, which could have an adverse effect on our business results, financial condition and liquidity.
Our venture capital and private equity investments are carried at fair value with unrealized gains and losses reflected in earnings. The value of our private equity portfolios can fluctuate and earnings from our venture capital investments can be volatile and difficult to predict. When, and if, we recognize gains can depend on a number of factors, including general economic conditions, the prospects of the companies in which we invest, when these companies go public, the size of our position relative to the public float and whether we are subject to any resale restrictions. Further, our investments could incur significant mark-to-market losses, especially if they have been written up in prior periods because of higher market prices.
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See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report for additional information regarding our exposure to and approaches to managing market risk.
We are exposed to credit risk.
We are generally exposed to the risk that third parties that owe us money, securities or other assets will fail to meet their performance obligations due to numerous causes, including bankruptcy, lack of liquidity, or operational failure, among others.
We actively buy and sell securities from and to clients and counterparties in the normal course of our broker-dealers market making and underwriting businesses, which exposes us to credit risk. Although generally collateralized by the underlying security to the transaction, we still face the risk associated with changes in the market value of collateral through settlement date. We also hold certain securities, loans and derivatives in our trading accounts. Deterioration in the actual or perceived credit quality of the underlying issuers of securities or loans, or the non-performance of issuers and counterparties to certain derivative contracts could result in trading losses.
We borrow securities from, and lend securities to, other broker-dealers, and may also enter into agreements to repurchase and/or resell securities as part of investing and financing activities. A sharp change in the security market values utilized in these transactions may result in losses if counterparties to these transactions fail to honor their commitments.
We manage the risk associated with these transactions by establishing and monitoring credit limits, as well as by monitoring collateral and transaction levels on a daily basis. A significant deterioration in the credit quality of one of our counterparties could lead to concerns in the market about the credit quality of other counterparties in the same industry, thereby exacerbating our credit risk exposure. We may require counterparties to deposit additional collateral or substitute collateral pledged. In the case of aged securities failed to receive, we may, under industry regulations, purchase the underlying securities in the market and seek reimbursement for any losses from the counterparty.
Also, we permit our clients to purchase securities on margin. During periods of steep declines in securities prices, the value of the collateral securing client margin loans may fall below the amount of the purchaser’s indebtedness. If the clients are unable to provide additional collateral for these margin loans, we may incur losses on those margin transactions. This may cause us to incur additional expenses defending or pursuing claims or litigation related to counterparty or client defaults.
We deposit our cash in depository institutions as a means of maintaining the liquidity necessary to meet our operating needs, and we also facilitate the deposit of cash awaiting investment in depository institutions on behalf of our clients. A failure of a depository institution to return these deposits could severely impact our operating liquidity, result in significant reputational damage, and adversely impact our financial performance.
We also incur credit risk by lending to businesses and individuals through the offering of: C&I loans, commercial and residential mortgage loans, tax-exempt loans, home equity lines of credit, and margin and non-purpose loans collateralized by securities, among others. We incur credit risk through our investments, which include MBS, collateralized mortgage obligations, auction rate securities, and other municipal securities.
Our credit risk and credit losses can increase if our loans or investments are concentrated among borrowers or issuers engaged in the same or similar activities, industries, geographies, or to borrowers or issuers who as a group may be uniquely or disproportionately affected by economic or market conditions. The deterioration of an individually large exposure, for example due to natural disasters, health emergencies or pandemics, acts of terrorism, severe weather events or other adverse economic events, could lead to additional loan loss provisions and/or charges-offs, or credit impairment of our investments, and subsequently have a material impact on our net income and regulatory capital.
Declines in the real estate market or sustained economic downturns may cause us to write down the value of some of the loans in RJ Bank’s portfolio, foreclose on certain real estate properties or write down the value of some of our available for sale securities portfolio. Credit quality generally may also be affected by adverse changes in the financial performance or condition of our debtors or deterioration in the strength of the U.S. economy. Our policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans or satisfy their obligations to us.
See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report for additional information regarding our exposure to and approaches to managing credit risk.
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Our business depends on fees generated from the distribution of financial products, fees earned from the management of client accounts by our asset management subsidiaries, and on advisory fees.
A large portion of our revenues are derived from fees generated from the distribution of financial products, such as mutual funds and variable annuities. Changes in the structure or amount of the fees paid by the sponsors of these products could directly affect our revenues, business and financial condition. In addition, if these products experience losses or increased investor redemptions, we may receive lower fee revenue from the investment management and distribution services we provide on behalf of the mutual funds and annuities. The investment management fees we are paid may also decline over time due to factors such as increased competition, renegotiation of contracts and the introduction of new, lower-priced investment products and services. Changes in market values or in the fee structure of asset management accounts would affect our revenues, business and financial condition. Asset management fees often are primarily comprised of base management and incentive fees. Management fees are primarily based on assets under management (“AUM”). AUM balances are impacted by net inflow/outflow of client assets and market values. Below-market investment performance by our funds and portfolio managers could result in a loss of managed accounts and could result in reputational damage that might make it more difficult to attract new investors and thus further impact our business and financial condition. If we were to experience the loss of managed accounts, our fee revenue would decline. In addition, in periods of declining market values, our asset values under management may resultantly decline, which would negatively impact our fee revenues.
Our underwriting, market-making, trading, and other business activities place our capital at risk.
We may incur losses and be subject to reputational harm to the extent that, for any reason, we are unable to sell securities which we have underwritten at the anticipated price levels. As an underwriter, we also are subject to heightened standards regarding liability for material misstatements or omissions in prospectuses and other offering documents relating to offerings we underwrite. As a market maker, we may own positions in specific securities, and these undiversified holdings concentrate the risk of market fluctuations and may result in greater losses than would be the case if our holdings were more diversified. In addition, we may incur losses as a result of proprietary positions we hold in connection with our market making or underwriting activities.
From time to time and as part of our underwriting processes, we may carry significant positions in securities of a single issuer or issuers engaged in a specific industry. Sudden changes in the value of these positions could impact our financial results.
We have made and may continue to make principal investments in private equity funds and other illiquid investments, which are typically private limited partnership interests and securities that are not publicly traded. There is risk that we may be unable to realize our investment objectives by sale or other disposition at attractive prices or that we may otherwise be unable to complete a desirable exit strategy. In particular, these risks could arise from changes in the financial condition or prospects of the portfolio companies in which investments are made, changes in economic conditions or changes in laws, regulations, fiscal policies or political conditions. It could take a substantial period of time to identify attractive investment opportunities and then to realize the cash value of such investments through resale. Even if a private equity investment proves to be profitable, it may be several years or longer before any profits can be realized in cash.
The soundness of other financial institutions and intermediaries affects us.
We face the risk of operational failure, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other financial intermediaries that we use to facilitate our securities transactions. As a result of the consolidation over the years among clearing agents, exchanges and clearing houses, our exposure to certain financial intermediaries has increased and could affect our ability to find adequate and cost-effective alternatives should the need arise. Any failure, termination or constraint of these intermediaries could adversely affect our ability to execute transactions, service our clients and manage our exposure to risk.
Our ability to engage in routine trading and funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, funding, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients. Furthermore, although we do not hold any EU sovereign debt, we may do business with and be exposed to financial institutions that have been affected by the EU sovereign debt circumstances. Defaults by, or even rumors or questions about the financial condition of, one or more financial services institutions, or the financial services industry generally, have historically led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. Although we have not suffered any material or significant losses
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as a result of the failure of any financial counterparty, any such losses in the future may have a material adverse effect on our results of operations.
We have experienced increased pricing pressures in areas of our business which may impair our future revenue and profitability.
Our business continues to experience increased pricing pressures on trading margins and commissions in fixed income and equity trading. In the fixed income market, regulatory requirements have resulted in greater price transparency, leading to increased price competition and decreased trading margins. In the equity market, we have experienced increased pricing pressure from institutional clients to reduce commissions, and this pressure has been augmented by the increased use of electronic and direct market access trading, which has created additional competitive downward pressure on trading margins. We believe that price competition and pricing pressures in these and other areas will continue as institutional investors continue to reduce the amounts they are willing to pay, including by reducing the number of brokerage firms they use, and some of our competitors seek to obtain market share by reducing fees, commissions or margins.
Regions may fail to honor its indemnification obligations associated with Morgan Keegan matters.
Under the definitive stock purchase agreement, dated January 11, 2012, entered into by RJF and Regions, governing our acquisition of Morgan Keegan (the “SPA”), Regions has ongoing obligations to continue to indemnify RJF with respect to certain litigation as well as other matters. Specifically, the terms of the SPA provide that Regions will indemnify RJF for losses incurred in connection with legal proceedings pending as of the closing date, April 2, 2012, or commenced thereafter and related to pre-closing matters that are received prior to April 2, 2015, as well as any cost of defense pertaining thereto. RJF is relying on Regions to continue fulfilling its indemnification obligations under the SPA with respect to such matters. Our inability to enforce these indemnification provisions, or our failure to recover losses for which we are entitled to be indemnified, could result in our incurring significant costs for defense, settlement, and any adverse judgments, and resultantly have an adverse effect on our results of operations, financial condition, and our regulatory capital levels.
See Note 21 of the Notes to Consolidated Financial Statements in this Form 10-K for further information regarding the indemnification from Regions.
Growth of our business could increase costs and regulatory and integration risks.
Integrating acquired businesses, providing a platform for new businesses and partnering with other firms involve a number of risks and present financial, managerial and operational challenges. We may incur significant expenses in connection with further expansion of our existing businesses, or recruitment of financial advisors, or in connection with strategic acquisitions or investments, if and to the extent they arise from time to time. Our overall profitability would be negatively affected if investments and expenses associated with such growth are not matched or exceeded by the revenues that are derived from such investment or growth.
Expansion may also create a need for additional compliance, documentation, risk management and internal control procedures, and often involves the hiring of additional personnel to monitor such procedures. To the extent such procedures are not adequate to appropriately monitor any new or expanded business, we could be exposed to a material loss or regulatory sanction.
Moreover, to the extent we pursue strategic acquisitions, we may be unable to complete such acquisitions on acceptable terms, or be unable to successfully integrate the operations of any acquired business into our existing business. Such acquisitions could be of significant size and/or complexity. This effort, together with difficulties we may encounter in integrating an acquired business, could have an adverse effect on our business, financial condition, and results of operations. In addition, we may need to raise equity capital or borrow to finance such acquisitions, which could dilute our shareholders or increase our leverage. Any such borrowings might not be available on terms as favorable to us as our current borrowings, or perhaps at all.
We face intense competition.
We are engaged in intensely competitive businesses. We compete on the basis of a number of factors, including the quality of our financial advisors and associates, our products and services, pricing (such as execution pricing and fee levels), location and reputation in relevant markets. Over time there has been substantial consolidation and convergence among companies in the financial services industry which has significantly increased the capital base and geographic reach of our competitors. See the section entitled “Competition” of Item 1 of this report for additional information about our competitors.
We compete directly with national full service broker-dealers, investment banking firms, and commercial banks, and to a lesser extent, with discount brokers and dealers and investment advisors. In addition, we face competition from more recent
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entrants into the market and increased use of alternative sales channels by other firms. We also compete indirectly for investment assets with insurance companies, real estate firms and hedge funds, among others. This competition could cause our business to suffer.
To remain competitive, our future success also depends in part on our ability to develop and enhance our products and services. The inability to develop new products and services, or enhance existing offerings, could have a material adverse effect on our profitability. In addition, we may incur substantial expenditures to keep pace with the constant changes and enhancements being made in technology, including improvements made to internet connectivity, networking and telecommunications systems.
Our ability to attract and retain senior professionals, qualified financial advisors and other associates is critical to the continued success of our business.
Our ability to develop and retain our client base depends on the reputation, judgment, business generation capabilities and skills of our senior professionals, particularly our managing directors, and the members of our executive committees, as well as employees and financial advisors. To compete effectively we must attract, retain and motivate qualified professionals, including successful financial advisors, investment bankers, trading professionals, portfolio managers and other revenue producing or specialized personnel. The reputations and relationships of our senior professionals with our clients are a critical element in obtaining and executing client engagement. Competitive pressures we experience could have an adverse effect on our business, results of operations, financial condition and liquidity.
Turnover in the financial services industry is high. The cost of retaining skilled professionals in the financial services industry has escalated considerably. Employers in the industry are increasingly offering guaranteed contracts, upfront payments, and increased compensation. These can be important factors in a current employee’s decision to leave us as well as a prospective employee’s decision to join us. As competition for skilled professionals in the industry remains intense, we may have to devote significant resources to attracting and retaining qualified personnel. To the extent we have compensation targets, we may not be able to retain our employees which could result in increased recruiting expense or result in our recruiting additional employees at compensation levels that are not within our target range. In particular, our financial results may be adversely affected by the costs we incur in connection with any upfront loans or other incentives we may offer to newly recruited financial advisors and other key personnel. If we were to lose the services of any of our investment bankers, senior equity research, sales and trading professionals, asset managers, or executive officers to a new or existing competitor or otherwise, we may not be able to retain valuable relationships and some of our clients could choose to use the services of a competitor instead of our services. If we are unable to retain our senior professionals or recruit additional professionals, our reputation, business, results of operations and financial condition will be adversely affected. Further, new business initiatives and efforts to expand existing businesses generally require that we incur compensation and benefits expense before generating additional revenues.
Moreover, companies in our industry whose employees accept positions with competitors frequently claim that those competitors have engaged in unfair hiring practices. We have been subject to several such claims in the past and may be subject to additional claims in the future as we seek to hire qualified personnel, some of whom may currently be working for our competitors. Some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. Such claims could also discourage potential employees who currently work for our competitors from joining us.
We are exposed to operational risk.
Our diverse operations expose us to risk of loss resulting from inadequate or failed internal processes, people and systems, external events, including technological or connectivity failures either at the exchanges in which we do business or between our data center, operations processing sites or our branches. Our businesses depend on our ability to process and monitor, on a daily basis, a large number of complex transactions across numerous and diverse markets. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, adversely affecting our ability to process these transactions or provide these services. Operational risk exists in every activity, function or unit of our business, and can take the form of internal or external fraud, employment and hiring practices, an error in meeting a professional obligation, or failure to meet corporate fiduciary standards. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. If our employees engage in misconduct, our businesses would be adversely affected. Operational risk also exists in the event of business disruption, system failures or failed transaction processing. Third parties with which we do business could also be a source of operational risk, including with respect to breakdowns or failures of the systems or misconduct by the employees of such parties. In addition as we change processes or introduce new products and services, we may not fully appreciate
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or identify new operational risks that may arise from such changes. Increasing use of automated technology has the potential to amplify risks from manual or system processing errors, including outsourced operations.
Our existing business contingency plan is intended to ensure that we have the ability to recover our critical business functions and supporting assets, including staff and technology, in the event of a systemic business interruption. Despite the diligence we have applied to the development and testing of our plans, due to unforeseen factors, our ability to conduct business may in any case be adversely affected by a disruption involving physical site access, catastrophic events including weather related events, events involving electrical, environmental or communications malfunctions, as well as events impacting services provided by others that we rely upon which could impact our employees or third parties with whom we conduct business.
See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report for additional information regarding our exposure to and approaches to managing operational risk.
Associate misconduct, which is difficult to detect and deter, could harm us by impairing our ability to attract and retain clients and subject us to significant legal liability and reputational harm.
There have been a number of highly-publicized cases involving fraud or other misconduct by associates in the financial services industry, and there is a risk that our associates could engage in misconduct that adversely affects our business. For example, our banking business often requires that we deal with confidential matters of great significance to our clients. If our associates were to improperly use or disclose confidential information provided by our clients, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial position, current client relationships and ability to attract future clients. We are also subject to a number of obligations and standards arising from our asset management business and our authority over the assets managed by our asset management business. In addition our financial advisors may act in a fiduciary capacity, providing financial planning, investment advice and discretionary asset management. The violation of these obligations and standards by any of our associates would adversely affect our clients and us. It is not always possible to deter associate misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. If our associates engage in misconduct, our business would be adversely affected.
Our businesses depend on technology.
Our businesses rely extensively on electronic data processing and communications systems. In addition to better serving clients, the effective use of technology increases efficiency and enables us to reduce costs. Adapting or developing our technology systems to meet new regulatory requirements, client needs, and competitive demands is critical for our business. Introduction of new technology presents challenges on a regular basis. There are significant technical and financial costs and risks in the development of new or enhanced applications, including the risk that we might be unable to effectively use new technologies or adapt our applications to emerging industry standards.
Our continued success depends, in part, upon our ability to: successfully maintain and upgrade the capability of our technology systems; address the needs of our clients by using technology to provide products and services that satisfy their demands; and retain skilled information technology employees. Failure of our technology systems, which could result from events beyond our control, or an inability to effectively upgrade those systems or implement new technology-driven products or services, could result in financial losses, liability to clients, violations of applicable privacy and other applicable laws and regulatory sanctions.
The expectations of sound operational and informational security practices have risen among our clients and customers, the public at large and regulators. Thus, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, cyberattacks and breakdowns. Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although cyber security incidents among financial services firms are on the rise, we have not experienced any material losses relating to cyberattacks or other information security breaches. However, there can be no assurances that we will not suffer such losses in the future. Despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, computer viruses and other malicious code and other events that could have an impact on the security and stability of our operations.
Notwithstanding the precautions taken by us and measures put in place, if one or more of these events were to occur, this could jeopardize the information we confidentially maintain, including that of our clients and counterparties, which is processed, stored in and transmitted through our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our clients and counterparties. We may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications.
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We may also be subject to litigation and financial losses that are neither insured nor covered under any of our current insurance policies. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators.
Extraordinary trading volumes beyond reasonably foreseeable spikes could cause our computer systems to operate at an unacceptably slow speed or even fail entirely. While we have invested resources to maintain the reliability and scalability of our systems and maintain hardware to address extraordinary volumes, there can be no assurance that our systems will be sufficient to handle truly extraordinary and unforeseen circumstances. Systems failures and delays could occur and could cause, among other things, unanticipated disruptions in service to our clients or slower system response times, resulting in client dissatisfaction due to transactions not being processed as quickly as desired.
In providing services to clients, we may manage, utilize and store sensitive or confidential client or employee data, including personal data. As a result, we may be subject to numerous laws and regulations designed to protect this information, such as U.S. federal and state laws governing the protection of personally identifiable information and international laws. These laws and regulations are increasing in complexity and number. If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to client or employee data, or otherwise mismanages or misappropriates such data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. In addition, unauthorized disclosure of sensitive or confidential client or employee data, whether through system failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients and related revenue. Potential liability in the event of a security breach of client data could be significant. Depending on the circumstances giving rise to the breach, this liability may not be subject to a contractual limit or an exclusion of consequential or indirect damages.
See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report for additional information regarding our exposure to and approaches for managing these types of operational risks.
Our operations could be adversely affected by serious weather conditions.
Certain of our principal operations are located in St. Petersburg, Florida. While we have a business continuity plan that permits significant operations to be conducted out of our Southfield, Michigan and Memphis, Tennessee locations and our information systems processing to be conducted out of our information technology data center in the Denver, Colorado area, our operations could be adversely affected by hurricanes or other serious weather conditions that could affect the processing of transactions, communications, and the ability of our associates to get to our offices, or work from home. Refer to the “we are exposed to credit risk” risk factor in this Item 1A for a discussion of how events, including weather events, could adversely impact RJ Bank’s loan portfolio. Refer to the “we are exposed to operational risk” risk factor in this Item 1A for a discussion of how weather-related events could impact our ability to conduct business.
We are exposed to litigation risks, which could materially and adversely impact our business operations and prospects.
Many aspects of our business involve substantial risks of liability arising out of the normal course of business. We have been named as a defendant or co-defendant in lawsuits and arbitrations involving primarily claims for damages. The risks associated with potential litigation often may be difficult to assess or quantify and the existence and magnitude of potential claims often remain unknown for substantial periods of time. Unauthorized or illegal acts of our associates could result in substantial liability. The failure of our advisors to fully understand investor needs or risk tolerances may result in the recommendation or purchase of a portfolio of assets that may not be suitable for the investor. To the extent we fail to fully understand our clients or improperly advise them, we could be found liable for losses suffered by such clients, which could harm our business. Our Private Client Group business segment has historically been more susceptible to litigation than our institutional businesses.
In highly volatile markets, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions has historically increased. These risks include potential liability under securities laws or other laws for: alleged materially false or misleading statements made in connection with securities offerings and other transactions; issues related to the suitability of our investment advice based on our clients’ investment objectives; the inability to sell or redeem securities in a timely manner during adverse market conditions; contractual issues; employment claims; and potential liability for other advice we provide to participants in strategic transactions. Substantial legal liability could have a material adverse financial impact or cause us significant reputational harm, which in turn could seriously harm our business and future business prospects.
In addition to the foregoing financial costs and risks associated with potential liability, the costs of defending individual litigation and claims continue to increase over time. The amount of outside attorneys’ fees incurred in connection with the defense of litigation and claims could be substantial and might materially and adversely affect our results of operations.
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With regard to Morgan Keegan, a number of the types of claims and matters described above arising prior to our acquisition, that are received prior to April 2, 2015, are subject to indemnification from Regions. Refer to the separate risk factor in this section entitled “Regions may fail to honor its indemnification obligations associated with Morgan Keegan matters” for a discussion of the risks associated with these indemnifications.
See Item 3, “Legal Proceedings” in this report for a discussion of our legal matters and Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report for a discussion regarding our approach to managing legal risk.
The preparation of the consolidated financial statements requires the use of estimates that may vary from actual results and new accounting standards could adversely affect future reported results.
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions may require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. One of our most critical estimates is RJ Bank’s allowance for loan losses. At any given point in time, conditions in the real estate and credit markets may increase the complexity and uncertainty involved in estimating the losses inherent in RJ Bank’s loan portfolio. If management’s underlying assumptions and judgments prove to be inaccurate, one outcome could be that the allowance for loan losses could be insufficient to cover actual losses. Our financial condition, including our liquidity and capital, and results of operations could be materially and adversely impacted. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates,” in this report for additional information on the nature of these estimates.
Our financial instruments, including certain trading assets and liabilities, available for sale securities including Auction Rate Securities (“ARS”), certain loans, intangible assets and private equity investments, among other items, require management to make a determination of their fair value in order to prepare our consolidated financial statements. Where quoted market prices are not available, we may make fair value determinations based on internally developed models or other means, which ultimately rely to some degree on our subjective judgment. Some of these instruments and other assets and liabilities may have no direct observable inputs, making their valuation particularly subjective and, consequently, based on significant estimation and judgment. In addition, sudden illiquidity in markets or declines in prices of certain securities may make it more difficult to value certain items, which may lead to the possibility that such valuations will be subject to further change or adjustment, as well as declines in our earnings in subsequent periods.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. The Financial Accounting Standards Board (the “FASB”) and the SEC have at times revised the financial accounting and reporting standards that govern the preparation of our financial statements. In addition, accounting standard setters and those who interpret the accounting standards may change or even reverse their previous interpretations or positions on how these standards should be applied. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. For further discussion of some of our significant accounting policies and standards, see the “Critical Accounting Estimates” discussion within Item 7 in this report, and Note 2 of the Notes to Consolidated Financial Statements in this Form 10-K.
In December 2012, the FASB issued a proposed standard on accounting for credit losses. The standard would replace multiple existing impairment models, including the replacement of the “incurred loss” model for loans with an “expected loss” model. The FASB announced it will establish the effective date when it issues the final standard. We cannot predict when a final standard will be issued, when it will be made effective, what its final provisions will encompass, or the potential impact its eventual adoption may have on our retained earnings.
Our risk management and conflicts of interest policies and procedures may leave us exposed to unidentified or unanticipated risk.
We seek to manage, monitor and control our operational, legal and regulatory risk through operational and compliance reporting systems, internal controls, management review processes and other mechanisms; however, there can be no assurance that our procedures will be fully effective. Our banking and trading processes seek to balance our ability to profit from banking and trading positions with our exposure to potential losses. While we utilize limits and other risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate unforeseen economic and financial outcomes or the specifics and timing of such outcomes.
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Further, our risk management methods may not effectively predict future risk exposures, which could be significantly greater than the historical measures indicate. In addition, some of our risk management methods are based on an evaluation of information regarding markets, clients and other matters that are based on assumptions that may no longer be accurate. A failure to adequately manage our growth, or to effectively manage our risk, could materially and adversely affect our business and financial condition.
Financial services firms are subject to numerous conflicts of interest or perceived conflicts, all of which are under growing scrutiny by federal and state regulators in the United States. Our risk management processes include addressing potential conflicts of interest that arise in our business. We have procedures and controls in place to address conflicts of interest. Management of potential conflicts of interest has become increasingly complex as we expand our business activities through numerous transactions, obligations and interests with and among our clients. The actual or perceived failure to adequately address conflicts of interest could affect our reputation, the willingness of clients to transact business with us or give rise to litigation or regulatory actions. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.
For more information on how we monitor and manage market and certain other risks, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report.
We are exposed to risk from international markets.
We do business in other parts of the world, including a few developing regions commonly known as emerging markets, and as a result, are exposed to a number of risks, including economic, market, litigation and regulatory risks. Our businesses and revenues derived from non-U.S. operations are subject to risk of loss from currency fluctuations, social or political instability, less established regulatory regimes, changes in governmental policies or policies of central banks, downgrades in the credit ratings of sovereign countries, expropriation, nationalization, confiscation of assets and unfavorable legislative, economic and political developments. Action or inaction in any of these operations, including failure to follow proper practices with respect to regulatory compliance and/or corporate governance, could harm our operations and our reputation. We also invest or trade in the securities of corporations located in non-U.S. jurisdictions. Revenues from the trading of non-U.S. securities also may be subject to negative fluctuations as a result of the abovementioned factors. The impact of these fluctuations could be magnified because non-U.S. trading markets, particularly in emerging market countries, are generally smaller and less developed, less liquid and more volatile than U.S. trading markets. Additionally, a political, economic or financial disruption in a country or region could adversely impact our business and increase volatility in financial markets generally.
We have risks related to our insurance programs.
Our operations and financial results are subject to risks and uncertainties related to our use of a combination of insurance, self-insured retention and self-insurance for a number of risks, including most significantly: property and casualty, workers’ compensation, errors and omissions liability, general liability and the portion of employee-related health care benefits plans we fund, among others.
While we endeavor to purchase insurance coverage that is appropriate to our assessment of risk, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages. Our business may be negatively affected if in the future our insurance proves to be inadequate or unavailable. In addition, insurance claims may divert management resources away from operating our business.
RISKS RELATED TO OUR REGULATORY ENVIRONMENT
Financial services firms have been subject to increased regulatory scrutiny over the last several years, increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions.
Firms in the financial services industry have been operating in an onerous regulatory environment, which will become even more stringent in light of recent well-publicized failures of regulators to detect and prevent fraud. The industry has experienced increased scrutiny from a variety of regulators, including the SEC, the Fed, the OCC and the CFPB, in addition to stock exchanges, FINRA and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. We may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and SROs. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many different aspects of financial services, including, but not limited to, the authority to fine us and to grant, cancel, restrict or otherwise impose conditions on the right to continue operating particular businesses. For example, the failure to comply with the obligations imposed by the Exchange Act on broker-dealers and the Investment Advisers Act of 1940 on investment advisers, including recordkeeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities,
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or by the Investment Company Act of 1940 (the “1940 Act”), could result in investigations, sanctions and reputational damage. We also may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or SROs (e.g., FINRA) that supervise the financial markets. Substantial legal liability or significant regulatory action taken against us could harm our business prospects through adverse financial effects and reputational harm.
Changes in regulations resulting from either the Dodd-Frank Act or any new regulations or laws may affect our businesses.
The market and economic conditions over the past several years have directly led to a demand by the public for changes in the way the financial services industry is regulated, including a call for more stringent legislation and regulation in the United States and abroad. The Dodd-Frank Act enacted sweeping changes and an unprecedented increase in the supervision and regulation of the financial services industry (see Item 1, “Regulation,” in this report for a discussion of such changes, including the Volcker Rule). The ultimate impact that the Dodd-Frank Act will have on us, the financial industry and the economy at large cannot be specifically ascertained until all of the implementing regulations called for under the legislation have been finalized and fully implemented. Nevertheless, it is apparent that these legislative and regulatory changes could affect our revenue, limit our ability to pursue business opportunities, impact the value of our assets, require us to alter at least some of our business practices, impose additional costs, and otherwise adversely affect our businesses.
The Dodd-Frank Act impacts the manner in which we market our products and services, manage our business and operations, and interact with regulators, all of which could materially impact our results of operations, financial condition and liquidity. Certain provisions of the Dodd-Frank Act that have or may impact our businesses include: the establishment of a fiduciary standard for broker-dealers; regulatory oversight of incentive compensation; the imposition of capital requirements on financial holding companies and to a lesser extent, greater oversight over derivatives trading; and restrictions on proprietary trading. There is also increased regulatory scrutiny (and related compliance costs) as we continue to grow and surpass certain thresholds established under the Dodd-Frank Act. These include, but are not limited to, RJ Bank’s oversight by the CFPB. The CFPB has been active in investigating products, services, and operations of credit providers, including banks, for compliance with various consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act. Any actions taken by the CFPB could result in requirements to alter or cease offering affected products and services, make them less attractive, and restrict our ability to offer them, in addition to increasing our regulatory and compliance costs. To the extent the Dodd-Frank Act impacts the operations, financial condition, liquidity and capital requirements of unaffiliated financial institutions with whom we transact business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present inefficiencies in their interactions with us.
In December 2013, the final version of the Volcker Rule was adopted (see Item 1, “Regulation,” in this report for discussion of the Volcker Rule) and became effective April 1, 2014. We were required to comply with the Volcker Rule’s provisions starting on July 21, 2015. Although we have not historically engaged in significant levels of proprietary trading for our own trading account, due to our underwriting and market making activities, the Volcker Rule will likely adversely affect our results of operations through increased operational and compliance costs, possible reductions in our trading revenues, and changes to our principal capital private equity investments.
The Basel III capital standards will impose additional capital and other requirements on us that could decrease our competitiveness and profitability.
In July 2013, the Fed, the OCC and the FDIC released final U.S. Basel III regulatory capital rules, which implemented the global regulatory capital reforms of Basel III and certain changes required by the Dodd-Frank Act. These rules increase the quantity and quality of regulatory capital, establish a capital conservation buffer, and make selected changes to the calculation of risk-weighted assets. The regulatory capital rule became effective for us January 1, 2015, subject to a phase-in period for several of its provisions, including the new minimum capital ratio requirements, the capital conservation buffer, and the regulatory capital adjustments and deductions. The increased capital requirements could restrict our ability to grow during favorable market conditions or require us to raise additional capital. As a result, our business, results of operations, financial condition or prospects could be adversely affected. We continue to evaluate the impact of the capital rules on both RJ Bank and RJF.
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Failure to comply with regulatory capital requirements primarily applicable to RJF, RJ Bank or our broker-dealer subsidiaries would significantly harm our business.
RJF and RJ Bank are subject to various regulatory and capital requirements administered by various federal regulators, and, accordingly, must meet specific capital guidelines that involve quantitative measures of RJF and RJ Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification for both RJF and RJ Bank are also subject to qualitative judgments by U. S. federal regulators based on components of our capital, risk-weightings of assets, off-balance sheet transactions, and other factors. Quantitative measures established by regulation to ensure capital adequacy require RJF and RJ Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets, Tier 1 capital to average assets (as defined in the regulations), and under rules defined in Basel III, Common equity Tier 1 capital to risk-weighted assets. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could harm either RJF or RJ Bank’s operations and our financial condition.
As more fully discussed in Item 1, “Regulation,” in this report, RJF is required to perform annual stress tests using certain scenarios provided by the Fed. While we believe that both the quality and magnitude of our capital base is sufficient to support our current operations given our risk profile, the results of the stress testing process may affect our approach to managing and deploying capital.
Additionally, as RJF is a holding company, it depends on dividends, distributions and other payments from its subsidiaries to fund payments of its obligations, including debt service. We are subject to the SEC’s uniform net capital rule (Rule 15c3-1) and FINRA’s net capital rule, which may limit our ability to make withdrawals of capital from our broker-dealer subsidiaries. The uniform net capital rule sets the minimum level of net capital that a broker-dealer must maintain and also requires that a portion of its assets be relatively liquid. FINRA may prohibit a member firm from expanding its business or paying cash dividends if resulting net capital falls below its requirements. In addition, our Canada-based broker-dealer subsidiary is subject to similar limitations under applicable regulation in that jurisdiction by IIROC. Regulatory capital requirements applicable to some of our significant subsidiaries may impede access to funds the holding company needs to make payments on any such obligations.
See Note 26 of the Notes to Consolidated Financial Statements in this Form 10-K for further information on regulations and capital requirements.
We operate in a highly regulated industry in which future developments could adversely affect our business and financial condition.
The securities industry is subject to extensive and constantly changing regulation, and broker-dealers and investment advisors are subject to regulations covering all aspects of the securities business, including, but not limited to, sales and trading methods, trade practices among broker-dealers, use and safekeeping of clients’ funds and securities, capital structure of securities firms, anti-money laundering efforts, recordkeeping, and the conduct of directors, officers and employees. A violation of any of these laws or regulations could subject us to: civil and criminal liability; sanctions, which could include the revocation of our subsidiaries’ registrations as investment advisors or broker-dealers; the revocation of the licenses of our financial advisors; censures; fines; or a temporary suspension or permanent bar from conducting business. Any of those events could have a material adverse effect on our business, financial condition and prospects.
The majority of our affiliated financial advisors are independent contractors. Legislative or regulatory action that redefines the criteria for determining whether a person is an employee or an independent contractor could materially impact our relationships with our advisors and our business, resulting in an adverse effect on our results of operations.
We are subject to financial holding company regulatory reporting requirements, including the maintenance of certain risk-based regulatory capital levels that could impact various capital allocation decisions of one or more of our businesses. A failure to satisfy the risk-based regulatory capital levels could require us to halt certain activities permitted under the Bank Holding Company Act of 1956. However, due to our strong current capital position, we do not anticipate that these capital level requirements will have any negative impact on our future business activities. See the section entitled “Business - Regulation” of Item 1 in this report for additional information.
As a financial holding company, we are regulated by the Fed. RJ Bank is regulated by the OCC, the Fed, the CFPB, and the FDIC. This oversight includes, but is not limited to, scrutiny with respect to affiliate transactions and compliance with consumer regulations. The economic and political environment over the past several years has caused increased attention on the regulation of the financial services industry, including many proposals for new rules. Any new rules issued by U.S. regulators that oversee the financial services industry could affect us in substantial and unpredictable ways and could have an adverse effect on our
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business, financial condition, and results of operations. We also may be adversely affected as a result of changes in federal, state, or foreign tax laws, or by changes in the interpretation or enforcement of existing laws and regulations.
The SEC has proposed certain measures that would establish a new framework to replace the requirements of Rule 12b-1 under the 1940 Act, with respect to how mutual funds pay fees to cover the costs of selling and marketing their shares. The staff of the SEC’s Office of Compliance, Inspections and Examinations has indicated that it is reviewing the use of fund assets to pay for fees to sub-transfer agents and sub-administrators for services that may be deemed to be distribution-related. Any adoption of such measures would be phased in over a number of years. As these measures are neither final nor undergoing implementation throughout the financial services industry, their impact cannot be predicted at this time. As this regulatory trend continues, it could adversely affect our operations and, in turn, our financial results.
Asset management businesses have experienced a number of highly publicized regulatory inquiries, which have resulted in increased scrutiny within the industry and new rules and regulations for mutual funds, investment advisors, and broker-dealers. As some of our wholly owned subsidiaries are registered as investment advisors with the SEC, increased regulatory scrutiny and rulemaking initiatives may result in augmented operational and compliance costs, or the assessment of significant fines or penalties against our asset management business, and may otherwise limit our ability to engage in certain activities. It is not possible to determine the extent of the impact of any new laws, regulations, or initiatives that may be proposed, or whether any of the proposals will become law. Conformance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business. For example, pursuant to the Dodd-Frank Act, the SEC was charged with considering whether broker-dealers should be subject to a standard of care similar to the fiduciary standard applicable to registered investment advisors. It is not clear whether the SEC will determine that a heightened standard of conduct is appropriate for broker-dealers; however, any such standard, if mandated, would likely require us to review our product and service offerings and implement certain changes, as well as require that we incur additional regulatory costs in order to ensure compliance.
In addition, the U.S. and foreign governments have recently taken regulatory actions impacting the investment management industry, and may continue to take further actions, including expanding current or enacting new standards, requirements and rules that may be applicable to us and our subsidiaries. For example, several states and municipalities in the United States have recently adopted “pay-to-play” rules, which could limit our ability to charge advisory fees. Such “pay-to-play” rules could affect the profitability of that portion of our business. Additionally, the use of “soft dollars,” where a portion of commissions paid to broker-dealers in connection with the execution of trades also pays for research and other services provided to advisors, is periodically reexamined and may in the future be limited or modified. A substantial portion of the research relied on by our investment management business in the investment decision making process is generated internally by our investment analysts and external research, including external research paid for with soft dollars. This external research generally is used for information gathering or verification purposes, and includes broker-provided research, as well as third party provided databases and research services. If the use of soft dollars is limited, we may have to bear some of these additional costs. Furthermore, new regulations regarding the management of hedge funds and the use of certain investment products may impact our investment management business and result in increased costs. For example, many regulators around the world adopted disclosure and reporting requirements relating to the hedge fund businesses or other businesses, and changes to the laws, rules and regulations in the United States related to the over-the-counter swaps and derivatives markets require additional registration, recordkeeping and reporting obligations.
See the section entitled “Business - Regulation” within Item 1 in this report for additional information regarding our regulatory environment and Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report regarding our approaches to managing regulatory risk. Regulatory actions brought against us may result in judgments, settlements, fines, penalties or other results adverse to us, which could have a material adverse effect on our business, financial condition or results of operations.
RJ Bank is subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other U.S. federal fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies, including the CFPB, are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil monetary penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws by bringing private class action litigation.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
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Item 2. PROPERTIES
The RJF and RJ Bank corporate headquarters are located on land we own that is located within the Carillon Office Park in St. Petersburg, Florida. This office complex currently includes buildings which provide approximately 920,000 square feet of office space. At this location, we also have the necessary rights to add approximately 440,000 square feet of new office space on our existing parcel. To facilitate certain storage needs, we lease approximately 30,000 square feet of warehouse space near this headquarters complex.
We conduct employee-based branch office operations in various locations throughout the U.S. and in certain foreign countries. With the exception of one company-owned RJ&A branch located in Crystal River, Florida, and certain interests in real estate holdings held under Morgan Properties, LLC which are insignificant in the aggregate, RJ&A branches are leased from third parties under leases that contain various expiration dates through 2026. Leases for branch offices of RJFS, the independent contractors of RJ Ltd., and RJIS, are the responsibility of the respective independent contractor financial advisors.
We conduct certain operations from our 88,000 square foot office building located on land we own in Southfield, Michigan. We operate a 40,000 square foot information technology data center on land we own in the Denver, Colorado area. We also conduct certain operations in approximately 240,000 square feet of leased office space in the Raymond James Tower located in downtown Memphis, Tennessee.
RJ Ltd. leases its main office premises in Vancouver, Calgary and Toronto, as well as certain branch offices located throughout Canada. These leases have various expiration dates through 2026. RJ Ltd. does not own any land or buildings.
During fiscal year 2011, we entered into an agreement to purchase land located in Pasco County, Florida. As of September 30, 2015, the completion of this purchase transaction is subject to the satisfactory resolution of certain permitting matters.
See Note 21 of the Notes to Consolidated Financial Statements in this Form 10-K for further information on our lease commitments.
Item 3. | LEGAL PROCEEDINGS |
Pre-Closing Date Morgan Keegan matters (all of which are subject to indemnification by Regions)
In July 2006, MK & Co. and a former MK & Co. analyst were named as defendants in a lawsuit filed by a Canadian insurance and financial services company, Fairfax Financial Holdings, and its American subsidiary in the Circuit Court of Morris County, New Jersey. Plaintiffs made claims under a civil Racketeer Influenced and Corrupt Organizations (“RICO”) statute, for commercial disparagement, tortious interference with contractual relationships, tortious interference with prospective economic advantage and common law conspiracy. Plaintiffs alleged that defendants engaged in a multi-year conspiracy to publish and disseminate false and defamatory information about plaintiffs to improperly drive down plaintiff’s stock price, so that others could profit from short positions. Plaintiffs alleged that defendants’ actions damaged their reputations and harmed their business relationships. Plaintiffs alleged a number of categories of damages they sustained, including lost insurance business, lost financings and increased financing costs, increased audit fees and directors and officers insurance premiums and lost acquisitions, and have requested monetary damages. On May 11, 2012, the trial court ruled that New York law applied to plaintiff’s RICO claims, therefore the claims were not subject to treble damages. On June 27, 2012, the trial court dismissed plaintiffs’ tortious interference with prospective relations claim, but allowed other claims to go forward. A jury trial was set to begin on September 10, 2012. Prior to its commencement the court dismissed the remaining claims with prejudice. Plaintiffs have appealed the court’s rulings.
Certain of the Morgan Keegan entities, along with Regions, have been named in class-action lawsuits filed in federal and state courts on behalf of shareholders of Regions and investors who purchased shares of certain mutual funds in the Regions Morgan Keegan Fund complex (the “Regions Funds”). The Regions Funds were formerly managed by Morgan Asset Management (“MAM”), an entity which was at one time a subsidiary of one of the Morgan Keegan affiliates, but an entity which was not part of our April 2, 2012 acquisition of Morgan Keegan. The complaints contain various allegations, including claims that the Regions Funds and the defendants misrepresented or failed to disclose material facts relating to the activities of the funds. In August 2013, the United States District Court for the Western District of Tennessee approved the settlement of the class action and the derivative action regarding the closed end funds for $62 million and $6 million, respectively. No class has been certified. Certain of the shareholders in the funds and other interested parties have entered into arbitration proceedings and individual civil claims, in lieu of participating in the class action lawsuits.
The SEC and the states of Missouri and Texas are investigating alleged securities law violations by MK & Co. in the underwriting and sale of certain municipal bonds. An enforcement action was brought by the Missouri Secretary of State in April
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2013, seeking monetary penalties and other relief, was dismissed and refiled in November 2013. A Civil action was brought by institutional investors of the bonds in March 2012, seeking a return of their investment and unspecified compensatory and punitive damages, which has been resolved. A class action was brought on behalf of retail purchasers of the bonds in September 2012, seeking unspecified compensatory and punitive damages. In September 2014, the District Court for the Western District of Missouri granted class certification. The matter was resolved and the settlement approved by the District Court in January 2015. Other individual investors and investor groups have also filed arbitration claims or separate civil claims, which have been resolved.
Prior to the Closing Date, Morgan Keegan was involved in other litigation arising in the normal course of its business. On all such matters, RJF is subject to indemnification from Regions pursuant to the terms of the stock purchase agreement.
Indemnification from Regions
Under the terms of RJF’s April 2, 2012 acquisition of Morgan Keegan, Regions has provided indemnification to RJF for losses it may incur in connection with any legal proceedings pending as of the closing date or commenced after the closing date related to pre-closing matters. The indemnification for legal proceedings related to pre-closing date activities of Morgan Keegan that commenced after the closing date and for a three year period that ended on April 2, 2015, are subject to an annual $2 million indemnification deductible, after which RJF is entitled to receive the full amount of all such losses incurred in excess of $2 million. All of the pre-Closing Date Morgan Keegan matters described above are subject to such indemnification provisions. See Note 21 of the Notes to Consolidated Financial Statements in this Form 10-K for additional information regarding Morgan Keegan’s pre-Closing Date legal matter contingencies.
Other matters unrelated to Morgan Keegan
We are a defendant or co-defendant in various lawsuits and arbitrations incidental to our securities business as well as regulatory investigations and other corporate litigation, matters which are unrelated to the pre-Closing Date activities of Morgan Keegan. We are contesting the allegations in these matters and believe that there are meritorious defenses in each. In view of the number and diversity of claims against us, the number of jurisdictions in which litigation is pending and the inherent difficulty of predicting the outcome of litigation and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be. In the opinion of management, based on current available information, review with outside legal counsel, and consideration of amounts provided for in the accompanying consolidated financial statements with respect to these matters, ultimate resolution of these matters will not have a material adverse impact on our financial position or cumulative results of operations. However, resolution of one or more of these matters may have a material effect on the results of operations in any future period, depending upon the ultimate resolution of those matters and upon the level of income for such period.
See Note 21 of the Notes to Consolidated Financial Statements in this Form 10-K for additional information regarding legal matter contingencies.
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PART II
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the NYSE under the symbol “RJF.” As of November 12, 2015, we had 362 holders of record of our common stock. A substantially greater number of shares of our common stock is held by beneficial owners, whose shares are held of record by banks, brokers, and other financial institutions. Our transfer agent is Computershare Inc. whose address is P.O. Box 30170, College Station, TX 77842-3170.
The following table sets forth for the periods indicated the high and low trades for our common stock:
Fiscal year | |||||||||||||||
2015 | 2014 | ||||||||||||||
High | Low | High | Low | ||||||||||||
First quarter | $ | 58.18 | $ | 48.06 | $ | 52.47 | $ | 40.01 | |||||||
Second quarter | $ | 59.77 | $ | 50.97 | $ | 56.31 | $ | 48.13 | |||||||
Third quarter | $ | 61.46 | $ | 54.99 | $ | 56.32 | $ | 47.49 | |||||||
Fourth quarter | $ | 61.82 | $ | 48.24 | $ | 56.61 | $ | 48.91 | |||||||
Cash dividends per share of common stock paid during the quarter are reflected below. The dividends were declared during the quarter preceding their payment.
Fiscal year | |||||||
2015 | 2014 | ||||||
First quarter | $ | 0.16 | $ | 0.14 | |||
Second quarter | $ | 0.18 | $ | 0.16 | |||
Third quarter | $ | 0.18 | $ | 0.16 | |||
Fourth quarter | $ | 0.18 | $ | 0.16 | |||
On August 19, 2015, our Board of Directors declared a quarterly dividend of $0.18 in cash per share of common stock which was paid on October 15, 2015. Additionally, on November 19, 2015, our Board of Directors declared a quarterly dividend of $0.20 in cash per share of common stock, to be paid January 15, 2016 to shareholders of record on January 4, 2016.
See Note 26 of the Notes to Consolidated Financial Statements in this Form 10-K for information regarding our intentions for paying cash dividends and the related capital restrictions.
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We purchase our own stock from time to time in conjunction with a number of activities, each of which is described below. The following table presents information on our purchases of our own stock, on a monthly basis, for the twelve month period ended September 30, 2015:
Total number of shares purchased (1) | Average price per share | Number of shares purchased as part of publicly announced plans or programs(2) | Approximate dollar value (in thousands) at each month-end, of securities that may yet be purchased under the plans or programs (3)(4) | ||||||||||
October 1, 2014 – October 31, 2014 | 8,894 | $ | 53.75 | — | $ | 49,357 | |||||||
November 1, 2014 – November 30, 2014 | 107,431 | 56.23 | — | $ | 49,357 | ||||||||
December 1, 2014 – December 31, 2014 | 110,756 | 55.89 | — | $ | 49,357 | ||||||||
First quarter | 227,081 | $ | 55.97 | — | |||||||||
January 1, 2015 – January 31, 2015 | 26,254 | $ | 53.90 | — | $ | 49,357 | |||||||
February 1, 2015 – February 28, 2015 | 9,789 | 56.46 | — | $ | 49,357 | ||||||||
March 1, 2015 – March 31, 2015 | 3,498 | 57.29 | — | $ | 49,357 | ||||||||
Second quarter | 39,541 | $ | 54.84 | — | |||||||||
April 1, 2015 – April 30, 2015 | 274,000 | $ | 56.56 | — | $ | 49,357 | |||||||
May 1, 2015 – May 31, 2015 | 4,895 | 58.44 | — | $ | 150,000 | ||||||||
June 1, 2015 – June 30, 2015 | 3,930 | 58.12 | — | $ | 150,000 | ||||||||
Third quarter | 282,825 | $ | 56.61 | — | |||||||||
July 1, 2015 – July 31, 2015 | 127 | $ | 59.60 | — | $ | 150,000 | |||||||
August 1, 2015 – August 31, 2015 | 975,315 | 51.08 | 962,167 | $ | 100,877 | ||||||||
September 1, 2015 – September 30, 2015 | 153,534 | 50.96 | 152,338 | $ | 93,112 | ||||||||
Fourth quarter | 1,128,976 | $ | 51.07 | 1,114,505 | |||||||||
Fiscal year total | 1,678,423 | $ | 52.75 | 1,114,505 | |||||||||
(1) | Of the total for the year ended September 30, 2015, share purchases for the trust fund established to acquire our common stock in the open market and used to settle restricted stock units granted as a retention vehicle for certain employees of our wholly owned Canadian subsidiaries amounted to 86,933 shares, for a total consideration of $4.9 million (for more information on this trust fund, see Note 2 and Note 11 of the Notes to Consolidated Financial Statements in this Form 10-K). These activities do not utilize the repurchase authority discussed in footnotes (3) and (4) below. |
We also repurchase shares when employees surrender shares as payment for option exercises or withholding taxes. Of the total for the year ended September 30, 2015, 476,985 shares were surrendered to us by employees for such purposes, for a total consideration of $27 million. These activities do not utilize the repurchase authority discussed in footnotes (3) and (4) below.
Of the total for the year ended September 30, 2015, 1,114,505 shares were repurchased pursuant to our securities repurchase authorization, see footnotes (2) and (3) below for additional information.
(2) | During August and September 2015, we purchased shares of our common stock in open market transactions, for a total purchase price of $56.9 million, which reflects an average purchase price per share of $51.04. These share repurchases were made pursuant to the RJF securities repurchase authorization described in footnote (3) below. |
(3) | On May 21, 2015, we announced an increase in the amount previously authorized by our Board of Directors to be used, at the discretion of our Securities Repurchase Committee, for open market repurchases of our common stock and certain senior notes. Such action increased the effective available authorization for such repurchases to $150 million subject to cash availability and other factors. After the effect of the August and September 2015 open market purchases of our common stock described in footnote (2) above, as of September 30, 2015, $93.1 million remained available for such purpose under the May 21, 2015 authorization. |
(4) | Subsequent to year-end, on November 19, 2015, we announced an increase in the amount previously authorized by our Board of Directors to be used, at the discretion of our Securities Repurchase Committee, for open market repurchases of our common stock and certain senior notes, to $150 million subject to cash availability and other factors. |
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Item 6. | SELECTED FINANCIAL DATA |
Year ended September 30, | |||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
Operating results: | |||||||||||||||||||
Total revenues | $ | 5,308,164 | $ | 4,965,460 | $ | 4,595,798 | $ | 3,897,900 | $ | 3,399,886 | |||||||||
Net revenues | $ | 5,200,210 | $ | 4,861,369 | $ | 4,485,427 | $ | 3,806,531 | $ | 3,334,056 | |||||||||
Net income attributable to RJF | $ | 502,140 | $ | 480,248 | $ | 367,154 | $ | 295,869 | $ | 278,353 | |||||||||
Net income per share - basic | $ | 3.51 | $ | 3.41 | $ | 2.64 | $ | 2.22 | $ | 2.20 | |||||||||
Net income per share - diluted | $ | 3.43 | $ | 3.32 | $ | 2.58 | $ | 2.20 | $ | 2.19 | |||||||||
Weighted-average common shares outstanding - basic | 142,548 | 139,935 | 137,732 | 130,806 | 122,448 | ||||||||||||||
Weighted-average common and common equivalent shares outstanding - diluted | 145,939 | 143,589 | 140,541 | 131,791 | 122,836 | ||||||||||||||
Cash dividends per common share - declared | $ | 0.72 | $ | 0.64 | $ | 0.56 | $ | 0.52 | $ | 0.52 | |||||||||
Financial condition: | |||||||||||||||||||
Total assets | $ | 26,479,684 | $ | 23,325,652 | $ | 23,186,122 | $ | 21,160,265 | $ | 18,006,995 | |||||||||
Senior notes maturing within twelve months | $ | 249,946 | $ | — | $ | — | $ | — | $ | — | |||||||||
Long-term obligations: | |||||||||||||||||||
Non-current portion of other borrowings | $ | 583,740 | (1) | $ | 537,932 | (1) | $ | 47,132 | $ | 173,918 | $ | 52,622 | |||||||
Non-current portion of loans payable of consolidated variable interest entities (2) | $ | 12,597 | $ | 25,928 | $ | 43,877 | $ | 62,938 | $ | 78,650 | |||||||||
Non-current portion of senior notes payable | $ | 899,276 | $ | 1,149,034 | $ | 1,148,846 | $ | 1,148,658 | $ | 549,505 | |||||||||
Total long-term debt | $ | 1,495,613 | $ | 1,712,894 | $ | 1,239,855 | $ | 1,385,514 | $ | 680,777 | |||||||||
Equity attributable to Raymond James Financial, Inc. | $ | 4,522,031 | $ | 4,141,236 | $ | 3,662,924 | $ | 3,268,940 | $ | 2,587,619 | |||||||||
Shares outstanding (3) | 142,751 | 140,836 | 138,750 | 136,076 | 123,273 | ||||||||||||||
Book value per share at end of year | $ | 31.68 | $ | 29.40 | $ | 26.40 | $ | 24.02 | $ | 20.99 | |||||||||
Tangible book value per share at end of year (a non-GAAP measure) (4) | $ | 29.17 | $ | 26.98 | $ | 23.86 | $ | 21.42 | $ | 20.45 | |||||||||
(1) | At September 30, 2015 and 2014, the outstanding balances were primarily comprised of borrowings from the Federal Home Loan Bank (“FHLB”) by RJ Bank and mortgage notes payable on our corporate headquarters offices. |
(2) | Loans payable of consolidated variable interest entities (“VIE”) are non-recourse to us. |
(3) | Excludes non-vested shares. |
(4) | This non-GAAP measure is computed by dividing equity attributable to Raymond James Financial, Inc., less goodwill and net identifiable intangible assets, offset by their related deferred tax balances (which are $19 million, $13 million, $9 million, $8 million and $6 million as of September 30, 2015, 2014, 2013, 2012 and 2011 respectively), by the number of shares outstanding. Management believes tangible book value per share is a measure that is useful to assess capital strength and that the GAAP and non-GAAP measures should be considered together. |
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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. 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
We operate as a financial services and bank holding company. Results in the businesses in which we operate are highly correlated to the general overall strength of economic conditions and, more specifically, to the direction of the U.S. equity and fixed income markets, the corporate and mortgage lending markets and commercial and residential credit trends. 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 market participants which include investors, borrowers, and competitors, impacting their level of participation in the financial markets. These factors also impact the level of public offerings, trading profits, interest rate volatility and asset valuations, or a combination thereof. In turn, these decisions and factors affect our business results.
Year ended September 30, 2015 compared with the year ended September 30, 2014
For the sixth consecutive year we achieved record net revenues for the fiscal year, $5.2 billion in fiscal year 2015, a $339 million, or 7%, increase compared to the prior year. All four operating segments achieved record levels of net revenues. Total client assets under administration increased to $480 billion at September 30, 2015, a 1% increase over the prior year level. The increase in assets under administration is attributable to strong financial advisor recruiting results and high levels of retention of our existing financial advisors, which more than offset the decline in the U.S. equity markets for the year (primarily occurring in our fourth fiscal quarter).
We also achieved a record level of net income of $502 million, an increase of $22 million, or 5%, compared to the prior year. Three of our four operating segments achieved record levels of profitability. Fully diluted earnings per share of $3.43 increased $0.11, or 3%, over the prior year amount.
Non-interest expenses increased $278 million, or 7%, compared to the prior year. The increase is primarily due to the increase in compensation, commissions and benefits expenses associated with the increased revenues. In addition, as a result of various growth strategies across our businesses, we experienced an increase in our business development expenses. Our strategic efforts during the year to continually improve the technology available to our financial advisors, as well as the additional costs of compliance with various new rules and regulations impacting our industry, are factors impacting an increase in our communications and information processing expenses. The provision for loan losses increased significantly year over year, as the prior year benefited to a greater extent than the current year, from improved credit characteristics of the loan portfolio. The combination of the above noted factors, even after consideration of the incremental expenses resulting from activities associated with the strategic growth initiatives that should favorably impact future revenues, resulted in a pre-tax margin on net revenues of 15.3%, a level that is nearly equivalent to the 15.4% pre-tax margin on net revenues in the prior year.
A summary of the most significant items impacting our financial results as compared to the prior year are as follows:
• | Our Private Client Group segment generated record net revenues of $3.5 billion, a $228 million, or 7%, increase over the prior year. Pre-tax income also established a record at $342 million, a $12 million, or 4%, increase over the prior year. The increase in revenues is primarily attributable to increased securities commissions and fee revenues, predominately arising from fee-based accounts, as well as an increase in mutual fund and annuity service fee revenues. Client assets under administration of the Private Client Group increased 1% over the prior year level, to $453.3 billion at September 30, 2015. The increase in commission revenues and client assets have resulted primarily from successful recruiting of financial advisors, and high levels of financial advisor retention. We had our second best financial advisor recruiting year ever in fiscal year 2015 with a net increase of 331 financial advisors over the year to 6,596 affiliated financial advisors as of September 30, 2015. There was an overall net increase in client assets despite the impact of the decline in the market value of assets that occurred during the fourth quarter of fiscal year 2015 as a result of declining equity market conditions. Commission expenses increased in proportion to the increase in commission revenues while all other components of non-interest expense increased 5% as we incurred increases in certain costs associated with the successful recruiting efforts and continued information system improvements. On July 31, 2015, we completed our |
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acquisition of The Producers Choice, LLC (“TPC”), a private insurance and annuity marketing organization based in Troy, Michigan. Our acquisition of TPC brings more life insurance and annuity experts to the firm to support financial advisors and their clients.
• | The Capital Markets segment generated record net revenues of $960 million, a $7 million, or 1%, increase over the prior year. Pre-tax income was $107 million, a decrease of $24 million, or 18%, compared to the prior year. Fiscal year 2015 reflected new record levels of merger and acquisition fees and tax credit fund syndication fees. Commission revenues from fixed income institutional sales increased over the prior year level, resulting in part from growth in our public finance activities. However, equity underwriting revenues declined compared to the prior year as a result of weakness in both the energy and real estate sectors, which also led to a decline in commission revenues on equity products. The net profit generated by this segment was negatively impacted by increased costs, some of which result from our efforts during the year to broadly build out certain sector capabilities and to increase investment banking coverage in certain sectors, which we believe present solid long-term opportunities for future revenue growth. The continued difficult market environment in Canada negatively impacted this segment’s revenues and profitability. |
• | Our Asset Management segment generated record net revenues of $392 million, a $23 million, or 6%, increase over the prior year. Pre-tax income was a record $135 million, a $7 million, or 5%, increase over the prior year. Financial assets under management increased 1% from the prior year, to $65.2 billion as of September 30, 2015. The increase resulted from net inflows of client assets, which more than offset the unfavorable impact of the decline in the market value of assets that occurred during the fourth quarter of fiscal year 2015 as a result of declining equity market conditions. On April 30, 2015, we completed our acquisition of Cougar Global Investments Limited (“Cougar”), an asset management firm based in Toronto, Canada that markets its investment services to high net worth individuals, families, foundations, trusts and institutions in Canada and the United States. |
• | RJ Bank generated record net revenues of $414 million, a $63 million, or 18%, increase over the prior year. Pre-tax income was a record $279 million, a $36 million, or 15% increase, over the prior year. Net interest income increased due to growth in average loans outstanding, coupled with a modest increase in net interest margin. Our provision for loan losses increased $10 million, or 74% compared to the prior year. We incurred substantial provision for loan losses associated with loan growth in both years, however the majority of the year-over-year increase resulted from the prior year benefiting to a greater extent than the current year, from improved credit characteristics of the loan portfolio. The credit characteristics of the loan portfolio generally improved over the year, reflecting the positive impact of improved economic conditions. |
• | Activities in our Other segment resulted in a pre-tax loss that was $19 million less than the prior year. Net revenues in this segment increased $25 million, resulting from increases in revenues associated with our private equity portfolio investments, and an increase in gains resulting from our auction rate securities portfolio sales and redemption activities. As a result of the increase in private equity investment revenues, the portion of this segment’s pre-tax income that is attributable to noncontrolling interests also increased. |
• | Our fiscal year 2015 effective tax rate was 37.1%, up from the 35.8% in the prior year. As a result of the fiscal year 2015 decline in equity market values compared to positive markets in fiscal year 2014, the change in the amount of our non-taxable gains/losses arising from the value of our company-owned life insurance portfolio had the effect of increasing our effective tax rate by 1.2% compared to the prior year effective tax rate. |
Consistent with our growth strategies, we completed two acquisitions during the year, Cougar and TPC. We continue to evaluate future opportunities, but remain committed to our strategy that our acquisitions must meet our strategic growth objectives, involve entities that share our culture of conservatism and “client-first” values, and be executed at purchase prices that provide us opportunities to increase our shareholders’ value.
During the year we implemented the new Basel III regulatory capital rules, a change which did not have a significant impact on our regulatory capital ratios. We have published the results of the 2015 Dodd-Frank Act mandated Stress Test, the results of which indicated that both RJF and RJ Bank have sufficient capital to successfully navigate a severe and prolonged economic downturn while still maintaining capital levels that exceed both regulatory requirements and higher management thresholds throughout the course of the Severely Adverse Scenario.
The volume of possible regulatory changes that impact the businesses in which we operate continues to grow and evolve. Regulatory rule-making activities that have arisen during the year include the DOL proposed rule enhancing standards for individuals providing investment advice to retirement plans, their participants, or beneficiaries. We are continuing our study and evaluation of the proposal. The total impact of the standard, once finalized and implemented, on our business is unknown at this
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time. We continue to monitor the impact of proposed future legislation while implementing new regulations. We presently do not expect currently enacted legislation to have a significant adverse direct impact on our operations as a whole, however, we continue to evaluate the specific impacts of each.
Year ended September 30, 2014 compared with the year ended September 30, 2013
We achieved record net revenues of $4.9 billion in fiscal year 2014, a $376 million or 8%, increase compared to the prior year. The increase generated by our on-going operations is even greater than that amount after factoring in the $74 million of revenue reflected in fiscal year 2013 that was associated with a private equity investment we sold in that year. All four operating segments achieved record levels of net revenues. Total client assets under administration increased to $475 billion at September 30, 2014, a 12% increase over the prior year level.
We also achieved a record level of net income in fiscal year 2014, to $480 million, an increase of $113 million, or 31%, compared to the prior year. Three of our four operating segments achieved record levels of profitability. Fully diluted earnings per share of $3.32 in fiscal year 2014 increased $0.74, or 29%, over the fiscal year 2013 amount. After excluding the acquisition related and other non-recurring expenses we incurred in fiscal year 2013, our adjusted net income in fiscal year 2014 increased $61 million, or 15%, compared to fiscal year 2013 (a non-GAAP measure).(1) The increase in net income in fiscal year 2014 over the prior year level is even more significant given that the fiscal year 2013 net income included $14 million (after the attribution to noncontrolling interests) arising from our indirect investment in Albion Medical Holdings, Inc. (“Albion”), a private equity holding which was sold during fiscal year 2013.
Non-interest expenses increased $254 million in fiscal year 2014, or 7%, compared to the prior year. The increase in fiscal year 2014 is primarily due to the increase in compensation, commissions and benefits expenses which were partially offset by the decrease in acquisition related expenses. Acquisition and integration related expenses in fiscal year 2014 were no longer material for separate reporting since our integration of Morgan Keegan was substantially complete as of September 30, 2013. The combination of increasing net revenues and overall expense control in fiscal year 2014 helped us achieve a 15.4% pre-tax margin on net revenues.
A summary of the most significant items impacting our financial results in fiscal year 2014 as compared to the prior year are as follows:
• | Our Private Client Group segment generated record net revenues of $3.3 billion in fiscal year 2014, a 12% increase, while pre-tax income increased $100 million, or 43%, to a record $330 million. The increase in revenues is primarily attributable to increased securities commissions and fee revenues, predominately arising from fee-based accounts, as well as an increase in mutual fund and annuity service fee revenues. Commission expenses increased in proportion to the increase in corresponding commission revenues while all other components of non-interest expense increased by 3%. Client assets under administration of the Private Client Group increased 12% over the prior year level, to $450.6 billion at September 30, 2014. Net inflows of client assets in fiscal year 2014 were positively impacted by successful recruiting of financial advisors, among other favorable factors. |
• | The Capital Markets segment generated record net revenues of $953 million in fiscal year 2014, a 3% increase, while pre-tax income increased $28 million, or 28%, to a record $131 million. Increases in trading profits, merger and acquisition fee revenues, equity underwriting fee revenues and institutional sales commissions on equity products more than offset a decline in institutional sales commissions on fixed income products. The decline in institutional fixed income commission revenues results from challenging fixed income market conditions during fiscal year 2014 due to economic uncertainty, historically low interest rates, relatively low volatility of benchmark interest rates, and decreased customer trading volumes. |
• | Our Asset Management segment generated record net revenues of $370 million in fiscal year 2014, a 26% increase, while pre-tax income increased $32 million, or 33%, to a record $128 million. Financial assets under management increased 15% from the prior year, to $64.6 billion as of September 30, 2014. Both strong net inflows of client assets and market appreciation contributed to the increase. We also earned nearly $10 million in performance fees in fiscal year 2014 (compared to nearly $2 million in the prior year) as a result of positive net performance from certain of our managed funds (a portion of which are attributable to noncontrolling interests), which contributed to the increase in revenues and pre-tax income. |
(1) | Refer to the discussion and reconciliation of the GAAP results to the non-GAAP results in the “Reconciliation of the GAAP results to the non-GAAP measures” section of this MD&A. |
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• | RJ Bank generated record net revenues of $352 million in fiscal year 2014, a 1% increase, while pre-tax income decreased $25 million, or 9%, to $243 million. Net interest income increased due to growth in average loans outstanding, offset in large part by a lower net interest margin. The provision for loan losses increased in fiscal year 2014 primarily as the result of significant loan portfolio growth, partially offset by decreases resulting from improved credit characteristics of the loan portfolio reflecting the positive impact from improved economic conditions. Non-interest expenses (excluding the provision for loan losses) increased $19 million. |
• | Activities in our Other segment resulted in a pre-tax loss that is $48 million less in fiscal year 2014 than the prior year. Our non-interest expenses decreased substantially as we are no longer incurring acquisition and integration related costs since our integration of Morgan Keegan was substantially complete as of September 30, 2013. In addition, fiscal year 2013 included significant revenues and pre-tax income associated with our indirect investment in Albion, which was sold in April 2013, thus having a significant impact on comparisons to the prior year. |
• | Our fiscal year 2014 effective tax rate was 35.8%, up from the 34.9% in fiscal year 2013. Our fiscal year 2013 effective tax rate included a nonrecurring tax benefit resulting from a change in management’s repatriation strategy of certain foreign earnings. Both years included significant non-taxable gains in the value of our company-owned life insurance portfolio. |
Segments
The following table presents our consolidated and segment gross revenues, net revenues and pre-tax income (loss), the latter excluding noncontrolling interests, for the years indicated:
Year ended September 30, | |||||||||||||||||
2015 | 2014 | % change | 2013 | % change | |||||||||||||
($ in thousands) | |||||||||||||||||
Total company | |||||||||||||||||
Revenues | $ | 5,308,164 | $ | 4,965,460 | 7 | % | $ | 4,595,798 | 8 | % | |||||||
Net revenues | 5,200,210 | 4,861,369 | 7 | % | 4,485,427 | 8 | % | ||||||||||
Pre-tax income excluding noncontrolling interests | 798,174 | 748,045 | 7 | % | 564,187 | 33 | % | ||||||||||
Private Client Group | |||||||||||||||||
Revenues | 3,519,558 | 3,289,503 | 7 | % | 2,930,603 | 12 | % | ||||||||||
Net revenues | 3,507,806 | 3,279,883 | 7 | % | 2,918,978 | 12 | % | ||||||||||
Pre-tax income | 342,243 | 330,278 | 4 | % | 230,315 | 43 | % | ||||||||||
Capital Markets | |||||||||||||||||
Revenues | 975,064 | 968,635 | 1 | % | 945,477 | 2 | % | ||||||||||
Net revenues | 960,035 | 953,215 | 1 | % | 927,408 | 3 | % | ||||||||||
Pre-tax income | 107,009 | 130,565 | (18 | )% | 102,171 | 28 | % | ||||||||||
Asset Management | |||||||||||||||||
Revenues | 392,378 | 369,690 | 6 | % | 292,817 | 26 | % | ||||||||||
Net revenues | 392,301 | 369,666 | 6 | % | 292,809 | 26 | % | ||||||||||
Pre-tax income | 135,050 | 128,286 | 5 | % | 96,300 | 33 | % | ||||||||||
RJ Bank | |||||||||||||||||
Revenues | 425,988 | 360,317 | 18 | % | 356,130 | 1 | % | ||||||||||
Net revenues | 414,295 | 351,770 | 18 | % | 346,906 | 1 | % | ||||||||||
Pre-tax income | 278,721 | 242,834 | 15 | % | 267,714 | (9 | )% | ||||||||||
Other | |||||||||||||||||
Revenues | 66,967 | 42,203 | 59 | % | 126,401 | (67 | )% | ||||||||||
Net revenues | (10,198 | ) | (35,253 | ) | 71 | % | 45,923 | (177 | )% | ||||||||
Pre-tax loss | (64,849 | ) | (83,918 | ) | 23 | % | (132,313 | ) | 37 | % | |||||||
Intersegment eliminations | |||||||||||||||||
Revenues | (71,791 | ) | (64,888 | ) | (11 | )% | (55,630 | ) | (17 | )% | |||||||
Net revenues | (64,029 | ) | (57,912 | ) | (11 | )% | (46,597 | ) | (24 | )% | |||||||
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Reconciliation of the GAAP results to the non-GAAP measures
We believe that the non-GAAP measures provide useful information by excluding material items that may not be indicative of our core operating results and that the GAAP and the non-GAAP measures should be considered together. There are no non-GAAP adjustments in either of the fiscal years ended September 30, 2015 or 2014, as we do not separately report acquisition and integration related costs in those years given that our integration of Morgan Keegan was substantially complete as of September 30, 2013. The non-GAAP adjustments in fiscal year 2013 were comprised of the acquisition and integration costs incurred during that fiscal year (primarily associated with the Morgan Keegan acquisition) as well as certain other non-recurring expenses, net of applicable taxes. Refer to the footnotes to the following table for further explanation of each fiscal year 2013 non-recurring item.
The following table provides a reconciliation of the fiscal year 2013 GAAP basis to the non-GAAP measures:
Year ended | |||
September 30, 2013 | |||
($ in thousands, except per share amounts) | |||
Net income attributable to RJF, Inc. - GAAP basis | $ | 367,154 | |
Non-GAAP adjustments: | |||
Acquisition related expenses (1) | 73,454 | ||
RJF’s share of RJES goodwill impairment expense (2) | 4,564 | ||
RJES restructuring expense (3) | 1,902 | ||
Pre-tax non-GAAP adjustments | 79,920 | ||
Tax effect of non-GAAP adjustments (4) | (27,908 | ) | |
Adjusted net income attributable to RJF, Inc. - Non-GAAP basis | $ | 419,166 | |
Non-GAAP earnings per common share: | |||
Non-GAAP basic | $ | 3.01 | |
Non-GAAP diluted | $ | 2.95 | |
Average equity - GAAP basis (5) | $ | 3,465,323 | |
Average equity - non-GAAP basis (6) | $ | 3,483,531 | |
Return on equity | 10.6 | % | |
Return on equity - non-GAAP basis (7) | 12.0 | % | |
(1) | The non-GAAP adjustment adds back to pre-tax income acquisition and integration expenses that were incurred during the fiscal year. |
(2) | The non-GAAP adjustment adds back to pre-tax income RJF’s share of the total goodwill impairment expense associated with our Raymond James European Securities, Inc. (“RJES”) reporting unit. |
(3) | The non-GAAP adjustment adds back to pre-tax income restructuring expenses associated with our RJES operations. |
(4) | The non-GAAP adjustment reduces net income for the income tax effect of all the pre-tax non-GAAP adjustments, utilizing the effective tax rate applicable in the fiscal year. |
(5) | Computed by adding the total equity attributable to RJF, Inc. as of each quarter-end date during the fiscal year, plus the beginning of the year total, divided by five. |
(6) | The calculation of non-GAAP average equity includes the impact on equity of the non-GAAP adjustments described in the table above. |
(7) | Computed by utilizing the adjusted net income attributable to RJF, Inc.-non-GAAP basis and the average equity-non-GAAP basis. See footnotes (5) and (6) above for the calculation of average equity-non-GAAP basis. |
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Net interest analysis
We have certain assets and liabilities, primarily held in our PCG and RJ Bank segments, which are subject to changes in interest rates, and would have a meaningful impact on our overall financial performance in the event of a change in short-term interest rates. A gradual increase in short-term interest rates would have the most significant favorable impact on our PCG and RJ Bank segments (refer to the table in Item 7A - Interest Rate Risk in this report, which presents an analysis of RJ Bank’s estimated net interest income over a 12 month period based on instantaneous shifts in interest rates using the asset/liability model applied by RJ Bank).
Based upon our analysis performed as of September 30, 2015, we estimate that a 100 basis point instantaneous rise in short-term interest rates would result in an increase in our pre-tax income of approximately $150 million over the subsequent twelve month period. Approximately 55% of such an increase would be reflected in account and service fee revenues (resulting from an increase in the fees generated from unaffiliated banks in lieu of interest income from client cash balances in our multi-bank sweep program and the discontinuance of money market fund fee waivers) which are reported in the PCG segment, and the remaining portion of the increase would be reflected in net interest income reported primarily in our PCG and RJ Bank segments. This estimate is based on static balances as of September 30, 2015 and a conservative assumption related to interest credited to our clients on their cash balances in such an interest rate environment. The actual amount of any increase we would realize in the future will ultimately be based on a number of factors including, but not limited to, the actual change in balances, the rapidity and magnitude of the increase in interest rates, the competitive landscape at such time, and the returns on comparable investments, all of which will factor into the interest rates we pay on client cash balances. The great majority of the benefit to pre-tax income from an increase in short-term interest rates would be expected to arise from the first 100 basis point increase, as we presume any further increases in short-term interest rates would be passed along to clients through our various cash sweep programs, and thus such additional interest revenues and interest sensitive fees would be offset by increases of similar amounts in our interest expense.
40
The following table presents our consolidated average interest-earning asset and liability balances, interest income and expense balances, and the average yield/cost, for the years indicated:
Year ended September 30, | ||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||
Average balance(1) | Interest inc./exp. | Average yield/cost | Average balance(1) | Interest inc./exp. | Average yield/cost | Average balance(1) | Interest inc./exp. | Average yield/cost | ||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||
Margin balances | $ | 1,805,312 | $ | 67,573 | 3.74 | % | $ | 1,764,305 | $ | 68,454 | 3.88 | % | $ | 1,775,251 | $ | 60,931 | 3.43 | % | ||||||||||||||
Assets segregated pursuant to regulations and other segregated assets | 2,498,357 | 13,792 | 0.55 | % | 2,783,598 | 15,441 | 0.55 | % | 3,554,917 | 17,251 | 0.49 | % | ||||||||||||||||||||
Bank loans, net of unearned income (2) | 12,129,531 | 405,578 | 3.34 | % | 10,048,719 | 343,942 | 3.39 | % | 8,605,013 | 335,964 | 3.86 | % | ||||||||||||||||||||
Available for sale securities | 508,223 | 5,100 | 1.00 | % | 648,515 | 6,560 | 1.01 | % | 739,976 | 8,005 | 1.08 | % | ||||||||||||||||||||
Trading instruments(3) | 716,409 | 19,450 | 2.71 | % | 630,295 | 17,883 | 2.84 | % | 742,991 | 20,089 | 2.70 | % | ||||||||||||||||||||
Stock loan | 433,642 | 12,036 | 2.78 | % | 423,466 | 8,731 | 2.06 | % | 349,285 | 8,271 | 2.37 | % | ||||||||||||||||||||
Loans to financial advisors (3) | 457,797 | 7,056 | 1.54 | % | 413,600 | 6,427 | 1.55 | % | 421,645 | 6,510 | 1.54 | % | ||||||||||||||||||||
Corporate cash and all other (3) | 2,917,208 | 12,622 | 0.43 | % | 3,396,796 | 13,448 | 0.40 | % | 3,178,925 | 16,578 | 0.52 | % | ||||||||||||||||||||
Total | $ | 21,466,479 | $ | 543,207 | 2.53 | % | $ | 20,109,294 | $ | 480,886 | 2.39 | % | $ | 19,368,003 | $ | 473,599 | 2.45 | % | ||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||
Brokerage client liabilities | $ | 3,693,928 | 940 | 0.03 | % | $ | 3,967,811 | $ | 1,269 | 0.03 | % | $ | 4,866,091 | $ | 2,049 | 0.04 | % | |||||||||||||||
Bank deposits (2) | 11,199,242 | 8,382 | 0.08 | % | 10,119,433 | 7,959 | 0.09 | % | 9,133,260 | 9,032 | 0.10 | % | ||||||||||||||||||||
Trading instruments sold but not yet purchased (3) | 294,256 | 4,503 | 1.53 | % | 243,737 | 4,327 | 1.78 | % | 241,334 | 3,595 | 1.49 | % | ||||||||||||||||||||
Stock borrow | 135,027 | 5,237 | 3.88 | % | 114,404 | 2,869 | 2.51 | % | 125,507 | 2,158 | 1.72 | % | ||||||||||||||||||||
Borrowed funds | 721,296 | 6,079 | 0.84 | % | 485,594 | 3,939 | 0.81 | % | 361,317 | 4,724 | 1.31 | % | ||||||||||||||||||||
Senior notes | 1,149,136 | 76,088 | 6.62 | % | 1,148,947 | 76,038 | 6.62 | % | 1,148,759 | 76,113 | 6.63 | % | ||||||||||||||||||||
Loans payable of consolidated variable interest entities (3) | 33,225 | 1,879 | 5.66 | % | 51,518 | 2,900 | 5.63 | % | 70,325 | 3,959 | 5.63 | % | ||||||||||||||||||||
Other (3) | 271,476 | 4,846 | 1.79 | % | 319,328 | 4,790 | 1.50 | % | 336,226 | 8,741 | 2.60 | % | ||||||||||||||||||||
Total | $ | 17,497,586 | $ | 107,954 | 0.62 | % | $ | 16,450,772 | $ | 104,091 | 0.63 | % | $ | 16,282,819 | $ | 110,371 | 0.68 | % | ||||||||||||||
Net interest income | $ | 435,253 | $ | 376,795 | $ | 363,228 | ||||||||||||||||||||||||||
(1) | Represents average daily balance, unless otherwise noted. |
(2) | See Results of Operations – RJ Bank in this MD&A for further information. |
(3) | Average balance is calculated based on the average of the end of month balances for each month within the period. |
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Year ended September 30, 2015 compared with the year ended September 30, 2014 – Net Interest Analysis
Net interest income increased $58 million, or 16%, compared to the prior year. Net interest income is earned primarily by our RJ Bank and PCG segments, which are discussed separately below.
The RJ Bank segment’s net interest income increased $57 million, or 16%, primarily as a result of an increase in average loans outstanding as well as a modest 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 was nearly unchanged compared to the prior year. A decrease in net interest income arising from our broker-dealer margin lending activities, where a decline in margin interest rates more than offset the impact of slightly higher average client margin balances outstanding, was nearly offset by an increase in net interest revenue arising from our securities lending activities.
Net interest income arising from our securities lending activities increased $1 million, or 16%, due primarily to an increase in interest income associated with hard-to-borrow securities in our Box lending program. These revenues increased $3 million due to our ability to lend these securities at a premium. The increase in revenues was offset by a $2 million increase in interest expense associated with our stock borrow activities, as a result of additional expense associated with borrowing hard-to-borrow securities.
Interest income earned on the available for sale securities portfolio held in our RJ Bank and Other segments decreased $1 million, or 22%, due to lower average investment balances and a slight decrease in yields on the portfolio. The decrease in average balances outstanding is the result of sales and redemptions within the portfolio during the year (see Note 7 of our Notes to Consolidated Financial Statements in this Form 10-K for additional information on our available for sale securities).
Interest income earned on our trading instruments held in the Capital Markets segment increased $2 million, or 9%, due to slightly higher average trading security inventory levels, partially offset by the impact of lower yields (see Note 6 of our Notes to Consolidated Financial Statements in this Form 10-K for additional information on our trading instruments).
Year ended September 30, 2014 compared with the year ended September 30, 2013 – Net Interest Analysis
Net interest income increased $14 million, or 4%, in fiscal year 2014 compared to the prior year.
Net interest income in the PCG segment in fiscal year 2014 increased $4 million, or 5%, compared to the prior year primarily resulting from the increase in margin interest rates we implemented as of October 1, 2013, offset by a slight decrease in average client margin balances outstanding.
The RJ Bank segment’s net interest income in fiscal year 2014 increased $8 million, or 2%, compared to the prior year primarily as a result of an increase in loans outstanding offset by a decrease 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.
Interest income earned on the available for sale securities portfolio in fiscal year 2014 decreased $1 million, or 18%, from the prior year due to lower investment balances primarily resulting from sales and redemptions within the portfolio, and a slight decrease in yields (see Note 7 of our Notes to Consolidated Financial Statements in this Form 10-K for additional information on our available for sale securities).
Interest income earned on our trading instruments in fiscal year 2014 decreased $2 million, or 11%, compared to the prior year due to lower average trading security inventory levels (see Note 6 of our Notes to Consolidated Financial Statements in this Form 10-K for additional information on our trading instruments).
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Results of Operations – Private Client Group
The following table presents consolidated financial information for our PCG segment for the years indicated:
Year ended September 30, | |||||||||||||||||
2015 | % change | 2014 | % change | 2013 | |||||||||||||
($ in thousands) | |||||||||||||||||
Revenues: | |||||||||||||||||
Securities commissions and fees: | |||||||||||||||||
Equities | $ | 270,435 | (9 | )% | $ | 297,535 | 3 | % | $ | 289,395 | |||||||
Fixed income products | 74,448 | (5 | )% | 78,082 | (21 | )% | 98,994 | ||||||||||
Mutual funds | 680,375 | — | 678,577 | 9 | % | 621,459 | |||||||||||
Fee-based accounts | 1,472,877 | 17 | % | 1,261,267 | 24 | % | 1,016,340 | ||||||||||
Insurance and annuity products | 363,352 | 2 | % | 354,629 | 5 | % | 338,666 | ||||||||||
New issue sales credits | 75,015 | (15 | )% | 88,341 | (3 | )% | 90,747 | ||||||||||
Sub-total securities commissions and fees | 2,936,502 | 6 | % | 2,758,431 | 12 | % | 2,455,601 | ||||||||||
Interest | 100,594 | 1 | % | 99,147 | 2 | % | 96,926 | ||||||||||
Account and service fees: | |||||||||||||||||
Client account and service fees | 176,175 | 9 | % | 162,057 | — | 162,283 | |||||||||||
Mutual fund and annuity service fees | 249,232 | 17 | % | 212,342 | 26 | % | 168,055 | ||||||||||
Client transaction fees | 18,971 | 11 | % | 17,124 | 1 | % | 16,932 | ||||||||||
Correspondent clearing fees | 2,401 | (21 | )% | 3,022 | (1 | )% | 3,059 | ||||||||||
Account and service fees – all other | 284 | (3 | )% | 293 | 4 | % | 282 | ||||||||||
Sub-total account and service fees | 447,063 | 13 | % | 394,838 | 13 | % | 350,611 | ||||||||||
Other | 35,399 | (5 | )% | 37,087 | 35 | % | 27,465 | ||||||||||
Total revenues | 3,519,558 | 7 | % | 3,289,503 | 12 | % | 2,930,603 | ||||||||||
Interest expense | (11,752 | ) | 22 | % | (9,620 | ) | (17 | )% | (11,625 | ) | |||||||
Net revenues | 3,507,806 | 7 | % | 3,279,883 | 12 | % | 2,918,978 | ||||||||||
Non-interest expenses: | |||||||||||||||||
Sales commissions | 2,169,823 | 8 | % | 2,002,831 | 13 | % | 1,765,933 | ||||||||||
Admin & incentive compensation and benefit costs | 552,762 | 7 | % | 518,489 | 2 | % | 507,629 | ||||||||||
Communications and information processing | 157,729 | 3 | % | 153,076 | (6 | )% | 163,125 | ||||||||||
Occupancy and equipment | 121,115 | 2 | % | 118,503 | 4 | % | 113,573 | ||||||||||
Business development | 92,473 | 14 | % | 80,950 | 23 | % | 65,679 | ||||||||||
Clearance and other | 71,661 | (5 | )% | 75,756 | 4 | % | 72,724 | ||||||||||
Total non-interest expenses | 3,165,563 | 7 | % | 2,949,605 | 10 | % | 2,688,663 | ||||||||||
Pre-tax income | $ | 342,243 | 4 | % | $ | 330,278 | 43 | % | $ | 230,315 | |||||||
Margin on net revenues | 9.8 | % | 10.1 | % | 7.9 | % | |||||||||||
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.
Revenues of the PCG segment are correlated with total PCG client assets under administration, which include assets in fee-based accounts, and the overall U.S. equities markets. RJ&A advisors operate under the RJ&A registered investment advisor (“RIA”) license while independent contractors affiliated with RJFS may operate either under their own RIA license, or the RIA license of RJFSA. The investment advisory fee revenues associated with these activities are recorded within securities commissions and fee revenues on our consolidated financial statements. Refer to the securities commissions and fees section of our summary of significant accounting policies in Note 2 of the Notes to Consolidated Financial Statements in this Form 10-K for our accounting policies on presenting these revenues in our consolidated financial statements.
Net interest revenue in the Private Client Group is generated by client balances, predominantly the earnings on margin loans and assets segregated pursuant to regulations, less interest paid on client cash balances (the “Client Interest Program”). We also utilize a multi-bank sweep program which generates fee revenue from unaffiliated banks in lieu of interest revenue. The cash sweep program, known as the Raymond James Bank Deposit Program (“RJBDP”), is a multi-bank (RJ Bank and several non-
43
affiliated banks) program under which clients’ cash deposits in their brokerage accounts are re-deposited into interest-bearing deposit accounts (up to $250,000 per bank for individual accounts and up to $500,000 per bank for joint accounts) at various third party banks. This program enables clients to obtain up to $2.5 million in individual FDIC deposit insurance coverage ($5 million for joint accounts) while earning competitive rates for their cash balances.
Clients’ transactions in securities are affected on either a cash or margin basis. Margin loans to clients are collateralized by the securities purchased or by other securities owned by the client. Interest is charged to clients on the amount borrowed. The interest rate charged to a client on a margin loan is based on current interest rates and on the outstanding amount of the loan.
Typically, broker-dealers utilize bank borrowings and equity capital as the primary sources of funds to finance clients’ margin account borrowings. RJ&A’s source of funds to finance clients’ margin account balances has been cash balances in brokerage clients’ accounts, which are funds awaiting investment. In addition, pursuant to written agreements with clients, broker-dealers are permitted by the SEC and FINRA rules to lend client securities in margin accounts to other financial institutions. SEC regulations, however, restrict the use of clients’ funds derived from pledging and lending clients’ securities, as well as funds awaiting investment, to the financing of margin account balances; to the extent not so used, such funds are required to be deposited in a special segregated account for the benefit of clients. The regulations also require broker-dealers, within designated periods of time, to obtain possession or control of, and to segregate, clients’ fully paid and excess margin securities.
No single client accounts for a material percentage of this segment’s total business.
PCG client asset balances are as follows as of the dates indicated:
As of September 30, | |||||||||||||||||
2015 | % change | 2014 | % change | 2013 | |||||||||||||
($ in billions) | |||||||||||||||||
Total PCG assets under administration | $ | 453.3 | 1 | % | $ | 450.6 | 12 | % | $ | 402.6 | |||||||
PCG assets in fee-based accounts | $ | 179.4 | 7 | % | $ | 167.7 | 20 | % | $ | 139.9 | |||||||
Total PCG assets under administration increased 1% over September 30, 2014 as a result of net client inflows as equity markets reflect a slight decline at September 30, 2015 compared to the prior year. Total PCG assets in fee-based accounts increased 7% compared to September 30, 2014. Increased client assets under administration typically result in higher fee-based account revenues and mutual fund and annuity service fees. In periods where equity markets improve, assets under administration increase and generally, client activity increases, thereby having a favorable impact on financial advisor productivity. Generally, assets under administration, client activity, and financial advisor productivity decline in periods where equity markets reflect downward trends. Higher client cash balances generally lead to increased interest income and account fee revenues, depending upon spreads realized in our Client Interest Program and RJBDP.
The following table presents a summary of PCG financial advisors and the total number of PCG branch locations as of the periods indicated:
Employees | Independent contractors | September 30, 2015 total | September 30, 2014 total | September 30, 2013 total | ||||||||||
RJ&A | 2,571 | — | 2,571 | 2,462 | 2,443 | |||||||||
RJFS | — | 3,544 | 3,544 | 3,329 | 3,275 | |||||||||
RJ Ltd. | 167 | 216 | 383 | 391 | 406 | |||||||||
RJIS | — | 98 | 98 | 83 | 73 | |||||||||
Total financial advisors | 2,738 | 3,858 | 6,596 | 6,265 | 6,197 | |||||||||
Total branch locations | 2,702 | 2,569 | 2,518 | |||||||||||
The number of financial advisors as of September 30, 2015 reflects a net increase of 331 individuals, or a 5% net increase, over the number of financial advisors as of September 30, 2014. Importantly, the client asset levels and productivity measures associated with those financial advisors recruited during the fiscal year exceed our historical benchmark averages. Nothwithstanding the future impact of changes in the overall economy and more specifically their impact on future equity markets and fixed income markets, factors which we have no control, we believe that this increase in productive financial advisors is a positive indication of potential future revenue growth in this segment.
44
Year ended September 30, 2015 compared with the year ended September 30, 2014 – Private Client Group
Net revenues increased $228 million, or 7%, to a record $3.5 billion while pre-tax income increased $12 million, or 4%, to a record $342 million. PCG’s pre-tax margin on net revenues decreased slightly to 9.8% as compared to 10.1% in fiscal year 2014.
Securities commissions and fees increased $178 million, or 6%. Client assets under administration increased to $453.3 billion, an increase of $2.7 billion, or 1%, compared to September 30, 2014. The year over year increase in client assets was driven by positive net inflows generated by financial advisor retention and recruiting results, as the equity markets in the U.S. were down compared to the prior year. The most significant increase in these revenues arose from revenues earned on fee-based accounts, which increased $212 million, or 17%, and was partially offset by a $27 million, or 9%, decrease in commissions on equity products, a $13 million, or 15%, decrease in new issue sales credits due to a decrease in equity underwritings, and a $4 million, or 5%, decrease in commissions on fixed income products. Fiscal year 2015 includes a $7 million decrease in mutual fund commission revenues due to the resolution of a mutual fund share class issue that resulted in refunds of commissions being paid during the year to certain of our clients. Despite this unusual item, mutual fund commission revenues still increased $2 million. Commission revenues on equity products have decreased in our Canadian broker-dealer subsidiary as a result of the weaker Canadian currency compared to the U.S. dollar, as well as the overall challenging Canadian market conditions that existed throughout the fiscal year. Commission earnings on fixed income products decreased primarily due to the continuation of historically low interest rates which continue to result in challenging fixed income market conditions.
Total account and service fee revenues increased $52 million, or 13%. Mutual fund and annuity service fees increased $37 million, or 17%, primarily as a result of an increase in education and marketing support (“EMS”) fees (which include no-transaction-fee (“NTF”) program revenues), and mutual fund omnibus fees, all of which are paid to us by the mutual fund companies whose products we distribute. During fiscal year 2014, we implemented technology changes in our EMS program and standardized tiered service levels provided to many mutual fund companies, resulting in increased fees earned from EMS arrangements. Omnibus fees are generally based on the number of positions held in our client portfolios. Increases in such revenues are a result of increases in the number of positions for existing fund families on the omnibus platform as well as new fund families joining the omnibus program. Client account and service fees increased $14 million, or 9%, as a result of the changes made in many of our fee schedules implemented since December 2013. In addition, transaction handling fees in fee-based accounts increased due to the increased number of transactions, fees generated in lieu of interest income from our multi-bank sweep program with unaffiliated banks increased due to higher average balances in the program, and SBL affiliate servicing fees increased (refer to the RJ Bank results of operations in this report for additional information on SBL activities) as SBL balances have continued to grow.
PCG net interest is relatively unchanged compared to the prior year. Net interest income arising from our broker-dealer margin lending activities decreased slightly compared to the prior year level, a slight decline in margin interest rates more than offset the impact of slightly higher average margin loan balances outstanding. The rate of growth in margin loan balances in fiscal year 2015 has been negatively impacted by the popularity of our SBL product offered by RJ Bank. As a result of the extremely low rate interest rate environment that existed during fiscal year 2015 and the related low net interest spreads earned, there was only a nominal impact on our net interest revenues resulting from changes in client cash balances. Refer to the discussion of how the pre-tax income of this segment could be favorably impacted by a 100 basis point instantaneous rise in short-term interest rates, in the net interest section of this MD&A.
Total segment revenues increased 7%. The portion of total segment revenues that we consider to be recurring is approximately 75% at September 30, 2015, an increase from 72% at September 30, 2014. Recurring commission and fee revenues include asset-based fees, trailing commissions from mutual funds and variable annuities/insurance products, mutual fund service fees, fees earned on funds in our multi-bank sweep program, and interest. Assets in fee-based accounts increased more than average PCG client assets as clients continue to elect fee-based alternatives versus traditional transaction-based accounts. At September 30, 2015, such assets were $179.4 billion, an increase of 7% compared to the $167.7 billion as of September 30, 2014.
Non-interest expenses increased $216 million, or 7%. Sales commission expense increased $167 million, or 8%, largely consistent with the 6% increase in commission and fee revenues, coupled with increased hiring bonuses resulting from the high level of recruiting activity. Administrative and incentive compensation and benefits expense increased $34 million, or 7%, in part from annual increases in salary expenses, increases in employee benefit plan costs, and additional staffing levels, primarily in information technology functions, to support our continuing growth. Business development expenses increased $12 million, or 14%, due to increased recruiting activity and the related incoming account transfer fee expenses, and conference and travel related expenses.
45
Year ended September 30, 2014 compared with the year ended September 30, 2013 – Private Client Group
Net revenues in fiscal year 2014 increased $361 million, or 12%, to $3.3 billion while pre-tax income increased $100 million, or 43%, to $330 million. PCG’s pre-tax margin on net revenues in fiscal year 2014 increased to 10.1% as compared to 7.9% in fiscal year 2013.
Securities commissions and fees in fiscal year 2014 increased $303 million, or 12%. The increase results predominately from growth in client assets under administration. The year over year increase in client assets in fiscal year 2014 was driven by the equity market conditions in the U.S., which were generally improved as compared to fiscal year 2013, and increased financial advisor productivity. The most significant increases in these revenues in fiscal year 2014 arose from revenues earned on fee-based accounts, which increased $245 million, or 24%, and commission revenues on mutual fund products which increased $57 million, or 9% (primarily due to increases in trailing commissions on mutual fund products), partially offset by a $21 million, or 21%, decrease in commissions on fixed income products. Commission earnings on fixed income products in fiscal year 2014 decreased primarily due to historically low interest rates and a general lack of volatility of benchmark interest rates. Securities commissions and fee revenues generated by our Canadian operations in fiscal year 2014 increased 5% over fiscal year 2013.
Total account and service fee revenues in fiscal year 2014 increased $44 million, or 13%, over fiscal year 2013. Mutual fund and annuity service fees increased $44 million, or 26%, primarily as a result of an increase in mutual fund omnibus fees and EMS fees (which include NTF program revenues), all of which are paid to us by the mutual fund companies whose products we distribute. In fiscal year 2014 we continued to implement changes in the data sharing arrangements with many mutual fund companies, converting from a 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. During fiscal year 2014, we implemented technology changes in our EMS program and standardized tiered service levels provided to many mutual fund companies, resulting in increased fees earned from EMS arrangements. In addition, effective with our mid-February 2013 platform integration, the former Morgan Keegan client mutual fund investments became eligible for our omnibus and EMS programs resulting in an increase in this fee revenue.
PCG net interest in fiscal year 2014 increased $4 million, or 5%, primarily resulting from an increase in margin interest rates despite a slight decrease in average margin balances. Growth in margin loans in fiscal year 2014 was negatively impacted by the popularity of our SBL product offered by RJ Bank. As a result of the extremely low rate interest environment that existed during fiscal year 2014 and the related low net interest spreads earned, there was only a nominal impact on our net interest revenues resulting from changes in client cash balances.
Total segment revenues in fiscal year 2014 increased 12%. The portion of total segment revenues that we consider to be recurring was approximately 72% at September 30, 2014, as contrasted to 68% at September 30, 2013.
Non-interest expenses in fiscal year 2014 increased $261 million, or 10%, over fiscal year 2013. Sales commission expense increased $237 million, or 13%, consistent with the 12% increase in commission and fee revenues. Business development expenses in fiscal year 2014 increased $15 million, or 23%, due to increases in advertising, recruiting, incoming account transfer fee expenses, and conference costs.
46
Results of Operations – Capital Markets
The following table presents consolidated financial information for our Capital Markets segment for the years indicated:
Year ended September 30, | |||||||||||||||||
2015 | % change | 2014 | % change | 2013 | |||||||||||||
($ in thousands) | |||||||||||||||||
Revenues: | |||||||||||||||||
Institutional sales commissions: | |||||||||||||||||
Equity | $ | 247,414 | (5 | )% | $ | 260,934 | 6 | % | $ | 246,588 | |||||||
Fixed income | 283,828 | 15 | % | 246,131 | (25 | )% | 326,792 | ||||||||||
Sub-total institutional sales commissions | 531,242 | 5 | % | 507,065 | (12 | )% | 573,380 | ||||||||||
Equity underwriting fees | 74,229 | (26 | )% | 100,091 | 14 | % | 87,466 | ||||||||||
Merger and acquisitions fees | 162,270 | 7 | % | 151,000 | |||||||||||||