Print

Email story

Comment

Email editor

Its humble home hides a big-time bank

Raymond James Bank, despite having just one branch, is quickly moving up the ranks in the Tampa Bay market.

By HELEN HUNTLEY
Published November 25, 2006

The biggest bank based in the Tampa Bay area easily could be confused with a modest-sized employee credit union.

Its only branch and both of its ATMs are on the St. Petersburg property of corporate parent Raymond James Financial Inc. Its retail customers are nearly all Raymond James employees and brokerage clients.

However, Raymond James Bank is a lot bigger than it looks. With little fanfare, the bank has grown to $3.2-billion in assets and is on track to be twice that size within the next three years. It’s not just the largest bank with headquarters in the Tampa Bay area; in terms of Tampa Bay deposits, it’s in the same league as the combined Regions Bank-AmSouth Bank and soon could be chasing SunTrust.

But Raymond James Bank bears little resemblance to those more familiar institutions. Its business is tailored to complement those of its parent, a St. Petersburg stockbroker, asset manager and investment banker. Now it is on its way to becoming a significant contributor to parent company profits.

“This is an opportunity for us,” said Tom James, chairman of the bank and its parent company. “It affords the firm the opportunity to invest more of its underutilized equity capital in a business that is related to serving our clients.”
RayJay’s game plan has three main parts:

• Build deposits by transferring brokerage client cash from a money-market fund Raymond James manages to the bank.

• Build loan volume by buying mortgage loan pools and by participating in groups of banks that make big loans to large corporations.

• Build the loan origination business by making more direct loans to customers, from home mortgages to business loans of up to about $30-million.

Here’s how the company expects the strategy to pay off, according to chief financial officer Jeff Julien:

Held in the money market fund, customer cash generates about 45 basis points (just less than a half a percent) in pretax profits for Raymond James through the management fee the company collects. Held at the bank, it can be lent out at higher rates, generating about 170 basis points (close to 2 percent) for Raymond James.

“We can triple or quadruple our earnings,” Julien said. “But it comes at a cost. We have to put in capital. Every dollar put into the bank requires 6 cents in capital.”

The money comes right out of parent company coffers, but there happens to be plenty available. Julien said about $400-million of the $1.4-billion sitting in Raymond James’ coffers is “underemployed.”

“That’s a big number, and it has been dragging down our return on equity over time,” he said. “We get comments from institutional shareholders, 'How about a special dividend? How about stepping up stock buybacks?’ We prefer to use our capital to grow our businesses, not to shrink the company.”

The initial return on that capital will be muted because the bank must set aside about 1 percent of new loan volume as loan loss reserves, which are subtracted from earnings.

“Even though interest earnings come in over a period of years, we have to take that entire expense up front,” Julien said. “In years when loan balances are growing as fast as ours will be the next couple of years, loan loss reserves eat into earnings,” he said. “But when this plateaus, and growth moderates to a more normal 15 to 20 percent, the earnings power that’s been built up will really kick in and have a big impact on our reported earnings around 2009 to 2010.”

The bank contributed 4.8 percent of Raymond James’ $334-million pretax profits last fiscal year.

Transfer in stages

The deposit transfer is occurring in stages, mainly because Raymond James doesn’t want to overwhelm bank employees charged with lending out the money. Eventually the bank may be the only option for uninvested cash balances in some types of brokerage accounts.

At some brokerage firms, customers earn lower interest rates when their deposits are switched to the company’s bank. Raymond James promises the bank rates will be the same or higher, with FDIC insurance as a bonus.
“Some people call it 'a tangled web we weave,’ but I would say it just shows the amount of synergy we have with all the different businesses we’re in,” Julien said.

Raymond James is counting on that synergy to help the bank build its modest loan origination business.
“We’re trying to integrate ourselves with the rest of the firm,” said Steve Raney, a former Bank of America executive who became Raymond James Bank president in January. “Raymond James’ 5,000 financial advisers are our sales force. In the past the bank’s products haven’t been that much of an emphasis, but now they will be.”

The bank is asking regulators for an exemption to rules that ban it from paying mortgage referral fees to Raymond James brokers who work as independent contractors.

It also wants to do more business lending in the Tampa Bay area. One of its local customers is Creative Mailbox and Sign Designs, which borrowed $3.3-million in August to buy a new headquarters building in Tampa.

“They had the most competitive proposal,” said CEO Jamie Harden, who said he talked with five banks about a loan. He isn’t a Raymond James brokerage customer, but he said he has known Raney for years, which made him comfortable dealing with the bank. “You want people who if they say they’re going to do something, they do it.”

Although the bank hopes to lend more to wealthy brokerage clients, underwriting business loans in the far-flung corners of the Raymond James brokerage network is a challenge. The bank has a $3-million minimum for out-of-state business loans.

Raney said the bank may open branches where the brokerage has a major presence, such as Atlanta, Detroit, Houston and South Florida.

“But for the next three or four years there’s no need to do that,” he said. “Branches are a more expensive way to get deposits.”

Down the road, Raymond James may convert from a thrift to a commercial bank, which would allow it to reduce its use of mortgage-backed securities and make more commercial loans.

Raymond James got into the banking business 12 years ago by buying $13-million in deposits and three branches of the failed Security Federal Savings Association. The Resolution Trust Corp. was cleaning up the mess in the savings and loan industry and willing to break with tradition to make a deal with Raymond James.

At the time, Raymond James was one of the few securities firms to own a federally insured institution. James credits the bank’s first president, Theresa Schefstad, with paving the way.

Since then regulatory barriers separating banks and brokerages have fallen by the wayside, notably the repeal of the Glass-Steagall Act in 1999. In its place, the Gramm-Leach-Bliley Act  created the legal framework for the financial services “department stores” that were forming. It set out disclosure and customer privacy rules.

Now banks, brokerages and insurance companies are in each others’ businesses. Although its Florida base makes Raymond James distinctive, its ownership of a bank is no longer unusual in the securities business. Merrill Lynch, Morgan Stanley, UBS and Charles Schwab are among the other brokerages that have banking subsidiaries.

One-stop shopping

“It’s obviously working,” said Benjamin Bishop, chairman of Allen C. Ewing & Co., a Jacksonville brokerage that specializes in bank stocks. “When you can provide all products and services to a customer, you maintain the relationship and you don’t lose the account.”

When banks got into the brokerage business, there were problems with unsophisticated CD investors being steered to investments that they failed to understand were not FDIC-insured. But Bishop said he doesn’t see providing bank and brokerage services to the same customer as a problem today.

He said Raymond James’ ownership of a bank gives it lots of options for the future.

“If I were a shareholder of Raymond James, I’d look at that as a smart, strategic move,” he said. “They can easily branch anywhere they want.”

Although Raymond James was among the brokerage pioneers in the banking business, it chose to take things slowly. It took a decade to reach its first $1-billion in assets, a milestone achieved only last year. Some time next year the number will be between $4-billion and $5-billion, Tom James said.

“I have this evolutionary philosophy about how you do things,” James said. “I prefer to make mistakes when they’re small.”

Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.Raymond James Bank

Headquarters: St. Petersburg
Assets: $3.2-billion
Ownership: Wholly-owned subsidiary of Raymond James Financial Inc.
Founded: 1994
Employees: 80
Chief Executive: Steve Raney, former Tampa Bay president of Bank of America

Biggest Tampa Bay banks

This chart shows Tampa Bay area bank deposits as of June 30. Since then, Raymond James Bank’s deposits have swelled to $3.2-billion. They will pass $4-billion next year with another transfer of cash from the parent company’s brokerage customers. Raymond James is the only bank among the top 10 that has its headquarters in Florida.

Rank
Institution                Tampa Bay deposits  Market share
1 Bank of America    $10.6-billion            23.50%
2 Wachovia               $7.8-bil.                 17.11%
3 SunTrust                $5.8-bil.                 12.82%
4 Regions-AmSouth*  $3.8-bil.                  8.37%
5 World Savings        $1.8-bil.                  3.89%
6 Raymond James     $1.4-bil.                   3.19%
7 Colonial Bank          $1.4-bi.                    3.13%
8 BB&T                    $1.2-bil.                    2.72%
9 Third Federal         $1.1-bil.                    2.38%
10 Fifth Third          $1.1-bil.                   2.36%

*Reflects merger of Regions and AmSouth
Source: Federal Deposit Insurance Corp.

[Last modified November 25, 2006, 17:10:29]