December 2006 10Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
(Mark
one)
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the
quarterly period ended December
31, 2006
or
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
File Number: 1-9109
RAYMOND
JAMES FINANCIAL, INC.
(Exact
name of registrant as specified in its charter)
Florida
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No. 59-1517485
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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880
Carillon Parkway, St. Petersburg, Florida 33716
(Address
of principal executive offices) (Zip Code)
(727)
567-1000
(Registrant's
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
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 for 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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer 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
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the close of the latest practicable date.
118,646,428
shares of Common Stock as of February 6, 2007
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RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
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Form
10-Q for the Quarter Ended December
31, 2006
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PART
I.
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FINANCIAL
INFORMATION
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PAGE
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Item
1.
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Financial
Statements (unaudited)
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3
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4
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5
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7
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Item
2.
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22
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Item
3.
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33
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Item
4.
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35
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PART
II.
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OTHER
INFORMATION
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Item
1.
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35
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Item
1A.
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36
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Item
2.
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36
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Item
6.
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37
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38
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PART
I FINANCIAL
INFORMATION
Item
1. FINANCIAL
STATEMENTS
RAYMOND
JAMES FINANCIAL, INC.
AND SUBSIDIARIES
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(Unaudited)
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December
31,
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September
30,
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2006
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2006
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(in
thousands)
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Assets:
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Cash
and cash equivalents
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$
565,046
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$
641,691
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Assets
segregated pursuant to federal regulations
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3,675,560
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3,189,900
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Securities
purchased under agreements to resell
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520,661
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776,863
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Securities
owned:
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Trading
securities, at fair value
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720,784
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485,771
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Available
for sale securities, at fair value
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336,004
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280,580
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Other
investments, at fair value
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79,074
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66,726
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Receivables:
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Brokerage
clients, net
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1,571,350
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1,504,607
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Stock
borrowed
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877,711
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1,068,102
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Bank
loans, net
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2,688,863
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2,262,832
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Brokers-dealers
and clearing organizations
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172,898
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210,443
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Other
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269,079
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290,294
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Investments
in real estate partnerships- held by variable interest
entities
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210,969
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227,963
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Property
and equipment, net
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148,942
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142,780
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Deferred
income taxes, net
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92,765
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94,957
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Deposits
with clearing organizations
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31,102
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30,780
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Goodwill
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62,575
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62,575
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Investment
in leveraged leases, net
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10,647
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10,882
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Prepaid
expenses and other assets
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242,147
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168,904
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$12,276,177
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$
11,516,650
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Liabilities
and Shareholders' Equity:
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Loans
payable
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$
408,092
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$
141,638
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Loans
payable related to investments by variable interest entities in real
estate partnerships
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140,475
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193,647
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Payables:
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Brokerage
clients
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5,044,397
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4,552,227
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Stock
loaned
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958,250
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1,235,104
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Bank
deposits
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3,066,724
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2,806,880
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Brokers-dealers
and clearing organizations
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164,635
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79,646
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Trade
and other
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125,361
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138,091
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Trading
securities sold but not yet purchased, at fair value
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176,324
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94,009
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Securities
sold under agreements to repurchase
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172,363
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301,110
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Accrued
compensation, commissions and benefits
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230,290
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321,224
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Income
taxes payable
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45,195
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34,294
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10,532,106
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9,897,870
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Minority
interests
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215,174
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154,911
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Shareholders'
equity:
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Preferred
stock; $.10 par value; authorized
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10,000,000
shares; issued and outstanding -0- shares
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-
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-
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Common
stock; $.01 par value; authorized 180,000,000 shares; issued 119,048,337
at
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December
31, 2006 and 117,655,883 at September 30, 2006
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1,160
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1,150
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Shares
exchangeable into common stock; 362,197
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at
December 31, 2006 and September 30, 2006
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4,649
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4,649
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Additional
paid-in capital
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221,928
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205,198
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Retained
earnings
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1,306,016
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1,258,446
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Accumulated
other comprehensive income
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9,422
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12,095
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1,543,175
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1,481,538
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Less:
974,153 and 1,270,015 common shares in treasury, at cost
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14,278
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17,669
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1,528,897
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1,463,869
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$12,276,177
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$11,516,650
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See
accompanying Notes to Condensed Consolidated Financial
Statements.
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RAYMOND
JAMES FINANCIAL, INC. AND
SUBSIDIARIES
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(In
thousands, except per share
amounts)
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Three
Months Ended
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December
31,
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December
31,
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2006
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2005
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Revenues:
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Securities
commissions and fees
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$
400,865
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$
366,476
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Investment
banking
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41,839
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29,714
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Investment
advisory fees
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50,136
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42,746
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Interest
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158,224
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88,050
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Net
trading profits
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6,293
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5,857
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Financial
service fees
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29,966
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23,052
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Other
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22,306
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19,452
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Total
revenues
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709,629
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575,347
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Interest
expense
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105,729
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48,811
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Net
revenues
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603,900
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526,536
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Non-Interest
Expenses:
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Compensation,
commissions and benefits
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408,509
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366,619
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Communications
and information processing
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25,974
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24,596
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Occupancy
and equipment costs
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20,150
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17,402
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Clearance
and floor brokerage
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7,536
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5,766
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Business
development
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21,762
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17,131
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Investment
advisory fees
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11,066
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6,484
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Other
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18,112
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17,718
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Total
non-interest expenses
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513,109
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455,716
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Income
before minority interest and provision for income taxes
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90,791
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70,820
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Minority
interest
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(2,975)
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(515)
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Income
before provision for income taxes
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93,766
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71,335
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Provision
for income taxes
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34,371
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26,226
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Net
income
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$
59,395
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$
45,109
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Net
income per share-basic
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$
0.52
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$
0.41
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Net
income per share-diluted
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$
0.50
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$
0.40
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Weighted
average common shares
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outstanding-basic*
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114,339
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111,501
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Weighted
average common and common
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equivalent
shares outstanding-diluted*
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117,893
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113,636
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Cash
dividend declared per common share*
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$
0.10
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$
0.08
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Net
income
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$
59,395
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$
45,109
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Other
Comprehensive Income:
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Net
unrealized gain (loss) on available
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for
sale securities, net of tax
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85
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(86)
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Net
unrealized gain on interest rate swaps
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accounted
for as cash flow hedges, net of tax
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-
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34
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Net
change in currency translations
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(2,758)
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(71)
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Total
comprehensive income
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$
56,722
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$
44,986
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*
All share amounts have been adjusted for the March 22, 2006 3-for-2
stock
split.
See
accompanying Notes to Condensed Consolidated Financial
Statements.
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RAYMOND
JAMES FINANCIAL, INC. AND
SUBSIDIARIES
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(Unaudited)
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(in
thousands)
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(continued
on next page)
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Three
Months Ended
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December
31,
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December
31,
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2006
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2005
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Cash
Flows from operating activities:
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Net
income
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$
59,395
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$
45,109
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Adjustments
to reconcile net income to net
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cash
used in operating activities:
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Depreciation
and amortization
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5,294
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4,378
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Excess
tax benefits from stock-based payment arrangements
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(969)
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(733)
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Deferred
income taxes
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2,192
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5,055
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Unrealized
gains, premium and discount amortization
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on
available for sale securities and other securities
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212
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159
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Loss
on sale of property and equipment
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17
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636
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Provision
for loan loss, legal proceedings, bad debts and other
accruals
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6,198
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6,244
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Stock-based
compensation expense
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10,568
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5,155
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Minority
interest
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(2,975)
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(515)
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(Increase)
decrease in operating assets:
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Assets
segregated pursuant to federal regulations
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(485,660)
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(716,342)
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Receivables:
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Brokerage
clients, net
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(66,646)
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15,145
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Stock
borrowed
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190,391
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134,091
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Brokers-dealers
and clearing organizations
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37,545
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(37,183)
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Other
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(40,120)
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(5,947)
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Securities
purchased under agreements to resell, net
of
securities sold under agreements to repurchase
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(77,545)
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73,556
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Trading
securities, net
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(152,698)
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(143,209)
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Prepaid
expenses and other assets
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3,198
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(25,648)
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Increase
(decrease) in operating liabilities:
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Payables:
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Brokerage
clients
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492,170
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664,016
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Stock
loaned
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(276,854)
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(25,233)
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Brokers-dealers
and clearing organizations
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84,989
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(59,500)
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Trade
and other
|
6,416
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18,128
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Accrued
compensation, commissions and benefits
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(93,332)
|
(95,443)
|
Income
taxes payable
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10,847
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7,806
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Net
cash used in operating activities
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(287,367)
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(130,275)
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See
accompanying Notes to Condensed Consolidated
Financial Statements.
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RAYMOND
JAMES FINANCIAL, INC. AND
SUBSIDIARIES
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CONDENSED
CONSOLIDATED STATEMENTS OF
CASH FLOWS
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(Unaudited)
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(in
thousands)
|
(continued
from previous
page)
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Three
Months Ended
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December
31,
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December
31,
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2006
|
2005
|
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Cash
Flows from investing activities:
|
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Additions
to property and equipment, net
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(11,738)
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(10,875)
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Loan
originations and purchases
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(803,875)
|
(443,955)
|
Loan
repayments
|
373,633
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172,362
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Purchases
of other investments
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(12,348)
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(64,127)
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Investments
in real estate partnerships-held by variable
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interest
entities
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(7,900)
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(23,156)
|
Repayments
of loans by investor members of variable interest entities related
to
investments in real estate partnerships
|
2,356
|
4,037
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Securities
purchased under agreements to resell, net
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205,000
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-
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Purchases
of available for sale securities
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(80,226)
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(2,308)
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Available
for sale securities maturations and repayments
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24,745
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18,460
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Net
cash used in investing activities
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(310,353)
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(349,562)
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Cash
Flows from financing activities:
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Proceeds
from borrowed funds, net
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284,600
|
151,102
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Repayments
of mortgage and borrowings, net
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(18,146)
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(5,974)
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Proceeds
from borrowed funds related to investments by variable interest entities
in real estate partnerships
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1,846
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1,074
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Repayments
of borrowed funds related to investments by variable interest entities
in
real estate partnerships
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(7,445)
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(1,400)
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Proceeds
from capital contributed to variable interest entities related to
investments in real estate partnerships
|
18,359
|
27,824
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Minority
interest
|
(19,920)
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(14,222)
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Exercise
of stock options and employee stock purchases
|
13,247
|
11,941
|
Increase
in bank deposits
|
259,844
|
22,512
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Purchase
of treasury stock
|
(1,350)
|
(128)
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Cash
dividends on common stock
|
(11,825)
|
(9,314)
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Excess
tax benefits from stock-based payment arrangements
|
969
|
733
|
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Net
cash provided by financing activities
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520,179
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184,148
|
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Currency
adjustment:
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Effect
of exchange rate changes on cash
|
(2,758)
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(71)
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Net
decrease in cash and cash equivalents
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(80,299)
|
(295,760)
|
Cash
reduced by deconsolidation of variable interest entity related to
investments in real estate partnerships
|
(291)
|
-
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Cash
resulting from consolidation of limited partnerships
|
3,945
|
-
|
Cash
and cash equivalents at beginning of period
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641,691
|
881,133
|
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Cash
and cash equivalents at end of period
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$
565,046
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$
585,373
|
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Supplemental
disclosures of cash flow information:
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Cash
paid for interest
|
$
102,877
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$
48,317
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Cash
paid for taxes
|
$
19,331
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$
12,935
|
See
accompanying Notes to Condensed Consolidated
Financial Statements.
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RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
December
31, 2006
Note
1 - Basis of Presentation:
The
accompanying
unaudited condensed consolidated financial statements include the accounts
of
Raymond
James Financial, Inc. (“RJF”) and
its
consolidated subsidiaries that are generally controlled through a majority
voting interest. RJF
is a
holding company headquartered in Florida whose subsidiaries are engaged in
various financial service businesses; as used herein, the term “the Company”
refers to RJF and/or one or more of its subsidiaries. In
accordance with Financial Accounting Standards Board (“FASB”) Interpretation
(“FIN”) No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), the
Company also consolidates any variable interest entities (“VIEs”) for which it
is the primary beneficiary. Additional
information is provided in Note 5. When
the
Company does not have a controlling interest in an entity, but exerts
significant influence over the entity, the Company applies the equity method
of
accounting. All material intercompany balances and transactions have been
eliminated in consolidation.
During
the three months ended December 31, 2006, the Company adopted Emerging Issues
Task Force (“EITF”) Issue 04-5, “Determining Whether a General Partner, or the
General Partners as a Group, Controls a Limited Partnership or Similar Entity
When the Limited Partners Have Certain Rights” for partnerships created before
and not subsequently modified after June 29, 2005. As a result, the Company
consolidated three partnerships during the three months ended December 31,
2006.
As of December 31, 2006, these partnerships had assets of approximately $81.1
million.
Certain
financial information that is normally included in annual financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America ("GAAP") but not required for interim reporting
purposes has been condensed or omitted. Pursuant to GAAP, these unaudited
condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial position and results of operations for the interim
periods presented. The nature of the Company's business is such that the results
of any interim period are not necessarily indicative of results for a full
year.
These unaudited condensed consolidated financial statements should be read
in
conjunction with Management’s Discussion and Analysis and the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended September 30, 2006. To prepare consolidated
financial statements in conformity with GAAP, management must estimate certain
amounts that affect the reported assets and liabilities, disclosure of
contingent assets and liabilities, and reported revenues and expenses. Actual
results could differ from those estimates. Certain reclassifications have been
made to the unaudited condensed consolidated financial statements of the prior
period to conform to the current period presentation.
The
Company’s quarters end on the last day of each calendar quarter.
Note
2 - Effects of Recently
Issued Accounting Standards, Not Yet Adopted:
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48), which clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with SFAS
No. 109, “Accounting for Income Taxes.” FIN 48 establishes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
This interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently evaluating the impact the adoption of this
interpretation will have on its consolidated financial statements
for the
fiscal year ending September 30, 2008.
In
July
2006, the FASB issued Staff Position No. FAS 13-2, “Accounting for a Change or
Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated
by a Leveraged Lease Transaction (“FSP FAS 13-2”). This FASB Staff Position
addresses how a change in the timing of cash flows relating to income taxes
generated by a leveraged lease transaction affects the accounting by a lessor
for that lease. FSP FAS 13-2 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact the adoption
of this staff position will have on its consolidated financial
statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements” (“SAB
108”). SAB 108 addresses how the effects of prior year uncorrected misstatements
should be considered when quantifying misstatements in current year financial
statements. SAB 108 requires an entity to quantify misstatements using a balance
sheet and income statement approach and to evaluate whether either approach
results in quantifying an error that is material in light of relevant
quantitative and qualitative factors. The guidance is effective for annual
financial statements covering the first fiscal year ending after November 15,
2006. The Company is currently evaluating the impact this guidance will have
on
its consolidated financial statements for the fiscal year ending September
30,
2007.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair-value measurements required under other accounting pronouncements
but
does not change existing guidance as to whether or not an instrument is carried
at fair value. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those
fiscal years. The Company does not expect SFAS No. 157 to have a material impact
on the consolidated financial statements of the Company.
Note
3 - Trading
Securities and Trading Securities Sold But Not Yet
Purchased:
|
December
31, 2006
|
|
September
30, 2006
|
|
|
|
Securities
|
|
|
|
Securities
|
|
|
|
Sold
but
|
|
|
|
Sold
but
|
|
Trading
|
|
Not
yet
|
|
Trading
|
|
Not
yet
|
|
Securities
|
|
Purchased
|
|
Securities
|
|
Purchased
|
|
(in
000's)
|
|
|
Marketable:
|
|
|
|
|
|
|
|
Municipal
obligations
|
$
290,673
|
|
$ -
|
|
$
192,028
|
|
$
5
|
Corporate
obligations
|
172,606
|
|
5
|
|
134,431
|
|
968
|
Government
obligations
|
101,052
|
|
95,357
|
|
37,793
|
|
31,636
|
Agencies
|
88,929
|
|
41,989
|
|
68,380
|
|
34,023
|
Total
debt securities
|
653,260
|
|
137,351
|
|
432,632
|
|
66,632
|
|
|
|
|
|
|
|
|
Derivative
contracts
|
25,991
|
|
9,041
|
|
20,904
|
|
8,309
|
Equity
securities
|
38,646
|
|
29,932
|
|
29,532
|
|
19,068
|
Other
securities
|
2,887
|
|
-
|
|
2,703
|
|
-
|
Total
|
$720,784
|
|
$176,324
|
|
$485,771
|
|
$94,009
|
Mortgage-backed
securities of $111.5 million and $77.1 million at December 31, 2006 and
September 30, 2006, respectively, are included in Corporate obligations and
Agencies in the table above. Mortgage-backed securities sold but not yet
purchased of $42 million and $34 million at December 31, 2006 and September
30,
2006, respectively, are included in Agencies in the table above.
Note
4
- Available
For Sale Securities:
Available
for sale securities are comprised primarily of collateralized mortgage
obligations, mortgage related debt, and certain equity securities of the
Company's non-broker-dealer subsidiaries, principally Raymond James Bank, F.S.B.
(“RJBank”). There were no proceeds from the sale of securities available for
sale for the three months ended December 31, 2006 and 2005.
The
amortized cost and estimated market values of securities available for sale
at
December 31, 2006 are as follows:
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
(in
000's)
|
|
|
|
|
|
|
|
|
|
|
Agency
collateralized mortgage obligations
|
$
196,829
|
$
654
|
$
(20)
|
$
197,463
|
Non-agency
collateralized mortgage obligations
|
137,179
|
295
|
(168)
|
137,306
|
Other
|
1,205
|
30
|
-
|
1,235
|
|
$
335,213
|
$
979
|
$
(188)
|
$
336,004
|
The
amortized cost and estimated market values of securities available for sale
at
September 30, 2006 are as follows:
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
(in
000's)
|
|
|
|
|
|
|
|
|
|
|
Agency
collateralized mortgage obligations
|
$
140,888
|
$
461
|
$
(27)
|
$
141,322
|
Non-agency
collateralized mortgage obligations
|
137,753
|
330
|
(156)
|
137,927
|
Other
|
1,306
|
26
|
(1)
|
1,331
|
|
$
279,947
|
$
817
|
$
(184)
|
$
280,580
|
Note
5
- Variable Interest Entities (“VIEs”):
Under
the
provisions of FIN 46R the Company has determined that Raymond James Employee
Investment Funds I and II (the “EIF Funds”), Comprehensive Software Systems,
Inc. (“CSS”), certain entities in which Raymond James Tax Credit Funds, Inc.
(“RJTCF”) owns variable interests, various partnerships involving real estate,
and a trust fund established for employee retention purposes are VIEs. Of these,
the Company has determined that the EIF Funds, certain tax credit fund
partnerships/LLCs, and the trust fund should be consolidated in the financial
statements.
The
EIF
Funds are limited partnerships, for which the Company is the general partner,
that invest in the merchant banking and private equity activities of the Company
and other unaffiliated venture capital limited partnerships. The EIF Funds
were
established as compensation and retention measures for certain qualified key
employees of the Company. The Company makes non-recourse loans to these
employees for two-thirds of the purchase price per unit. The loans and
applicable interest are to be repaid based on the earnings of the EIF Funds.
The
Company is deemed to be the primary beneficiary, and accordingly, consolidates
the EIF Funds, which had combined assets of approximately $19.7 million at
December 31, 2006. None of those assets act as collateral for any obligations
of
the EIF Funds. The Company's exposure to loss is limited to its contributions
and the non-recourse loans funded to the employee investors, for which their
partnership interests serve as collateral. At December 31, 2006 that exposure
is
approximately $8.7 million.
CSS
was
formed by a group of broker-dealer firms, including the Company, to develop
a
back-office software system. CSS is currently funded by capital contributions
from its owners. CSS had assets of $3.9 million at December 31, 2006. As of
December 31, 2006, the Company owns approximately 42% of CSS. The Company's
exposure to loss is limited to its capital contributions. The Company is not
the
primary beneficiary of CSS and accounts for its investment using the equity
method of accounting.
RJTCF
is
a wholly owned subsidiary of RJF and is the managing member or general partner
in approximately 44 separate tax credit housing funds having one or more
investor members or limited partners. These tax credit housing funds are
organized as limited liability companies or limited partnerships for the purpose
of investing in limited partnerships which purchase and develop low income
housing properties qualifying for tax credits. As of December 31, 2006, 42
of
these tax credit housing funds are VIEs as defined by FIN 46R, and RJTCF’s
interest in these tax credit housing funds which are VIEs range from .01% to
1%.
RJTCF
has
concluded that it is the primary beneficiary in approximately one quarter of
these tax credit housing funds, and accordingly, consolidates these funds,
which
have combined assets of approximately $271.9 million at December 31, 2006.
None
of those assets act as collateral for any obligations of these funds. The
Company's exposure to loss is limited to its investments in and advances to
these funds and at December 31, 2006, that exposure is approximately $11.3
million.
RJTCF
is
not the primary beneficiary of the remaining tax credit housing funds it
determined to be VIEs and accordingly the Company does not consolidate these
funds. The Company's exposure to loss is limited to its investments in and
advances to those funds and at December 31, 2006, that exposure is approximately
$24.5 million.
The
two
remaining tax credit housing funds that have been determined not to be VIEs
are
wholly owned by RJTCF and are included in the Company’s consolidated financial
statements. As of December 31, 2006, only one of these funds had any material
activity. This fund typically holds interests in certain tax credit limited
partnerships for less than 90-days and has assets of approximately $8.6 million
at December 31, 2006.
As
of
December 31, 2006, the Company has a variable interest in several limited
partnerships involved in various real estate activities, in which a subsidiary
is the general partner. The Company is not the primary beneficiary of these
partnerships and accordingly the Company does not consolidate these
partnerships. These partnerships have assets of approximately $23 million at
December 31, 2006. The Company's exposure to loss is limited to its capital
contributions. The carrying value of the Company's investment in these
partnerships is not material at December 31, 2006.
One
of
the Company’s restricted stock plans is associated with a trust fund which was
established through the Company’s wholly owned Canadian subsidiary. This trust
fund was established and funded to enable the trust fund to acquire Company
common stock in the open market to be used to settle restricted stock units
granted as a retention vehicle for certain employees of the Canadian subsidiary.
For financial statement purposes, the Company is deemed to be the primary
beneficiary in accordance with FIN 46R, and accordingly, consolidates this
trust
fund, which has assets of approximately $6.5 million at December 31, 2006.
None
of those assets are specifically pledged as collateral for any obligations
of
the trust fund. The Company's exposure to loss is limited to its contributions
to the trust fund and at December 31, 2006, that exposure is approximately
$6.5
million.
Note
6 - Bank Loans, Net and Deposits:
Bank
Loans, Net
Bank
client receivables are primarily comprised of loans originated or purchased
by
RJBank
and
include commercial and residential mortgage loans, as well as consumer loans.
These receivables are collateralized by first or second mortgages on residential
property, real property, or assets of the borrower. The following table provides
a summary of RJBank's loans receivable at December 31, 2006 and September 30,
2006:
|
December
31,
|
September
30,
|
|
2006
|
2006
|
|
(in
000's)
|
|
|
|
Residential
mortgage loans
|
$
1,472,282
|
$
1,322,911
|
Commercial
loans
|
1,240,439
|
960,977
|
Consumer
loans
|
4,029
|
1,917
|
|
2,716,750
|
2,285,805
|
|
|
|
Allowance
for loan losses
|
(22,911)
|
(18,694)
|
Unearned
income, net of deferred expenses
|
(4,976)
|
(4,279)
|
|
|
|
|
$
2,688,863
|
$
2,262,832
|
Bank
Deposits
Bank
deposits include demand deposits, savings accounts and certificates of deposit.
The following table presents a summary of bank deposits at December 31, 2006
and
September 30, 2006:
|
December
31,
|
September
30,
|
|
2006
|
2006
|
|
Balance
|
Weighted
Average Rate
|
Balance
|
Weighted
Average Rate
|
|
($
in 000's)
|
|
|
|
|
|
Bank
deposits:
|
|
|
|
|
Demand
deposits - interest bearing
|
$
7,408
|
1.97%
|
$
6,088
|
1.95%
|
Demand
deposits - non-interest bearing
|
2,400
|
-
|
2,538
|
-
|
Savings
and money market accounts
|
2,814,713
|
4.60%
|
2,542,894
|
4.59%
|
Certificates
of deposit (1)
|
242,203
|
4.58%
|
255,360
|
4.49%
|
Total
bank deposits
|
$3,066,724
|
4.59%
|
$2,806,880
|
4.57%
|
|
|
|
|
|
|
(1)
|
Certificates
of deposit in amounts of $100,000 or more at December 31, 2006 and
September 30, 2006 were $69,216,937 and $72,067,000,
respectively.
|
Certificates
of deposit issued have remaining maturities at December 31, 2006 and September
30, 2006, as follows:
|
December
31,
|
September
30,
|
|
2006
|
2006
|
|
(in
000's):
|
|
|
|
One
year or less
|
$115,517
|
$125,622
|
One
to two years
|
48,285
|
50,427
|
Two
to three years
|
40,188
|
36,306
|
Three
to four years
|
19,807
|
24,885
|
Four
to five years and thereafter
|
18,406
|
18,120
|
Total
|
$242,203
|
$255,360
|
Note
7 - Borrowings:
Loans
payable at December 31, 2006 and September 30, 2006 are presented
below:
|
December
31,
2006
|
September
30,
2006
|
|
(in
000's)
|
Short-term
Borrowings:
|
|
|
Borrowings
on lines of credit (1)
|
$
290,125
|
$
13,040
|
Current
portion of mortgage notes payable
|
2,783
|
2,746
|
Total
short-term borrowings
|
292,908
|
15,786
|
|
|
|
Long-term
Borrowings:
|
|
|
Mortgage
notes payable
(2)
|
65,184
|
65,852
|
Federal
Home Loan Bank advances (3)
|
50,000
|
60,000
|
Total
long-term borrowings
|
115,184
|
125,852
|
|
|
|
Total
loans payable
|
$
408,092
|
$
141,638
|
|
|
|
|
(1)
|
The
Company and its subsidiaries maintain one committed and several
uncommitted lines of credit denominated in U.S. dollars and one
uncommitted line of credit denominated in Canadian dollars (“CDN”). At
December 31, 2006, the aggregate domestic lines were $710.1 million
and
CDN $40 million, respectively. The interest rates for the lines of
credit
are variable and are based on the Fed Funds rate, LIBOR, and Canadian
prime rate. For the three months ended December 31, 2006, interest
rates
on the lines of credit ranged from 4.5% to 6.52%. For the three months
ended December 31, 2005, interest rates on the lines of credit ranged
from
4.25% to 5.82%. In addition, the Company’s joint ventures in Turkey and
Argentina have multiple settlement lines of credit. The Company has
guaranteed certain of these settlement lines of credit as follows:
four in
Turkey totaling $22.5 million and one in Argentina for $3 million.
At
December 31, 2006 the aggregate unsecured settlement lines of credit
available were $78 million, and there was an outstanding balance
of
approximately $1.8 million. The interest rates for these lines of
credit
ranged from 9% to 21%.
|
|
(2)
|
Mortgage
notes payable is comprised of a mortgage loan for the financing of
the
Company's home office complex and a note for the financing of the
office
for a foreign joint venture. The mortgage loan bears interest at
5.7% and
is secured by land, buildings, and improvements with a net book value
of
$73 million at December 31, 2006. The foreign joint venture note
bears
interest at 8.25% and is secured by the
building.
|
|
(3)
|
RJBank
has $50 million in FHLB advances outstanding at December 31, 2006,
which
are comprised of long-term, fixed rate advances. The long-term, fixed
rate
advances bear interest at rates ranging from 4.82% to 5.67%. The
outstanding FHLB advances mature between May 2008 and February 2011.
These
advances are secured by a blanket lien on RJBank's residential loan
portfolio granted to FHLB at December 31, 2006. The FHLB has the
right to
convert advances totaling $40 million and $50 million at December
31, 2006
and September 30, 2006, respectively, to a floating rate at one or
more
future dates. RJBank has the right to prepay these advances without
penalty if the FHLB exercises its
right.
|
Note
8 - Stock Based Compensation:
Effective
October 1, 2005, the Company
adopted SFAS No. 123R, “Share-Based Payment”, which requires the measurement and
recognition of compensation expense for all share-based payment awards made
to
employees and directors based on estimated fair values. The Company’s
share-based employee and outside director compensation plans are described
more
fully in Note 17 of the Notes to the Consolidated Financial Statements included
in the Company's Annual Report on Form 10-K for the year ended September 30,
2006. The Company’s net income for the three months ended December 31, 2006 and
2005 includes $7.8 million and $4.6 million, respectively, of compensation
costs
and $2.1 million and $1.2 million, respectively of income tax benefits related
to the Company’s share-based plans available for awards to employees and members
of its Board of Directors.
During
the
three months ended December 31, 2006, the Company granted 219,500 stock options,
841,641 shares of restricted stock and 60,959 restricted stock units to
employees under its stock-based employee compensation plans. No share-based
payment awards were made to outside directors during the three months ended
December 31, 2006.
The
weighted-average grant-date fair value of stock options granted to employees
during the three months ended December 31, 2006 was $9.38 per share. Pre-tax
unrecognized compensation expense for stock options granted to employees and
outside directors, net of estimated forfeitures, was $13.2 million as of
December 31, 2006, and will be recognized as expense over a weighted-average
period of approximately three years.
The
weighted-average grant-date fair value of restricted stock granted to employees
during the three months ended December 31, 2006 was $30.67 per share. Pre-tax
unrecognized compensation expense for unvested restricted stock granted to
employees, net of estimated forfeitures, was $55 million as of December 31,
2006, and will be recognized as expense over a weighted-average period of
approximately 3.29 years.
The
weighted-average grant-date fair value of restricted stock units granted to
employees during the three months ended December 31, 2006 was $31.78 per share.
Pre-tax unrecognized compensation expense for unvested restricted stock units
granted to employees, net of estimated forfeitures, was $4.4 million as of
December 31, 2006, and will be recognized as expense over a weighted-average
period of approximately 2.13 years.
Under
one
of its non-qualified fixed stock option plans, the Company may grant stock
options to its independent contractor Financial Advisors. In addition, the
Company may grant restricted stock units or restricted shares of common stock
to
its independent contractor Financial Advisors under one of its restricted stock
plans. The Company accounts for share-based awards to its independent contractor
Financial Advisors in accordance with Emerging Issues Task Force (“EITF”) No.
96-18, “Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and
EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (see Note 18 of the Notes to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2006 for more information). The
Company’s net income for the three months ended December 31, 2006 and 2005
includes $2.4 million and $0.4 million, respectively, of compensation costs
and
$0.9 million and $147,000, respectively of income tax benefits related to the
Company’s share-based plans available for awards to its independent contractor
Financial Advisors.
During
the three months ended December 31, 2006, the Company granted 342,600 stock
options and 13,300 shares of restricted stock to its independent contractor
Financial Advisors.
The
weighted-average grant-date fair value of stock options granted to independent
contractor Financial Advisors during the three months ended December 31, 2006
was $8.87 per share. As of December 31, 2006, there was $10 million of total
unrecognized pre-tax compensation cost related to unvested stock options granted
to its independent contractor Financial Advisors based on estimated fair value
at that date. These costs are expected to be recognized over a weighted average
period of approximately 3.5 years.
The
weighted-average grant-date fair value of restricted stock granted to
independent contractor Financial Advisors during the three months ended December
31, 2006 was $31.78 per share. As of December 31, 2006, there was $0.4 million
of total unrecognized pre-tax compensation cost related to unvested restricted
shares granted to its independent contractor Financial Advisors based on
estimated fair value at that date. These costs are expected to be recognized
over a weighted average period of approximately 2.9 years.
Note
9
- Commitments and Contingencies:
The
Company is the lessor in two leveraged commercial aircraft transactions with
two
major domestic airlines (Delta Air Lines, Inc. “Delta” and Continental Airlines,
Inc. “Continental").
The
Company's ability to realize its expected return is dependent upon the airlines'
ability to fulfill their lease obligations. In the event that the airlines
default on their lease commitments and the Trustee for the debt holders is
unable to re-lease or sell the planes with adequate terms, the Company would
suffer a loss of some or all of its investment.
Delta
Airlines filed for bankruptcy protection on September 14, 2005. Accordingly,
the
Company recorded a $6.5 million pretax charge in 2005 to fully reserve the
balance of its investment in the leveraged lease of an aircraft to Delta. The
Company had taken a $4 million pretax charge in 2004 to partially reserve for
this investment. No
amount
of these charges represents a cash expenditure; however, in the likely event
of
a material modification to the lease or foreclosure of the aircraft by the
debt
holders in fiscal 2007, certain tax payments of up to approximately $7.9 million
could be accelerated. The expected tax payments are currently reflected on
the
statement of financial condition as a deferred tax liability and are not
expected to result in a further charge to earnings. Subsequent to December
31,
2006, the Company entered into an agreement in principle to sell its interest
in
the Delta transaction for $2 million, which is expected to be recognized as
a
pre-tax gain in the quarter ending March 31, 2007. Upon closing, the
aforementioned tax payments will be triggered.
The
Company also has a leveraged lease outstanding with Continental valued at $10.6
million as of December 31, 2006. The Company's equity investment represented
20%
of the aggregate purchase price; the remaining 80% was funded by public debt
issued in the form of equipment trust certificates. The residual value of the
aircraft at the end of the lease term of approximately 17 years is projected
to
be 15% of the original cost. This lease expires in May 2014.
Although
Continental remains current on its lease payments to the Company, the inability
of Continental to make its lease payments, or the termination or modification
of
the lease through a bankruptcy proceeding, could result in the write-down of
the
Company's investment and the acceleration of certain income tax payments. The
Company continues to monitor this lessee for specific events or circumstances
that would increase the likelihood of a default on Continental’s obligations
under this lease.
RJBank
has outstanding at any time a significant number of commitments to extend credit
or purchase loans. These arrangements are subject to strict credit control
assessments and each client's credit worthiness is evaluated on a case-by-case
basis. A summary of commitments to extend credit, purchase loans and letters
of
credit outstanding is as follows:
|
|
December
31, 2006
|
|
September
30, 2006
|
|
|
(in
000's)
|
|
|
|
|
|
Standby
letters of credit
|
|
$
79,049
|
|
$
55,193
|
Consumer
lines of credit
|
|
23,994
|
|
25,772
|
Commercial
lines of credit
|
|
906,886
|
|
760,253
|
Unfunded
loan commitments - variable rate
|
|
270,989
|
|
264,663
|
Unfunded
loan commitments - fixed rate
|
|
10,783
|
|
6,412
|
Because
many commitments expire without being funded in whole or part, the contract
amounts are not estimates of future cash flows.
In
the
normal course of business, RJBank issues, or participates in the issuance of,
financial standby letters of credit whereby it provides an irrevocable guarantee
of payment in the event the letter of credit is drawn down by the beneficiary.
As of December 31, 2006, $79.0 million of such letters of credit were
outstanding. Of the letters of credit outstanding, $78.9 million are
underwritten as part of a larger corporate credit relationship. In the event
that a letter of credit is drawn down, RJBank would pursue repayment from the
account party under the existing borrowing relationship, or would liquidate
collateral, or both. The proceeds from repayment or liquidation of collateral
are expected to satisfy the maximum potential future amount of any payments
of
amounts drawn down under the existing letters of credit.
At
December 31, 2006 and September 30, 2006, no securities were pledged by RJBank
as collateral with the FHLB for advances. In lieu of pledging securities as
collateral for advances, RJBank provided the FHLB with a blanket lien against
RJBank's entire portfolio of residential mortgage loans.
As
of
December 31, 2006, RJBank has entered into a $255 million reverse repurchase
agreement with a single counterparty. Although RJBank is exposed to risk that
this counterparty may not fulfill its contractual obligation, the risk of
default is minimal due to the creditworthiness of the counterparty, collateral
received and the short duration of this agreement.
As
part
of an effort to increase brand awareness, the Company entered into a stadium
naming rights contract in July 1998. The contract expires in 2016 and has a
4%
annual escalator. Expenses of $736,000
and $707,000 were recognized in the three months ended December 31, 2006 and
2005.
In
the
normal course of business, the Company enters into underwriting commitments.
Transactions relating to such commitments that were open at December 31, 2006
and were subsequently settled had no material effect on the consolidated
financial statements as of that date.
The
Company utilizes client marginable securities to satisfy deposits with clearing
organizations. At December 31, 2006 and September 30, 2006, the Company had
client margin securities valued at $68.1 million and $65.2 million,
respectively, on deposit with a clearing organization.
The
Company has committed a total of $42.6 million, in amounts ranging from $200,000
to $2.0 million, to 40 different independent venture capital or private equity
partnerships. As of December 31, 2006, the Company has invested $30 million
of
that amount and has received $26 million in distributions. Additionally, the
Company is the general partner in two internally sponsored private equity
limited partnerships to which it has committed $14 million. Of that amount,
the
Company has invested $11.7 million and has received $6.7 million in
distributions as of December 31, 2006.
The
Company is the general partner in EIF Funds. These limited partnerships invest
in the merchant banking and private equity activities of the Company and other
unaffiliated venture capital limited partnerships. The EIF Funds were
established as compensation and retention measures for certain qualified key
employees of the Company. At December 31, 2006, the funds have unfunded
commitments of $4.3 million.
At
December 31, 2006, the approximate market values of collateral received that
can
be repledged by the Company, were:
Sources
of collateral (in 000's):
|
|
Securities
purchased under agreements to resell
|
$
261,580
|
Securities
received in securities borrowed vs. cash transactions
|
878,296
|
Collateral
received for margin loans
|
1,452,632
|
Total
|
$2,592,508
|
During
the quarter certain collateral was repledged and at December 31, 2006, the
approximate market values of this portion of collateral and financial
instruments owned that were repledged by the Company were:
Uses
of collateral and trading securities (in 000's):
|
|
Securities
purchased under agreements to resell
|
$
261,580
|
Securities
received in securities borrowed vs. cash transactions
|
849,693
|
Collateral
received for margin loans
|
174,160
|
Total
|
$1,285,433
|
In
the
normal course of business, certain subsidiaries of the Company act as general
partner and may be contingently liable for activities of various limited
partnerships. These partnerships engaged primarily in real estate activities.
In
the opinion of the Company, such liabilities, if any, for the obligations of
the
partnerships will not in the aggregate have a material adverse effect on the
Company's consolidated financial position.
The
Company and its subsidiaries maintain one committed and several uncommitted
lines of credit denominated in U.S. dollars and one uncommitted line of credit
denominated in Canadian dollars. At December 31, 2006, the aggregate domestic
lines were $710.1 million and total Canadian lines were CDN $40 million. The
interest rates for the lines of credit are variable and are based on the Fed
Funds rate, LIBOR, and Canadian prime rate. The Company’s committed $200 million
line of credit is subject to a 0.125% per annum facility fee. RJBank has $50
million in FHLB advances outstanding at December 31, 2006, which are comprised
of long-term, fixed rate advances. RJBank had $947 million in credit available
from the FHLB at December 31, 2006.
The
Company’s joint ventures in Turkey and Argentina have multiple settlement lines
of credit. The Company has guaranteed certain of these settlement lines of
credit as follows: four in Turkey totaling $22.5 million and one in Argentina
for $3 million. At December 31, 2006 the aggregate unsecured settlement lines
of
credit available were $78 million, and there was an outstanding balance of
approximately $1.8 million. The Company has also from time to time authorized
performance guarantees for the completion of trades with counterparties in
Argentina and Turkey. At December 31, 2006, there were no outstanding
performance guarantees in Turkey or Argentina.
The
Company guarantees the existing mortgage debt of RJA of approximately $66.9
million. The
Company guarantees interest rate swap obligations of RJ Capital Services, Inc.
The Company has also committed to lend to or guarantee obligations of RJTCF
of
up to $100 million upon request, subject to certain limitations as well as
annual review and renewal. RJTCF borrows in order to invest in partnerships
which purchase and develop properties qualifying for tax credits. These
investments in project partnerships are then sold to various tax credit funds,
which have third party investors, and for which RJTCF serves as the managing
member or general partner. RJTCF typically sells these investments within 90
days of their acquisition, and the proceeds from the sales are used to repay
RJTCF’s borrowings. Additionally, RJTCF may make short-term loans or advances to
project partnerships on behalf of the tax credit funds in which it serves as
managing member or general partner. At December 31, 2006, cash funded to invest
in either loans or investments in project partnerships was $43 million. In
addition, at December 31, 2006, RJTCF is committed to additional future fundings
of $18.9 million related to project partnerships that have not yet been sold
to
various tax credit funds.
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. Like others in the retail
securities industry, the Company experienced a significant increase in the
number of claims seeking recovery due to portfolio losses in the early 2000's.
During the past year, the number of claims has declined to more historic levels.
As
previously reported, RJF and RJFS were defendants in a series of lawsuits and
arbitrations relating to an alleged mortgage lending program known as the
"Premiere 72" program, that was administered by a company owned in part by
two
individuals who were registered as Financial Advisors with RJFS in Houston.
In
July 2005, RJFS paid approximately $24 million in a settlement with
approximately 380 claimants in this litigation, representing approximately
two-thirds of the outstanding claims. In September 2006, RJFS settled with
an
additional 150 claimants for a lump sum of $18 million. These settlements
effectively extinguish the Company’s liability with the exception of one
remaining lawsuit in federal court involving one claimant family
group.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately US$6.8 million by the Turkish
tax
authorities. The authorities applied a significantly different methodology
than
in the prior year’s audit. RJY is vigorously contesting most aspects of this
assessment and has filed an appeal with the Turkish tax court. Audits of 2002
through 2004 are anticipated and their outcome is unknown in light of the change
in methodology and the pending litigation. The Company has made provision in
its
consolidated financial statements for its estimate of the reasonable potential
exposure for this matter. As of December 31, 2006, RJY had total capital of
approximately US$6.8 million, of which the Company owns approximately
73%.
The
Company is contesting the allegations in this and other cases and believes
that
there are meritorious defenses in each of these lawsuits and arbitrations.
In view of the number and diversity of claims against the Company, the number
of
jurisdictions in which litigation is pending and the inherent difficulty of
predicting the outcome of litigation and other claims, the Company cannot state
with certainty what the eventual outcome of pending litigation or other claims
will be. In the opinion of the Company's 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 the Company's financial position or 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.
Note
10
- Capital Transactions:
The
following table presents information on a monthly basis for purchases of the
Company’s stock for the quarter ended December
31, 2006:
|
Number
of
|
|
Average
|
Period
|
Shares
Purchased (1)
|
|
Price
Per Share
|
|
|
|
|
October
1, 2006 - October 31, 2006
|
2,149
|
|
$31.77
|
November
1, 2006 - November 30, 2006
|
842
|
|
30.92
|
December
1, 2006 - December 31, 2006
|
5,795
|
|
31.63
|
Total
|
8,786
|
|
$31.59
|
(1)
|
The
Company does not have a formal stock repurchase plan. Shares are
repurchased at the discretion of management pursuant to prior
authorization from the Board of Directors. On May 20, 2004, the Board
of
Directors authorized purchases of up to $75 million. Since that date
400,300 shares have been repurchased for a total of $7.7 million,
leaving
$67.3 million available to repurchase shares. Historically the Company
has
considered such purchases when the price of its stock reaches or
approaches 1.5 times book value or when employees surrender shares
as
payment for option exercises. The decision to repurchase shares is
subject
to cash availability and other factors. During the three months ended
December 31, 2006, the Company only purchased shares that were surrendered
by employees as payment for option exercises.
|
Note
11
- Regulation and Capital Requirements:
Certain
broker-dealer subsidiaries of the Company are subject to the requirements of
the
Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of
1934. Raymond
James & Associates, Inc. (“RJA”), a member firm of the New York Stock
Exchange (“NYSE”), is also subject to the rules of the NYSE, whose requirements
are substantially the same. Rule 15c3-1 requires that aggregate indebtedness,
as
defined, not to exceed fifteen times net capital, as defined. Rule 15c3-1 also
provides for an “alternative net capital requirement”, which RJA, Raymond James
Financial Services, Inc. (“RJFS”) and Heritage Fund Distributors, Inc. (“HFD”)
have elected. It requires that minimum net capital, as defined, be equal to
the
greater of $250,000 or two percent of Aggregate Debit Items arising from client
transactions. The NYSE may require a member firm to reduce its business if
its
net capital is less than four percent of Aggregate Debit Items and may prohibit
a member firm from expanding its business and declaring cash dividends if its
net capital is less than five percent of Aggregate Debit Items. The net capital
position of RJA at December 31, 2006 and September 30, 2006 was as
follows:
|
December
31,
|
|
September
30,
|
|
2006
|
|
2006
|
Raymond
James & Associates, Inc.:
|
($
in 000's)
|
(alternative
method elected)
|
|
|
|
Net
capital as a percent of Aggregate
|
|
|
|
Debit
Items
|
23.62%
|
|
27.58%
|
Net
capital
|
$
330,412
|
|
$
369,443
|
Less:
required net capital
|
(27,974)
|
|
(26,793)
|
Excess
net capital
|
$
302,438
|
|
$
342,650
|
At
December 31, 2006 and September 30, 2006,
RJFS
had no Aggregate Debit Items and therefore the minimum net capital of $250,000
was applicable. The net capital position of RJFS at December 31, 2006 and
September 30, 2006 was as follows:
|
December
31,
|
|
September
30,
|
|
2006
|
|
2006
|
Raymond
James Financial Services, Inc.:
|
(in
000's)
|
(alternative
method elected)
|
|
|
|
Net
capital
|
$
35,691
|
|
$
41,200
|
Less:
required
net capital
|
(250)
|
|
(250)
|
Excess
net capital
|
$
35,441
|
|
$
40,950
|
At
December
31, 2006, HFD had no Aggregate Debit Items and therefore the minimum net capital
of $250,000 was applicable. The net capital position of HFD at December 31,
2006
and September 30, 2006 was as follows:
|
December
31,
|
|
September
30,
|
|
2006
|
|
2006
|
Heritage
Fund Distributors, Inc.
|
(in
000’s)
|
(alternative
method elected)
|
|
|
|
Net
capital
|
$
6,979
|
|
$
1,669
|
Less:
required net capital
|
(250)
|
|
(250)
|
Excess
net capital
|
$
6,729
|
|
$
1,419
|
Raymond
James Ltd.
("RJ
Ltd.") is subject to the Minimum Capital Rule (By-Law No. 17 of the Investment
Dealers Association ("IDA")) and the Early Warning System (By-Law No. 30 of
the
IDA). The Minimum Capital Rule requires that every member shall have and
maintain at all times Risk Adjusted Capital greater than zero calculated in
accordance with Form 1 (Joint Regulatory Financial Questionnaire and Report)
and
with such requirements as the Board of Directors of the IDA may from time to
time prescribe. Insufficient Risk Adjusted Capital may result in suspension
from
membership in the stock exchanges or the IDA.
The
Early
Warning System is designed to provide advance warning that a member firm is
encountering financial difficulties. This system imposes certain sanctions
on
members who are designated in Early Warning Level 1 or Level 2 according to
their capital, profitability, liquidity position, frequency of designation
or at
the discretion of the IDA. Restrictions on business activities and capital
transactions, early filing requirements, and mandated corrective measures are
sanctions that may be imposed as part of the Early Warning System. The Company
was not in Early Warning Level 1 or Level 2 at December 31, 2006 or September
30, 2006.
The
Risk
Adjusted Capital of RJ Ltd. was CDN$33,761,000 and CDN$42,841,000 at December
31, 2006 and September 30, 2006, respectively.
RJBank
is
subject to various regulatory and capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions
by
regulators. Under capital adequacy guidelines and the regulatory framework
for
prompt corrective action, RJBank must meet specific capital guidelines that
involve quantitative measures of RJBank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
RJBank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require RJBank
to
maintain minimum amounts and ratios (set forth in the table below) of total
and
Tier I Capital (as defined in the regulations) to risk-weighted assets (as
defined). Management believes that, as of December 31, 2006 and September 30,
2006, the Bank meets all capital adequacy requirements to which it is
subject.
As
of
December 31, 2006, the most recent notification from the Office of Thrift
Supervision categorized RJBank as “well capitalized” under the regulatory
framework for prompt corrective action. To be categorized as “well capitalized”,
RJBank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table below. There are no conditions
or
events since that notification that management believes have changed RJBank's
category.
|
|
|
To
be well capitalized
|
|
|
Requirement
for capital
|
under
prompt
|
|
|
adequacy
|
corrective
action
|
|
Actual
|
purposes
|
provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
($
in 000's)
|
As
of December 31, 2006:
|
|
|
|
|
|
|
Total
capital (to
|
|
|
|
|
|
|
risk-weighted
assets)
|
$
252,621
|
11.6%
|
$
173,904
|
8.0%
|
$
217,380
|
10.0%
|
Tier I
capital (to
|
|
|
|
|
|
|
risk-weighted
assets)
|
225,448
|
10.4%
|
86,952
|
4.0%
|
130,428
|
6.0%
|
Tier I
capital (to
|
|
|
|
|
|
|
adjusted
assets)
|
225,448
|
6.7%
|
134,298
|
4.0%
|
167,873
|
5.0%
|
|
|
|
To
be well capitalized
|
|
|
Requirement
for capital
|
under
prompt
|
|
|
adequacy
|
corrective
action
|
|
Actual
|
purposes
|
Provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
($
in 000's)
|
As
of September 30, 2006:
|
|
|
|
|
|
|
Total
capital (to
|
|
|
|
|
|
|
risk-weighted
assets)
|
$
219,339
|
12.0%
|
$146,716
|
8.0%
|
$183,396
|
10.0%
|
Tier I
capital (to
|
|
|
|
|
|
|
risk-weighted
assets)
|
196,415
|
10.7%
|
73,358
|
4.0%
|
110,037
|
6.0%
|
Tier I
capital (to
|
|
|
|
|
|
|
average
assets)
|
196,415
|
6.4%
|
122,975
|
4.0%
|
153,719
|
5.0%
|
The
following table presents the computation of basic and diluted earnings
per
share
(in 000’s, except per share amounts):
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2006
|
2005
|
|
|
|
Net
income
|
$
59,395
|
$
45,109
|
|
|
|
Weighted
average common shares
|
|
|
outstanding
during the period*
|
114,339
|
111,501
|
|
|
|
Dilutive
effect of stock options and awards (1)*
|
3,554
|
2,135
|
|
|
|
Weighted
average diluted common
|
|
|
shares
(1)*
|
117,893
|
113,636
|
|
|
|
Net
income per share - basic*
|
$
0.52
|
$
0.41
|
|
|
|
Net
income per share - diluted (1)*
|
$
0.50
|
$
0.40
|
|
|
|
Securities
excluded from weighted average
|
|
|
common
shares because their effect
|
|
|
would
be antidulitive*
|
-
|
-
|
* Gives
effect to the three-for-two stock split paid on March 22, 2006.
(1)
|
Diluted
earnings per share is computed on the basis of the weighted average
number
of shares of common stock plus the effect of dilutive potential common
shares outstanding during the period using the treasury stock method.
Dilutive potential common shares include stock options, units and
awards.
|
Note
13
- Derivative Financial Instruments:
The
Company uses interest rate swaps as well as futures contracts as
part
of its fixed income business. These positions are marked to market with the
gain
or loss and the related interest recorded in Net Trading Profits within the
statement of income for the period. Any collateral exchanged as part of the
swap
agreement is recorded in Broker Receivables and Payables in the consolidated
statement of financial condition for the period. At December 31, 2006 and
September 30, 2006, the Company had outstanding interest rate derivative
contracts with notional amounts of $2.6 billion and $2.3 billion, respectively.
The notional amount of a derivative contract does not change hands; it is simply
used as a reference to calculate payments. Accordingly, the notional amount
of
the Company’s derivative contracts outstanding at December 31, 2006 vastly
exceeds the possible losses that could arise from such transactions. The net
market value of all open swap positions at December 31, 2006 and September
30,
2006 was $17 million and $13 million, respectively.
The
Company is exposed to credit losses in the event of nonperformance by the
counterparties to its interest rate swap agreements. The Company performs a
credit evaluation of counterparties prior to entering into swap transactions
and
monitors their credit standings. Currently, the Company anticipates that all
counterparties will be able to fully satisfy their obligations under those
agreements. The Company may require collateral from counterparties to support
these obligations as established by the credit threshold specified by the
agreement and/or as a result of monitoring the credit standing of the
counterparties. The Company is also exposed to interest rate risk related to
its
interest rate swap agreements. The Company monitors exposure in its derivatives
subsidiary daily based on established limits with respect to a number of
factors, including interest rate risk, spread, ratio and basis risk and
volatility. These exposures are monitored both on a total portfolio basis and
separately for selected maturity periods.
Note
14 - Segment Information:
SFAS
No.
131, Disclosures about Segments of an Enterprise
and
Related Information, establishes standards for reporting information about
operating segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance.
The
Company currently operates through the following seven business segments:
Private Client Group; Capital Markets; Asset Management; RJBank; Emerging
Markets; Stock Loan/Borrow and various corporate investments combined in the
"Other" segment. The business segments are based upon factors such as the
services provided and the distribution channels served and are consistent with
how the Company assesses performance and determines how to allocate resources
throughout the Company and its subsidiaries. The financial results of the
Company's segments are presented using the same policies as those described
in
Note 1 of the Notes to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended September 30, 2006.
Segment data includes charges allocating corporate overhead and benefits to
each
segment. Intersegment revenues, charges, receivables and payables are eliminated
between segments upon consolidation.
The
Private Client Group segment includes the retail branches of the Company's
broker-dealer subsidiaries located throughout the United States, Canada and
the
United Kingdom. These branches provide securities brokerage services including
the sale of equities, mutual funds, fixed income products and insurance products
to their individual clients. The segment includes net interest earnings on
client margin loans and cash balances. Additionally, this segment includes
the
correspondent clearing services that the Company provides to other broker-dealer
firms.
The
Capital Markets segment includes institutional sales and trading in the United
States, Canada and Europe. It provides securities brokerage, trading, and
research services to institutions with an emphasis on the sale of U.S. and
Canadian equities and fixed income products. This segment also includes the
Company's management of and participation in underwritings, merger and
acquisition services, public finance activities, and the operations of Raymond
James Tax Credit Funds.
The
Asset
Management segment includes investment portfolio management services of Eagle
Asset Management, Inc., Awad Asset Management, Inc., and Raymond James
Consulting Services (RJA’s asset management services division), mutual fund
management by Heritage Asset Management, Inc., private equity management by
Raymond James Capital, Inc. and RJ Ventures, LLC, and trust services of Raymond
James Trust Company and Raymond James Trust Company West. In addition to the
asset management services noted above, this segment also offers fee-based
programs to clients who have contracted for portfolio management services from
outside money managers.
RJBank
is
a separate segment, which provides consumer, residential, and commercial loans,
as well as FDIC-insured deposit accounts to clients of the Company's
broker-dealer subsidiaries and to the general public.
The
Emerging Markets segment includes various joint ventures in Argentina, India,
Turkey, and Uruguay. These joint ventures operate in securities brokerage,
investment banking and asset management.
The
Stock
Loan/Borrow segment involves the borrowing and lending of securities from and
to
other broker-dealers, financial institutions and other counterparties, generally
as an intermediary.
The
Other
segment includes various investment and corporate activities of the
Company.
Information
concerning operations in these segments of business is as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2006
|
2005
|
|
(000's)
|
Revenues:
|
|
|
Private
Client Group
|
$
449,133
|
$
375,745
|
Capital
Markets
|
117,551
|
106,604
|
Asset
Management
|
58,147
|
46,950
|
RJBank
|
50,402
|
17,854
|
Emerging
Markets
|
11,797
|
13,809
|
Stock
Loan/Borrow
|
15,059
|
11,616
|
Other
|
7,540
|
2,769
|
Total
|
$
709,629
|
$
575,347
|
|
|
|
Income
Before Provision for Income Taxes:
|
Private
Client Group
|
$
54,010
|
$
36,811
|
Capital
Markets
|
13,811
|
14,575
|
Asset
Management
|
14,755
|
11,014
|
RJBank
|
6,439
|
3,201
|
Emerging
Markets
|
936
|
2,210
|
Stock
Loan/Borrow
|
196
|
2,224
|
Other
|
3,619
|
1,300
|
Pre-tax
Income
|
$
93,766
|
$
71,335
|
The
following table presents the Company's total assets on a segment
basis:
|
|
|
|
December
31,
|
September
30,
|
|
2006
|
2006
|
|
(000's)
|
Total
Assets:
|
|
|
Private
Client Group *
|
$
5,854,602
|
$
5,370,018
|
Capital
Markets **
|
1,516,024
|
1,369,479
|
Asset
Management
|
146,297
|
76,684
|
RJBank
|
3,422,227
|
3,120,840
|
Emerging
Markets
|
969,854
|
58,950
|
Stock
Loan/Borrow
|
60,156
|
1,250,857
|
Other
|
307,017
|
269,822
|
Total
|
$
12,276,177
|
$
11,516,650
|
|
*
|
Includes
$46 million of goodwill allocated pursuant to SFAS No. 142, "Goodwill
and
Other Intangible Assets".
|
|
**
|
Includes
$17 million of goodwill allocated pursuant to SFAS No.
142.
|
The
Company has operations in the United States, Canada, Europe and joint ventures
in India, Turkey, Argentina
and Uruguay. Substantially all long-lived assets are located in the United
States. The following table represents revenue by country:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2006
|
2005
|
|
(000's)
|
Revenues:
|
|
|
United
States
|
$
629,465
|
$
492,894
|
Canada
|
56,391
|
54,655
|
Europe
|
12,648
|
15,273
|
Other
|
11,125
|
12,525
|
Total
|
$
709,629
|
$
575,347
|
The
Company has $13.6 million invested in emerging market joint ventures, which
carry greater risk than amounts invested in developed markets.
Business
and Total Company Overview
The
following Management’s Discussion and Analysis is intended to help the reader
understand the results of operations and the financial condition of the Company.
Management’s Discussion and Analysis is provided as a supplement to, and should
be read in conjunction with, the Company’s financial statements and accompanying
notes to the financial statements.
The
Company’s overall financial results continue to be highly and directly
correlated to the direction and activity levels of the U.S. equity markets.
Despite the flat yield curve resulting from numerous increases in short-term
interest rates in 2005 - 2006 and volatile energy prices, positive recruiting
results in the private client group, a strong pipeline in investment banking,
increased assets under management, and growth at RJBank should augur well for
continued strong revenues.
Results
of Operations - Three Months Ended December 31, 2006 Compared with the Three
Months Ended December 31, 2005
Total
Company
Net
revenues of $603.9 million represented a 15% increase over the prior year’s
$526.5 million, with all revenue line items showing an increase. Net income
increased 32% over the prior year quarter, demonstrating the operating leverage
inherent in all of the Company’s significant operating segments. Both net
revenues and net income were the second highest in the Company’s history.
Diluted net income was $0.50 per share, up 25% from the prior year’s
$0.40
per
share. The quarter included a 34% increase in net interest income, record merger
and acquisition fee revenue, and was augmented by a $10 million incentive
compensation accrual reversal.
Segments
The
Company currently operates through the following seven business segments:
Private
Client Group; Capital Markets; Asset Management; RJBank; Emerging Markets;
Stock
Loan/Borrow and various corporate investments and expenses combined in the
"Other" segment.
The
following tables present the gross revenues and pre-tax income of the Company
on
a segment basis (in 000’s):
|
Three
Months Ended
|
|
December
31,
|
|
December
31,
|
|
Percentage
|
|
2006
|
|
2005
|
|
Change
|
Revenues:
|
|
|
|
|
|
Private
Client Group
|
$
449,133
|
|
$
375,745
|
|
20%
|
Capital
Markets
|
117,551
|
|
106,604
|
|
10%
|
Asset
Management
|
58,147
|
|
46,950
|
|
24%
|
RJBank
|
50,402
|
|
17,854
|
|
182%
|
Emerging
Markets
|
11,797
|
|
13,809
|
|
(15%)
|
Stock
Loan/Stock Borrow
|
15,059
|
|
11,616
|
|
30%
|
Other
|
7,540
|
|
2,769
|
|
172%
|
Total
|
$
709,629
|
|
$
575,347
|
|
23%
|
|
Three
Months Ended
|
|
December
31,
|
|
December
31,
|
|
Percentage
|
|
2006
|
|
2005
|
|
Change
|
Income
Before Provision for Income Taxes:
|
|
|
|
|
|
Private
Client Group
|
$
54,010
|
|
$
36,811
|
|
47%
|
Capital
Markets
|
13,811
|
|
14,575
|
|
(5%)
|
Asset
Management
|
14,755
|
|
11,014
|
|
34%
|
RJBank
|
6,439
|
|
3,201
|
|
101%
|
Emerging
Markets
|
936
|
|
2,210
|
|
(58%)
|
Stock
Loan/Stock Borrow
|
196
|
|
2,224
|
|
(91%)
|
Other
|
3,619
|
|
1,300
|
|
178%
|
Pre-tax
Income
|
$
93,766
|
|
$
71,335
|
|
31%
|
Net
Interest Analysis
The
following table presents the net interest income of the Company for the periods
indicated. The respective average rates are presented on an annualized
basis:
|
Three
Months Ended
|
|
December
31,
|
|
December
31,
|
|
2006
|
|
2005
|
|
($
in 000's)
|
Interest
Revenue
|
|
|
|
Margin
balances:
|
|
|
|
Average
balance
|
$
1,368,875
|
|
$
1,256,184
|
Average
rate
|
8.0%
|
|
6.7%
|
Interest
revenue - margin balances
|
27,254
|
|
21,121
|
|
|
|
|
Assets
segregated pursuant to federal regulations:
|
|
|
|
Average
balance
|
3,478,406
|
|
2,571,386
|
Average
rate
|
5.3%
|
|
4.0%
|
Interest
revenue - segregated assets
|
45,828
|
|
25,971
|
|
|
|
|
Raymond
James Bank, FSB interest revenue:
|
|
|
|
Average
earning assets
|
3,207,727
|
|
1,382,965
|
Average
rate
|
6.1%
|
|
5.1%
|
Interest
revenue - Raymond James Bank, FSB
|
50,293
|
|
17,706
|
|
|
|
|
Stock
borrowed interest revenue
|
15,059
|
|
11,616
|
|
|
|
|
Interest
revenue- variable interest entities
|
256
|
|
286
|
Other
interest revenue
|
19,534
|
|
11,350
|
|
|
|
|
Total
interest revenue
|
$ 158,224
|
|
$
88,050
|
|
|
|
|
Interest
Expense
|
|
|
|
Client
interest program:
|
|
|
|
Average
balance
|
$ 4,341,141
|
|
$
3,408,985
|
Average
rate
|
4.4%
|
|
3.0%
|
Interest
expense - client interest program
|
48,139
|
|
25,869
|
|
|
|
|
Raymond
James Bank, FSB interest expense:
|
|
|
|
Average
interest bearing liabilities
|
2,992,054
|
|
1,210,379
|
Average
rate
|
4.6%
|
|
3.2%
|
Interest
expense - Raymond James Bank, FSB
|
34,464
|
|
9,798
|
|
|
|
|
Stock
loaned interest expense
|
12,983
|
|
8,468
|
|
|
|
|
Interest
expense- variable interest entities
|
1,743
|
|
1,000
|
Other
interest expense
|
8,400
|
|
3,676
|
|
|
|
|
Total
interest expense
|
$
105,729
|
|
$
48,811
|
|
|
|
|
Net
interest income
|
$
52,495
|
|
$
39,239
|
Private
Client Group
The
Private Client Group (“PCG”) segment includes the retail branches of the
Company's broker-dealer subsidiaries located throughout the United States,
Canada, and the United Kingdom. The Private Client Group Financial Advisors
provide securities brokerage services including the sale of equity securities,
mutual funds, fixed income instruments, annuities and insurance products. This
segment accounts for the majority of the Company's revenues (63% of total
company revenues for the three months ended December 31, 2006). It generates
revenues principally through commissions charged on securities transactions,
fees from wrap fee investment accounts and the interest revenue generated from
client margin loans and cash balances. The Company primarily charges for the
services provided to its Private Client Group clients based on commission
schedules or through asset based advisory fees.
The
success of the Private Client Group is dependent upon the quality and integrity
of its Financial Advisors and other associates and the Company's ability to
attract, retain, and motivate a sufficient number of these associates. The
Company faces competition for qualified associates from major financial services
companies, including other brokerage firms, insurance companies, banking
institutions, and discount brokerage firms. The Company currently offers several
alternatives for Financial Advisors ranging from the traditional branch setting,
under which the Financial Advisors are employees of the Company and the costs
associated with running the branch are incurred by the Company, to the
independent contractor model, under which the Financial Advisors are responsible
for all of their own direct costs. Accordingly, the independent contractor
Financial Advisors are paid a larger percentage of commissions and fees. By
offering alternative models to potential and existing Financial Advisors, the
Company is able to effectively compete with other brokerage firms for qualified
Financial Advisors, as Financial Advisors can choose the model that best suits
their practice and profile. For the past two years, the Company has focused
on
increasing its minimum production standards and recruiting Financial Advisors
with high average production. The following table presents a summary of Private
Client Group Financial Advisors as of the periods indicated:
|
December
31,
|
|
December
31,
|
|
2006
|
|
2005
|
Private
Client Group - Financial Advisors:
|
|
|
|
Traditional
Branch
|
1,218
|
|
1,170
|
Independent
Contractor
|
3,281
|
|
3,491
|
Total
Financial Advisors
|
4,499
|
|
4,661
|
The
PCG
results reflect a 47% increase in pre-tax income over the prior year on a 20%
increase in revenues. Commission revenues increased $41 million (14%) over
the
prior year quarter, with 54% of that increase coming from the RJA private client
group. RJA has been successfully recruiting large producers throughout the
past
year, adding a net 39 FAs. Average production within RJA’s PCG group has
increased 13% from $371,000 to $ 419,000. Commission expense also increased
14%,
in line with the increase in commission revenue. Of the Company’s $52.5 million
in net interest income for the most recent quarter, approximately $30.9 million
was attributable to PCG. Net interest income increased $7.4 million (32%),
accounting for 43% of the increase in the segment’s pre-tax income. This
increase resulted from an 8.9% increase in average customer margin balances,
an
increase in segregated cash in excess of the increased customer cash balances
and increased rates earned on the additional segregated cash. PCG margins on
net
revenue increased from 10.6% to 13.3%.
Capital
Markets
The
Capital Markets segment includes institutional sales and trading in the United
States, Canada, and Europe; management of and participation in underwritings;
financial advisory services including private placements and merger and
acquisition services; public finance activities; and the syndication and related
management of investment partnerships designed to yield returns in the form
of
low-income housing tax credits to institutions. The Company provides securities
brokerage services to institutions with an emphasis on the sale of U.S. and
Canadian equities and fixed income products. Institutional sales commissions
account for over 50% of the segment’s revenues and are driven primarily through
trade volume, resulting from a combination of general market activity and by
the
Capital Markets group’s ability to find attractive investment opportunities and
promote those opportunities to potential and existing clients. Revenues from
investment banking activities are driven principally by the number and the
dollar value of the transactions with which the Company is involved. This
segment also includes trading of taxable and tax-exempt fixed income products,
as well as equity securities in the OTC and Canadian markets. This trading
involves the purchase of securities from, and the sale of securities to, clients
of the Company or other dealers who may be purchasing or selling securities
for
their own account or acting as agent for their clients. Profits and losses
related to this trading activity are primarily derived from the spreads between
bid and ask prices in the relevant market.
Capital
Market’s quarterly results included record merger and acquisition (“M&A”)
fees of $20 million for the quarter ended December 31, 2006. Commission revenues
were $2.5 million lower than the prior year quarter. Commissions were flat
in RJ
Ltd. and up $1.4 million in fixed income, however commissions
were down almost $3 million in RJA’s domestic institutional sales division and
down $2.7 million in the institutional European branches, for a net decline
in
the segment. The decline can be primarily attributed to lower underwriting
commission revenues. Although the Company underwrote an equal number of domestic
deals, the Company was not the lead or co-lead manager in as many deals. The
number of underwritings at RJ Ltd. declined considerably from 14 in the prior
year to two in the quarter ended December 31, 2006. As a result, underwriting
fee revenue was down 33%. Capital Markets margins declined from 12.7% to
10.6%.
|
Three
Months Ended
|
|
December
31,
|
|
December
31,
|
|
2006
|
|
2005
|
Number
of managed/co-managed public equity offerings:
|
|
|
|
United
States
|
27
|
|
27
|
Canada
|
2
|
|
14
|
|
|
|
|
Total
dollars raised (in 000's):
|
|
|
|
United
States
|
$6,088,000
|
|
$5,052,000
|
Canada
(in U.S. dollars)
|
158,000
|
|
220,000
|
Asset
Management
The
Asset
Management segment includes investment portfolio management services, mutual
fund management, private equity management, and trust services. Investment
portfolio management services include both proprietary and selected outside
money managers. The majority of the revenue for this segment is generated by
the
investment advisory fees related to asset management services for individual
investment portfolios and mutual funds. These accounts are billed a fee based
on
a percentage of assets. Investment advisory fees are charged based on either
a
single point in time within the quarter, typically the beginning or end of
a
quarter, or the “average daily” balances of assets under management. The balance
of assets under management is affected by both the performance of the underlying
investments and the new sales and redemptions of client accounts/funds.
Improving equity markets provide the Asset Management segment with the potential
to improve revenues from investment advisory fees as existing accounts
appreciate in value, in addition to individuals and institutions being more
likely to commit new funds to the equity markets. The following table presents
the assets under management as of the dates indicated:
|
Dec.
31,
|
|
Sept.
30,
|
|
Dec.
31,
|
|
2006
|
|
2006
|
|
2005
|
Assets
Under Management (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
Eagle
Asset Management, Inc.
|
$
12,951,956
|
|
$
12,463,417
|
|
$11,583,998
|
Heritage
Family of Mutual Funds
|
9,842,757
|
|
9,311,324
|
|
8,587,468
|
Raymond
James Consulting Services
|
8,508,212
|
|
7,915,168
|
|
6,886,746
|
Awad
Asset Management
|
1,028,454
|
|
996,353
|
|
1,189,863
|
Freedom
Accounts
|
5,920,265
|
|
5,122,733
|
|
3,052,367
|
Total
Assets Under Management
|
38,251,644
|
|
35,808,995
|
|
31,300,442
|
|
|
|
|
|
|
Less:
Assets Managed for Affiliated Entities
|
4,320,643
|
|
3,991,281
|
|
3,250,683
|
|
|
|
|
|
|
Total
Third Party Assets Under Management
|
$33,931,001
|
|
$31,817,714
|
|
$28,049,759
|
Investment
Advisory fees increased 17% over the same quarter in the prior year, with assets
under management up 21%. The increases in assets under management are
predominantly in high net worth or retail individual accounts, with significant
increases in Freedom (a managed mutual fund product), Raymond James Consulting
Services (a program offering independent investment subadvisors to the Company’s
clients) and Eagle Asset Management (proprietary asset management). The Heritage
mutual funds and money market balances also increased, despite the movement
of
approximately $1.3 billion in cash balances out of the money market into RJBank.
The increases are due to the increase in overall client assets at the firm,
a
large portion of which have been brought in by the clients of newly recruited
Financial Advisors in addition to market appreciation. Demonstrating the
leverage associated with increased assets under management, margins have
increased from nearly 23% to 26% since the prior year.
RJBank
RJBank
provides residential, consumer, and corporate loans, as well as FDIC-insured
deposit accounts, to clients of the Company's broker-dealer subsidiaries and
to
the general public. RJBank also purchases residential whole loan pools, and
participates with other banks in corporate loan syndications. RJBank generates
revenue principally through the interest income earned on the loans noted above
offset by the interest expense it incurs on client deposits and borrowings.
RJBank’s objective is to maintain a substantially duration-matched portfolio of
assets and liabilities.
Net
interest and pre-tax income at RJBank has doubled over the same quarter in
the
prior year. This is the direct result of the increased loan and deposit balances
at RJBank. In July 2006, RJA began to utilize a RJBank sweep option for the
cash
that is or has been held in the Heritage Money Market or in client brokerage
accounts. Approximately $1.3 billion was transferred into RJBank in the first
phase of a multi- year phase-in of this cash sweep option. In conjunction with
this increase in customer deposits, RJBank has increased its loan portfolio,
both by the purchase of additional residential loan pools and an increase in
commercial loan participations. The second phase of the RJBank sweep option
is
anticipated to take place in March 2007, transferring an estimated additional
$1.5 billion to RJBank. Related to the growth in the loan portfolio there was
the attendant growth in the loan loss reserves which is reflected as an increase
in other expense, suppressing the earnings, as is expected during periods of
robust growth. RJBank margins were 40% in the quarter ended December 31, 2006
versus 37% in the same quarter of the prior year.
Emerging
Markets
Emerging
Markets includes the results of the Company’s joint ventures in Latin America
and Turkey. The Company has signed an agreement to sell its interest in its
joint venture in India. Results in the emerging market segment are down 58%
from
the prior year - the result of a decline in commission revenues in both Latin
America and Turkey. These declines were modestly offset by trading profits
and
increased investment advisory fees in Latin America and increased investment
banking revenue in Turkey. Despite the decline in revenues, expenses were flat
with the prior year quarter resulting in a decline in pre-tax results.
Stock
Loan/Stock Borrow
This
segment conducts its business through the borrowing and lending of securities
from and to other broker-dealers, financial institutions and other
counterparties, generally as an intermediary. The borrower of the securities
puts up a cash deposit, commonly 102% of the market value of the securities,
on
which interest is earned. Accordingly, the lender receives cash and pays
interest. These cash deposits are adjusted daily to reflect changes in current
market value. The net revenues of this operation are the interest spreads
generated. Improved
results in this segment were a result of higher interest rates and resultant
improved spreads, as the average balances actually declined
marginally.
Stock
Loan interest revenue is higher than in the prior year due to higher rates
on
similar average balances, which was offset by commensurate interest expenses
on
similar balances. Overall, spreads narrowed in the current period versus the
prior comparative period. The segment was also negatively impacted by an
increase in legal reserves taken in regard to a pending regulatory matter.
As a
result, the segment’s pre-tax income was down 90% from the prior
year.
Other
This
segment consists of earnings on corporate cash, private equity investments
and
other corporate investments made at the corporate level net of expenses,
predominantly executive compensation. The results for the three months ended
December 31, 2006 include the positive impact of approximately $1.9 million
in
bonus reversals.
Statement
of Financial Condition Analysis
The
Company’s statement of financial condition consists primarily of cash and cash
equivalents (a large portion of which are segregated for the benefit of
customers), receivables and payables. The statement of financial condition
is
primarily liquid in nature, providing the Company with flexibility in financing
its business. Total assets of $12.3
billion at December 31, 2006 were up approximately 6.6% over September 30,
2006.
Most of this increase is due to the significant increases in brokerage client
cash deposits, leading to a similar increase in segregated cash balances on
the
asset side, and growth of RJBank, with the increased loan balances being largely
funded by deposits. RJBank loan balances increased significantly as the Company
continued to introduce an additional cash sweep offering to brokerage customers.
The Company initiated the first phase of this option in July 2006 and plans
to
continue to expand the offering for the next few years, which will result in
continued growth in RJBank balances. The other significant increase in assets
was in trading securities. The broker-dealer gross assets and liabilities,
including trading inventory, stock loan/stock borrow, receivables and payables
from/to brokers, dealers and clearing organizations and clients fluctuate with
the Company's business levels and overall market conditions.
Liquidity
and Capital Resources
Cash
used
in operating activities during the three months ended December 31, 2006 was
approximately $287.4 million, primarily attributable to the increase in
segregated assets (directly correlated to the increase in brokerage client
deposits), an increase in securities inventory levels and receivables from
clients, and a decrease in payables associated with the Company’s stock
loan/borrowed business, securities sold under agreements to repurchase, and
accrued compensation, commissions and benefits. This was offset by a decrease
in
receivables associated with the Company’s stock loan/borrowed business and an
increase in payables to broker-dealers and clearing organizations.
Investing
activities used $310.4 million, which is primarily due to loans originated
and
purchased by RJBank. This was offset by loan repayments at RJBank and sales
by
RJBank of securities under agreements to resell.
Financing
activities provided $520.2 million, the result of an increase in borrowings,
an
increase in deposits at RJBank and cash provided from the exercise of stock
options and employee stock purchases. This was partially offset by the
repayments of borrowings and the payment of cash dividends.
At
December 31, 2006 and September 30, 2006 the Company had loans payable of
approximately $408.1 million and $141.6 million, respectively. The balance
at
December 31, 2006 is comprised primarily of a $66.9 million loan for its
home-office complex, a $1.1 million mortgage loan for the office of a foreign
joint venture, $50 million in Federal Home Loan Bank advances (RJBank), and
various short-term borrowings totaling approximately $290.1 million (used to
fund increased inventory levels).
In
addition, the Company and its subsidiaries have the following lines of credit:
RJF has a committed $200 million line of credit, RJA has uncommitted bank lines
of credit aggregating $485.1 million with commercial banks, Raymond James Credit
Corporation has a line of credit for $25 million, and RJ Ltd. has a CDN$40
million uncommitted line of credit (see Note 7 to the Condensed Consolidated
Financial Statements for further information on the Company's lines of credit).
At December 31, 2006, the Company had approximately $290.1 million in
outstanding short-term borrowings under these lines of credit. The Company’s
committed $200 million line of credit is subject to a 0.125% per annum facility
fee. RJBank has $50 million in FHLB advances outstanding at December 31, 2006,
which are comprised of long-term, fixed rate advances. RJBank had $947 million
in credit available from the FHLB at December 31, 2006.
The
Company’s joint ventures in Turkey and Argentina have multiple settlement lines
of credit. The Company has guaranteed certain of these settlement lines of
credit as follows: four in Turkey totaling $22.5 million and one in Argentina
for $3 million. At December 31, 2006 the aggregate unsecured settlement lines
of
credit available were $78 million, and there was an outstanding balance of
approximately $1.8 million. The Company has also from time to time authorized
performance guarantees for the completion of trades with counterparties in
Argentina and Turkey. At December 31, 2006, there were no outstanding
performance guarantees in Turkey or Argentina.
As
of
December 31, 2006, the Company's liabilities are comprised primarily of
brokerage client payables of $5.0 billion at the broker-dealer subsidiaries
and
deposits of $3.1 billion at RJBank, as well as deposits held on stock loaned
transactions of $958.3 million. The Company primarily acts as an intermediary
in
stock borrowed/loan transactions. As a result, the liability associated with
the
stock loan transactions is related to the $877.7 million receivable comprised
of
the Company's cash deposits for stock borrowed transactions. To meet its
obligations to clients, the Company has approximately $4.2 billion in cash
and
assets segregated pursuant to federal regulations. The Company also has client
brokerage receivables of $1.6 billion.
The
Company will continue its implementation of a new cash sweep option to its
clients through RJBank. This new cash sweep option will require substantial
capital to be contributed to RJBank to meet regulatory requirements, and
therefore may require the Company to infuse an estimated $200 to $300 million
over the next several years for this purpose.
The
Company has committed a total of $42.6 million, in amounts ranging from $200,000
to $2.0 million, to 40 different independent venture capital or private equity
partnerships. As of December 31, 2006, the Company has invested $30 million
of
that amount and has received $26 million in distributions. Additionally, the
Company is the general partner in two internally sponsored private equity
limited partnerships to which it has committed $14 million. Of that amount,
the
Company has invested $11.7 million and has received $6.7 million in
distributions as of December 31, 2006.
Management
has been authorized by the Board of Directors to repurchase its common stock
at
their discretion for general corporate purposes. There is no formal stock
repurchase plan at this time. In May 2004 the Board authorized the repurchase
of
up to $75 million of shares. As of December 31, 2006 the unused portion of
this
authorization was $67.3 million.
The
Company has committed to lend to or guarantee obligations of its wholly owned
subsidiary, RJ Tax Credit Funds, Inc. (“RJTCF”), of up to $100 million upon
request, subject to certain limitations as well as annual review and renewal.
RJTCF borrows in order to invest in partnerships which purchase and develop
properties qualifying for tax credits. These investments in project partnerships
are then sold to various tax credit funds, which have third party investors,
and
for which RJTCF serves as the managing member or general partner. RJTCF
typically sells these investments within 90 days of their acquisition, and
the
proceeds from the sales are used to repay RJTCF’s borrowings. Additionally,
RJTCF may make short-term loans or advances to project partnerships on behalf
of
the tax credit funds in which it serves as managing member or general partner.
At December 31, 2006, cash funded to invest in either loans or investments
in
project partnerships was $43 million. In addition, at December 31, 2006, RJTCF
is committed to additional future fundings of $18.9 million related to project
partnerships that have not yet been sold to various tax credit
funds.
The
Company believes its existing assets, which are highly liquid in nature,
together with funds generated from operations, should provide adequate funds
for
continuing operations.
The
Company is the lessor in two leveraged commercial aircraft transactions with
two
major domestic airlines (Delta Air Lines, Inc. “Delta” and Continental Airlines,
Inc. “Continental"). The Company's ability to realize its expected return is
dependent upon the airlines' ability to fulfill their lease obligations. In
the
event that the airlines default on their lease commitments and the Trustee
for
the debt holders is unable to re-lease or sell the planes with adequate terms,
the Company would suffer a loss of some or all of its investment.
Delta
Airlines filed for bankruptcy protection on September 14, 2005. Accordingly,
the
Company recorded a $6.5 million pretax charge in 2005 to fully reserve the
balance of its investment in the leveraged lease of an aircraft to Delta. The
Company had taken a $4 million pretax charge in 2004 to partially reserve for
this investment. No amount of these charges represents a cash expenditure;
however, in the likely event of a material modification to the lease or
foreclosure of the aircraft by the debt holders in fiscal 2007, certain tax
payments of up to approximately $7.9 million could be accelerated. The expected
tax payments are currently reflected on the statement of financial condition
as
a deferred tax liability and are not expected to result in a further charge
to
earnings. Subsequent to December 31, 2006, the Company entered into an agreement
in principle to sell its interest in the Delta transaction for $2 million,
which
is expected to be recognized as a pre-tax gain in the quarter ending March
31,
2007. Upon closing, the aforementioned tax payments will be
triggered.
The
Company also has a leveraged lease outstanding with Continental valued at $10.6
million as of December 31, 2006. Although Continental remains current on its
lease payments to the Company, the inability of Continental to make its lease
payments, or the termination or modification of the lease through a bankruptcy
proceeding, could result in the write-down of the Company's investment and
the
acceleration of certain income tax payments. The Company continues to monitor
this lessee for specific events or circumstances that would increase the
likelihood of a default on Continental’s obligations under this lease.
The
Company’s Turkish affiliate was assessed for the year 2001 approximately US$6.8
million by the Turkish tax authorities. This affiliate is vigorously contesting
most aspects of this assessment and has filed an appeal with the Turkish tax
court. Audits of 2002 through 2004 are anticipated and their outcome is unknown
in light of the change in methodology from the prior year’s audit and the
pending litigation. As of December 31, 2006, this affiliate had total capital
of
approximately US$6.8 million, of which the Company owns approximately
73%.
As
of
December 31, 2006 all of the Company's domestic broker-dealer subsidiaries
exceeded the net capital requirements of the Uniform Net Capital Rule under
the
Securities Exchange Act of 1934, RJ Ltd. exceeded the Risk Adjusted Capital
required under the Minimum Capital Rule of the IDA, and RJBank was “well
capitalized” under the regulatory framework for prompt corrective action. There
have been no significant changes in circumstances since year-end that have
affected the capital of any of the broker-dealer subsidiaries or RJBank with
respect to their respective regulatory capital requirements.
The
Company has contractual obligations of approximately $2.3 billion, with $1.8
billion coming due in the next twelve months related to its short and long-term
debt, non-cancelable lease agreements, partnership investments, unfunded
commitments to extend credit, a stadium naming rights agreement, and $1.0
billion in commitments related to RJBank's letters of credit and lines of
credit. Commitments related to letters of credit and lines of credit may expire
without being funded in whole or part, therefore these amounts are not estimates
of future cash flows (see Note 9 to the Condensed Consolidated Financial
Statements for further information on the Company’s commitments).
Effects
of Inflation
The
Company's assets are primarily liquid in nature and are not significantly
affected by inflation.
However, the rate of inflation affects the Company's expenses, including
employee compensation, communications and occupancy, which may not be readily
recoverable through charges for services provided by the Company.
Factors
Affecting “Forward-Looking Statements”
From
time
to time, the Company may publish “forward-looking statements” within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the
Securities and Exchange Act of 1934, as amended, or make oral
statements that constitute forward-looking statements. These forward-looking
statements may relate to such matters as anticipated financial performance,
future revenues or earnings, business prospects, projected ventures, new
products, anticipated market performance, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company cautions readers that a variety of factors could cause
the
Company's actual results to differ materially from the anticipated results
or
other expectations expressed in the Company's forward-looking statements. These
risks and uncertainties, many of which are beyond the Company's control, are
discussed in the section entitled “Risk Factors” of Item 1A of Part I included
in the Company's Annual Report on Form 10-K for the year ended September 30,
2006 and in Item 1A of Part II of this report on Form 10-Q. The Company does
not
undertake any obligation to publicly update or revise any forward-looking
statements.
Critical
Accounting Policies
The
condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. For
a
full description of these and other accounting policies, see Note 1 of the
Notes
to the Consolidated Financial Statements included in the Company's Annual Report
on Form 10-K
for the
year ended September 30, 2006. The Company believes that of its significant
accounting policies, those described below involve a high degree of judgment
and
complexity. These critical accounting policies require estimates and assumptions
that affect the amounts of assets, liabilities, revenues and expenses reported
in the condensed consolidated financial statements. Due to their nature,
estimates involve judgment based upon available information. Actual results
or
amounts could differ from estimates and the difference could have a material
impact on the condensed consolidated financial statements. Therefore,
understanding these policies is important in understanding the reported results
of operations and the financial position of the Company.
Valuation
of Securities and Other Assets
“Trading
securities” and “Available for sale securities” are reflected in the Condensed
Consolidated Statements of Financial Condition at fair value or amounts that
approximate fair value. In accordance with SFAS 115, “Accounting for Certain
Investments in Debt and Equity Securities”, unrealized gains and losses related
to these financial instruments are reflected in net earnings
or other comprehensive income, depending on the underlying purpose of the
instrument. The following table presents the Company’s trading and available for
sale securities segregated into cash (i.e., non-derivative) trading instruments,
derivative contracts, and available for sale securities:
|
December
31,
2006
|
|
Financial
Instruments
Owned
at
Fair Value
|
|
Financial
Instruments
Sold
but
not yet Purchased
at
Fair Value
|
|
(in
000’s)
|
|
|
|
|
Cash
trading instruments
|
$
694,793
|
|
$
167,283
|
Derivative
contracts
|
25,991
|
|
9,041
|
Available
for sale securities
|
336,004
|
|
-
|
Total
|
$
1,056,788
|
|
$
176,324
|
Cash
Trading Instruments, Available for Sale Securities and Derivative
Contracts
When
available, the Company uses prices from independent sources such as listed
market prices, or broker or dealer price quotations to derive the fair value
of
the instruments. For investments in illiquid, privately held or other securities
that do not have readily determinable fair values, the Company uses estimated
fair values as determined by management. Fair
market value of OTC derivative contracts is estimated by using pricing models,
based on the contractual terms and conditions, current market levels of interest
rates and volatilities, and other factors. The following table presents the
carrying value of cash trading instruments, available for sale securities,
and
derivative contracts for which fair value is measured based on quoted prices
or
other independent sources versus those for which fair value is determined by
management:
|
December
31,
2006
|
|
Financial
Instruments
Owned at Fair Value
|
|
Financial
Instruments
Sold
but
not yet Purchased at Fair Value
|
|
(in
000’s)
|
Fair
value based on quoted prices and independent sources
|
$
1,030,670
|
|
$
167,283
|
Fair
value determined by Management
|
26,118
|
|
9,041
|
Total
|
$
1,056,788
|
|
$
176,324
|
Derivative
Contracts
Fair
value for derivative
contracts are obtained from pricing models that consider current market and
contractual prices for the underlying financial instruments, as well as time
value and yield curve or volatility factors underlying the positions.
Investment
in Leveraged Leases
The
Company is the lessor in two leveraged commercial aircraft transactions with
two
major domestic airlines (Delta Air Lines, Inc. “Delta” and Continental Airlines,
Inc. “Continental").
The
Company's ability to realize its expected return is dependent upon the airlines'
ability to fulfill their lease obligations. In the event that the airlines
default on their lease commitments and the Trustee for the debt holders is
unable to re-lease or sell the planes with adequate terms, the Company would
suffer a loss of some or all of its investment. Delta Airlines filed for
bankruptcy protection on September 14, 2005. Accordingly, the Company recorded
a
$6.5 million pretax charge in 2005 to fully reserve the balance of its
investment in the leveraged lease of an aircraft to Delta. The Company had
taken
a $4 million pretax charge in 2004 to partially reserve for this investment.
No
amount of these charges represents a cash expenditure; however, in the likely
event of a material modification to the lease or foreclosure of the aircraft
by
the debt holders in fiscal 2007, certain tax payments of up to approximately
$7.9 million could be accelerated. The expected tax payments are currently
reflected on the statement of financial condition as a deferred tax liability
and are not expected to result in a further charge to earnings. Subsequent
to
December 31, 2006, the Company entered into an agreement in principle to sell
its interest in the Delta transaction for $2 million, which is expected to
be
recognized as a pre-tax gain in the quarter ending March 31, 2007. Upon closing,
the aforementioned tax payments will be triggered.
The
Company also has a leveraged lease outstanding with Continental valued at $10.6
million as of December 31, 2006. The Company's equity investment represented
20%
of the aggregate purchase price; the remaining 80% was funded by public debt
issued in the form of equipment trust certificates. The residual value of the
aircraft at the end of the lease term of approximately 17 years is projected
to
be 15% of the original cost. This lease expires in May 2014.
Although
Continental remains current on its lease payments to the Company, the inability
of Continental to make its lease payments, or the termination or modification
of
the lease through a bankruptcy proceeding, could result in the write-down of
the
Company's investment and the acceleration of certain income tax payments. The
Company continues to monitor this lessee for specific events or circumstances
that would increase the likelihood of a default on Continental’s obligations
under this lease.
Goodwill
Goodwill
is related to the acquisitions of Roney & Co. (now part of RJA) and Goepel
McDermid, Inc. (now called Raymond James Ltd.).
This
goodwill, totaling $63 million, was allocated to the reporting units within
the
Private Client Group and Capital Markets segments pursuant to SFAS No. 142,
“Goodwill and Other Intangible Assets”. Goodwill represents the excess cost of a
business acquisition over the fair value of the net assets acquired. In
accordance with SFAS No. 142, indefinite-life intangible assets and goodwill
are
not amortized. Rather they are subject to impairment testing on an annual basis,
or more often if events or circumstances indicate there may be impairment.
This
test involves assigning tangible assets and liabilities, identified intangible
assets and goodwill to reporting units and comparing the fair value of each
reporting unit to its carrying amount. If the fair value is less than the
carrying amount, a further test is required to measure the amount of the
impairment.
When
available, the Company uses recent, comparable transactions to estimate the
fair
value of the respective reporting units. The Company calculates an estimated
fair value based on multiples of revenues, earnings, and book value of
comparable transactions. However, when such comparable transactions are not
available or have become outdated, the Company uses discounted cash flow
scenarios to estimate the fair value of the reporting units. As of December
31,
2006, goodwill had been allocated to the Private Client Group of RJA, and both
the Private Client Group and Capital Markets segments of RJ Ltd. As of the
most
recent impairment test, the Company determined that the carrying value of the
goodwill for each reporting unit had not been impaired. However, changes in
current circumstances or business conditions could result in an impairment
of
goodwill. As required, the Company will continue to perform impairment testing
on an annual basis or when an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount.
Reserves
The
Company recognizes liabilities for contingencies when there is an exposure
that,
when fully analyzed, indicates it is both probable that a liability has been
incurred and the amount of loss can be reasonably estimated. When a range of
probable loss can be estimated, the Company accrues the most likely amount;
if
not determinable, the Company accrues at least the minimum of the range of
probable loss.
The
Company records reserves related to legal proceedings in "other payables".
Such
reserves are established and maintained in accordance with SFAS No. 5,
"Accounting for Contingencies", and Financial Interpretation No. 14. The
determination of these reserve amounts requires significant judgment on the
part
of management. Management considers many factors including, but not limited
to:
the amount of the claim; the amount of the loss in the client's account; the
basis and validity of the claim; the possibility of wrongdoing on the part
of an
employee of the Company; previous results in similar cases; and legal precedents
and case law. Each legal proceeding is reviewed with counsel in each accounting
period and the reserve is adjusted as deemed appropriate by management. Lastly,
each case is reviewed to determine if it is probable that insurance coverage
will apply, in which case the reserve is reduced accordingly. Any change in
the
reserve amount is recorded in the consolidated financial statements and is
recognized as a charge/credit to earnings in that period.
The
Company also records reserves or allowances for doubtful accounts related to
client receivables and loans. Client receivables at the broker-dealers are
generally collateralized by securities owned by the brokerage clients.
Therefore, when a receivable is considered to be impaired, the amount of the
impairment is generally measured based on the fair value of the securities
acting as collateral, which is measured based on current prices from independent
sources such as listed market prices or broker-dealer price quotations.
Client
loans at RJBank are generally collateralized by real estate or other property.
RJBank provides for both an allowance for losses in accordance with SFAS No.
5,
“Accounting for Contingencies”, and a reserve for individually impaired loans in
accordance with SFAS No. 114, “Accounting by a Creditor for Impairment of a
Loan”. The calculation of the SFAS No. 5 allowance is subjective as management
segregates the loan portfolio into different homogeneous classes and assigns
each class an allowance percentage based on the perceived risk associated with
that class of loans. The factors taken into consideration when assigning the
reserve percentage to each reserve category include estimates of borrower
default probabilities and collateral values; trends in delinquencies; volume
and
terms; changes in geographic distribution, lending policies, local, regional,
and national economic conditions; concentrations of credit risk and past loss
history. In addition, the Company provides for potential losses inherent in
RJBank’s unfunded lending commitments using the criteria above, further adjusted
for an estimated probability of funding. For individual loans identified as
impaired, RJBank measures impairment based on the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
observable market price, or the fair value of the collateral if the loan is
collateral dependent. At December 31, 2006, the amortized cost of all RJBank
loans was $2.7 billion and an allowance for loan losses of $22.9 million was
recorded against that balance. The total allowance for loan losses, including
$4.6 million in reserves for off-balance sheet exposures maintained in Other
Liabilities, is equal to 1.01% of the amortized cost of the loan portfolio.
The
Company also makes loans or pays advances to Financial Advisors, primarily
for
recruiting and retention purposes. The Company provides for an allowance for
doubtful accounts based on an evaluation of the Company’s ability to collect
such receivables. The Company’s ongoing evaluation includes the review of
specific accounts of Financial Advisors no longer associated with the Company
and the Company’s historical collection experience. At December 31, 2006 the
receivable from Financial Advisors was $92.8 million, which is net of an
allowance of $4.5 million for estimated uncollectibility.
Income
Taxes
SFAS
No.
109, “Accounting for Income Taxes”, establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable
for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company’s financial
statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in the Company’s financial
statements or tax returns. Variations in the actual outcome of these future
tax
consequences could materially impact the Company’s financial position, results
of operations, or cash flows.
For
a
description of the Company’s risk management policies, including a discussion of
the Company’s primary market risk exposures, which include interest rate risk
and equity price risk, as well as a discussion of the Company’s credit risk,
operational risk, and regulatory and legal risk and a discussion of how these
exposures are managed, refer to the Company’s Annual Report on Form 10-K for the
year ended September 30, 2006.
Market
Risk
Market
risk is the risk of loss to the Company resulting from changes in interest
rates
and equity prices. The Company has exposure to market risk primarily through
its
broker-dealer and banking operations. The Company's broker-dealer subsidiaries,
primarily RJA, trade tax exempt and taxable debt obligations and act as an
active market maker in approximately 235 over-the-counter equity securities.
In
connection with these activities, the Company maintains inventories in order
to
ensure availability of securities and to facilitate client transactions.
Additionally, the Company, primarily within its Canadian broker-dealer
subsidiary, invests for its own proprietary equity investment
account.
See
Note
3 of the Notes to the Condensed Consolidated Financial Statements for
information regarding the fair value of trading inventories associated with
the
Company's broker-dealer client facilitation, market-making and proprietary
trading activities.
Changes
in value of the Company's trading inventory may result from fluctuations in
interest rates, credit ratings of the issuer, equity prices and the correlation
among these factors. The Company manages its trading inventory by product type
and has established trading divisions that have responsibility for each product
type. The Company's primary method of controlling risk in its trading inventory
is through the establishment and monitoring of limits on the dollar amount
of
securities positions that can be entered into and other risk-based limits;
limits are established both for categories of securities (e.g., OTC equities,
high yield securities, municipal bonds) and for individual traders. As of
December 31, 2006 the absolute fixed income and equity inventory limits were
$1,905,000,000 and $83,250,000, respectively. The Company's trading activities
were well within these limits at December 31, 2006. Position limits in trading
inventory accounts are monitored on a daily basis. Consolidated position and
exposure reports are prepared and distributed to senior management. Limit
violations are carefully monitored. Management also monitors inventory levels
and trading results, as well as inventory aging, pricing, concentration and
securities ratings. For derivatives, primarily interest rate swaps, the Company
monitors exposure in its derivatives subsidiary daily based on established
limits with respect to a number of factors, including interest rate risk,
spread, ratio and basis risk and volatility. These exposures are monitored
both
on a total portfolio basis and separately for selected maturity periods.
Interest
Rate Risk
The
Company is exposed to interest rate risk as a result of maintaining trading
inventories of fixed income instruments and actively manages this risk using
hedging techniques that involve swaps, futures, and U.S. Treasury obligations.
The Company monitors, on a daily basis, the Value-at-Risk (“VaR”) in its
institutional Fixed Income trading portfolios (cash instruments and interest
rate derivatives). VaR is an appropriate statistical technique for estimating
the potential loss in trading portfolios due to typical adverse market movements
over a specified time horizon with a suitable confidence level.
To
calculate VaR, the Company uses historical simulation. This approach assumes
that historical changes in market conditions are representative of future
changes. The simulation is based upon daily market data for the previous twelve
months. VaR is reported at a 99% confidence level, based on a one-day time
horizon. This means that the Company could expect to incur losses greater than
those predicted by the VaR estimates only once in every 100 trading days, or
about 2.5 times a year. During the three months ended December 31 2006, the
reported daily loss in the institutional Fixed Income trading portfolio exceeded
the predicted VaR one time. This is consistent with the model and its
business-as-usual assumptions.
However,
trading losses on a single day could exceed the reported VaR by significant
amounts in unusually volatile markets and might accumulate over a longer time
horizon, such as a number of consecutive trading days. Accordingly, management
employs additional interest rate risk controls including position limits, a
daily review of trading results, review of the status of aged inventory,
independent controls on pricing, monitoring of concentration risk, and by issuer
ratings.
The
following tables set forth the high, low, and daily average VaR for the
Company's overall institutional portfolio during the three months ended December
31, 2006, with the corresponding dollar value of the Company's
portfolio.
|
Three
months ended December 31, 2006
|
|
VaR
at
|
($
in 000's)
|
High
|
Low
|
|
Daily Average
|
|
December
31, 2006
|
|
September
30, 2006
|
Daily
VaR
|
$
859
|
$
366
|
|
$
513
|
|
$
443
|
|
$
483
|
Related
Portfolio Value (net)*
|
$361,767
|
$359,999
|
|
$405,773
|
|
$459,263
|
|
$312,917
|
VaR
as a percent
of
Portfolio Value
|
0.24%
|
0.10%
|
|
0.13%
|
|
0.10%
|
|
0.15%
|
* Portfolio
value achieved on the day of the VAR calculation.
The
modeling of the risk characteristics of trading positions involves a number
of
assumptions and approximations. While management believes that its assumptions
and approximations are reasonable, there is no uniform industry methodology
for
estimating VaR, and different assumptions or approximations could produce
materially different VaR estimates. As a result, VaR statistics are more
reliable when used as indicators of risk levels and trends within a firm than
as
a basis for inferring differences in risk-taking across firms.
Additional
information is discussed under Derivative Financial Instruments in Note
13
of the
Notes to the Condensed Consolidated Financial Statements.
RJBank
maintains an earning asset portfolio that is comprised of mortgage, corporate
and consumer loans, as well as mortgage-backed securities, securities purchased
under resale agreements, and other investments. Those earning assets are funded
in part by its obligations to clients, including demand deposits, money market
accounts, savings accounts, and certificates of deposit; and FHLB advances.
Based on the current earning asset portfolio of RJBank, market risk for RJBank
is limited primarily to interest rate risk. RJBank analyzes interest rate risk
based on forecasted net interest income, which is the net amount of interest
received and interest paid, and the net portfolio valuation, both in a range
of
interest rate scenarios. The following table represents the carrying value
of
RJBank's assets and liabilities that are subject to market risk. This table
does
not include financial instruments with limited market risk exposure due to
offsetting asset and liability positions, short holding periods or short periods
of time until the interest rate resets.
RJBank
Financial Instruments with Market Risk (as described above, in
000's):
|
|
|
|
|
|
|
|
December
31, 2006
|
|
September
30, 2006
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$
149,551
|
|
$ 151,437
|
Loans
receivable, net
|
|
1,446,722
|
|
1,282,504
|
Total
assets with market risk
|
|
$
1,596,273
|
|
$
1,433,941
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$
242,203
|
|
$
255,360
|
Federal
Home Loan Bank advances
|
|
50,000
|
|
60,000
|
Total
liabilities with market risk
|
|
$
292,203
|
|
$
315,360
|
One
of
the core objectives of RJBank's Asset/Liability Management Committee is to
manage the sensitivity of net interest income to changes in market interest
rates. The Asset/Liability Management Committee uses several measures to monitor
and limit RJBank's interest rate risk including scenario analysis, interest
repricing gap analysis and limits, and net portfolio value limits. Simulation
models and estimation techniques are used to assess the sensitivity of the
net
interest income stream to movements in interest rates. Assumptions about
consumer behavior play an important role in these calculations; this is
particularly relevant for loans such as mortgages where the client has the
right, but not the obligation, to repay before the scheduled maturity.
The
sensitivity of net interest income to interest rate conditions is estimated
for
a variety of scenarios. Assuming an immediate and lasting shift of 100 basis
points in the term structure of interest rates, RJBank's sensitivity analysis
indicates that an upward movement would decrease RJBank's net interest income
by
13.31% in the first year after the rate jump, whereas a downward shift of the
same magnitude would increase RJBank's net interest income by 1.49%. These
sensitivity figures are based on positions as of December 31, 2006, and are
subject to certain simplifying assumptions, including that management takes
no
corrective action.
Equity
Price Risk
The
Company is exposed to equity price risk as a consequence of making markets
in
equity securities and the investment activities of RJA and RJ Ltd. The U.S.
broker-dealer activities are primarily
client-driven, with the objective of meeting clients' needs while earning a
trading profit to compensate for the risk associated with carrying inventory.
The Company attempts to reduce the risk of loss inherent in its inventory of
equity securities by monitoring those security positions constantly throughout
each day and establishing position limits. The Company's Canadian broker-dealer
has a proprietary trading business with 27 traders. The average aggregate
inventory held for proprietary trading during the three months ended December
31, 2006 was CDN$6,114,834. The Company's equity securities inventories are
priced on a regular basis and there are no material unrecorded gains or
losses.
Disclosure
controls are procedures designed to ensure that information required to be
disclosed in the Company's reports filed
under the Exchange Act, such as this report, is recorded, processed, summarized,
and reported within the time periods specified in the SEC's rules and forms.
Disclosure controls are also designed to ensure that such information is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance of achieving the desired control objectives, as the
Company's are designed to do, and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
Under
the
supervision and with the participation of the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, the Company has
evaluated the effectiveness of its disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(b) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures
are effective. There were no changes in the Company’s internal control over
financial reporting during the quarter ended December 31, 2006 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART
II OTHER INFORMATION
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. Like others in the retail
securities industry, the Company experienced a significant increase in the
number of claims seeking recovery due to portfolio losses in the early 2000's.
During the past year, the number of claims has declined to more historic levels.
As
previously reported, RJF and RJFS were defendants in a series of lawsuits and
arbitrations relating to an alleged mortgage lending program known as the
"Premiere 72" program, that was administered by a company owned in part by
two
individuals who were registered as Financial Advisors with RJFS in Houston.
In
July 2005, RJFS paid approximately $24 million in a settlement with
approximately 380 claimants in this litigation, representing approximately
two-thirds of the outstanding claims. In September 2006, RJFS settled with
an
additional 150 claimants for a lump sum of $18 million. These settlements
effectively extinguish the Company’s liability with the exception of one
remaining lawsuit in federal court involving one claimant family
group.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately US$6.8 million by the Turkish
tax
authorities. The authorities applied a significantly different methodology
than
in the prior year’s audit. RJY is vigorously contesting most aspects of this
assessment and has filed an appeal with the Turkish tax court. Audits of 2002
through 2004 are anticipated and their outcome is unknown in light of the change
in methodology and the pending litigation. The Company has made provision in
its
consolidated financial statements for its estimate of the reasonable potential
exposure for this matter. As
of
December 31, 2006, RJY had total capital of approximately US$6.8 million, of
which the Company owns approximately 73%.
The
Company is contesting the allegations in this and other cases and believes
that
there are meritorious defenses in each of these lawsuits and arbitrations.
In view of the number and diversity of claims against the Company, the number
of
jurisdictions in which litigation is pending and the inherent difficulty of
predicting the outcome of litigation and other claims, the Company cannot state
with certainty what the eventual outcome of pending litigation or other claims
will be. In the opinion of the Company's 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 the Company's financial position or 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.
There
were no changes to Item 1A, “Risk Factors” included in the Company’s Annual
Report on Form 10-K for the year ended September 30, 2006.
Reference
is made to information contained under “Capital Transactions” in Note
10
of the
Notes to Condensed Consolidated Financial Statements for the information
required by Part II, Item 2(c).
The
Company expects to continue paying cash dividends. However, the payment and
rate
of dividends on the Company's common stock is subject to several factors
including operating results, financial requirements of the Company, compliance
with the net worth covenant in the Company's line of credit agreement, and
the
availability of funds from the Company's subsidiaries, including the
broker-dealer subsidiaries, which may be subject to restrictions under the
net
capital rules of the SEC, NYSE and the IDA; and RJBank, which may be subject
to
restrictions by federal banking agencies. Such restrictions have never become
applicable with respect to the Company's dividend payments. (See Note 11 of
the
Notes to the Condensed Consolidated Financial Statements for more information
on
the capital restrictions placed on RJBank and the Company's broker-dealer
subsidiaries).
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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RAYMOND
JAMES FINANCIAL, INC.
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(Registrant)
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Date:
February 9, 2007
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/s/
Thomas A. James
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Thomas
A. James
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Chairman
and Chief
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Executive
Officer
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/s/
Jeffrey P. Julien
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Jeffrey
P. Julien
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Senior
Vice President - Finance
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and
Chief Financial
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Officer
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38