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
|
For
the
quarterly period ended March 31,
2008
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
|
(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, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x |
Accelerated
filer
o |
|
|
Non-accelerated
filer o |
Smaller
reporting
company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No x
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
119,296,173
shares of Common
Stock as of May 7, 2008
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|
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
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Form
10-Q for the Quarter Ended March 31, 2008
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INDEX
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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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|
|
|
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Condensed
Consolidated Statements of Financial Condition as of March 31,
2008 and
September 30, 2007 (unaudited)
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3
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|
|
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|
|
Condensed
Consolidated Statements of Income and Comprehensive Income for
the three
months ended March 31, 2008 and March 31, 2007 (unaudited)
|
4
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|
|
|
|
|
Condensed
Consolidated Statements of Income and Comprehensive Income for
the six
months ended March 31, 2008 and March 31, 2007 (unaudited)
|
4
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|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the six months ended
March 31,
2008 and March 31, 2007 (unaudited)
|
5
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|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
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7
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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
30
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|
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|
Item
3.
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|
Quantitative
and Qualitative Disclosures About Market Risk
|
51
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|
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Item
4.
|
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Controls
and Procedures
|
54
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PART
II.
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OTHER
INFORMATION
|
54
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Item
1.
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Legal
Proceedings
|
54
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Item
1A.
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Risk
Factors
|
55
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Item
2.
|
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
55
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|
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Item
4.
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Submission
of Matters to a Vote of Security Holders
|
55
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Item
6.
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Exhibits
|
56
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Signatures
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57
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PART
I FINANCIAL INFORMATION
Item
1. FINANCIAL
STATEMENTS
RAYMOND
JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
|
March
31,
|
September
30,
|
|
2008
|
2007
|
|
(in
000’s)
|
Assets:
|
|
|
Cash
and Cash Equivalents
|
$ 826,502
|
$ 644,943
|
Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
|
4,683,186
|
4,127,667
|
Securities
Purchased under Agreements to Resell and Other Collateralized
Financings
|
1,337,369
|
1,295,004
|
Financial
Instruments:
|
|
|
Trading
Instruments, at Fair Value
|
359,011
|
467,761
|
Available
for Sale Securities, at Fair Value
|
654,864
|
569,952
|
Other
Investments, at Fair Value
|
87,958
|
90,637
|
Receivables:
|
|
|
Brokerage
Clients, Net
|
1,707,800
|
1,704,300
|
Stock
Borrowed
|
741,045
|
1,292,265
|
Bank
Loans, Net
|
6,175,866
|
4,664,209
|
Brokers-Dealers
and Clearing Organizations
|
176,717
|
228,865
|
Other
|
337,233
|
315,227
|
Investments
in Real Estate Partnerships - Held by Variable Interest
Entities
|
231,545
|
221,147
|
Property
and Equipment, Net
|
176,230
|
166,963
|
Deferred
Income Taxes, Net
|
114,474
|
107,922
|
Deposits
With Clearing Organizations
|
65,503
|
36,416
|
Goodwill
|
62,575
|
62,575
|
Prepaid
Expenses and Other Assets
|
343,991
|
258,315
|
|
|
|
|
$
18,081,869
|
$
16,254,168
|
|
|
|
Liabilities
And Shareholders' Equity:
|
|
|
Loans
Payable
|
$ 328,425
|
$ 122,640
|
Loans
Payable Related to Investments by Variable Interest Entities in
Real
Estate Partnerships
|
109,991
|
116,479
|
Payables:
|
|
|
Brokerage
Clients
|
6,142,906
|
5,675,860
|
Stock
Loaned
|
747,438
|
1,280,747
|
Bank
Deposits
|
7,712,295
|
5,585,259
|
Brokers-Dealers
and Clearing Organizations
|
189,462
|
128,298
|
Trade
and Other
|
197,945
|
450,008
|
Trading
Instruments Sold but Not Yet Purchased, at Fair Value
|
149,301
|
149,729
|
Securities
Sold Under Agreements to Repurchase
|
240,078
|
393,282
|
Accrued
Compensation, Commissions and Benefits
|
257,473
|
356,627
|
Income
Taxes Payable
|
-
|
7,755
|
|
|
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|
16,075,314
|
14,266,684
|
|
|
|
Minority
Interests
|
234,286
|
229,670
|
|
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|
Shareholders'
Equity:
|
|
|
Preferred
Stock; $.10 Par Value; Authorized
|
|
|
10,000,000
Shares; Issued and Outstanding -0- Shares
|
-
|
-
|
Common
Stock; $.01 Par Value; Authorized 350,000,000 Shares
|
|
|
with
123,192,972 Issued at March 31,
2008 and
Authorized
|
|
|
180,000,000
Shares with 120,903,331 Issued at September 30,
2007
|
1,193
|
1,176
|
Shares
Exchangeable into Common Stock; 273,042
|
|
|
at
March 31, 2008 and September 30, 2007
|
3,504
|
3,504
|
Additional
Paid-In Capital
|
317,516
|
277,095
|
Retained
Earnings
|
1,546,775
|
1,461,898
|
Accumulated
Other Comprehensive Income
|
(11,403)
|
30,191
|
|
1,857,585
|
1,773,864
|
Less:
3,948,494 and
1,005,668 Common Shares in Treasury, at Cost
|
(85,316)
|
(16,050)
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|
1,772,269
|
1,757,814
|
|
|
|
|
$
18,081,869
|
$
16,254,168
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
RAYMOND
JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(in
000’s, except per share
amounts)
|
Three
Months
Ended
|
Six
Months
Ended
|
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|
2008
|
2007
|
2008
|
2007
|
Revenues:
|
|
|
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|
Securities
Commissions and
Fees
|
$
481,497
|
$
418,292
|
$ 954,102
|
$ 819,157
|
Investment
Banking
|
27,232
|
38,025
|
51,087
|
79,864
|
Investment
Advisory
Fees
|
53,319
|
50,597
|
109,924
|
100,733
|
Interest
|
191,314
|
164,812
|
404,264
|
323,036
|
Net
Trading
Profits
|
(6,946)
|
3,091
|
(5,844)
|
9,384
|
Financial
Service
Fees
|
32,763
|
31,432
|
65,738
|
61,398
|
Other
|
27,955
|
32,022
|
57,054
|
54,328
|
|
|
|
|
|
Total
Revenues
|
807,134
|
738,271
|
1,636,325
|
1,447,900
|
|
|
|
|
|
Interest
Expense
|
115,447
|
112,552
|
258,811
|
218,281
|
Net
Revenues
|
691,687
|
625,719
|
1,377,514
|
1,229,619
|
|
|
|
|
|
Non-Interest
Expenses:
|
|
|
|
|
Compensation,
Commissions and
Benefits
|
473,306
|
428,894
|
943,910
|
837,403
|
Communications
and Information
Processing
|
31,230
|
28,278
|
62,241
|
54,252
|
Occupancy
and Equipment
Costs
|
24,101
|
19,716
|
45,498
|
39,866
|
Clearance
and Floor
Brokerage
|
7,093
|
6,946
|
15,679
|
14,482
|
Business
Development
|
21,744
|
22,074
|
45,603
|
43,836
|
Investment
Advisory
Fees
|
12,563
|
11,438
|
25,493
|
22,504
|
Other
|
27,056
|
13,418
|
53,194
|
31,530
|
Total
Non-Interest
Expenses
|
597,093
|
530,764
|
1,191,618
|
1,043,873
|
|
|
|
|
|
Minority
Interest in
Subsidiaries
|
(3,224)
|
2,000
|
(2,679)
|
(975)
|
|
|
|
|
|
Income
Before Provision for Income
Taxes
|
97,818
|
92,955
|
188,575
|
186,721
|
|
|
|
|
|
Provision
for Income
Taxes
|
38,028
|
33,240
|
72,543
|
67,611
|
|
|
|
|
|
Net
Income
|
$ 59,790
|
$ 59,715
|
$ 116,032
|
$ 119,110
|
|
|
|
|
|
Net
Income per
Share-Basic
|
$ 0.51
|
$ 0.52
|
$ 0.99
|
$ 1.04
|
Net
Income per
Share-Diluted
|
$ 0.50
|
$ 0.50
|
$ 0.97
|
$ 1.00
|
Weighted
Average Common
Shares
|
|
|
|
|
Outstanding-Basic
|
117,312
|
115,702
|
117,078
|
115,015
|
Weighted
Average Common and
Common
|
|
|
|
|
Equivalent
Shares
Outstanding-Diluted
|
119,520
|
118,687
|
119,817
|
118,258
|
|
|
|
|
|
Cash
Dividend per Common
Share
|
$ 0.11
|
$ 0.10
|
$ 0.22
|
$ 0.20
|
|
|
|
|
|
Net
Income
|
$ 59,790
|
$ 59,715
|
$ 116,032
|
$
119,110
|
Other
Comprehensive
Income:
|
|
|
|
|
Net
Unrealized (Loss) Gain on
Available
|
|
|
|
|
for
SaleSecurities,
Net of
Tax
|
(34,324)
|
35
|
(37,217)
|
120
|
Net
Change in Currency
Translations, Net of Tax
|
(6,443)
|
1,410
|
(4,377)
|
(1,348)
|
Total
Comprehensive
Income
|
$ 19,023
|
$ 61,160
|
$
74,438
|
$ 117,882
|
See
accompanying Notes to Condensed
Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in
000’s)
(continued
on next
page)
|
Six
Months
Ended
|
|
March
31,
|
March
31,
|
|
2008
|
2007
|
Cash
Flows From Operating
Activities:
|
|
|
Net
Income
|
$
116,032
|
$ 119,110
|
Adjustments
to Reconcile Net
Income to Net
|
|
|
Cash
Provided by (Used in)
Operating Activities:
|
|
|
Depreciation
and
Amortization
|
13,165
|
10,726
|
Excess
Tax Benefits from
Share-Based
Payment
Arrangements
|
(392)
|
(1,579)
|
Deferred
Income
Taxes
|
(643)
|
(176)
|
Premium
and Discount
Amortization
|
|
|
on
Available for Sale Securities
|
129
|
405
|
Loss
on Sale of
Property and
Equipment
|
37
|
38
|
Gain
on Sale of
Loans Available for Sale
|
(232)
|
(190)
|
Gain
on Sale of
Joint Venture
Interest
|
-
|
(2,559)
|
Provision
for Loan Loss, Legal
Proceedings, Bad Debts and Other Accruals
|
26,897
|
8,529
|
Share-Based
Compensation
Expense
|
15,854
|
17,649
|
|
|
|
(Increase)
Decrease in Operating
Assets:
|
|
|
Assets
Segregated Pursuant to
Regulations and Other Segregated Assets
|
(555,519)
|
(538,074)
|
Receivables:
|
|
|
Brokerage
Clients,
Net
|
(6,540)
|
(121,377)
|
Stock
Borrowed
|
551,220
|
221,331
|
Brokers-Dealers
and Clearing
Organizations
|
52,148
|
(43,567)
|
Other
|
(13,497)
|
(57,939)
|
Securities
Purchased Under
Agreements to Resell and Other Collateralized
|
|
|
Financings,
Net of Securities Sold
Under Agreements to Repurchase
|
(80,569)
|
(67,699)
|
Trading
Instruments,
Net
|
108,322
|
(46,567)
|
Proceeds
from Sale of
Loans Available for Sale
|
19,843
|
12,979
|
Origination
of Loans Available for
Sale
|
(19,865)
|
(16,245)
|
Prepaid
Expenses and Other
Assets
|
(116,388)
|
(3,303)
|
|
|
|
Increase
(Decrease) in Operating
Liabilities:
|
|
|
Payables:
|
|
|
Brokerage
Clients
|
467,046
|
649,736
|
Stock
Loaned
|
(533,309)
|
(281,959)
|
Brokers-Dealers
and Clearing
Organizations
|
61,164
|
90,357
|
Trade
and
Other
|
5,215
|
20,407
|
Accrued
Compensation, Commissions
and Benefits
|
(98,403)
|
(72,823)
|
Income
Taxes
Payable
|
(13,683)
|
(23,732)
|
Minority
Interest
|
(2,679)
|
(975)
|
|
|
|
Net
Cash Used in Operating
Activities
|
(4,647)
|
(127,497)
|
See
accompanying Notes to Condensed
Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in
000’s)
(continued
from previous
page)
|
Six
Months
Ended
|
|
March
31,
|
March
31,
|
|
2008
|
2007
|
|
|
|
Cash
Flows from Investing
Activities:
|
|
|
Additions
to Property and
Equipment, Net
|
(19,659)
|
(19,929)
|
Proceeds
from Sale of
Joint Venture Interest, Net of
Cash Disposed
|
-
|
3,514
|
Bank
loan Originations
and
Purchases
|
(3,020,829)
|
(1,564,349)
|
Bank
loan
Repayments
|
1,231,698
|
815,231
|
Purchases
of Other Investments,
Net
|
2,679
|
(13,130)
|
Investments
in Real Estate
Partnerships-Held by Variable
|
|
|
Interest
Entities
|
(10,398)
|
(17,403)
|
Repayments
of Loans by Investor
Members of Variable Interest Entities Related
|
|
|
to
Investments in Real Estate
Partnerships
|
4,436
|
10,090
|
Securities
Purchased Under
Agreements to Resell, Net
|
(115,000)
|
(1,070,000)
|
Sales
of Available for
Sale Securities
|
-
|
81
|
Purchases
of Available for
Sale Securities
|
(189,565)
|
(254,428)
|
Available
for Sale Securities
Maturations and
Repayments
|
45,626
|
46,689
|
|
|
|
Net
Cash Used in Investing
Activities
|
(2,071,012)
|
(2,063,634)
|
|
|
|
Cash
Flows from Financing
Activities:
|
|
|
Proceeds
from Borrowed Funds,
Net
|
206,904
|
358,400
|
Repayments
of Mortgage and
Borrowings, Net
|
(1,119)
|
(10,787)
|
Proceeds
from Borrowed Funds
Related to Investments by Variable Interest
|
|
|
Entities
in Real Estate
Partnerships
|
2,890
|
3,549
|
Repayments
of Borrowed Funds
Related to Investments by Variable Interest
|
|
|
Entities
in Real Estate
Partnerships
|
(9,378)
|
(7,314)
|
Proceeds
from Capital Contributed
to Variable Interest Entities Related to
|
|
|
Investments
in Real Estate
Partnerships
|
16,156
|
23,226
|
Minority
Interest
|
(8,861)
|
(32,492)
|
Exercise
of Stock Options and
Employee Stock Purchases
|
21,810
|
27,891
|
Increase
in Bank
Deposits
|
2,127,036
|
1,884,899
|
Purchase
of Treasury
Stock
|
(67,243)
|
(1,350)
|
Cash
Dividends on Common
Stock
|
(26,992)
|
(23,798)
|
Excess
Tax Benefits from
Share-Based
Payment
Arrangements
|
392
|
1,579
|
|
|
|
Net
Cash Provided by Financing
Activities
|
2,261,595
|
2,223,803
|
|
|
|
Currency
Adjustment:
|
|
|
Effect
of Exchange Rate Changes on
Cash
|
(4,377)
|
(1,348)
|
Net
Increase in Cash and Cash
Equivalents
|
181,559
|
31,324
|
Cash
Resulting from Consolidation
of Variable Interest Entities Related to
|
|
|
Investments
in Real Estate
Partnerships
|
-
|
(291)
|
Cash
Resulting from Consolidation
of Limited Partnerships
|
-
|
3,945
|
Cash
and Cash Equivalents at
Beginning of Year
|
644,943
|
392,418
|
|
|
|
Cash
and Cash Equivalents at End
of Period
|
$
826,502
|
$ 427,396
|
|
|
|
Supplemental
Disclosures of Cash
Flow Information:
|
|
|
Cash
Paid for
Interest
|
$
262,908
|
$ 217,491
|
Cash
Paid for Income
Taxes
|
$ 88,065
|
$ 88,995
|
See
accompanying Notes to Condensed
Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March
31,
2008
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 6. 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.
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. 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, 2007. 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 revisions
and reclassifications have been made to the unaudited condensed consolidated
financial statements of the prior period to conform to the current period
presentation. For the six months ended March 31, 2007, the Company reclassified
certain segregated assets and reverse repurchase agreements from cash and
cash
equivalents. The Condensed Consolidated Statements of Cash Flows for the
respective period were adjusted for this reclassification, which resulted
in an
increase in cash flows provided by operating activities of $16.2 million.
This
increase was partially offset by a reclassification of $3.3 million related
to
loans available for sale to net cash used in investing activities. In the
quarter ended September 30, 2007, a new segment was established: Proprietary
Capital. The components of this segment were previously included in the Asset
Management and Other segments. Reclassifications have been made in the segment
disclosure for the three and six months ended March 31, 2007 to conform to
this
presentation. Additional information is provided in Note 17 below.
The
Company’s quarters end on the last day of each calendar quarter.
NOTE
2 – EFFECTS OF RECENTLY
ISSUED ACCOUNTING STANDARDS:
In
June
2006, the FASB issued FIN 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 Statement
of Financial Accounting Standards (“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. Under FIN 48, evaluation of income
tax
benefits is a two-step process. First, income tax benefits can be recognized
in
financial statements for a tax position if it is considered “more likely than
not” (as defined in SFAS 5, “Accounting for Contingencies”) of being sustained
on audit based solely on the technical merits of the income tax position.
Second, if the recognition criteria are met, the amount of income tax benefits
to be recognized is measured based on the largest income tax benefit that
is
more than 50 percent likely to be realized on ultimate resolution of the
tax
position. This
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition.
The
Company adopted the provisions of FIN 48 on October 1, 2007. See Note 10
below
for information regarding the impact the adoption of FIN 48 had on the Company’s
consolidated financial statements.
In
September 2006, the FASB issued SFAS 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 157 is effective
for
financial statements issued for fiscal years beginning after November 15,
2007
(October 1, 2008 for the Company), and interim periods within those fiscal
years. Although the Company will have to comply with the extensive disclosure
requirements of this pronouncement, it does not expect SFAS 157 to have a
material impact on the financial position or operating results of the
Company.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows
companies to elect to follow fair value accounting for certain financial
assets
and liabilities on an instrument by instrument basis. SFAS 159 is applicable
only to certain financial instruments and is effective for fiscal years
beginning after November 15, 2007 (October 1, 2008 for the Company). The
Company does not expect SFAS 159 to have a material impact on the consolidated
financial statements of the Company.
In
April
2007, the FASB issued Staff Position (“FSP”) FIN No. 39-1, "Amendment of FASB
Interpretation No. 39” (“FSP FIN No. 39-1”). FSP FIN No. 39-1 defines "right of
setoff" and specifies what conditions must be met for a derivative contract
to
qualify for this right of setoff. FSP FIN No. 39-1 also addresses the
applicability of a right of setoff to derivative instruments and clarifies
the
circumstances in which it is appropriate to offset amounts recognized for
those
instruments in the statement of financial position. In addition, this FSP
permits offsetting of fair value amounts recognized for multiple derivative
instruments executed with the same counterparty under a master netting
arrangement and fair value amounts recognized for the right to reclaim cash
collateral (a receivable) or the obligation to return cash collateral (a
payable) arising from the same master netting arrangement as the derivative
instruments. This interpretation is effective for fiscal years beginning
after
November 15, 2007 (October 1, 2008 for the Company), with early application
permitted. The Company is currently evaluating the impact the adoption of
FSP
FIN No. 39-1 will have on its consolidated financial statements.
In
May
2007, the FASB issued FSP FIN No. 46R-7, "Application of FASB Interpretation
No.
46(R) to Investment Companies". FSP FIN No. 46R-7 amends the scope of the
exception to FIN 46R to state that investments accounted for at fair value
in
accordance with the specialized accounting guidance in the American Institute
of
Certified Public Accountants ("AICPA") Audit and Accounting Guide, Investment
Companies, (the “Guide”) are not subject to consolidation under FIN 46R. This
FSP remains effective only upon initial adoption of Statement of Position
(“SOP”) 07-1, "Clarification of the Scope of the Audit and Accounting Guide
Investment Companies and Accounting by Parent Companies and Equity Method
Investors for Investments in Investment Companies" (“SOP 07-1”).
In
June
2007, the Accounting Standards Executive Committee of the AICPA issued SOP
07-1.
This SOP provides guidance for determining whether an entity is within the
scope
of the Guide. Additionally, it provides guidance as to whether a parent company
or an equity method investor can apply the specialized industry accounting
principles of the Guide (referred to as investment company accounting). In
February 2008, the FASB issued FSP SOP 07-1-1, “Effective Date of AICPA
Statement of Position 07-1”, which delays indefinitely the effective date of SOP
07-1.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires
noncontrolling interests to be treated as a separate component of equity,
not as
a liability or other item outside of permanent equity. This statement is
applicable to the accounting for noncontrolling interests and transactions
with
noncontrolling interest holders in consolidated financial statements and
is
effective for fiscal years beginning on or after December 15, 2008 (October
1,
2009 for the Company). The Company is currently evaluating the impact the
adoption of SFAS 160 will have on its consolidated financial
statements.
In
February 2008, the FASB issued FSP SFAS No. 157-2, “Effective Date of FASB
Statement No. 157” (“FSP SFAS No. 157-2”). FSP SFAS No. 157-2 delays the
effective date of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities that are not remeasured at fair value on a recurring basis (at
least
annually) until fiscal years beginning after November 15, 2008 (October 1,
2009
for the Company), and interim periods within those fiscal years. The Company
is
currently evaluating the impact the adoption of FSP SFAS No. 157-2 will have
on
its consolidated financial statements.
In
February 2008, the FASB issued FSP SFAS No. 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions” (“FSP SFAS No. 140-3”).
FSP SFAS No. 140-3 addresses the issue of whether these transactions should
be
viewed as two separate transactions or as one "linked" transaction. The FSP
includes a "rebuttable presumption" that presumes linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria.
The FSP will be effective for fiscal years beginning after November 15, 2008
(October 1, 2009 for the Company) and will apply only to original transfers
made
after that date; early adoption will not be allowed. The Company is currently
evaluating the impact the adoption of FSP SFAS No. 140-3 will have on its
consolidated financial statements.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 requires companies to expand its
disclosures regarding derivative instruments and hedging activities to include
how and why an entity is using a derivative instrument or hedging activity,
an
explanation of its accounting under SFAS 133, and how this instrument affects
the entity’s financial position and performance as well as cash flows. SFAS 161
also clarifies that derivative instruments are subject to
concentration-of-credit-risk disclosures which amends SFAS 107, “Disclosures
about Fair Value of Financial Instruments”. This statement is effective for
fiscal years beginning on or after November 15, 2008 (October 1, 2009 for
the
Company) with early adoption permitted. The Company is currently evaluating
the
impact the adoption of SFAS 161 will have on its consolidated financial
statements.
NOTE
3 – TRADING INSTRUMENTS
AND TRADING INSTRUMENTS SOLD BUT NOT YET PURCHASED:
|
March
31, 2008
|
September
30, 2007
|
|
|
Instruments
|
|
Instruments
|
|
|
Sold
but
|
|
Sold
but
|
|
Trading
|
Not
Yet
|
Trading
|
Not
Yet
|
|
Instruments
|
Purchased
|
Instruments
|
Purchased
|
|
(in
000's)
|
|
|
|
|
|
Municipal
Obligations
|
$ 96,292
|
$ 672
|
$
200,024
|
$ 54
|
Corporate
Obligations
|
56,008
|
436
|
56,069
|
952
|
Government
Obligations
|
61,208
|
77,100
|
83,322
|
45,275
|
Agencies
|
24,801
|
5,863
|
47,123
|
60,829
|
Total
Debt Securities
|
238,309
|
84,071
|
386,538
|
107,110
|
|
|
|
|
|
Derivative
Contracts
|
43,928
|
36,508
|
30,603
|
8,445
|
Equity
Securities
|
74,412
|
28,722
|
46,913
|
34,174
|
Other
Securities
|
2,362
|
-
|
3,707
|
-
|
Total
|
$
359,011
|
$
149,301
|
$
467,761
|
$
149,729
|
Trading
securities are valued at fair market value, and securities which are not
readily
marketable are carried at estimated fair value as determined by management.
When
available, the Company uses prices from independent sources, which include
pricing services. Depending upon the type of security, the pricing service
may
provide a listed price or a matrix price. If listed market prices are
unavailable to the pricing service, then its matrix pricing may utilize pricing
services or broker or dealer price quotations, or spread-based models
periodically re-calibrated to market trades in similar securities in order
to
derive the fair value of the instruments. For positions in illiquid securities
that do not have readily determinable fair values, the Company uses estimated
fair values. Estimated fair values are determined by management based upon
consideration of available information, including trading levels of similar
securities in liquid markets, standard spread-based pricing models re-calibrated
from time to time to trade activity in the identical asset or similar assets,
the coupon level and possible early redemption features of the security,
and
current financial information regarding the issuer, including information
which
may be of a confidential nature to the Company from time to time. Fair values
for derivative contracts are obtained from pricing models that consider current
market trading levels and the contractual prices for the underlying financial
instruments, as well as time value and yield curve or other volatility factors
underlying the positions.
Mortgage
backed securities of $30.5 million and $48.9 million at March 31, 2008 and
September 30, 2007, respectively, are included in Corporate Obligations and
Agencies in the table above. Mortgage backed securities sold but not yet
purchased of $5.9 million and $60.8 million at March 31, 2008 and September
30,
2007, respectively, are included in Agencies in the table above. As of March
31,
2008, auction rate securities totaling $48.9 million are included in Municipal
Obligations in the table above. These securities are carried at fair value
which
was par as of March 31, 2008. The Company believes these securities will
be
redeemed at par, within a reasonable time period, by virtue of call provisions,
as issuers refinance their bonds to reduce the higher levels of debt service
resulting from recent failed auctions.
NOTE
4 - AVAILABLE FOR SALE
SECURITIES:
Available
for sale securities are comprised primarily of collateralized mortgage
obligations (“CMOs”) and mortgage-related debt securities, owned by Raymond
James Bank (“RJBank”), and certain equity securities owned by the Company's
non-broker-dealer subsidiaries. About 40 percent of the RJBank portfolio
is
invested in relatively short average-life floating rate securities issued
by
Ginnie Mae, Fannie Mae or Freddie Mac. Other than approximately $10 million
of
fair value in securities rated less than “AAA,” the remaining fair value of the
mortgage-backed securities portfolio is comprised of “AAA” rated non-agency
residential mortgage securities. These securities were purchased based on
the
underlying loan characteristics such as loan to value (“LTV”) ratio, credit
scores, property type, location and the current level of credit enhancement.
Current characteristics of each security owned such as delinquency and
foreclosure levels, credit enhancement, projected losses and coverage are
reviewed monthly by management. There were no material proceeds from the
sale of
available for sale securities for the three and six months ended March 31,
2008
and 2007.
The
fair
value of available for sale securities is based on bid quotations received
from
securities dealers or, in the absence of dealer quotations, bid quotations
from
various pricing services. If these sources are not available, then the fair
value is estimated using quoted market prices for similar securities, pricing
models, or discounted cash flow analyses, using observable market data where
available. The amortized cost and estimated market values of securities
available for sale at March 31, 2008 and September 30, 2007 are as
follows:
|
March
31, 2008
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Available
for Sale Securities:
|
|
|
|
|
Agency
Mortgage Backed Securities
|
$
275,576
|
$
192
|
$ (2,970)
|
$
272,798
|
Non-Agency
Collateralized Mortgage Obligations
|
441,029
|
-
|
(58,983)
|
382,046
|
|
|
|
|
|
Total
RJBank Available for Sale Securities
|
716,605
|
192
|
(61,953)
|
654,844
|
|
|
|
|
|
Other
Securities
|
3
|
17
|
-
|
20
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
716,608
|
$
209
|
$
(61,953)
|
$
654,864
|
|
September
30, 2007
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Available
for Sale Securities:
|
|
|
|
|
Agency
Mortgage Backed Securities
|
$
189,816
|
$
283
|
$ (404)
|
$
189,695
|
Non-Agency
Collateralized Mortgage Obligations
|
382,980
|
239
|
(3,003)
|
380,216
|
|
|
|
|
|
Total
RJBank Available for Sale Securities
|
572,796
|
522
|
(3,407)
|
569,911
|
|
|
|
|
|
Other
Securities
|
3
|
38
|
-
|
41
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
572,799
|
$
560
|
$ (3,407)
|
$
569,952
|
Based
on
the Company’s evaluation of the performance and underlying characteristics of
the securities including the low levels of current and estimated credit losses
relative to the level of credit enhancement, and the consideration of its
intent
and ability to hold the securities for a period of time sufficient to allow
for
the anticipated recovery in the market value of the securities, these
investments are not considered “other-than-temporarily”
impaired.
NOTE
5 – BANK LOANS,
NET:
Bank
client receivables are primarily comprised of loans originated or purchased
by
RJBank and include commercial and residential real estate loans, as well
as
commercial and consumer loans. These receivables are collateralized by first
or
second mortgages on residential or other real property, by other assets of
the
borrower, or are unsecured. The following table presents the balance and
associated percentage of each major loan category in RJBank's portfolio,
including loans receivable and loans available for sale:
|
|
|
|
March
31,
|
September
30,
|
|
2008
|
2007
|
|
Balance
|
%
|
Balance
|
%
|
|
($
in 000’s)
|
|
|
|
|
|
Commercial
Loans (1)
|
$ 766,053
|
12%
|
$ 343,783
|
7%
|
Real
Estate Construction Loans
|
247,658
|
4%
|
123,664
|
3%
|
Commercial
Real Estate Loans (2)
|
2,993,480
|
48%
|
2,317,840
|
49%
|
Residential
Mortgage Loans
|
2,260,337
|
36%
|
1,934,645
|
41%
|
Consumer
Loans
|
8,492
|
-
|
4,541
|
-
|
|
|
|
|
|
Total
Loans
|
6,276,020
|
100%
|
4,724,473
|
100%
|
|
|
|
|
|
Net
Unearned Income and Deferred Expenses (3)
|
(29,935)
|
|
(13,242)
|
|
Allowance
for Loan Losses
|
(70,219)
|
|
(47,022)
|
|
|
|
|
|
|
|
(100,154)
|
|
(60,264)
|
|
|
|
|
|
|
Loans,
Net
|
$
6,175,866
|
|
$
4,664,209
|
|
(1)
Loans
not secured by real estate.
(2)
Loans
wholly or partially secured by real estate.
(3)
Includes purchase premiums, purchase discounts, and net deferred origination
fees and costs.
At
March
31, 2008 and September 30, 2007, $55 million in Federal Home Loan Bank (“FHLB”)
advances were secured by a blanket lien on RJBank's residential mortgage
loan
portfolio.
At
March
31, 2008 and September 30, 2007, RJBank had $1.8 million and $5.1 million
in
loans available for sale, respectively. RJBank's gain from the sale of
originated loans available for sale was $135,000 and $119,000 for the three
months ended March 31, 2008 and 2007, respectively. RJBank's gain from the
sale
of originated loans available for sale was $232,000 and $190,000 for the
six
months ended March 31, 2008 and 2007, respectively.
Certain
officers, directors, and affiliates, and their related entities were indebted
to
RJBank for $972,000 and $999,000 at March 31, 2008 and September 30, 2007,
respectively. All such loans were made in the ordinary course of
business.
Loan
interest and fee income for the three months ended March 31, 2008 and 2007
was
$89.4 million and $45.8 million, respectively. Loan interest and fee income
for
the six months ended March 31, 2008 and 2007 was $173.6 million and $86.1
million, respectively.
The
following table shows the contractual maturities of RJBank’s loan portfolio at
March 31, 2008, including contractual principal repayments. This table does
not,
however, include any estimates of prepayments. These prepayments could
significantly shorten the average loan lives and cause the actual timing
of the
loan repayments to differ from those shown in the following
table:
|
Due
in
|
|
|
1
Year or Less
|
1
Year – 5 Years
|
>5
Years
|
Total
|
|
(in
000’s)
|
|
|
|
|
|
Commercial
Loans (1)
|
$ 999
|
$ 331,016
|
$ 434,038
|
$ 766,053
|
Real
Estate Construction Loans
|
37,185
|
200,006
|
10,467
|
247,658
|
Commercial
Real Estate Loans (2)
|
171,010
|
1,976,001
|
846,469
|
2,993,480
|
Residential
Mortgage Loans
|
1,348
|
4,269
|
2,254,720
|
2,260,337
|
Consumer
Loans
|
5,342
|
3,074
|
76
|
8,492
|
|
|
|
|
|
Total
Loans
|
$
215,884
|
$
2,514,366
|
$
3,545,770
|
$
6,276,020
|
(1)
Loans
not secured by real estate.
(2)
Loans
wholly or partially secured by real estate.
RJBank
classifies loans as nonperforming when full and timely collection of interest
or
principal becomes uncertain or when they are 90 days past due. The following
table shows the comparative data for nonperforming loans and
assets:
|
March
31,
|
September
30,
|
|
2008
|
2007
|
|
($
in 000’s)
|
|
|
|
Nonaccrual
Loans
|
$
9,375
|
$
1,391
|
Accruing
Loans Which are 90 Days or More
|
|
|
Past
Due
|
3,839
|
2,674
|
|
|
|
Total
Nonperforming Loans
|
13,214
|
4,065
|
|
|
|
Real
Estate Owned and Other
|
|
|
Repossessed
Assets, Net
|
1,785
|
1,653
|
|
|
|
Total
Nonperforming Assets, Net
|
$
14,999
|
$
5,718
|
|
|
|
Total
Nonperforming Assets as a % of
|
|
|
Total
Loans, Net and Other Real Estate Owned, Net
|
0.24%
|
0.12%
|
The
gross
interest income related to non-performing loans, which would have been recorded
had these loans been current in accordance with their original terms and
had
been outstanding throughout the period or since origination, and the interest
income recognized on these loans for the three and six months ended March
31,
2008 were immaterial to the consolidated financial statements. As of March
31,
2008, there were two impaired loans totaling $4.7 million included in nonaccrual
loans with reserves totaling $1.6 million established against these loans.
To
date, there have been no charge-offs related to these impaired loans. There
were
no troubled debt restructurings for any of the periods presented
above.
Changes
in the allowance for loan losses at RJBank were as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|
2008
|
2007
|
2008
|
2007
|
|
($
in 000’s)
|
|
|
|
|
|
Allowance
for Loan Losses,
|
|
|
|
|
Beginning
of Period
|
$
59,256
|
$
22,911
|
$
47,022
|
$
18,694
|
Provision
For Loan Losses
|
11,113
|
2,430
|
23,933
|
6,692
|
Charge-Offs:
|
|
|
|
|
Commercial
Loans (1)
|
-
|
-
|
-
|
-
|
Real
Estate Construction Loans
|
-
|
-
|
-
|
-
|
Commercial
Real Estate Loans (2)
|
-
|
-
|
(372)
|
-
|
Residential
Mortgage Loans
|
(216)
|
-
|
(430)
|
(45)
|
Consumer
Loans
|
-
|
-
|
-
|
-
|
|
|
|
|
|
Total
Charge-Offs
|
(216)
|
-
|
(802)
|
(45)
|
|
|
|
|
|
Recoveries
|
66
|
-
|
66
|
-
|
|
|
|
|
|
Net
Charge-Offs
|
(150)
|
-
|
(736)
|
(45)
|
|
|
|
|
|
Allowance
for Loan Losses,
|
|
|
|
|
End
of Period
|
$
70,219
|
$
25,341
|
$
70,219
|
$
25,341
|
|
|
|
|
|
Annualized
Net Charge-Offs to Average
|
|
|
|
|
Bank
Loans, Net Outstanding
|
0.01%
|
0.00%
|
0.03%
|
0.00%
|
(1)
Loans
not secured by real estate.
(2)
Loans
wholly or partially secured by real estate.
The
calculation of the 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. The provision for loan loss is included
in
other expenses in the Condensed Consolidated Statements of Income and
Comprehensive Income.
In
addition to the allowance for loan losses, RJBank had reserves for unfunded
lending commitments included in Trade and Other Payables of $7.4 million
and
$6.8 million at March 31, 2008 and September 30, 2007,
respectively.
RJBank’s
net interest income after provision for loan losses for the quarter ended
March
31, 2008 and 2007 was $36.9 million and $15.0 million,
respectively. RJBank’s net interest income after provision for loan
losses for the six months ended March 31, 2008 and 2007 was $59.3 million
and
$26.5 million, respectively.
RJBank
originates and purchases portfolios of loans that may or may not include
interest only loans that subject the borrower to payment increases over the
life
of the loan. RJBank does not originate or purchase residential loans that
have
terms that permit negative amortization features or are option adjustable
rate
mortgages. Loans with deeply discounted teaser rates are not originated or
purchased.
Loans
where borrowers may be subject to payment increases include adjustable rate
mortgage loans with terms that initially require payment of interest only,
payments may increase significantly when the interest-only period ends and
the
loan principal begins to amortize. At March 31, 2008 and September 30, 2007,
these loans totaled $1.8 billion and $1.6 billion, respectively. These loans
are
underwritten based on a variety of factors including the borrower’s credit
history, debt to income ratio, employment, the LTV ratio, and the borrower’s
disposable income and cash reserves. In instances where the borrower is of
lower
credit standing, the loans are typically underwritten to have a lower LTV
ratio
and/or other mitigating factors.
Management
does not believe these loans represent any unusual concentrations of risk,
as
evidenced by low net charge-offs and past due loans. All of these loans are
secured by mortgages on one-to-four family residential real estate and are
diversified geographically. Interest-only loans are underwritten at the time
of
application based on the amortizing payment amount, and borrowers are required
to meet stringent parameters regarding debt ratios, LTV levels, and credit
score.
High
LTV
loans include all mortgage loans where the LTV is greater than or equal to
90%
and the borrower has not provided other credit support or purchased private
mortgage insurance (“PMI”). At March 30, 2008 and September 30, 2007, RJBank
held $1.1 million and $0.7 million, respectively, of these loans. Under RJBank’s
current policy, the maximum original combined LTV ratio for a new mortgage
loan
with no PMI or other security is 80%.
NOTE
6 - 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”), 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 as the Company is
the
primary beneficiary.
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 $18.3 million at
March
31, 2008. 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 March 31, 2008 that exposure is approximately
$5.4 million.
RJTCF is a wholly owned subsidiary of RJF and is the managing member or general
partner in approximately 51 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 March 31, 2008, 48 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
1.0%.
RJTCF
has
concluded that it is the primary beneficiary in approximately one fifth of
these
tax credit housing funds, and accordingly, consolidates these funds, which
have
combined assets of approximately $253 million at March 31, 2008. 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, advances to, and receivables
due from these funds and at March 31, 2008, that exposure is approximately
$4.5
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, advances
to, and receivables due from these funds and at March 31, 2008, that exposure
is
approximately $22.2 million.
The
three
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. During March 31, 2008, only two of these funds had any material
activity. These funds typically hold interests in certain tax credit limited
partnerships for less than 90 days. These funds had assets of approximately
$3.6
million at March 31, 2008.
As
of
March 31, 2008, 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 $11 million
at
March 31, 2008. 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 March 31, 2008.
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 $14.2 million at March 31, 2008.
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 March 31, 2008, that exposure is approximately $14.2
million.
NOTE
7 - BANK
DEPOSITS:
Bank
deposits include Negotiable Order of Withdrawal (“NOW”) accounts, demand
deposits, savings and money market accounts and certificates of deposit.
The
following table presents a summary of bank deposits at March 31, 2008 and
September 30, 2007:
|
March
31, 2008
|
September
30, 2007
|
|
|
Weighted
|
|
Weighted
|
|
|
Average
|
|
Average
|
|
Balance
|
Rate
(1)
|
Balance
|
Rate
(1)
|
|
($
in 000's)
|
|
|
|
|
|
Bank
Deposits:
|
|
|
|
|
NOW
Accounts
|
$ 4,531
|
0.56%
|
$ 4,493
|
1.57%
|
Demand
Deposits (Non-Interest Bearing)
|
1,263
|
-
|
3,645
|
-
|
Savings
and Money Market Accounts
|
7,462,526
|
1.96%
|
5,337,587
|
4.59%
|
Certificates
of Deposit
|
243,975
|
4.50%
|
239,534
|
4.75%
|
Total
Bank Deposits
|
$7,712,295
|
2.04%
|
$5,585,259
|
4.59%
|
(1)
Weighted average rate calculation is based on the actual deposit balances
at
March 31, 2008 and September 30, 2007.
RJBank
had deposits from RJF executive officers and directors of $147,000 and $234,000
at March 31, 2008 and September 30, 2007, respectively.
Scheduled
maturities of certificates of deposit and brokered certificates of deposit
at
March 31, 2008 and September 30, 2007 were as follows:
|
March
31, 2008
|
September
30, 2007
|
|
Denominations
|
|
Denominations
|
|
|
Greater
than
|
Denominations
|
Greater
than
|
Denominations
|
|
or
Equal
|
Less
than
|
or
Equal
|
Less
than
|
|
to
$100,000
|
$100,000
|
to
$100,000
|
$100,000
|
|
(in
000's)
|
|
|
|
|
|
Three
Months or Less
|
$
16,923
|
$ 29,760
|
$
14,386
|
$ 23,922
|
Over
Three Through Six Months
|
9,754
|
26,687
|
10,949
|
28,980
|
Over
Six Through Twelve Months
|
15,988
|
35,235
|
11,790
|
38,005
|
Over
One Through Two Years
|
14,409
|
41,523
|
14,706
|
36,997
|
Over
Two Through Three Years
|
6,475
|
18,003
|
7,978
|
22,345
|
Over
Three Through Four Years
|
7,757
|
13,682
|
7,857
|
14,103
|
Over
Four Years
|
1,888
|
5,891
|
1,802
|
5,714
|
Total
|
$
73,194
|
$
170,781
|
$
69,468
|
$
170,066
|
Interest
expense on deposits is
summarized as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|
2008
|
2007
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
|
|
Certificates
of Deposit
|
$ 2,847
|
$ 2,648
|
$ 5,663
|
$ 5,454
|
Money
Market, Savings and
|
|
|
|
|
NOW
Accounts
|
51,725
|
35,439
|
112,345
|
66,404
|
Total
|
$
54,572
|
$
38,087
|
$
118,008
|
$
71,858
|
NOTE
8 – LOANS
PAYABLE:
Loans
payable at March 31, 2008 and September 30, 2007 are presented
below:
|
March
31,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
Short-Term
Borrowings:
|
|
|
Borrowings
on Lines of Credit (1)
|
$ 209,589
|
$ 2,685
|
Current
Portion of Mortgage Notes Payable
|
3,037
|
2,731
|
Federal
Home Loan Bank Advances (2)
|
5,000
|
5,000
|
Total
Short-Term Borrowings
|
217,626
|
10,416
|
|
|
|
Long-Term
Borrowings:
|
|
|
Mortgage
Notes Payable
(3)
|
60,799
|
62,224
|
Federal
Home Loan Bank Advances (2)
|
50,000
|
50,000
|
Total
Long-Term Borrowings
|
110,799
|
112,224
|
|
|
|
Total
Loans Payable
|
$ 328,425
|
$
122,640
|
(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
March 31, 2008, the aggregate domestic lines were $1.3 billion
and CDN $40
million, respectively. The interest rates for these lines of credit
are
variable and are based on the Fed Funds rate, LIBOR, and Canadian
prime
rate. For the three months ended March 31, 2008, interest rates
on the
lines of credit ranged from 2.63% to 5.56%. For the three months
ended
March 31, 2007, interest rates on the lines of credit ranged from
5.00% to
6.57%. Loans on the secured uncommitted lines of credit are collateralized
by Company owned and/or client margin securities, as permitted
by
regulatory requirements. The Company maintains a $600 million uncommitted
tri-party repurchase agreement line of credit. Under this agreement,
the
Company pledges certain of its trading inventory as collateral
against
borrowings on this line. The required market value of the collateral
ranges from 102% to 105% of the cash borrowed. The interest rate
is set
daily based on market conditions for Fed funds. The lender is under
no
obligation to lend to the Company under this tri-party line at
any given
time. Under this agreement, there were secured short-term borrowings
of
$90 million outstanding at March 31, 2008 which are included in
Securities
Sold Under Agreements to Repurchase. This loan was collateralized
by
Company owned securities with a market value of $94 million at
March 31,
2008. The Company’s committed $200 million line of credit is subject to a
0.125% per annum facility fee. During the quarter ended March 31,
2008,
the Company drew down the entire amount of the committed line of
credit.
|
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: three in Turkey totaling $18 million
and
one in Argentina for $9 million. At March 31, 2008, there were
outstanding balances on the settlement lines of $5.4 million and $1.2 million
in
Argentina and Turkey, respectively. At March 31, 2008 the aggregate unsecured
settlement lines of credit available were $96.8 million, and there were
outstanding balances of $3.0 million on these lines. The interest rates for
these lines of credit ranged from 9% to 18%.
(2)
|
RJBank
had $55 million in FHLB advances outstanding at March 31, 2008,
which were
comprised of one short-term, fixed rate advance and several long-term,
fixed rate advances. The weighted average interest rate on these
fixed
rate advances at March 31, 2008 was 5.23%. The outstanding FHLB
advances
mature between May 2008 and February 2011. The maximum amount of
FHLB
advances outstanding at any month-end during the three months ended
March
31, 2008 and 2007 was $55 million and $60 million, respectively.
The
average amounts of FHLB advances outstanding and the weighted average
interest rate thereon for the three months ended March 31, 2008
and 2007
were $55.4 million at a rate of 5.28% and $56.6 million at a rate
of
5.19%, respectively. These advances are secured by a blanket lien
on
RJBank's residential loan portfolio granted to FHLB. The FHLB has
the
right to convert advances totaling $35 million at March 31, 2008
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.
|
(3)
|
Mortgage
notes payable evidences a mortgage loan for the financing of the
Company's
home office complex. The mortgage loan bears interest at 5.7% and
is
secured by land, buildings, and improvements with a net book value
of
$69.2 million at March 31, 2008.
|
NOTE
9 – DERIVATIVE
FINANCIAL INSTRUMENTS:
The
Company enters into interest rate swaps and futures contracts as part of
its
fixed income business to facilitate customer transactions and to hedge a
portion
of the Company’s trading inventory. 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 statement
of financial condition for the period. At March 31, 2008 and September 30,
2007,
the Company had outstanding interest rate derivative contracts with notional
amounts of $3.9 billion and $3.5 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 March 31, 2008 greatly exceeds the possible losses
that
could arise from such transactions. The net market value of all open swap
positions at March 31, 2008 and September 30, 2007 was $7.4 million and $22.2
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, spread, ratio and basis, and volatility
risks.
These exposures are monitored both on a total portfolio basis and separately
for
selected maturity periods.
NOTE
10 – INCOME
TAXES:
The
Company adopted the provisions of FIN 48 on October 1, 2007. The impact of
the
adoption of FIN 48 resulted in a decrease to beginning retained earnings
and an
increase to the liability for unrecognized tax benefits of approximately
$4.2
million.
The
total
amount of gross unrecognized tax benefits as of the date of adoption was
approximately $8.6 million. Of this total, approximately $6.9 million (net
of
the federal benefit on state issues) represents the amount of unrecognized
tax
benefits that, if recognized, would favorably affect the effective tax rate
in
future periods. At March 31, 2008 our liability for unrecognized tax benefits
decreased to $5.4 million and the amount of unrecognized tax benefits that,
if
recognized, would affect the effective tax rate for income from continuing
operations decreased to $3.9 million. Approximately $2.8 million of the decrease
in unrecognized tax benefits was the result of the conclusion of various
state
tax audits.
The
Company recognizes the accrual of interest and penalties related to income
tax
matters in interest expense and other expense, respectively. Interest and
penalties accrued as of the beginning of the year was $1.6 million. During
the
six months ended March 31, 2008, accrued interest expense related to
unrecognized tax benefits increased by a net $125,000. During the six months
ended March 31, 2008, there was no penalty expense related to unrecognized
tax
benefits. Interest and penalties accrued as of March 31, 2008 was $1.7
million.
The
Company’s tax liability does not include any accrual for potential taxes,
interest or penalties related to tax assessments of the Company’s Turkish joint
venture. The Company has fully reserved for its equity interest in this joint
venture (see Note 11 below for additional information).
The
Company files income tax returns in the U. S. federal jurisdiction and various
states, local and foreign jurisdictions. With few exceptions, the Company
is no
longer subject to U.S. federal, state and local, or foreign income tax
examination by tax authorities for years prior to 2007 for federal tax returns,
2004 for state and local tax returns and 2000 for foreign tax returns. During
the second quarter, the Company settled the Limited Issue Focused Examinations
by the Internal Revenue Service for fiscal years 2005 and 2006. As a result,
the
Company paid $163,000 that was previously provided for under FIN 48 as an
unrecognized tax benefit. The fiscal year 2007 and 2008 federal income tax
returns are being examined under the IRS Compliance Assurance Program. This
program accelerates the examination of key issues in an attempt to resolve
them
before the tax return is filed. Certain state and local returns are also
currently under various stages of audit. The 2007 IRS audit and state audits
in
process are expected to be completed in 2008. It is anticipated that the
unrecognized tax benefits may be reduced by an estimated $0.5 million over
the
next 12 months.
NOTE
11 – COMMITMENTS AND
CONTINGENCIES:
The
Company is the lessor in a leveraged commercial aircraft transaction with
Continental Airlines, Inc. (“Continental"). The Company's ability to
realize its expected return is dependent upon this airline’s ability to fulfill
its lease obligation. In the event that this airline defaults on its
lease commitment and the Trustee for the debt holders is unable to re-lease
or
sell the plane with adequate terms, the Company would suffer a loss of some
or
all of its investment. The value of this leveraged lease with
Continental was approximately $9.6 million as of March 31, 2008. 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 was originally projected to be 15% of the original
cost
and has not been adjusted since inception. 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
had $55 million in FHLB advances outstanding at March 31, 2008, which were
comprised of one short-term, fixed rate advance and several long-term, fixed
rate advances. RJBank had $1.7 billion in credit available from the FHLB
at
March 31, 2008. See Note 8 of the Notes to Condensed Consolidated Financial
Statements for more information.
At
March
31, 2008 and September 30, 2007, no securities other than FHLB stock were
pledged by RJBank as collateral with the FHLB for advances. In addition to
the
FHLB stock pledged as collateral for advances, RJBank provided the FHLB with
a
blanket lien against RJBank's entire portfolio of residential mortgage
loans.
As
of
March 31, 2008, RJBank had entered into overnight reverse repurchase agreements
totaling $1.02 billion with three counterparties, with individual exposures
of
$420 million, $400 million and $200 million. Although RJBank is exposed to
risk
that these counterparties may not fulfill their contractual obligations,
the
Company believes the risk of default is minimal due to the creditworthiness
of
these counterparties, collateral received and the short duration of these
agreements.
As
of
September 30, 2007, RJBank had not settled purchases of $300.6 million in
syndicated loans (included in Bank Loans, Net) due to the sellers’ delays in
finalizing settlement, all of which had settled prior to March 31, 2008.
As of
March, 31, 2008, RJBank had not settled the purchases of $48.0 million in
syndicated loans. These loans are expected to be settled during the three
months
ended June 30, 2008.
See
Note
15 of the Notes to Condensed Consolidated Financial Statements with respect
to
RJBank’s commitments to extend credit and other credit-related off-balance sheet
financial instruments such as standby letters of credit and loan
purchases.
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 escalation clause. Expenses of $796,000 and $765,000 were recognized
in
the three months ended March 31, 2008 and 2007, respectively. Expenses of
$1,561,000 and $1,501,000 were recognized in the six months ended March 31,
2008
and 2007, respectively
In
the
normal course of business, the Company enters into underwriting commitments.
Transactions relating to such commitments of Raymond James & Associates
(“RJA”) that were open at March 31, 2008 and were subsequently settled had no
material effect on the consolidated financial statements as of that date.
Transactions relating to such commitments of Raymond James Ltd. (“RJ Ltd.”) that
were recorded and open at March 31, 2008 were approximately CDN $33.5
million.
The
Company utilizes client marginable securities to satisfy deposits with clearing
organizations. At March 31, 2008, the Company had client margin securities
valued at $116.9 million pledged with a clearing organization to meet the
point
in time requirement of $67.4 million. At September 30, 2007, the Company
had
client margin securities valued at $135.7 million pledged with a clearing
organization to meet the point in time requirement of $67.5
million.
In
January 2008, Sirchie Acquisition Company, LLC (“SAC”), an 80% owned indirect
subsidiary of the Company, acquired substantially all of the business, assets,
and properties of Sirchie Finger Print Laboratories, Inc., the assets or
stock
of several other companies and certain real estate. The Company’s equity
investment in SAC was approximately $20 million. SAC also acquired 51% of
the
common stock of Law Enforcement Associates Corporation as part of the
transaction. This acquisition is one of the Company’s recent merchant banking
initiatives.
The
Company has committed a total of $56.5 million, in amounts ranging from $200,000
to $5 million, to 43 different independent venture capital or private equity
partnerships. As of March 31, 2008, the Company has invested $33.8 million
of
that amount and has received $29 million in distributions. Additionally,
the
Company controls 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 $13 million and has received $9 million in distributions
as
of March 31, 2008. The Company is not the controlling general partner in
another
internally sponsored private equity limited partnership to which it has
committed $30 million. As of March 31, 2008, the Company has invested $2.3
million of that amount and has not received any distributions.
The
Company is the general partner in the 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 March 31, 2008, the funds have unfunded commitments
of $2.6 million.
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.
At
March
31, 2008, 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 and Other
|
|
Collateralized
Financings
|
$ 1,359,120
|
Securities
Received in Securities Borrowed Vs. Cash Transactions
|
742,606
|
Collateral
Received for Margin Loans
|
1,476,415
|
Total
|
$ 3,578,141
|
During
the quarter certain collateral was repledged. At March 31, 2008, 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 and Other
|
|
Collateralized
Financings
|
$ 183,432
|
Securities
Received in Securities Borrowed Vs. Cash Transactions
|
680,833
|
Collateral
Received for Margin Loans
|
116,909
|
Total
|
$ 981,174
|
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 March 31, 2008, the aggregate domestic
lines
were $1.3 billion and CDN $40 million. The interest rates for these lines
of
credit are variable and are based on the Fed Funds rate, LIBOR, and Canadian
prime rate. See Note 8 of the Notes to Condensed Consolidated Financial
Statements for more information.
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: three in Turkey totaling $18 million and one in Argentina
for
$9 million. See Note 8 of the Notes to Condensed Consolidated Financial
Statements for more information. The Company has also from time to time
authorized performance guarantees for the completion of trades with
counterparties in Argentina and Turkey. At March 31, 2008, there were no
outstanding performance guarantees in Argentina or Turkey.
The
Company guarantees the existing mortgage debt of RJA of approximately $63.8
million. The Company guarantees interest rate swap obligations of RJ Capital
Services, Inc. The Company has also committed to lend to RJTCF, or guarantee
obligations in connection with RJTCF’s low income housing
development/rehabilitation and syndication activities, aggregating up to
$125
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 March 31, 2008, cash funded to invest in either loans or investments in
project partnerships was $36.5 million. In addition, at March 31, 2008, RJTCF
is
committed to additional future fundings of $18.3 million related to project
partnerships that have not yet been sold to various tax credit funds. The
Company and RJTCF also issue certain guarantees to various third parties
related
to project partnerships, interests in which have been or are expected to
be sold
to one or more tax credit funds under RJTCF’s management. In some instances,
RJTCF is not the primary guarantor of these obligations which aggregate to
a
cumulative maximum obligation of approximately $15.7 million as of March
31,
2008.
The
Company was required to enter into two agreements, both with Raymond James
Trust, National Association and one with the Office of the Controller of
the
Currency (“OCC”), as a condition to the conversion of Raymond James Trust
Company, now known as Raymond James Trust, National Association, (‘RJT”) from a
state to a federally chartered institution. The conversion was effective
January
1, 2008. Under those agreements, the Company is obligated to provide RJT
with
sufficient capital in a form acceptable to the OCC to meet and maintain the
capital and liquidity requirements commensurate with RJT’s risk profile for its
conversion and any subsequent requirements of the OCC. The conversion expands
RJT’s market nationwide, while substituting federal for multiple state
regulatory oversight. RJT’s federal charter limits it to fiduciary activities.
Thus, capital requirements are not expected to be significant. Based on current
projections, RJT’s existing capital is expected to be sufficient for the
foreseeable future.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately $6.8 million by the Turkish
tax
authorities. The authorities applied a significantly different methodology
than
in the prior year’s audit which the Turkish tax court and Council of State
affirmed. RJY is vigorously contesting most aspects of this assessment and
has
sought reconsideration of the Turkish Council of State. The Turkish tax
authorities, utilizing the 2001 methodology, assessed RJY $5.7 million for
2002,
which is also being challenged. Audits of 2003 and 2004 are anticipated and
their outcome is unknown in light of the change in methodology and the pending
litigation. The Company has recorded a provision for loss in its consolidated
financial statements for its net equity interest in this joint venture. As
of
March 31, 2008, RJY had total capital of approximately $11.1 million, of
which
the Company owns approximately 50%.
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. The Company is contesting the allegations
in these 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
12 - CAPITAL
TRANSACTIONS:
The
following table presents information on a monthly basis for purchases of
the
Company’s stock for the quarter ended March 31, 2008:
|
Number
of
|
|
Average
|
Period
|
Shares
Purchased (1)
|
|
Price
Per Share
|
|
|
|
|
January
1, 2008 – January 31, 2008
|
34,289
|
|
$28.70
|
February
1, 2008 – February 29, 2008
|
972,214
|
|
24.07
|
March
1, 2008 – March 31, 2008
|
1,666,245
|
|
21.69
|
Total
|
2,672,748
|
|
$22.64
|
(1)
|
The
Company does not have a formal stock repurchase plan. On May 20,
2004, the
Board of Directors authorized $75 million for repurchases pursuant
to
prior authorization from the Board of Directors. During March 2008,
the
Company exhausted this authorization. On March 11, 2008, the Board
of
Directors authorized an additional $75 million for repurchases
at the
discretion of the Board’s Share Repurchase Committee. Since May 2004,
3,355,564 shares have been repurchased for a total of $77.4 million,
leaving $72.6 million available to repurchase shares. Historically
the
Company has considered such purchases when the price of its stock
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. Accordingly, the Company
purchased
2,634,833 shares in open market transactions during the quarter
ended
March 31, 2008. During the three and six months ended March 31,
2008,
32,963 and 241,614 shares, respectively, were purchased for the
trust fund
that was established and funded 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 Company’s wholly owned
Canadian subsidiary (see 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, 2007 for more information on this
trust
fund). The Company also purchased 4,952 shares that were surrendered
by
employees as payment for option exercises during the three months
ended
March 31, 2008.
|
NOTE
13 – SHARE-BASED
COMPENSATION:
The
Company applies the provisions of SFAS No. 123R, “Share-Based Payment”, to
account for share-based awards made to employees and directors. This
pronouncement requires the measurement and recognition of compensation expense
for all share-based awards made to employees and directors to be 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, 2007. The Company’s net income for
the three and six months ended March 31, 2008 includes $8.3 million and $18.6
million, respectively, of compensation costs and $2.6 million and $5.7 million,
respectively of income tax benefits related to the Company’s share-based awards
to employees and members of its Board of Directors. The Company’s net income for
the three and six months ended March 31, 2007 includes $5.8 million and $13.6
million, respectively, of compensation costs and $1.8 million and $3.9 million,
respectively of income tax benefits related to the Company’s share-based awards
to employees and members of its Board of Directors.
During
the three months ended March 31, 2008, the Company granted 21,600 stock options,
109,328 shares of restricted stock and 34,188 restricted stock units to
employees under its share-based employee compensation plans. During the three
and six months ended March 31, 2008, 17,500 stock options were granted to
outside directors. During the six months ended March 31, 2008, the Company
granted 1,488,050 stock options, 921,024 shares of restricted stock and 240,483
restricted stock units to employees under its share-based employee compensation
plans. Restricted stock grants under the 2007 Stock Bonus Plan and the 2005
Restricted Stock Plan are limited to 750,000 and 1,200,000 shares, respectively,
per fiscal year.
The
weighted-average grant-date fair value of stock options granted to employees
and
directors during the three and six months ended March 31, 2008 was $6.28
and
$8.24 per share, respectively. Pre-tax unrecognized compensation expense
for
stock options granted to employees and outside directors, net of estimated
forfeitures, was $16.9 million as of March 31, 2008, and will be recognized
as
expense over a weighted-average period of approximately 3.2 years.
The
weighted-average grant-date fair value of restricted stock granted to employees
during the three and six months ended March 31, 2008 was $24.28 and $31.26
per
share, respectively. Pre-tax unrecognized compensation expense for unvested
restricted stock granted to employees, net of estimated forfeitures, was
$63.8
million as of March 31, 2008, and will be recognized as expense over a
weighted-average period of approximately 3 years.
The
weighted-average grant-date fair value of restricted stock units granted
to
employees during the three and six months ended March 31, 2008 was $29.39
and
$30.29 per share, respectively. Pre-tax unrecognized compensation
expense for unvested restricted stock units granted to employees, net of
estimated forfeitures, was $7.6 million as of March 31, 2008, and will be
recognized as expense over a weighted-average period of approximately 1.9
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 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, 2007 for more information). Due
to
the decline in the value of the Company’s common stock during the quarter ended
March 31, 2008, the Company’s net income for the three and six months ended
March 31, 2008 includes $6.2 million and $4.7 million, respectively, of
reductions in compensation expense and $2.4 million and $1.8 million,
respectively, of reductions in income tax benefits related to the Company’s
share-based awards to its independent contractor Financial Advisors. The
Company’s net income for the three and six months ended March 31, 2007 includes
$0.5 million and $2.9 million, respectively, of compensation costs and $0.2
million and $1.1 million, respectively, of income tax benefits related to
the
Company’s share-based awards to its independent contractor Financial
Advisors.
During
the three months ended March 31, 2008, the Company granted 25,847 shares
of
restricted stock to its independent contractor Financial Advisors. During
the
six months ended March 31, 2008, the Company granted 48,000 stock options
and
45,319 shares of restricted stock to its independent contractor Financial
Advisors.
As
of
March 31, 2008, there was $2.4 million of total unrecognized pre-tax
compensation cost related to unvested stock options granted to its independent
contractor Financial Advisors based on an estimated weighted-average fair
value
of $5.57 per share at that date. These costs are expected to be
recognized over a weighted average period of approximately 3.1
years.
As
of
March 31, 2008, there was $1.9 million of total unrecognized pre-tax
compensation cost related to unvested restricted stock granted to its
independent contractor Financial Advisors based on an estimated fair value
of
$23.45 per share at that date. These costs are expected to be recognized
over a
weighted average period of approximately 4 years.
NOTE
14 - REGULATIONS 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. RJA, a member firm of the Financial Industry Regulatory
Authority (“FINRA”), is also subject to the rules of FINRA, whose
requirements are substantially the same. Rule 15c3-1 requires that aggregate
indebtedness, as defined, not exceed 15 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 $250,000 or two percent of Aggregate Debit Items
arising
from client transactions. FINRA may require a member firm to reduce its business
if its net capital is less than four percent of Aggregate Debit Items and
may
prohibit a member firm from expanding its business and declaring cash dividends
if its net capital is less than five percent of Aggregate Debit Items. The
net
capital position of RJA at March 31, 2008 and September 30, 2007 was as
follows:
|
March
31,
|
September
30,
|
|
2008
|
2007
|
|
($
in 000's)
|
Raymond
James & Associates, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital as a Percent of Aggregate
|
|
|
Debit
Items
|
23.85%
|
21.94%
|
Net
Capital
|
$
350,331
|
$
332,873
|
Less:
Required Net Capital
|
(29,373)
|
(30,344)
|
Excess
Net Capital
|
$
320,958
|
$
302,529
|
At
March
31, 2008 and September 30, 2007, RJFS had no Aggregate Debit Items and therefore
the minimum net capital of $250,000 was applicable. The net capital position
of
RJFS at March 31, 2008 and September 30, 2007 was as follows:
|
March
31,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
Raymond
James Financial Services, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital
|
$
58,832
|
$
70,583
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$
58,582
|
$
70,333
|
At
March
31, 2008 and September 30, 2007, HFD had no Aggregate Debit Items and therefore
the minimum net capital of $250,000 was applicable. The net capital position
of
HFD at March 31, 2008 and September 30, 2007 was as follows:
|
March
31,
|
September
30,
|
|
2008
|
2007
|
|
(in
000’s)
|
Heritage
Fund Distributors, Inc.
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital
|
$
3,028
|
$
6,039
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$
2,778
|
$
5,789
|
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. RJ Ltd.
was
not in Early Warning Level 1 or Level 2 at March 31, 2008 or September 30,
2007.
The
Risk
Adjusted Capital of RJ Ltd. was CDN $33,104,703 and CDN $47,724,293 at March
31,
2008 and September 30, 2007, respectively.
The
Company’s other domestic and international broker-dealers are in compliance with
and meet all net capital requirements.
RJBank
is
subject to various regulatory and capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions
by
regulators. Under capital adequacy guidelines and the regulatory framework
for
prompt corrective action, RJBank must meet specific capital guidelines that
involve quantitative measures of RJBank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
RJBank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require RJBank
to
maintain minimum amounts and ratios (set forth in the table below) of total
and
Tier I Capital (as defined in the regulations) to risk-weighted assets (as
defined). Management believes that, as of March 31, 2008, RJBank meets all
capital adequacy requirements to which it is subject.
As
of
March 31, 2008, the most recent notification from the Office of Thrift
Supervision categorized RJBank as “well capitalized” under the regulatory
framework for prompt corrective action. To be categorized as “well capitalized”,
RJBank must maintain minimum total risk-based, Tier I risk-based, and Tier
I
leverage ratios as set forth in the table below. There are no conditions
or
events since that notification that management believes have changed RJBank's
category.
|
|
|
To
be well
capitalized
|
|
|
Requirement
for
capital
|
under
prompt
|
|
|
adequacy
|
corrective
action
|
|
Actual
|
purposes
|
provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
($
in
000's)
|
As
of March 31,
2008:
|
|
|
|
|
|
|
Total
Capital
(to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
$
596,227
|
10.3%
|
$
463,067
|
8.0%
|
$
578,834
|
10.0%
|
Tier I
Capital
(to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
523,873
|
9.1%
|
231,534
|
4.0%
|
347,300
|
6.0%
|
Tier I
Capital
(to
|
|
|
|
|
|
|
Adjusted
Assets)
|
523,873
|
6.3%
|
335,024
|
4.0%
|
418,780
|
5.0%
|
|
|
|
|
|
|
|
As
of September 30,
2007:
|
|
|
|
|
|
|
Total
Capital
(to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
$
420,704
|
10.1%
|
$
332,832
|
8.0%
|
$
416,040
|
10.0%
|
Tier I
Capital
(to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
368,699
|
8.9%
|
166,416
|
4.0%
|
249,624
|
6.0%
|
Tier I
Capital
(to
|
|
|
|
|
|
|
Adjusted
Assets)
|
368,699
|
5.8%
|
253,048
|
4.0%
|
316,309
|
5.0%
|
NOTE
15 - FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
RJBank
has outstanding at any time a significant number of commitments to extend
credit
and other credit-related off-balance sheet financial instruments such as
standby
letters of credit and loan purchases. These arrangements are subject to strict
credit control assessments and each customer’s credit worthiness is evaluated on
a case-by-case basis. A summary of commitments to extend credit and other
credit-related off-balance sheet financial instruments outstanding at March
31,
2008 and September 30, 2007, is as follows:
|
March
31,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
Standby
Letters of Credit
|
$ 185,668
|
$ 100,397
|
Open
End Consumer Lines of Credit
|
33,989
|
27,871
|
Commercial
Lines of Credit
|
1,351,174
|
1,218,690
|
Unfunded
Loan Commitments - Variable Rate (1)
|
884,696
|
397,752
|
Unfunded
Loan Commitments - Fixed Rate
|
11,712
|
12,831
|
(1)
|
Includes
commitments to purchase pools of whole first mortgage
loans.
|
Because
many loan commitments expire without being funded in whole or part, the contract
amounts are not estimates of future cash flows.
Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted. The credit
risk amounts are equal to the contractual amounts, assuming that the amounts
are
fully advanced and that the collateral or other security is of no value.
RJBank
uses the same credit approval and monitoring process in extending loan
commitments and other credit-related off-balance sheet instruments as it
does in
making loans.
RJBank’s
policy is generally to require customers to provide collateral at the time
of
closing. The amount of collateral obtained, if it is deemed necessary by
RJBank
upon extension of credit, is based on RJBank’s credit evaluation of the
borrower. Collateral held varies but may include accounts receivable, inventory,
real estate, and income producing commercial properties.
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 March 31, 2008, $185.7 million of such letters of credit were outstanding.
Of the letters of credit outstanding, $183.9 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 debtor 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. The credit risk involved in issuing letters of credit
is
essentially the same as that involved with extending loan commitments to
clients, and accordingly, RJBank uses a credit evaluation process and collateral
requirements similar to those for loan commitments.
See
Note
20 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, 2007
for
more information regarding the Company’s financial instruments with off-balance
sheet risk.
NOTE
16 – EARNINGS PER
SHARE:
The
following table presents the computation of basic and diluted earnings per
share:
|
Three
Months Ended
|
Six
Months Ended
|
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|
2008
|
2007
|
2008
|
2007
|
|
(in
000’s, except per share amounts)
|
|
|
|
|
|
Net
Income
|
$ 59,790
|
$ 59,715
|
$
116,032
|
$
119,110
|
|
|
|
|
|
Weighted
Average Common Shares
|
|
|
|
|
Outstanding
During the Period
|
117,312
|
115,702
|
117,078
|
115,015
|
|
|
|
|
|
Dilutive
Effect of Stock Options and Awards (1)
|
2,208
|
2,985
|
2,739
|
3,243
|
|
|
|
|
|
Weighted
Average Diluted Common
|
|
|
|
|
Shares
(1)
|
119,520
|
118,687
|
119,817
|
118,258
|
|
|
|
|
|
Net
Income per Share – Basic
|
$ 0.51
|
$ 0.52
|
$ 0.99
|
$ 1.04
|
|
|
|
|
|
Net
Income per Share - Diluted (1)
|
$ 0.50
|
$ 0.50
|
$ 0.97
|
$ 1.00
|
|
|
|
|
|
Securities
Excluded from Weighted Average
|
|
|
|
|
Diluted
Common Shares Because Their Effect
|
|
|
|
|
Would
Be Antidilutive
|
4,163
|
570
|
2,575
|
387
|
(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
17 – SEGMENT
ANALYSIS:
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 eight business segments:
Private Client Group; Capital Markets; Asset Management; RJBank; Emerging
Markets; Stock Loan/Borrow; Proprietary Capital and various corporate activities
combined in the "Other" segment. In the quarter ended September 30, 2007,
a new
segment was established: Proprietary Capital. The components of this segment
were previously included in Asset Management and Other. Reclassifications
have
been made in the segment disclosure for previous periods to conform to this
presentation. 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,
2007. 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 U.S., 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 U.S.,
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, Inc.
The
Asset
Management segment includes investment portfolio management services of Eagle
Asset Management, Inc., Eagle Boston Investment Management, Inc., and Raymond
James Consulting Services (RJA’s asset management services division), mutual
fund management by Heritage Asset Management, Inc., and trust services of
Raymond James Trust Company, N.A. 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 Turkey and Latin
America. 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
Proprietary Capital segment consists of the Company’s principal capital and
private equity activities including: various direct and third party private
equity and merchant banking investments (including Raymond James Capital,
Inc. a
captive merchant banking business), short-term special situation mezzanine
and
bridge investments, the EIF Funds, and three private equity funds sponsored
by
the Company: Raymond James Capital Partners, L.P., Ballast Point Ventures,
L.P.,
and Ballast Point Ventures II, L.P.
The
Other
segment includes certain corporate activities of the Company.
Information
concerning operations in these segments of business is as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|
2008
|
2007
|
2008
|
2007
|
|
(in
000’s)
|
Revenues:
|
|
|
|
|
Private
Client Group
|
$
497,989
|
$
473,216
|
$
1,016,028
|
$ 922,349
|
Capital
Markets
|
124,202
|
106,671
|
238,962
|
227,125
|
Asset
Management
|
59,016
|
57,912
|
122,197
|
115,558
|
RJBank
|
105,134
|
56,377
|
207,723
|
106,779
|
Emerging
Markets
|
9,988
|
16,653
|
22,646
|
28,450
|
Stock
Loan/Borrow
|
8,411
|
14,652
|
22,287
|
29,711
|
Proprietary
Capital
|
1,212
|
6,820
|
2,341
|
5,202
|
Other
|
1,182
|
5,970
|
4,141
|
12,726
|
Total
Revenues
|
$
807,134
|
$
738,271
|
$
1,636,325
|
$
1,447,900
|
|
|
|
|
|
Income
Before Provision for Income Taxes:
|
|
Private
Client Group
|
$ 52,098
|
$ 51,359
|
$ 106,824
|
$ 105,369
|
Capital
Markets
|
7,477
|
10,737
|
13,840
|
27,451
|
Asset
Management
|
14,170
|
15,092
|
31,685
|
30,040
|
RJBank
|
25,891
|
9,794
|
40,665
|
16,233
|
Emerging
Markets
|
276
|
3,669
|
(1,270)
|
4,605
|
Stock
Loan/Borrow
|
1,291
|
1,378
|
2,934
|
1,574
|
Proprietary
Capital
|
(592)
|
1,612
|
(1,231)
|
217
|
Other
|
(2,793)
|
(686)
|
(4,872)
|
1,232
|
Pre-Tax
Income
|
$ 97,818
|
$ 92,955
|
$ 188,575
|
$ 186,721
|
|
Net
Interest Income (Expense):
|
Private
Client Group
|
$ 20,815
|
$ 30,051
|
$ 48,691
|
$ 61,019
|
Capital
Markets
|
736
|
(1,816)
|
410
|
(4,044)
|
Asset
Management
|
259
|
306
|
783
|
662
|
RJBank
|
47,983
|
17,385
|
83,187
|
33,214
|
Emerging
Markets
|
806
|
703
|
1,710
|
1,411
|
Stock
Loan/Borrow
|
2,118
|
2,076
|
4,689
|
4,152
|
Proprietary
Capital
|
284
|
541
|
1,008
|
626
|
Other
|
2,866
|
3,014
|
4,975
|
7,715
|
Net
Interest Income
|
$ 75,867
|
$ 52,260
|
$ 145,453
|
$ 104,755
|
The
following table presents the Company's total assets on a segment
basis:
|
|
|
|
March
31,
|
September
30,
|
|
2008
|
2007
|
|
(in
000’s)
|
Total
Assets:
|
|
|
Private
Client Group *
|
$ 7,203,506
|
$ 6,608,059
|
Capital
Markets **
|
1,378,435
|
1,533,273
|
Asset
Management
|
69,353
|
95,894
|
RJBank
|
8,299,105
|
6,312,966
|
Emerging
Markets
|
92,185
|
104,238
|
Stock
Loan/Borrow
|
753,350
|
1,302,937
|
Proprietary
Capital
|
148,324
|
115,062
|
Other
|
137,611
|
181,739
|
Total
|
$
18,081,869
|
$
16,254,168
|
*
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 U.S., Canada, Europe and joint ventures in
Turkey
and Latin America. Substantially all long-lived assets are located in the
U.S.
Revenues, classified by the major geographic areas in which they are earned,
were as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
March
31,
|
March
31,
|
March
31,
|
March
31,
|
|
2008
|
2007
|
2008
|
2007
|
|
(in
000’s)
|
Revenues:
|
|
|
|
|
United
States
|
$
717,013
|
$ 655,033
|
$ 1,447,924
|
$
1,284,555
|
Canada
|
65,409
|
57,709
|
134,027
|
114,100
|
Europe
|
15,372
|
10,066
|
32,604
|
22,657
|
Other
|
9,340
|
15,463
|
21,770
|
26,588
|
Total
|
$
807,134
|
$ 738,271
|
$ 1,636,325
|
$
1,447,900
|
The
Company has $10.0 million invested, net of a $5.5 million reserve for its
Turkish joint venture interest, in emerging market joint ventures, which
carry
greater risk than amounts invested in developed markets.
ITEM
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
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 results continue to be highly correlated to the activity
levels in the U.S. equity markets. Active securities markets, a
steep, positively sloping yield curve and upward movements in equity indices
have a positive impact, while volatile interest rates and disruption in credit
markets have a negative impact on brokerage results. As Raymond James Bank
(“RJBank”) continues to grow and a greater percentage of the firm’s revenues
come from asset-based fees and interest earnings, results have become somewhat
more insulated from these market influences. The Company is currently operating
in a challenging environment: indications of a possible recession and industry
issues related to auction rate securities and liquidity are negatively impacting
activity levels, declining interest rates are having a negative impact on
near
term spreads, and the current equity market conditions have severely dampened
investment banking activity. However, positive Financial Advisor recruiting
results (especially in the employee subsidiary), increased institutional
commissions and loan growth at RJBank had a positive impact on results and
should position the Company well for future periods.
Segments
The
Company currently operates through the following eight business segments:
Private Client Group; Capital Markets; Asset Management; Raymond James Bank;
Emerging Markets; Stock Loan/Borrow, Proprietary Capital and certain corporate
activities in the Other segment.
The
following table presents the gross revenues and pre-tax earnings of the Company
on a segment basis for the periods indicated:
|
Three
Months
Ended
|
|
March
31,
|
|
March
31,
|
|
Percentage
|
|
2008
|
|
2007
|
|
Change
|
|
(in
000’s)
|
Total
Company
|
|
|
|
|
|
Revenues
|
$
807,134
|
|
$
738,271
|
|
9%
|
Pre-tax
Earnings
|
$ 97,818
|
|
$ 92,955
|
|
5%
|
|
|
|
|
|
|
Private
Client
Group
|
|
|
|
|
|
Revenues
|
497,989
|
|
473,216
|
|
5%
|
Pre-tax
Earnings
|
52,098
|
|
51,359
|
|
1%
|
|
|
|
|
|
|
Capital
Markets
|
|
|
|
|
|
Revenues
|
124,202
|
|
106,671
|
|
16%
|
Pre-tax
Earnings
|
7,477
|
|
10,737
|
|
(30%)
|
|
|
|
|
|
|
Asset
Management
|
|
|
|
|
|
Revenues
|
59,016
|
|
57,912
|
|
2%
|
Pre-tax
Earnings
|
14,170
|
|
15,092
|
|
(6%)
|
|
|
|
|
|
|
Raymond
James Bank
|
|
|
|
|
|
Revenues
|
105,134
|
|
56,377
|
|
86%
|
Pre-tax
Earnings
|
25,891
|
|
9,794
|
|
164%
|
|
|
|
|
|
|
Emerging
Markets
|
|
|
|
|
|
Revenues
|
9,988
|
|
16,653
|
|
(40%)
|
Pre-tax
Earnings
|
276
|
|
3,669
|
|
(92%)
|
|
|
|
|
|
|
Stock
Loan/Borrow
|
|
|
|
|
|
Revenues
|
8,411
|
|
14,652
|
|
(43%)
|
Pre-tax
Earnings
|
1,291
|
|
1,378
|
|
(6%)
|
|
|
|
|
|
|
Proprietary
Capital
|
|
|
|
|
|
Revenues
|
1,212
|
|
6,820
|
|
(82%)
|
Pre-tax
(Loss)
Earnings
|
(592)
|
|
1,612
|
|
(137%)
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Revenues
|
1,182
|
|
5,970
|
|
(80%)
|
Pre-tax
(Loss)
|
(2,793)
|
|
(686)
|
|
(307%)
|
Results
of Operations –
Three Months Ended March 31, 2008 Compared with the Three Months Ended March
31,
2007
Total
Company
Total
Company net revenues increased 11% to $691.7 million from $625.7 million
in the
prior year. Revenues increased in each line item except Investment Banking,
Net
Trading Profits and Other. Despite a 45% increase in net interest earnings,
net
income was flat versus the prior year quarter. The prior year results included
a
more active investment banking environment, positive trading results and
gains
on the sale of the Company’s investment in its interest in its joint venture in
India and the Delta leveraged lease and a gain on a proprietary capital
investment in Other Income. Primarily as a result of the current year unrealized
loss on the Company’s Corporate Owned Life Insurance investment, in contrast to
the gain in the prior year, the Company’s effective tax rate for the quarter is
3% higher than it was for the same quarter in the prior year. It is currently
anticipated that the annual tax rate will be 2% higher than the prior year.
Diluted net income was $0.50 per share, the same as the prior year
quarter.
Net
Interest
Analysis
The
following table presents average balance data and interest income and expense
data for the Company, as well as the related net interest income. The respective
average rates are presented on an annualized basis.
|
Three
Months Ended
|
|
March
31,
|
March
31,
|
|
2008
|
2007
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
Interest
|
|
Yield/
|
Average
|
Interest
|
|
Yield/
|
|
Balance
|
Inc./Exp.
|
|
Cost
|
Balance
|
Inc./Exp.
|
|
Cost
|
|
($
in 000’s)
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
Margin
Balances
|
$1,519,189
|
$
21,627
|
|
5.69%
|
$1,368,937
|
$ 26,252
|
|
7.67%
|
Assets
Segregated Pursuant
|
|
|
|
|
|
|
|
|
to
Regulations and Other
|
|
|
|
|
|
|
|
|
Segregated
Assets
|
4,710,500
|
37,684
|
|
3.20%
|
3,680,379
|
48,581
|
|
5.28%
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
RJBank (1)
|
7,468,400
|
104,190
|
|
5.58%
|
3,660,966
|
56,206
|
|
6.14%
|
Stock
Borrow
|
|
8,411
|
|
|
|
14,652
|
|
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
Variable Interest Entities
|
|
199
|
|
|
|
297
|
|
|
Other
|
|
19,203
|
|
|
|
18,824
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
|
191,314
|
|
|
|
164,812
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
Client
Interest Program
|
$5,873,238
|
42,530
|
|
2.90%
|
$4,571,353
|
50,152
|
|
4.39%
|
Interest-Bearing
Liabilities
|
|
|
|
|
|
|
|
|
of
RJBank (1)
|
7,017,969
|
56,207
|
|
3.20%
|
3,394,609
|
38,821
|
|
4.57%
|
Stock
Loan
|
|
6,293
|
|
|
|
12,576
|
|
|
Interest-Bearing
Liabilities of
|
|
|
|
|
|
|
|
|
Variable
Interest Entities
|
|
1,595
|
|
|
|
1,909
|
|
|
Other
|
|
8,822
|
|
|
|
9,094
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Expense
|
|
115,447
|
|
|
|
112,552
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$
75,867
|
|
|
|
$
52,260
|
|
|
(1)
|
See
Raymond James Bank section in Item 2 of Part I for
details.
|
Net
interest at RJBank increased $30.6 million versus the same quarter prior
year
and represented 63% of the Company’s net interest earnings. Average interest
earning assets increased $3.8 billion, or 104%, versus the same quarter prior
year. Deposit growth continued at a strong pace and RJBank took advantage
of
quality loans available for purchase at attractive prices. The deployment
of
deposits from overnight investments into loan balances has increased the
spreads
earned at RJBank.
Average
customer margin balances have increased $150 million, or 11%, versus the
same
quarter prior year. Similar to the $1.3 billion, or 28%, increase in customer
cash balances held in the Client Interest Program, assets segregated pursuant
to
regulations have also increased 28%, or $1 billion. Interest rate cuts resulted
in temporarily lower spreads on customer balances and assets segregated pursuant
to regulations, having a negative impact on net interest earnings for the
quarter.
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 62% of the Company's revenues for
the three months ended March 31, 2008. 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 support personnel 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 affiliation 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 a wide variety of other brokerage firms
for
qualified Financial Advisors, as Financial Advisors can choose the model
that
best suits their practice and profile. For the past several 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:
|
|
|
March
31,
|
March
31,
|
|
|
Independent
|
2008
|
2007
|
|
Employee
|
Contractors
|
Total
|
Total
|
Private
Client Group - Financial Advisors:
|
|
|
|
|
RJA
|
1,138
|
-
|
1,138
|
1,045
|
RJFS
|
-
|
3,090
|
3,090
|
3,130
|
RJ
Ltd.
|
190
|
155
|
345
|
323
|
RJIS
|
-
|
87
|
87
|
70
|
Total
Financial Advisors
|
1,328
|
3,332
|
4,660
|
4,568
|
The
Private Client Segment continues to be positively impacted by the successful
recruiting of employee Financial Advisors and increased productivity. The
9%
increase in PCG commissions accounted for 47% of the increase in the Company’s
commission revenue. RJA added a net 93 Financial Advisors versus March of
the
prior year, as the Company continues to benefit from brokerage industry unrest.
Average annual production per RJA Financial Advisor increased 15% from $454,000
to $522,000 and average annual production per RJFS Financial Advisor also
increased 15% from $290,000 to $333,000 over the same quarter prior year.
RJ
Ltd. added 22 Financial Advisors versus the prior March and their average
annual
production increased 8%. Total Company financial service fee revenue increased
4% as a result of the continued growth in client assets and number of client
accounts.
The
pre-tax segment results increased 1% versus the prior year on a 7% increase
in
net revenues. The segment results were impacted by a $9 million decline in
net
interest income from the prior year primarily due to the lowering of interest
rates which compressed net interest earnings despite higher client balances.
In
addition, the business margins continue to be negatively impacted by the
expenses associated with successful recruiting, including commission
concessions, the expense associated with the amortization of advances, account
transfer fees, new branch expenses and additional support staff.
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
accounted for 73% 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 declined approximately $3 million, or 30%, from the
comparable prior year quarter. Volatile market conditions led to a $34 million,
or 60%, increase in commissions, with fixed income commissions up 150% over
the
prior year quarter. Investment banking revenues were down nearly $10 million,
or
27%. While domestic underwriting activity is down considerably from prior
year,
RJ Ltd. completed the largest deal in its history, boosting RJ Ltd’s Capital
Market’s results for the quarter. Trading losses were nearly $7 million as
domestic equity trading continued to incur trading losses facilitating customer
trades ($2 million), RJ Ltd. also incurred facilitation losses of $2 million
and
domestic fixed income generated a $2 million loss for the quarter. In the
prior
year quarter, the Company had trading profits of $3 million. Given the recent
retraction in the market for low-income housing tax credit investments, RJTCF
anticipates a decrease in its profitability for fiscal year 2008 as compared
to
the prior fiscal year.
|
Three
Months Ended
|
|
March
31,
|
|
March
31,
|
|
2008
|
|
2007
|
Number
of managed/co-managed public equity offerings:
|
|
|
|
United
States
|
10
|
|
20
|
Canada
|
5
|
|
5
|
|
|
|
|
Total
dollars raised (in 000's):
|
|
|
|
United
States
|
$
3,615,000
|
|
$4,984,000
|
Canada
(in U.S. dollars)
|
$ 232,000
|
|
$ 185,000
|
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:
|
March
31,
|
December
31,
|
September
30,
|
March
31,
|
|
2008
|
2007
|
2007
|
2007
|
Assets
Under Management (in 000's):
|
|
|
|
|
|
|
|
|
|
Eagle
Asset Management, Inc.
|
$
13,038,733
|
$
14,224,337
|
$
14,527,304
|
$
13,289,695
|
Heritage
Family of Mutual Funds
|
9,776,781
|
9,746,392
|
9,481,275
|
8,884,563
|
Raymond
James Consulting Services
|
8,638,306
|
9,424,142
|
9,638,691
|
8,810,559
|
Eagle
Boston Investment Management, Inc.
|
633,820
|
740,069
|
622,860
|
755,685
|
Freedom
Accounts
|
8,173,769
|
8,388,208
|
8,144,920
|
6,728,802
|
Total Assets
Under Management
|
$
40,261,409
|
$
42,523,148
|
$
42,415,050
|
$
38,469,304
|
|
|
|
|
|
Less:
Assets Managed for Affiliated Entities
|
(4,878,202)
|
(5,249,550)
|
(5,305,506)
|
(4,575,138)
|
|
|
|
|
|
Total
Third Party Assets
|
|
|
|
|
Under
Management
|
$
35,383,207
|
$
37,273,598
|
$
37,109,544
|
$
33,894,166
|
Total
Company investment advisory fees increased 5% versus the prior year quarter,
resulting primarily from the $1.5 billion, or 4.4% increase in assets under
management. The increase in assets under management was driven primarily
by net
sales, one of the impacts of positive PCG recruiting results. The increased
balances are predominantly in Heritage money market, Eagle retail and Freedom
accounts. Expenses for the segment increased 5% versus the prior year quarter.
Pre-tax margins remained near 25%.
Raymond
James Bank
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 and other investments, 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.
Gross
revenues increased 86% and pre-tax profits at RJBank more than doubled compared
to the same quarter in the prior year. Interest revenue at RJBank increased
$48
million with the loan balances more than doubling from $3.0 billion to $6.2
billion and total assets increasing from $5.1 billion to $8.3 billion. Interest
expense increased 45% with deposits increasing 64% from $4.7 billion to $7.7
billion. The growth in loan balances at RJBank gave rise to an attendant
increase in loan loss provisions; the provision for loan loss was $11.1 million
compared to $2.4 million in the prior year quarter. Actual loan charge-offs
continue to be minimal. RJBank has no exposure to subprime loans.
The
following table presents average balance data and interest income and expense
data for the Company's banking operations, as well as the related interest
yields/costs, rates and interest spread for the periods
indicated. The respective average rates are presented on an
annualized basis.
|
Three
Months Ended
|
|
|
|
|
March
31, 2008
|
March
31, 2007
|
|
|
|
Average
|
|
|
Average
|
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued
on next page)
|
Interest-Earning
Banking Assets:
|
|
|
|
|
|
|
Loans,
Net of Unearned
|
|
|
|
|
|
|
Income
(1)
|
$
6,000,555
|
$ 89,357
|
5.96%
|
$
2,877,849
|
$ 45,768
|
6.36%
|
Reverse
Repurchase
|
|
|
|
|
|
|
Agreements
|
683,242
|
5,383
|
3.15%
|
330,667
|
4,348
|
5.26%
|
Agency
Mortgage backed
|
|
|
|
|
|
|
Securities
|
195,326
|
1,928
|
3.95%
|
215,829
|
2,978
|
5.52%
|
Non-agency
Collateralized
|
|
|
|
|
|
|
Mortgage
Obligations
|
412,999
|
6,067
|
5.88%
|
145,576
|
1,996
|
5.48%
|
Money
Market Funds, Cash and
|
|
|
|
|
|
|
Cash
Equivalents
|
166,796
|
1,321
|
3.17%
|
85,350
|
1,033
|
4.84%
|
FHLB
Stock and Other
|
9,482
|
134
|
5.65%
|
5,695
|
83
|
5.83%
|
Total
Interest-Earning
|
|
|
|
|
|
|
Banking
Assets
|
7,468,400
|
104,190
|
5.58%
|
3,660,966
|
56,206
|
6.14%
|
Non-Interest-Earning
Banking Assets
|
|
|
|
|
|
|
and
Allowance for Loan Losses
|
20,402
|
|
|
(5,387)
|
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
$
7,488,802
|
|
|
$3,655,579
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
|
|
|
Retail
Deposits:
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 249,043
|
$ 2,847
|
4.57%
|
$ 235,226
|
$ 2,648
|
4.50%
|
Money
Market, Savings,
|
|
|
|
|
|
|
and
NOW (2) Accounts
|
6,613,021
|
51,725
|
3.13%
|
3,102,828
|
35,439
|
4.57%
|
Loans
purchased, not yet settled
|
100,470
|
903
|
3.60%
|
-
|
-
|
-
|
FHLB
Advances
|
55,435
|
732
|
5.28%
|
56,555
|
734
|
5.19%
|
|
|
|
|
|
|
|
Total
Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
7,017,969
|
56,207
|
3.20%
|
3,394,609
|
38,821
|
4.57%
|
|
|
|
|
|
|
|
Non-Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
21,452
|
|
|
17,851
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
|
7,039,421
|
|
|
3,412,460
|
|
|
Total
Banking
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
449,381
|
|
|
243,119
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
and
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
$
7,488,802
|
|
|
$
3,655,579
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
March
31, 2008
|
March
31, 2007
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Interest
|
Yield/
|
Average
|
|
Interest
|
Yield/
|
|
Balance
|
|
Inc./Exp.
|
Cost
|
Balance
|
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued)
|
Excess
of Interest-
|
|
|
|
|
|
|
|
|
Earning Banking
|
|
|
|
|
|
|
|
|
Assets Over Interest-
|
|
|
|
|
|
|
|
|
Bearing Banking
|
|
|
|
|
|
|
|
|
Liabilities/Net
|
|
|
|
|
|
|
|
|
Interest Income
|
$ 450,431
|
|
$ 47,983
|
|
$ 266,357
|
|
$
17,385
|
|
|
|
|
|
|
|
|
|
|
Bank
Net Interest:
|
|
|
|
|
|
|
|
|
Spread
|
|
|
|
2.38%
|
|
|
|
1.57%
|
Margin
(Net Yield on
|
|
|
|
|
|
|
|
|
Interest-
Earning
|
|
|
|
|
|
|
|
|
Bank
Assets)
|
|
|
|
2.57%
|
|
|
|
1.90%
|
Ratio
of Interest
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
to Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
106.42%
|
|
|
|
107.85%
|
Return
On Average:
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
|
|
|
0.84%
|
|
|
|
0.67%
|
Total
Banking
|
|
|
|
|
|
|
|
|
Shareholder's
Equity
|
|
|
|
13.96%
|
|
|
|
10.10%
|
Average
Equity to
|
|
|
|
|
|
|
|
|
Average
Total
|
|
|
|
|
|
|
|
|
Banking
Assets
|
|
|
|
6.00%
|
|
|
|
6.65%
|
(1)
|
Nonaccrual
loans are included in
the average loan balances. Payments or income received on impaired
nonaccrual loans are applied to principal. Income on other
nonaccrual loans is recognized on a cash basis. Fee income on loans
included in interest income for the three months ended March 31,
2008 and
2007 was $3.5 million and $1.2 million,
respectively.
|
(2)
|
Negotiable
Order of Withdrawal
(“NOW”) account.
|
Increases
and decreases in interest
income and interest expense result from changes in average balances (volume)
of
interest-earning banking assets and liabilities, as well as changes in average
interest rates. The following table shows the effect that these factors had
on
the interest earned on RJBank's interest-earning assets and the interest
incurred on its interest-bearing liabilities. The effect of changes in volume
is
determined by multiplying the change in volume by the previous year's average
yield/cost. Similarly, the effect of rate changes is calculated by multiplying
the change in average yield/cost by the previous year's volume. Changes
applicable to both volume and rate have been allocated
proportionately.
|
Three
Months Ended March 31,
|
|
2008
Compared to 2007
|
|
Increase
(Decrease) Due To
|
|
Volume
|
Rate
|
Total
|
|
(in
000’s)
|
Interest
Revenue
|
|
|
|
Interest-Earning
Banking Assets:
|
|
|
|
Loans,
Net of Unearned Income
|
$
49,663
|
$ (6,074)
|
$
43,589
|
Reverse
Repurchase Agreements
|
4,636
|
(3,601)
|
1,035
|
Agency
Mortgage Backed Securities
|
(283)
|
(767)
|
(1,050)
|
Non-agency
Collateralized Mortgage Obligations
|
3,667
|
404
|
4,071
|
Money
Market Funds, Cash and Cash Equivalents
|
986
|
(698)
|
288
|
FHLB
Stock and Other
|
55
|
(4)
|
51
|
|
|
|
|
Total
Interest-Earning Banking Assets
|
$
58,724
|
$
(10,740)
|
$
47,984
|
|
|
|
|
Interest
Expense
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
Retail
Deposits:
|
|
|
|
Certificates
Of Deposit
|
$ 156
|
$ 43
|
$ 199
|
Money
Market, Savings and
|
|
|
|
NOW
Accounts
|
40,091
|
(23,805)
|
16,286
|
Loans
purchased, not yet settled
|
903
|
-
|
903
|
FHLB
Advances
|
(15)
|
13
|
(2)
|
|
|
|
|
Total
Interest-Bearing Banking Liabilities
|
41,135
|
(23,749)
|
17,386
|
|
|
|
|
Change
in Net Interest Income
|
$
17,589
|
$ 13,009
|
$
30,598
|
Emerging
Markets
This
segment includes the results of the Company’s joint ventures in Latin America
and Turkey. Commission revenues declined $1 million, or 12%, versus the same
quarter prior year. Investment banking fees declined $1.3 million and trading
profits declined $2.0 million from the same quarter prior year as market
conditions have been unfavorable. In addition, the prior year’s quarter included
a $2.5 million gain on the Company’s sale of its ownership in its joint venture
in India. As a result, revenues were 40% below the prior year quarter. The
Company continues to record a reserve, included in other expense, for its
portion of any profits in the Turkish joint venture (see Note 11 of the Notes
to
the Condensed Consolidated Financial Statements for further
information).
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.
Stock
Loan net revenues are 2% higher than for the same quarter in the prior
year. This was the result of slightly higher average balances and a
consistent interest rate spread. Pre-tax profits for the segment were down
6%.
Proprietary
Capital
This
segment consists of the Company’s principal capital and private equity
activities including: various direct and third party private equity and merchant
banking investments, short-term special situation mezzanine and bridge
investments, Raymond James Employee Investment Funds I and II (the “EIF Funds”),
and three private equity funds sponsored by the Company: Raymond James Capital
Partners, L.P., a merchant banking limited partnership, and Ballast Point
Ventures, L.P. and Ballest Point Ventures II, L.P., venture capital limited
partnerships (the “Funds”). The Company earns management fees for services
provided to two of the Funds and participates in profits or losses through
both general and limited partnership interests. Additionally, the Company
incurs
profits or losses as a result of direct merchant banking investments and
short-term special situation mezzanine and bridge investments. 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.
Proprietary
Capital results are $2.2 million below the same quarter prior year as that
quarter included a $6 million gain on an investment within the Ballast Point
Ventures, L.P.
Other
This
segment includes various corporate activities of Raymond James Financial,
Inc.
Despite
an 8% decrease in non-interest expense, the pre-tax results for this segment
declined substantially. This decline is the result of the prior year including
the gain on the sale of the Company’s investment in the Delta airplane leveraged
lease and utilization of corporate cash in the growth of other segments of
the
Company. Net revenues declined 51%.
Results
of Operations – Six
Months Ended March 31, 2008 Compared with the Six Months Ended March 31,
2007
Except
as
discussed below, the underlying reasons for the variances to the prior year
period are substantially the same as the comparative quarterly discussion
above
and the statements contained in such foregoing discussion also apply for
the six
month comparison.
Total
Company
Total
Company net revenues increased 12% to $1.38 billion from $1.23 billion in
the
prior year. Revenues increased in every line item except Investment Banking
and
Net Trading Profits. Despite a $40.7 million, or 39%, increase in net interest
earnings, net income declined 3% versus the prior year. The prior year results
included a $10 million benefit from the reversal of over accrued incentive
compensation, a much more active investment banking environment, including
record merger and acquisition fees, and included $4.5 million in gains on
the
sale of the Company’s interest in its joint venture in India and its Delta
airplane leveraged lease. Diluted net income was $0.97 per share, down 3%
from
the prior year’s $1.00 per share.
Segments
The
Company currently operates through the following eight business segments:
Private Client Group; Capital Markets; Asset Management; Raymond James Bank;
Emerging Markets; Stock Loan/Borrow, Proprietary Capital and certain corporate
activities in the Other segment.
The
following table presents the gross revenues and pre-tax earnings of the Company
on a segment basis for the periods indicated:
|
Six
Months
Ended
|
|
March
31,
|
|
March
31,
|
|
Percentage
|
|
2008
|
|
2007
|
|
Change
|
|
(in
000’s)
|
Total
Company
|
|
|
|
|
|
Revenues
|
$
1,636,325
|
|
$
1,447,900
|
|
13%
|
Pre-tax
Earnings
|
$ 188,575
|
|
$ 186,721
|
|
1%
|
|
|
|
|
|
|
Private
Client
Group
|
|
|
|
|
|
Revenues
|
1,016,028
|
|
922,349
|
|
10%
|
Pre-tax
Earnings
|
106,824
|
|
105,369
|
|
1%
|
|
|
|
|
|
|
Capital
Markets
|
|
|
|
|
|
Revenues
|
238,962
|
|
227,125
|
|
5%
|
Pre-tax
Earnings
|
13,840
|
|
27,451
|
|
(50%)
|
|
|
|
|
|
|
Asset
Management
|
|
|
|
|
|
Revenues
|
122,197
|
|
115,558
|
|
6%
|
Pre-tax
Earnings
|
31,685
|
|
30,040
|
|
5%
|
|
|
|
|
|
|
Raymond
James Bank
|
|
|
|
|
|
Revenues
|
207,723
|
|
106,779
|
|
95%
|
Pre-tax
Earnings
|
40,665
|
|
16,233
|
|
151%
|
|
|
|
|
|
|
Emerging
Markets
|
|
|
|
|
|
Revenues
|
22,646
|
|
28,450
|
|
(20%)
|
Pre-tax
(Loss)
Earnings
|
(1,270)
|
|
4,605
|
|
(128%)
|
|
|
|
|
|
|
Stock
Loan/Borrow
|
|
|
|
|
|
Revenues
|
22,287
|
|
29,711
|
|
(25%)
|
Pre-tax
Earnings
|
2,934
|
|
1,574
|
|
86%
|
|
|
|
|
|
|
Proprietary
Capital
|
|
|
|
|
|
Revenues
|
2,341
|
|
5,202
|
|
(55%)
|
Pre-tax
(Loss)
Earnings
|
(1,231)
|
|
217
|
|
(667%)
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Revenues
|
4,141
|
|
12,726
|
|
(67%)
|
Pre-tax
(Loss)Earnings
|
(4,872)
|
|
1,232
|
|
(495%)
|
Net
Interest
Analysis
The
following table presents average balance data and interest income and expense
data for the Company, as well as the related net interest income. The respective
average rates are presented on an annualized basis.
|
Six
Months Ended
|
|
|
|
|
March
31, 2008
|
March
31, 2007
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
Interest
|
|
Yield/
|
Average
|
Interest
|
|
Yield/
|
|
Balance
|
Inc./Exp.
|
|
Cost
|
Balance
|
Inc./Exp.
|
|
Cost
|
|
($
in 000’s)
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
Margin
Balances
|
$1,516,521
|
$ 47,948
|
|
6.32%
|
$1,368,906
|
$ 53,506
|
|
7.82%
|
Assets
Segregated Pursuant
|
|
|
|
|
|
|
|
|
to
Regulations and Other
|
|
|
|
|
|
|
|
|
Segregated
Assets
|
4,459,675
|
85,244
|
|
3.82%
|
3,579,393
|
94,409
|
|
5.28%
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
RJBank (1)
|
6,965,129
|
205,908
|
|
5.91%
|
3,436,858
|
106,499
|
|
6.20%
|
Stock
Borrow
|
|
22,287
|
|
|
|
29,711
|
|
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
Variable Interest Entities
|
|
406
|
|
|
|
553
|
|
|
Other
|
|
42,471
|
|
|
|
38,358
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
|
404,264
|
|
|
|
323,036
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
Client
Interest Program
|
$5,588,410
|
96,172
|
|
3.44%
|
$4,456,247
|
98,291
|
|
4.41%
|
Interest-Bearing
Liabilities
|
|
|
|
|
|
|
|
|
of
RJBank (1)
|
6,546,353
|
122,721
|
|
3.75%
|
3,191,201
|
73,285
|
|
4.59%
|
Stock
Loan
|
|
17,598
|
|
|
|
25,559
|
|
|
Interest-Bearing
Liabilities of
|
|
|
|
|
|
|
|
|
Variable
Interest Entities
|
|
3,214
|
|
|
|
3,652
|
|
|
Other
|
|
19,106
|
|
|
|
17,494
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Expense
|
|
258,811
|
|
|
|
218,281
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$
145,453
|
|
|
|
$
104,755
|
|
|
(1)
|
See
Raymond James Bank section in Item 2 of Part I for
details.
|
Net
interest at RJBank increased $50 million, or 150% versus the prior year and
represented 57% of the Company’s net interest earnings. Net interest within the
broker-dealer declined due to the compression of interest spreads caused
by the
decline in interest rates during the six months ended, March 31,
2008.
Capital
Markets
|
Six
Months Ended
|
|
March
31,
|
|
March
31,
|
|
2008
|
|
2007
|
Number
of managed/co-managed public equity offerings:
|
|
|
|
United
States
|
29
|
|
47
|
Canada
|
13
|
|
10
|
|
|
|
|
Total
dollars raised (in 000's):
|
|
|
|
United
States
|
$
11,137,000
|
|
$11,071,000
|
Canada
(in U.S. dollars)
|
$ 467,000
|
|
$ 343,000
|
Asset
Management
Asset
management year to date results improved 5% on a 6% increase in revenues.
Assets
under management increased 4.4% generating the increased revenues.
Raymond
James Bank
Gross
revenues increased 95% and pre-tax profits at RJBank more than doubled in
the
current six month period compared to the same prior year period. Interest
revenue at RJBank increased over 93% with the loan balances more than doubling
from $3.0 billion to $6.2 billion and total assets increasing from $5.1 billion
to $8.3 billion. Interest expense increased 67% with deposits increasing
64%
from $4.7 billion to $7.7 billion. The growth in loan balances at RJBank
gave
rise to an attendant increase in loan loss provisions; the provision for
loan
loss was $23.9 million compared to $6.7 million in the prior year
period. Actual loan charge-offs continue to be
minimal. RJBank has no exposure to subprime loans.
The
following table presents average balance data and interest income and expense
data for the Company's banking operations, as well as the related interest
yields/costs, rates and interest spread for the periods
indicated. The respective average rates are presented on an
annualized basis.
|
Six
Months Ended
|
|
|
|
|
March
31, 2008
|
March
31, 2007
|
|
|
|
Average
|
|
|
Average
|
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued
on next page)
|
Interest-Earning
Banking Assets:
|
|
|
|
|
|
|
Loans,
Net of Unearned
|
|
|
|
|
|
|
Income
(1)
|
$
5,546,277
|
$ 173,615
|
6.26%
|
$
2,678,424
|
$ 86,107
|
6.43%
|
Reverse
Repurchase
|
|
|
|
|
|
|
Agreements
|
674,235
|
13,251
|
3.93%
|
359,396
|
9,559
|
5.32%
|
Agency
Mortgage backed
|
|
|
|
|
|
|
Securities
|
191,947
|
4,402
|
4.59%
|
194,280
|
5,373
|
5.53%
|
Non-agency
Collateralized
|
|
|
|
|
|
|
Mortgage
Obligations
|
400,882
|
11,647
|
5.81%
|
143,973
|
3,927
|
5.46%
|
Money
Market Funds, Cash and
|
|
|
|
|
|
|
Cash
Equivalents
|
142,717
|
2,728
|
3.82%
|
55,238
|
1,370
|
4.96%
|
FHLB
Stock and Other
|
9,071
|
265
|
5.84%
|
5,547
|
163
|
5.88%
|
Total
Interest-Earning
|
|
|
|
|
|
|
Banking
Assets
|
6,965,129
|
205,908
|
5.91%
|
3,436,858
|
106,499
|
6.20%
|
Non-Interest-Earning
Banking Assets
|
|
|
|
|
|
|
and
Allowance for Loan Loss
|
20,359
|
|
|
(3,788)
|
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
$
6,985,488
|
|
|
$
3,433,070
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
|
|
|
Retail
Deposits:
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 245,446
|
$ 5,662
|
4.61%
|
$ 241,266
|
$ 5,454
|
4.52%
|
Money
Market, Savings,
|
|
|
|
|
|
|
and
NOW Accounts (2)
|
6,101,711
|
112,345
|
3.68%
|
2,894,770
|
66,404
|
4.59%
|
Loans
purchased, not yet settled
|
142,381
|
3,208
|
4.51%
|
-
|
-
|
-
|
FHLB
Advances and Other
|
56,815
|
1,506
|
5.30%
|
55,165
|
1,427
|
5.17%
|
|
|
|
|
|
|
|
Total
Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
6,546,353
|
122,721
|
3.75%
|
3,191,201
|
73,285
|
4.59%
|
|
|
|
|
|
|
|
Non-Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
22,504
|
|
|
19,801
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
|
6,568,857
|
|
|
3,211,002
|
|
|
Total
Banking
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
416,631
|
|
|
222,068
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
and
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
$
6,985,488
|
|
|
$
3,433,070
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
March
31, 2008
|
March
31, 2007
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Interest
|
Yield/
|
Average
|
|
Interest
|
Yield/
|
|
Balance
|
|
Inc./Exp.
|
Cost
|
Balance
|
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued)
|
Excess
of Interest-
|
|
|
|
|
|
|
|
|
Earning Banking
|
|
|
|
|
|
|
|
|
Assets Over Interest-
|
|
|
|
|
|
|
|
|
Bearing Banking
|
|
|
|
|
|
|
|
|
Liabilities/Net
|
|
|
|
|
|
|
|
|
Interest Income
|
$ 418,776
|
|
$ 83,187
|
|
$ 245,657
|
|
$
33,214
|
|
|
|
|
|
|
|
|
|
|
Bank
Net Interest:
|
|
|
|
|
|
|
|
|
Spread
|
|
|
|
2.16%
|
|
|
|
1.61%
|
Margin
(Net Yield on
|
|
|
|
|
|
|
|
|
Interest-
Earning
|
|
|
|
|
|
|
|
|
Bank
Assets)
|
|
|
|
2.39%
|
|
|
|
1.93%
|
Ratio
of Interest
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
to Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
106.40%
|
|
|
|
107.70%
|
Return
On Average:
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
|
|
|
0.72%
|
|
|
|
0.59%
|
Total
Banking
|
|
|
|
|
|
|
|
|
Shareholder's Equity
|
|
|
|
12.08%
|
|
|
|
9.16%
|
Average
Equity to
|
|
|
|
|
|
|
|
|
Average
Total
|
|
|
|
|
|
|
|
|
Banking
Assets
|
|
|
|
5.96%
|
|
|
|
6.47%
|
(1)
|
Nonaccrual
loans are included in
the average loan balances. Payments or income received on impaired
nonaccrual loans are applied to principal. Income on other
nonaccrual loans is recognized on a cash basis. Fee income on loans
included in interest income for the six months ended March 31,
2008 and
2007 was $6.5 million and $3.1 million,
respectively.
|
(2)
|
Negotiable
Order of Withdrawal
(“NOW”) account.
|
Increases
and decreases in interest
income and interest expense result from changes in average balances (volume)
of
interest-earning banking assets and liabilities, as well as changes in average
interest rates. The following table shows the effect that these factors had
on
the interest earned on RJBank's interest-earning assets and the interest
incurred on its interest-bearing liabilities. The effect of changes in volume
is
determined by multiplying the change in volume by the previous year's average
yield/cost. Similarly, the effect of rate changes is calculated by multiplying
the change in average yield/cost by the previous year's volume. Changes
applicable to both volume and rate have been allocated
proportionately.
|
Six
Months Ended March 31,
|
|
2008
Compared to 2007
|
|
Increase
(Decrease) Due To
|
|
Volume
|
Rate
|
Total
|
|
(in
000’s)
|
Interest
Revenue
|
|
|
|
Interest-Earning
Banking Assets:
|
|
|
|
Loans,
Net of Unearned Income
|
$ 92,197
|
$ (4,689)
|
$
87,508
|
Reverse
Repurchase Agreements
|
8,374
|
(4,682)
|
3,692
|
Agency
Mortgage Backed Securities
|
(65)
|
(906)
|
(971)
|
Non-agency
Collateralized Mortgage Obligations
|
7,008
|
712
|
7,720
|
Money
Market Funds, Cash and Cash Equivalents
|
2,170
|
(812)
|
1,358
|
FHLB
Stock and Other Investments
|
103
|
(1)
|
102
|
|
|
|
|
Total
Interest-Earning Banking Assets
|
$
109,787
|
$
(10,378)
|
$
99,409
|
|
|
|
|
Interest
Expense
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
Retail
Deposits:
|
|
|
|
Certificates
Of Deposit
|
$ 94
|
$ 114
|
$ 208
|
Money
Market, Savings and
|
|
|
|
NOW
Accounts
|
73,565
|
(27,624)
|
45,941
|
Loans
purchased, not yet settled
|
3,208
|
-
|
3,208
|
FHLB
Advances
|
43
|
36
|
79
|
|
|
|
|
Total
Interest-Bearing Banking Liabilities
|
76,910
|
(27,474)
|
49,436
|
|
|
|
|
Change
in Net Interest Income
|
$ 32,877
|
$ 17,096
|
$
49,973
|
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 items represented in the statement
of
financial condition are primarily liquid in nature, providing the Company
with
flexibility in financing its business. Total assets of $18.1 billion at March
31, 2008 were up approximately 11% over September 30, 2007. Most of this
increase is due to the significant increase 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 funded by deposits.
RJBank loan balances increased significantly as the Company took advantage
of
quality loans available for purchase at attractive prices. The Company plans
to
continue to expand use of the bank sweep offering to brokerage customers
for the
next several years, which will result in steady growth in RJBank balances.
The
other significant increase in assets was in available for sale securities,
where
purchases exceeded unrealized losses for the six months ended March 31, 2008.
Significant decreases in assets were in stock borrowed receivables (stock
loaned
payables experienced a similar decrease on the liability side) and trading
instruments. The broker-dealer gross assets and liabilities, including trading
inventory, stock loan/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 six months ended March 31, 2008 was $4.6
million, which was primarily attributable to an increase in segregated assets
(directly correlated to the increase in brokerage client deposits) and a
decrease in stock loaned payables, which was more than offset by a similar
decrease in stock borrowed receivables. This was further offset by an increase
in brokerage client payables and a decrease in receivables from broker-dealers
and clearing organizations.
Investing
activities used $2.1 billion, which was primarily due to loans originated
and
purchased by RJBank, an increase in reverse repurchase agreements at RJBank,
and
purchases of available for sale securities. This was partially offset by
loan
repayments to RJBank.
Financing
activities provided $2.3 billion, predominantly the result of an increase
in
deposits at RJBank and an increase in proceeds from borrowed funds, which
is
mostly comprised of the draw down of the Company’s $200 million committed,
unsecured line of credit. This was partially offset by an increase in treasury
stock purchases, including the open market purchase of 2.7 million shares
during
the six months ended, March 31, 2008.
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 $1.1 billion with commercial banks, and RJ Ltd. has a CDN$40
million
uncommitted line of credit (see Note 8 of the Notes to the Condensed
Consolidated Financial Statements for further information on the Company's
lines
of credit). The Company’s committed $200 million line of credit is subject to a
0.125% per annum facility fee. Loans on the secured uncommitted lines of
credit
are collateralized by Company owned and/or client margin securities, as
permitted by regulatory requirements. The Company maintains a $600 million
uncommitted tri-party repurchase agreement line of credit. Under this agreement,
the Company pledges certain of its trading inventory as collateral against
borrowings on this line. The required market value of the collateral ranges
from
102% to 105% of the cash borrowed. The interest rate is set daily based on
market conditions for Fed funds. The lender is under no obligation to lend
to
the Company under this tri-party line at any given time. Under this agreement,
there were secured short-term borrowings of $90 million outstanding at March
31,
2008 which are included in Securities Sold Under Agreements to Repurchase.
This
loan was collateralized by Company owned securities with a market value of
$94
million at March 31, 2008. The lenders with whom the Company has other
uncommitted lines of credit have no obligation to make funds available to
the
Company. The Company is currently assessing its financing needs and anticipates
increasing the amount of committed lines and adding some term debt to ensure
adequate cash resources are available in times of tight liquidity when there
may
be lender unwillingness to honor uncommitted lines.
At
March
31, 2008 and September 30, 2007, the Company had loans payable of $328.4
million
and $122.6 million, respectively. The balance at March 31, 2008 is comprised
of
a $63.8 million loan for its home-office complex, $55 million in Federal
Home
Loan Bank advances (RJBank), and various short-term borrowings totaling $209.6
million, which includes the entire amount of the RJF committed line of credit,
which the Company drew down during the quarter ended March 31, 2008 to ensure
adequate cash availability to fund normal operations.
The
$55
million in FHLB advances RJ Bank had outstanding at March 31, 2008 was comprised
of one short-term, fixed rate advance and several long-term, fixed rate
advances. RJBank had $1.7 billion in credit available from the FHLB at March
31,
2008.
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: three in Turkey totaling $18 million and one in Argentina
for
$9 million. At March 31, 2008, there were outstanding balances on the settlement
lines of $5.4 million and $1.2 million in Argentina and Turkey, respectively.
At
March 31, 2008, the aggregate unsecured settlement lines of credit available
were $96.8 million, and there were outstanding balances of $3.0 million on
these
lines. The Company has also from time to time authorized performance guarantees
for the completion of trades with counterparties in Argentina and Turkey.
At
March 31, 2008, there were no outstanding performance guarantees in Argentina
or
Turkey.
As
of
March 31, 2008, the Company's liabilities are comprised primarily of brokerage
client payables of $6.1 billion at the broker-dealer subsidiaries and deposits
of $7.7 billion at RJBank, as well as deposits held on stock loan transactions
of $747 million. The Company primarily acts as an intermediary in stock
loan/borrow transactions. As a result, the liability associated with the
stock
loan transactions is related to the $741 million receivable comprised of
the
Company's cash deposits for stock borrowed transactions. To meet its obligations
to clients, the Company has approximately $5.5 billion in cash and segregated
assets. The Company also has client brokerage receivables of $1.7 billion
and
$6.2 billion in loans at RJBank.
The
Company will continue its implementation of the cash sweep option available
to
its brokerage clients from RJBank. This 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 additional $150 to $200
million over the next several years for this purpose.
As
of
September 30, 2007, RJBank had not settled purchases of $300.6 million in
syndicated loans (included in Bank Loans, Net) due to the sellers’ delays in
finalizing settlement, all of which had settled prior to March 31, 2008.
As of
March, 31, 2008, RJBank had not settled the purchases of $48 million in
syndicated loans. These loans are expected to be settled during the three
months
ended June 30, 2008.
The
Company has committed a total of $56.5 million, in amounts ranging from $200,000
to $5 million, to 43 different independent venture capital or private equity
partnerships. As of March 31, 2008, the Company has invested $33.8 million
of
that amount and has received $29 million in distributions. Additionally,
the
Company controls 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 $13 million and has received $9 million in distributions
as
of March 31, 2008. The Company is not the controlling general partner in
another
internally sponsored private equity limited partnership to which it has
committed $30 million. As of March 31, 2008, the Company has invested $2.3
million of that amount and has not received any distributions.
The
Company’s Board of Directors approved the use of up to $200 million in mezzanine
financing to facilitate investment banking transactions. There were no
investments or commitments outstanding as of March 31, 2008. The Board of
Directors has approved the use of up to $75 million for investment in
proprietary merchant banking opportunities. As of March 31, 2008, the Company
had invested $32.3 million.
In
January 2008, Sirchie Acquisition Company, LLC (“SAC”), an 80% owned indirect
subsidiary of the Company, acquired substantially all of the business, assets,
and properties of Sirchie Finger Print Laboratories, Inc., the assets or
stock
of several other companies and certain real estate. The Company’s equity
investment in SAC was approximately $20 million. SAC also acquired 51% of
the
common stock of Law Enforcement Associates Corporation as part of the
transaction. This acquisition is one of the Company’s recent merchant banking
initiatives.
The
Company has been authorized by the Board of Directors to repurchase its common
stock for general corporate purposes. There is no formal stock repurchase
plan
at this time. On May 20, 2004, the Board of Directors authorized $75 million
for
repurchases pursuant to prior authorization from the Board of Directors.
During
March 2008, the Company exhausted this authorization. On March 11, 2008,
the
Board of Directors authorized an additional $75 million for repurchases at
the
discretion of the Board’s Share Repurchase Committee. As of March 31, 2008 the
unused portion of this authorization was $72.6 million.
The
Company has committed to lend to RJTCF, or guarantee obligations in connection
with RJTCF’s low income housing development/rehabilitation and syndication
activities, aggregating up to $125 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 March 31, 2008, cash funded
to
invest in either loans or investments in project partnerships was $36.5 million.
In addition, at March 31, 2008, RJTCF is committed to additional future fundings
of $18.3 million related to project partnerships that have not yet been sold
to
various tax credit funds. The Company and RJTCF also issue certain guarantees
to
various third parties related to project partnerships, interests in which
have
been or are expected to be sold to one or more tax credit funds under RJTCF’s
management. In some instances, RJTCF is not the primary guarantor of these
obligations which aggregate to a cumulative maximum obligation of approximately
$15.7 million as of March 31, 2008.
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 a leveraged commercial aircraft transaction with
Continental Airlines, Inc. (“Continental”). The Company's ability to realize its
expected return is dependent upon this airline’s ability to fulfill its lease
obligation. In the event that this airline defaults on its lease commitment
and
the Trustee for the debt holders is unable to re-lease or sell the plane
with
adequate terms, the Company would suffer a loss of some or all of its
investment. The value of the Company’s leveraged lease with Continental was
approximately $9.6 million as of March 31, 2008. 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
was
originally projected to be 15% of the original cost and has not been adjusted
since inception. 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.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately $6.8 million by the Turkish
tax
authorities. The authorities applied a significantly different methodology
than
in the prior year’s audit which the Turkish tax court and Council of State
affirmed. RJY is vigorously contesting most aspects of this assessment and
has
sought reconsideration of the Turkish Council of State. The Turkish tax
authorities, utilizing the 2001 methodology, assessed RJY $5.7 million for
2002,
which is also being challenged. Audits of 2003 and 2004 are anticipated and
their outcome is unknown in light of the change in methodology and the pending
litigation. The Company has recorded a provision for loss in its consolidated
financial statements for its net equity interest in this joint venture. As
of
March 31, 2008, RJY had total capital of approximately $11.1 million, of
which
the Company owns approximately 50%.
As
of
March 31, 2008 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 $3.4 billion, with $3.0
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, unsettled loan purchases, underwriting commitments
and a stadium naming rights agreement. Included in the obligations
due within the next twelve months are $1.57 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 Notes
11 and
15 of the Notes 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, recruiting efforts, 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,
2007 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, 2007. 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
instruments” 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 income or other
comprehensive income, depending on the underlying purpose of the instrument.
See
Notes 3, 4 and 9 of the Notes to the Condensed Consolidated Financial Statements
for further information. The following table presents the Company’s trading
instruments and available for sale securities segregated into trading securities
(i.e., non-derivative), derivative contracts, and available for sale
securities:
|
March
31, 2008
|
|
|
Financial
|
|
Financial
|
Instruments
Sold
|
|
Instruments
Owned
|
but
not yet Purchased
|
|
at
Fair Value
|
at
Fair Value
|
|
(in
000’s)
|
|
|
|
Trading
Securities
|
$ 315,083
|
$
112,793
|
Derivative
Contracts
|
43,928
|
36,508
|
Available
for Sale Securities
|
654,864
|
-
|
Total
|
$ 1,013,875
|
$
149,301
|
Trading
Securities, Derivative Contracts and Available for Sale Securities
Trading
securities are valued at fair market value, and securities which are not
readily
marketable are carried at estimated fair value as determined by management.
When
available, the Company uses prices from independent sources, which include
pricing services. Depending upon the type of security, the pricing service
may
provide a listed price or a matrix price. If listed market prices are
unavailable to the pricing service, then its matrix pricing may utilize pricing
services or broker or dealer price quotations, or spread-based models
periodically re-calibrated to market trades in similar securities in order
to
derive the fair value of the instruments. For positions in illiquid securities
that do not have readily determinable fair values, the Company uses estimated
fair values. Estimated fair values are determined by management based upon
consideration of available information, including trading levels of similar
securities in liquid markets, standard spread-based pricing models re-calibrated
from time to time to trade activity in the identical asset or in similar
assets,
the coupon level and possible early redemption features of the security,
and
current financial information regarding the issuer, including information
which
may be of a confidential nature to the Company from time to time. Fair values
for derivative contracts are obtained from pricing models that consider current
market trading levels and the contractual prices for the underlying financial
instruments, as well as time value and yield curve or other volatility factors
underlying the positions. The fair value of available for sale securities
is
based on bid quotations received from securities dealers or in the absence
of
dealer quotations, bid quotations from various pricing services. If these
sources are not available, then the fair value is estimated using quoted
market
prices for similar securities, pricing models, or discounted cash flow analyses,
using observable market data where available.
The
following table presents the carrying value of trading securities, 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:
|
March
31, 2008
|
|
|
Financial
|
|
Financial
|
Instruments
Sold
|
|
Instruments
Owned
|
but
not yet Purchased
|
|
at
Fair Value
|
at
Fair Value
|
|
(in
000’s)
|
|
|
|
Fair
Value Based on Quoted Prices and Independent Sources
|
$ 953,022
|
$
112,793
|
Fair
Value Determined by Management (1)
|
60,853
|
36,508
|
Total
|
$
1,013,875
|
$
149,301
|
(1)
Includes trading securities which are not readily marketable and derivative
contracts.
Private
Equity Investments
Private
equity investments, held primarily by the Company’s Proprietary Capital segment,
are reflected in the Condensed Consolidated Statements of Financial Condition
at
amounts that attempt to approximate fair value. The valuation of these
investments requires significant management judgment due to the absence of
quoted market prices, inherent lack of liquidity and long-term nature of
these
assets. As such, direct private equity investments are valued initially at
transaction price until significant transactions or developments indicate
that a
change in the carrying values of these investments is appropriate. Generally,
the carrying values of these investments will be adjusted based on financial
performance, investment-specific events, financing and sales transactions
with
third parties and changes in market outlook. Investments in funds structured
as
limited partnerships are generally valued using similar methodologies. As
of
March 31, 2008, the Company had $132.8 million in private equity investments,
which represented less than one percent of its total assets.
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
this pronouncement, 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 March
31,
2008, goodwill had been allocated to the Private Client Group of RJA, and
both
the Private Client Group and Capital Markets segments of Raymond James Limited.
As of the most recent impairment test performed in March 2008, 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. There were no events
that
triggered a reassessment in the current quarter.
Reserves
and Allowance for Loan Losses
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 the minimum of the range of probable
loss.
The
Company records reserves related to legal proceedings in Trade and Other
Payables. Such reserves are established and maintained in accordance with
SFAS
No. 5, "Accounting for Contingencies" (“SFAS 5”), and Financial Interpretation
No. 14, “Reasonable Estimation of the Amount of a Loss”. 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
5 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
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 loan
grading process provides specific and detailed risk measurement across the
corporate loan portfolio. 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
supported by collateral. At March 31, 2008, the amortized cost of all RJBank
loans was $6.2 billion and an allowance for loan losses of $70.2 million
was
recorded against that balance. The total allowance for loan losses, including
$7.4 million in reserves for off-balance sheet exposures maintained in Trade
and
Other Payables, is equal to 1.24% of the amortized cost of the loan
portfolio.
The
following table allocates RJBank’s allowance for loan losses by loan
category:
|
March
31,
|
|
September
30,
|
|
2008
|
|
2007
|
|
|
Loan
Category
|
|
|
Loan
Category
|
|
|
as
a % of
|
|
|
as
a % of
|
|
|
Total
Loans
|
|
|
Total
Loans
|
|
Allowance
|
Receivable
|
|
Allowance
|
Receivable
|
|
($
in 000’s)
|
|
|
|
|
|
|
Commercial
Loans (1)
|
$
10,770
|
12%
|
|
$ 4,471
|
7%
|
|
|
|
|
|
|
Real
Estate Construction Loans
|
4,468
|
4%
|
|
2,121
|
3%
|
|
|
|
|
|
|
Commercial
Real Estate Loans (2)
|
49,132
|
48%
|
|
35,766
|
49%
|
|
|
|
|
|
|
Residential
Mortgage Loans
|
5,810
|
36%
|
|
4,659
|
41%
|
|
|
|
|
|
|
Consumer
Loans
|
39
|
-
|
|
5
|
-
|
|
|
|
|
|
|
Total
|
$
70,219
|
100%
|
|
$
47,022
|
100%
|
(1)
Loans
not secured by real estate.
(2)
Loans
wholly or partially secured by real estate.
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 March 31, 2008 the
receivable from Financial Advisors was $143.1 million, which is net of an
allowance of $1.9 million for estimated uncollectibility.
Income
Taxes
SFAS
No.
109, “Accounting for Income Taxes”, as interpreted by FIN 48, 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. See Note 10 of the Notes
to the
Condensed Consolidated Financial Statements for further information on the
Company’s income taxes.
Item
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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, 2007.
Market
Risk
Market
risk is the risk of loss to the Company resulting from changes in interest
rates
and security 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
345
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,
corporate bonds, municipal bonds) and for individual traders. As of March
31,
2008, the absolute fixed income and equity inventory limits, excluding
contractual underwriting commitments, were $1,955,000,000 and $59,925,000,
respectively. The Company's trading activities were within these limits at
March
31, 2008. 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, spread, ratio, basis, and volatility risk. 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 under “business as usual” conditions. During the six
months ended March 31, 2008, the reported daily loss in the institutional
Fixed
Income trading portfolio exceeded the predicted VaR eight times, due in part,
to
greater volatility in interest rates and in bond prices experienced during
the
quarter as compared to conditions prevailing in the previous months during
the
one year historical modeling period.
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 review
of
issuer ratings.
The
following tables set forth the high, low, and daily average VaR for the
Company's overall institutional portfolio during the six months ended March
31,
2008, with the corresponding dollar value of the Company's
portfolio:
|
Six
Months Ended March 31, 2008
|
|
VaR
at
|
|
|
|
|
|
|
March
31,
|
|
September
30,
|
|
High
|
Low
|
|
DailyAverage
|
|
2008
|
|
2007
|
|
($
in 000's)
|
|
|
|
|
|
|
|
|
|
Daily
VaR
|
$ 1,368
|
$ 166
|
|
$ 644
|
|
$ 303
|
|
$ 232
|
Related
Portfolio Value
|
|
|
|
|
|
|
|
|
(Net)*
|
$
321,520
|
$
344,824
|
|
$
370,525
|
|
$
139,218
|
|
$
278,605
|
VaR
as a Percent
|
|
|
|
|
|
|
|
|
of
Portfolio Value
|
0.43%
|
0.05%
|
|
0.18%
|
|
0.22%
|
|
0.08%
|
*
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 9
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 NOW accounts, demand deposits,
money market accounts, savings accounts, and certificates of deposit; and,
FHLB
advances. Based on the current earning asset portfolio of RJBank and considering
the Bank’s intent and ability to hold the assets until maturity or recovery in
the market value of the assets, 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):
|
March
31,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
Mortgage
Backed Securities
|
$ 371,913
|
$ 382,455
|
Loans
Receivable, Net
|
2,086,810
|
2,020,530
|
Total
Assets with Market Risk
|
$2,458,723
|
$
2,402,985
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 109,628
|
$ 185,729
|
Federal
Home Loan Bank Advances
|
50,000
|
50,000
|
Total
Liabilities with Market Risk
|
$ 159,628
|
$ 235,729
|
The
following table shows the distribution of those RJBank loans that mature
in more
than one year between fixed and adjustable interest rate loans at March 31,
2008:
|
Interest
Rate Type
|
|
Fixed
|
Adjustable
|
Total
|
|
(in
000’s)
|
|
|
|
|
Commercial
Loans (1)
|
$ 2,145
|
$ 762,909
|
$ 765,054
|
Real
Estate Construction Loans
|
-
|
210,473
|
210,473
|
Commercial
Real Estate Loans (2)
|
9,116
|
2,813,354
|
2,822,470
|
Residential
Mortgage Loans
|
23,533
|
2,235,456
|
2,258,989
|
Consumer
Loans
|
-
|
3,150
|
3,150
|
|
|
|
|
Total
Loans
|
$
34,794
|
$
6,025,342
|
$
6,060,136
|
(1)
Loans
not secured by real estate.
(2)
Loans
wholly or partially secured by real estate.
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
4.55% in the first year after the rate increase, whereas a downward shift
of the
same magnitude would increase RJBank's net interest income by 3.58%. These
sensitivity figures are based on positions as of March 31, 2008, 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
26
traders. The average aggregate inventory held for proprietary trading during
the
three months ended March 31, 2008 was CDN$13,892,700. The Company's equity
securities inventories are priced on a regular basis and there are no material
unrecorded gains or losses.
Item
4. CONTROLS AND
PROCEDURES
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. Except for the instance described below, there were no changes
in
the Company’s internal control over financial reporting during the quarter ended
March 31, 2008 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
RJA,
a
registered broker dealer subsidiary of the Company, routinely provides margin
loans to its brokerage customers in the ordinary course of business. Similar
to
other brokerage customers, RJA has historically provided margin loans to
executive officers of the Company on terms no more favorable than those offered
to other brokerage customers. Subject to certain limitations, ordinary course
margin loans made by RJA to such executive officers are excepted from the
prohibition against loans to insiders imposed by section 402 of the
Sarbanes-Oxley Act of 2002. Section 402 generally prohibits a public company
and
its subsidiaries from extending or maintaining credit in the form of a personal
loan to or for its directors and executive officers, but provides an exception
for registered broker-dealers extending credit to an employee to buy, trade
or
carry securities in accordance with the margin regulations of the Federal
Reserve, provided that such loans are not used to buy securities of the issuer
and satisfy certain other conditions. Historically, neither the Company nor
RJA
was aware that the exception to the section 402 prohibition did not extend
to
margin loans used for the purchase of Company common stock. In the course
of a
general overall review of its procedures relating to trading in Company common
stock by insiders, the Company discovered that, since the enactment of section
402 in 2002, RJA had extended margin credit to nine officers of the Company
that
could be deemed to relate to 35 purchases of Company common stock. Those
35
purchases involved $8,055,331 of margin borrowings, of which $3,886,892 was
outstanding at February 29, 2008. Following discovery of the error, the Company
took action to ensure that those outstanding margin borrowings were promptly
repaid in full. In addition, the Company has adopted enhanced procedures
and
controls related to section 402 compliance.
PART
II OTHER INFORMATION
Item
1. LEGAL
PROCEEDINGS
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately $6.8 million by the Turkish
tax
authorities. The authorities applied a significantly different methodology
than
in the prior year’s audit which the Turkish tax court and Council of State
affirmed. RJY is vigorously contesting most aspects of this assessment and
has
sought reconsideration of the Turkish Council of State. The Turkish tax
authorities, utilizing the 2001 methodology, assessed RJY $5.7 million for
2002,
which is also being challenged. Audits of 2003 and 2004 are anticipated and
their outcome is unknown in light of the change in methodology and the pending
litigation. The Company has recorded a provision for loss in its consolidated
financial statements for its net equity interest in this joint venture. As
of
March 31, 2008, RJY had total capital of approximately $11.1 million, of
which
the Company owns approximately 50%.
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. The Company is contesting the allegations
in these 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.
Item
1A. RISK
FACTORS
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, 2007.
Item
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Reference
is made to information contained under “Capital Transactions” in Note 12 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, FINRA 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 14
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).
Item
4. SUBMISSION OF
MATTERS TO A VOTE OF SECURTIY HOLDERS
Proxies
for the Annual Meeting of Shareholders held on February 14, 2008 were solicited
by the Company pursuant to Regulation 14A of the Securities Act of 1934,
as
amended. Matters voted upon at the Annual Meeting of Shareholders
were as follows:
1.
|
The
election of eleven directors to the Board of Directors to hold
office
until the Annual Meeting of Shareholders in 2009 and until their
respective successors have been elected. There was no solicitation
in
opposition to the nominees and all such nominees were elected.
|
|
For
|
|
Withheld
|
Biever,
Angela
M.
|
91,252,876
|
|
7,167,472
|
Broader,
Shelley
G.
|
97,328,902
|
|
1,091,446
|
Godbold,
Francis
S.
|
89,931,105
|
|
8,489,243
|
Habermeyer,
H.
William
|
97,379,401
|
|
1,040,947
|
Helck,
Chet
B.
|
89,856,900
|
|
8,563,448
|
James,
Thomas
A.
|
90,601,975
|
|
7,818,373
|
Reilly,
Paul
C.
|
69,022,436
|
|
29,397,912
|
Saltzman,
Robert
P.
|
97,365,180
|
|
1,055,168
|
Shields,
Kenneth
A.
|
83,508,363
|
|
14,911,985
|
Simmons,
Hardwick
|
97,334,748
|
|
1,085,600
|
Story,
Susan
N.
|
97,335,255
|
|
1,085,093
|
As
previously reported, effective April 15, 2008, Angela M. Biever resigned
from
the Board of Directors, and on April 29, 2008, was appointed Chief
Administrative Officer of the Company.
2.
|
To
ratify the appointment by the Audit Committee of the Board of Directors
of
KPMG LLP as the Company’s independent registered public accounting firm.
|
For
|
|
Against
|
|
Abstain
|
98,144,852
|
|
194,740
|
|
80,756
|
3.
|
To
approve an amendment to the Company’s Articles of Incorporation, as
amended, to increase the number of authorized shares of common
stock to
350 million shares, $.01 par value.
|
For
|
|
Against
|
|
Abstain
|
84,897,297
|
|
13,338,244
|
|
184,808
|
Item
6. EXHIBITS
3(i).3
|
|
Articles
of Amendment to Articles of Incorporation of Raymond James Financial,
Inc.
approved by shareholders on February 14, 2008. Filed
herewith.
|
|
|
|
|
|
11
|
|
Statement
Re: Computation of per Share Earnings (The calculation of per share
earnings is included in Part I, Item 1 in the Notes to Condensed
Consolidated Financial Statements (Earnings Per Share) and is omitted
here
in accordance with Section (b)(11) of Item 601 of Regulation
S-K).
|
|
|
|
|
|
31.1
|
|
Principal
Executive Officer Certification as required by Rule 13a-14(a)/15d-14(a),
filed herewith.
|
|
|
|
|
|
31.2
|
|
Principal
Financial Officer Certification as required by Rule 13a-14(a)/15d-14(a),
filed herewith.
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002,filed
herewith.
|
|
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002,filed
herewith.
|
|
SIGNATURES
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.
|
|
RAYMOND
JAMES FINANCIAL, INC.
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: May
12, 2008
|
|
/s/
Thomas A. James
|
|
|
Thomas
A. James
|
|
|
Chairman
and Chief
|
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jeffrey P. Julien
|
|
|
Jeffrey
P. Julien
|
|
|
Senior
Vice President - Finance
|
|
|
and
Chief Financial
|
|
|
Officer
|
57