k10093008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the
fiscal year ended September 30,
2008
OR
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the
transition period from to
Commission
file number 1-9109
RAYMOND JAMES FINANCIAL,
INC.
(Exact
name of registrant as specified in its charter)
Florida
|
|
No. 59-1517485
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(State
or other jurisdiction of
|
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(I.R.S.
Employer
|
incorporation
or organization)
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|
Identification
No.)
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880 Carillon Parkway, St. Petersburg,
Florida
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33716
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(Address
of principal executive offices)
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|
(Zip
Code)
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Registrant's
telephone number, including area code
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(727)
567-1000
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Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
|
|
Name of each exchange on which
registered
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Common
Stock, $.01 Par Value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
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None
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer oSmaller
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 oNo x
As of
March 31, 2008, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant computed by reference to the price at which
the common stock was last sold was $2,173,106,435.
The
number of shares outstanding of the registrant’s common stock as of November 19,
2008 was 120,296,903.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions
of the definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held February 19, 2009 are
incorporated by reference into Part III.
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RAYMOND
JAMES FINANCIAL, INC.
TABLE
OF CONTENTS
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Page
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PART
I
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Item
1
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Business
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2
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Item
1A
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Risk
Factors
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15
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Item
1B
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Unresolved
Staff Comments
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21
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Item
2
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Properties
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21
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Item
3
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Legal
Proceedings
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21
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Item
4
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Submission
of Matters to a Vote of Security Holders
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22
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PART
II
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|
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Item
5
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Market
for Registrant's Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
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23
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Item
6
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Selected
Financial Data
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24
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Item
7
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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25
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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56
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Item
8
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Financial
Statements and Supplementary Data
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64
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Item
9
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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118
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Item
9A
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Controls
and Procedures
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118
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Item
9B
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Other
Information
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121
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PART
III
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Item
10
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Directors,
Executive Officers and Corporate Governance
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121
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Item
11
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Executive
Compensation
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121
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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121
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Item
13
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Certain
Relationships and Related Transactions, and Director
Independence
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121
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Item
14
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Principal
Accountant Fees and Services
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121
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PART
IV
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Item
15
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Exhibits,
Financial Statement Schedules
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122
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Signatures
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125
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PART I
ITEM
1. BUSINESS
Raymond
James Financial, Inc. (“RJF”), the parent company of a business established in
1962 and a public company since 1983, is a holding company headquartered in St.
Petersburg, Florida whose subsidiaries are engaged in various financial services
businesses predominantly in the United States of America (“U.S.”) and Canada. At
September 30, 2008, its principal subsidiaries include Raymond James &
Associates, Inc. (“RJA”), Raymond James Financial Services, Inc. (“RJFS”),
Raymond James Ltd. ("RJ Ltd."), Eagle Asset Management, Inc. (“Eagle”), Heritage
Asset Management, Inc. (“Heritage”) and Raymond James Bank, FSB (“RJBank”). All
of these subsidiaries are wholly owned by RJF. RJF and its subsidiaries are
hereinafter collectively referred to as the “Company”.
PRINCIPAL
SUBSIDIARIES
RJF's
principal subsidiary, RJA, is the largest full service brokerage and investment
firm headquartered in the state of Florida and one of the largest retail
brokerage firms in North America. RJA is a self-clearing broker-dealer engaged
in most aspects of securities distribution, trading, investment banking and
asset management. RJA also offers financial planning services for individuals
and provides clearing services for RJFS, other affiliated entities and several
unaffiliated broker-dealers. In addition, RJA has six institutional sales
offices in Europe. RJA is a member of the New York Stock Exchange (“NYSE”),
American Stock Exchange, and most regional exchanges in the U.S. It is also a
member of the Financial Industry Regulatory Authority (“FINRA”) and Securities
Investors Protection Corporation (“SIPC”).
RJFS is
one of the largest independent contractor brokerage firms in the U.S. Financial
Advisors affiliated with RJFS may offer their clients all products and services
offered by RJA. RJFS is a member of FINRA and SIPC, but not of any exchange, as
it clears all of its business on a fully disclosed basis through
RJA.
RJ Ltd.
is the Company's Canadian broker-dealer subsidiary which engages in both retail
and institutional distribution and investment banking. RJ Ltd. is a member of
the Toronto Stock Exchange (“TSX”) and the Investment Industry Regulatory
Organization of Canada (“IIROC”). Its U.S. broker-dealer subsidiary is a member
of FINRA.
Eagle is
a registered investment advisor serving as the discretionary manager for
individual and institutional equity and fixed income portfolios.
Heritage
acts as the manager of the Company's internally sponsored Heritage Family of
Mutual Funds.
RJBank
provides traditional banking products and services to the clients of the
Company's broker-dealer subsidiaries and to the general public.
BUSINESS
SEGMENTS
The
Company has eight business segments: Private Client Group; Capital Markets;
Asset Management; RJBank; Emerging Markets; Stock Loan/Borrow; Proprietary
Capital and certain corporate activities combined in the "Other" segment.
Financial information concerning RJF for each of the fiscal years ended
September 30, 2008, September 30, 2007, and September 30, 2006, is included in
the consolidated financial statements and notes thereto.
PRIVATE
CLIENT GROUP
The
Company provides securities transaction and financial planning services to
approximately 1.8 million client accounts through the branch office systems of
RJA, RJFS, RJ Ltd., and Raymond James Investment Services Limited (“RJIS"), a
joint venture in the United Kingdom. The Company's Financial Advisors offer a
broad range of investments and services, including both third party and
proprietary products, and a variety of financial planning services. The Company
charges sales commissions or asset-based fees for investment services it
provides to its Private Client Group clients based on established schedules.
Varying discounts may be given, generally based upon the client's level of
business, the trade size, service level provided, and other relevant factors. In
fiscal year 2008, asset-based fees, including mutual fund and insurance trail
annuity commissions, represented 59% of the Private Client Group's commission
and fees.
The
majority of the Company’s U.S. Financial Advisors are also licensed to sell
insurance and annuity products through its general insurance agency, Planning
Corporation of America (“PCA”), a wholly owned subsidiary of RJA. Through the
Financial Advisors of the Company's broker-dealer subsidiaries, PCA provides
product and marketing support for a broad range of insurance products,
principally fixed and variable annuities, life insurance, disability insurance
and long-term care coverage.
The
Company's Financial Advisors offer a number of professionally managed load
mutual funds, as well as a selection of no-load funds. RJA and RJFS maintain
dealer sales agreements with most major distributors of mutual fund shares sold
through broker-dealers, including funds managed by Heritage. Commissions on such
sales generally range up to 5% of the dollar value of the transaction. The
majority of mutual fund purchases includes a front-end sales charge or occur at
net asset value (“NAV”) in fee-based accounts. In addition, there is typically
an annual charge in the form of a fund expense.
Private
Client Group Securities Commission and Fees
For
the Fiscal Years Ended:
|
September
30,
|
%
of
|
September
30,
|
%
of
|
September
30,
|
%
of
|
|
2008
|
Total
|
2007
|
Total
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2006
|
Total
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|
($
in 000's)
|
|
|
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Listed
Equities
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$ 187,891
|
12%
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$ 188,120
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13%
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$ 188,031
|
15%
|
OTC
Equities
|
58,814
|
4%
|
56,847
|
4%
|
55,706
|
5%
|
Fixed
Income Products
|
54,097
|
4%
|
36,414
|
3%
|
37,911
|
3%
|
Mutual
Funds
|
379,964
|
25%
|
354,647
|
24%
|
294,586
|
23%
|
Fee-Based
Accounts
|
550,489
|
36%
|
487,988
|
34%
|
390,691
|
31%
|
Insurance
and Annuity Products
|
219,878
|
14%
|
233,878
|
16%
|
228,888
|
18%
|
New
Issue Sales Credits
|
69,204
|
5%
|
94,005
|
6%
|
66,938
|
5%
|
Total
Private Client Group
|
|
|
|
|
|
|
Commissions
And Fees
|
$
1,520,337
|
100%
|
$
1,451,899
|
100%
|
$
1,262,751
|
100%
|
Net
interest revenue in the Private Client Group is generated by customer balances,
predominantly the earnings on margin loans and assets segregated pursuant to
regulations less interest paid on customer cash balances. See Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” in this report for financial information regarding the Company’s
net interest revenues.
Clients'
transactions in securities are effected on either a cash or margin basis. In
margin transactions, the client pays a portion of the purchase price, and RJA
makes a loan to the client for the balance, collateralized by the securities
purchased or by other securities owned by the client. Interest is charged to
clients on the amount borrowed to finance margin transactions. The financing of
margin purchases is an important source of revenue to RJA, since the interest
rate paid by the client on funds loaned by RJA exceeds RJA's cost of short-term
funds. The interest charged to a client on a margin loan is based on current
interest rates and on the size of the loan balance in the client's
account.
Typically,
broker-dealers utilize bank borrowings and equity capital as the primary sources
of funds to finance clients' margin account borrowings. RJA's primary source of
funds to finance clients' margin account balances has been cash balances in
brokerage clients' accounts (Client Interest Program), which are funds awaiting
investment. In addition, pursuant to written agreements with clients,
broker-dealers are permitted by the Securities and Exchange Commission (“SEC”)
and FINRA rules to lend client securities in margin accounts to other financial
institutions. SEC regulations, however, restrict the use of clients' funds
derived from pledging and lending clients' securities, as well as funds awaiting
investment, to the financing of margin account balances; to the extent not so
used, such funds are required to be deposited in a special segregated account
for the benefit of clients. The regulations also require broker-dealers, within
designated periods of time, to obtain possession or control of, and to
segregate, clients' fully paid and excess margin securities.
No single
client accounts for a material percentage of this segment's total
business.
Raymond
James & Associates
RJA
employs 1,180 Financial Advisors in 156 retail branch offices and 50 satellite
offices concentrated in the Southeast, Midwest, Southwest and Mid-Atlantic
regions of the U.S. RJA's Financial Advisors work in a traditional branch
setting supported by local management and administrative staffs. The number of
Financial Advisors per office ranges from one to 31. RJA Financial Advisors are
employees and their compensation includes both commission payments and
participation in the firm’s benefit plans (including Profit Sharing and ESOP
programs). Experienced Financial Advisors are hired from a wide variety of
competitors. In addition, between 40 and 50 new Financial Advisors are trained
each year at the Robert A. James National Training Center in St. Petersburg,
Florida.
Raymond
James Financial Services
RJFS
supports 3,149 independent contractor Financial Advisors in providing products
and services to their Private Client Group clients in 1,364 offices and 570
satellite offices throughout all 50 states. The number of Financial Advisors in
RJFS offices ranges from one to 43. Independent contractors are responsible for
all of their direct costs and, accordingly, are paid a larger percentage of
commissions and fees. They are permitted to conduct other approved businesses
unrelated to their RJFS activities such as offering insurance products,
independent registered investment advisory services, and accounting and tax
services, among others, with the approval of the RJFS compliance
department.
The
Financial Institutions Division (“FID”) is a subdivision of RJFS. Through FID,
RJFS offers securities to customers of financial institutions such as banks,
thrifts and credit unions. FID consists of 588 Financial Advisors in 196
branches and 243 satellite offices. RJFS also provides custodial, trading, and
other services (including access to clients' account information and the
services of the Asset Management segment) to unaffiliated independent investment
advisors through its Investment Advisor Division (“IAD”). IAD’s 93 investment
advisory firms are able to conduct daily business online with RJFS.
Raymond
James Ltd.
RJ Ltd.
is a self-clearing broker-dealer in Canada with its own operations and
information processing personnel. RJ Ltd. has 19 private client branches with
202 employee Financial Advisors and 189 independent Financial Advisors in 70
branch locations.
Raymond
James Investment Services Limited
The
Company is a 75% shareholder of RJIS. This entity operates an independent
contractor network in the United Kingdom which currently has 42 branch locations
and 89 Financial Advisors. RJIS also provides custodian and execution services
to independent investment advisory firms.
RJA
– Operations and Information Technology
RJA's
operations personnel are responsible for the execution of orders, processing of
securities transactions, custody of client securities, support of client
accounts, receipt, identification and delivery of funds and securities,
compliance with certain regulatory and legal requirements and general office
administration for most of the Company's securities brokerage operations. At
September 30, 2008, RJA employed 777 persons in its operations areas who provide
services primarily to the Private Client Group, but also support the Company's
other segments.
The
Company's businesses are supported by, and are dependent upon, an extensive
system of electronic data processing. These computer systems are largely
developed and maintained by the 838 employees in the Company’s information
technology department.
Since the
Company’s principal operations are located in St. Petersburg, the Company has
continued to enhance certain aspects of its business continuity plan to deal
with the possible impact of future hurricanes or other events by expanding its
operational and processing capabilities in Southfield, Michigan. As of September
30, 2008, 25% and 7% of the employees in RJA’s operational and information
technology areas, respectively, are located in Southfield. The Company’s
business continuity plan is designed to permit continued operation of critical
business functions in the event of disruptions to the St. Petersburg facility;
all mission critical business departments have developed operational plans for
such disruptions, and the Company has a staff which devotes their full time to
monitoring and facilitating those plans., The Company maintains computer
capacity to support mission critical functions at its Southfield location, and
conducts some of its daily operational activities from that site. Systems have
been designed so that the Company can transfer all mission critical processing
activities to Southfield. Personnel have been identified who are assigned
responsibility for this role, including some personnel who will be required to
temporarily relocate to Southfield to carry out these activities if
necessary.
CAPITAL
MARKETS
Capital
Markets activities consist primarily of equity and fixed income products and
services. No single client accounts for a material percentage of this segment's
total business.
Institutional
Sales
Institutional
sales commissions account for a significant portion of this segment's revenue,
which is fueled by a combination of general market activity and the Capital
Markets group’s ability to identify and promote attractive investment
opportunities. The Company's institutional clients are serviced by the RJA and
RJ Ltd. Institutional Equity Departments, the RJA Fixed Income Department, RJA’s
European offices, and Raymond James Financial International Ltd, an
institutional UK broker-dealer located in London. The Company charges its
commissions on equity transactions based on trade size and the amount of
business conducted annually with each institution. Fixed income commissions are
based on trade size and the characteristics of the specific security
involved.
Capital
Markets Commissions
For
the Fiscal Years Ended:
|
September
30,
|
%
of
|
September
30,
|
%
of
|
September
30,
|
%
of
|
|
2008
|
Total
|
2007
|
Total
|
2006
|
Total
|
|
($
in 000's)
|
|
|
|
|
|
|
|
Equity
|
$
237,920
|
70%
|
$
210,343
|
83%
|
$
217,840
|
84%
|
Fixed
Income
|
99,870
|
30%
|
44,454
|
17%
|
41,830
|
16%
|
|
|
|
|
|
|
|
Total
Commissions
|
$
337,790
|
100%
|
$
254,797
|
100%
|
$
259,670
|
100%
|
The 117
domestic and overseas professionals in RJA's Institutional Equity Sales and
Sales Trading Departments maintain relationships with over 1,250 institutional
clients, principally in North America and Europe. In addition to the Company's
headquarters in St. Petersburg, Florida, RJA has institutional equity sales
offices in New York City, Boston, Chicago, Los Angeles, San Francisco, London,
Geneva, Brussels, Dusseldorf, Luxembourg and Paris. European offices also
provide services to high net worth clients. RJ Ltd. has 32 institutional equity
sales and trading professionals servicing predominantly Canadian institutional
investors from offices in Montreal, Toronto and Vancouver.
RJA
distributes to its institutional clients both taxable and tax-exempt fixed
income products, primarily municipal, corporate, government agency and mortgage
backed bonds. RJA carries inventory positions of taxable and tax-exempt
securities in both the primary and secondary markets to facilitate its
institutional sales activities. In addition to St. Petersburg, the Fixed Income
Department maintains institutional sales and trading offices in New York City,
Chicago and 20 other cities throughout the U.S.
Equity
Research
The 47
domestic senior analysts in RJA's research department support the Company's
institutional and retail sales efforts and publish research on approximately 701
companies. This research primarily focuses on U.S. companies in specific
industries including Technology, Telecommunications, Consumer, Financial
Services, Business and Industrial Services, Healthcare, Real Estate and Energy.
Proprietary industry studies and company-specific research reports are made
available to both institutional and individual clients. RJ Ltd. has an
additional 15 analysts who publish research on approximately 200 companies
focused in the Energy, Energy Services, Mining, Forest Products, Biotechnology,
Technology, Clean Technology, Consumer and Industrial Products, REIT and Income
Trust sectors. These analysts, combined with nine additional analysts located in
France (whose services are obtained through a joint venture there), represent
the Company’s global research effort within the Capital Markets
segment.
Equity
Trading
Trading
equity securities in the over-the-counter ("OTC") and TSX markets involves the
purchase and sale of securities from/to clients of the Company or other dealers.
Profits and losses are derived from the spreads between bid and asked prices, as
well as market trends for the individual securities during the holding period.
RJA makes markets in approximately 678 common stocks in listed and OTC markets.
Similar to the equity research department, this operation serves to support both
the Company's institutional and Private Client Group sales efforts. The RJ Ltd.
Institutional and Private Client Group trading desks not only support client
activity, but also take proprietary positions. RJ Ltd. also provides specialist
services through its Registered Traders in approximately 124 TSX listed common
stocks.
Equity
Investment Banking
The 70
professionals of RJA's Investment Banking Group, located in St. Petersburg with
additional offices in Atlanta, New York City, Nashville, Chicago, San Francisco,
Dallas, and Houston, are involved in a variety of activities including public
and private equity financing for corporate clients, and merger and acquisition
advisory services. RJ Ltd.'s Investment Banking Group consists of 21
professionals located in Calgary, Toronto and Vancouver providing equity
financing and financial advisory services to corporate clients. The Company's
investment banking activities provide a comprehensive range of strategic and
financial advisory services tailored to our clients’ business evolution life
cycle and backed by our strategic industry focus.
Syndicate
The
Syndicate department consists of professionals who coordinate the marketing,
distribution, pricing and stabilization of lead and co-managed equity
underwritings. In addition to managed and co-managed offerings, this department
coordinates the firm's syndicate and selling group activities in transactions
managed by other investment banking firms.
Fixed
Income Trading
RJA
trades both taxable and tax-exempt fixed income products. The 18 taxable and 16
tax-exempt RJA fixed income traders purchase and sell corporate, municipal,
government, government agency, and mortgage backed bonds, asset backed
securities, preferred stock and certificates of deposit from/to clients of the
Company or other dealers. RJA enters into future commitments such as forward
contracts and “to be announced” securities (e.g. securities having a stated
coupon and original term to maturity, although the issuer and/or the specific
pool of mortgage loans is not known at the time of the transaction). Low levels
of proprietary trading positions are also periodically taken by RJA for various
purposes and are closely monitored within well defined limits. In addition, a
subsidiary of RJF, RJ Capital Services Inc., participates in the interest rate
swaps market as a principal, both for economically hedging RJA fixed income
inventory and for transactions with customers.
Fixed
Income Investment Banking
Fixed
income investment banking includes debt underwriting and public finance
activities. The 48 professionals in the RJA Public Finance division operate out
of 18 offices (located in St. Petersburg, Birmingham, Boston, New York City,
Chicago, Atlanta, Nashville, Orlando, Dallas, Naples, Sarasota, Charleston (WV),
Indianapolis, Philadelphia, Pittsburgh, Red Bank (NJ), Grosse Point Farms (MI)
and San Antonio). The Company acts as a financial advisor or underwriter to
various municipal agencies or political subdivisions, housing developers and
non-profit health care institutions.
RJA acts
as a consultant, underwriter or selling group member for corporate bonds,
mortgage backed securities, agency bonds, preferred stock and unit investment
trusts. When underwriting new issue securities, RJA agrees to purchase the issue
through a negotiated sale or submits a competitive bid.
Raymond
James Tax Credit Funds, Inc.
Raymond
James Tax Credit Funds, Inc. (“RJTCF”) is the general partner or managing member
in a number of limited partnerships and limited liability companies. RJTCF
either invests in, or through its wholly owned subsidiary Raymond James
Multi-Family Finance, Inc., provides loans to multi-family, real estate project
entities that qualify for tax credits under Section 42 of the Internal Revenue
Code. RJTCF has been an active participant in the tax credit program since its
inception in 1986, and currently focuses on tax credit funds for institutional
investors that invest in a portfolio of tax credit eligible multi-family
apartments. The investors’ expected return on investment from these funds are
primarily derived from tax credits and tax losses that investors can use to
reduce their federal tax liability. During fiscal 2008, RJTCF invested over
$154.5 million for large institutional investors in 45 real estate transactions
for properties located throughout the U.S. From inception, RJTCF has raised over
$1.9 billion in equity and has sponsored 53 tax credit funds, with investments
in approximately 1,200 tax credit apartment properties in 42
states.
ASSET
MANAGEMENT
The
Company's asset management segment includes proprietary asset management
operations, internally sponsored mutual funds, non-affiliated private account
portfolio management alternatives, and other fee based programs. No single
client accounts for a material percentage of this segment's total
business.
Effective
November 1, 2008, the Company reorganized its asset management segment and Eagle
became the advisor to the Heritage Family of Funds, renamed Eagle Family of
Funds. Heritage was renamed Eagle Fund Services, Inc. and continues to serve as
the transfer agent and fund accountant to the funds as noted above. In addition,
this reorganization will include the renaming of Heritage Fund Distributors,
Inc.
Eagle
Asset Management, Inc.
Eagle is
a registered investment advisor with $12.6 billion under management at September
30, 2008, including approximately $1.9 billion for the Heritage Family of Mutual
Funds. Eagle offers a variety of equity and fixed income objectives managed by
seven portfolio management teams. Eagle's clients include individuals, pension
and profit sharing plans, foundations, endowments, variable annuities and mutual
fund portfolios. These accounts are managed on a discretionary basis in
accordance with the investment objective(s) specified by the client. Eagle
manages $6.8 billion for institutional clients, including funds managed as a
sub-advisor to variable annuity accounts and mutual funds (including Heritage),
and $5.8 billion for private client accounts. Eagle also manages
non-discretionary assets of $161 million.
The
investment management fee paid to Eagle for discretionary accounts generally
ranges from 0.20% to 1.00% of asset balances per year depending upon the size
and investment objective(s) of the account.
Heritage
Asset Management, Inc. (Now known as Eagle Fund Services, Inc.)
Heritage
serves as investment advisor to the Heritage Family of Mutual Funds and certain
short-term fixed income accounts. Heritage also serves as transfer agent for all
of the funds and as fund accountant for all Heritage funds except the
International Equity Fund. Heritage internally manages the largest of its
portfolios, the Heritage Cash Trust Money Market Fund, which has $4.3 billion in
assets as of September 30, 2008. Portfolio management services for the Core
Equity Fund, Diversified Growth Fund and the Mid-Cap Stock Fund are sub-advised
by Eagle. Portfolio management services for the Small Cap Stock Fund are
sub-advised by both Eagle and Eagle Boston Investment Management, Inc. (“EBIM”).
Unaffiliated advisors are utilized for the Municipal Money Market Fund, Capital
Appreciation Trust, High Yield Bond Fund, Growth and Income Fund, and the
International Equity Fund.
Heritage
also serves as an advisor to RJBank to make recommendations and monitor the
Bank's liquid assets, investments in mortgages and mortgage related
securities.
Total
assets under management at September 30, 2008 were $9.2 billion, of which
approximately $6.1 billion were money market funds.
Heritage
Fund Distributors, Inc. (To be
renamed)
Heritage
Fund Distributors, Inc. (“HFD”) is a registered broker-dealer engaged in the
distribution of the Heritage Family of Mutual Funds. Heritage Fund Distributors,
Inc. is a wholly owned subsidiary of Heritage Asset Management.
Eagle
Boston Investment Management, Inc.
EBIM is a
registered investment advisor that primarily manages small cap equity
portfolios. At September 30, 2008, EBIM had approximately $634 million under
management, including approximately $172 million of the Heritage Small Cap Stock
Fund. EBIM's clients include individuals, pension and profit sharing plans,
retirement funds and mutual fund portfolios. Accounts are managed on a
discretionary basis in accordance with the investment objective(s) specified by
the client. The investment management fee paid to EBIM for discretionary
accounts generally range from 0.25% to 1.00% of asset balances annually
depending upon the size and investment objective(s) of the account.
Asset
Management Services
RJA's
Asset Management Services (“AMS”) Department manages several investment advisory
programs. The primary advisory services offered are the Raymond James Consulting
Services program, which offers a variety of both affiliated and non-affiliated
advisors, and the Eagle High Net Worth program. Both programs maintain an
approved list of investment managers, provide asset allocation model portfolios,
establish custodial facilities, monitor performance of client accounts, provide
clients with accounting and other administrative services, and assist investment
managers with certain trading management activities. AMS earns fees generally
ranging from 0.35% to 0.85% of asset balances per annum, a portion of which is
paid to the investment managers who direct the investment of the clients'
accounts. In addition, AMS offers the Freedom and Russell Model Strategy
programs. Freedom’s investment committee manages portfolios of mutual funds and
exchange traded funds on a discretionary basis. The Russell Model
Strategy is a similar program managed jointly by AMS and Russell Investment
Management. At September 30, 2008, these four programs had approximately $15.8
billion in assets under management, including approximately $2.6 billion managed
by Heritage, Eagle and EBIM.
Additional
advisory programs AMS offers include Passport, Ambassador, Opportunity, and the
Managed Investment Programs. For these accounts, AMS provides quarterly
performance reporting and other accounting and administrative services. Advisory
services are provided by PCG Financial Advisors. Fees are based on the
individual account size and are also dependent on the type of securities in the
accounts. Total client fees generally range from 0.50% to 3.00% of assets, which
are predominantly allocated to the Private Client Group. As of September 30,
2008, these programs had approximately $22.7 billion in assets. RJFS offers a
similar advisory fee based program called IMPAC. As of September 30, 2008, IMPAC
had $8.4 billion in assets serviced by RJFS Financial Advisors.
In
addition to the foregoing programs, AMS also administers fee-based programs for
clients who have contracted for portfolio management services from nonaffiliated
investment advisors that are not part of the Raymond James Consulting Services
program.
Raymond
James Trust, National Association
Raymond
James Trust Company, now known as Raymond James Trust, National Association,
(‘RJT”) converted from a state to a federally chartered institution effective
January 1, 2008. Effective July 1, 2008, the Company merged its second
state-chartered trust company, Raymond James Trust Company West, into
RJT.
RJT
provides personal trust services primarily to existing clients of the
broker-dealer subsidiaries. Portfolio management of trust assets is often
subcontracted to the asset management operations of the Company. This subsidiary
had a total of approximately $1.7 billion in client assets at September 30,
2008, including $86 million in the donor-advised charitable foundation known as
the Raymond James Charitable Endowment Fund.
RAYMOND
JAMES BANK, FSB
RJBank is
a federally chartered savings bank, regulated by the Office of Thrift
Supervision (“OTS”), which provides residential, consumer and commercial loans,
as well as Federal Deposit Insurance Corporation (“FDIC”) -insured deposit
accounts, to clients of the Company's broker-dealer subsidiaries and to the
general public. RJBank also purchases residential whole loan packages and is
active in bank participations and corporate loan syndications. RJBank generates
revenue principally
through the interest income earned on loans and investments, offset by the
interest expense it incurs on client deposits and on its borrowings. See Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” in this report for financial information regarding RJBank’s net
interest revenues.
RJBank is
in the application process of converting from a federal savings bank to a
nationally-chartered commercial bank, which would change its regulator from the
OTS to the Office of the Comptroller of the Currency (“OCC”). This change also
requires that RJF become a bank holding company, as required by law, and then
elect to become a financial holding company. Once the financial holding company
status is achieved, RJF would be under regulation of the Federal
Reserve.
RJBank
operates from a single branch location adjacent to the Company’s headquarters
complex in St. Petersburg, Florida. Access to RJBank's products and services is
available nationwide through the offices of its affiliated broker-dealers as
well as through telephonic and electronic banking services. As of September 30,
2008, RJBank had total assets of $11.4 billion, which were mostly comprised of
loans that are either originated or purchased by RJBank and include commercial
and residential mortgage loans, as well as consumer loans. RJBank’s total
liabilities primarily consist of deposits that are cash balances swept from the
investment accounts of RJA and RJFS clients. These balances are held in the FDIC
insured Raymond James Bank Deposit Program administered by RJA. RJBank does not
have any significant concentrations to any one industry or customer other
than large deposits at the Federal Home Loan Bank of Atlanta (FHLB) from time to
time, and does not have significant exposure to any counterparty exceeding
RJBank Board approved counterparty limits. Long-term debt issued by FHLB, a
Government Sponsored Enterprise, is rated AAA by Moody’s and AAA by Standard and
Poor’s.
EMERGING
MARKETS
Raymond
James International Holdings, Inc. (“RJIH”) currently has interests in joint
ventures in Latin America and Turkey. These joint ventures operate securities
brokerage, investment banking, asset management and equity research
businesses. No single client accounts for a material percentage of
this segment's total business.
STOCK
LOAN/BORROW
This
activity involves 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. No single client accounts for
a material percentage of this segment's total business.
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 situations and bridge investments
(“Special Situations 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 Ballast Point Ventures II,
L.P., which are both venture capital limited partnerships (the “Funds”) along
with their management companies. The Company, through wholly owned subsidiaries,
earns management fees for services provided to 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 Special Situations 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 vehicles for certain qualified key
employees of the Company.
OTHER
This
segment includes various corporate activities of Raymond James Financial,
Inc.
COMPETITION
The
Company is engaged in intensely competitive businesses. The Company competes
with many larger, better capitalized providers of financial services, including
other securities firms, most of which are affiliated with major financial
services companies, insurance companies, banking institutions and other
organizations. The Company also competes with a number of firms offering on-line
financial services and discount brokerage services, usually with lower levels of
service, to individual clients. The Company competes principally on the basis of
the quality of its associates, service, product selection, location and
reputation in local markets.
In the
financial services industry, there is significant competition for qualified
associates. The Company's ability to compete effectively in its businesses is
substantially dependent on its continuing ability to attract, retain, and
motivate qualified associates, including successful Financial Advisors,
investment bankers, trading professionals, portfolio managers and other
revenue-producing or specialized personnel.
REGULATION
The
following discussion sets forth some of the material elements of the regulatory
framework applicable to the financial services industry and provides some
specific information relevant to the Company. The regulatory framework is
intended primarily for the protection of customers and the securities markets,
depositors and the Federal Deposit Insurance Fund and not for
the protection of creditors or shareholders. Under certain circumstances, these
rules may limit the ability of the Company to make capital withdrawals from its
broker-dealer subsidiaries.
To the
extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. A change in applicable statutes,
regulations or regulatory policy may have a material effect on the Company’s
business.
Broker-dealers
are subject to regulations that cover all aspects of the securities business,
including:
· sales
methods
· trading
practices
· uses and
safekeeping of clients' funds and securities
· capital
structure and financial soundness
· record
keeping
· the
conduct of directors, officers and employees
· internal
controls
· insurance
requirements
The
financial services industry in the U.S. is subject to extensive regulation under
federal and state laws. The SEC is the federal agency charged with
administration of the federal securities laws. Financial services firms are also
subject to regulation by state securities commissions in those states in which
they conduct business. RJA and RJFS are currently registered as broker-dealers
in all 50 states. In addition, financial services firms are subject to
regulation by various foreign governments, securities exchanges, central banks
and regulatory bodies, particularly in those countries where they have
established offices. The Company has offices in Europe (including, Turkey),
Canada and Latin America.
Much of
the regulation of broker-dealers in the U.S. and Canada, however, has been
delegated to self-regulatory organizations ("SROs"), principally FINRA, the
IIROC and other securities exchanges. These SROs adopt and amend rules (which
are subject to approval by government agencies) for regulating the industry and
conduct periodic examinations of member broker-dealers.
The SEC,
SROs and state securities commissions may conduct administrative proceedings
that can result in censure, fine, suspension or expulsion of a broker-dealer,
its officers or employees. Such administrative proceedings, whether or not
resulting
in adverse findings, can require substantial expenditures and can have an
adverse impact on the reputation of a broker-dealer.
The
Company's U.S. broker-dealer subsidiaries are required by federal law to belong
to SIPC. When the SIPC fund falls below a certain amount, members are required
to pay annual assessments of up to 1% of adjusted gross revenues. As a result of
adequate SIPC fund levels, each of the Company's domestic broker-dealer
subsidiaries was required to pay only the minimum annual assessment of $150 in
fiscal 2008. The SIPC fund provides protection for securities held in customer
accounts up to $500,000 per customer, with a limitation of $100,000 on claims
for cash balances. In December 2003, RJA joined with other major U.S. securities
brokerage firms to form Customer Asset Protection Company (“CAPCO”), a licensed
Vermont insurance company, to provide excess SIPC coverage. CAPCO provides
account protection for the total net equity of client accounts of participating
firms with no aggregate limit. CAPCO has received a financial strength rating of
A+ from Standard and Poor’s, however, this rating is currently under a negative
credit watch. These coverages do not protect against market
fluctuations.
RJ Ltd.
is currently registered in all provinces and territories in Canada. The
financial services industry in Canada is subject to comprehensive regulation
under both federal and provincial laws. Securities commissions have been
established in all provinces and territorial jurisdictions which are charged
with the administration of securities laws. Investment dealers in Canada are
also subject to regulation by SROs which are responsible for the enforcement of
and conformity with securities legislation for their members and have been
granted the powers to prescribe their own rules of conduct and financial
requirements of members. RJ Ltd. is regulated by the securities commissions in
the jurisdictions of registration as well as by the SROs, and the IIROC.
RJ Ltd.
is required by the IIROC to belong to the Canadian Investors Protection Fund
("CIPF"), whose primary role is investor protection. The CIPF Board of Directors
determines the fund size required to meet its coverage obligations and sets a
quarterly assessment rate. Dealer members are assessed the lesser of 0.1875% of
revenue or a risk based assessment. RJ Ltd. paid CDN$91,000 in 2008. The CIPF
provides protection for securities and cash held in client accounts up to
CDN$1.0 million
per client with separate coverage of CDN$1.0 million for certain types of
accounts. This coverage does not protect against market
fluctuations.
See Note
18 of the Notes to Consolidated Financial Statements for further information on
SEC, FINRA and IIROC regulations pertaining to broker-dealer regulatory minimum
net capital requirements.
The
Company's investment advisory operations, including the Company-sponsored mutual
funds, are also subject to extensive regulation. The Company's U.S. asset
managers are registered as investment advisors with the SEC and are also
required to make notice filings in certain states. Virtually all aspects of the
asset management business are subject to various federal and state laws and
regulations. These laws and regulations are primarily intended to benefit the
asset management clients and generally grant supervisory agencies and bodies
broad administrative powers, including the power to limit or restrict an
investment advisor from conducting its asset management business in the event
that it fails to comply with such laws and regulations. Possible sanctions that
may be imposed for a failure include the suspension of individual employees,
limitations on the asset managers engaging in the asset management business for
specified periods of time, the revocation of registrations, and other censures
and fines. A regulatory proceeding, regardless of whether it results in a
sanction, can require substantial expenditures and can have an adverse effect on
the reputation of an asset manager.
The
Company is a “unitary savings and loan holding company,” as defined by federal
law, which owns one savings association, RJBank, and is under the supervision
of, and subject to periodic examination by, the OTS. Since the
Company was a savings and loan holding company prior to May 4, 1999, the Company
is exempt from certain restrictions that would otherwise apply under federal law
to the activities and investments of a savings and loan holding
company. These restrictions would become applicable to the Company if
RJBank fails to meet a qualified thrift lender test established by federal
law. As of September 30, 2008, RJBank was in compliance with
qualified thrift lender standards.
RJBank is
under the supervision of, and subject to periodic examination by, the OTS, and
is subject to the rules and regulations of the OTS, the Federal Reserve Board,
and the FDIC. In addition, since RJBank has FDIC insurance, it is
subject to the Federal Deposit Insurance Act.
RJBank is
subject to various regulatory capital requirements established by the federal
banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on RJBank's
financial statements. 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 of Total and Tier
I capital to risk-weighted assets (as defined in the regulations). See Note 18
of the Notes to the Consolidated Financial Statements for further information
and capital analysis.
The
Company recently announced its plans to seek financial holding company status as
a result of RJBank’s planned conversion from a thrift to a nationally-chartered
commercial bank. The Company’s plan includes an application to become a bank
holding company, and then the election to become a financial holding company.
Once the financial holding company status is achieved, the Company would be
under regulation of the Federal Reserve.
The
Company's federally chartered trust company is subject to regulation by the OCC.
This regulation focuses on, among other things, ensuring the safety and
soundness of the trust company’s provision of fiduciary services.
As a
public company whose common stock is listed on the NYSE, the Company is subject
to corporate governance requirements established by the SEC and NYSE, as well as
federal and state law. Under the Sarbanes-Oxley Act, the Company is required to
meet certain requirements regarding business dealings with members of the Board
of Directors, the structure of its Audit Committee, and ethical standards for
its senior financial officers. Under SEC and NYSE rules, the Company is required
to comply with other standards of corporate governance, including having a
majority of independent directors serve on its Board of Directors, and the
establishment of independent audit, compensation and corporate governance
committees.
Under
Section 404 of the Sarbanes-Oxley Act, the Company is required to complete an
assessment of its internal controls over financial reporting and to obtain a
report from its independent auditors regarding their opinion of the Company's
internal
control over financial reporting. This requirement has imposed additional costs
on the Company, reflecting internal staff and management time, as well as
additional audit fees since the Act went into effect.
EXECUTIVE OFFICERS OF THE
REGISTRANT
Executive
officers of the registrant (which includes officers of certain significant
subsidiaries) who are not Directors of the registrant are as
follows:
Jennifer
C. Ackart
|
44
|
Controller
and Chief Accounting Officer
|
|
|
|
Paul
D. Allison
|
52
|
Co-President
and Co-CEO – Raymond James Ltd. since August, 2008; Executive Vice
President and Vice Chairman, Merrill Lynch Canada, December, 2007 –
August, 2008; Executive Vice President and Managing Director, Co-Head of
Canada Investment Banking, Merrill Lynch Canada, March, 2001 – December,
2007
|
|
|
|
Richard
G. Averitt, III
|
63
|
Chairman
and CEO - Raymond James Financial Services, Inc.
|
|
|
|
Peter
A. Bailey
|
66
|
Co-President
and Co-CEO – Raymond James Ltd. since August, 2008; President and CEO –
Raymond James Ltd., February, 2006 – August, 2008; Executive Vice
President, August, 2001 – February, 2006
|
|
|
|
Angela
M. Biever
|
55
|
Chief
Administrative Officer since May, 2008; Director, RJF, May, 1997 – April,
2008; Vice President, Intel Capital and Managing Director, Consumer
Internet Sector, November, 2006 – May, 2008; General Manager, Intel New
Business Initiatives, January, 1999 – November, 2006
|
|
|
|
George
Catanese
|
49
|
Senior
Vice President and Chief Risk Officer since October, 2005; Director,
Internal Audit, November, 2001 – October, 2005
|
|
|
|
Tim
Eitel
|
59
|
Chief
Information Officer - Raymond James & Associates
|
|
|
|
Jeffrey
P. Julien
|
52
|
Senior
Vice President - Finance and Chief Financial Officer, Director and/or
officer of several RJF subsidiaries
|
|
|
|
Paul
L. Matecki
|
52
|
Senior
Vice President - General Counsel, Director of Compliance – RJF since
August, 2004; Corporate Counsel, April, 1989 – August,
2004
|
|
|
|
Steven
M. Raney
|
43
|
President
and CEO – Raymond James Bank, FSB since January, 2006; Partner and
Director of Business Development, LCM Group, February, 2005 – December,
2005; various executive positions in the Tampa Bay area, Bank of America,
June, 1988 – January, 2005
|
|
|
|
Richard
K. Riess
|
59
|
Executive
Vice President - RJF,
|
|
|
CEO
and Director of both Eagle and Heritage
|
|
|
|
Van
C. Sayler
|
53
|
Senior
Vice President - Fixed Income, Raymond James &
Associates
|
|
|
|
Thomas
R. Tremaine
|
52
|
Executive
Vice President - Operations and Administration, Raymond James &
Associates
|
|
|
|
Jeffrey
E. Trocin
|
49
|
Executive
Vice President - Equity Capital Markets, Raymond James &
Associates
|
|
|
|
Dennis
W. Zank
|
54
|
President
- Raymond James & Associates
|
Except
where otherwise indicated, the executive officer has held his or her current
position for more than five years.
EMPLOYEES AND INDEPENDENT
CONTRACTORS
The
Company’s employees are vital to the Company’s success in the financial services
industry. As of September 30, 2008, the Company employed approximately 6,900
people. As of September 30, 2008, the Company had approximately 3,400
independent contractors affiliated with it.
OTHER INFORMATION MADE
AVAILABLE BY THE COMPANY
The
Company's internet address is www.raymondjames.com.
The Company makes available, free of charge, through links to the U.S.
Securities and Exchange Commission website, the Company’s annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. Investors can find financial information under
“About Our Company – Investor Relations – Financial Reports – SEC Filings”.
These reports are available through the Company’s website as soon as reasonably
practicable after the Company electronically files such material with, or
furnishes it to, the SEC. The Company also makes available on its website its
Annual Report to Shareholders and its proxy statements in PDF format under
“About Our Company- Investors Relations – Financial Reports.”
Additionally,
the Company makes available on its website under “About Our Company – Investor
Relations – Corporate Governance”, a number of its corporate governance
documents. These include; the Corporate Governance Principles, the charters of
the Audit Committee and the Corporate Governance, Nominating and Compensation
Committee of the Board of Directors, the Senior Financial Officers’ Code of
Ethics and the Codes of Ethics for Employees and the Board of Directors. Printed
copies of these documents will be furnished to any shareholder who requests
them. The information on the Company's websites are not incorporated by
reference into this report.
The
information on the Company’s Internet site is not incorporated by
reference.
Factors Affecting
“Forward-Looking Statements”
From time
to time, the Company may publish “forward-looking statements” within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended, or make oral statements that
constitute forward-looking statements. These forward-looking statements may
relate to such matters as anticipated financial performance, future revenues or
earnings, business prospects, projected ventures, new products, anticipated
market performance, and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, the Company cautions readers
that a variety of factors could cause the Company's actual results to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. These risks and uncertainties, many of
which are beyond the Company's control, are discussed in Item 1A, “Risk Factors”
in this report. The Company does not undertake any obligation to publicly update
or revise any forward-looking statements.
ITEM
1A. RISK
FACTORS
The
Company’s operations and financial results are subject to various risks and
uncertainties, including those described below, that could adversely affect its
business, financial condition, results of operations, cash flows, and the
trading price of its common stock.
The
Company is Affected by Difficult Conditions in the Global Financial Markets and
Economic and Political Conditions Generally
The
Company is engaged in various financial services businesses. As such, the
Company is affected by economic and political conditions. These
conditions may directly and indirectly impact a number of factors that may be
detrimental to the operating results of the company, including the inflation
rate and the related impact on the securities markets, fluctuations in interest
and currency rates, reduced investor confidence, a slowdown in economic
activity, and changes in volume and price levels of the securities markets.
These conditions historically have reduced the Company’s trading volume and net
revenues and adversely affected its profitability. Additionally, a decline in
the strength of the U.S. economy can lead to deterioration in credit quality and
decreased loan demand. Continued or further credit dislocations or
sustained market downturns may result in a decrease in the volume of trades the
Company executes for its clients, a decline in the value of securities it holds
in inventory as assets, and reduced investment banking revenues given that
associated fees are directly related to the number and size of transactions in
which the Company participates. In addition, declines in the market value of
securities generally result in a decline in revenues from fees based on the
asset values of client portfolios, in the failure of buyers and sellers of
securities to fulfill their settlement obligations, and in the failure of the
Company’s clients to fulfill their credit and settlement obligations. During
market downturns, the Company’s counterparties may be less likely to complete
transactions. Also, the Company permits its clients to purchase securities on
margin. During periods of steep declines in securities prices, the value of the
collateral securing client accounts margin purchases may drop below the amount
of the purchaser’s indebtedness. If the clients are unable to provide additional
collateral for these loans, the Company may lose money on these margin
transactions. This may cause the Company to incur additional expenses defending
or pursuing claims or litigation related to counterparty or client defaults.
Dramatic declines in the housing market over the past year, with increasing
foreclosures and unemployment, have resulted in significant write-downs of asset
values by other financial institutions, including government-sponsored entities
as well as major commercial and investment banks. These write-downs, initially
of mortgage-backed securities but spreading to credit default swaps and other
derivative securities, in turn have caused many financial institutions to seek
additional capital, to merge with larger and stronger institutions and, in some
cases, to fail. Reflecting concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and institutional
investors have ceased to provide funding to even the most credit-worthy
borrowers. These lender concerns are particularly severe with respect to
financial institution borrowers. As described in Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources,” the resulting lack of available credit and
lack of confidence in the financial markets could materially and adversely
affect the Company’s financial condition and results of operations as well as
its access to capital.
Lack
of Liquidity or Access to Capital Could Impair the Company’s Business and
Financial Condition
Liquidity,
or ready access to funds, is essential to the Company’s business. A compromise
to the Company’s liquidity could have a significant negative effect on the
Company. Some potential conditions that could negatively affect the Company’s
liquidity include illiquid or volatile markets, diminished access to debt or
capital markets, unforeseen cash or capital requirements and adverse legal
settlements or judgments (including, among others, risks associated with auction
rate securities). The Company’s largest subsidiaries operate in highly regulated
industries. These subsidiaries require access to funds in order to maintain
certain net capital requirements. If existing internal sources of liquidity
resources do not satisfy the Company’s needs, it may have to seek outside
financing or scale back or curtail its operations, including limiting its
efforts to recruit additional Financial Advisors, selling assets at prices that
may be less favorable to the Company, cutting or eliminating the dividends it
pays to its shareholders and reducing its operating expenses. The availability
of outside financing, including access to the capital markets and bank lending,
depends on a variety of factors, such as market conditions, the general
availability of credit, the volume of trading activities, the overall
availability of credit to the financial services sector and the Company’s credit
ratings. The Company’s cost and availability of funding have been and may
continue to be adversely affected by illiquid credit markets and wider credit
spreads. In addition, a reduction in the Company’s credit ratings could
adversely affect its liquidity and competitive position, increase its borrowing
costs, limit its access to the capital markets or trigger its obligations under
certain financial agreements. As a result of concern about the stability of the
markets generally and the strength of counterparties specifically, many lenders
have reduced, and in some cases, ceased to provide funding to borrowers,
including the Company. As such, the Company may not be able to successfully
obtain outside financing to fund its operations on favorable terms, or at all.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations- Liquidity and Capital Resources,” for additional
information on liquidity and how the Company manages its liquidity
risk.
The
Company is Exposed to Market Risk
The
Company, directly and indirectly, is affected by changes in market conditions.
Market risk generally represents the risk that values of assets and liabilities
or revenues will be adversely affected by changes in market conditions. For
example, changes in interest rates could adversely affect the Company’s net
interest spread – the difference between the yield the Company earns on its
assets and the interest rate the Company pays for deposits and other sources of
funding – which could in turn affect the Company’s net interest income and
earnings. Market risk is inherent in the financial instruments associated with
the Company’s operations and activities including loans, deposits, securities,
short-term borrowings, long-term debt, trading account assets and liabilities,
and derivatives. Market conditions that may shift from time to time, thereby
exposing the Company to market risk, include fluctuations in interest rates,
equity prices, and price deterioration or changes in value due to changes in
market perception or actual credit quality of an issuer. See Item 7A,
“Quantitative and Qualitative Disclosures About Market Risk” in this report for
additional information regarding the Company’s exposure to and approaches to
managing market risk.
The
Company Is Exposed to Credit Risk
The
Company is exposed to the risk that third parties that owe it money, securities
or other assets will not perform their obligations. These parties may default in
their obligations to the Company due to bankruptcy, lack of liquidity,
operational failure or other reasons. Deterioration in the credit
quality of third parties who are indebted to the Company could result in
losses. In addition, the credit quality of the Company’s loan and
investment portfolios can have a significant impact on earnings. Due to the
growth in RJBank’s loan portfolio, credit risk at RJBank has become more
significant. Continued declines in the housing market or a sustained economic
downturn may cause the Company to have to write-down the value of some of the
loans in RJBank’s’s portfolio. Credit quality generally may also be affected by
adverse changes in the financial performance or condition of the Company’s
debtors or deterioration in the strength of the U.S. economy, such as the U.S.
is currently experiencing. See Item 7A, “Quantitative and Qualitative
Disclosures About Market Risk” in this report for additional information
regarding the Company’s exposure to and approaches to managing credit
risk.
The
Market Price of the Company’s Common Stock May Continue to be
Volatile
The
market price of the Company’s common stock has been, and is likely to continue
to be more volatile than in prior years and subject to fluctuations. Stocks of
financial institutions have experienced significant downward pressure in
connection with the current economic downturn and may continue to experience
such pressures in the future. Significant declines in the market price of the
Company’s common stock or failure of the market price to increase could harm its
ability to recruit and retain key employees, reduce its access to debt or equity
capital and otherwise harm the Company’s business or financial
condition.
The
Company’s Business Depends on Fees Generated from the Distribution of Financial
Products and on Fees Earned from the Management of Client Accounts By the
Company’s Asset Management Subsidiaries
A large
portion of the Company’s revenues are derived from fees generated from the
distribution of financial products such as mutual funds and variable annuities.
Changes in the structure or amount of the fees paid by the sponsors of these
products could directly affect the Company’s revenues, business and financial
condition. In addition, if these products experience losses, or increased
investor redemptions, the Company may receive reduced fees from the investment
management and distribution services it provides on behalf of the mutual funds
and annuities. The investment management fees the Company is paid may
also decline over time due to factors such as increased competition,
renegotiation of contracts and the introduction of new, lower-priced investment
products and services. In addition, changes in market values or in
the fee structure of asset management accounts would affect the Company’s
revenues, business and financial condition. Asset management fees often are
comprised of base management and incentive fees. Management fees are primarily
based on assets under management. If the Company experiences losses in its
managed accounts, its fees will decline. In addition, the relative investment
performance of these accounts could affect the Company’s ability to attract and
retain clients and thus affect the Company’s revenues, business and financial
condition.
The
Company Faces Intense Competition
The
Company is engaged in intensely competitive businesses. The Company competes on
the basis of a number of factors, including the quality of its Financial
Advisors and associates, its products and services and location and reputation
in local markets. Over time there has been substantial consolidation and
convergence among companies in the financial services industry which has
significantly increased the capital base and geographic reach of the Company’s
competitors. Because of recent market unrest and increased government
intervention, this trend toward consolidation has intensified. See the section
entitled “Competition” of Item 1 of this report for additional information about
the Company’s competitors. The Company’s ability to develop and retain its
client base depends on the reputation, judgment, business generation
capabilities and skills of its employees and Financial Advisors. As
such, to compete effectively, the Company must attract, retain, and motivate
qualified associates, including successful Financial Advisors, investment
bankers, trading professionals, portfolio managers and other revenue-producing
or specialized personnel. Competitive pressures experienced by the Company could
have an adverse affect on its business, results of operations, financial
condition and liquidity.
Regulatory
and Legal Developments Could Adversely Affect the Company’s Business and
Financial Condition
The
securities industry is subject to extensive regulation and broker-dealers and
investment advisors are subject to regulations covering all aspects of the
securities business. The Company could be subject to civil liability, criminal
liability, or sanctions, including revocation of its subsidiaries’ registrations
as investment advisors or broker-dealers, revocation of the licenses of its
Financial Advisors, censures, fines, or a temporary suspension or permanent bar
from conducting business, if it violates such laws or regulations. Any such
liability or sanction could have a material adverse effect on the Company’s
business, financial condition and prospects. The Company’s banking operations
also expose it to a risk of loss resulting from failure to comply with banking
laws. In light of current conditions in the U.S. financial markets and the
economy, regulators have increased their focus on the regulation of the
financial services industry, including by introducing proposals for new
legislation. The Company is unable to predict whether any of these proposals
will be implemented and in what form, or whether any additional or similar
changes to statutes or regulations, including the interpretation or
implementation thereof, will occur in the future. Any such action could affect
the Company in substantial and unpredictable ways and could have an adverse
effect on its business, financial condition and results of operations. The
Company also may be adversely affected as a result of changes in federal, state
or foreign tax laws, or by changes in the interpretation or enforcement of
existing laws and regulations. See the section entitled “Business – Regulation”
of Item 1 of this report for additional information regarding the Company’s
regulatory environment and Item 7A, “Quantitative and Qualitative Disclosures
About Market Risk” in this report regarding the Company’s approaches to managing
regulatory risk. Legal actions brought against the Company may result in
judgments, settlements, fines, penalties or other results adverse to the
Company, which could materially adversely affect the Company’s business,
financial condition or results of operation, or cause it serious reputational
harm.
In
turbulent times such as these, the volume of claims and amount of damages sought
in litigation and regulatory proceedings against financial institutions have
historically increased. These risks include potential liability under securities
or other laws for alleged materially false or misleading statements made in
connection with securities offerings and other transactions, issues related to
the suitability of its investment advice based on the Company’s clients'
investment objectives (including auction rate securities), the ability to sell
or redeem securities in a timely manner during adverse market conditions,
contractual issues, employment claims, and potential liability for other advice
it provides to participants in strategic transactions. The Company has received
inquiries from the SEC, the FINRA and several state regulatory authorities
requesting information concerning auction rate securities. The
Company has also been named in a civil class action lawsuit relating
to sales of auction rate securities. The Company is working with other industry
participants in order to resolve issues relating to auction rate securities and
is exploring a range of potential solutions. If the Company were to determine,
in order to resolve pending claims, inquiries or investigations, to repurchase
at par value auction rate securities from certain of its clients, the Company
would be required to assess whether it has sufficient regulatory capital and
cash or borrowing capacity to do so, and there can be no assurance that the
Company would have such capacity. See Item 3, “Legal Proceedings,” of this
report for a discussion of the Company’s legal matters (including auction rate
securities) and Item 7A, “Quantitative and Qualitative Disclosures About Market
Risk” in this report regarding the Company’s approaches to managing legal
risk.
The
Company’s Risk Management Policies and Procedures May Leave it Exposed to
Unidentified or Unanticipated Risk
The
Company seeks to manage, monitor and control its operational, legal and
regulatory risk through operational and compliance reporting systems, internal
controls, management review processes and other mechanisms, however, there can
be no assurance that its procedures will be fully effective. Further, the
Company’s risk management methods may not effectively predict future risk
exposures, which could be significantly greater than the historical measures
indicate. In addition, some of the Company’s risk management methods are based
on an evaluation of information regarding markets, clients and other matters
that are based on assumptions that may no longer be accurate. In addition,
RJBank has undergone significant growth in recent years. A failure to adequately
manage the growth of RJBank, or to effectively manage the Company’s risk, could
materially and adversely affect its business and financial condition. The
Company must also address potential conflicts of interest that arise in its
business. The Company has procedures and controls in place to address conflicts
of interest, but identifying and managing potential conflicts of interest can be
complex and difficult and the Company’s reputation could be damaged if its
fails, or appears to fail, to deal appropriately with conflicts of interest. For
more information on how the Company monitors and manages market and certain
other risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market
Risk” in this report.
The
Company Is Exposed to Operational Risk
The
Company’s diverse operations are exposed to risk of loss resulting from
inadequate or failed internal processes, people and systems, or from external
events. The Company’s business depends on its ability to process and monitor, on
a daily basis, a large number of transactions. The Company’s
financial, accounting, data processing or other operating systems and facilities
may fail to operate properly or become disabled as a result of events that are
wholly or partially beyond its control, adversely affecting its ability to
process these transactions or provide these services. Operational
risk exists in every activity, function, or unit of the Company, and can take
the form of internal or external fraud, employment and hiring practices, an
error in meeting a professional obligation, business disruption or system
failures, and failed transaction processing. Also, increasing use of automated
technology has the potential to amplify risks from manual or system processing
errors, including outsourced operations. The Company also faces the risk of
operational failure, termination or capacity constraints of any of the clearing
agents, exchanges, clearing houses or other financial intermediaries that it
uses to facilitate its securities transactions. In recent years there
has been significant consolidation among clearing agents, exchanges and clearing
houses, which has increased the Company’s exposure to certain financial
intermediaries the Company uses and could affect its ability to find adequate
and cost-effective alternatives in such events. Any such failure, termination or
constraint could adversely affect the Company’s ability to effect transactions,
service its clients and manage its exposure to risk. In addition,
significant operational loss could damage the Company’s reputation. See Item 7A,
“Quantitative and Qualitative Disclosures About Market Risk” in this report for
additional information regarding the Company’s exposure to and approaches to
managing operational risk.
The
Company’s Business Depends on Technology
The
Company’s businesses rely extensively on electronic data processing and
communications systems. In addition to better serving clients, the
effective use of technology increases efficiency and enables firms to reduce
costs. The Company’s continued success will depend, in part, upon its
ability to successfully maintain and upgrade the capability of its systems, its
ability to address the needs of its clients by using technology to provide
products and services that satisfy their demands and its ability to retain
skilled information technology employees. Failure of its systems, which could
result from events beyond the Company’s control, or an inability to effectively
upgrade those systems or implement new technology-driven products or services,
could result in financial losses, liability to clients and damage to the
Company’s reputation. The Company’s operations rely on the secure processing,
storage and transmission of confidential and other information in its computer
systems and networks. Although the Company takes protective measures and
endeavors to modify them as circumstances warrant, the computer systems,
software and networks may be vulnerable to unauthorized access, computer viruses
or other malicious code and other events that could have a security impact. If
one or more of these events occur, this could jeopardize the Company’s or its
clients’ or counterparties’ confidential and other information processed, stored
in and transmitted through its computer systems and networks, or otherwise cause
interruptions or malfunctions in the Company’s, its clients’, its
counterparties’ or third parties’ operations. The Company may be required to
expend significant additional resources to modify its protective measures, to
investigate and remediate vulnerabilities or other exposures or to make required
notifications, and it may be subject to litigation and financial losses that are
either not insured or not fully covered through any insurance it
maintains. See Item 7A, “Quantitative and Qualitative Disclosures
About Market Risk” in this report for additional information regarding the
Company’s exposure to and approaches to managing this type of operational
risk.
The
Company’s Business and Financial Condition Could be Adversely Affected by New
Regulations to Which It Expects to Become Subject as a Result of Becoming a
Financial Holding Company
In
September 2008, the Company announced that it will seek approval from the
Federal Reserve Board to become a bank holding company and subsequently elect to
become a financial holding company. Although the Company has a statutory grace
period of two years, with the possibility of three one-year extensions for a
total grace period of five years, to conform existing activities and investments
to the restrictions on nonbanking activities that apply to financial holding
companies, and although it expects to be able to continue to engage in the vast
majority of the activities in which it currently engages after such time, it is
possible that certain of the Company’s existing activities will not be deemed to
be permissible under applicable regulations. In addition, as a financial holding
company, the Company will become subject to the comprehensive, consolidated
supervision and regulation of the Federal Reserve Board, including risk-based
and leverage capital requirements and information reporting requirements, and,
as a nationally-chartered commercial bank, RJBank will be subject to the
functional supervision and regulation of the OCC. See the section entitled
“Business –Regulation” of Item 1 of this report for additional
information.
The
Company’s Operations Could Be Adversely Affected By Serious Weather
Conditions
The
Company’s principal operations are located in St. Petersburg, Florida. While the
Company has a business continuity plan that permits significant operations to be
conducted from its Southfield, Michigan location (see Item 1, “Business” in this
report), the Company’s operations could be adversely affected by hurricanes or
other serious weather conditions that could affect processing of transactions
and communications. For the past several years, the Company has been unable to
obtain meaningful hurricane-related insurance coverage at a reasonable cost for
its headquarters complex in St. Petersburg, Florida. Due to the modest hurricane
activity during the past three seasons, such coverage has become more readily
available and, effective May 15, 2008, the Company has increased its limits to
levels management considers adequate for such a catastrophe. Notwithstanding
this coverage, the Company’s business continuity plan continues to be enhanced
and tested to allow for continuous business processing in the event of
weather-related or other interruptions of operations at the headquarters
complex. The Company has also developed a business continuity plan for its
Private Client Group branches in the event these branches are impacted by severe
weather. Each branch is assigned a “contingency branch” in another part of the
country that allows the impacted branch the ability to communicate through the
contingency branch.
Insurance
Risks
The
Company’s operations and financial results are subject to risks and
uncertainties related to its use of a combination of insurance, self-insured
retention and self-insurance for a number of risks, including, without
limitation, property and casualty, workers’ compensation, general liability, and
the Company-funded portion of employee-related health care
benefits.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
The
Company's headquarters is located on approximately 55 acres within the Carillon
office park in St. Petersburg, Florida. The headquarters complex currently
includes four main towers which encompass a total of 884,000 square feet of
office space, the Raymond James Bank building, which is a 42,000-square-foot
two-story building, including the newly completed 16,000-square-foot building
addition, and two five-story parking garages. At this location, the Company has
the ability to add approximately 474,000 square feet of new office space.
Raymond James also has 30,000 square feet of leased space near Carillon. The
Company’s Michigan operations are conducted from an 84,000-square-foot building
on 14 acres in Southfield, Michigan. The Company’s facilities are used to
conduct the current operations of its segments.
The
Company leases offices in various locations throughout the U.S. and in certain
foreign countries. With the exception of a Company-owned RJA branch office
building in Crystal River, FL, RJA branches are leased with various expiration
dates through 2018. RJ Ltd. leases premises for main offices in Vancouver,
Calgary, and Toronto and for branch offices throughout Canada. These leases have
various expiration dates through 2020. RJ Ltd. does not own any land or
buildings. See Note 12 to the Consolidated Financial Statements for further
information regarding the Company's leases.
Leases
for branch offices of RJFS, the independent contractors of RJ Ltd. and RJIS are
the responsibility of the respective independent contractor Financial
Advisors.
ITEM
3. 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. Subsequent to the fiscal year end, RJY was notified by the Capital
Markets Board of Turkey that the technical capital inadequacy resulting from
RJY’s provision for this case required an additional capital contribution, and
as a result, RJY has had to halt all trading activities until the capital
requirements are met. The Company has recorded a provision for loss in its
consolidated financial statements for its full equity interest in this joint
venture. As of September 30, 2008, RJY had total capital of approximately $8.1
million, of which the Company owns approximately 50%.
Sirchie
Acquisition Company, LLC (“SAC”), an 80% owned indirect unconsolidated
subsidiary acquired as a merchant banking investment has been advised
by the Commerce and Justice Departments that they intend to seek civil and
criminal sanctions against it, as the purported successor in interest to Sirchie
Finger Print Laboratories, Inc. (“Sirchie”), based upon alleged breaches of
Department of Commerce suspension orders by Sirchie and its former majority
shareholder that occurred prior to the acquisition. Discussions are ongoing, and
the impact, if any, on the value of this investment is indeterminate at this
time.
In
connection with auction rate securities (“ARS”), the Company's primary broker
dealers, RJA and RJFS, have been subject to ongoing investigations, with which
they are cooperating fully, by the Securities and Exchange Commission (“SEC”),
the New York Attorney General's Office and Florida’s Office of Financial
Regulation. The Company is also named in a class action lawsuit similar to that
filed against a number of brokerage firms alleging various securities law
violations, which it is vigorously defending. The Company announced in April
2008 that customers held approximately $1.9 billion of ARS, which as of
September 30, 2008, had declined to approximately $1 billion due to the
redemption and refinancing of such securities by the issuers of the ARS.
Additional information regarding ARS can be found at http://www.raymondjames.com/auction_rate_preferred.htm.
The information on the Company’s Internet site is not incorporated by
reference.
Several
large banks and brokerage firms, most of who were the primary underwriters of
and supported the auctions for, ARS have announced agreements, usually as part
of a regulatory settlement, to repurchase ARS at par from some of their clients.
Other brokerage firms have entered into similar agreements. The Company, in
conjunction with other industry participants is actively seeking a solution to
ARS’ illiquidity. This includes issuers restructuring and refinancing the ARS,
which has met with some success. Should these restructurings and refinancings
continue, then clients’ holdings could be reduced further, however, there can be
no assurance these events will continue. If the Company were to consider
resolving pending claims, inquiries or investigations by offering to repurchase
all or some portion of these ARS from certain clients, it would have to have
sufficient regulatory capital and cash or borrowing power to do so, and at
present it does not have such capacity. Further, if such repurchases were made
at par value there could be a market loss if the underlying securities’ value is
less than par and any such loss could adversely affect the results of
operations.
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
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
None.
PART II
ITEM
5. MARKET FOR REGISTRANT'S
COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The
Company's common stock is traded on the NYSE under the symbol “RJF”. At November
19, 2008 there were approximately 18,000 holders of the Company's common stock.
The following table sets forth for the periods indicated the high and low trades
for the common stock:
|
Fiscal
Year 2008
|
Fiscal
Year 2007
|
|
High
|
Low
|
High
|
Low
|
First
Quarter
|
$
37.60
|
$
28.04
|
$
33.63
|
$
28.53
|
Second
Quarter
|
32.73
|
19.38
|
32.52
|
27.38
|
Third
Quarter
|
31.36
|
21.76
|
34.62
|
29.10
|
Fourth
Quarter
|
38.25
|
22.60
|
36.00
|
28.65
|
See
Quarterly Financial Information in Item 8 for the amount of the quarterly
dividends paid.
See Note
18 of the Notes to Consolidated Financial Statements for information regarding
the Company’s intentions for paying cash dividends and the related capital
restrictions.
See Note
14 of the Notes to Consolidated Financial Statements for information regarding
repurchased shares of the Company's common stock.
ITEM
6. SELECTED FINANCIAL
DATA
|
Year
Ended
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
September
24,
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
(in
000’s, except per share data)
|
Operating
Results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
$ 3,204,932
|
|
$ 3,109,579
|
|
$ 2,645,578
|
|
$
2,168,196
|
|
$
1,829,776
|
Net
Revenues
|
$ 2,812,703
|
|
$ 2,609,915
|
|
$ 2,348,908
|
|
$
2,050,407
|
|
$
1,781,259
|
Net
Income
|
$ 235,078
|
|
$ 250,430
|
|
$ 214,342
|
|
$ 151,046
|
|
$ 127,575
|
Net
Income per
|
|
|
|
|
|
|
|
|
|
Share
- Basic: (1)
|
$ 2.02
|
|
$ 2.17
|
|
$ 1.90
|
|
$ 1.37
|
|
$ 1.16
|
Net
Income per
|
|
|
|
|
|
|
|
|
|
Share
- Diluted: (1)
|
$ 1.97
|
|
$ 2.11
|
|
$ 1.85
|
|
$ 1.33
|
|
$ 1.14
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Common
Shares
|
|
|
|
|
|
|
|
|
|
Outstanding
- Basic: (1)
|
116,383
|
|
115,608
|
|
112,614
|
|
110,217
|
|
110,093
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Common
and
|
|
|
|
|
|
|
|
|
|
Common
Equivalent
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding -
|
|
|
|
|
|
|
|
|
|
Diluted:
(1)
|
119,059
|
|
118,693
|
|
115,738
|
|
113,048
|
|
111,603
|
Cash
Dividends
|
|
|
|
|
|
|
|
|
|
per
Common Share (1)
|
$ 0.44
|
|
$ 0.40
|
|
$ 0.32
|
|
$ 0.21
|
|
$ 0.17
|
|
|
|
|
|
|
|
|
|
|
Financial
Condition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
$ 20,731,859
|
(2)
|
$ 16,254,168
|
|
$
11,516,650
|
|
$
8,369,256
|
|
$
7,621,846
|
Long-Term
Debt
|
$ 197,910
|
(3)
|
$ 214,864
|
(3)
|
$ 286,712
|
(3)
|
$ 280,784
|
(3)
|
$ 174,223
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
$ 1,883,905
|
|
$ 1,757,814
|
|
$ 1,463,869
|
|
$
1,241,823
|
|
$
1,065,213
|
Shares
Outstanding (1)
|
116,434
|
(4)
|
116,649
|
(4)
|
114,064
|
(4)
|
113,394
|
|
110,769
|
|
|
|
|
|
|
|
|
|
|
Book
Value per Share
|
|
|
|
|
|
|
|
|
|
at
End of Period (1)
|
$ 16.18
|
|
$ 15.07
|
|
$ 12.83
|
|
$ 10.95
|
|
$ 9.62
|
|
|
|
|
|
|
|
|
|
|
(1)
|
2005
and 2004 amounts have been adjusted for the March 22, 2006 3-for-2 stock
split.
|
|
(2)
|
Total
assets include $1.9 billion in cash, offset by an equal amount in
overnight borrowing to meet point-in-time regulatory balance sheet
composition requirements related to RJBank’s qualifying as a thrift
institution.
|
|
(3)
|
Includes
loans payable related to investments by variable interest entities in real
estate partnerships, which are non-recourse to the
Company.
|
|
(4)
|
Excludes
non-vested shares.
|
|
|
|
|
ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 consolidated financial statements and
accompanying notes to the consolidated financial statements.
The
Company’s results continue to be correlated to the direction of the U.S. equity
markets and are subject to volatility due to changes in interest rates,
valuation of financial instruments, economic and political trends and industry
competition. During 2008, the market was impacted by volatile energy prices, a
housing market slowdown, the subprime lending collapse that led to an overall
credit crisis, a weakening U.S. dollar and declining interest rates. The
Company’s Private Client Group’s recruitment and retention of Financial Advisors
was positively impacted by industry consolidation. RJBank benefited from the
widening interest rate spreads and what management feels are quality loans
available for purchase that resulted from a desire for liquidity in the markets
in response to the credit crisis.
Results of Operations - Total
Company
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 certain corporate activities
in the Other segment.
The
following table presents consolidated and segment financial information for the
Company for the years indicated:
|
Year
Ended
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
2008
|
|
2007
|
|
2006
|
|
(in
000's)
|
Total
Company
|
|
|
|
|
|
Revenues
|
$
3,204,932
|
|
$
3,109,579
|
|
$
2,645,578
|
Pre-tax
Earnings
|
386,854
|
|
392,224
|
|
342,066
|
|
|
|
|
|
|
Private
Client Group
|
|
|
|
|
|
Revenues
|
1,950,292
|
|
1,938,154
|
|
1,679,813
|
Pre-tax
Earnings
|
177,696
|
|
219,864
|
|
168,519
|
|
|
|
|
|
|
Capital
Markets
|
|
|
|
|
|
Revenues
|
506,007
|
|
506,498
|
|
487,419
|
Pre-tax
Earnings
|
50,169
|
|
68,966
|
|
78,221
|
|
|
|
|
|
|
Asset
Management
|
|
|
|
|
|
Revenues
|
236,928
|
|
234,875
|
|
207,821
|
Pre-tax
Earnings
|
58,865
|
|
60,517
|
|
48,749
|
|
|
|
|
|
|
RJBank
|
|
|
|
|
|
Revenues
|
405,304
|
|
279,572
|
|
114,692
|
Pre-tax
Earnings
|
112,282
|
|
27,005
|
|
16,003
|
|
|
|
|
|
|
Emerging
Markets
|
|
|
|
|
|
Revenues
|
41,269
|
|
59,083
|
|
55,263
|
Pre-tax
(Loss) Earnings
|
(3,260)
|
|
3,640
|
|
2,857
|
|
|
|
|
|
|
Stock
Loan/Borrow
|
|
|
|
|
|
Revenues
|
36,843
|
|
68,685
|
|
59,947
|
Pre-tax
Earnings
|
7,034
|
|
5,003
|
|
8,001
|
|
|
|
|
|
|
Proprietary
Capital
|
|
|
|
|
|
Revenues
|
22,775
|
|
8,280
|
|
17,312
|
Pre-tax
Earnings
|
7,341
|
|
3,577
|
|
8,468
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Revenues
|
5,514
|
|
14,432
|
|
23,311
|
Pre-tax
(Loss) Earnings
|
(23,273)
|
|
3,652
|
|
11,248
|
Year ended September 30,
2008 Compared with the Year ended September 30, 2007 - Total
Company
The
Company had record annual gross and net revenues for the year, exceeding the
prior year by 3% and 8%, respectively. Gross revenues were fueled by strong
institutional sales commissions offset by trading losses, while net revenues
also benefited from record net interest earnings. Non-interest expenses grew by
9%, thus net income declined 6% from the prior year. Three of the Company’s four
major segments experienced increases in revenues, but only RJBank generated an
increase in pre-tax income.
Year ended September 30,
2007 Compared with the Year ended September 30, 2006 - Total
Company
The
Company had record earnings for the fourth consecutive year, with 2007 total
revenues surpassing $3 billion and net income surpassing $250 million. Revenues
exceeded the prior year by 18% while net income exceeded the prior year by 17%.
Net revenues were $2.6 billion, or up 11% over the prior year, thus positive
operating leverage was realized. Non-interest expenses also rose by 11%. Once
again, results were driven by an increase in net interest earnings, which were
up 31%. All of the Company’s four major segments had higher revenues and three
of the four had higher pre-tax income than in the prior year.
Net Interest
Analysis
The
following table presents average balance data and interest income and expense
data for the Company, as well as the related net interest income:
|
Year
Ended
|
|
September
30, 2008
|
September
30, 2007
|
September
30, 2006
|
|
|
Operating
|
Average
|
|
Operating
|
Average
|
|
Operating
|
Average
|
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
|
($
in 000's)
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
|
Margin
Balances
|
$1,559,305
|
$ 83,856
|
5.38%
|
$1,401,931
|
$
108,368
|
7.73%
|
$1,327,121
|
$ 98,417
|
7.42%
|
Assets
Segregated Pursuant
|
|
|
|
|
|
|
|
|
|
to
Regulations and Other
|
|
|
|
|
|
|
|
|
|
Segregated
Assets
|
4,264,868
|
126,556
|
2.97%
|
3,738,106
|
195,356
|
5.23%
|
2,983,853
|
141,741
|
4.75%
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
|
of
RJBank (1)
|
7,740,036
|
407,123
|
5.26%
|
4,544,875
|
278,248
|
6.12%
|
1,967,225
|
114,065
|
5.80%
|
Stock
Borrow
|
|
36,843
|
|
|
68,685
|
|
|
59,947
|
|
Interest
Earnings of Variable
|
|
|
|
|
|
|
|
|
|
Interest
Entities
|
|
657
|
|
|
955
|
|
|
1,008
|
|
Other
|
|
69,028
|
|
|
75,380
|
|
|
54,803
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
|
724,063
|
|
|
726,992
|
|
|
469,981
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
Client
Interest Program
|
$5,412,303
|
137,511
|
2.54%
|
$4,619,292
|
204,158
|
4.42%
|
$3,793,570
|
143,428
|
3.78%
|
Interest-Bearing
Liabilities
|
|
|
|
|
|
|
|
|
|
of
RJBank (1)
|
7,279,182
|
191,537
|
2.63%
|
4,187,365
|
193,747
|
4.63%
|
1,796,481
|
73,529
|
4.09%
|
Stock
Loan
|
|
26,552
|
|
|
59,276
|
|
|
47,593
|
|
Interest
Expense of Variable
|
|
|
|
|
|
|
|
|
|
Interest
Entities
|
|
5,604
|
|
|
6,972
|
|
|
8,368
|
|
Other
|
|
31,025
|
|
|
35,511
|
|
|
23,752
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Expense
|
|
392,229
|
|
|
499,664
|
|
|
296,670
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$
331,834
|
|
|
$
227,328
|
|
|
$
173,311
|
|
(1) See Results of Operations - RJBank
in Item 7 of Part II for details.
Net
interest income at RJBank increased over 155%, representing greater than 100%
all of the $105 million increase in the Company’s net interest earnings. Average
interest-earning assets at RJBank increased 70% over the prior year. Average
bank loan balances increased 93% from $3.2 billion to $6.1
billion. This increase was funded by the growth in new client cash
balances which are a result of the positive recruiting results and the third
bulk transfer of client cash deposits of $550 million in March 2008 as well as
clients raising cash to historically high levels in their accounts.
Average
customer margin balances grew only modestly during 2008, thus the increased
client cash balances in the firm’s Client Interest Program led to an increase in
assets segregated pursuant to regulations. Net interest on the stock loan/borrow
business increased 9%, due to increased spreads primarily on hard-to-locate
securities. Other interest revenue and expense include earnings on
corporate cash, inventory balances, interest on overnight borrowings and the
mortgage on the headquarters facility.
Results of Operations -
Private Client Group
The
following table presents consolidated financial information for the Private
Client Group segment for the years indicated:
|
Year
Ended
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
2008
|
|
(Decr.)
|
|
2007
|
|
(Decr.)
|
|
2006
|
|
($
in 000's)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Securities
Commissions And Fees
|
$ 1,520,337
|
|
5%
|
|
$
1,451,899
|
|
15%
|
|
$
1,262,751
|
Interest
|
233,796
|
|
(26%)
|
|
317,378
|
|
28%
|
|
248,709
|
Financial
Service Fees
|
91,042
|
|
7%
|
|
85,018
|
|
(9%)
|
|
93,421
|
Other
|
105,117
|
|
25%
|
|
83,859
|
|
12%
|
|
74,932
|
Total
Revenues
|
1,950,292
|
|
1%
|
|
1,938,154
|
|
15%
|
|
1,679,813
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
140,952
|
|
(27%)
|
|
192,722
|
|
38%
|
|
139,593
|
Net
Revenues
|
1,809,340
|
|
4%
|
|
1,745,432
|
|
13%
|
|
1,540,220
|
|
|
|
|
|
|
|
|
|
|
Non-Interest
Expenses:
|
|
|
|
|
|
|
|
|
|
Sales
Commissions
|
1,132,191
|
|
6%
|
|
1,070,479
|
|
14%
|
|
940,567
|
Admin
& Incentive Comp and Benefit Costs
|
295,851
|
|
12%
|
|
265,038
|
|
13%
|
|
233,684
|
Communications
and Information Processing
|
59,150
|
|
7%
|
|
55,224
|
|
4%
|
|
53,064
|
Occupancy
and Equipment
|
69,503
|
|
21%
|
|
57,310
|
|
12%
|
|
51,101
|
Business
Development
|
64,391
|
|
13%
|
|
57,216
|
|
13%
|
|
50,555
|
Clearance
and Other
|
10,434
|
|
(49%)
|
|
20,449
|
|
(52%)
|
|
42,836
|
Total
Non-Interest Expenses
|
1,631,520
|
|
7%
|
|
1,525,716
|
|
11%
|
|
1,371,807
|
Income
Before Taxes and Minority Interest
|
177,820
|
|
(19%)
|
|
219,716
|
|
30%
|
|
168,413
|
Minority
Interest
|
124
|
|
|
|
(148)
|
|
|
|
(106)
|
Pre-tax
Earnings
|
$ 177,696
|
|
(19%)
|
|
$ 219,864
|
|
30%
|
|
$ 168,519
|
Margin
on Net Revenues
|
9.8%
|
|
|
|
12.6%
|
|
|
|
10.9%
|
The
following table presents a summary of Private Client Group Financial Advisors as
of the periods indicated:
|
|
Independent
|
2008
|
2007
|
|
Employee
|
Contractors
|
Total
|
Total
|
Private
Client Group - Financial Advisors:
|
|
|
|
|
RJA
|
1,180
|
-
|
1,180
|
1,087
|
RJFS
|
-
|
3,149
|
3,149
|
3,068
|
RJ
Ltd
|
202
|
189
|
391
|
325
|
RJIS
|
-
|
89
|
89
|
81
|
Total
Financial Advisors
|
1,382
|
3,427
|
4,809
|
4,561
|
Year ended September 30,
2008 Compared with the Year ended September 30, 2007 – Private Client
Group
The
Private Client Group (“PCG”) revenues continue to benefit from the successful
recruiting of employee Financial Advisors, however this has been offset by the
impact of the uncertain market conditions on investor confidence. As a result,
commission revenue increased $68 million, only 5% over the prior year, with $56
million of that increase in RJA due to the recruitment of 184 employee Financial
Advisors in fiscal 2008 (for a net increase of 93) and 153 in fiscal 2007 (for a
net increase of 59). It generally takes newly recruited Financial Advisors two
years to reach their previous production levels. Average production per employee
Financial Advisor increased to $515,000 in fiscal 2008 driven by the recruiting
of above-average producers.
RJFS
recruited 398 independent contractor Financial Advisors in fiscal 2008 (for a
net increase of 81). Independent contractor Financial Advisor average production
increased from $316,000 in fiscal 2007 to $330,000 in fiscal 2008, again driven
by recruiting above average producers. As a result of these two
factors, RJFS’s securities commissions and fees increased $10 million despite
the difficult market environment.
Offsetting
this modest increase in securities commissions and fees was a 26% decrease in
gross and net interest from the prior year as interest rates declined and
spreads narrowed. Sales commission expense increased 6% in comparison to the 5%
increase in commission revenue as it includes the increased expenses associated
with recruiting such as hiring bonuses and guaranteed payout
amounts. Total non-interest expenses increased 7% as a result of
company growth. Administrative expense includes the compensation for
additional support personnel, primarily in branch offices. Business development
expense includes transition expense (i.e. account transfer fees) and the direct
expenses associated with recruiting such as bringing Financial Advisors to the
corporate headquarters. Occupancy expense includes the expenses associated with
the opening of new branch offices. RJA added 19 offices during fiscal
2008 and 14 during fiscal 2007.
The 7%
increase in non-interest expense exceeded the 4% increase in net revenues,
resulting in a 19% decline in pre-tax earnings from the prior year. Overall PCG
margins decreased from 12.6% to 9.8%. While over half of the Private Client
Group’s revenues are recurring in nature, much of that is asset
based. With the decline in the equity markets, client assets have
declined and revenues based on these balances will be lower until the market
values recover. Historically, in uncertain markets individual
investors within PCG execute fewer transactions as they often prefer to wait and
see, hoping for positive market movement. Both of these factors will
have a negative impact on PCG revenues in the near term. Meanwhile
the turmoil within the financial services industry has led to increased
opportunities to recruit successful Financial Advisors.
Year ended September 30,
2007 Compared with the Year ended September 30, 2006 – Private Client
Group
The
Private Client Group was significantly impacted by the successful recruiting of
employee Financial Advisors and increased productivity throughout domestic PCG.
RJA added a net 59 employee Financial Advisors and increased average production
per Financial Advisor 22% to $493,000, resulting in a 31% increase in RJA PCG
securities commissions and fees. Average assets under management per RJA
Financial Advisor increased 24% to $72 million. RJA continues to benefit from
the industry consolidation and the resultant unrest and Financial Advisor
turnover. Securities commissions and fees increased 10% in RJFS despite a 6%
decline in the number of Financial Advisors, most of which was by design in the
strategic upgrading initiative. The increased commission and fee revenue is the
result of a 16% increase in average production to $316,000 per Financial
Advisor. RJ Ltd’s 4% increase in number of Financial Advisors generated a 6.5%
increase in securities commissions and fees.
Financial
service fees in the prior year included a one-time adjustment of approximately
$10 million related to the change in accounting for IRA fees. Excluding this
adjustment, financial service fees increased modestly over the prior year. Other
revenue increased $9 million, or 12% over the prior year, as a result of
increased mutual fund networking and educational and marketing support fees from
mutual fund companies.
Commission
expense within PCG was up 14%, relatively proportional to the increase in
commission revenues and fees of 15%. Administrative compensation, occupancy and
business development expenses increased proportionately to net revenues. These
increases include expenses associated with new branches, sales support staff,
home office visits and account transfer fees.
Information processing expenses rose only 4% and reflect the benefit of
operating leverage despite continued investment in systems upgrades. The
decrease in other expense is the result of lower legal costs and settlements as
the last of the outstanding large cases related to the 2000 – 2002 market
decline were settled in the prior year.
Overall
PCG margins increased by 16% over the prior year, reaching 12.6%.
Results of Operations –
Capital Markets
The following table presents
consolidated financial information for the Capital Markets segment for the years
indicated:
|
Year
Ended
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
2008
|
|
(Decr.)
|
|
2007
|
|
(Decr.)
|
|
2006
|
|
($
in 000's)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Institutional
Sales Commissions:
|
|
|
|
|
|
|
|
|
|
Equity
|
$ 237,920
|
|
13%
|
|
$ 210,343
|
|
(3%)
|
|
$ 217,840
|
Fixed
Income
|
99,870
|
|
125%
|
|
44,454
|
|
6%
|
|
41,830
|
Underwriting
Fees
|
80,400
|
|
(33%)
|
|
120,205
|
|
14%
|
|
105,429
|
Mergers
& Acquisitions Fees
|
38,385
|
|
(36%)
|
|
59,929
|
|
34%
|
|
44,693
|
Private
Placement Fees
|
2,536
|
|
12%
|
|
2,262
|
|
(3%)
|
|
2,334
|
Trading
Profits
|
(3,503)
|
|
(138%)
|
|
9,262
|
|
(58%)
|
|
21,876
|
Interest
|
33,032
|
|
(32%)
|
|
48,275
|
|
27%
|
|
38,090
|
Other
|
17,367
|
|
48%
|
|
11,768
|
|
(23%)
|
|
15,327
|
Total
Revenue
|
506,007
|
|
-
|
|
506,498
|
|
4%
|
|
487,419
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
31,692
|
|
(44%)
|
|
56,841
|
|
23%
|
|
46,126
|
Net
Revenues
|
474,315
|
|
5%
|
|
449,657
|
|
2%
|
|
441,293
|
|
|
|
|
|
|
|
|
|
|
Non-Interest
Expenses
|
|
|
|
|
|
|
|
|
|
Sales
Commissions
|
111,448
|
|
13%
|
|
98,903
|
|
2%
|
|
96,649
|
Admin
& Incentive Comp and Benefit Costs
|
221,905
|
|
9%
|
|
204,512
|
|
2%
|
|
200,453
|
Communications
and Information Processing
|
35,981
|
|
11%
|
|
32,366
|
|
20%
|
|
27,084
|
Occupancy
and Equipment
|
18,271
|
|
38%
|
|
13,196
|
|
9%
|
|
12,073
|
Business
Development
|
23,511
|
|
-
|
|
23,468
|
|
6%
|
|
22,177
|
Clearance
and Other
|
26,605
|
|
15%
|
|
23,054
|
|
16%
|
|
19,907
|
Total
Non-Interest Expense
|
437,721
|
|
11%
|
|
395,499
|
|
5%
|
|
378,343
|
Income
Before Taxes and Minority Interest
|
36,594
|
|
(32%)
|
|
54,158
|
|
(14%)
|
|
62,950
|
Minority
Interest
|
(13,575)
|
|
|
|
(14,808)
|
|
|
|
(15,271)
|
Pre-tax
Earnings
|
$ 50,169
|
|
(27%)
|
|
$ 68,966
|
|
(12%)
|
|
$ 78,221
|
Year ended September 30,
2008 Compared with the Year ended September 30, 2007 – Capital
Markets
Capital
Markets net revenues increased 5% compared to the prior year due to record
equity and fixed income institutional sales commissions, which increased 13% and
125%, respectively, compared to the prior year. Equity institutional
sales commissions were higher both domestically and in Canada as volatile market
conditions generated increased activity. The equally volatile fixed
income markets produced an even greater increase in commission revenue as
institutions sought expertise on various products, and many altered their
weighting in fixed income products.
These
increases were offset by reduced investment banking fee revenue compared to the
prior year. Equity underwriting fees were $26 million and $3 million below the
prior year in the U.S. and Canada, respectively. This was attributable to the
lack of underwritings due to the uncertain market conditions. During the year
Capital Markets managed or co-managed 82 transactions in the U.S. and Canada,
compared to 108 transactions in the prior year. In addition, the prior year was
a record year for mergers and acquisition fees. RJTCF saw a dramatic decrease of
$15 million in deal related fee revenue (included in underwriting fees) as
several of its major clients are no longer in the market.
Total
Company trading profits declined $18 million (over 100%) with $12.8 million of
that decline in the Capital Markets segment. While domestic equity facilitation
losses remained consistent at $8 million, overall fixed income trading
profits increased from $11 million in fiscal 2007 to $15 million in
fiscal 2008. This included a particularly difficult fixed income trading
environment due to a flight to quality, especially during the fourth quarter. RJ
Ltd.’s trading profits reversed from a $2.8 million profit in fiscal 2007 to a
$6 million loss in fiscal 2008. This was a combined result of an
increase in facilitation losses of $6.6 million and a $2.6 million decline in
proprietary trading gains.
Gross
revenues were flat with the prior year and net revenues were up 5%. However, due
to the $42 million increase in non-interest expense, pre-tax earnings were down
27% from the prior year. Commission expense increased in line with
commission revenues. The other compensation expenses, occupancy and
communications and information processing expenses increased due to growth as
the Company has taken advantage of the opportunity to add quality Capital
Markets teams. Equity Capital Markets has added a net seven professionals in
Investment Banking over the past year, as well as additional Sales and Research
personnel. This segment moved or substantially renovated several of
its larger offices this year, including offices in New York, Atlanta and
Chicago, and opened one new office in San Francisco. Fixed Income has
taken advantage of market conditions in the taxable fixed income institutional
sales area and in Public Finance to recruit a combined 49 additional
professionals, representing a 20% increase in its producing professionals.
These hires were accomplished at lower costs than possible in recent
years.
Year ended September 30,
2007 Compared with the Year ended September 30, 2006 – Capital
Markets
The
Capital Markets segment pre-tax earnings declined 12% despite a 2% increase in
net revenues. Commission revenue was down slightly, the net of a decline in
equity commissions related to the decline in commissions generated by
underwriting transactions, and an increase in fixed income commissions, a result
of the increased volatility. Commissions generated by underwriting transactions
reached a record $41 million in the prior year and were only $22 million in the
current year.
The
increase in underwriting fees included increases of $3 million at RJA, despite a
decline in the number of deals from 97 to 78, and $3 million at RJ Ltd. on 30
deals versus 29 in the prior year. Merger and acquisition fees were up $15
million, reaching an all time record level of $60 million for the year. During
fiscal 2007, RJA closed 15 individual merger and acquisition transactions with
fees in excess of $1 million. Trading profits were down 58% from the prior year,
reflecting a particularly difficult fixed income trading environment during the
fourth quarter. As credit issues drove fixed income product values down there
was a flight to quality and the firm’s economic hedges (short positions in US
Treasuries) contributed additional losses. Meanwhile, there were also increased
losses in equity customer facilitations and OTC market making. Raymond James Tax
Credit Fund (“RJTCF”) revenues increased 11% as they invested $375 million for
institutional investors versus $277 million in the prior year. Interest revenue
increased related to higher average fixed income inventory levels.
Expenses
were generally in line with revenue growth with two
exceptions. Communications and information processing increased
predominantly due to increased costs associated with market information systems
and software development costs. Other expense reflects a shift to the use of
electronic and other non-exchange clearing methods and includes transaction
related underwriting expenses incurred by RJTCF.
Results of Operations -
Asset Management
The
following table presents consolidated financial information for the Asset
Management segment for the years indicated:
|
Year
Ended
|
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
%
Incr.
|
|
September
30,
|
|
|
2008
|
|
(Decr.)
|
|
2007
|
|
(Decr.)
|
|
2006
|
|
|
($
in 000's)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Investment
Advisory Fees
|
$ 195,884
|
|
2%
|
|
$ 192,763
|
|
14%
|
|
$ 169,055
|
|
Other
|
41,044
|
|
(3%)
|
|
42,112
|
|
9%
|
|
38,766
|
|
Total
Revenues
|
236,928
|
|
1%
|
|
234,875
|
|
13%
|
|
207,821
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Admin
& Incentive Comp and Benefit Costs
|
74,392
|
|
2%
|
|
72,887
|
|
9%
|
|
66,689
|
|
Communications
and Information Processing
|
18,902
|
|
3%
|
|
18,360
|
|
11%
|
|
16,523
|
|
Occupancy
and Equipment
|
4,228
|
|
(2%)
|
|
4,296
|
|
3%
|
|
4,163
|
|
Business
Development
|
8,898
|
|
-
|
|
8,876
|
|
6%
|
|
8,379
|
|
Investment
Advisory Fees
|
46,788
|
|
1%
|
|
46,368
|
|
18%
|
|
39,281
|
|
Other
|
24,435
|
|
6%
|
|
22,945
|
|
(3%)
|
|
23,588
|
|
Total
Expenses
|
177,643
|
|
2%
|
|
173,732
|
|
10%
|
|
158,623
|
|
Income
Before Taxes And Minority Interest
|
59,285
|
|
(3%)
|
|
61,143
|
|
24%
|
|
49,198
|
|
Minority
Interest
|
420
|
|
|
|
626
|
|
|
|
449
|
|
Pre-tax
Earnings
|
$ 58,865
|
|
(3%)
|
|
$ 60,517
|
|
24%
|
|
$ 48,749
|
|
The following table presents assets
under management and a portion of the Company’s non-managed fee based assets at
the dates indicated:
|
September
30,
|
%
Incr.
|
September
30,
|
%
Incr.
|
September
30,
|
|
2008
|
(Decr.)
|
2007
|
(Decr.)
|
2006
|
Assets
Under Management:
|
($
in 000's)
|
|
|
|
|
|
|
Eagle
Asset Mgmt., Inc.
|
|
|
|
|
|
Retail
|
$ 5,852,904
|
(15%)
|
$ 6,925,930
|
24%
|
$ 5,600,806
|
Institutional
|
6,753,282
|
(11%)
|
7,601,374
|
11%
|
6,862,611
|
Total
Eagle
|
12,606,186
|
(13%)
|
14,527,304
|
17%
|
12,463,417
|
|
|
|
|
|
|
Heritage
Family of Mutual Funds
|
|
|
|
|
|
Money
Market
|
6,108,327
|
11%
|
5,524,598
|
(12%)
|
6,306,508
|
Other
|
3,043,460
|
(23%)
|
3,956,677
|
32%
|
3,004,816
|
Total
Heritage
|
9,151,787
|
(3%)
|
9,481,275
|
2%
|
9,311,324
|
|
|
|
|
|
|
Raymond
James Consulting Services (“RJCS”)
|
7,989,510
|
(17%)
|
9,638,691
|
22%
|
7,915,168
|
Eagle
Boston Investment Management, Inc.
|
633,646
|
2%
|
622,860
|
(37%)
|
996,353
|
Freedom
Accounts
|
7,603,840
|
(7%)
|
8,144,920
|
59%
|
5,122,733
|
|
|
|
|
|
|
Total
Assets Under Management
|
37,984,969
|
(10%)
|
42,415,050
|
18%
|
35,808,995
|
|
|
|
|
|
|
Less: Assets
Managed for Affiliated Entities
|
(4,675,129)
|
(12%)
|
(5,305,506)
|
33%
|
(3,991,281)
|
|
|
|
|
|
|
Third
Party Assets Under Management
|
$
33,309,840
|
(10%)
|
$
37,109,544
|
17%
|
$
31,817,714
|
|
|
|
|
|
|
Non-Managed
Fee Based Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Passport
|
$
17,681,201
|
(11%)
|
$ 19,945,507
|
21%
|
$ 16,514,313
|
IMPAC
|
8,436,116
|
(12%)
|
9,565,051
|
20%
|
7,966,313
|
Total
|
$
26,117,317
|
(11%)
|
$
29,510,558
|
21%
|
$24,480,626
|
Year ended September 30,
2008 Compared with the Year ended September 30, 2007 - Asset
Management
Asset
Management revenues increased modestly despite a 10% decline in assets under
management as most of this decline occurred in the last few weeks of the fiscal
year. Expenses were well controlled, thus pre-tax income declined only 3%.
Assets under management declined by 10% or $3.8 billion during the year as
positive net sales did not offset a significant decline in the market value of
portfolios. Portfolios managed by Eagle experienced approximately $1.9 billion
in market depreciation in 2008 compared to $2.1 billion in appreciation during
the prior year. Market depreciation of RJCS/Freedom portfolios was approximately
$4.0 billion compared to appreciation of $1.3 billion in fiscal
2007. Other fee based programs (non-managed) witnessed a decline in
market values in the amount of $5.9 billion in 2008 as compared to a gain of
$1.4 billion in the prior year. Despite adverse market conditions,
net inflows for the segment amounted to approximately $7 billion in 2008. This
included approximately $2.3 billion in managed accounts (including Eagle) and
$4.7 billion in non-managed fee based accounts. Money market fund
assets increased despite the transfer of $550 million to RJBank in March
2008. Performance results were very good, as 87% of the investment
managers participating in the Raymond James Consulting Services program
outperformed their indices for the five year period ended September 30, 2008. Of
Eagle’s 11 principal investment programs, 10 outperformed their indices during
the same period. At September 30, 2008, five of the eight funds
managed by Heritage had earned a four-star overall rating from
Morningstar.
Year ended September 30,
2007 Compared with the Year ended September 30, 2006 - Asset
Management
The Asset
Management segment has benefited significantly from the successful recruiting in
PCG. New Financial Advisors bring additional client assets, a portion of which
is often directed into an asset management alternative. In addition, both Eagle
and Heritage have been successful in their efforts to increase their presence on
outside broker-dealer platforms. Eagle’s retail sales to outside broker-dealers
were 33% of their total 2007 sales, while Heritage’s were 78% of their total
sales. Revenues in this segment increased 13% on a 17% increase in assets under
management, as there continues to be some fee compression. Expenses increased
only 10%, generating a 24% increase in pre-tax earnings and a 26% margin as a
result of operating leverage. Money market fund balances declined as a result of
the transfer of $1.3 billion to RJBank in March 2007.
Results of Operations -
RJBank
The following table presents
consolidated financial information for RJBank for the years
indicated:
|
Year
Ended
|
|
September
30,
|
%
Incr.
|
September
30,
|
%
Incr.
|
September
30,
|
|
2008
|
(Decr.)
|
2007
|
(Decr.)
|
2006
|
|
($
in 000's)
|
Interest
Earnings
|
|
|
|
|
|
Interest
Income
|
$
407,123
|
46%
|
$
278,248
|
144%
|
$
114,065
|
Interest
Expense
|
191,537
|
(1%)
|
193,747
|
163%
|
73,529
|
Net
Interest Income
|
215,586
|
155%
|
84,501
|
108%
|
40,536
|
|
|
|
|
|
|
Other
Income
|
(1,819)
|
(237%)
|
1,324
|
111%
|
627
|
Net
Revenues
|
213,767
|
149%
|
85,825
|
109%
|
41,163
|
|
|
|
|
|
|
Non-Interest
Expense
|
|
|
|
|
|
Employee
Compensation and Benefits
|
10,091
|
30%
|
7,778
|
27%
|
6,135
|
Communications
and Information Processing
|
1,130
|
7%
|
1,052
|
16%
|
907
|
Occupancy
and Equipment
|
721
|
-
|
719
|
14%
|
629
|
Provision
for Loan Losses and Unfunded
|
|
|
|
|
|
Commitments
|
57,127
|
78%
|
32,150
|
134%
|
13,760
|
Other
|
32,416
|
89%
|
17,121
|
359%
|
3,729
|
Total
Non-Interest Expense
|
101,485
|
73%
|
58,820
|
134%
|
25,160
|
Pre-tax
Earnings
|
$ 112,282
|
316%
|
$ 27,005
|
69%
|
$ 16,003
|
The
tables below present certain credit quality trends for corporate loans and
residential/consumer loans:
|
Fiscal
Year
|
|
September
30,
|
September
30
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000’s)
|
|
|
|
|
Net
Loan Charge-offs:
|
|
|
|
Corporate
Loans
|
$
(10,169)
|
$ (629)
|
$
-
|
Residential/Consumer
Loans
|
(3,447)
|
(453)
|
(52)
|
|
|
|
|
Total
|
$(13,616)
|
$
(1,082)
|
$
(52)
|
|
|
|
|
Allowance
for Loan Loss:
|
|
|
|
Corporate
Loans
|
$
79,404
|
$
42,358
|
$
14,814
|
Residential/Consumer
Loans
|
8,751
|
4,664
|
3,880
|
|
|
|
|
Total
|
$
88,155
|
$
47,022
|
$
18,694
|
|
September
30,
|
September
30
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000’s)
|
|
|
|
|
Nonperforming
Assets:
|
|
|
|
Corporate
|
$
39,390
|
$ 682
|
$ -
|
Residential/Consumer
|
22,918
|
5,036
|
2,091
|
|
|
|
|
Total
|
$
62,308
|
$ 5,718
|
$ 2,091
|
|
|
|
|
Total
Loans(1):
|
|
|
|
Corporate
Loans(1)
|
$
4,563,065
|
$
2,769,517
|
$ 956,038
|
Residential/Consumer
Loans(1)
|
2,620,317
|
1,941,714
|
1,325,488
|
|
|
|
|
Total
|
$
7,183,382
|
$
4,711,231
|
$
2,281,526
|
(1) Net
of unearned income and deferred expenses.
Year ended September 30,
2008 Compared with the Year ended September 30, 2007 -
RJBank
Net
interest income increased 155% and pre-tax profits at RJBank more than
quadrupled during the fiscal year compared to the prior year. Interest revenue
at RJBank increased 46% despite falling rates, with the loan balances increasing
from $4.7 billion to $7.1 billion. The loan increase consisted primarily of 24%
purchased residential mortgage pools and 73% corporate loans, with 97% of the
latter purchased or originated participations in syndicated loans. As a result,
total assets increased from $6.3 billion to $9.4 billion, adjusted to exclude
the investment of the $1.9 billion FHLB advance repaid on October 1, 2008.
Corporate loans increased from $2.8 billion to $4.6 billion, while retail and
residential loans increased from $1.9 billion to $2.6 billion. The
growth in loans was funded by the growth in customer deposits. The influx of
client cash balances into the RJBank Deposit Program (reaching historically high
levels), generated by a combination of new clients bringing cash to the firm,
clients raising cash, and clients electing to hold their cash in FDIC insured
accounts, plus the bulk transfer of $550 million in cash balances in March 2008,
resulted in a $3.2 billion increase in deposit balances from $5.6 billion to
$8.8 billion. As a result of the falling interest rate environment, interest
expense fell 1% despite the higher balances. RJBank has benefited from the
declining interest rate environment as the rates on the interest earning assets
have declined at a slower pace than the rates paid on deposits. In addition,
RJBank’s corporate loan portfolio is predominantly LIBOR based and LIBOR was
unusually high in comparison to other rates for a period of time during the
year, generating particularly good spreads. The growth in loan balances at
RJBank gave rise to an attendant increase in loan loss provisions; the
provisions for loan loss and unfunded lending commitments were $57.1 million
compared to $32.1 million in the prior year. Net loan charge-offs for the year
were $13.6 million compared to $1.1 million in the prior year. RJBank has no
exposure to subprime loans.
In
addition to the increase in the allowance for loan loss, charge-offs and
nonperforming assets have increased as the loan portfolio has grown and aged.
The Company does not believe that this is related to a significant decline in
the loan credit quality
other than for loans to borrowers in the Residential Acquisition and
Development/Homebuilder industry. During the year ended September 30, 2008,
RJBank experienced some credit quality deterioration in corporate credits in
this industry segment. Four credits in this segment account for approximately
$35.7 million in nonaccrual loans (91% of the nonperforming corporate assets
above) and three of those credits contributed $8.5 million in net charge-offs
(83% of the corporate loan charge-offs above) for the year ended September 30,
2008. Total loans outstanding and commitments in this industry segment are $98
million and $116 million, respectively. Committed exposures to this industry
segment have been reduced by more than 40% over the past year. Credit trends in
other segments of our corporate loan portfolio have remained relatively stable
to date.
RJBank
does not own any payment option ARM loans or subprime mortgage loans. Shared
National Credits (“SNCs”), large syndicated corporate loans that are reviewed
under a common program in which several bank regulatory agencies participate,
comprise approximately 90% of RJBank’s corporate loan portfolio. RJBank’s
residential loan portfolio consists of 76% in interest-only mortgages. 7% of the
residential loan portfolio was originated under a streamlined documentation
feature for high net worth clients or with reduced documentation, which may be
considered Alt A. However, for streamlined documentation, very strict standards
must be met including a minimum $1.0 million account relationship, maximum
loan-to-value (“LTV”) of 70%, and minimum credit score of 720. In addition, the
streamlined documentation feature is only available for purchases and is not
available for cash out refinance transactions.
As of
October 31, 2008, the unrealized loss on the Company’s available for sale
securities portfolio was $114.4 million, compared to $89.0 million as of
September 30, 2008, a decrease in value of $25.4 million. The decline in value
was due to a significant widening of interest rate spreads across market sectors
related to the continued illiquidity and uncertainty in the markets. No factors
were identified that would indicate additional securities were considered to be
other-than-temporarily impaired and therefore had no impact on
earnings.
Year ended September 30,
2007 Compared with the Year ended September 30, 2006 -
RJBank
The
Company completed its second bulk transfer of cash balances into the RJBank
Deposit Program in March 2007, moving another $1.3 billion. This, combined with
organic growth from the influx of new client assets, resulted in a $2.6 billion
increase in average deposit balances. This increase in average deposit balances
provided the funding for the $1.6 billion increase in average loan balances.
This increase was 38% purchased residential mortgage pools and 62% corporate
loans, 98% of which are purchased interests in corporate loan syndications with
the remainder originated by RJBank. As a result of this growth, RJBank net
interest income increased 108% to $84.5 million. Due to robust loan growth, the
associated allowance for loan losses that are established upon recording a new
loan and making new unfunded commitments required a provision of over $32
million in 2007. Accordingly, RJBank’s pre-tax income increased only 69%. During
periods of growth when new loans are originated or purchased, an allowance for
loan losses is established for potential losses inherent in those new loans.
Accordingly, a robust period of growth generally results in charges to earnings
in that period, while the benefits of higher interest earnings are realized in
later periods.
The
following table presents average balance data and operating interest income and
expense data for the Company's banking operations, as well as the related
interest yields and rates and interest spread for the years
indicated:
|
Year
Ended
|
|
September
30, 2008
|
September
30, 2007
|
September
30, 2006
|
|
|
Operating
|
Average
|
|
Operating
|
Average
|
|
Operating
|
Average
|
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued
on next page)
|
Interest-Earning
Banking Assets:
|
|
|
|
|
|
|
|
|
|
Loans,
Net of Unearned
|
|
|
|
|
|
|
|
|
|
Income
(1)
|
$
6,144,131
|
$346,560
|
5.64%
|
$
3,180,331
|
$204,959
|
6.44%
|
$
1,601,708
|
$
95,366
|
5.95%
|
Reverse
Repurchase
|
|
|
|
|
|
|
|
|
|
Agreements
|
786,598
|
22,839
|
2.90%
|
878,822
|
46,438
|
5.28%
|
122,301
|
6,497
|
5.31%
|
Agency
Mortgage backed
|
|
|
|
|
|
|
|
|
|
Securities
|
225,935
|
8,226
|
3.64%
|
199,514
|
11,086
|
5.56%
|
157,454
|
7,833
|
4.97%
|
Non-agency
Collateralized
|
|
|
|
|
|
|
|
|
|
Mortgage
Obligations
|
379,979
|
23,474
|
6.18%
|
229,108
|
12,808
|
5.59%
|
21,204
|
1,151
|
5.43%
|
Other
Government Agency
|
|
|
|
|
|
|
|
|
|
Obligations
|
-
|
-
|
-
|
-
|
-
|
-
|
8,314
|
404
|
4.86%
|
Corporate
Debt and Asset
|
|
|
|
|
|
|
|
|
|
Backed
Securities
|
-
|
-
|
-
|
-
|
-
|
-
|
8,839
|
499
|
5.65%
|
Money
Market Funds, Cash
|
|
|
|
|
|
|
|
|
|
and
Cash Equivalents
|
190,954
|
5,416
|
2.84%
|
49,979
|
2,533
|
5.07%
|
34,469
|
1,607
|
4.66%
|
FHLB
Stock and Other
|
12,439
|
608
|
4.89%
|
7,121
|
424
|
5.95%
|
12,936
|
708
|
5.47%
|
Total
Interest-Earning
|
|
|
|
|
|
|
|
|
|
Banking
Assets
|
7,740,036
|
407,123
|
5.26%
|
4,544,875
|
278,248
|
6.12%
|
1,967,225
|
114,065
|
5.80%
|
Non-Interest-Earning
|
|
|
|
|
|
|
|
|
|
Banking
Assets
|
24,835
|
|
|
16,410
|
|
|
13,329
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
$
7,764,871
|
|
|
$
4,561,285
|
|
|
$
1,980,554
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
|
|
|
|
|
|
|
|
|
|
Banking
Liabilities:
|
|
|
|
|
|
|
|
|
|
Retail
Deposits:
|
|
|
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 242,058
|
$
10,780
|
4.45%
|
$ 239,478
|
$ 11,021
|
4.60%
|
$ 269,949
|
$
10,872
|
4.03%
|
Money
Market, Savings,
|
|
|
|
|
|
|
|
|
|
and
NOW Accounts (2)
|
6,895,785
|
174,252
|
2.53%
|
3,890,955
|
179,741
|
4.62%
|
1,293,104
|
51,313
|
3.97%
|
|
|
|
|
|
|
|
|
|
|
FHLB
Advances and Other
|
141,339
|
6,505
|
4.60%
|
56,932
|
2,985
|
5.24%
|
233,428
|
11,344
|
4.86%
|
|
|
|
|
|
|
|
|
|
|
Total
Interest-Bearing
|
|
|
|
|
|
|
|
|
|
Banking
Liabilities
|
7,279,182
|
191,537
|
2.63%
|
4,187,365
|
193,747
|
4.63%
|
1,796,481
|
73,529
|
4.09%
|
|
|
|
|
|
|
|
|
|
|
Non-Interest-Bearing
|
|
|
|
|
|
|
|
|
|
Banking
Liabilities
|
20,630
|
|
|
98,117
|
|
|
11,781
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
|
|
|
Liabilities
|
7,299,812
|
|
|
4,285,482
|
|
|
1,808,262
|
|
|
Total
Banking
|
|
|
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
|
|
|
Equity
|
465,059
|
|
|
275,803
|
|
|
172,292
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
|
|
|
Liabilities
and
|
|
|
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
|
|
|
Equity
|
$
7,764,871
|
|
|
$
4,561,285
|
|
|
$
1,980,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
September
30, 2008
|
September
30, 2007
|
September
30, 2006
|
|
|
|
Operating
|
Average
|
|
|
Operating
|
Average
|
|
|
Operating
|
Average
|
|
Average
|
|
Interest
|
Yield/
|
Average
|
|
Interest
|
Yield/
|
Average
|
|
Interest
|
Yield/
|
|
Balance
|
|
Inc./Exp.
|
Cost
|
Balance
|
|
Inc./Exp.
|
Cost
|
Balance
|
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued)
|
Excess
of Interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
Over Interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities/Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
$
460,854
|
|
$
215,586
|
|
$
357,510
|
|
$ 84,501
|
|
$
170,744
|
|
$ 40,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Net Interest (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
Spread
|
|
|
|
2.63%
|
|
|
|
1.49%
|
|
|
|
1.71%
|
Margin
(Net Yield on
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-
Earning
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Assets)
|
|
|
|
2.79%
|
|
|
|
1.86%
|
|
|
|
2.06%
|
Ratio
of Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
to Interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
106.33%
|
|
|
|
108.54%
|
|
|
|
109.50%
|
Return
On Average(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
|
|
|
0.91%
|
|
|
|
0.38%
|
|
|
|
0.48%
|
Total
Banking
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder's Equity
|
|
|
|
15.18%
|
|
|
|
6.27%
|
|
|
|
5.54%
|
Average
Equity to
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking
Assets
|
|
|
|
5.99%
|
|
|
|
6.05%
|
|
|
|
8.70%
|
(1)
|
Nonaccrual
loans are included in the average loan balances. Payment 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 years ended September 30, 2008, 2007,
and 2006, respectively was $15.1 million, $8.1 million, and $3.5
million.
|
(2)
|
Negotiable
Order of Withdrawal (“NOW”)
account.
|
(3)
|
The
increase in interest spreads is due to a rapid decline in short-term
interest rates, which led to a decline in RJBank’s cost of
funds.
|
(4)
|
RJBank
has gone through a period of rapid loan growth and accordingly established
allowances for loan losses for potential losses inherent in the loan
portfolios. These charges to earnings have a negative impact on returns
during periods of loan growth.
|
Increases and decreases in interest
income and operating 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.
|
2008
Compared to 2007
|
2007
Compared to 2006
|
|
Increase
(Decrease) Due To
|
Increase
(Decrease) Due To
|
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
|
(in
000’s)
|
Interest
Revenue
|
|
|
|
|
|
|
Interest-Earning
Banking Assets:
|
|
|
|
|
|
|
Loans,
Net of Unearned Income
|
$ 191,005
|
$ (49,404)
|
$141,601
|
$ 93,992
|
$ 15,601
|
$
109,593
|
Reverse
Repurchase Agreements
|
(4,873)
|
(18,726)
|
(23,599)
|
40,189
|
(248)
|
39,941
|
Agency
Mortgage Backed Securities
|
1,468
|
(4,328)
|
(2,860)
|
2,092
|
1,161
|
3,253
|
Non-agency
Collateralized Mortgage Obligations
|
8,435
|
2,231
|
10,666
|
11,285
|
372
|
11,657
|
Other
Government Agency Obligations
|
-
|
-
|
-
|
(404)
|
-
|
(404)
|
Corporate
Debt and Asset Backed Securities
|
-
|
-
|
-
|
(499)
|
-
|
(499)
|
Money
Market Funds, Cash and Cash Equivalents
|
7,145
|
(4,262)
|
2,883
|
723
|
203
|
926
|
FHLB
Stock and Other
|
317
|
(133)
|
184
|
(318)
|
34
|
(284)
|
|
|
|
|
|
|
|
Total
Interest-Earning Banking Assets
|
$ 203,497
|
$ (74,622)
|
$
128,875
|
$
147,060
|
$ 17,123
|
$
164,183
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
|
|
|
Retail
Deposits:
|
|
|
|
|
|
|
Certificates
Of Deposit
|
$ 119
|
$ (360)
|
$ (241)
|
$ (1,227)
|
$ 1,376
|
$ 149
|
Money
Market, Savings and
|
|
|
|
|
|
|
NOW
Accounts
|
138,808
|
(144,297)
|
(5,489)
|
103,372
|
25,056
|
128,428
|
FHLB
Advances and Other
|
4,426
|
(906)
|
3,520
|
(8,577)
|
218
|
(8,359)
|
|
|
|
|
|
|
|
Total
Interest-Bearing Banking Liabilities
|
143,353
|
(145,563)
|
(2,210)
|
93,568
|
26,650
|
120,218
|
|
|
|
|
|
|
|
Change
in Net Operating Interest Income
|
$ 60,144
|
$ 70,941
|
$131,085
|
$ 53,492
|
$ (9,527)
|
$ 43,965
|
Results of Operations –
Emerging Markets
|
Year
Ended
|
|
September
30,
|
%
Incr.
|
September
30,
|
%
Incr.
|
September
30,
|
|
2008
|
(Decr.)
|
2007
|
(Decr.)
|
2006
|
|
($
in 000's)
|
Revenues
|
|
|
|
|
|
Securities
Commissions and
|
|
|
|
|
|
Investment
Banking Fees
|
$
32,292
|
(23%)
|
$
41,879
|
(4%)
|
$
43,703
|
Investment
Advisory Fees
|
3,326
|
17%
|
2,846
|
48%
|
1,919
|
Interest
Income
|
3,649
|
(10%)
|
4,042
|
11%
|
3,647
|
Trading
Profits
|
1,027
|
(80%)
|
5,254
|
41%
|
3,720
|
Other
|
975
|
(81%)
|
5,062
|
123%
|
2,274
|
Total
Revenues
|
41,269
|
(30%)
|
59,083
|
7%
|
55,263
|
|
|
|
|
|
|
Interest
Expense
|
1,235
|
15%
|
1,075
|
(27%)
|
1,467
|
Net
Revenues
|
40,034
|
(31%)
|
58,008
|
8%
|
53,796
|
|
|
|
|
|
|
Non-Interest
Expense
|
|
|
|
|
|
Compensation
Expense
|
25,917
|
(8%)
|
28,071
|
(4%)
|
29,185
|
Other
Expense
|
17,504
|
(25%)
|
23,302
|
17%
|
19,867
|
Total
Non-Interest Expense
|
43,421
|
(15%)
|
51,373
|
5%
|
49,052
|
|
|
|
|
|
|
Minority
Interest
|
(127)
|
|
2,995
|
|
1,887
|
Pre-tax
(Loss) Earnings
|
$ (3,260)
|
(190%)
|
$ 3,640
|
27%
|
$ 2,857
|
Year ended September 30,
2008 Compared with the Year ended September 30, 2007 – Emerging
Markets
Emerging
markets consists of the results of the Company’s joint ventures in Argentina,
Uruguay, Brazil and Turkey. The results in the emerging market segment declined
from a $3.6 million profit in the prior year to a $3.3 million loss in fiscal
2008. This decline was a result of a greater decline in revenues than
an increase in expenses. Expenses were impacted by the Company’s
investment in Brazil. The global economic slowdown and credit crisis
significantly impacted emerging markets in all business lines. Commission
revenue declined 23% as the economic slowdown and a series of political crises
in Turkey and Argentina severely undermined investors’ confidence in these
countries. Trading profits declined due to losses taken in proprietary positions
in Turkey. The commission expense portion of compensation expense declined in
proportion to the decline in commission revenue. Other expenses in the prior
year were unusually high due to the accrual of tax liabilities and the related
legal expenses. The Company is still awaiting the final outcome of the court
case in Turkey, and in light of the suspension of the entity’s license, its
ability to continue as a going concern is uncertain. The Company has fully
reserved for its investment in the Turkish joint venture. Accordingly, pre-tax
earnings do not include any net impact of the Turkish joint
venture.
Year ended September 30,
2007 Compared with the Year ended September 30, 2006 – Emerging
Markets
This
segment consists of the results of the Company’s joint ventures in Argentina,
Uruguay and Turkey. Securities commissions declined in Turkey, increased in
Argentina, and the joint venture in India generated $2 million in commissions in
fiscal 2006 whereas none were included in fiscal 2007 due to the Company’s sale
of its interest in this joint venture early in 2007. Investment banking revenues
were flat. Trading profits increased $3.5 million in Argentina, stemming from a
large volume of ADR trades. Other income includes the $2.5 million gain on the
sale of the Company’s interest in its joint venture in India.
The $2 million increase in expense is
predominantly related to the accrual of estimated tax liabilities in
Turkey.
Results of Operations –
Stock Loan/Borrow
|
Year
Ended
|
|
September
30,
|
%
Incr.
|
September
30,
|
%
Incr.
|
September
30,
|
|
2008
|
(Decr.)
|
2007
|
(Decr.)
|
2006
|
|
($
in 000's)
|
Interest
Income and Expense
|
|
|
|
|
|
Interest
Income
|
$
36,843
|
(46%)
|
$
68,685
|
15%
|
$
59,947
|
Interest
Expense
|
26,552
|
(55%)
|
59,276
|
25%
|
47,593
|
Net
Interest Income
|
10,291
|
9%
|
9,409
|
(24%)
|
12,354
|
|
|
|
|
|
|
Non-Interest
Expenses
|
3,257
|
(26%)
|
4,406
|
1%
|
4,353
|
Pre-tax
Earnings
|
$ 7,034
|
41%
|
$ 5,003
|
(37%)
|
$ 8,001
|
Year ended September 30,
2008 Compared with the Year ended September 30, 2007 – Stock
Loan/Borrow
Despite
an approximately 15% decline in average stock borrow balances from the prior
year, net interest in this segment increased 9%. The vast majority of the
balances continue to be matched book business with similar asset and liability
balances. Average spreads on the matched book business increased from 0.5% to
0.65%, resulting in the increased net interest. Expenses were lower than in the
prior year resulting in a 41% increase in pre-tax profits.
Year ended September 30,
2007 Compared with the Year ended September 30, 2006 – Stock
Loan/Borrow
The
Company’s stock borrow balances averaged $1.1 billion during fiscal year 2007
vs. $1.0 billion in fiscal 2006. The Company’s stock loan balances are
predominantly the result of a matched-book however, box loan/borrow balances are
also carried. As the Company’s stock loan business is predominantly a
matched-book business, stock borrow balances were similar. Average spreads
decreased from 2.0% in fiscal 2006 to 0.5% in 2007, resulting in a 24% decrease
in net interest income and a 37% decrease in pre-tax profits.
Results of Operations –
Proprietary Capital
The
following table presents consolidated financial information for the Propriety
Capital segment for the years indicated:
|
Year
Ended
|
|
September
30,
|
%
Incr.
|
September
30,
|
%
Incr.
|
September
30,
|
|
2008
|
(Decr.)
|
2007
|
(Decr.)
|
2006
|
|
($
in 000's)
|
Revenues
|
|
|
|
|
|
Investment
Advisory Fees
|
$ 749
|
-
|
$ 746
|
(54%)
|
$ 1,625
|
Other
|
22,026
|
192%
|
7,534
|
(52%)
|
15,687
|
Total
Revenues
|
22,775
|
175%
|
8,280
|
(52%)
|
17,312
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
Compensation
Expense
|
3,759
|
60%
|
2,348
|
(21%)
|
2,959
|
Other
Expenses
|
2,823
|
278%
|
747
|
(26%)
|
1,003
|
Total
Expenses
|
6,582
|
113%
|
3,095
|
(22%)
|
3,962
|
|
|
|
|
|
|
Minority
Interest
|
8,852
|
|
1,608
|
|
4,882
|
Pre-tax
Earnings
|
$ 7,341
|
105%
|
$ 3,577
|
(58%)
|
$ 8,468
|
Year ended September 30,
2008 Compared with the Year ended September 30, 2007 – Proprietary
Capital
Proprietary
Capital results are driven by the valuations made within Raymond James Capital
Partners, L.P., Ballast Point Ventures I and II, L.P., the EIF Funds, the
Company’s direct merchant banking investments managed by Raymond James Capital,
Inc. and the third party private equity funds in which RJF is
invested. During fiscal 2008 the Company’s direct merchant banking
investments, Raymond James Capital Partners LP and RJF private equity investment
portfolio increased in value by $3.0 million, $8.2 million and $4.0 million,
respectively.
Year ended September 30,
2007 Compared with the Year ended September 30, 2006 – Proprietary
Capital
Proprietary
Capital results are driven by the valuations made within Raymond James Capital
Partners, L.P., Ballast Point Ventures, L.P., the EIF Funds and the third party
private equity funds in which RJF is invested. Fiscal 2006 included write-ups
within Ballast Point of $3.6 million versus a write-down of $1 million in fiscal
2007. Fiscal 2007 included valuation adjustments to the RJF private equity
investment portfolio.
Results of Operations -
Other
The
following table presents consolidated financial information for the Other
segment for the years indicated:
|
Year
Ended
|
|
September
30,
|
%
Incr.
|
September
30,
|
%
Incr.
|
September
30,
|
|
2008
|
(Decr.)
|
2007
|
(Decr.)
|
2006
|
|
($
in 000's)
|
Revenues
|
|
|
|
|
|
Interest
Income
|
$
7,076
|
(9%)
|
$ 7,773
|
89%
|
$ 4,114
|
Other
|
(1,562)
|
(123%)
|
6,659
|
(65%)
|
19,197
|
Total
Revenues
|
5,514
|
(62%)
|
14,432
|
(38%)
|
23,311
|
|
|
|
|
|
|
Other
Expense
|
28,787
|
167%
|
10,780
|
(11%)
|
12,063
|
Pre-tax
(Loss) Earnings
|
$ (23,273)
|
(737%)
|
$ 3,652
|
(68%)
|
$
11,248
|
Year ended September 30,
2008 Compared with the Year ended September 30, 2007 - Other
Revenue
in the Other segment includes interest earnings on available corporate cash
balances and gains/losses on corporate investments, including company-owned life
insurance used as a funding vehicle for non-qualified deferred compensation
programs. Expenses in this segment are predominantly executive compensation and
certain compensation accruals related to the Company’s benefit plans as a result
of increased profitability at RJBank.
Year ended September 30,
2007 Compared with the Year ended September 30, 2006 - Other
Revenue
in the Other segment includes $1 million in gains on corporate investments,
including Eagle asset managed accounts, and nearly $3 million in proceeds from
company owned life insurance. Interest income represents earnings on available
corporate cash balances. Expenses in this segment are predominantly executive
compensation.
Liquidity and Capital
Resources
The
Company’s senior management establishes the liquidity and capital policies of
the Company. These policies include senior management’s review of short- and
long-term cash flow forecasts, review of monthly capital expenditures, the
monitoring of the availability of alternative sources of financing, and the
daily monitoring of liquidity in the Company’s significant subsidiaries.
Decisions on the allocation of capital to business units considers, among other
factors, projected profitability and cash flow, risk and impact on future
liquidity needs. The Company’s Treasury Department assists in evaluating,
monitoring and controlling the impact that the Company’s business activities
have on its financial condition, liquidity and capital structure as well as
maintains the relationships the Company has with various lenders. The objectives
of these policies are to support the successful execution of the Company’s
business strategies while ensuring ongoing and sufficient
liquidity.
The
unprecedented volatility of the financial markets, accompanied by a severe
deterioration of economic conditions worldwide, has had a pronounced adverse
affect on the availability of credit through traditional sources. As a result of
concern about the stability of the markets generally and the strength of
counterparties specifically, many lenders have reduced and, in some cases,
ceased to provide funding to the Company. See Sources of Liquidity-Borrowings
section below for additional information. Further, the current environment is
not conducive to most types of financings.
Liquidity
is provided primarily through the Company’s business operations and financing
activities.
Cash
provided by operating activities during the fiscal year ended September 30, 2008
was approximately $84.3 million, primarily attributable to the decrease in stock
borrowed receivables, the modest increases in brokerage client deposits
(directly correlated to the increase in segregated assets) and payables to
broker-dealers and clearing organizations. This was partially offset by the
decrease in stock loaned payables and modest increases in segregated
assets.
Investing
activities used $2.7 billion, which is primarily due to activity at RJBank,
including loans originated and purchased and purchases of available for sale
securities. This was partially offset by loan repayments, the
reduction in securities purchased under agreements to resell and maturations and
repayments of available for sale securities at RJBank.
Financing
activities provided $5.2 billion, the result of an increase in deposits at
RJBank, proceeds from borrowed funds, which includes a $1.9 billion overnight
borrowing to meet point-in-time regulatory balance sheet composition
requirements related to RJBank’s qualifying as a thrift institution, and cash
provided from the exercise of stock options and employee stock purchases. This
was partially offset by the purchase of treasury stock, including the open
market purchase of 2.7 million shares during the fiscal year, and the payment of
cash dividends.
The
Company believes its existing assets, most of which are liquid in nature,
together with funds generated from operations and potential external financing,
should provide adequate funds for continuing operations at current levels of
activity.
Sources
of Liquidity
In
addition to the liquidity provided through the Company’s business operations,
the Company has various potential sources of capital.
Liquidity
Available from Subsidiaries
The
Company’s two principal domestic broker-dealer subsidiaries are required to
maintain net capital equal to the greater of $250,000 or 2% of aggregate debit
balances arising from customer transactions. At September 30, 2008, both of
these brokerage subsidiaries far exceeded their minimum net capital
requirements. At that date, these subsidiaries had excess net capital of $324.1
million, of which approximately $150 to $200 million is available for dividend
(subject to cash availability and possibly to regulatory approval) while still
maintaining a capital level well above regulatory “early warning”
guidelines.
Subject
to notification and in some cases approval by the OTS, RJBank may dividend to
the Company as long as RJBank maintains its “well capitalized” status under bank
regulatory capital guidelines.
Liquidity
available to the Company from its subsidiaries, other than its broker-dealer
subsidiaries and RJBank, is not limited by regulatory requirements.
Borrowings
and Financing Arrangements
The
following table presents the Company’s financial arrangements as of September
30, 2008:
|
Committed
|
Committed
|
Uncommitted
|
Uncommitted
|
Total
Financing
|
|
Unsecured
|
Secured
|
Secured
|
Unsecured
|
Arrangements
|
|
(in
000’s)
|
|
|
|
|
|
|
RJA
(with third party lenders)
|
$ -
|
$
150,000
|
$
835,100
|
$
200,000
|
$
1,185,100
|
RJA
(with related parties)
|
-
|
-
|
360,000
|
-
|
360,000
|
RJF
|
200,000
|
-
|
-
|
-
|
200,000
|
|
|
|
|
|
|
Total
Company
|
$
200,000
|
$
150,000
|
$
1,195,100
|
$
200,000
|
$
1,745,100
|
At
September 30, 2008, the Company maintained three 364-day committed and several
uncommitted financing arrangements denominated in U.S. dollars and one
uncommitted line of credit denominated in Canadian dollars
(“CDN”). At September 30, 2008, the aggregate domestic facilities
were $1.4 billion and the Canadian line of credit was CDN $40 million with third
party lenders. Shortly before the fiscal year end, the lender in RJA’s $600
million uncommitted tri-party repurchase arrangement notified RJA that this
facility was on hold and financing was not available until further notice,
pending the completion of the lender’s acquisition by a new
parent. Subsequent to September 30, 2008, $50 million of RJA’s
uncommitted, unsecured lines of credit were cancelled. Lenders are under no
obligation to lend to the Company under uncommitted lines and there have been
several recent instances where they were unwilling to do so. RJF
maintained a $200 million committed unsecured revolving line of credit which was
fully drawn at September 30, 2008. RJF’s committed line of credit is subject to
a 0.125% per annum facility fee. Upon expiration in October 2008, RJF extended
$100 million of its 364-day, unsecured revolving credit agreement to January
2009, subject to modification or renewal. The extended fully drawn facility
amortizes 25% after one month, another 25% after two months, and the remaining
50% at the maturity date. RJA maintains a $50 million committed secured line of
credit and a $100 million committed tri-party repurchase arrangement. There were
collateralized financings of $80 million outstanding under the $100 million
tri-party repurchase arrangement at September 30, 2008, which are included in
Securities Sold Under Agreements to Repurchase on the Consolidated Statement of
Financial Condition. RJA’s committed facilities are subject to 0.15% and 0.125%
per annum facility fees, respectively. In addition, RJA maintains
$235 million in uncommitted secured facilities. RJA also maintains $360 million
in uncommitted tri-party repurchase arrangements with related parties. RJBank
has provided $300 million of those uncommitted arrangements to RJA, which is
guaranteed by RJF. Approximately $240 million is only available until January
30, 2009 under an exception from affiliate lending regulations granted by the
OTS, unless the exemption is extended. Collateral for loans under secured lines
of credit and securities sold under repurchase agreements (collectively
“collateral”) are Company owned and/or client margin securities, as permitted by
regulatory requirements. The required market value of the collateral ranges from
102% to 125% of the cash provided. At September 30, 2008, the $80 million
outstanding is collateralized by company-owned securities with a market value of
$89.4 million. Although the Company has $510 million committed or related party
collateralized financing arrangements available, the Company’s inventory levels,
which could serve as collateral, are substantially less. RJA supplements its
secured lines of credit and repurchase arrangements with $200 million of
uncommitted unsecured lines of credit. The interest rates for all of the
Company’s financing facilities are variable and are based on the Fed Funds rate,
LIBOR, or Canadian prime rate as applicable. For the fiscal year ended September
30, 2008, interest rates on the financing facilities ranged from 1.58% to
7.75%.
On
September 30, 2008, RJBank had advances outstanding at the FHLB of $1.95
billion, which included $1.9 billion in overnight advances to meet point in time
regulatory balance sheet composition requirements related to its qualifying as a
thrift institution. The latter action was discussed well in advance with the
OTS. These borrowed funds were invested in qualifying assets and the necessary
qualification was met. Prior to the advance, the Company infused $120 million of
additional capital into RJBank to ensure RJBank retained its “well capitalized”
status as of September 30, 2008, under bank regulatory capital guidelines. After
the $1.9 billion advance was repaid on October 1, 2008, RJBank made a return of
capital distribution of $60 million back to RJF on October 2, 2008, to return a
portion of the excess capital above the amount necessary to meet all regulatory
capital requirements for “well capitalized” status. Due to its outstanding
overnight advances, RJBank had no immediate credit available from the FHLB at
September 30, 2008 but had total available credit of $1.38 billion with the
pledging of additional collateral to the FHLB. Following the repayment of the
$1.9 billion overnight advance on October 1, 2008, RJBank had $1.71 billion in
immediate credit available from the FHLB and total available credit of $3.29
billion with the pledging of additional collateral to the FHLB.
The
Company’s joint ventures in Turkey and Argentina have settlement lines of
credit. The Company has guaranteed certain of these settlement lines of credit
as follows: one in Turkey totaling $8 million and one in Argentina for $9
million. At September 30, 2008, there were no outstanding balances on the
settlement lines in Argentina or Turkey. At September 30, 2008, these joint
ventures had aggregate unsecured settlement lines of credit available of $40.5
million, and there were no outstanding balances on these lines. The interest
rates for these lines of credit ranged from 9% to 18%. Subsequent to September
30, 2008, the Company’s Turkish joint venture has had to halt all trading
activities due to a technical capital inadequacy. See Legal and Regulatory
section below for additional information.
At
September 30, 2008 and September 30, 2007, the Company had loans payable of $2.2
billion and $122.6 million, respectively. The balance at September 30, 2008 is
comprised of a $62.2 million loan for its home-office complex, $1.95 billion in
FHLB advances (RJBank), and $200 million outstanding on its committed line of
credit.
Other
Sources of Liquidity
The
Company is pursuing eligibility for the FDIC’s Temporary Liquidity Guarantee
Program (“TLGP”). Participation in the TLGP would be expected to assist the
Company in obtaining up to $250 million of senior unsecured debt
financing at the holding company level. The Company is pursuing several
alternative forms of debt financing that could utilize the TLGP, if eligibility
is obtained. It is also pursuing other forms of debt financing that would not
benefit from the TLGP. There is no assurance that either form of financing will
be obtained.
The
Company believes that it qualifies to participate in the U.S. Treasury’s Capital
Purchase Program (“CPP”) and submitted an application through its primary
regulator in November 2008. While there is no guarantee that the Company will be
approved, the Company estimates that this program could provide up to
approximately $300 million in new preferred equity, at rates substantially
discounted to current market rates. While the Company views additional capital
as beneficial in the current environment, it would also have the
potential to significantly improve the Company’s liquidity position, which would
be important in the event that TLGP eligibility is not obtained.
If the
Company were unable to obtain external financing, it may be necessary to reduce
cash contributions to its subsidiaries, extract capital from its subsidiaries to
the extent permitted to maintain continued compliance with regulatory
requirements or reduce investments in private equity and venture capital
endeavors. Those courses of action could result in foregoing opportunities to
recruit additional financial advisors or acquire new business operations,
reducing inventory levels of carried securities or scaling back of current
business operations. A consequence of any of those courses of action would
likely have a negative impact on near term earnings.
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. Total assets of $18.8 billion (excluding
the cash received from the $1.9 billion overnight borrowing at RJBank) at
September 30, 2008 were up approximately 16% over September 30, 2007. Most of
this increase is due to the growth of RJBank, with the increased loan balances
being funded by increased deposits. RJBank loan balances increased significantly
as the Company took advantage of quality loans available for purchase at
attractive prices resulting from a desire for liquidity in the markets in
response to the credit crisis. Significant decreases in assets were in
securities purchased under agreements to resell and stock borrowed receivables
(stock loaned payables experienced a similar decrease on the liability side).
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.
As of
September 30, 2008, the Company's liabilities were comprised primarily of
deposits of $8.8 billion at RJBank and brokerage client payables of $5.8 billion
at the broker-dealer subsidiaries, as well as loans payable of $312 million
(excluding $1.9 billion in overnight borrowings at RJBank, which were repaid on
October 1, 2008). The Company primarily acts as an intermediary in stock
loan/borrow transactions. As a result, the liability of $696 million associated
with the stock loan transactions is related to the $675 million receivable
comprised of the Company's cash deposits for stock borrowed transactions. To
meet its obligations to clients and operating needs, the Company has
approximately $1.3 billion in cash (excluding the cash received from the $1.9
billion overnight borrowing at RJBank) and $4.3 billion in assets segregated
pursuant to regulations. The Company also has client brokerage receivables of
$1.9 billion and $7.1 billion in loans at RJBank.
Contractual
Obligations, Commitments and Contingencies
The
Company has contractual obligations to make future payments in connection with
its short and long-term debt, non-cancelable lease agreements, partnership
investments, commitments to extend credit, loans purchased but not settled,
underwriting commitments and a naming rights agreement. The following table sets
forth these contractual obligations by fiscal year:
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
|
(in
000’s)
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
$ 112,224
|
$ 2,891
|
$ 23,060
|
$ 33,239
|
$ 3,429
|
$ 3,630
|
$ 45,975
|
Variable
Interest Entities’ Loans
|
|
|
|
|
|
|
|
Payable(1)
|
102,564
|
13,987
|
12,489
|
12,967
|
13,030
|
13,425
|
36,666
|
Short-Term
Debt (2)
|
2,100,000
|
2,100,000
|
-
|
-
|
-
|
-
|
-
|
Operating
Leases
|
200,262
|
36,345
|
33,534
|
29,510
|
25,228
|
20,655
|
54,990
|
Investments
– Private Equity
|
|
|
|
|
|
|
|
Partnerships(3)
|
48,700
|
48,700
|
-
|
-
|
-
|
-
|
-
|
Certificates
of Deposit
|
248,207
|
129,974
|
54,264
|
34,559
|
11,295
|
18,115
|
-
|
Commitments
to Extend
|
|
|
|
|
|
|
|
Credit
- RJBank(4)
|
2,727,493
|
2,727,493
|
-
|
-
|
-
|
-
|
-
|
RJBank
Loans Purchased,
|
|
|
|
|
|
|
|
Not
Yet Settled
|
8,500
|
8,500
|
-
|
-
|
-
|
-
|
-
|
Commitments
to Real Estate
|
|
|
|
|
|
|
|
Partnerships(5)
|
60,800
|
60,800
|
-
|
-
|
-
|
-
|
-
|
RJ
Multi-Family Finance
|
|
|
|
|
|
|
|
Loan
Commitments
|
26,038
|
20,176
|
5,862
|
-
|
-
|
-
|
-
|
Commitments
to Unsold RJTCF
|
|
|
|
|
|
|
|
Fund
Interests (5)
|
75,000
|
75,000
|
-
|
-
|
-
|
-
|
-
|
Underwriting
Commitments
|
8,669
|
8,669
|
-
|
-
|
-
|
-
|
-
|
Naming
Rights for Raymond
|
|
|
|
|
|
|
|
James
Stadium
|
26,937
|
3,278
|
3,409
|
3,545
|
3,687
|
3,835
|
9,183
|
Total
|
$5,745,394
|
$5,235,813
|
$
132,618
|
$
113,820
|
$
56,669
|
$
59,660
|
$
146,814
|
(1)
|
Loans
which are non-recourse to the Company. See Notes 6 and 9 in the Notes to
the Consolidated Financial Statements for additional
information.
|
(2)
|
Includes
$1.9 billion in overnight borrowing to meet point-in-time regulatory
balance sheet composition requirements related to RJBank’s qualifying as a
thrift institution. This borrowing was repaid on October 1,
2008.
|
(3)
|
The
Company has committed a total of $56.3 million, in amounts ranging from
$200,000 to $5 million, to 42 different independent venture capital or
private equity partnerships. As of September 30, 2008, the Company has
invested $36.3 million of that amount and has received $30.2 million in
distributions. Additionally, the Company is the general partner in two
internally sponsored private equity limited partnerships to which it has
committed $14 million. Of that amount, the Company has invested $13.0
million and has received $9.2 million in distributions as of September 30,
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 September 30, 2008, the Company has invested
$2.3 million of that amount and has not received any distributions.
Although the combined remaining balance of $48.7 million has been included
in fiscal year 2009 above, the contributions to the partnerships may occur
after that time and are dependent upon the timing of the capital calls by
the general partners.
|
(4)
|
Because
many commitments expire without being funded in whole or part, the
contract amounts are not estimates of future liquidity
requirements.
|
(5)
|
RJTCF
is committed to additional future fundings related to real estate
partnerships.
|
The
Company’s Board of Directors approved up to $200 million in short-term or
mezzanine financing investments, primarily related to investment banking
transactions. As of September 30, 2008, the Company did not have any such
investments. The Board of Directors has approved the use of up to $75 million
for investment in proprietary merchant banking opportunities. As of September
30, 2008, the Company has invested $32.3 million. The use of this capital is
subject to availability of funds.
The
Company is 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. In May 2004 the Board authorized the repurchase of up to $75 million of
shares. 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
September 30, 2008 the unused portion of this authorization was $72.1
million.
RJBank
provides to its affiliate, Raymond James Capital Services, Inc. (RJCS), on
behalf of certain corporate borrowers, a guarantee of payment in the event of
the borrower’s default for exposure under interest rate swaps entered into with
RJCS. At September 30, 2008, the aggregate exposure under these guarantees was
$2.5 million, which was underwritten as part of the larger corporate credit
relationships. There was no aggregate exposure at September 30, 2007. The
estimated total potential exposure under these guarantees is $12.1
million.
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. Because many loan commitments
expire without being funded in whole or part, the contract amounts are not
estimates of the Company’s future liquidity requirements. Based on the
underlying terms and conditions of these loans, management believes it is highly
unlikely that a material percentage of these commitments would be drawn. Many of
these loan commitments have fixed expiration dates or other termination clauses
and, historically, a large percentage of the letters of credit expire without
being funded.
As of
September 30, 2008, RJBank had entered into overnight reverse repurchase
agreements totaling $705 million with three counterparties, with individual
exposures of $350 million, $305 million and $50 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, which is closely monitored, collateral
received and the short duration of these agreements.
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 that 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. During the quarter ended September 30,
2008, the Company made a commitment to purchase and potentially hold up to $75
million of unsold interests in one of RJTCF’s current fund offerings. In such an
event, the Company would expect to resell these interests to other investors,
however the holding period of these interests could be much longer than 90 days.
Subsequent to September 30, 2008, RJTCF closed this fund offering and purchased
$58 million of the unsold interests. In addition to the interests purchased,
RJTCF provided certain specific performance guarantees to the investors of the
fund. The Company has guaranteed RJTCF’s $58 million capital contribution
obligation as well as the specified performance guarantees provided to the
fund’s investors. 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 September 30, 2008, cash funded to invest
in either loans or investments in project partnerships was $30.3 million. At
September 30, 2008, RJTCF is also committed to additional future fundings of
$45.9 million related to project partnerships that have not yet been sold to
various tax credit funds (including the fund offering mentioned previously that
the Company made a commitment to purchase and potentially hold up to $75 million
of unsold interests). 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
$14.9 million as of September 30, 2008. Through RJTCF’s wholly owned lending
subsidiary, Raymond James Multi-Family Finance, Inc., certain construction loans
or loans of longer duration (“permanent loans”) may be made directly to certain
project partnerships. As of September 30, 2008, nine such
construction loans are outstanding with an unfunded balance of $20.2 million
available for future draws on such loans. Similarly, five permanent
loan commitments are outstanding as of September 30, 2008. Each of these
commitments will only be funded if certain conditions are achieved by the
project partnership and in the event such conditions are not met, generally
expire two years after their issuance. The total amount of such
unfunded permanent loan commitments as of September 30, 2008 is $5.9
million.
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 $8.8 million as of September 30, 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 is projected to be 15% of the original cost. This lease expires in May
2014. Although Continental remains current on its lease payments to the Company,
the inability of Continental to make its lease payments, or the termination or
modification of the lease through a bankruptcy proceeding, could result in the
write-down of the Company's investment and the acceleration of certain income
tax payments. The Company continues to monitor this lessee for specific events
or circumstances that would increase the likelihood of a default on
Continental’s obligations under this lease.
The
Company utilizes client marginable securities to satisfy deposits with clearing
organizations. At September 30, 2008, the Company had client margin securities
valued at $210.0 million pledged with a clearing organization to meet the point
in time requirement of $139.9 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 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.
See Note
12 of the Notes to the Consolidated Financial Statements for further information
on the Company's commitments and contingencies.
In
addition, see Item 3, “Legal Proceedings,” for discussion of auction rate
securities (“ARS”) and the potential implications of the Company’s current
liquidity position on its ability to resolve these matters.
Regulatory
The
Company's broker-dealer subsidiaries are subject to requirements of the SEC in
the United States and the IIROC in Canada relating to liquidity and capital
standards. The domestic 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 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, RJFS, HFD and Raymond James (USA) Ltd. have elected. It
requires that minimum net capital, as defined, be equal to the greater of
$250,000 or 2% 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 5% of Aggregate Debit Items. RJA, RJFS, HFD, Raymond James (USA)
Ltd. all had net capital in excess of minimum requirements as of September 30,
2008.
RJ Ltd.
is subject to the Minimum Capital Rule (By-Law No. 17 of the IIROC) and the
Early Warning System (By-Law No. 30 of the IIROC). 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 IIROC may from time to time prescribe. Insufficient Risk
Adjusted Capital may result in suspension from membership in the stock exchanges
or the IIROC. 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 its capital, profitability, liquidity position, frequency
of designation or at the discretion of the IIROC. 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 during
fiscal 2008 or 2007.
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 of Total and Tier
I Capital (as defined in the regulations) to risk-weighted assets (as defined).
Management believes, as of September 30, 2008, that RJBank meets all capital
adequacy requirements to which it is subject.
See Notes
13 and 18 of the Notes to the Consolidated Financial Statements for further
information on the Company’s legal matters and regulatory
environment.
Critical Accounting
Policies
The
Company’s financial statements and accompanying notes are prepared in accordance
with accounting principles generally accepted in the U.S. The following is a
summary of the Company’s critical accounting policies. For a full description of
these and other accounting policies, see Note 1 of the Notes to the Consolidated
Financial Statements. The Company believes that its significant accounting
policies described below involve a higher 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
consolidated financial statements. Due to their nature, estimates involve
judgments based upon available information. Actual results or amounts could
differ from estimates and the difference could have a material impact on the
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 Financial
Instruments and Other Assets
“Trading
instruments” and “Available for sale securities” are reflected in the
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 2, 3, and 10 of the Notes to the 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:
|
September
30, 2008
|
|
Financial
Instruments
Owned
at
Fair Value
|
Financial
Instruments
Sold
but
not yet Purchased
at
Fair Value
|
|
(in
000’s)
|
|
|
|
Trading
Securities
|
$ 278,693
|
$ 104,454
|
Derivative
Contracts
|
46,393
|
30,250
|
Available
for Sale Securities
|
577,933
|
-
|
Total
|
$ 903,019
|
$ 134,704
|
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 with
changes recognized in current earnings. To corroborate management’s estimated
valuation, 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 it may use other methods including
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 securities that do not have available
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, standard
spread-based pricing models re-calibrated from time to time to trade activity in
in similar assets, the coupon level and possible early redemption features of
the security, and current financial information regarding the issuer. 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. Changes in fair value of derivative contracts
are recognized into current earnings. The fair value of available for sale
securities is based on bid quotations received from a pricing service or
securities dealers with changes to fair value being recognized in Other
Comprehensive Income. Positions valued in this manner represent approximately
98% of the available for sale portfolio. If these sources are not available or
are deemed unreliable when an active market does not exist, 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.
Unrealized losses deemed to be other-than-temporary for available for sale
securities are included in current period earnings within Other Revenue and a
new cost basis for the security is established. In order to evaluate the
Company’s risk exposure and any potential impairment of these securities,
characteristics of each security owned such as collateral type, delinquency and
foreclosure levels, credit enhancement, projected loan losses and collateral
coverage are reviewed monthly by management. These factors, in
addition to the Company’s intent and ability to hold the investment for a time
period sufficient to allow for the anticipated valuation recovery to the
Company’s cost basis, are also considered in determining whether these
securities are other-than-temporarily impaired. Evidence considered in this
assessment includes the reasons for the impairment, the severity and duration of
the impairment, changes in value subsequent to year-end, and forecasted
performance of the security.
The
following table presents the carrying value of trading securities, derivative
contracts and available for sale securities for which fair value is measured
based on quoted prices or other independent sources versus those for which fair
value is determined by management:
|
September
30, 2008
|
|
Financial
Instruments
Owned at Fair Value
|
Financial
Instruments
Sold
but
not yet Purchased at Fair Value
|
|
(in
000’s)
|
|
|
|
Fair
Value Based on Quoted Prices and Independent Sources
|
$
833,795
|
$
104,454
|
Fair
Value Determined by Management (1)
|
69,224
|
30,250
|
Total
|
$
903,019
|
$
134,704
|
(1)
Includes trading securities which are not readily marketable and derivative
contracts.
The
Emergency Economic Stabilization Act of 2008 (the “Act”) was signed into law on
October 3, 2008. The Act grants the U.S. Secretary of the Treasury
authority to purchase debt securities from and make capital injections into
financial institutions. The Act was a significant change in circumstances that
occurred after September 30, 2008, that has not been considered in the Company’s
assessment of whether securities are other-than-temporarily impaired as of
September 30, 2008.
Private
Equity Investments
Private
equity investments, held primarily by the Company’s Proprietary Capital segment,
are reflected in the Consolidated Statements of Financial Condition at
management’s estimate of 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. 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 September 30, 2008, the
Company had $169.7 million in direct and third party private equity investments,
which represented less than 1% 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 September 30,
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
(“RJ Ltd.”). 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.
Subsequent to September 30, 2008, stocks at financial institutions, including
the Company’s, are experiencing significant downward pressure in connection with
the current economic downturn. As a result, the Company will evaluate whether it
needs to perform an impairment test during the quarter ending December 31,
2008.
Allowance for Loan Losses
and Other Provisions
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 or an asset has been impaired and the amount of loss can be reasonably
estimated. When a range of probable loss can be estimated, the Company accrues
the most likely amount; if not determinable, the Company accrues at least the
minimum of the range of probable loss.
The
Company records reserves related to legal proceedings in Trade and Other
Payables. Such reserves are established and maintained in accordance with
Statement of Financial Accounting Standard No. 5, "Accounting for
Contingencies" (“SFAS 5”), and Financial Interpretation No. 14, “Reasonable
Estimation of the Amount of a Loss” (“FIN 14”). The determination of these
reserve amounts requires significant judgment on the part of management.
Management considers many factors including, but not limited to: the amount of
the claim; the amount of the loss in the client's account; the basis and
validity of the claim; the possibility of wrongdoing on the part of an employee
of the Company; previous results in similar cases; and legal precedents and case
law. Each legal proceeding is reviewed with counsel in each accounting period
and the reserve is adjusted as deemed appropriate by management. Lastly, each
case is reviewed to determine if it is probable that insurance coverage will
apply, in which case the reserve is reduced accordingly. Any change in the
reserve amount is recorded in the consolidated financial statements and is
recognized as a charge/credit to earnings in that period.
The
Company also records reserves or allowances for doubtful accounts related to
client receivables and loans. Client receivables at the broker-dealers are
generally collateralized by securities owned by the brokerage clients.
Therefore, when a receivable is considered to be impaired, the amount of the
impairment is generally measured based on the fair value of the securities
acting as collateral, which is measured based on current prices from independent
sources such as listed market prices or broker-dealer price
quotations.
Client
loans at RJBank are generally collateralized by real estate or other property.
RJBank provides for both an allowance for losses in accordance
with SFAS 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 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. A commercial loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. 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
September 30, 2008, the amortized cost of all RJBank loans was $7.2 billion and
an allowance for loan losses of $88.2 million was recorded against that balance.
The total allowance for loan losses, including $9.2 million in reserves for
off-balance sheet exposures maintained in Trade and Other Payables, is equal to
1.35% of the amortized cost of the loan portfolio.
The
following table allocates RJBank’s allowance for loan losses by loan
category:
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
|
|
|
|
|
|
|
|
Loan
Category
|
|
Loan
Category
|
|
Loan
Category
|
|
|
as
a % of
|
|
as
a % of
|
|
as
a % of
|
|
|
Total
Loans
|
|
Total
Loans
|
|
Total
Loans
|
|
Allowance
|
Receivable
|
Allowance
|
Receivable
|
Allowance
|
Receivable
|
|
($
in 000’s)
|
|
|
|
|
|
|
|
Commercial
Loans (1)
|
$10,147
|
10%
|
$ 4,471
|
7%
|
$
3,663
|
12%
|
|
|
|
|
|
|
|
Real
Estate
|
|
|
|
|
|
|
Construction
Loans
|
7,061
|
5%
|
2,121
|
3%
|
548
|
2%
|
|
|
|
|
|
|
|
Commercial
Real Estate
|
|
|
|
|
|
|
Loans
(2)
|
62,197
|
49%
|
35,766
|
49%
|
10,603
|
28%
|
|
|
|
|
|
|
|
Residential
Mortgage
|
|
|
|
|
|
|
Loans
|
8,589
|
36%
|
4,659
|
41%
|
3,878
|
58%
|
|
|
|
|
|
|
|
Consumer
Loans
|
161
|
-
|
5
|
-
|
2
|
-
|
|
|
|
|
|
|
|
Total
|
$88,155
|
100%
|
$47,022
|
100%
|
$18,694
|
100%
|
(1)
|
Loans
not secured by real estate.
|
(2)
|
Loans
wholly or partially secured by real
estate.
|
|
September
30,
|
September
24,
|
|
2005
|
2004
|
|
|
|
|
|
|
|
Loan
Category
|
|
Loan
Category
|
|
|
as
a % of
|
|
as
a % of
|
|
|
Total
Loans
|
|
Total
Loans
|
|
Allowance
|
Receivable
|
Allowance
|
Receivable
|
|
($
in 000’s)
|
|
|
|
|
|
Commercial
Loans (1)
|
$1,574
|
14%
|
$1,372
|
18%
|
|
|
|
|
|
Real
Estate
|
|
|
|
|
Construction
Loans
|
567
|
3%
|
383
|
5%
|
|
|
|
|
|
Commercial
Real Estate
|
|
|
|
|
Loans
(2)
|
2,878
|
14%
|
826
|
11%
|
|
|
|
|
|
Residential
Mortgage
|
|
|
|
|
Loans
|
2,537
|
69%
|
5,044
|
66%
|
|
|
|
|
|
Consumer
Loans
|
37
|
-
|
17
|
-
|
|
|
|
|
|
Total
|
$7,593
|
100%
|
$7,642
|
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 September 30, 2008 the
receivable from Financial Advisors was $176.1 million, which is net of an
allowance of $2.0 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. FIN No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”), 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 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 period, disclosure, and transition. 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. The Company
recognizes the accrual of interest and penalties related to income tax matters
in interest expense and other expense, respectively. See Note 11 of the Notes to
the Consolidated Financial Statements for further information on the Company’s
income taxes.
Effects of recently issued
accounting standards, not yet adopted
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 additional 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 and elected not to adopt the fair value
option for any recognized financial assets and liabilities as permitted by SFAS
159.
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 does not expect the adoption of FSP FIN No. 39-1 to have
a material impact 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”). The Company
does not expect the adoption of FSP FIN No. 46R-7 to have a material impact on
the consolidated financials.
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. 141R, “Business Combinations” (“SFAS
141R”). SFAS 141R provides new guidance on accounting for business
combinations which includes the fundamental principle of recording the acquired
business at fair value. In addition, this statement requires extensive
disclosures about the acquisition’s quantitative and qualitative effects
including validation of the fair value of goodwill. This statement is
effective for all business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008 (October 1, 2009 for the Company). Earlier
application is prohibited.
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).
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
does not expect the adoption of FSP SFAS No. 157-2 will have a material impact
on its consolidated financial statements.
In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active” (“FSP SFAS No.
157-3”). FSP SFAS No. 157-3 clarifies the application of SFAS 157 in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. This statement is effective upon issuance, but
will be adopted once SFAS 157 is effective for the Company (October 1, 2008 for
the Company). The Company does not expect the adoption of FSP SFAS
No. 157-3 will have a material impact 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
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 (March 31, 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.
In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents to be treated as participating securities as defined in
EITF Issue No. 03-6, "Participating Securities and the Two-Class Method under
FASB Statement No. 128," and, therefore, included in the earnings allocation in
computing earnings per share under the two-class method described in FASB
Statement No. 128, “Earnings per Share”. This FSP is effective for fiscal years
beginning after December 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 EITF 03-6-1 will have on its consolidated financial
statements.
Off Balance Sheet
Arrangements
Information
concerning the Company's off balance sheet arrangements is included in Note 19
of the Notes to the Consolidated Financial Statements. Such information is
hereby incorporated by reference.
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.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK
MANAGEMENT
Risks are
an inherent part of the Company's business and activities. Management of these
risks is critical to the Company's fiscal soundness and profitability. Risk
management at the Company is a multi-faceted process that requires
communication, judgment and knowledge of financial products and markets. The
Company's senior management takes an active role in the risk management process
and requires specific administrative and business functions to assist in the
identification, assessment, monitoring and control of various risks. The
principal risks involved in the Company's business activities are market,
credit, liquidity, operational, and regulatory and legal.
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 678 listed and 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
2 of the Notes to Consolidated Financial Statements for information regarding
the fair value of trading inventories associated with the Company’s
broker-dealer 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 September
30, 2008, the absolute fixed income and equity inventory limits excluding
contractual underwriting commitments for the Company’s domestic subsidiaries,
were $1.98 billion and $59.8 million, respectively. These same inventory limits
for RJ Ltd. as of September 30, 2008, were $46.3 million and $62.5 million,
respectively. The Company's trading activities in the aggregate were
significantly below these limits at September 30, 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.
In the
normal course of business, the Company enters into underwriting commitments. RJ
Ltd., as a lead, co-lead or syndicate member in the underwriting deal, may
commit to purchase a specified amount of the shares issued in the
offering. A management committee reviews each proposed underwriting
commitment to assess the quality of the offering and the adequacy of due
diligence investigation. In addition, this committee ensures RJ Ltd. maintains
sufficient regulatory capital to meet its underwriting
obligations. Maximum risk exposure limits are maintained by limiting
deal size or through the syndication process. Capital commitments of
$7 million or greater are approved by one of RJ Ltd.’s
Co-Presidents.
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 on average over the course of
time. During the fiscal year ended September 30, 2008, the reported daily loss
in the institutional Fixed Income trading portfolio exceeded the predicted VaR
nine times, due in part, to greater volatility in interest rates and in bond
prices experienced during the fiscal year ended September 30, 2008 as compared
to the previous reporting 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 twelve months ended
September 30, 2008, with the corresponding dollar value of the Company's
portfolio:
|
Twelve
Months Ended September 30, 2008
|
|
VaR
at
|
|
|
|
|
Daily
|
|
September
30,
|
|
September
30,
|
|
High
|
Low
|
|
Average
|
|
2008
|
|
2007
|
|
($
in 000's)
|
|
|
|
|
|
|
|
|
|
Daily
VaR
|
$ 1,368
|
$ 166
|
|
$ 617
|
|
$ 586
|
|
$ 232
|
Related
Portfolio Value (Net)
(1)
|
$
321,520
|
$
344,824
|
|
$
262,987
|
|
$
103,047
|
|
$
278,605
|
VaR
as a Percent
|
|
|
|
|
|
|
|
|
of
Portfolio Value
|
0.43%
|
0.05%
|
|
0.32%
|
|
0.57%
|
|
0.08%
|
(1)
|
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 10 of
the Notes to the Consolidated Financial Statements.
RJ Ltd.’s
net income is sensitive to changes in interest rate conditions. Assuming a shift
of 100 basis points in interest rates and using interest-bearing asset and
liability balances as of September 30, 2008, RJ Ltd.'s sensitivity analysis
indicates that an upward movement would increase RJ Ltd.'s net income by CDN$0.4
million, whereas a downward shift of the same magnitude would decrease RJ Ltd.'s
net income by CDN$1.9 million. This sensitivity analysis is based on the
assumption that all other variables remain constant.
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, deposits at other banks 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, market risk for RJBank is limited primarily to interest
rate risk. In the current market and economic environment, short term
interest rate risk has been severely impacted as credit conditions have rapidly
deteriorated and financial markets have experienced widespread illiquidity and
elevated levels of volatility. 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):
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
Mortgage
Backed Securities
|
$ 301,329
|
$ 382,455
|
Loans
Receivable, Net
|
2,314,884
|
2,020,530
|
Total
Assets with Market Risk
|
$
2,616,213
|
$
2,402,985
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 118,233
|
$ 185,729
|
Federal
Home Loan Bank Advances
|
50,000
|
50,000
|
Total
Liabilities with Market Risk
|
$ 168,233
|
$ 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 September 30,
2008:
|
Interest
Rate Type
|
|
Fixed
|
Adjustable
|
Total
|
|
(in
000’s)
|
|
|
|
|
Commercial
Loans (1)
|
$ 1,440
|
$ 721,923
|
$ 723,363
|
Real
Estate Construction Loans
|
-
|
272,708
|
272,708
|
Commercial
Real Estate Loans (2)
|
8,874
|
3,348,589
|
3,357,463
|
Residential
Mortgage Loans
|
21,843
|
2,576,377
|
2,598,220
|
Consumer
Loans
|
-
|
1,154
|
1,154
|
|
|
|
|
Total
Loans
|
$
32,157
|
$
6,920,751
|
$
6,952,908
|
(1)
|
Loans
not secured by real estate.
|
(2)
|
Loans
wholly or partially secured by real estate. Of this amount, $546.7 million
is wholly or substantially secured by lien(s) on real estate. The
remainder is partially secured by real estate, the majority of which are
also secured by other assets of the borrower, and includes loans to
certain real estate investment
trusts.
|
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
4.30% in the first year after the rate increase, whereas a downward shift of the
same magnitude would increase RJBank's net interest income by 3.91%. These
sensitivity figures are based on positions as of September 30, 2008, and are
subject to certain simplifying assumptions, including that management takes no
corrective action.
To
mitigate interest rate risk in a significantly rising rate environment, RJBank
purchased three year term interest rate caps with high strike rates (more than
300 basis points higher than current rates) during the year ended September 30,
2008 that will increase in value if interest rates rise and entitle RJBank to
cash flows if interest rates rise above strike rates. RJBank minimizes the
credit or repayment risk of derivative instruments by entering into transactions
only with high-quality counterparties whose credit rating is investment grade.
See Note 10 of the Notes to the Consolidated Financial Statements for further
information.
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
year ended September 30, 2008 was CDN$9.6 million. The Company's equity
securities inventories are priced on a regular basis and there are no material
unrecorded gains or losses.
Credit
Risk
Credit
risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or
counterparty’s ability to meet its financial obligations under contractual or
agreed upon terms. The nature and amount of credit risk depends on the type of
transaction, the structure of that transaction and the parties
involved. Credit risk is an integral component of the profit
assessment of lending and other financing activities.
The
Company is engaged in various trading and brokerage activities whose
counterparties primarily include broker-dealers, banks and other financial
institutions. The Company is exposed to risk that these counterparties may not
fulfill their obligations. The risk of default depends on the creditworthiness
of the counterparty and/or the issuer of the instrument. The Company manages
this risk by imposing and monitoring individual and aggregate position limits
within each business segment for each counterparty, conducting regular credit
reviews of financial counterparties, reviewing security and loan concentrations,
holding and marking to market collateral on certain transactions and conducting
business through clearing organizations, which guarantee
performance.
The
Company's client activities involve the execution, settlement, and financing of
various transactions on behalf of its clients. Client activities are
transacted on either a cash or margin basis. Credit exposure associated with the
Company's Private Client Group results primarily from customer margin accounts,
which are monitored daily and are collateralized. When clients execute a
purchase, the Company is at some risk that the client will renege on the trade.
If this occurs, the Company may have to liquidate the position at a loss.
However, most private clients have available funds in the account before the
trade is executed. The Company monitors exposure to industry sectors and
individual securities and performs analysis on a regular basis in connection
with its margin lending activities. The Company adjusts its margin requirements
if it believes its risk exposure is not appropriate based on market
conditions.
The
Company is subject to concentration risk if it holds large positions, extends
large loans to, or has large commitments with a single counterparty, borrower,
or group of similar counterparties or borrowers (e.g. in the same industry).
Securities purchased under agreements to resell consist primarily of securities
issued by the U.S. government or its agencies. Receivables from and payables to
clients and stock borrow and lending activities are conducted with a large
number of clients and counterparties and potential concentration is carefully
monitored. Inventory and investment positions taken and commitments made,
including underwritings, may involve exposure to individual issuers and
businesses. The Company seeks to limit this risk through careful review of the
underlying business and the use of limits established by senior management,
taking into consideration factors including the financial strength of the
counterparty, the size of the position or commitment, the expected duration of
the position or commitment and other positions or commitments
outstanding.
The
Company is also the lessor in a leveraged commercial aircraft transaction with
Continental. The Company's ability to realize its expected return is dependent
upon the airline’s ability to fulfill its lease obligation. In the event that
the airline defaults on its lease commitments 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. 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
manages risks inherent in its lending activities through policies and procedures
which incorporate strong lending standards and management oversight. The
underwriting policies are described in the section below.
Loan
Underwriting Policies
The
Company’s credit risk is managed through its policies and
procedures. There have been no material changes in the Company’s
underwriting policies during the year ended September 30, 2008. RJBank’s
underwriting policies for the major types of loans are discussed
below.
Residential
Loan Portfolio
RJBank's
residential loan portfolio consists of first mortgage loans originated by RJBank
via referrals from the Company’s Private Client Group Financial Advisors, and
first mortgage loans purchased by RJBank originated by select large financial
institutions. These purchased mortgage loans represent over 90% of RJBank's
residential loan portfolio. All of RJBank's residential loans adhere to strict
underwriting parameters pertaining to credit score and credit history,
debt-to-income ratio of the borrower, loan-to-value (“LTV”), and combined LTV
(including second mortgage/ home equity loans). Interest-only adjustable rate
mortgages represent the majority of first mortgages in the residential
portfolio. On average, three-fourths of the purchased residential loans are
re-underwritten with updated borrower credit information and valuations, if
warranted, by RJBank staff prior to purchase, with the remainder coming from
long-standing sources and meeting high credit criteria. Approximately 90% of the
residential loans are fully documented loans to owner-occupant borrowers. RJBank
does not originate or purchase option ARM loans with negative amortization,
reverse mortgages, or other types of exotic loan products. Loans with deeply
discounted teaser rates are not originated or purchased. Originated 15 or
30-year fixed rate mortgages are typically sold to correspondents and only
retained on an exception basis. All of RJBank’s first mortgage loans are
serviced by the seller or by third parties.
Corporate
Loan Portfolio
RJBank's
corporate loan portfolio is diversified among a number of industries and
comprised of project finance real estate loans, commercial lines of credit and
term loans, the majority of which (approximately 90%), are Shared National
Credits (“SNC”). These SNCs are agented by approximately 30 different financial
institutions with whom RJBank has a relationship. RJBank is sometimes involved
in the initial syndication of the loan at inception and some of these loans have
been purchased in secondary trading markets. The remainder of the corporate loan
portfolio is comprised of smaller “club” transactions which do not fall under
the definition of a SNC, and direct loans. Regardless of the source, all loans
are independently underwritten to RJBank credit policies, are subject to loan
committee approval, and credit quality is continually monitored by RJBanks’s
corporate lending staff. RJBank credit policies include criteria related to LTV
limits based upon property type, single borrower loan limits, loan term and
structure parameters (including guidance on leverage and debt service coverage
ratios), industry concentration limits, secondary sources of repayment and other
criteria. A large portion of RJBank’s corporate loans are to borrowers in
industries in which the Company has expertise, through coverage provided by the
Company’s Capital Markets research analysts. More than half of RJBank's
corporate borrowers are public companies and nearly two-thirds have annual
earnings before interest, taxes, depreciation and amortization (“EBITDA”) of
greater than $50 million. RJBank's corporate loans are generally secured by all
assets of the borrower and in some instances are secured by mortgages on
specific real estate. In a limited number of transactions, loans in the
portfolio are extended on an unsecured basis to very creditworthy borrowers.
There are no subordinated loans or mezzanine financings in the corporate loan
portfolio.
Loan
Portfolio
The
Company tracks and reviews many factors to monitor credit risk in RJBank’s loan
portfolios. These factors include, but are not limited to: loan performance
trends, loan product parameters and qualification requirements, geographic and
industry concentrations, borrower credit scores, LTV ratios, occupancy (i.e.
owner occupied, second home or investment property), collateral value trends,
level of documentation, loan purpose, industry performance trends, average loan
size, and policy exceptions.
The
LTV/FICO scores of RJBank’s residential first mortgage loan portfolio are as
follows:
|
September
30,
|
September
30,
|
|
2008
|
2007(1)
|
|
|
Residential
First Mortgage
|
|
|
Loan
Weighted Average
|
|
|
LTV/FICO
(2)
|
64%
/ 750
|
69%
/
748
|
(1)
LTV/FICO averages presented are for interest only residential
loans.
(2) At
origination. Small group of local loans representing less than 0.5% of
residential portfolio excluded.
The geographic concentrations (top five
states) of RJBank’s one-to-four family residential mortgage loans are as
follows:
September
30,
|
September
30,
|
2008
(1)
|
2007
|
($
outstanding as a % of RJBank total assets)
|
5.2%
CA
|
5.5%
CA
|
3.3%
NY
|
3.9%
FL
|
3.0%
FL
|
1.9%
NJ
|
2.1%
NJ
|
1.9%
NY
|
1.3%
VA
|
1.8%
VA
|
(1)
|
Concentration
ratios are presented as a percentage of adjusted RJBank total assets of
$9.4 billion. Adjusted RJBank total assets (non-GAAP) at September 30,
2008 exclude the $1.9 billion FHLB advance repaid on October 1, 2008 and
the $60 million return of capital to RJF on October 2,
2008.
|
The
industry concentrations (top five categories) of RJBank’s corporate loans are as
follows:
September
30,
|
September
30,
|
2008
(1)
|
2007
|
($
outstanding as a % of RJBank total assets)
|
|
|
3.3%
Telecom
|
3.6%
Media Communications
|
3.2%
Retail Real Estate
|
3.2%
Industrial Manufacturing
|
3.2%
Consumer Products/Services
|
3.1%
Consumer Products/Services
|
3.1%
Industrial Manufacturing
|
2.9%
Gaming
|
3.0%
Healthcare (excluding hospitals)
|
2.6%
Retail Real
Estate
|
(1)
|
Concentration
ratios are presented as a percentage of adjusted RJBank total assets of
$9.4 billion. Adjusted RJBank total assets (non-GAAP) at September 30,
2008 exclude the $1.9 billion FHLB advance repaid on October 1, 2008 and
the $60 million return of capital to RJF on October 2,
2008.
|
To manage
and limit credit losses, the Company maintains a rigorous process to manage its
loan delinquencies. With all whole loans purchased on a servicing-retained basis
and all originated first mortgages serviced by a third party, the primary
collection effort resides with the servicer. RJBank personnel direct and
actively monitor the servicers’ efforts through extensive communications
regarding individual loan status changes and requirements of timely and
appropriate collection or property management actions and reporting, including
management of other third parties used in the collection process (appraisers,
attorneys, etc.). Additionally, every residential and consumer loan over 60 days
past due is reviewed by RJBank personnel monthly and documented in a written
report detailing delinquency information, balances, collection status, appraised
value, and other data points. RJBank senior management meets monthly to discuss
the status, collection strategy and charge-off/write-down recommendations on
every residential or consumer loan over 60 days past due.
See Note
5 of the Notes to the Consolidated Financial Statements for more
information.
Liquidity
Risk
See Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources,” in this report for more
information regarding the Company’s liquidity and how it manages its liquidity
risk.
Operational
Risk
Operational
risk generally refers to the risk of loss resulting from the Company's
operations, including, but not limited to, business disruptions, improper or
unauthorized execution and processing of transactions, deficiencies in the
Company's technology or financial operating systems and inadequacies or breaches
in the Company's control processes. The Company operates different businesses in
diverse markets and is reliant on the ability of its employees and systems to
process a large number of transactions. These risks are less direct than credit
and market risk, but managing them is critical, particularly in a rapidly
changing environment with increasing transaction volumes. In the event of a
breakdown or improper operation of systems or improper action by employees, the
Company could suffer financial loss, regulatory sanctions and damage to its
reputation. In order to mitigate and control operational risk, the Company has
developed and continues to enhance specific policies and procedures that are
designed to identify and manage operational risk at appropriate levels
throughout the organization and within such departments as Accounting,
Operations, Information Technology, Legal, Compliance and Internal Audit. These
control mechanisms attempt to ensure that operational policies and procedures
are being followed and that the Company's various businesses are operating
within established corporate policies and limits. Business continuity plans
exist for critical systems, and redundancies are built into the systems as
deemed appropriate.
A
Compliance and Standards Committee comprised of senior executives meets monthly
to consider policy issues. The Committee reviews material customer complaints
and litigation, as well as issues in operating departments, for the purpose of
identifying issues that present risk exposure to customers or to the Company.
The Committee adopts policies to deal with these issues, which are then
disseminated throughout the Company.
The
Company has established a Quality of Markets Committee that meets regularly to
monitor the best execution activities of the trading departments within the
Company as they relate to customer orders. This Committee is comprised of
representatives from the OTC Trading, Listed Trading, Options, Municipal
Trading, Taxable Trading, Compliance and Legal Departments and is under the
direction of a senior officer of the Company. This Committee reviews reports
from the respective departments listed above and recommends action for
improvement when necessary.
Regulatory and Legal
Risk
Legal
risk includes the risk of Private Client Group customer claims, the possibility
of sizable adverse legal judgments and non-compliance with applicable legal and
regulatory requirements. The Company is generally subject to extensive
regulation in the different jurisdictions in which it conducts business.
Regulatory oversight of the securities industry has become increasingly
demanding over the past several years and the Company, as well as others in the
industry, has been directly affected by this increased regulatory
scrutiny.
The
Company has comprehensive procedures addressing issues such as regulatory
capital requirements, sales and trading practices, use of and safekeeping of
customer funds, extension of credit, collection activities, money-laundering and
record keeping. The Company and its subsidiaries have designated Anti-money
Laundering Compliance Officers who monitor compliance with regulations adopted
under the U.S.A. Patriot Act. The Company acts as an underwriter or selling
group member in both equity and fixed income product offerings. Particularly
when acting as lead or co-lead manager, the Company has financial and legal
exposure. To manage this exposure, a committee of senior executives review
proposed underwriting commitments to assess the quality of the offering and the
adequacy of due diligence investigation.
The
Company’s banking activities are highly regulated and subject to impact from
changes in banking laws and regulations, including unanticipated rulings. The
current economic environment has led to rapid introduction of significant
regulatory programs or changes which may continue. Regulations and related
requirements including the Bank Secrecy Act and U.S.A. Patriot Act, as well as
new regulatory or government programs, are closely monitored and acted upon to
ensure a timely response.
The
Company's major business units have compliance departments that are responsible
for regularly reviewing and revising compliance and supervisory procedures to
conform to changes in applicable regulations.
The
Company has experienced an increase in the number of claims as a result of the
market downturn and the illiquidity of auction rate securities. While these
claims may not be the result of any wrongdoing, the Company does, at a minimum,
incur costs associated with investigating and defending against such claims. See
further discussion on the Company's reserve policy under "Critical Accounting
Policies" in this section; see also Item 3, "Legal Proceedings" and Item 1,
“Business -Regulation”.
ITEM
8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Report of Independent
Registered Public Accounting Firm
The Board
of Directors and Shareholders
Raymond
James Financial, Inc.:
We have
audited the accompanying consolidated statements of financial condition of
Raymond James Financial, Inc. and subsidiaries as of September 30, 2008 and
2007, and the related consolidated statements of income and comprehensive
income, changes in shareholders’ equity, and cash flows for each of the years in
the three-year period ended September 30, 2008. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Raymond James Financial,
Inc. and subsidiaries as of September 30, 2008 and 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2008, in conformity with U.S. generally accepted
accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Raymond James Financial, Inc.’s internal
control over financial reporting as of September 30, 2008, based on criteria
established in Internal
Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated November 26, 2008 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
KPMG
LLP
November
26, 2008
Tampa,
Florida
Certified
Public Accountants
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
($
in 000’s)
|
Assets
|
|
|
Cash
and Cash Equivalents
|
$ 3,207,493
|
$ 644,943
|
Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
|
4,311,933
|
4,127,667
|
Securities
Purchased under Agreements to Resell and Other Collateralized
Financings
|
950,546
|
1,295,004
|
Financial
Instruments, at fair value:
|
|
|
Trading
Instruments
|
325,086
|
467,761
|
Available
for Sale Securities
|
577,933
|
569,952
|
Other
Investments
|
52,691
|
90,637
|
Receivables:
|
|
|
Brokerage
Clients, Net
|
1,850,464
|
1,704,300
|
Stock
Borrowed
|
675,080
|
1,292,265
|
Bank
Loans, Net
|
7,095,227
|
4,664,209
|
Brokers-Dealers
and Clearing Organizations
|
198,006
|
228,865
|
Other
|
344,594
|
315,227
|
Investments
in Real Estate Partnerships - Held by Variable Interest
Entities
|
239,714
|
221,147
|
Property
and Equipment, Net
|
192,450
|
166,963
|
Deferred
Income Taxes, Net
|
108,765
|
107,922
|
Deposits
With Clearing Organizations
|
94,242
|
36,416
|
Goodwill
|
62,575
|
62,575
|
Prepaid
Expenses and Other Assets
|
445,060
|
258,315
|
|
|
|
|
$
20,731,859
|
$
16,254,168
|
|
|
|
Liabilities
And Shareholders' Equity
|
|
|
Loans
Payable
|
$ 2,212,224
|
$ 122,640
|
Loans
Payable Related to Investments by Variable Interest Entities in Real
Estate Partnerships
|
102,564
|
116,479
|
Payables:
|
|
|
Brokerage
Clients
|
5,789,952
|
5,675,860
|
Stock
Loaned
|
695,739
|
1,280,747
|
Bank
Deposits
|
8,774,457
|
5,585,259
|
Brokers-Dealers
and Clearing Organizations
|
277,567
|
128,298
|
Trade
and Other
|
154,915
|
450,008
|
Trading
Instruments Sold but Not Yet Purchased, at Fair Value
|
134,704
|
149,729
|
Securities
Sold Under Agreements to Repurchase
|
122,728
|
393,282
|
Accrued
Compensation, Commissions and Benefits
|
345,782
|
356,627
|
Income
Taxes Payable
|
-
|
7,755
|
|
|
|
|
18,610,632
|
14,266,684
|
|
|
|
Minority
Interests
|
237,322
|
229,670
|
|
|
|
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; Issued 124,078,129 at
|
|
|
September
30, 2008 and 120,903,331 at September 30, 2007
|
1,202
|
1,176
|
Shares
Exchangeable into Common Stock; 273,042
|
|
|
at
September 30, 2008 and at September 30, 2007
|
3,504
|
3,504
|
Additional
Paid-In Capital
|
355,274
|
277,095
|
Retained
Earnings
|
1,639,662
|
1,461,898
|
Accumulated
Other Comprehensive Income
|
(33,976)
|
30,191
|
|
1,965,666
|
1,773,864
|
Less: 3,825,619 and
1,005,668 Common Shares in Treasury, at Cost
|
(81,761)
|
(16,050)
|
|
1,883,905
|
1,757,814
|
|
|
|
|
$
20,731,859
|
$
16,254,168
|
|
|
|
See
accompanying Notes to Consolidated Financial
Statements.
|
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME
(in
000’s, except per share amounts)
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
Revenues:
|
|
|
|
Securities
Commissions and Fees
|
$
1,888,745
|
$
1,740,717
|
$
1,561,504
|
Investment
Banking
|
124,062
|
192,114
|
158,598
|
Investment
Advisory Fees
|
212,478
|
206,076
|
179,366
|
Interest
|
724,063
|
726,992
|
469,981
|
Net
Trading Profits
|
(1,691)
|
16,476
|
27,156
|
Financial
Service Fees
|
130,569
|
125,214
|
128,811
|
Other
|
126,706
|
101,990
|
120,162
|
|
|
|
|
Total
Revenues
|
3,204,932
|
3,109,579
|
2,645,578
|
|
|
|
|
Interest
Expense
|
392,229
|
499,664
|
296,670
|
Net
Revenues
|
2,812,703
|
2,609,915
|
2,348,908
|
|
|
|
|
Non-Interest
Expenses:
|
|
|
|
Compensation,
Commissions and Benefits
|
1,906,366
|
1,766,690
|
1,601,037
|
Communications
and Information Processing
|
123,578
|
114,161
|
103,576
|
Occupancy
and Equipment Costs
|
97,613
|
79,881
|
72,593
|
Clearance
and Floor Brokerage
|
31,346
|
30,746
|
28,329
|
Business
Development
|
95,750
|
88,067
|
78,579
|
Investment
Advisory Fees
|
50,764
|
47,452
|
40,524
|
Bank
Loan Loss Provision
|
54,749
|
29,410
|
11,153
|
Other
|
69,989
|
71,011
|
79,210
|
Total
Non-Interest Expenses
|
2,430,155
|
2,227,418
|
2,015,001
|
|
|
|
|
Minority
Interest in Earnings of Subsidiaries
|
(4,306)
|
(9,727)
|
(8,159)
|
|
|
|
|
Income
Before Provision for Income Taxes
|
386,854
|
392,224
|
342,066
|
|
|
|
|
Provision
for Income Taxes
|
151,776
|
141,794
|
127,724
|
|
|
|
|
Net
Income
|
$ 235,078
|
$ 250,430
|
$ 214,342
|
|
|
|
|
Net
Income per Share-Basic
|
$ 2.02
|
$ 2.17
|
$ 1.90
|
Net
Income per Share-Diluted
|
$ 1.97
|
$ 2.11
|
$ 1.85
|
Weighted
Average Common Shares
|
|
|
|
Outstanding-Basic
|
116,383
|
115,608
|
112,614
|
Weighted
Average Common and Common
|
|
|
|
Equivalent
Shares Outstanding-Diluted
|
119,059
|
118,693
|
115,738
|
|
|
|
|
Cash
Dividends per Common Share
|
$ 0.44
|
$ 0.40
|
$ 0.32
|
|
|
|
|
Net
Income
|
$ 235,078
|
$ 250,430
|
$ 214,342
|
Other
Comprehensive Income:
|
|
|
|
Change
in Unrealized (Loss) Gain on Available
|
|
|
|
for
Sale Securities, Net of Tax
|
(54,377)
|
(2,150)
|
217
|
Change
in Unrealized Gain on Interest
|
|
|
|
Rate
Swaps Accounted for as Cash Flow
|
|
|
|
Hedges,
Net of Tax
|
-
|
-
|
44
|
Change
in Currency Translations
|
(9,790)
|
20,246
|
2,202
|
Comprehensive
Income
|
$ 170,911
|
$ 268,526
|
$ 216,805
|
See
accompanying Notes to Consolidated Financial Statements.
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
(in 000’s, except per share
amounts)
|
|
|
|
|
Accum-
|
|
|
|
|
Shares
Exchangeable
|
|
|
ulated
Other
|
|
|
|
|
into
|
Additional
|
|
Compre-
|
Treasury
Stock
|
Total
|
|
Common
Stock
|
Common
Stock
|
Paid-in
|
Retained
|
hensive
|
Common
|
|
Shareholders'
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
|
Shares
|
Amount
|
Equity
|
Balances
at September 30, 2005
|
76,567
|
$ 765
|
285
|
$5,493
|
$165,074
|
$1,082,063
|
$
9,632
|
(1,256)
|
$(21,204)
|
$1,241,823
|
Net
Income Fiscal 2006
|
|
|
|
|
|
214,342
|
|
|
|
214,342
|
Cash
Dividends - Common Stock
|
|
|
|
|
|
|
|
|
|
|
($0.32
per Share) (1)
|
|
|
|
|
|
(37,570)
|
|
|
|
(37,570)
|
Purchase
of Treasury Shares
|
|
|
|
|
|
|
|
(126)
|
(5,580)
|
(5,580)
|
3-For-2
Stock Split
|
38,945
|
389
|
129
|
|
|
(389)
|
|
(426)
|
|
|
Employee
Stock Purchases
|
321
|
3
|
|
|
10,710
|
|
|
|
|
10,713
|
Exchangeable
Shares
|
52
|
|
(52)
|
(844)
|
844
|
|
|
|
|
|
Exercise
of Stock Options
|
987
|
10
|
|
|
19,721
|
|
|
290
|
4,761
|
24,492
|
Grant
of Restricted Shares
|
784
|
8
|
|
|
|
|
|
248
|
4,354
|
4,362
|
Restricted
Stock Expense
|
|
|
|
|
11,308
|
|
|
|
|
11,308
|
Stock
Option Expense
|
|
|
|
|
13,773
|
|
|
|
|
13,773
|
Restricted
Stock Units
|
|
|
|
|
1,584
|
|
|
|
|
1,584
|
APIC
Reclass Related to Unvested
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Grants
|
|
(25)
|
|
|
(17,816)
|
|
|
|
|
(17,841)
|
Net
Unrealized Gain on Available for Sale
|
|
|
|
|
|
|
|
|
|
|
Securities
(2)
|
|
|
|
|
|
|
217
|
|
|
217
|
Net
Unrealized Gain on Interest Rate
|
|
|
|
|
|
|
|
|
|
|
Swaps
Accounted for as Cash Flow Hedges (2)
|
|
|
|
|
|
|
44
|
|
|
44
|
Net
Change in Currency Translations
|
|
|
|
|
|
|
2,202
|
|
|
2,202
|
Balances
at September 30, 2006
|
117,656
|
$1,150
|
362
|
$4,649
|
$205,198
|
$1,258,446
|
$12,095
|
(1,270)
|
$(17,669)
|
$1,463,869
|
Net
Income Fiscal 2007
|
|
|
|
|
|
250,430
|
|
|
|
250,430
|
Cash
Dividends - Common Stock
|
|
|
|
|
|
|
|
|
|
|
($0.40
per Share)
|
|
|
|
|
|
(48,488)
|
|
|
|
(48,488)
|
Purchase
of Treasury Shares
|
|
|
|
|
|
|
|
(70)
|
(2,208)
|
(2,208)
|
Employee
Stock Purchases
|
445
|
4
|
|
|
14,096
|
|
|
|
(7)
|
14,093
|
Exchangeable
Shares
|
89
|
|
(89)
|
(1,145)
|
1,145
|
|
|
|
|
|
Exercise
of Stock Options
|
1,734
|
17
|
|
|
25,098
|
|
|
125
|
1,839
|
26,954
|
Grant
of Restricted Shares
|
979
|
5
|
|
|
(2,000)
|
|
|
209
|
1,995
|
|
Restricted
Stock Expense
|
|
|
|
|
19,321
|
|
|
|
|
19,321
|
Stock
Option Expense
|
|
|
|
|
12,361
|
|
|
|
|
12,361
|
Restricted
Stock Unit Expense
|
|
|
|
|
1,828
|
|
|
|
|
1,828
|
APIC
Reclass Related to Unvested
|
|
|
|
|
|
|
|
|
|
|
Independent
Contractor Stock Options
|
|
|
|
|
48
|
|
|
|
|
48
|
Net
Unrealized Loss on Available for Sale
|
|
|
|
|
|
|
|
|
|
|
Securities
(2)
|
|
|
|
|
|
|
(2,150)
|
|
|
(2,150)
|
Net
Change in Currency Translations
|
|
|
|
|
|
|
20,246
|
|
|
20,246
|
Other
(2)
|
|
|
|
|
|
1,510
|
|
|
|
1,510
|
Balances
at September 30, 2007
|
120,903
|
$1,176
|
273
|
$3,504
|
$277,095
|
$1,461,898
|
$30,191
|
(1,006)
|
$(16,050)
|
$1,757,814
|
Net
Income Fiscal 2008
|
|
|
|
|
|
235,078
|
|
|
|
235,078
|
Cash
Dividends - Common Stock
|
|
|
|
|
|
|
|
|
|
|
($0.44
per Share)
|
|
|
|
|
|
(53,151)
|
|
|
|
(53,151)
|
Purchase
of Treasury Shares
|
|
|
|
|
|
|
|
(2,911)
|
(68,322)
|
(68,322)
|
Employee
Stock Purchases
|
725
|
7
|
|
|
19,057
|
|
|
|
(5)
|
19,059
|
Exercise
of Stock Options
|
1,166
|
12
|
|
|
16,628
|
|
|
39
|
832
|
17,472
|
Grant
of Restricted Shares
|
1,284
|
7
|
|
|
2,680
|
|
|
(95)
|
(2,687)
|
|
Restricted
Stock Expense
|
|
|
|
|
25,766
|
|
|
|
|
25,766
|
Stock
Option Expense
|
|
|
|
|
10,027
|
|
|
|
|
10,027
|
Restricted
Stock Unit Expense
|
|
|
|
|
4,169
|
|
|
|
|
4,169
|
Vesting
of Restricted Stock Units
|
|
|
|
|
(4,471)
|
|
|
147
|
4,471
|
|
APIC
Reclass Related to Unvested Independent
|
|
|
|
|
|
|
|
|
|
|
Contractor
Stock Options
|
|
|
|
|
(151)
|
|
|
|
|
(151)
|
Net
Unrealized Loss on Available for Sale
|
|
|
|
|
|
|
|
|
|
|
Securities
(2)
|
|
|
|
|
|
|
(54,377)
|
|
|
(54,377)
|
Net
Change in Currency Translations
|
|
|
|
|
|
|
(9,790)
|
|
|
(9,790)
|
Excess
Tax Benefit from Share-Based Payments
|
|
|
|
|
4,460
|
|
|
|
|
4,460
|
Adoption
of FIN 48
|
|
|
|
|
|
(4,163)
|
|
|
|
(4,163)
|
Other
(2)
|
|
|
|
|
14
|
|
|
|
|
14
|
Balances
at September 30, 2008
|
124,078
|
$1,202
|
273
|
$3,504
|
$355,274
|
$1,639,662
|
$(33,976)
|
(3,826)
|
$(81,761)
|
$1,883,905
|
(1) Adjusted
to reflect 3-for-2 stock split paid on March 22, 2006.
(2) Net
of
tax
See accompanying Notes to Consolidated Financial
Statements.
|
Year
Ended
|
|
September
30,
|
September
30,
|
September30,
|
|
2008
|
2007
|
2006
|
Cash
Flows From Operating Activities:
|
|
|
|
Net
Income
|
$
235,078
|
$
250,430
|
$
214,342
|
Adjustments
to Reconcile Net Income to Net
|
|
|
|
Cash
Provided by (Used in) Operating Activities:
|
|
|
|
Depreciation
and Amortization
|
27,982
|
22,631
|
19,173
|
Excess
Tax Benefits from Stock-Based Payment Arrangements
|
(4,460)
|
-
|
-
|
Deferred
Income Taxes
|
32,422
|
(11,515)
|
(6,097)
|
Premium
and Discount Amortization on Available for Sale
|
|
|
|
Securities and
Unrealized Gain on Other Investments
|
(132)
|
790
|
196
|
Other-than-temporary
Impairment on Available for Sale Securities
|
4,868
|
-
|
-
|
Loss
on Sale of Property and Equipment
|
36
|
20
|
143
|
Gain
on Sale of Loans Available for Sale
|
(364)
|
(518)
|
(413)
|
Gain
on Sale of Joint Venture Interest
|
-
|
(2,559)
|
-
|
Provision
for Loan Loss, Legal Proceedings, Bad Debts and Other
Accruals
|
68,764
|
37,138
|
31,011
|
Stock-Based
Compensation Expense
|
42,127
|
36,563
|
29,820
|
|
|
|
|
(Increase)
Decrease in Operating Assets:
|
|
|
|
Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
|
(184,266)
|
(739,025)
|
(868,505)
|
Receivables:
|
|
|
|
Brokerage
Clients, Net
|
(149,780)
|
(179,030)
|
(78,980)
|
Stock
Borrowed
|
617,185
|
(224,163)
|
11,747
|
Brokers-Dealers
and Clearing Organizations
|
30,859
|
(9,301)
|
(99,683)
|
Other
|
(45,584)
|
(122,198)
|
(39,084)
|
Securities
Purchased Under Agreements to Resell and Other
Collateralized
|
|
|
|
Financings,
Net of Securities Sold Under Agreements to Repurchase
|
(126,096)
|
100,708
|
132,979
|
Trading
Instruments, Net
|
127,650
|
74,770
|
(166,678)
|
Proceeds
from Sale of Loans Available for Sale
|
34,933
|
39,778
|
15,875
|
Origination
of Loans Available for Sale
|
(30,029)
|
(39,695)
|
(14,349)
|
Prepaid
Expenses and Other Assets
|
(242,354)
|
(2,451)
|
(32,171)
|
Minority
Interest
|
(4,306)
|
(9,727)
|
(8,159)
|
|
|
|
|
Increase
(Decrease) in Operating Liabilities:
|
|
|
|
Payables:
|
|
|
|
Brokerage
Clients
|
114,092
|
1,062,194
|
784,692
|
Stock
Loaned
|
(585,008)
|
45,643
|
119,509
|
Brokers-Dealers
and Clearing Organizations
|
149,269
|
46,751
|
(66,623)
|
Trade
and Other
|
(12,553)
|
54,379
|
(3,179)
|
Accrued
Compensation, Commissions and Benefits
|
(10,288)
|
33,086
|
20,016
|
Income
Taxes Payable
|
(9,011)
|
(27,516)
|
2,681
|
|
|
|
|
Net
Cash Provided by (Used in) Operating Activities
|
81,034
|
437,183
|
(1,737)
|
See
accompanying Notes to Consolidated Financial Statements.
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(in
000’s)
(continued)
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
Additions
to Property and Equipment, Net
|
(51,043)
|
(46,081)
|
(27,280)
|
Proceeds
from Sale of Joint Venture Interest, Net of Cash Disposed
|
-
|
3,514
|
-
|
Bank
Loan Originations and Purchases
|
(5,504,009)
|
(4,133,345)
|
(2,318,831)
|
Bank
Loan Repayments and Increase in Unearned Fees, Net
|
2,716,410
|
1,997,824
|
1,044,015
|
Purchases
of Other Investments, Net
|
38,282
|
(15,639)
|
(66,726)
|
Investments
in Real Estate Partnerships-Held by Variable Interest
Entities
|
(18,567)
|
(18,078)
|
(89,735)
|
Loans
to Investor Members of Variable Interest Entities Related to
Investments
|
|
|
|
in
Real Estate Partnerships
|
-
|
-
|
(42,715)
|
Repayments
of Loans by Investor Members of Variable Interest Entities
Related
|
|
|
|
to
Investments in Real Estate Partnerships
|
7,320
|
16,619
|
10,898
|
Securities
Purchased Under Agreements to Resell, Net
|
200,000
|
(445,000)
|
(460,000)
|
Sale
of Available for Sale Securities
|
-
|
81
|
252
|
Purchases
of Available for Sale Securities
|
(209,546)
|
(396,450)
|
(1,180,414)
|
Available
for Sale Securities Maturations and Repayments
|
110,385
|
102,700
|
1,087,624
|
|
|
|
|
Net
Cash Used in Investing Activities
|
(2,710,768)
|
(2,933,855)
|
(2,042,912)
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
Proceeds
from Borrowed Funds, Net
|
2,095,000
|
-
|
8,464
|
Repayments
of Mortgage and Borrowings, Net
|
(5,416)
|
(18,872)
|
(13,288)
|
Proceeds
from Borrowed Funds Related to Investments by Variable
Interest
|
|
|
|
Entities
in Real Estate Partnerships
|
5,604
|
6,744
|
54,249
|
Repayments
of Borrowed Funds Related to Investments by Variable
Interest
|
|
|
|
Entities
in Real Estate Partnerships
|
(19,519)
|
(36,339)
|
(5,382)
|
Proceeds
from Capital Contributed to Variable Interest Entities
|
|
|
|
Related
to Investments in Real Estate Partnerships
|
31,185
|
66,201
|
83,215
|
Minority
Interest
|
(19,227)
|
(42,659)
|
(11,176)
|
Exercise
of Stock Options and Employee Stock Purchases
|
32,594
|
38,076
|
33,120
|
Increase
in Bank Deposits
|
3,189,198
|
2,778,379
|
1,730,860
|
Purchase
of Treasury Stock
|
(67,243)
|
(578)
|
(5,100)
|
Dividends
on Common Stock
|
(53,151)
|
(48,488)
|
(37,570)
|
Excess
Tax Benefits from Stock-Based Payment Arrangements
|
4,460
|
-
|
-
|
|
|
|
|
Net
Cash Provided by Financing Activities
|
5,193,485
|
2,742,464
|
1,837,392
|
|
|
|
|
Currency
Adjustment:
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
(1,201)
|
3,079
|
2,202
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
2,562,550
|
248,871
|
(205,055)
|
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
|
597,473
|
|
|
|
|
Cash
and Cash Equivalents at End of Year
|
$
3,207,493
|
$
644,943
|
$
392,418
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
Cash
Paid for Interest
|
$
396,693
|
$
498,175
|
$
294,215
|
Cash
Paid for Income Taxes
|
$ 134,783
|
$
177,087
|
$
129,480
|
See
accompanying Notes to Consolidated Financial Statements.
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
Description of
Business
Raymond
James Financial, Inc. (“RJF”) is a holding company headquartered in Florida
whose subsidiaries are engaged in various financial services businesses,
including the underwriting, distribution, trading and brokerage of equity and
debt securities and the sale of mutual funds and other investment products. In
addition, some of these subsidiaries provide investment management services for
retail and institutional clients and banking and trust services. The accounting
and reporting policies of Raymond James Financial, Inc. and its subsidiaries
(the “Company”) conform to accounting principles generally accepted in the
United States of America (“U.S.”), the more significant of which are summarized
below:
Basis of
Presentation
The
consolidated financial statements include the accounts of RJF and its
consolidated subsidiaries that are generally controlled through a majority
voting interest. All material consolidated subsidiaries are 100% owned by the
Company. 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 entity (“VIE”)
of which it is the primary beneficiary, as defined. Additional information is
provided in Note 6 below. When the Company does not have a controlling interest
in an entity, but exerts significant influence over the entity, the Company
applies the equity method of accounting. All material intercompany balances and
transactions have been eliminated in consolidation.
During
the three months ended March 31, 2008, the Company consolidated two additional
partnerships under Emerging Issues Task Force (“EITF”) Issue 04-5, “Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights.” As of September 30, 2008, these consolidated partnerships had assets of
approximately $7.3 million.
Management Estimates and
Assumptions
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and could
have a material impact on the consolidated financial statements.
Reporting
Period
The
Company’s quarters end on the last day of each calendar quarter.
Recognition of
Revenues
Securities
transactions and related commission revenues and expenses are recorded on a
trade date basis.
Insurance
and annuity commissions are comprised of those commissions resulting from the
sale of life, disability and long-term care insurance policies issued by
unrelated insurance carriers and from the sale of variable and fixed
annuities. Insurance commission revenue and expense are recognized
when the contract is signed and the premium is remitted to the insurance
company. Annuity commission revenue and expense is recognized when
the signed contract is accepted by the insurance carrier. Insurance
and annuity trail commission revenue and expense are recorded ratably over the
period earned.
Investment
banking revenues are recorded at the time a transaction is completed and the
related income is reasonably determinable. Investment banking revenues include
management fees and underwriting fees, net of reimbursable expenses, earned in
connection with the distribution of the underwritten securities, merger and
acquisition fees, private placement fees and limited partnership distributions.
Securities received in connection with investment banking transactions are
carried at estimated fair value as determined by management.
The
Company earns investment advisory fees based on the value of clients'
portfolios. These fees are recorded ratably over the period earned.
Financial
service fees include per account fees such as IRA fees, transaction fees on fee
based accounts, and servicing fees. The IRA, other annual account fees, and
distribution fees are recognized into income as earned over the term of the
contract. The transaction fees are collected from clients as trades are executed
and are recognized into income. Servicing fees are collected from investment
companies and partnerships for marketing services and are recorded as
earned.
Under
clearing agreements, the Company clears trades for unaffiliated correspondent
brokers and retains a portion of commissions as a fee for its services.
Correspondent clearing revenues are recorded net of commissions remitted and
included in other revenue. Total commissions generated by correspondents were
$39.7 million, $39.6 million, and $30.0 million and commissions remitted totaled
$36.2 million, $34.0 million, and $25.1 million for the years ended September
30, 2008, September 30, 2007, and September 30, 2006, respectively.
Cash and Cash
Equivalents
Cash
equivalents are highly liquid investments with original maturities of 90 days or
less, other than those used for trading purposes.
Assets Segregated Pursuant
to Regulations and Other Segregated Assets
In
accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Raymond
James & Associates (“RJA”), as a broker-dealer carrying client accounts, is
subject to requirements related to maintaining cash or qualified securities in a
segregated reserve account for the exclusive benefit of its clients. In
addition, Raymond James Limited (“RJ Ltd.”) is required to hold client
Registered Retirement Savings Plan funds in trust. Segregated assets at
September 30, 2008 and September 30, 2007 consist of cash and cash equivalents.
Raymond James Bank (“RJBank”) maintains interest-bearing bank deposits that are
restricted for pre-funding letter of credit draws related to certain syndicated
borrowing relationships in which RJBank is involved and occasionally pledged as
collateral for FHLB advances and
occasionally pledged as collateral for Federal Home Loan Bank of Atlanta
(“FHLB”) advances.
Repurchase Agreements and
Other Collateralized Financings
The
Company purchases short-term securities under agreements to resell (“reverse
repurchase agreements”). Additionally, the Company sells securities under
agreements to repurchase (“repurchase agreements”). Both reverse repurchase and
repurchase agreements are accounted for as collateralized financings and are
carried at contractual amounts plus accrued interest. Other than RJBank’s policy
described below, it is the Company's policy to obtain possession of collateral
with a market value equal to or in excess of the principal amount loaned under
the reverse repurchase agreements. To ensure that the market value of the
underlying collateral remains sufficient, the collateral is valued daily, and
the Company may require counterparties to deposit additional collateral (or may
return collateral to counterparties) when appropriate. Other collateralized
financings include secured call loans receivable held by RJ Ltd. These
financings represent loans of excess cash to financial institutions which are
fully collateralized by treasury bills and bear interest at call loan
rates.
RJBank’s
reverse repurchase agreements are accounted for as collateralized financing
transactions and are recorded at the amounts at which the securities were
acquired plus accrued interest. Securities obtained under the resale agreements
have a market value exceeding the principal amount of the resale agreements. The
securities are held by third party custodians and are segregated under written
agreements that recognize RJBank’s interest in the securities. One custodian is
a national bank affiliate of the repurchase agreement counterparty. The
securities purchased are primarily mortgage backed securities or collateralized
mortgage obligations (“CMOs”) issued by U.S. agencies. The fair value of
securities purchased is monitored and collateral is obtained from or returned to
the counterparty when appropriate. These reverse repurchase agreements generally
mature on the next business day, and may result in credit exposure in the event
the counterparty to the transaction is unable to fulfill its contractual
obligations. RJBank has the right to sell, transfer or pledge the securities
purchased under agreements to resell.
Financial
Instruments
Trading
Instruments
Trading
instruments are comprised primarily of the financial instruments held by the
Company's broker-dealer subsidiaries. These instruments are recorded at fair
value with unrealized gains and losses reflected in current period earnings.
Trading securities are valued at fair 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 it may use other methods including broker 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
similar assets, the coupon level and possible early redemption features of the
security, and current financial information regarding the issuer. 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.
Available
for Sale
Available
for sale securities are comprised primarily of collateralized mortgage
obligations (“CMOs”) and mortgage related debt securities. Debt and equity
securities classified as available for sale are reported at fair value with
unrealized gains and losses, net of deferred taxes, reported in shareholders'
equity as a component of accumulated other comprehensive income. The fair value
of available for sale securities is based primarily on bid quotations received
from a pricing service or independent securities dealers. Positions
valued in this manner represent approximately 98% of the portfolio as of
September 30, 2008. If these sources are not available or are deemed unreliable
when an active market does not exist, 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.
Interest
on securities is recognized in interest income on an accrual basis. Discounts
are accreted and premiums are amortized as an adjustment to yield over the
contractual term of the security. A combination of the level factor and
straight-line methods is used, the effect of which does not differ materially
from the effective interest method. When a principal reduction occurs on a
security, any related premium or discount is recognized as an adjustment to
yield in the results of operations in the period in which the principal
reduction occurs. Realized gains and losses on sales of such securities are
recognized using the specific identification method.
On a
quarterly basis, the Company makes an assessment to determine whether there have
been any events or economic circumstances to indicate that a security on which
there is an unrealized loss is impaired on an other-than-temporary basis. In
order to evaluate the Company’s risk exposure and any potential impairment of
these securities, characteristics of each security owned such as collateral
type, delinquency and foreclosure levels, credit enhancement, projected loan
losses and collateral coverage are reviewed monthly by management. Many
additional factors are considered to determine whether an impairment is
other-than-temporary, including whether the Company has the ability and intent
to hold the investment until a market price recovery and whether evidence
indicating the cost of the investment is recoverable outweighs evidence to the
contrary. Evidence considered in this assessment includes the reasons for the
impairment, the severity and duration of the impairment, changes in value
subsequent to year-end, recent events specific to the issuer or industry,
forecasted performance of the security; and for debt securities, external credit
ratings and recent downgrades. Securities on which there is an unrealized loss
that is deemed to be other-than-temporary are written down to fair value with
the write-down recorded as a realized loss in securities gains (losses), and a
new cost basis for the security is established.
The
Company assesses at the date of acquisition whether a security is within the
scope of FASB’s EITF Issue 99-20, “Recognition of Interest Income and Impairment
of Purchased and Retained Beneficial Interest in Securitized Financial
Assets.”
Brokerage Client Receivables
and Allowance for Doubtful Accounts
Brokerage
client receivables include receivables of the Company's asset management and
broker-dealer subsidiaries. The receivables from asset management clients are
primarily for accrued asset management service fees, while the receivables from
broker-dealer clients are principally for amounts due on cash and margin
transactions and are generally collateralized by securities owned by the
clients. Both the receivables from the asset management and broker-dealer
clients are reported at their outstanding principal balance, adjusted for any
allowance for doubtful accounts. When a broker-dealer 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. Securities owned by customers, including those
that collateralize margin or other similar transactions, are not reflected in
the Consolidated Statements of Financial Condition.
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. When the review of these
accounts indicates that further collection activity is highly unlikely, the
loans are written-off and the corresponding allowance for doubtful accounts is
reversed.
Securities Borrowed and
Securities Loaned
Securities
borrowed and securities loaned transactions are reported as collateralized
financings and recorded at the amount of collateral advanced or received.
Securities borrowed transactions generally require the Company to deposit cash
with the lender. With respect to securities loaned, the Company generally
receives collateral in the form of cash in an amount in excess of the market
value of securities loaned. The Company monitors the market value of securities
borrowed and loaned on a daily basis, with additional collateral obtained or
refunded as necessary.
Bank Loans and
Allowances for Losses
Bank
loans are primarily comprised of loans originated or purchased by RJBank and
include commercial and residential mortgage loans, as well as non-real estate
commercial and consumer loans. Those loans which the Company has the intent and
the ability to hold until maturity or payoff are recorded at their unpaid
principal balance plus any premium paid in connection with the purchase of the
loan, less the allowance for loan losses and discounts received in connection
with the purchase of the loan and net of deferred fees and costs on originated
loans. Syndicated loans purchased are recognized as of the earlier of the
settlement date or the delayed settlement compensation commencement date.
Interest income is recognized on an accrual basis.
Loan
origination fees and direct costs as well as premiums and discounts on loans
that are not revolving, tranche-based or pooled, are capitalized and recognized
in interest income using the interest method. For revolving or tranche-based
loans, the straight-line method is used based on the contractual term, the
effect of which does not differ materially from the effective interest method.
Monthly premium amortization or discount accretion on pools of residential
mortgages is calculated to be proportionate to the amount of the monthly
principal payments. Loan commitment fees are generally deferred and accreted on
a straight-line basis over the commitment period, the affect of which does not
differ materially from the effective interest method.
Residential
mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value. Gains and losses on sales
of these assets are included as a component of other income, while interest
collected on these assets is included in interest income. Net unrealized losses
are recognized through a valuation allowance by charges to income as a component
of Other Revenue in the Consolidated Statements of Income and Comprehensive
Income. Corporate loans are designated as held for investment upon inception and
recognized in loans receivable. If the Company subsequently designates a
corporate loan as held for sale, then the Company writes down the carrying value
of the loan with a partial charge-off, if necessary, to carry it at the lower of
cost or estimated fair value on an individual asset basis.
Loans are
placed on nonaccrual status when the loan becomes 90 days past due as to
contractual interest or principal and the collection of interest is not
probable, or when the full timely collection of interest or principal becomes
uncertain. When a loan is placed on nonaccrual status, the accrued and unpaid
interest receivable is written-off against interest income and accretion of the
net deferred loan origination fees cease. The loan is accounted for on the cash
or cost recovery method thereafter until qualifying for return to accrual
status. If contractual terms on commercial loans have been restructured to grant
a concession to a borrower experiencing financial difficulties, and the Company
does not receive adequate compensation, the restructuring is considered a
troubled debt restructuring. When the uncollectibility of a loan balance is
believed to be confirmed, loan losses are charged against the allowance and
subsequent recoveries, if any, are credited to the allowance.
Real
estate acquired in the settlement of loans, including through, or in lieu of,
loan foreclosure, is initially recorded at the lower of cost or estimated fair
value less estimated selling costs, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of the carrying amount or fair value, as determined by
a current appraisal, or valuation less estimated costs to sell and are
classified as other assets on the Consolidated Statements of Financial
Condition. Costs relating to development and improvement of the property are
capitalized, whereas those relating to holding the property are charged to
operations.
Client
loans at RJBank are generally collateralized by real estate or other property.
RJBank provides for both an allowance for losses in accordance with Statement of
Financial Accounting Standard No. 5, "Accounting for Contingencies" (“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 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. A commercial loan is considered impaired when,
based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. 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.
Investments in Real Estate
Partnerships Held by Variable Interest Entities
A wholly
owned subsidiary of the Company is the managing member or general partner in
several separate tax credit housing funds. Additional information is presented
in Note 6 below. These funds invest in limited partnerships which purchase and
develop affordable housing properties qualifying for federal and state tax
credits.
Property and
Equipment
Property,
equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Depreciation of assets is primarily provided for
using the straight-line method over the estimated useful lives of the assets,
which range from two to seven years for software, two to five for furniture and
equipment and 10 to 31 years for buildings and land improvements. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful lives of the assets.
Additions,
improvements and expenditures for repairs and maintenance that significantly
extend the useful life of an asset are capitalized. Other expenditures for
repairs and maintenance are charged to operations in the period incurred. Gains
and losses on disposals of property and equipment are reflected in income in the
period realized.
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 September 30,
2008, goodwill had been allocated to the Private Client Group of RJA, and both
the Private Client Group and Capital Markets segments of RJ Ltd. As of the most
recent impairment test, the Company determined that the carrying value of the
goodwill for each reporting unit had not been impaired. However, changes in
current circumstances or business conditions could result in an impairment of
goodwill. As required, the Company will continue to perform impairment testing
on an annual basis or when an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount.
Investment
Accounting
Investments
in the Company’s proprietary capital investment portfolio are measured at fair
value with any changes recognized in earnings. 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. 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.
Legal
Reserves
The
Company recognizes liabilities for contingencies when there is an exposure that,
when fully analyzed, indicates it is both probable that a liability has been
incurred and the amount of loss can be reasonably estimated. When a range of
probable loss can be estimated, the Company accrues the most likely amount; if
not determinable, the Company accrues at least the minimum of the range of
probable loss.
The
Company records reserves related to legal proceedings in Trade and Other
Payables. Such reserves are established and maintained in accordance with SFAS 5
and FIN 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.
Stock
Compensation
The
Company accounts for share-based awards in accordance with SFAS No. 123R,
“Share-Based Payment”, which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors based on estimated fair values. See Note 16 below for additional
information. In addition, 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”. As a
result, these awards are revalued at each reporting date for purposes of
measuring compensation expense associated with these awards. See Note 17 below
for additional information. Compensation expense is recognized for all
stock-based compensation with future service requirements over the relevant
vesting periods using the straight-line method.
Derivative Financial
Instruments
The
Company accounts for derivative financial instruments and hedging activities in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as subsequently amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statements No. 133", SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", and SFAS No. 149, "Amendments of
Statement 133 on Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivatives and hedging
activities. These statements establish standards for designating a derivative as
a hedge. Derivatives in a broker-dealer or those that do not meet the criteria
for designation as a hedge are accounted for as trading account assets and
liabilities, and recorded at fair value in the statement of financial condition
with the realized and unrealized gains or losses recorded in the consolidated
statement of income for that period.
Under FIN
39, “Offsetting of Amounts Related to Certain Contracts”, the Company elects to
net-by-counterparty the fair value of interest rate swap contracts entered into
by the Fixed Income Trading group. Certain contracts contain a legally
enforceable master netting arrangement and therefore, the fair value of those
swap contracts are netted by counterparty in the Consolidated Statements of
Financial Condition.
The
Company uses interest rate swaps as well as futures contracts as part of its
fixed income business. In addition, the Company enters into interest rate swaps
which are, in turn, substantially economically hedged with counterparties. These
positions are marked to market with the gain or loss and the related interest
recorded in Net Trading Profits within the Consolidated Statements of Income for
the period. Any collateral exchanged as part of the swap agreement is recorded
in broker receivables and payables in the Consolidated Statements of Financial
Condition for the period.
The
Company uses interest caps to mitigate interest rate risk within
RJBank. These positions are recorded at fair value with any changes
in fair value recorded in Other Revenue in the Consolidated Statements of Income
and Comprehensive Income for the respective period.
Leases
The
Company leases office space and equipment under operating leases. The Company
recognizes rent expense related to these operating leases on a straight-line
basis over the lease term. The lease term commences on the earlier of the date
when the Company becomes legally obligated for the rent payments or the date on
which the Company takes possession of the property. For tenant improvement
allowances and rent holidays, the Company records a deferred rent liability in
other liabilities in the Consolidated Statements of Financial Condition and
amortizes the deferred rent over the lease term as a reduction to rent expense
in the consolidated statement of income.
Foreign Currency
Translation
The
Company consolidates its foreign subsidiaries and joint ventures. The statement
of financial condition of the subsidiaries and joint ventures are translated at
exchange rates as of the period end. The statements of income are translated at
an average exchange rate for the period. The gains or losses resulting from
translating foreign currency financial statements into U.S. dollars are included
in shareholders' equity as a component of Accumulated Other Comprehensive
Income.
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. FIN No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”), 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. 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. The Company recognizes the accrual of interest and penalties
related to income tax matters in interest expense and other expense,
respectively. See Note 11 of the Notes to the Consolidated Financial Statements
for further information on the Company’s income taxes.
Earnings per Share
(“EPS”)
Basic EPS
is calculated by dividing earnings available to common stockholders by the
weighted-average number of common shares outstanding. Diluted EPS is similar to
basic EPS, but adjusts for the effect of the potential issuance of common shares
by application of the treasury stock method.
Reclassifications
Certain amounts from prior years have been reclassified to conform
to the current year presentation. The effect of these reclassifications on
the Company's previously reported annual consolidated financial statements was
not material.
NOTE 2 – TRADING INSTRUMENTS
AND TRADING INSTRUMENTS SOLD BUT NOT YET PURCHASED:
|
September
30, 2008
|
September
30, 2007
|
|
|
Instruments
|
|
Instruments
|
|
|
Sold
but
|
|
Sold
but
|
|
Trading
|
Not
Yet
|
Trading
|
Not
Yet
|
|
Instruments
|
Purchased
|
Instruments
|
Purchased
|
|
(in
000's)
|
Marketable:
|
|
|
|
|
Municipal
Obligations
|
$ 101,748
|
$ 79
|
$
200,024
|
$ 54
|
Corporate
Obligations
|
43,738
|
-
|
56,069
|
952
|
Government
Obligations
|
28,896
|
82,062
|
83,322
|
45,275
|
Agencies
|
60,950
|
25
|
47,123
|
60,829
|
Total
Debt Securities
|
235,332
|
82,166
|
386,538
|
107,110
|
|
|
|
|
|
Derivative
Contracts
|
46,393
|
30,250
|
30,603
|
8,445
|
Equity
Securities
|
42,391
|
22,288
|
46,913
|
34,174
|
Other
Securities
|
970
|
-
|
3,707
|
-
|
Total
|
$
325,086
|
$
134,704
|
$
467,761
|
$
149,729
|
Trading
securities are valued at fair value, and securities which are not readily
marketable are carried at estimated fair value as determined by management. To
corroborate management’s estimated valuation, 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 it may use other methods including 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 securities that do not have readily available 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, standard spread-based pricing models re-calibrated
from time to time to trade activity in similar assets, the coupon level and
possible early redemption features of the security, and current financial
information regarding the issuer. 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 $70.1 million and $48.9 million at September 30, 2008 and
September 30, 2007, respectively, are included in Corporate Obligations and
Agencies in the table above. There were no material mortgage backed securities
sold but not yet purchased at September 30, 2008, and $60.8 million at September
30, 2007, which are included in Agencies in the table above. Net unrealized
(losses) gains related to open trading positions at September 30, 2008,
September 30, 2007, and September 30, 2006 were ($14.6) million, ($0.7) million
and $4.4 million, respectively. As of September 30, 2008, auction rate
securities totaling $16.8 million are included in Municipal Obligations in the
table above. As of September 30, 2008 these securities were carried at par,
which is management’s estimate of fair value. Subsequent to September
30, 2008, approximately $2.9 million of these securities were redeemed at
par. The Company believes most of the remainder of 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. There are no auction rate
securities sold but not yet purchased as of September 30, 2008.
NOTE 3 - AVAILABLE FOR SALE
SECURITIES:
Available
for sale securities are comprised primarily of collateralized mortgage
obligations (“CMOs”) and other mortgage related debt securities, owned by
RJBank, and certain equity securities owned by the Company's non-broker-dealer
subsidiaries. There were no proceeds from the sale of available for sale
securities for the year ended September 30, 2008. There were proceeds of $81,000
for the year ended September 30, 2007 and $252,000 for the year ended September
30, 2006. The realized gains and losses related to the sale of available for
sale securities were immaterial to the consolidated financial statements for all
years presented.
The fair
value of available for sale securities is based primarily on bid quotations
received from a pricing service or independent securities dealers. Positions
valued in this manner represent 98% of the portfolio. If these sources are not
available or are deemed unreliable when an active market does not exist, 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 September 30, 2008, September 30, 2007 and
September 30, 2006 are as follows:
|
September
30, 2008
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Available
for Sale Securities:
|
|
|
|
|
Agency
Mortgage Backed Securities
|
$
262,823
|
$
82
|
$ (3,907)
|
$
258,998
|
Non-Agency
Collateralized Mortgage Obligations
|
404,044
|
-
|
(85,116)
|
318,928
|
|
|
|
|
|
Total
RJBank Available for Sale Securities
|
666,867
|
82
|
(89,023)
|
577,926
|
|
|
|
|
|
Other Securities
|
3
|
4
|
-
|
7
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
666,870
|
$
86
|
$
(89,023)
|
$
577,933
|
|
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
|
|
September
30, 2006
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Available
for Sale Securities:
|
|
|
|
|
Agency
Mortgage Backed Securities
|
$
142,084
|
$
495
|
$ (27)
|
$
142,552
|
Non-Agency
Collateralized Mortgage Obligations
|
137,753
|
363
|
(156)
|
137,960
|
|
|
|
|
|
Total
RJBank Available for Sale Securities
|
279,837
|
858
|
(183)
|
280,512
|
|
|
|
|
|
Other Securities
|
110
|
-
|
(42)
|
68
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
279,947
|
$
858
|
$
(225)
|
$
280,580
|
The
following table shows the contractual maturities, carrying values and current
yields for RJBank's available for sale securities at September 30, 2008. Since
RJBank’s available for sale securities are backed by mortgages, actual
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without prepayment
penalties.
|
|
After
One But
|
After
Five But
|
|
|
|
Within
One Year
|
Within
Five Years
|
Within
Ten Years
|
After
Ten Years
|
Total
|
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
|
Due
|
Yield
|
Due
|
Yield
|
Due
|
Yield
|
Due
|
Yield
|
Due
|
Yield
|
|
($
in 000’s)
|
Agency
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
Backed
|
|
|
|
|
|
|
|
|
|
|
Securities
|
$ -
|
-
|
$19,640
|
5.36%
|
$82,955
|
5.18%
|
$156,403
|
5.29%
|
$258,998
|
5.26%
|
Non-Agency
|
|
|
|
|
|
|
|
|
|
|
Collateralized
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
Obligations
|
-
|
-
|
-
|
-
|
-
|
-
|
318,928
|
12.16%
|
318,928
|
12.16%
|
|
$ -
|
|
$19,640
|
|
$82,955
|
|
$475,331
|
|
$577,926
|
|
The
following table shows RJBank’s investments’ gross unrealized losses and fair
value, aggregated by investment category and length of time the individual
securities have been in a continuous unrealized loss position, at September 30,
2008:
|
Less
than 12 Months
|
12
Months or More
|
Total
|
|
Estimated
|
|
Estimated
|
|
Estimated
|
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|
(in
000’s)
|
|
|
|
|
|
|
|
Agency
Mortgage Backed Securities
|
$
154,797
|
$ (2,053)
|
$
93,308
|
$ (1,854)
|
$
248,105
|
$ (3,907)
|
|
|
|
|
|
|
|
Non-Agency
Collateralized |
|
|
|
|
|
|
Mortgage
Obligations
|
119,547
|
(17,236)
|
197,774
|
(67,880)
|
317,321
|
(85,116)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Temporary Impaired Securities
|
$
274,344
|
$ (19,289)
|
$
291,082
|
$
(69,734)
|
$
565,426
|
$
(89,023)
|
At
September 30, 2008, of the 98 U.S. Government agency mortgage-backed securities
in a continuous unrealized loss position, 62 were in a continuous unrealized
loss position for less than 12 months and 36 for 12 months or more. Of the 28
non-agency collateralized mortgage obligations in a continuous unrealized loss
position, eight were in a continuous unrealized loss position for less than 12
months and 20 for 12 months or more.
The
reference point for determining when securities are in a loss position is fiscal
year-end. As such, it is possible that a security had a fair value that exceeded
its amortized cost on other days during the past twelve-month period. The
unrealized losses at September 30, 2008, were primarily caused by interest rate
and market changes. The Federal National Mortgage Association or Federal Home
Loan Mortgage Corporation, both of which were placed under the conservatorship
of the U.S. Government on September 7, 2008, guarantees the contractual cash
flows of the agency mortgage backed securities. As of September 30, 2008 and
including subsequent ratings changes, $272 million of the non-agency
collateralized mortgage obligations were rated AAA by two rating agencies, $28
million were rated AAA by one rating agency, and $17 million were rated below
AAA by two rating agencies. All of the non-agency securities carry various
amounts of credit enhancement, and none are collateralized with subprime loans.
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. The Company
has reviewed these securities in accordance with its accounting policy for
other-than-temporary impairment, which is described in Note 1 of the Notes to
the Consolidated Financial Statements, and since the decline in fair value of
the securities presented in the table above is attributable to changes in
interest rates and illiquidity in the credit markets and not credit quality and
because the Company has the ability and intent to hold these investments until a
fair value recovery or maturity, it does not consider these securities to be
other-than-temporarily impaired as of September 30, 2008.
The
Company determined that two securities in the portfolio were
other-than-temporarily impaired and recognized a loss of $4.9 million in income
for the year ended September 30, 2008. No securities were identified as
other-than-temporarily impaired during the years ended September 30, 2007 or
2006.
The
Emergency Economic Stabilization Act of 2008 (the “Act”) was signed into law on
October 3, 2008. The Act grants the U.S. Secretary of the Treasury
authority to purchase debt securities from and make capital injections into
financial institutions. The Act was a significant change in circumstances that
occurred after September 30, 2008, that has not been considered in the Company’s
assessment of whether securities are other-than-temporarily impaired as of
September 30, 2008.
NOTE 4 - RECEIVABLES FROM
AND PAYABLES TO BROKERAGE CLIENTS:
Receivables from Brokerage
Clients
Receivables
from brokerage clients include amounts arising from normal cash and margin
transactions and fees receivable. Margin receivables are collateralized by
securities owned by brokerage clients. Such collateral is not reflected in the
accompanying consolidated financial statements. The amount receivable from
clients at September 30, 2008 and September 30, 2007 is as follows:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
Brokerage
Client Receivables
|
$
1,853,953
|
$
1,704,944
|
Allowance
For Doubtful Accounts
|
(3,489)
|
(644)
|
Brokerage
Client Receivables, Net
|
$
1,850,464
|
$
1,704,300
|
Payables to Brokerage
Clients
Payables
to brokerage clients include brokerage client funds on deposit awaiting
reinvestment. The following table presents a summary of such payables at
September 30, 2008 and September 30, 2007:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
Brokerage
Client Payables:
|
|
|
Interest
Bearing
|
$
5,396,765
|
$
5,115,215
|
Non-Interest
Bearing
|
393,187
|
560,645
|
Total
Brokerage Client Payables
|
$
5,789,952
|
$
5,675,860
|
Interest
expense on brokerage client payables for the years ended September 30, 2008,
September 30, 2007, and September 30, 2006 was $137.5 million, $204.2 million,
and $143.4 million, respectively.
NOTE 5 – BANK LOANS,
NET:
Bank
client receivables are primarily comprised of loans originated or purchased by
RJBank and include commercial and residential real estate loans, as well as
commercial and consumer loans. These receivables are collateralized by first or
second mortgages on residential or other real property, by other assets of the
borrower, or are unsecured. The following table presents the balance and
associated percentage of each major loan category in RJBank's portfolio,
including loans receivable and loans available for sale:
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
September
24,
|
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
Balance
|
%
|
Balance
|
%
|
Balance
|
%
|
Balance
|
%
|
Balance
|
%
|
|
($
in 000’s)
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
$ 725,997
|
10%
|
$ 343,783
|
7%
|
$ 272,957
|
12%
|
$ 144,254
|
14%
|
$ 124,243
|
18%
|
Real
Estate
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
Loans
|
346,691
|
5%
|
123,664
|
3%
|
34,325
|
2%
|
32,563
|
3%
|
34,838
|
5%
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
|
|
|
|
|
|
|
|
|
Loans
(2)
|
3,528,732
|
49%
|
2,317,840
|
49%
|
653,695
|
28%
|
136,375
|
14%
|
75,632
|
11%
|
Residential
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
Loans
|
2,599,567
|
36%
|
1,934,645
|
41%
|
1,322,908
|
58%
|
690,242
|
69%
|
457,921
|
66%
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
Loans
|
23,778
|
-
|
4,541
|
-
|
1,917
|
-
|
2,752
|
-
|
1,568
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total
Loans
|
7,224,765
|
100%
|
4,724,473
|
100%
|
2,285,802
|
100%
|
1,006,186
|
100%
|
694,202
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Unearned
|
|
|
|
|
|
|
|
|
|
|
Income
and
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Expenses
(3)
|
(41,383)
|
|
(13,242)
|
|
(4,276)
|
|
1,688
|
|
112
|
|
Allowance
for
|
|
|
|
|
|
|
|
|
|
|
Loan
Losses
|
(88,155)
|
|
(47,022)
|
|
(18,694)
|
|
(7,593)
|
|
(7,642)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129,538)
|
|
(60,264)
|
|
(22,970)
|
|
(5,905)
|
|
(7,530)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
Net
|
$7,095,227
|
|
$
4,664,209
|
|
$
2,262,832
|
|
$
1,000,281
|
|
$
686,672
|
|
(1)
|
Loans
not secured by real estate.
|
(2)
|
Loans
wholly or partially secured by real estate. Of this amount, $546.7 million
is wholly or substantially secured by lien(s) on real estate. The
remainder is partially secured by real estate, the majority of which are
also secured by other assets of the borrower, and includes loans to
certain real estate investment
trusts.
|
(3)
|
Includes
purchase premiums, purchase discounts, and net deferred origination fees
and costs.
|
At
September 30, 2008 and 2007, $1.7 billion and $55.0 million FHLB advances,
respectively, were secured by a blanket lien on RJBank's residential mortgage
loan portfolio. The remaining $226.8 million in FHLB advances were secured by
pledged cash deposits at the FHLB. See Note 9 of the Notes to the Consolidated
Financial Statements for more information regarding the FHLB
advances.
At
September 30, 2008 and 2007, RJBank had $524,000 and $5.1 million in loans
available for sale, respectively. RJBank's gain from the sale of
originated residential loans available for sale was $364,000, $518,000, and
$413,000 for the years ended September 30, 2008, September 30, 2007, and
September 30, 2006, respectively.
Certain
officers, directors, and affiliates, and their related interests were indebted
to RJBank for $1.9 million and $999,000 at September 30, 2008 and September 30,
2007, respectively. All such loans were made in the ordinary course
of business.
Loan
interest and fee income for the years ended September 30, 2008, 2007, and 2006
was $346.6 million, $205.0 million, and $95.4 million,
respectively.
The
following table shows the contractual maturities of RJBank’s loan portfolio at
September 30, 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)
|
$ 2,634
|
$ 392,797
|
$ 330,566
|
$ 725,997
|
Real
Estate Construction Loans
|
73,983
|
245,195
|
27,513
|
346,691
|
Commercial
Real Estate Loans (2)
|
171,269
|
2,702,653
|
654,810
|
3,528,732
|
Residential
Mortgage Loans
|
1,347
|
4,557
|
2,593,663
|
2,599,567
|
Consumer
Loans
|
22,624
|
1,129
|
25
|
23,778
|
|
|
|
|
|
Total
Loans
|
$
271,857
|
$
3,346,331
|
$
3,606,577
|
$
7,224,765
|
(1)
|
Loans
not secured by real estate.
|
(2)
|
Loans
wholly or partially secured by real estate. Of this amount, $546.7 million
is wholly or substantially secured by lien(s) on real estate. The
remainder is partially secured by real estate, the majority of which are
also secured by other assets of the borrower, and includes loans to
certain real estate investment
trusts.
|
RJBank classifies loans as
nonperforming when full and timely collection of interest or principal becomes
uncertain or when they are 90 days past due. The following table shows the
comparative data for nonperforming loans and assets:
|
Sept.
30,
|
Sept.
30,
|
Sept.
30,
|
Sept.
30,
|
Sept.
24,
|
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
($
in 000’s)
|
Nonaccrual
Loans
|
$
52,033
|
$
1,391
|
$
2,091
|
$ 117
|
$
801
|
Accruing
Loans Which are 90 Days
|
|
|
|
|
|
Past
Due
|
6,131
|
2,674
|
-
|
1,200
|
125
|
Total
Nonperforming Loans
|
58,164
|
4,065
|
2,091
|
1,317
|
926
|
Real
Estate Owned and Other
|
|
|
|
|
|
Repossessed
Assets, Net
|
4,144
|
1,653
|
-
|
-
|
-
|
Total
Nonperforming Assets, Net
|
$
62,308
|
$
5,718
|
$
2,091
|
$
1,317
|
$
926
|
Total
Nonperforming Assets as a % of
|
|
|
|
|
|
Total
Loans, Net and Other Real
|
|
|
|
|
|
Estate
Owned, Net
|
0.88%
|
0.12%
|
0.09%
|
0.13%
|
0.13%
|
As of September 30, 2008, RJBank had commitments to lend $1.9 million to
borrowers whose loans were classified as nonperforming.
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 totaled
$1.4 million for the year ended September 30, 2008 or $1.6 million since
origination. The interest income recognized on nonaccrual loans for the year
ended September 30, 2008 was $231,000. As of September 30, 2008, there were five
loans which RJBank considers to be impaired in the corporate loan portfolio for
which $37.5 million is included in nonaccrual loans. The Company has established
reserves totaling $5.0 million against these five loans. The average balance of
the impaired loans was $15.9 million for the 12 months ending September 30,
2008. RJBank considers a loan to be impaired when it is probable that it will be
unable to collect the scheduled payments of principal or interest when due
according to the terms of the loan agreement. Of the $10.2 million in
charge-offs related to corporate loans, $8.5 million in charge-offs related to
these impaired loans, $781,000 related to a loan that was sold during the year
and $866,000 related to a loan secured by property that was subsequently
foreclosed and carried in other real estate owned. As of September 30, 2008, two
of these impaired loans totaling $14.5 million were classified as troubled debt
restructurings. At the time of the restructuring, RJBank increased its
commitment to one borrower by $894,000. As of September 30, 2008 RJBank had
commitments to lend $1.9 million to borrowers whose loans were classified as
troubled debt restructurings.
Changes
in the allowance for loan losses at RJBank were as follows:
|
Year
Ended
|
|
Sept.
30,
|
Sept.
30,
|
Sept.
30,
|
Sept.
30,
|
Sept.
30,
|
|
2008
|
2007
|
2006
|
2005
|
2004
|
|
($
in 000’s)
|
|
|
|
|
|
|
Allowance
for Loan Losses,
|
|
|
|
|
|
Beginning
of Period
|
$
47,022
|
$
18,694
|
$ 7,593
|
$
7,642
|
$ 5,910
|
Provision
For Loan Losses
|
54,749
|
29,410
|
11,153
|
1,037
|
1,732
|
Transfer
to Reserve for Unfunded
|
|
|
|
|
|
Commitments
|
-
|
-
|
-
|
(1,086)
|
-
|
Charge-Offs:
|
|
|
|
|
|
Real
Estate Construction Loans
|
|
(629)
|
|
|
|
Commercial
Real Estate Loans
|
(10,169)
|
-
|
-
|
-
|
-
|
Residential
Mortgage Loans
|
(3,745)
|
(454)
|
(61)
|
-
|
-
|
|
|
|
|
|
|
Total
Charge-Offs
|
(13,914)
|
(1,083)
|
(61)
|
-
|
-
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
Residential
Mortgage Loans
|
298
|
1
|
9
|
-
|
-
|
|
|
|
|
|
|
Total
Recoveries
|
298
|
1
|
9
|
-
|
-
|
|
|
|
|
|
|
Net
Charge-Offs
|
(13,616)
|
(1,082)
|
(52)
|
-
|
-
|
|
|
|
|
|
|
Allowance
for Loan Losses,
|
|
|
|
|
|
End
of Period
|
$
88,155
|
$
47,022
|
$
18,694
|
$
7,593
|
$
7,642
|
|
|
|
|
|
|
Net
Charge-Offs to Average Bank
|
|
|
|
|
|
Loans,
Net Outstanding
|
0.22%
|
0.03%
|
-
|
-
|
-
|
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 Consolidated Statements of Income and Comprehensive
Income.
In
addition to the allowance for loan losses shown net of Bank Loans, Net, RJBank
had reserves for unfunded lending commitments included in Trade and Other
Payables of $9.2 million and $6.8 million for the years ended September 30, 2008
and 2007.
RJBank’s
net interest income after provision for loan losses for the years ended
September 30, 2008, 2007, and 2006 was $160.8 million, $55.1 million, and $29.4
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. RJBank also does not originate or purchase loans with deeply
discounted teaser rates.
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 September 30, 2008 and September 30, 2007,
these loans totaled $2.0 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 loan-to-value (“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. Loans with aggregate
balances totaling $166 million at September 30, 2008 were scheduled to re-price
within the next six months. A large percentage of these loans were projected to
adjust to a lower payment than the current payment, and this percentage is
likely to increase in a falling rate environment.
Management
does not believe these loans represent an unusual concentration 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 or purchased 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 September 30, 2008 and September 30, 2007, RJBank
held $472,000 and $734,000, respectively, in total outstanding balances for
these loans.
NOTE 6 - VARIABLE INTEREST
ENTITIES:
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
following table summarizes the balance sheets of the variable interest entities
consolidated by the Company:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
Assets:
|
|
|
Cash
and Cash Equivalents
|
$ 15,636
|
$ 6,406
|
Receivables,
Other
|
4,627
|
32,675
|
Investments
in Real Estate Partnerships – Held by Variable Interest
Entities
|
239,714
|
221,147
|
Trust
Fund Investment in Parent Company Common Stock(1)
|
9,777
|
6,450
|
Prepaid
Expenses and Other Assets
|
17,547
|
24,894
|
|
|
|
Total
Assets
|
$
287,301
|
$
291,572
|
|
|
|
Liabilities
And Shareholders’ Equity:
|
|
|
Loans
Payable Related to Investments by Variable Interest Entities in
Real
|
|
|
Estate
Partnerships
|
$
102,564
|
$
116,479
|
Trade
and Other Payable
|
2,395
|
849
|
Intercompany
Payable
|
21,829
|
8,203
|
|
|
|
Total
Liabilities
|
126,788
|
125,531
|
|
|
|
Minority
Interests
|
155,027
|
162,319
|
Shareholders'
Equity
|
5,486
|
3,722
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
$
287,301
|
$
291,572
|
(1) Included
in common shares in treasury in the Company’s Consolidated Statements of
Financial Condition.
The following table summarizes the
statements of income of the variable interest entities consolidated by the
Company:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000’s)
|
|
|
|
|
Revenues:
|
|
|
|
Interest
|
$ 657
|
$ 955
|
$ 1,009
|
Other
|
7,229
|
2,580
|
4,397
|
|
|
|
|
Total
Revenues
|
7,886
|
3,535
|
5,406
|
|
|
|
|
Interest
Expense
|
5,604
|
6,972
|
8,368
|
Net
Revenues
|
2,282
|
(3,437)
|
(2,962)
|
|
|
|
|
Non-Interest
Expenses
|
11,900
|
10,430
|
9,246
|
|
|
|
|
Minority
Interest in Earnings of Subsidiaries
|
(10,506)
|
(13,858)
|
(12,245)
|
|
|
|
|
Income Before
Provision for Income Taxes
|
888
|
(9)
|
37
|
|
|
|
|
Provision
for Income Taxes
|
-
|
-
|
-
|
|
|
|
|
Net
Income (Loss)
|
$ 888
|
$ (9)
|
$ 37
|
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 made 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 have combined assets of approximately $19.8 million at September 30, 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 September 30, 2008 that exposure is approximately $4.0
million.
RJTCF is
a wholly owned subsidiary of RJF and is the managing member or general partner
in approximately 53 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 September 30, 2008, 50 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
1.00%.
RJTCF has
concluded that it is the primary beneficiary in approximately one fifth of the
tax credit housing funds determined to be VIEs, and accordingly, consolidates
these funds, which have combined assets of approximately $241.1 million at
September 30, 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 September 30, 2008,
that exposure is approximately $2.8 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 September 30, 2008, that
exposure is approximately $5.7 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. At September 30, 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, or until beneficial interest in the fund is
sold to third-parties. These funds had assets of approximately $15.9 million at
September 30, 2008, which is also the Company’s exposure to losses of September
30, 2008. See Note 12 of the Notes to Consolidated Financial
Statements for information regarding the Company’s commitments related to
RJTCF.
As of
September 30, 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 $12 million at
September 30, 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 September 30, 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 $9.9 million at September 30, 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 September 30, 2008, that exposure is approximately $9.9
million.
NOTE 7 - PROPERTY AND
EQUIPMENT:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
Land
|
$ 18,644
|
$ 18,644
|
Construction
in Process
|
4,866
|
1,621
|
Software
Development
|
13,281
|
7,573
|
Buildings,
Leasehold and Land Improvements
|
158,615
|
142,329
|
Furniture,
Fixtures, and Equipment
|
190,435
|
182,851
|
|
385,841
|
353,018
|
Less: Accumulated
Depreciation
|
|
|
and
Amortization
|
(193,391)
|
(186,055)
|
|
$
192,450
|
$
166,963
|
NOTE 8 - 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 September 30, 2008 and
September 30, 2007:
|
September
30, 2008
|
September
30, 2007
|
|
|
Weighted
|
|
Weighted
|
|
|
Average
|
|
Average
|
|
Balance
|
Rate
(1)
|
Balance
|
Rate
(1)
|
|
($
in 000's)
|
|
|
|
|
|
Bank
Deposits:
|
|
|
|
|
NOW
Accounts
|
$ 3,402
|
0.30%
|
$ 4,493
|
1.57%
|
Demand
Deposits (Non-Interest Bearing)
|
2,727
|
-
|
3,645
|
-
|
Savings
and Money Market Accounts
|
8,520,121
|
1.58%
|
5,337,587
|
4.59%
|
Certificates
of Deposit
|
248,207
|
4.12%
|
239,534
|
4.75%
|
Total
Bank Deposits
|
$8,774,457
|
1.65%
|
$5,585,259
|
4.59%
|
(1) Weighted
average rate calculation is based on the actual deposit balances at September
30, 2008 and 2007, respectively.
RJBank
had deposits from RJF executive officers and directors of $401,000
and $444,000 million at September 30, 2008 and September 30, 2007,
respectively.
Scheduled
maturities of certificates of deposit and brokered certificates of deposit at
September 30, 2008 and 2007 were as follows:
|
September
30, 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
|
$
12,068
|
$ 25,820
|
$
14,386
|
$ 23,922
|
Over
Three Through Six Months
|
12,971
|
27,996
|
10,949
|
28,980
|
Over
Six Through Twelve Months
|
12,336
|
38,783
|
11,790
|
38,005
|
Over
One Through Two Years
|
14,592
|
39,672
|
14,706
|
36,997
|
Over
Two Through Three Years
|
11,520
|
23,039
|
7,978
|
22,345
|
Over
Three Through Four Years
|
2,442
|
8,853
|
7,857
|
14,103
|
Over
Four Years
|
8,145
|
9,970
|
1,802
|
5,714
|
Total
|
$
74,074
|
$
174,133
|
$
69,468
|
$
170,066
|
Interest expense on deposits is
summarized as follows:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000's)
|
|
|
|
|
Certificates
of Deposit
|
$ 10,781
|
$ 11,021
|
$
10,872
|
Money
Market, Savings and
|
|
|
|
NOW
Accounts
|
174,252
|
179,741
|
51,313
|
Total
Interest Expense on Deposits
|
$
185,033
|
$
190,762
|
$
62,185
|
NOTE 9 – LOANS
PAYABLE:
Loans
Payable
Loans payable at September 30, 2008 and
September 30, 2007 are presented below:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
Short-Term
Borrowings:
|
|
|
Borrowings
on Lines of Credit (1)
|
$ 200,000
|
$ 2,685
|
Current
Portion of Mortgage Notes Payable
|
2,891
|
2,731
|
Federal
Home Loan Bank Advances (2)
|
1,900,000
|
5,000
|
Total
Short-Term Borrowings
|
2,102,891
|
10,416
|
|
|
|
Long-Term
Borrowings:
|
|
|
Mortgage
Notes Payable
(3)
|
59,333
|
62,224
|
Federal
Home Loan Bank Advances (2)
|
50,000
|
50,000
|
Total
Long-Term Borrowings
|
109,333
|
112,224
|
|
|
|
Total
Loans Payable
|
$
2,212,224
|
$
122,640
|
(1)
|
At
September 30, 2008, the Company maintained three 364-day committed and
several uncommitted financing arrangements denominated in U.S. dollars and
one uncommitted line of credit denominated in Canadian dollars
(“CDN”). At September 30, 2008, the aggregate domestic
facilities were $1.385 billion and the Canadian line of credit was CDN $40
million with third party lenders. Shortly before the fiscal year end, the
lender in RJA’s $600 million uncommitted tri-party repurchase arrangement
notified RJA that this facility was on hold and financing was not
available until further notice, pending the completion of the lender’s
acquisition by a new parent. Subsequent to September 30, 2008, $50 million
of RJA’s uncommitted, unsecured lines of credit were cancelled. Lenders
are under no obligation to lend to the Company under uncommitted lines and
there have been several recent instances where they were unwilling to do
so. RJF maintained a $200 million committed unsecured revolving line of
credit which was fully drawn at September 30, 2008. RJF’s committed line
of credit is subject to a 0.125% per annum facility fee. Upon expiration
in October 2008, RJF extended $100 million of its 364-day, committed,
unsecured revolving credit agreement to January 2009, subject to
modification or renewal. The extended fully drawn facility
amortizes 25% after one month, another 25% after two months, and the
remaining 50% at the maturity date. RJA maintains a $50 million committed
secured line of credit and a $100 million committed tri-party repurchase
arrangement. There were collateralized financings of $80 million
outstanding under the $100 million tri-party repurchase arrangement at
September 30, 2008, which are included in Securities Sold Under Agreements
to Repurchase on the Consolidated Statement of Financial Condition and is
collateralized by company-owned securities with a market value of $89.4
million. RJA’s committed facilities are subject to 0.15% and 0.125% per
annum facility fees, respectively. In addition, RJA maintains $235 million
in uncommitted secured facilities. RJA also maintains $360 million in
uncommitted tri-party repurchase arrangements with related parties. RJBank
has provided $300 million of those uncommitted arrangements to RJA, which
is guaranteed by RJF. Approximately $240 million is only available until
January 30, 2009 under an exception from affiliate lending regulations
granted by the OTS, unless the exemption is extended. Collateral for loans
under secured lines of credit and securities sold under repurchase
agreements (collectively “collateral”) are Company owned and/or client
margin securities, as permitted by regulatory requirements. The required
market value of the collateral ranges from 102% to 125% of the cash
provided. Although the Company has $510 million committed or
related party collateralized financing arrangements available, the
Company’s inventory levels, which could serve as collateral, are
substantially less. RJA supplements its secured lines of credit and
repurchase arrangements with $200 million of uncommitted unsecured lines
of credit. The interest rates for all of the Company’s financing
facilities are variable and are based on the Fed Funds rate, LIBOR, or
Canadian prime rate as applicable. For the fiscal year ended September 30,
2008, interest rates on the financing facilities ranged from 1.58% to
7.75%. For the fiscal year ended September 30, 2007, those interest rates
ranged from 5.00% to 6.70%.
|
In
addition, the Company’s joint ventures in Turkey and Argentina have settlement
lines of credit. The Company has guaranteed certain of these settlement lines of
credit as follows: one in Turkey totaling $8 million and one in Argentina for $9
million. On September 30, 2008, there were no outstanding balances on the
settlement lines in Argentina and Turkey. At September 30, 2008 these joint
ventures had aggregate unsecured settlement lines of credit available of $40.5
million, and there were no outstanding balances on these lines. The interest
rates for these lines of credit ranged from 9% to 18%. Subsequent to September
30, 2008, the Company’s Turkish joint venture has had to halt all trading
activities due to a technical capital inadequacy. See Note 13 of the Notes to
the Consolidated Financial Statements for more information.
(2)
|
RJBank
has $1.95 billion, $55 million, and $60 million in FHLB advances
outstanding at September 30, 2008, 2007, and 2006, respectively, which are
comprised of one short-term overnight rate advance and several long-term
fixed rate advances. The September 30, 2008 FHLB advances included $1.9
billion in overnight advances to meet point in time regulatory balance
sheet composition requirements related to its qualifying as a thrift
institution. The latter action was discussed well in advance with the
Office of Thrift Supervision (“OTS”). These borrowed funds were invested
in qualifying assets and the necessary qualification was met. The weighted
average interest rates on the $50 million in fixed rate advances
at September 30, 2008, 2007, and 2006 were 5.19%, 5.23%, and 4.69%,
respectively. The outstanding fixed FHLB advances mature between September
2010 and February 2011. The maximum amount of FHLB advances outstanding at
any month-end during the years ended September 30, 2008, 2007, and 2006
was $1.95 billion, $70 million, and $47 million, respectively. The average
amounts of FHLB advances outstanding and the weighted average interest
rate thereon for the years ended September 30, 2008, 2007, and 2006 were
$60 million at a rate of 5.07%, $57 million at a rate of 5.24% and $233
million at a rate of 4.86%, respectively. These advances are secured by a
blanket lien on RJBank's residential loan portfolio granted to FHLB and
cash deposits of $226.8 million as of September 30, 2008. The FHLB has the
right to convert advances totaling $35 million at both September 30, 2008
and September 30, 2007, 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
$67.8 million at September 30,
2008.
|
Long-term
borrowings at September 30, 2008, based on their contractual terms, mature as
follows (in 000's):
2010
|
$ 23,060
|
2011
|
33,239
|
2012
|
3,429
|
2013
|
3,630
|
2014
and Thereafter
|
45,975
|
Total
|
$109,333
|
Loans Payable Related to
Investments by Variable Interest Entities in Real Estate
Partnerships
The
borrowings of certain VIEs’ are comprised of several loans, which are
non-recourse to the Company. See Note 6 of the Notes to Consolidated
Financial Statements for additional information regarding the entities deemed to
be variable interest entities under FIN 46R, which are consolidated by the
Company.
VIEs’
loans payable at September 30, 2008 and September 30, 2007 are presented
below:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
Current
Portion of Loans Payable
|
$ 13,987
|
$ 13,839
|
Long-Term
Portion of Loans Payable
|
88,577
|
102,640
|
Total
Loans Payable
|
$102,564
|
$116,479
|
|
|
|
VIEs’ long-term borrowings at September
30, 2008, based on their contractual terms, mature as follows (in
000's):
2010
|
$ 12,489
|
2011
|
12,967
|
2012
|
13,030
|
2013
|
13,425
|
2014
and Thereafter
|
36,666
|
Total
|
$
88,577
|
NOTE 10 – 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 Consolidated Statements of Income and Comprehensive Income for the period.
Any collateral exchanged as part of the swap agreement is recorded in Broker
Receivables and Payables in the Consolidated Statements of Financial Condition
for the period. The Company had outstanding interest rate derivative contracts
with notional amounts of $3.7 billion and $3.5 billion at September 30, 2008 and
September 30, 2007. 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 September
30, 2008 greatly exceeds the possible losses that could arise from such
transactions. The net market value of all open derivative positions at September
30, 2008 and September 30, 2007 was $16.1 million and $22.2 million,
respectively.
To
mitigate interest rate risk in a significantly rising rate environment, RJBank
purchased three year term interest rate caps with high strike rates (more than
300 basis points higher than current rates) during the year ended September 30,
2008 that will increase in value if interest rates rise and entitle RJBank to
cash flows if interest rates rise above strike rates. These positions are
recorded at fair value with any changes in fair value recorded in Other Revenue
within the Statement of Income for the period. At September 30, 2008, the
notional amount of the interest rate caps held by RJBank was $1.5 billion and
the fair value was $1.3 million. The Company’s maximum loss exposure under these
interest rate cap contracts is $1.8 million.
The
Company is exposed to credit losses in the event of nonperformance by the
counterparties to its interest rate derivative agreements. The Company performs
a credit evaluation of counterparties prior to entering into derivative
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 11 - INCOME
TAXES:
The
provision (benefit) for income taxes consists of the following:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
|
(in
000’s)
|
|
Current:
|
|
|
|
Federal
|
$
110,001
|
$
142,531
|
$
102,665
|
State
|
12,860
|
17,098
|
16,844
|
Foreign
|
(1,221)
|
(5,813)
|
13,379
|
|
121,640
|
153,816
|
132,888
|
Deferred:
|
|
|
|
Federal
|
21,250
|
(26,132)
|
(3,742)
|
State
|
2,509
|
(1,463)
|
(495)
|
Foreign
|
6,377
|
15,573
|
(927)
|
|
30,136
|
(12,022)
|
(5,164)
|
|
$
151,776
|
$
141,794
|
$
127,724
|
The
Company's income tax expense differs from the amount computed by applying the
statutory federal income tax rate due to the following:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
|
(in
000’s)
|
|
|
|
|
|
Provision
Calculated at Statutory Rates
|
$
135,399
|
$
137,279
|
$
119,723
|
State
Income Taxes, Net of Federal Benefit
|
9,990
|
10,163
|
10,627
|
Other
|
6,387
|
(5,648)
|
(2,626)
|
|
$
151,776
|
$
141,794
|
$
127,724
|
U.S. and
foreign components of income before income taxes were as follows:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
|
(in
000’s)
|
|
|
|
|
|
U.S.
|
$
371,118
|
$
356,591
|
$
308,003
|
Foreign
|
15,736
|
35,633
|
34,063
|
Income
Before Provision for Income Taxes
|
$
386,854
|
$
392,224
|
$
342,066
|
The major deferred tax asset
(liability) items, as computed under SFAS 109, are as follows:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000’s)
|
Deferred
Tax Assets:
|
|
|
Deferred
Compensation
|
$ 35,620
|
$ 65,392
|
Allowances
for Loan Losses
|
36,811
|
20,293
|
Unrealized
Loss
|
35,999
|
3,035
|
Accrued
Expenses
|
20,089
|
28,743
|
Capitalized
Expenditures
|
6,768
|
10,812
|
Net
Operating Loss Carryforward
|
142
|
5,259
|
Other
|
12,672
|
-
|
Total
Gross Deferred Tax Assets
|
148,101
|
133,534
|
Less
Valuation Allowance
|
(3,599)
|
-
|
Total
Deferred Tax Assets
|
144,502
|
133,534
|
Deferred
Tax Liabilities:
|
|
|
Aircraft
Leases
|
(9,194)
|
(10,420)
|
Undistributed Earnings of Foreign Subsidiaries |
(15,663) |
(11,562) |
Other
|
(10,880)
|
(3,630)
|
Total
Deferred Tax Liabilities
|
(35,737)
|
(25,612)
|
Net
Deferred Tax Assets
|
$ 108,765
|
$ 107,922
|
The
Company has recorded a deferred tax asset at September 30, 2008 and September
30, 2007. A deferred tax asset has also been recognized for net operating loss
carryforwards that will expire between 2009 and 2017. A valuation
allowance for the fiscal year ended September 30, 2008 has been established for
state net operating losses and foreign tax credit carryforwards due to
management’s belief that, based on the Company’s historical operating income,
projection of future taxable income, scheduled reversal of taxable temporary
differences, and tax planning strategies, it is more likely than not that the
tax carryforwards will expire unutilized.
The
“American Jobs Creation Act of 2004” provides for a one-time deduction for
qualifying repatriations of foreign earnings in either fiscal year 2005 or 2006.
The 85% dividends received deduction can result in a lower tax rate if the
eligible dividends are reinvested within the limitations and requirements of
Internal Revenue Code Section 965. During fiscal year 2006, the Company
repatriated $1.9 million in extraordinary dividends and recorded a tax liability
of $102,000. To the degree that the cumulative undistributed earnings of
non-U.S. subsidiaries were permanently invested, no deferred U.S. federal income
taxes have been provided. The Company has provided for U.S. deferred income
taxes in the amount of $15.6 million on undistributed earnings not considered
permanently reinvested in its non-U.S. subsidiaries.
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 September 30, 2008 our liability for unrecognized tax
benefits decreased to $4.9 million and the amount of unrecognized tax benefits
that, if recognized, would affect the effective tax rate for income from
continuing operations decreased to $3.5 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
twelve months ended September 30, 2008, accrued interest expense related to
unrecognized tax benefits decreased by approximately $65,000. During the twelve
months ended September 30, 2008, penalty expense related to unrecognized tax
benefits decreased by approximately $35,000. Interest and penalties accrued as
of September 30, 2008 was $1.5 million.
The
aggregate changes in the balance of unrecognized tax benefits were as
follows:
|
September
30,
|
|
2008
|
|
(in
000’s)
|
|
|
Balance,
beginning of year
|
$ 8,579
|
Increases
for tax positions related to the current year
|
932
|
Increases
for tax positions related to prior years
|
80
|
Decreases
for tax positions related to prior years
|
(3,516)
|
Reductions
due to lapsed statute of limitations
|
(814)
|
Decreases
related to settlements
|
(399)
|
Balance, end of year
|
$ 4,862
|
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 13 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 2008 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. During the fourth quarter, the fiscal year 2007
federal income tax return examined under the IRS Compliance Assurance Program
was accepted as filed. The 2008 federal income tax return is
currently 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 2008 IRS audit and state audits in
process are expected to be completed in fiscal year ending 2009. It is
anticipated that the unrecognized tax benefits may increase by an estimated $0.3
million over the next 12 months.
NOTE 12 – COMMITMENTS AND
CONTINGENCIES:
Long-term
lease agreements expire at various times through 2020. Minimum annual rentals
under such agreements for the succeeding five fiscal years are approximately:
$36.3 million in 2009, $33.5 million in 2010, $29.5 million in 2011, $25.2
million in 2012, $20.7 million in 2013 and $55.0 million thereafter. Rental
expense incurred under all leases, including equipment under short-term
agreements, aggregated $50.1 million, $40 million and $34.3 million in 2008,
2007 and 2006, respectively.
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 carrying amount of this leveraged lease
with Continental was approximately $8.8 million as of September 30, 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.
On September 30, 2008, RJBank had advances outstanding at the FHLB of $1.95
billion, which included $1.9 billion in overnight advances to meet point in time
regulatory balance sheet composition requirements related to its qualifying as a
thrift institution. The latter action was discussed in advance with the OTS.
These borrowed funds were invested in qualifying assets and the necessary
qualification was met. Prior to the advance, the Company infused $120
million of additional capital into RJBank to ensure RJBank retained its “well
capitalized” status as of September 30, 2008, under bank regulatory capital
guidelines. After the $1.9 billion advance was repaid on October 1, 2008, RJBank
made a return of capital distribution of $60 million back to RJF on October 2,
2008, to return a portion of the excess capital above the amount necessary to
meet all regulatory capital requirements for “well capitalized” status. Due to
its outstanding overnight advance, RJBank had no immediate credit available from
the FHLB at September 30, 2008 but total available credit of $1.38 billion would
become available with the pledging of additional collateral to the FHLB.
Following the repayment of the $1.9 billion overnight advance on October 1,
2008, RJBank had $1.71 billion in immediate credit available from the FHLB but
total available credit of $3.29 billion would become available with the pledging
of additional collateral to the FHLB. At September 30, 2008 and September 30,
2007, no securities other than FHLB stock were pledged by RJBank as collateral
with the FHLB for advances. See Note 9 of the Notes to Consolidated Financial
Statements for more information.
As of
September 30, 2008, RJBank had entered into overnight reverse repurchase
agreements totaling $705 million with three counterparties, with individual
exposures of $350 million, $305 million and $50 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, which is closely monitored, collateral
received and the short duration of these agreements.
As of
September 30, 2008, RJBank had not settled the purchases of $8.5 million in
syndicated loans (included in Bank Loans, Net) due to sellers’ delays in
finalizing settlement. These loans are expected to be settled during the three
months ended December 31, 2008. As of September 30, 2007, RJBank had not settled
purchases of $300.6 million in syndicated loans, all of which had settled prior
to March 31, 2008.
RJBank
provides to its affiliate, Raymond James Capital Services, Inc. (RJCS), on
behalf of certain corporate borrowers, a guarantee of payment in the event of
the borrower’s default for exposure under interest rate swaps entered into with
RJCS. At September 30, 2008, the aggregate exposure under these guarantees was
$2.5 million, which was underwritten as part of the larger corporate credit
relationships. There was no aggregate exposure at September 30, 2007. The
estimated total potential exposure under these guarantees is $12.1
million.
See Note
19 of the Notes to Consolidated Financial Statements with respect to RJBank’s
and Raymond James Multi-Family Finance, Inc.’s commitments to extend credit and
other RJBank 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 escalator. Annual payments under this agreement for the succeeding five
fiscal years are approximately: $3.3 million in 2009, $3.4 million in 2010, $3.5
million in 2011, $3.7 million in 2012, $3.8 million in 2013 and $9.2 million
thereafter. Expenses of $3.1 million, $3.0 million and $2.9 million were
recognized in the fiscal years 2008, 2007 and 2006, respectively.
In the
normal course of business, the Company enters into underwriting commitments.
Transactions relating to such commitments of RJA that were open at September 30,
2008 and were subsequently settled had no material effect on the consolidated
financial statements as of that date. Transactions relating to such commitments
of RJ Ltd. that were recorded and open at September 30, 2008 were approximately
CDN $8.7 million.
The
Company utilizes client marginable securities to satisfy deposits with clearing
organizations. At September 30, 2008, the Company had client margin securities
valued at $210.0 million pledged with a clearing organization to meet the point
in time requirement of $139.9 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”), a 80% owned indirect
unconsolidated subsidiary of the Company, acquired substantially all of the
business, assets, and properties of Sirchie Finger Print Laboratories, Inc.
(“Sirchie”), 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.
SAC has
been advised by the Commerce and Justice Departments that they intend to seek
civil and criminal sanctions against it, as the purported successor in interest
to Sirchie, based upon alleged breaches of Department of Commerce suspension
orders by Sirchie and its former majority shareholder that occurred prior to the
acquisition. Discussions are ongoing and the impact, if any, on the value of
this investment is indeterminate at this time.
The
Company has committed a total of $56.3 million, in amounts ranging from $200,000
to $5 million, to 42 different independent venture capital or private equity
partnerships. As of September 30, 2008, the Company has invested $36.3 million
of that amount and has received $30.2 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 $13.0 million and has received $9.2 million in
distributions as of September 30, 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 September 30, 2008, the
Company has invested $2.3 million of that amount and has not received any
distributions.
The
Company is the general partner in EIF Funds. These limited partnerships invest
in the merchant banking and private equity activities of the Company and other
unaffiliated venture capital limited partnerships. The EIF Funds were
established as compensation and retention measures for certain qualified key
employees of the Company. At September 30, 2008, the funds have unfunded
commitments of $2.4 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
September 30, 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
|
$ 963,618
|
Securities
Received in Securities Borrowed Vs. Cash Transactions
|
651,201
|
Collateral
Received for Margin Loans
|
1,448,858
|
Total
|
$
3,063,677
|
During
the year certain collateral was repledged. At September 30, 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
|
$ 76,585
|
Securities
Received in Securities Borrowed Vs. Cash Transactions
|
602,955
|
Collateral
Received for Margin Loans
|
210,003
|
Total
|
$
889,543
|
The
Company has from time to time authorized performance guarantees for the
completion of trades with counterparties in Argentina and Turkey. At September
30, 2008, there were no outstanding performance guarantees in Argentina or
Turkey.
See Note
9 of the Notes to Consolidated Financials Statements for information regarding
the Company’s other financing arrangements.
The
Company guarantees the existing mortgage debt of RJA of approximately $62
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 (“project partnerships”). 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. The Company has committed to purchase and potentially hold
up to $75 million of unsold interests in one of RJTCF’s current fund
offerings. In such an event, the Company would expect to resell these
interests to other investors, however the holding period of these interests
could be much longer than 90 days. Subsequent to September 30, 2008, RJTCF
closed this fund offering and purchased $58 million of the unsold interests. In
addition to the interests purchased, RJTCF provided certain specific performance
guarantees to the investors of the fund. The Company has guaranteed RJTCF’s $58
million capital contribution obligation as well as the specified performance
guarantees provided to the fund’s investors. 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 September 30,
2008, cash funded to invest in either loans or investments in project
partnerships was $30.3 million. In addition, at September 30, 2008, RJTCF is
committed to additional future fundings of $45.9 million related to project
partnerships that have not yet been sold to various tax credit funds (including
the fund offering mentioned previously that the Company made a commitment to
purchase and potentially hold up to $75 million of unsold interests). 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 $14.9 million as of September 30,
2008. Through RJTCF’s wholly owned lending subsidiary, Raymond James
Multi-Family Finance, Inc., certain construction loans or loans of longer
duration (“permanent loans”) may be made directly to certain project
partnerships. As of September 30, 2008, nine such construction loans
are outstanding with an unfunded balance of $20.2 million available for future
draws on such loans. Similarly, five permanent loan commitments are
outstanding as of September 30, 2008. Each of these commitments will only be
funded if certain conditions are achieved by the project partnership and in the
event such conditions are not met, generally expire two years after their
issuance. The total amount of such unfunded permanent loan
commitments as of September 30, 2008 is $5.9 million.
The
Company was required to enter into two agreements, one with Raymond James Trust,
N.A.and one with the Office of the Comptroller of the Currency (“OCC”), as a
condition to the conversion of Raymond James Trust Company, now known as Raymond
James Trust, N.A., (‘RJT”) from a state to a federally chartered institution.
The conversion was effective January 1, 2008. Effective July 1, 2008, the
Company merged its second state-chartered trust company, Raymond James Trust
Company West, into RJT. 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.
NOTE 13 – LEGAL AND
REGULATORY PROCEEDINGS:
As a
result of the extensive regulation of the securities industry, the Company's
broker-dealer subsidiaries are subject to regular reviews and inspections by
regulatory authorities and self-regulatory organizations, which can result in
the imposition of sanctions for regulatory violations, ranging from non-monetary
censure to fines and, in serious cases, temporary or permanent suspension from
business. In addition, from time to time regulatory agencies and self-regulatory
organizations institute investigations into industry practices, which can also
result in the imposition of such sanctions.
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. Subsequent to the fiscal year end, RJY was notified by the Capital
Markets Board of Turkey that the technical capital inadequacy resulting from
RJY’s provision for this case required an additional capital contribution, and
as a result, RJY has had to halt all trading activities until the capital
requirements are met. The Company has recorded a provision for loss in its
consolidated financial statements for its full equity interest in this joint
venture. As of September 30, 2008, RJY had total capital of approximately $8.1
million, of which the Company owns approximately 50%.
SAC, an
80% owned indirect unconsolidated subsidiary acquired as a merchant banking
investment, has been advised by the Commerce and Justice Departments that they
intend to seek civil and criminal sanctions against it, as the purported
successor in interest to Sirchie, based upon alleged breaches of Department of
Commerce suspension orders by Sirchie and its former majority shareholder that
occurred prior to the acquisition. Discussions are ongoing and the impact, if
any, on the value of this investment is indeterminate at this time.
In
connection with auction rate securities (“ARS”), the Company's broker dealers,
RJA and RJFS, have been subject to ongoing investigations, with which they are
cooperating fully, by the Securities and Exchange Commission (“SEC”) the New
York Attorney General's Office and Florida’s Office of Financial Regulation. The
Company is also named in a class action similar to that filed against a number
of brokerage firms alleging various securities law violations, which it is
vigorously defending.
Several
large banks and brokerage firms, most of who were the primary underwriters of
and supported the auctions for, ARS have announced agreements, usually as part
of a regulatory settlement, to repurchase ARS at par from some of their clients.
Other brokerage firms have entered into similar agreements. The Company, in
conjunction with other industry participants is actively seeking a solution to
ARS’ illiquidity. This includes issuers restructuring and refinancing the ARS,
which has met with some success. Should these restructurings and refinancings
continue, then clients’ holdings could be reduced further, however, there can be
no assurance these events will continue. If the Company were to consider
resolving pending claims, inquiries or investigations by offering to repurchase
all or some portion of these ARS from certain clients, it would have to have
sufficient regulatory capital and cash or borrowing power to do so, and at
present it does not have such capacity. Further, if such repurchases were made
at par value there could be a market loss if the underlying securities’ value is
less than par and any such loss could adversely affect the results of
operations.
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 14 - CAPITAL
TRANSACTIONS:
The
following table presents information on a monthly basis for purchases of the
Company’s stock for the quarter ended September 30, 2008:
|
Number
of
|
|
Average
|
Period
|
Shares
Purchased (1)
|
|
Price
Per Share
|
|
|
|
|
July
1, 2008 – July 31, 2008
|
-
|
|
$ -
|
August
1, 2008 – August 31, 2008
|
868
|
|
31.19
|
September
1, 2008 – September 30, 2008
|
15,511
|
|
30.90
|
Total
|
16,379
|
|
$
30.91
|
(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,
3,372,340 shares have been repurchased for a total of $77.9 million,
leaving $72.1 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 for the year ended September
30, 2008. During the year ended September 30, 2008, 241,614
shares 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 16
below for more information on this trust fund). The Company also purchased
34,393 shares that were surrendered by employees as payment for option
exercises during the year ended September 30,
2008.
|
NOTE 15 - OTHER
COMPREHENSIVE INCOME:
The
activity in other comprehensive income and related tax effects are as
follows:
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000's)
|
|
|
|
|
Net
Unrealized (Loss) Gain on Available for Sale Securities,
Net
|
|
|
|
Of
Tax Effect Of ($31,716) in 2008, ($1,217) in 2007, and
|
|
|
|
$129
in 2006
|
$ (54,377)
|
$ (2,150)
|
$ 217
|
|
|
|
|
Net
Unrealized Gain on Interest Rate Swaps Accounted for as
|
|
|
|
Cash
Flow Hedges, Net of Tax Effect of $0 in 2008, $0 in
|
|
|
|
2007,
and $28 in 2006
|
-
|
-
|
44
|
|
|
|
|
Net
Change in Currency Translations
|
(9,790)
|
20,246
|
2,202
|
|
|
|
|
Other
Comprehensive Income
|
$
(64,167)
|
$
18,096
|
$
2,463
|
The components of accumulated other
comprehensive income, net of income taxes:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
Net
Unrealized Loss on Securities Available for Sale, Net of Tax Effect
of
|
|
|
($32,701)
in 2008 and ($998) in 2007
|
$ (56,124)
|
$ (1,747)
|
|
|
|
Net
Currency Translations
|
22,148
|
31,938
|
|
|
|
Accumulated
Other Comprehensive Income
|
$ (33,976)
|
$
30,191
|
NOTE
16 - EMPLOYEE BENEFIT PLANS:
The
Company's profit sharing plan and employee stock ownership plan provide certain
death, disability or retirement benefits for all employees who meet certain
service requirements. The plans are noncontributory. Contributions by the
Company, if any, are determined annually by the Company’s Board of Directors on
a discretionary basis and are recognized as compensation cost throughout the
year. Benefits become fully vested after six years of qualified service. All
shares owned by the ESOP are included in earnings per share calculations. Cash
dividends paid to the ESOP are reflected as a reduction of retained earnings.
The number of shares of RJF common stock held by the ESOP at September 30, 2008
and 2007 was approximately 5,468,000 and 5,538,000, respectively. The Company
also offers a plan pursuant to section 401(k) of the Internal Revenue Code,
which provides for the Company to match 100% of the first $500 and 50% of the
next $500 of compensation deferred by each participant annually. The Company's
Long Term Incentive Plan (“LTIP”) is a non-qualified deferred compensation plan
that provides benefits to employees who meet certain compensation or production
requirements. The Company has purchased and holds life insurance on the lives of
most of those employees participating in the LTIP, to earn a competitive rate of
return for participants and to provide a source of funds available to satisfy
its obligations under this plan. Contributions to the qualified plans and the
LTIP contribution for management are made in amounts approved annually by the
Board of Directors and management. Compensation expense includes aggregate
contributions to these plans of $43.3 million, $40.5 million, and $36.9 million
for fiscal years 2008, 2007, and 2006, respectively.
Stock-Based
Compensation Plans
At
September 30, 2008, the Company had multiple stock-based employee compensation
plans, which are described below. The Company issues new shares under all plans
approved by shareholders. Effective October 1, 2005, the Company adopted SFAS
No. 123R, “Share-Based Payment”. The adoption of this statement did not have a
material impact on the Company’s consolidated financial statements given that it
adopted the fair value recognition provisions of SFAS No. 123 effective
September 28, 2002 using the modified prospective application transition method
within the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation
– Transition and Disclosure”.
Fixed
Stock Option Plans
The
Company has one qualified and two non-qualified fixed stock option plans
available for grants to employees and members of the Company’s Board of
Directors. Under the 2002 Incentive Stock Option Plan, the Company’s qualified
plan, the Company may grant options to its management personnel for up to
9,000,000 shares of common stock. Options are granted to key administrative
employees and Financial Advisors of RJA who achieve certain gross commission
levels. Options are exercisable in the 36th to 72nd months following the date of
grant and only in the event that the grantee is an employee of the Company at
that time, disabled, deceased or recently retired.
As noted
above, the Company has two non-qualified fixed stock option plans. Under the
first of those plans, the Company may grant up to 854,298 shares of common stock
to the Company's outside directors. Options vest over a three year period from
grant date provided that the director is still serving on the Board of the
Company. Under the Company's second non-qualified stock option plan, the Company
may grant up to 2,531,250 shares of common stock to key management personnel.
Option terms are specified in individual agreements and expire on a date no
later than the tenth anniversary of the grant
date. Under all fixed stock option plans, the exercise price of each option
equals the market price of the Company's stock on the date of
grant.
The
Company’s net income for the years ended September 30, 2008, September 30, 2007,
and September 30, 2006 includes $6.6 million $5.9 million, and $5.6 million,
respectively, of compensation costs and $273,000, $212,000, and $281,000,
respectively of income tax benefits related to the Company’s three fixed stock
option plans available for grants to employees and members of its Board of
Directors.
These
amounts may not be representative of future stock-based compensation expense
since the estimated fair value of stock options is amortized over the applicable
vesting period using the straight-line method and additional options may be
granted in future years. The fair value of each fixed option grant for these
plans is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for stock option
grants in years ended 2008, 2007, and 2006:
|
2008
|
|
2007
|
|
2006
|
Dividend
Yield
|
1.36%
|
|
1.32%
|
|
1.19%
|
Expected
Volatility
|
29.55%
|
|
29.44%
|
|
29.38%
|
Risk-free
Interest Rate
|
3.44%
|
|
4.68%
|
|
4.41%
|
Expected
Lives
|
4.7
yrs
|
|
4.8
yrs
|
|
4.9
yrs
|
The
dividend yield assumption is based on the Company’s current declared dividend as
a percentage of the stock price. The expected volatility assumption is based on
the Company’s historical stock price and is a weighted average combining (1) the
volatility of the most recent year, (2) the volatility of the most recent time
period equal to the expected lives assumption, and (3) the annualized volatility
of the price of the Company’s stock since the late 1980’s. The risk-free
interest rate assumption is based on the U.S. Treasury yield curve in effect at
the time of grant of the options. The expected lives assumption is based on the
average of (1) the assumption that all outstanding options will be exercised at
the midpoint between their vesting date and full contractual term and (2) the
assumption that all outstanding options will be exercised at their full
contractual term.
A summary of option activity of the
Company's three fixed stock option plans available for grants to employees and
members of its Board of Directors for the year ended September 30, 2008 is
presented below:
|
|
|
Weighted
|
|
|
|
Weighted
|
Average
|
|
|
|
Average
|
Remaining
|
Aggregate
|
|
Options
For
|
Exercise
|
Contractual
|
Intrinsic
|
|
Shares
|
Price
($)
|
Term
(Years)
|
Value
($)
|
Outstanding
at
|
|
|
|
|
October
1, 2007
|
3,985,626
|
$
20.19
|
-
|
$ -
|
Granted
|
1,505,299
|
30.36
|
-
|
-
|
Exercised
|
(913,127)
|
14.79
|
-
|
-
|
Canceled
|
(112,800)
|
24.66
|
-
|
-
|
Expired
|
(11,025)
|
25.47
|
-
|
-
|
Outstanding
at
|
|
|
|
|
September
30, 2008
|
4,453,973
|
$
24.64
|
2.85
|
$
37,145,192
|
Exercisable
at
|
|
|
|
|
September
30, 2008
|
743,157
|
$
17.15
|
0.52
|
$
11,766,458
|
As of
September 30, 2008, there was $14.0 million of total unrecognized pre-tax
compensation cost related to stock options for these plans. These costs are
expected to be recognized over a weighted average period of approximately 3.3
years. The weighted average grant date fair value of stock options granted under
these plans during the years ended September 30, 2008, September 30, 2007 and
September 30, 2006 was $8.23 per share, $9.37 per share and $7.36 per share,
respectively. The total intrinsic value of stock options exercised for these
plans during the years ended September 30, 2008, September 30, 2007 and
September 30, 2006 was $14.0 million, $25.0 million and $15.3 million,
respectively. The total grant date fair value of stock options vested for these
plans during the years ended September 30, 2008, September 30, 2007 and
September 30, 2006 was $3.8 million, $8.0 million and $5.4 million,
respectively.
Cash
received from stock option exercises for these plans for the year ended
September 30, 2008 was $12.4 million. The actual tax benefit realized for the
tax deductions from option exercise for these stock option plans was $1.2
million for the year ended September 30, 2008.
Restricted Stock Plan
Under
the 2005 Restricted Stock Plan the Company is authorized to issue up to
4,250,000 restricted stock units or restricted shares of common stock to
employees and independent contractors. Restricted stock grants under the 2005
Plan are limited to 1,350,000 shares per fiscal year. The 2005 Plan was
established to replace, on substantially the same terms and conditions, the 1999
Plan. During the three months ended March 31, 2006, this plan was amended to
allow the issuance of restricted stock units as retention measures for certain
employees of the Company’s Canadian subsidiary. In addition, the Company,
through that Canadian subsidiary, established a trust fund which is associated
with the 2005 Plan. This trust fund was established and funded to enable the
trust fund to acquire Company common stock in the open market to be used to
settle restricted stock units granted as a retention vehicle for certain
employees of the Canadian subsidiary. Awards under this plan may be granted by
the Company in connection with initial employment or under various retention
plans for individuals who are responsible for a contribution to the management,
growth, and/or profitability of the Company. These awards are forfeitable in the
event of termination other than for death, disability or retirement. The
compensation cost is recognized over the applicable vesting period of the awards
and is calculated as the market value of the awards on the date of grant. The
following employee related activity occurred during the year ended September 30,
2008:
|
|
Weighted
|
|
|
Average
|
|
|
Grant
Date
|
|
Shares/Units
|
Fair
Value ($)
|
Nonvested
at
|
|
|
October
1, 2007
|
2,550,668
|
$
25.30
|
Granted
|
1,073,511
|
29.61
|
Vested
|
(379,887)
|
23.13
|
Canceled
|
(95,940)
|
28.02
|
Nonvested
at
|
|
|
September
30, 2008
|
3,148,352
|
$
27.23
|
The
Company’s net income for the year ended September 30, 2008 includes $17.5
million of compensation costs and $6.6 million of income tax benefits related to
the Company’s Restricted Stock Plan. The Company’s net income for the years
ended September 30, 2007 and September 30, 2006 includes $11.7 million and $7.5
million, respectively, of compensation costs and $4.5 million and $2.9 million,
respectively, of income tax benefits related to this plan.
As of
September 30, 2008, there was $52.9 million of total unrecognized pre-tax
compensation cost related to grants under the Company’s Restricted Stock Plan.
These costs are expected to be recognized over a weighted average period of
approximately 3.8 years. The total fair value of shares vested under this plan
during the year ended September 30, 2008 was $8.8 million.
Employee
Stock Purchase Plan
Under the
2003 Employee Stock Purchase Plan, the Company is authorized to issue up to
3,375,000 shares of common stock to its full-time employees, nearly all of whom
are eligible to participate. Under the terms of the Plan, employees can choose
each year to have up to 20% of their annual compensation specified to purchase
the Company's common stock. Share purchases in any calendar year are limited to
the lesser of 1,000 shares or shares with a fair market value of $25,000. The
purchase price of the stock is 85% of the market price on the day prior to the
purchase date. Under the Plan the Company sold approximately 725,000, 444,000
and 379,000 shares to employees during the years ended September 30, 2008,
September 30, 2007 and September 30, 2006, respectively. The compensation cost
is calculated as the value of the 15% discount from market value and was $2.9
million, $2.1 million and $1.6 million during the years ended September 30,
2008, September 30, 2007 and September 30, 2006, respectively.
Stock Bonus Plan
The
Company's 2007 Stock Bonus Plan authorizes the Company to issue up to 3,000,000
restricted shares to officers and certain other employees in lieu of cash for
10% to 20% of annual bonus amounts in excess of $250,000. Restricted stock
grants under the 2007 Plan are limited to 750,000 shares per fiscal year. The
2007 Plan was established to replace, on substantially the same terms and
conditions, the 1999 Plan. The determination of the number of shares to be
granted may encompass a discount from market value at the discretion of the
Compensation Committee of the Board of Directors. Under the plan the shares are
generally restricted for a three year period, during which time the shares are
forfeitable in the event of voluntary termination other than for death,
disability or retirement. The compensation cost is recognized over the three
year vesting period based on the market value of the shares on the date of
grant. The following activity occurred during the year ended September 30,
2008:
|
|
Weighted
|
|
|
Average
|
|
|
Grant
Date
|
|
Shares
|
Fair
Value ($)
|
Nonvested
at
|
|
|
October
1, 2007
|
1,095,781
|
$
25.24
|
Granted
|
376,961
|
33.31
|
Vested
|
(370,062)
|
20.53
|
Canceled
|
(3,315)
|
31.42
|
Nonvested
at
|
|
|
September
30, 2008
|
1,099,365
|
$
29.64
|
The
Company’s net income for the year ended September 30, 2008 includes $11.7
million of compensation costs and $4.4 million of income tax benefits related to
the Company’s Stock Bonus Plan. The Company’s net income for the years ended
September 30, 2007 and September 30, 2006 includes $9.1 million and $5.4
million, respectively, of compensation costs and $3.5 million and $2.0 million,
respectively, of income tax benefits related to this plan.
As of
September 30, 2008, there was $10.3 million of total unrecognized pre-tax
compensation cost related to grants under the Company’s Stock Bonus Plan. These
costs are expected to be recognized over a weighted average period of
approximately 1.8 years. The total fair value of shares vested under this plan
during the fiscal year ended September 30, 2008 was $7.6 million.
Employee
Investment Funds
Certain
key employees of the Company participate in the Raymond James Employee
Investment Funds I and II, which are limited partnerships that invest in the
merchant banking and venture capital activities of the Company and other
unaffiliated venture capital limited partnerships. The Company made 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 solely on the distributions
from the funds.
NOTE 17 – NON-EMPLOYEE
STOCK-BASED AND OTHER COMPENSATION:
Stock-Based
Compensation Plans
Fixed
Stock Option Plan
Under one
of its non-qualified fixed stock option plans, the Company may grant stock
options to its independent contractor Financial Advisors. The Company issues new
shares under this plan as it was approved by shareholders. Under the 2007 Stock
Option Plan for Independent Contractors, the Company may grant up to 2,000,000
shares of common stock to independent contractor Financial Advisors. The 2007
Plan was established to replace, on substantially the same terms and conditions,
the 1990 Plan. As of September 30, 2008, the 1990 Plan still has options
outstanding. Options are exercisable five years after grant date provided that
the Financial Advisors are still associated with the Company, disabled, deceased
or recently retired. Option terms are specified in individual agreements and
expire on a date no later than the sixth anniversary of the grant
date. Under these fixed stock option plans, the exercise price of each option
equals the market price of the Company's stock on the date of
grant.
The
Company accounts for share-based awards to its independent contractor Financial
Advisors in accordance with Emerging Issues Task Force (“EITF”) No. 96-18,
“Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.” Absent a specific
performance commitment, these grants are measured at their vesting date fair
value and their fair value estimated at reporting dates prior to that time. The
compensation expense recognized each period is based on the most recent
estimated value. Further, in accordance with EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock,” the Company classifies these non-employee awards as
liabilities at fair value upon vesting, with changes in fair value reported in
earnings until these awards are exercised or forfeited.
The
Company’s net income for the years ended September 30, 2008, September 30, 2007,
and September 30, 2006 includes $2.8 million, $7.0 million, and $9.7 million,
respectively, of compensation costs and $1.0 million, $2.7 million, and $3.7
million, respectively, of income tax benefits related to option grants to its
independent contractor Financial Advisors.
The fair
value of each fixed option grant awarded to an independent contractor Financial
Advisor is estimated on the date of grant and periodically revalued using the
Black-Scholes option pricing model with the following weighted average
assumptions used for fiscal years ended 2008, 2007, and 2006:
|
2008
|
|
2007
|
|
2006
|
Dividend
Yield
|
1.49%
|
|
1.27%
|
|
1.11%
|
Expected
Volatility
|
30.38%
|
|
29.65%
|
|
30.89%
|
Risk-free
Interest Rate
|
2.85%
|
|
4.70%
|
|
4.62%
|
Expected
Lives
|
2.62
yrs
|
|
2.92
yrs
|
|
2.76
yrs
|
The
dividend yield assumption is based on the Company’s current declared dividend as
a percentage of the stock price. The expected volatility assumption is based on
the Company’s historical stock price and is a weighted average combining (1) the
volatility of the most recent year, (2) the volatility of the most recent time
period equal to the expected lives assumption, and (3) the annualized volatility
of the price of the Company’s stock since the late 1980’s. The risk-free
interest rate assumption is based on the U.S. Treasury yield curve in effect at
each point in time the options are valued. The expected lives assumption is
based on the difference between the option’s vesting date plus 90 days (the
average exercise period) and the date of the current reporting
period.
A summary
of option activity of the Company's fixed stock option plans under which awards
are granted to its independent contractor Financial Advisors for the year ended
September 30, 2008 is presented below:
|
|
|
Weighted
|
|
|
|
Weighted
|
Average
|
|
|
|
Average
|
Remaining
|
Aggregate
|
|
Options
For
|
Exercise
|
Contractual
|
Intrinsic
|
|
Shares
|
Price
($)
|
Term
(Years)
|
Value
($)
|
Outstanding
at
|
|
|
|
|
October
1, 2007
|
1,567,966
|
$
20.25
|
-
|
-
|
Granted
|
39,699
|
30.44
|
-
|
-
|
Exercised
|
(291,950)
|
13.59
|
-
|
-
|
Canceled
|
(28,113)
|
19.71
|
-
|
-
|
Expired
|
-
|
-
|
-
|
-
|
Outstanding
at
|
|
|
|
|
September
30, 2008
|
1,287,602
|
$
22.15
|
2.74
|
$
13,947,534
|
Exercisable
at
|
|
|
|
|
September
30, 2008
|
77,175
|
$
13.95
|
0.45
|
$ 1,468,447
|
As of
September 30, 2008, there was $4.3 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 $12.76 per share at that date. These costs are expected to be recognized over
a weighted average period of approximately 2.3 years. The total intrinsic value
of stock options exercised for these plans during the years ended September 30,
2008, September 30, 2007 and September 30, 2006 was $4.6 million, $6.1 million
and $5.6 million, respectively. The total estimated fair value of stock options
vested for these plans during the years ended September 30, 2008, September 30,
2007 and September 30, 2006 was $4.7 million, $6.2 million and $4.1 million,
respectively.
Cash
received from stock option exercises for these plans for the year ended
September 30, 2008 was $4.0 million. There were no actual tax benefits realized
for the tax deductions from option exercise of awards to its independent
contractor Financial Advisors for the year ended September 30,
2008.
Restricted
Stock Plan
Under the
2005 Restricted Stock Plan the Company may grant restricted shares of common
stock or restricted stock units to employees and independent contractor
Financial Advisors. The Company issues new shares under this plan as it was
approved by shareholders. These awards are forfeitable in the event the
independent contractor Financial Advisors are no longer associated with the
Company, other than for death, disability or retirement. The compensation cost
is recognized over the vesting period of the awards. The following activity for
independent contractor Financial Advisors occurred during the year ended
September 30, 2008:
|
|
Weighted
|
|
|
Average
|
|
|
Reporting
Date
|
|
Shares
|
Fair
Value ($)
|
Nonvested
at
|
|
|
October
1, 2007
|
74,401
|
$32.85
|
Granted
|
94,671
|
-
|
Vested
|
(2,433)
|
-
|
Canceled
|
(1,200)
|
-
|
Nonvested
at
|
|
|
September
30, 2008
|
165,439
|
$32.98
|
The
weighted average fair value of shares vested for this plan during the year ended
September 30, 2008 was $28.75 per share. The weighted average fair
value of shares canceled for this plan during the year ended September 30, 2008
was $25.32 per share.
The
Company’s net income for the years ended September 30, 2008 and September 30,
2007 includes $774,000 and $276,000, respectively, of compensation costs and
$294,000 and $105,000, respectively, of income tax benefits related to
restricted shares granted to its independent contractor Financial
Advisors.
As of
September 30, 2008, there was $4.0 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
$32.98 per share at that date. These costs are expected to be recognized over a
weighted average period of approximately 4.3 years. The total fair value of
shares vested under this plan during the years ended September 30, 2008 and
September 30, 2007 was $70,000 and $18,000, respectively.
Other
Compensation
The
Company’s Wealth Accumulation Plan (“WAP”) is a non-qualified deferred
compensation plan that provides benefits to the Company’s independent contractor
Financial Advisors who meet certain production requirements. The Company has
purchased and holds life insurance on employees, to earn a competitive rate of
return for participants and to provide the source of funds available to satisfy
its obligations under this plan. The WAP contribution is made in amounts
approved annually by management.
NOTE 18 - 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”), Heritage Fund Distributors, Inc. (“HFD”), and Raymond
James (USA) Ltd. (“RJ(USA)”) have elected. It requires that minimum net capital,
as defined, be equal to the greater of $250,000 or two percent of Aggregate
Debit Items arising from client transactions. FINRA may require a member firm to
reduce its business if its net capital is less than four percent of Aggregate
Debit Items and may prohibit a member firm from expanding its business and
declaring cash dividends if its net capital is less than five percent of
Aggregate Debit Items. The net capital position of RJA at September 30, 2008 and
September 30, 2007 was as follows:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
($
in 000's)
|
Raymond
James & Associates, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital as a Percent of Aggregate
|
|
|
Debit
Items
|
18.32%
|
21.94%
|
Net
Capital
|
$
303,192
|
$
332,873
|
Less:
Required Net Capital
|
(33,096)
|
(30,344)
|
Excess
Net Capital
|
$
270,096
|
$
302,529
|
At
September 30, 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 September 30, 2008 and September 30, 2007 was as
follows:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
Raymond
James Financial Services, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital
|
$
54,225
|
$
70,583
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$
53,975
|
$
70,333
|
At
September 30, 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 September 30, 2008 and September 30, 2007 was as
follows:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000’s)
|
Heritage
Fund Distributors, Inc.
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital
|
$
2,326
|
$
6,039
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$
2,076
|
$
5,789
|
The net
capital position of RJ(USA) at September 30, 2008 and September 30, 2007 was as
follows:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
($
in 000's)
|
Raymond
James (USA) Ltd.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital as a Percent of Aggregate
|
|
|
Debit
Items
|
749.6%
|
22.8%
|
Net
Capital
|
$
4,507
|
$
3,418
|
Less:
Required Net Capital
|
(250)
|
(299)
|
Excess
Net Capital
|
$
4,257
|
$
3,119
|
RJ Ltd.
is subject to the Minimum Capital Rule (Dealer Member Rule No. 17 of the
Investment Industry Regulatory Organization of Canada (“IIROC”)) and the Early
Warning System (Dealer Member Rule No. 30 of the IIROC). 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 IIROC may from time to time prescribe. Insufficient
Risk Adjusted Capital may result in suspension from membership in the stock
exchanges or the IIROC.
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 IIROC. Restrictions on business activities and capital
transactions, early filing requirements, and mandated corrective measures are
sanctions that may be imposed as part of the Early Warning System. The Company
was not in Early Warning Level 1 or Level 2 at September 30, 2008 or September
30, 2007. The Risk Adjusted Capital of RJ Ltd. was at September 30, 2008 and
September 30, 2007 was as follows (in Canadian dollars):
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000’s)
|
Raymond
James Ltd.:
|
|
|
Risk
Adjusted Capital before minimum
|
$
48,520
|
$
47,974
|
Less:
Required Minimum Capital
|
(250)
|
(250)
|
Risk
Adjusted Capital
|
$
48,270
|
$
47,724
|
At
September 30, 2008, the Company’s other domestic and international
broker-dealers were in compliance with and met all net capital requirements.
Subsequent to the fiscal year end the Company’s Turkish affiliate, RJY, had been
notified by the Capital Markets Board of Turkey that the additional letter of
guarantee RJF provided to counterbalance the technical capital inadequacy
resulting from RJY’s provision for the pending court case, was no longer an
acceptable alternative for an additional capital contribution. As a
result, RJY no longer meets the capital requirements and has had to halt all
trading activities until the capital requirements can be met. See
Note 13 of the Notes to the Consolidated Financial Statements for more
information regarding the legal proceeding.
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 September 30, 2008, RJBank meets all
capital adequacy requirements to which it is subject.
As of
September 30, 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 September 30, 2008:
|
|
|
|
|
|
|
Total
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
$
778,624
|
10.9%
|
$
571,793
|
8.0%
|
$
714,741
|
10.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
689,281
|
9.6%
|
285,896
|
4.0%
|
428,844
|
6.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Adjusted
Assets)
|
689,281
|
6.0%
|
457,633
|
4.0%
|
572,042
|
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%
|
Raymond
James Trust, N.A., is regulated by the OCC and is required to maintain
sufficient capital and meet capital and liquidity requirements. As of September
30, 2008, RJT met the requirements.
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, and the
availability of funds from the Company's subsidiaries, including the
broker-dealer and bank subsidiaries, which may be subject to restrictions under
the net capital rules of the SEC, FINRA and the IIROC; and RJBank, which may be
subject to restrictions by federal banking agencies. Such restrictions have
never limited the Company's dividend payments.
NOTE 19 - FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In the
normal course of business, the Company purchases and sells securities as either
principal or agent on behalf of its clients. If either the client or
counterparty fails to perform, the Company may be required to discharge the
obligations of the nonperforming party. In such circumstances, the Company may
sustain a loss if the market value of the security or futures contract is
different from the contract value of the transaction.
The
Company also acts as an intermediary between broker-dealers and other financial
institutions whereby the Company borrows securities from one broker-dealer and
then lends them to another. Securities borrowed and securities loaned are
carried at the amounts of cash collateral advanced and received in connection
with the transactions. The Company measures the market value of the securities
borrowed and loaned against the cash collateral on a daily basis. The market
value of securities borrowed was $647.9 million and securities loaned was $639.6
million at September 30, 2008 and $1.2 billion for both at September 30, 2007.
The contract value of securities borrowed and securities loaned was $675.1
million and $695.7 million, respectively, at September 30, 2008 and $1.3 billion
for both at September 30, 2007. Additional cash is obtained as necessary to
ensure such transactions are adequately collateralized. If another party to the
transaction fails to perform as agreed (for example failure to deliver a
security or failure to pay for a security), the Company may incur a loss if the
market value of the security is different from the contract amount of the
transaction.
The
Company has also loaned, to brokers-dealers and other financial institutions,
securities owned by clients and others for which it has received cash or other
collateral. The market value of securities loaned was $56.0 million at September
30, 2008. The contract value of securities loaned was $53.8 million at September
30, 2008. If a borrowing institution or broker-dealer does not return a
security, the Company may be obligated to purchase the security in order to
return it to the owner. In such circumstances, the Company may incur a loss
equal to the amount by which the market value of the security on the date of
nonperformance exceeds the value of the collateral received from the financial
institution or the broker-dealer.
The
Company has sold securities that it does not currently own, and will therefore,
be obligated to purchase such securities at a future date. The Company has
recorded $134.7 million and $149.7 million at September 30, 2008 and September
30, 2007, respectively, which represents the market value of such securities.
The Company is subject to loss if the market price of those securities not
covered by a hedged position increases subsequent to fiscal year end. The
Company utilizes short government obligations and equity securities to
economically hedge long proprietary inventory positions. At September 30, 2008,
the Company had $82.5 million in short government obligations and $14.5 million
in short equity securities, which represented economic hedge positions. At
September 30, 2007, the Company had $106 million in short government obligations
and $11 million in short equity securities, which represented hedge
positions.
The
Company enters into security transactions involving forward settlement. Forward
contracts provide for the delayed delivery of the underlying instrument. The
Company has entered into transactions with both contract and market values of
$1.7 billion and $2.0 billion as of September 30, 2008 and September 30, 2007,
respectively. The contractual amounts related to these financial instruments
reflect the volume and activity and do not reflect the amounts at risk. The gain
or loss on these transactions is recognized on a trade date basis. Transactions
involving future settlement give rise to market risk, which represents the
potential loss that can be caused by a change in the market value of a
particular financial instrument. The Company's exposure to market risk is
determined by a number of factors, including the duration, size, composition and
diversification of positions held, the absolute and relative levels of interest
rates, and market volatility. The credit risk for these transactions is limited
to the unrealized market valuation gains recorded in the Consolidated Statements
of Financial Condition.
The
majority of the Company's transactions, and consequently, the concentration of
its credit exposure is with clients, broker-dealers and other financial
institutions in the U.S. These activities primarily involve collateralized
arrangements and may result in credit exposure in the event that the
counterparty fails to meet its contractual obligations. The Company's exposure
to credit risk can be directly impacted by volatile securities markets, which
may impair the ability of counterparties to satisfy their contractual
obligations. The Company seeks to control its credit risk through a variety of
reporting and control procedures, including establishing credit limits based
upon a review of the counterparties' financial condition and credit ratings. The
Company monitors collateral levels on a daily basis for compliance with
regulatory and internal guidelines and requests changes in collateral levels as
appropriate.
The
Company, through RJTCF’s wholly owned lending subsidiary, Raymond James
Multi-Family Finance, Inc., may have at any time unfunded commitments to extend
credit to certain project partnerships for either construction or permanent
loans. At September 30, 2008, the unfunded portion of executed commitments to
extend credit was $26 million. See Note 12 of the Notes to the Consolidated
Financial Statements for more information regarding these
commitments.
RJ Ltd.
is subject to foreign exchange risk primarily due to financial instruments held
in U.S. dollars that may be impacted by fluctuation in foreign exchange rates.
In order to mitigate this risk, RJ Ltd. enters into forward foreign exchange
contracts. The fair value of these contracts is nominal. As of September 30,
2008, forward contracts outstanding to buy and sell U.S. dollars totaled CDN
$12.0 million and CDN $2.9 million, respectively.
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 September
30, 2008 and 2007, is as follows:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
Standby
Letters of Credit
|
$ 239,317
|
$ 100,397
|
Open
End Consumer Lines of Credit
|
43,544
|
27,871
|
Commercial
Lines of Credit
|
1,384,941
|
1,218,690
|
Unfunded
Loan Commitments - Variable Rate (1)
|
1,055,686
|
397,752
|
Unfunded
Loan Commitments - Fixed Rate
|
4,005
|
12,831
|
(1) Includes
commitments to purchase pools of adjustable rate whole first mortgage
loans.
Because
many loan commitments expire without being funded in whole or part, the contract
amounts are not estimates of the Company’s future liquidity
requirements.
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 September 30, 2008, $239.3 million of such letters of credit were
outstanding. Of the letters of credit outstanding, $236.9 million are
underwritten as part of a larger corporate credit relationship. In the event
that a letter of credit is drawn down, RJBank would pursue repayment from the
account party under the existing borrowing relationship, or would liquidate
collateral, or both. The proceeds from repayment or liquidation of collateral
are expected to satisfy the maximum potential future amount of any payments of
amounts drawn down under the existing letters of credit. At September 30, 2008,
RJBank had no unearned fees related to these instruments. 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.
NOTE 20 – EARNINGS PER
SHARE:
The
following table presents the computation of basic and diluted earnings per
share:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000’s, except per share amounts)
|
|
|
|
|
Net
Income
|
$ 235,078
|
$ 250,430
|
$ 214,342
|
|
|
|
|
Weighted
Average Common Shares
|
|
|
|
Outstanding
During the Period
|
116,383
|
115,608
|
112,614
|
|
|
|
|
Dilutive
Effect of Stock Options and Awards (1)
|
2,676
|
3,085
|
3,124
|
|
|
|
|
Weighted
Average Diluted Common
|
|
|
|
Shares
(1)
|
119,059
|
118,693
|
115,738
|
|
|
|
|
Net
Income per Share – Basic
|
$ 2.02
|
$ 2.17
|
$ 1.90
|
|
|
|
|
Net
Income per Share - Diluted (1)
|
$ 1.97
|
$ 2.11
|
$ 1.85
|
|
|
|
|
Securities
Excluded from Weighted Average
|
|
|
|
Diluted
Common Shares Because Their Effect
|
|
|
|
Would
Be Antidilutive
|
2,542
|
1,321
|
-
|
(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 21 – 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. 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, “Summary of Significant Accounting Policies”. 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.
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, National Association. 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 private equity 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:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000’s)
|
Revenues:
|
|
|
|
Private
Client Group
|
$ 1,950,292
|
$ 1,938,154
|
$ 1,679,813
|
Capital
Markets
|
506,007
|
506,498
|
487,419
|
Asset
Management
|
236,928
|
234,875
|
207,821
|
RJBank
|
405,304
|
279,572
|
114,692
|
Emerging
Markets
|
41,269
|
59,083
|
55,263
|
Stock
Loan/Borrow
|
36,843
|
68,685
|
59,947
|
Proprietary
Capital
|
22,775
|
8,280
|
17,312
|
Other
|
5,514
|
14,432
|
23,311
|
Total
Revenues (1)
|
$
3,204,932
|
$
3,109,579
|
$
2,645,578
|
|
|
|
|
Income
Before Provision for Income Taxes:
|
Private
Client Group
|
$ 177,696
|
$ 219,864
|
$ 168,519
|
Capital
Markets
|
50,169
|
68,966
|
78,221
|
Asset
Management
|
58,865
|
60,517
|
48,749
|
RJBank
|
112,282
|
27,005
|
16,003
|
Emerging
Markets
|
(3,260)
|
3,640
|
2,857
|
Stock
Loan/Borrow
|
7,034
|
5,003
|
8,001
|
Proprietary
Capital
|
7,341
|
3,577
|
8,468
|
Other
|
(23,273)
|
3,652
|
11,248
|
Pre-Tax
Income
|
$ 386,854
|
$ 392,224
|
$ 342,066
|
(1) No individual client accounted
for more than 10 percent of total revenues in fiscal year 2008, 2007 or
2006
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000’s)
|
Net
Interest Income (Expense):
|
Private
Client Group
|
$ 92,844
|
$ 124,656
|
$ 109,116
|
Capital
Markets
|
1,340
|
(8,566)
|
(8,036)
|
Asset
Management
|
1,094
|
1,535
|
1,096
|
RJBank
|
215,586
|
84,501
|
40,536
|
Emerging
Markets
|
2,414
|
2,967
|
2,180
|
Stock
Loan/Borrow
|
10,291
|
9,409
|
12,354
|
Proprietary
Capital
|
1,432
|
1,122
|
290
|
Other
|
6,833
|
11,704
|
15,775
|
Net
Interest Income
|
$ 331,834
|
$ 227,328
|
$ 173,311
|
The
following table presents the Company's total assets on a segment
basis:
|
|
|
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000’s)
|
Total
Assets:
|
|
|
Private
Client Group (1)
|
$
6,861,688
|
$ 6,608,059
|
Capital
Markets (2)
|
1,422,901
|
1,533,273
|
Asset
Management
|
75,339
|
95,894
|
RJBank
|
11,356,939
|
6,312,966
|
Emerging
Markets
|
52,786
|
104,238
|
Stock
Loan/Borrow
|
698,926
|
1,302,937
|
Proprietary
Capital
|
169,652
|
115,062
|
Other
|
93,628
|
181,739
|
Total
|
$
20,731,859
|
$
16,254,168
|
(1) Includes
$46 million of goodwill allocated pursuant to SFAS No. 142, "Goodwill and Other
Intangible Assets".
(2) 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.
The percentage of total assets associated with foreign activities is
5.5%. The percentages of pre-tax income and net income associated
with foreign activities are 6.4% and 6.9%, respectively. Revenues, classified by
the major geographic areas in which they are earned, were as
follows:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000’s)
|
Revenues:
|
|
|
|
United
States
|
$
2,852,634
|
$
2,757,314
|
$
2,322,518
|
Canada
|
254,483
|
249,372
|
222,365
|
Europe
|
60,042
|
52,156
|
52,489
|
Other
|
37,773
|
50,737
|
48,206
|
Total
|
$
3,204,932
|
$
3,109,579
|
$
2,645,578
|
The
Company has $8.7 million invested, net of a $4.1 million reserve for its Turkish
joint venture interest, in emerging market joint ventures, which carry greater
risk than amounts invested in developed markets.
NOTE 22 – CONDENSED
FINANCIAL INFORMATION (PARENT COMPANY ONLY):
RJF is a
holding company headquartered in Florida whose subsidiaries are engaged in
various financial services businesses, including the underwriting, distribution,
trading and brokerage of equity and debt securities and the sale of mutual funds
and other investment products. RJF’s primary activities include investments in
subsidiaries and corporate investments, including cash management and private
equity investments. See Notes 9 and 12 of the Notes to the Consolidated
Financial Statements for information regarding RJF’s obligations, contingencies
and guarantees.
The
following table presents RJF’s condensed statement of financial
condition:
|
September
30,
|
September
30,
|
|
2008
|
2007
|
|
(in
000's)
|
Assets:
|
|
|
Cash
and Cash Equivalents
|
$ 4,033
|
$ -
|
Property
and Equipment, Net
|
10,077
|
10,037
|
Goodwill
|
29,538
|
29,538
|
Investments
in Consolidated Subsidiaries
|
1,776,186
|
1,429,938
|
Intercompany
Receivables
|
157,740
|
147,725
|
Other
Assets
|
183,350
|
207,959
|
|
|
|
Total
Assets
|
$
2,160,924
|
$
1,825,197
|
|
|
|
Liabilities
And Shareholders’ Equity:
|
|
|
Loan
Payable
|
$
200,000
|
$ -
|
Trade
and Other
|
12,393
|
9,186
|
Accrued
Compensation and Benefits
|
64,375
|
56,890
|
Intercompany
Payables
|
251
|
1,307
|
|
|
|
Total
Liabilities
|
277,019
|
67,383
|
|
|
|
Shareholders'
Equity
|
1,883,905
|
1,757,814
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
$
2,160,924
|
$
1,825,197
|
The following table presents RJF’s
condensed statement of income:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000’s)
|
|
|
|
|
Revenues:
|
|
|
|
Dividends
from Subsidiaries
|
$ 118,043
|
$ 104,464
|
$ 125,862
|
Interest
from Subsidiaries
|
5,346
|
10,129
|
8,806
|
Interest,
Other
|
827
|
545
|
608
|
Other
|
4,705
|
7,651
|
9,792
|
|
|
|
|
Total
Revenues
|
128,921
|
122,789
|
145,068
|
|
|
|
|
Expenses:
|
|
|
|
Compensation
and Benefits
|
27,421
|
13,075
|
18,444
|
Communications
and Information Processing
|
4,872
|
4,399
|
3,674
|
Occupancy
and Equipment Costs
|
1,471
|
1,509
|
1,309
|
Business
Development
|
9,859
|
10,482
|
7,939
|
Interest
|
3,748
|
900
|
62
|
Other
|
5,800
|
4,309
|
3,900
|
Intercompany
Allocations and Charges
|
(23,298)
|
(24,397)
|
(19,194)
|
|
|
|
|
Total
Expenses
|
29,873
|
10,277
|
16,134
|
|
|
|
|
Income
Before Income Tax (Benefits) Expense and
|
|
|
|
Equity
in Undistributed Net Income of Subsidiaries
|
99,048
|
112,512
|
128,934
|
|
|
|
|
Income
Tax (Benefits) Expense
|
(2,447)
|
525
|
(1,258)
|
|
|
|
|
Income
Before Equity in Undistributed Net Income of
|
|
|
|
Subsidiaries
|
101,495
|
111,987
|
130,192
|
|
|
|
|
Equity
in Undistributed Net Income of Subsidiaries
|
133,583
|
138,443
|
84,150
|
|
|
|
|
Net
Income
|
$ 235,078
|
$ 250,430
|
$ 214,342
|
The following table presents RJF’s
condensed statement of cash flows:
|
Year
Ended
|
|
September
30,
|
September
30,
|
September
30,
|
|
2008
|
2007
|
2006
|
|
(in
000’s)
|
|
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
Net
Income
|
$ 235,078
|
$ 250,430
|
$ 214,342
|
Adjustments
to Reconcile Net Income to Net Cash
|
|
|
|
Provided
by Operating Activities:
|
|
|
|
Gain
on Investments
|
(2,560)
|
(3,103)
|
(9,250)
|
Equity
in Undistributed Net Income of Subsidiaries
|
(133,583)
|
(138,443)
|
(84,150)
|
Other,
Net
|
54,681
|
19,744
|
21,644
|
|
|
|
|
(Increase)
Decrease in Operating Assets:
|
|
|
|
Intercompany
Receivables
|
(10,015)
|
93,182
|
(120,037)
|
Other
|
30,140
|
(38,126)
|
(4,355)
|
|
|
|
|
Increase
(Decrease) in Operating Liabilities:
|
|
|
|
Intercompany
Payables
|
(1,056)
|
1,165
|
(328)
|
Trade
and Other
|
3,207
|
5,240
|
(1,412)
|
Accrued
Compensation and Benefits
|
7,485
|
(6,133)
|
8,645
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
183,377
|
183,956
|
25,099
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
Investments
in Subsidiaries, Net
|
(284,580)
|
(188,093)
|
(25,755)
|
Purchases
of Investments, Net
|
(6,964)
|
10,756
|
3,334
|
|
|
|
|
Net
Cash Used in Investing Activities
|
(291,544)
|
(177,337)
|
(22,421)
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
Proceeds
from Borrowed Funds, Net
|
200,000
|
-
|
-
|
Exercise
of Stock Options and Employee Stock Purchases
|
32,594
|
38,076
|
33,120
|
Purchase
of Treasury Stock
|
(67,243)
|
(578)
|
(5,100)
|
Dividends
on Common Stock
|
(53,151)
|
(48,488)
|
(37,570)
|
|
|
|
|
Net
Cash Provided by (Used in) Financing Activities
|
112,200
|
(10,990)
|
(9,550)
|
|
|
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
4,033
|
(4,371)
|
(6,872)
|
Cash
and Cash Equivalents at Beginning of Year
|
-
|
4,371
|
11,243
|
|
|
|
|
Cash
and Cash Equivalents at End of Year
|
$ 4,033
|
$ -
|
$ 4,371
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
Cash
Paid for Interest
|
$ 2,695
|
$ -
|
$ -
|
Cash
(Received) Paid for Income Taxes
|
$ (2,447)
|
$ 525
|
$ (1,258)
|
QUARTERLY FINANCIAL INFORMATION
(unaudited)
2008
|
1st
Qtr.
|
2nd
Qtr.
|
3rd
Qtr.
|
4th
Qtr.
|
|
(in
000’s, except per share data)
|
|
|
|
|
|
Revenues
|
$
829,191
|
$
807,134
|
$
808,748
|
$
759,859
|
Net
Revenues
|
685,827
|
691,687
|
742,024
|
693,165
|
Non-Interest
Expenses
|
594,525
|
597,093
|
627,331
|
611,206
|
Income
Before Income Taxes
|
90,757
|
97,818
|
115,118
|
83,161
|
Net
Income
|
56,242
|
59,790
|
69,938
|
49,108
|
Net
Income per Share – Basic(1)
|
0.48
|
0.51
|
0.60
|
0.42
|
Net
Income per Share – Diluted
|
0.47
|
0.50
|
0.59
|
0.41
|
Dividends
Declared per Share
|
0.11
|
0.11
|
0.11
|
0.11
|
2007
|
1st
Qtr.
|
2nd
Qtr.
|
3rd
Qtr.
|
4th
Qtr.
|
|
(in
000’s, except per share data)
|
|
|
|
|
|
Revenues
|
$
709,629
|
$
738,271
|
$
822,753
|
$
838,926
|
Net
Revenues
|
603,900
|
625,719
|
688,660
|
691,636
|
Non-Interest
Expenses
|
513,109
|
530,764
|
583,133
|
600,412
|
Income
Before Income Taxes
|
93,766
|
92,955
|
109,898
|
95,605
|
Net
Income
|
59,395
|
59,715
|
68,353
|
62,967
|
Net
Income per Share – Basic
|
0.52
|
0.52
|
0.59
|
0.54
|
Net
Income per Share – Diluted(1)
|
0.50
|
0.50
|
0.57
|
0.53
|
Dividends
Declared per Share
|
0.10
|
0.10
|
0.10
|
0.10
|
(1)
|
Due
to rounding the quarterly results do not add to the total for the
year.
|
ITEM
9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND
PROCEDURES
DISCLOSURE
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.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
REPORT OF MANAGEMENT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. Internal control over
financial reporting is a process to provide reasonable assurance regarding the
reliability of the Company’s financial reporting for external purposes in
accordance with accounting principles generally accepted in the United States.
Internal control over financial reporting includes maintaining records that in
reasonable detail accurately and fairly reflect the Company’s transactions;
providing reasonable assurance that transactions are recorded as necessary for
preparation of its financial statements; providing reasonable assurance that
receipts and expenditures of Company assets are made in accordance with
management authorization; and providing reasonable assurance that unauthorized
acquisition, use or disposition of Company assets that could have a material
effect on the Company’s financial statements would be prevented or detected on a
timely basis. Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance that a
misstatement of the Company’s financial statements would be prevented or
detected.
Management
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management concluded that
the Company’s internal control over financial reporting was effective as of
September 30, 2008. KPMG LLP, who audited and reported on the consolidated
financial statements of the Company included in this report, has issued an
attestation report on the Company’s internal control over financial reporting as
of September 30, 2008 (included below).
Report of Independent
Registered Public Accounting Firm
The Board
of Directors and Shareholders
Raymond
James Financial, Inc.:
We have
audited Raymond James Financial, Inc.’s internal control over financial
reporting as of September 30, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Raymond James Financial, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Report of Management on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Raymond James Financial, Inc. maintained, in all material respects,
effective internal control over financial reporting as of September 30, 2008,
based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated statements of financial
condition of Raymond James Financial, Inc. and subsidiaries as of September 30,
2008 and 2007, and the related consolidated statements of income and
comprehensive income, changes in shareholders’ equity, and cash flows for each
of the years in the three-year period ended September 30, 2008, and our report
dated November 26, 2008 expressed an
unqualified opinion on those consolidated financial statements.
KPMG
LLP
November
26, 2008
Tampa,
Florida
Certified
Public Accountants
ITEM
9B. OTHER
INFORMATION
None.
PART III
ITEM
10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
A list of
the Company’s executive officers appears in Part I, Item 1 of this form 10-K.
The balance of the information required by Item 10 is incorporated herein by
reference to the registrant's definitive proxy statement for the 2009 Annual
Meeting of Shareholders. Such proxy statement will be filed with the SEC prior
to January 5, 2009.
ITEMS
11, 12, 13 AND 14.
The
information required by Items 11, 12, 13 and 14 is incorporated herein by
reference to the registrant's definitive proxy statement for the 2009 Annual
Meeting of Shareholders. Such proxy statement will be filed with the SEC prior
to January 5, 2009.
PART IV
ITEM
15. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES
(a) Financial
Statements and Schedules
The
financial statements are set forth under Item 8 of this Annual Report on Form
10-K. Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.
(b) Exhibit
Listing
Exhibit
Number
|
Description
|
|
|
|
|
3(i).1
|
Restated
Articles of Incorporation of Raymond James Financial, Inc. as filed with
the Secretary of State Florida on November 25, 2008, filed
herewith.
|
|
|
|
|
3(ii).1
|
Amended
and Restated By-Laws of Raymond James Financial, Inc. reflecting
amendments adopted by the Board of Directors on May 25, 2006, incorporated
by reference to Exhibit 3(ii) as filed with Form 10-Q on August 9,
2006.
|
|
|
|
|
3(ii).2
|
Amended
and Restated By-Laws of Raymond James Financial, Inc. reflecting
amendments adopted by the Board of Directors on May 24, 2007, incorporated
by reference to Exhibit 3(ii).1 as filed with Form 10-Q on August 9,
2007.
|
|
|
|
|
3(ii).3
|
Amended
and Restated By-Laws of Raymond James Financial, Inc. reflecting
amendments adopted by the Board of Directors on June 28, 2007,
incorporated by reference to Exhibit 3(ii).2 as filed with Form 10-Q on
August 9, 2007.
|
|
|
|
|
10.1*
|
Raymond
James Financial, Inc. 2002 Incentive Stock Option Plan effective February
14, 2002, incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-8, No. 333-98537, filed August 22,
2002.
|
|
|
|
|
10.2*
|
Raymond
James Financial, Inc. Restricted Stock Plan and Stock Bonus Plan effective
October 1, 1999, incorporated by reference to Exhibits 4.1 and 4.2,
respectively to Registration Statement on Form S-8, No. 333-74716, filed
December 7, 2001.
|
|
|
|
|
10.3
|
Arrangement
Agreement between Goepel McDermid Inc. as seller, and Raymond James
Holdings (Canada), Inc. incorporated by reference to Exhibit 10 to
Registration Statement on Form S-3, No. 333-51840, filed on December 14,
2000.
|
|
|
|
|
10.4
|
Mortgage
Agreement for $75 million dated as of December 13, 2002 incorporated by
reference to Exhibit No. 10 as filed with Form 10-K on December 23,
2002.
|
|
|
|
|
10.5*
|
Raymond
James Financial, Inc.'s Stock Option Plan for Key Management Personnel
effective November 21, 1996, incorporated by reference to Exhibit 4.1 to
Registration Statement on Form S-8, No. 333-103277, filed February 18,
2003.
|
|
|
|
|
10.6(i)*
|
Raymond
James Financial, Inc. 2003 Employee Stock Purchase Plan incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-8, No.
333-103280, filed February 18, 2003.
|
|
|
|
|
10.6(ii)*
|
First
Amendment to Raymond James Financial, Inc. 2003 Employee Stock Purchase
Plan, incorporated by reference to Exhibit 10.6(ii) filed with Current
Report on Form 8-K on November 26, 2008.
|
|
Exhibit
Number
|
Description
|
|
|
|
|
10.7
|
Form
of Indemnification Agreement with Directors, incorporated by reference to
Exhibit 10.18 as filed with Form 10-K on December 8, 2004.
|
|
|
|
|
10.8*
|
Amended
and Restated 2005 Raymond James Financial, Inc. Restricted Stock Plan, as
amended May 21, 2008, filed herewith.
|
|
|
|
|
10.9.1
|
Amended
and Restated Revolving Credit Agreement for $200 million dated as of
October 13, 2005, incorporated by reference to Exhibit 10.9 as filed with
Form 10-K on December 14, 2005.
|
|
|
|
|
10.9.2
|
Amendment
No. 1 and Waiver to Amended and Restated Revolving Credit Agreement, dated
as of October 11, 2006, incorporated by reference to Exhibit 10.9.2 as
filed with Form 10-K on December 14, 2006.
|
|
|
|
|
10.9.3
|
Amendment
No. 2 and Waiver to Amended and Restated Revolving Credit Agreement, dated
as of April 16, 2007, incorporated by reference to Exhibit 10.9.3 as filed
with Form 10-Q on May 10, 2007.
|
|
|
|
|
10.9.4
|
Amendment
No. 3 to Amended and Restated Revolving Credit Agreement, dated as of July
11, 2007, incorporated by reference to Exhibit 10.9.4 as filed with Form
10-Q on August 9, 2007.
|
|
|
|
|
10.9.5
|
Amendment
No. 4 and Waivers to Amended and Restated Revolving Credit Agreement,
dated as of October 9, 2007, incorporated by reference to Exhibit 10.9.5
as filed with Form 10-K on November 29, 2007.
|
|
|
|
|
10.9.6
|
Amendment
No. 5 to Amended and Restated Revolving Credit Agreement, dated as of
October 8, 2008, incorporated by reference to Exhibit 10.9.6 as filed with
Form 8-K on October 22, 2008.
|
|
|
|
|
10.10*
|
Raymond
James Financial, Inc. Amended Stock Option Plan for Outside Directors,
incorporated by reference to Exhibit 10 as filed with Form 10-Q on
February 9, 2006.
|
|
|
|
|
10.11*
|
Amended
and Restated Raymond James Financial Long Term Incentive Plan,
incorporated by reference to Exhibit 10.11 as filed with Form 10-K on
December 14, 2006.
|
|
|
|
|
10.12*
|
The
2007 Raymond James Financial, Inc. Stock Bonus Plan effective February 15,
2007, incorporated by reference to Exhibit 4.1 to Registration Statement
on Form S-8, No. 333-141999, filed April 10, 2007.
|
|
|
|
|
10.13
|
The
2007 Raymond James Financial, Inc. Stock Option Plan for Independent
Contractors effective February 15, 2007, incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8, No. 333-142000, filed
April 10, 2007.
|
|
|
|
|
11
|
Computation
of Earnings per Share is set forth in Note 21 of the Notes to the
Consolidated Financial Statements in this Form 10-K.
|
|
|
|
|
14.1
|
Code
of Ethics for Senior Financial Officers, filed herewith.
|
|
|
|
|
14.2
|
Business
Ethics and Corporate Policy as amended on November 27, 2007, incorporated
by reference to Exhibit 14.2 as filed with Form 10-K on November 29,
2007.
|
|
|
|
|
21
|
List
of Subsidiaries, filed herewith.
|
|
|
|
|
23
|
Consent
of Independent Auditors, filed herewith.
|
|
Exhibit
Number
|
Description
|
|
31
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, filed herewith.
|
|
|
|
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, filed herewith.
|
|
|
|
|
99(i).1
|
Charter
of the Audit Committee of the Board of Directors as revised on November
27, 2007, incorporated by reference to Exhibit 99(i).1 as
filed with Form 10-K on November 29 , 2007.
|
|
|
|
|
99(i).2
|
Charter
of the Corporate Governance, Nominating and Compensation Committee as
revised on November 27, 2007, incorporated by reference to Exhibit 99(i).2
as filed with Form 10-K on November 29, 2007.
|
|
|
*
|
Indicates
a management contract or compensatory plan or arrangement in which a
director or named executive officer
participates.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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, in the City of St. Petersburg, State
of Florida, on the 26th day of
November, 2008.
|
RAYMOND
JAMES FINANCIAL, INC.
|
By /s/ THOMAS A. JAMES
|
Thomas
A. James, Chairman
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
Signature
|
|
Title
|
Date
|
|
|
|
|
/s/ THOMAS A. JAMES
|
|
Chairman
and Chief
|
November
26, 2008
|
Thomas
A. James
|
|
Executive
Officer, Director
|
|
|
|
|
|
/s/ CHET B. HELCK
|
|
President
and Chief Operating Officer, Director
|
November
26, 2008
|
Chet
B. Helck
|
|
|
|
|
|
|
|
/s/ FRANCIS S. GODBOLD
|
|
Vice
Chairman and Director
|
November
26, 2008
|
Francis
S. Godbold
|
|
|
|
|
|
|
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/s/ JEFFREY P. JULIEN
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Senior
Vice President - Finance
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November
26, 2008
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Jeffrey
P. Julien
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and
Chief Financial Officer
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/s/ JENNIFER C. ACKART
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Controller
and Chief Accounting Officer
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November
26, 2008
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Jennifer
C. Ackart
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/s/ SHELLEY G. BROADER
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Director
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November
26, 2008
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Shelley
G. Broader
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/s/ H. WILLIAM HABERMEYER
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Director
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November
26, 2008
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H.
William Habermeyer
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/s/ PAUL C. REILLY
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Director
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November
26, 2008
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Paul
C. Reilly
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/s/ ROBERT P. SALTZMAN
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Director
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November
26, 2008
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Robert
P. Saltzman
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/s/ KENNETH A. SHIELDS
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Director
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November
26, 2008
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Kenneth
A. Shields
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/s/ HARDWICK SIMMONS
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Director
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November
26, 2008
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Hardwick
Simmons
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/s/ SUSAN N. STORY
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Director
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November
26, 2008
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Susan
N. Story
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