q10123109.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
x
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|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For the
quarterly period ended December 31,
2009
or
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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|
THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
File Number: 1-9109
RAYMOND JAMES FINANCIAL,
INC.
(Exact
name of registrant as specified in its charter)
Florida
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No. 59-1517485
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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880 Carillon Parkway, St.
Petersburg, Florida 33716
(Address
of principal executive offices) (Zip Code)
(727)
567-1000
(Registrant's
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files). Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x
|
Accelerated
filer o
|
|
|
Non-accelerated
filer o
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Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
123,738,794 shares of Common
Stock as of February 4, 2010
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|
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
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Form
10-Q for the Quarter Ended December 31, 2009
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INDEX
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PAGE
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PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements (unaudited)
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Condensed
Consolidated Statements of Financial Condition as of December 31, 2009 and
September 30, 2009 (unaudited)
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3
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Condensed
Consolidated Statements of Income and Comprehensive Income for the three
months ended December 31, 2009 and December 31, 2008
(unaudited)
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4
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Condensed
Consolidated Statements of Cash Flows for the three months ended December
31, 2009 and December 31, 2008 (unaudited)
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5
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Notes
to Condensed Consolidated Financial Statements (unaudited)
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7
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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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38
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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60
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Item
4.
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Controls
and Procedures
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66
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PART
II.
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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66
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Item
1A.
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Risk
Factors
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66
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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67
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Item
3.
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Defaults
Upon Senior Securities
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67
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Item
5.
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Other
Information
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67
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Item
6.
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Exhibits
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68
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Signatures
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69
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PART
I FINANCIAL INFORMATION
Item
1. FINANCIAL
STATEMENTS
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
($
in 000’s)
|
Assets
|
|
|
Cash
and Cash Equivalents
|
$ 1,018,585
|
$ 2,306,085
|
Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
|
1,977,995
|
2,310,261
|
Securities
Purchased under Agreements to Resell and Other Collateralized
Financings
|
352,268
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2,306,186
|
Financial
Instruments, at Fair Value:
|
|
|
Trading
Instruments
|
362,942
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431,445
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Available
for Sale Securities
|
488,997
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509,073
|
Private
Equity and Other Investments
|
296,056
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291,389
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Receivables:
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|
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Brokerage
Clients, Net
|
1,538,470
|
1,463,136
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Stock
Borrowed
|
635,670
|
416,964
|
Bank
Loans, Net
|
6,452,530
|
6,593,973
|
Brokers-Dealers
and Clearing Organizations
|
35,788
|
38,610
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Other
|
436,283
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540,035
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Deposits
with Clearing Organizations
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79,668
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83,799
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Prepaid
Expenses and Other Assets
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322,998
|
260,427
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Investments
in Real Estate Partnerships - Held by Variable Interest
Entities
|
276,335
|
270,139
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Property
and Equipment, Net
|
182,999
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186,232
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Deferred
Income Taxes, Net
|
171,836
|
156,399
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Goodwill
|
62,575
|
62,575
|
|
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Total
Assets
|
$
14,691,995
|
$
18,226,728
|
|
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Liabilities
And Equity
|
|
|
Trading
Instruments Sold but Not Yet Purchased, at Fair Value
|
$ 91,493
|
$ 93,376
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Securities
Sold Under Agreements to Repurchase
|
22,733
|
102,758
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Payables:
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|
Brokerage
Clients
|
3,143,549
|
3,789,870
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Stock
Loaned
|
1,009,278
|
490,240
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Bank
Deposits
|
7,007,069
|
9,423,387
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Brokers-Dealers
and Clearing Organizations
|
158,698
|
157,032
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Trade
and Other
|
229,067
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177,769
|
Other
Borrowings
|
51,027
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980,000
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Accrued
Compensation, Commissions and Benefits
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222,889
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330,879
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Loans
Payable Related to Investments by Variable Interest Entities in Real
Estate Partnerships
|
81,821
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89,244
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Corporate
Debt
|
358,282
|
359,034
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Total
Liabilities
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12,375,906
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15,993,589
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Commitments
and Contingencies (See Note 12)
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Equity
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Preferred
Stock; $.10 Par Value; Authorized
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10,000,000
Shares; Issued and Outstanding -0- Shares
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-
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-
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Common
Stock; $.01 Par Value; Authorized
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350,000,000
Shares; Issued 127,858,633 at
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December
31, 2009 and 127,039,672 at September 30, 2009
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1,229
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1,227
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Shares
Exchangeable into Common Stock; 249,013
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at
December 31, 2009 and 249,168 at September 30, 2009
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3,196
|
3,198
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Additional
Paid-In Capital
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435,788
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416,662
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Retained
Earnings
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1,766,808
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1,737,591
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Treasury
Stock, at Cost, 4,123,419 Common Shares at December 31, 2009
and
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3,975,136
Common Shares at September 30, 2009
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(88,235)
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(84,412)
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Accumulated
Other Comprehensive Income
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(25,607)
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(41,803)
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Total
Equity Attributable to Raymond James Financial, Inc.
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2,093,179
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2,032,463
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Noncontrolling
Interests
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222,910
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200,676
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Total
Equity
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2,316,089
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2,233,139
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Total
Liabilities and Equity
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$
14,691,995
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$
18,226,728
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See
accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
|
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(in
000’s, except per share amounts)
|
Three
Months Ended
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December
31,
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December
31,
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2009
|
2008
|
Revenues:
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Securities
Commissions and Fees
|
$ 469,151
|
$ 418,225
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Investment
Banking
|
25,718
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20,733
|
Investment
Advisory Fees
|
43,975
|
44,435
|
Interest
|
91,372
|
143,612
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Net
Trading Profits
|
11,637
|
9,175
|
Financial
Service Fees
|
36,782
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33,135
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Other
|
24,034
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26,518
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Total
Revenues
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702,669
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695,833
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Interest
Expense
|
15,702
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31,891
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Net
Revenues
|
686,967
|
663,942
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|
Non-Interest
Expenses:
|
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|
Compensation,
Commissions and Benefits
|
471,079
|
419,254
|
Communications
and Information Processing
|
28,074
|
35,223
|
Occupancy
and Equipment Costs
|
26,715
|
26,435
|
Clearance
and Floor Brokerage
|
8,502
|
8,588
|
Business
Development
|
19,881
|
24,724
|
Investment
Advisory Fees
|
9,103
|
9,722
|
Bank
Loan Loss Provision
|
22,835
|
24,870
|
Other
|
33,665
|
18,469
|
Total
Non-Interest Expenses
|
619,854
|
567,285
|
|
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|
Income
Before Provision for Income Taxes and Noncontrolling
Interests
|
67,113
|
96,657
|
|
|
|
Provision
for Income Taxes
|
26,485
|
40,571
|
|
|
|
Net
Income Before Noncontrolling Interests
|
40,628
|
56,086
|
Net
Loss Attributable to Noncontrolling Interests
|
(2,275)
|
(5,007)
|
Net
Income Attributable to Raymond James Financial, Inc.
|
$ 42,903
|
$ 61,093
|
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Net
Income per Common Share-Basic
|
$ 0.35
|
$ 0.50
|
Net
Income per Common Share-Diluted
|
$ 0.35
|
$ 0.50
|
Weighted
Average Common Shares
|
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|
Outstanding-Basic
|
118,763
|
116,307
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Weighted
Average Common and Common
|
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Equivalent
Shares Outstanding-Diluted
|
118,983
|
116,559
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Dividends
Paid per Common Share
|
$ 0.11
|
$ 0.11
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|
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|
Net
Income Attributable to Raymond James Financial, Inc.
|
$ 42,903
|
$ 61,093
|
Other
Comprehensive Income, Net of Tax:
|
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Change
in Unrealized Loss on Available
|
|
|
for
Sale Securities and Non-Credit Portion of Other-Than-Temporary Impairment
Losses
|
13,223
|
(53,387)
|
Change
in Currency Translations
|
2,973
|
(19,810)
|
Total
Comprehensive Income (Loss)
|
$ 59,099
|
$ (12,104)
|
|
|
|
Other-Than-Temporary
Impairment:
|
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|
Total
Other-than-Temporary Impairment Losses
|
$
(15,520)
|
$ (571)
|
Portion
of Losses recognized in Other
|
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|
Comprehensive
Income (Before Taxes)
|
12,521
|
-
|
Net
Impairment Losses Recognized in
|
|
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Other
Revenue
|
$ (2,999)
|
$ (571)
|
See
accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in
000’s)
(continued
on next page)
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
Cash
Flows From Operating Activities:
|
|
|
Net
Income Before Noncontrolling Interests
|
$ 40,628
|
$ 56,086
|
Adjustments
to Reconcile Net Income to Net
|
|
|
Cash
Provided by (Used in) Operating Activities:
|
|
|
Depreciation
and Amortization
|
11,758
|
8,345
|
Deferred
Income Taxes
|
(23,070)
|
(16,423)
|
Premium
and Discount Amortization on Available for Sale Securities
|
|
|
and
Unrealized/Realized Gain on Other Investments
|
360
|
(1,192)
|
Other-than-Temporary
Impairment on Available for Sale Securities
|
2,999
|
571
|
Impairment
of and Loss on Sale of Property and Equipment
|
(22)
|
6,197
|
Gain
on Sale of Loans Held for Sale and Securitizations
|
(505)
|
(49)
|
Provision
for Loan Loss, Legal Proceedings, Bad Debts and Other
Accruals
|
37,635
|
30,153
|
Stock-Based
Compensation Expense
|
12,901
|
2,769
|
(Gain)
Loss on Company-Owned Life Insurance
|
(3,864)
|
13,505
|
|
|
|
(Increase)
Decrease in Operating Assets:
|
|
|
Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
|
332,266
|
(342,333)
|
Receivables:
|
|
|
Brokerage
Clients, Net
|
(75,029)
|
539,995
|
Stock
Borrowed
|
(218,706)
|
117,544
|
Brokers-Dealers
and Clearing Organizations
|
2,822
|
113,650
|
Other
|
101,904
|
(16,320)
|
Securities
Purchased Under Agreements to Resell and Other
Collateralized
|
|
|
Financings,
Net of Securities Sold Under Agreements to Repurchase
|
(126,107)
|
(68,953)
|
Trading
Instruments, Net
|
29,808
|
13,243
|
Proceeds
from Sale of Loans Held for Sale
|
13,039
|
3,540
|
Proceeds
from Sale of SBA Loan Securitizations
|
93,913
|
-
|
Origination
of Loans Held for Sale
|
(119,584)
|
(3,217)
|
Excess
Tax Benefits from Stock-Based Payment Arrangements
|
457
|
(3,754)
|
Prepaid
Expenses and Other Assets
|
(45,038)
|
97,614
|
|
|
|
Increase
(Decrease) in Operating Liabilities:
|
|
|
Payables:
|
|
|
Brokerage
Clients
|
(646,321)
|
144,496
|
Stock
Loaned
|
519,038
|
(146,685)
|
Brokers-Dealers
and Clearing Organizations
|
1,666
|
(198,043)
|
Trade
and Other
|
(9,875)
|
(13,989)
|
Accrued
Compensation, Commissions and Benefits
|
(107,096)
|
(115,086)
|
Income
Taxes Payable
|
35,032
|
52,171
|
|
|
|
Net
Cash (Used in) Provided by Operating Activities
|
(138,991)
|
273,835
|
See
accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(in
000’s)
(continued)
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
Additions
to Property and Equipment, Net
|
(5,827)
|
(15,138)
|
Decrease
(Increase) in Loans, Net
|
177,759
|
(624,960)
|
Purchases
of Private Equity and Other Investments, Net
|
(5,069)
|
(1,703)
|
Investments
in Company-Owned Life Insurance
|
(8,819)
|
(8,836)
|
Investments
in Real Estate Partnerships-Held by Variable Interest
Entities
|
(6,196)
|
(24,761)
|
Repayments
of Loans by Investor Members of Variable Interest Entities
Related
|
|
|
to
Investments in Real Estate Partnerships
|
251
|
783
|
Decrease
(Increase) in Securities Purchased Under Agreements to Resell,
Net
|
2,000,000
|
(345,000)
|
Available
for Sale Securities Maturations and Repayments
|
37,975
|
24,907
|
|
|
|
Net
Cash Provided by (Used in) Investing Activities
|
2,190,074
|
(994,708)
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
Proceeds
from Borrowed Funds, Net
|
1,027
|
-
|
Repayments
of Borrowings, Net
|
(930,752)
|
(2,050,946)
|
Proceeds
from Borrowed Funds Related to Company-Owned Life
Insurance
|
-
|
38,120
|
Proceeds
from Borrowed Funds Related to Investments by Variable
Interest
|
|
|
Entities
in Real Estate Partnerships
|
1,090
|
1,260
|
Repayments
of Borrowed Funds Related to Investments by Variable
Interest
|
|
|
Entities
in Real Estate Partnerships
|
(8,513)
|
(9,130)
|
Proceeds
from Capital Contributed to Variable Interest Entities
|
|
|
Related
to Investments in Real Estate Partnerships
|
25,917
|
10,685
|
Exercise
of Stock Options and Employee Stock Purchases
|
5,309
|
4,135
|
(Decrease)
Increase in Bank Deposits
|
(2,416,318)
|
18,525
|
Purchase
of Treasury Stock
|
(3,321)
|
(4,462)
|
Dividends
on Common Stock
|
(13,687)
|
(13,365)
|
Excess
Tax Benefits from Stock-Based Payment Arrangements
|
(457)
|
3,754
|
|
|
|
Net
Cash Used in Financing Activities
|
(3,339,705)
|
(2,001,424)
|
|
|
|
Currency
Adjustment:
|
|
|
Effect
of Exchange Rate Changes on Cash
|
1,122
|
(4,214)
|
Net
Decrease in Cash and Cash Equivalents
|
(1,287,500)
|
(2,726,511)
|
Cash
and Cash Equivalents at Beginning of Year
|
2,306,085
|
3,207,493
|
|
|
|
Cash
and Cash Equivalents at End of Period
|
$
1,018,585
|
$ 480,982
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
Cash
Paid for Interest
|
$ 6,472
|
$ 33,601
|
Cash
Paid for Income Taxes
|
$ 8,972
|
$ 1,197
|
Loans
Charged-off, Net
|
$ 23,943
|
$ 6,885
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements
(Unaudited).
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31,
2009
NOTE 1 - BASIS OF
PRESENTATION:
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Raymond James Financial, Inc. (“RJF”) and its consolidated
subsidiaries that are generally controlled through a majority voting interest.
RJF is a holding company headquartered in Florida whose subsidiaries are engaged
in various financial service businesses; as used herein, the terms “our”, “we”
or “us” refer to RJF and/or one or more of its subsidiaries. In addition, we
consolidate any variable interest entities (“VIEs”) in which we are the primary
beneficiary. Additional information on these VIEs is provided in Note 7 of these
Notes to Condensed Consolidated Financial Statements. When we do not have a
controlling interest in an entity, but we exert significant influence over the
entity, we apply the equity method of accounting. All material intercompany
balances and transactions have been eliminated in consolidation.
Certain
financial information that is normally included in annual financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America ("GAAP") but not required for interim reporting
purposes has been condensed or omitted. These unaudited condensed consolidated
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the consolidated financial position and
results of operations for the interim periods presented.
Subsequent
events have been evaluated for either recognition in these interim financial
statements, or for disclosure purposes herein as appropriate, through February
8, 2010, which is the date the unaudited condensed consolidated financial
statements were issued.
The
nature of our business is such that the results of any interim period are not
necessarily indicative of results for a full year. These unaudited condensed
consolidated financial statements should be read in conjunction with
Management’s Discussion and Analysis and the consolidated financial statements
and notes thereto included in our Annual Report on Form 10-K for the year ended
September 30, 2009, as filed with the United States of America (“U.S.”)
Securities and Exchange Commission (the “2009 Form 10-K”). To prepare
consolidated financial statements in conformity with GAAP, we must make certain
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.
Reclassifications
and Update of Significant Accounting Policies
Prior to
October 1, 2009, we reported minority interest within mezzanine equity on our
consolidated statements of financial condition and in minority interest in
earnings of subsidiaries in our computation of net income. As a result of the
implementation of new Financial Accounting Standards Board (“FASB”) guidance, we
now present noncontrolling interests within shareholders’ equity, separately
from our equity. We have reclassified certain amounts previously reported in
prior financial statements to retrospectively reflect noncontrolling interest
within shareholders’ equity and to allocate net income (loss) between
noncontrolling and our own interests.
We
implemented new FASB guidance regarding the computation of earnings per share
which impacted the prior period computations. See Note 17 of these Notes to
Condensed Consolidated Financial Statements for discussion of the change in
method and its impact on prior periods.
Certain
other prior period amounts have been reclassified to conform to the current
presentation.
A summary
of our significant accounting policies is included in Note 1 on pages 77 – 88 of
our 2009 Form 10-K. New FASB guidance related to the valuation of Private Equity
Investments and the application of certain pronouncements applicable to
nonfinancial assets and liabilities that are not measured at fair value on a
recurring basis are discussed in Note 3 of these Notes to Condensed Consolidated
Financial Statements. These two changes, together with the changes in minority
interests and earnings per share discussed previously, are the only changes in
significant accounting policies implemented since the year-end September 30,
2009.
NOTE 2 - CASH AND CASH
EQUIVALENTS, ASSETS SEGREGATED PURSUANT TO REGULATIONS, AND DEPOSITS WITH
CLEARING ORGANIZATIONS:
Our cash
equivalents include money market funds or highly liquid investments not held for
resale with original maturities of 90 days or less, other than those used for
trading purposes. For further discussion of our accounting policies regarding
assets segregated pursuant to regulations and other segregated assets, see Note
1 on page 78 of our 2009 Form 10-K.
The
following are financial instruments that are cash and cash equivalents or other
investment balances which are readily convertible into cash as of December 31,
2009 and September 30, 2009:
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
(in
000's)
|
Cash
and Cash Equivalents:
|
|
|
Cash
in banks
|
$ 1,002,460
|
$ 1,085,202
|
U.
S. Treasury securities(1)
|
236
|
1,206,914
|
Money
market investments
|
15,889
|
13,969
|
Total
cash and cash equivalents
|
1,018,585
|
2,306,085
|
|
|
|
Cash
and securities segregated pursuant to federal regulations and
other
|
|
|
segregated
assets (2)
|
1,977,995
|
2,310,261
|
Deposits
with clearing organizations(3)
|
79,668
|
83,799
|
|
$ 3,076,248
|
$ 4,700,145
|
(1)
|
Consists
of U.S. Treasury Securities with maturities of 90 days or less. The
balance at September 30, 2009 included $1.2 billion in U.S. Treasury
Securities purchased as part of the transactions associated with the
point-in-time regulatory balance sheet composition requirements of RJ
Bank. See Note 21 on page 127 of our 2009 Form 10-K for discussion of the
September 30, 2009 point-in-time
test.
|
(2)
|
Consists
of cash and cash equivalents maintained in accordance with Rule 15c3-3 of
the Securities Exchange Act of 1934. Raymond James and Associates, Inc.
(“RJ&A”), 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.
Additionally, our Canadian broker-dealer subsidiary Raymond James Ltd.
(“RJ Ltd”) is required to hold client Registered Retirement Savings Plan
funds in trust. Raymond James Bank, FSB (“RJ Bank”) maintains
interest-bearing bank deposits that are restricted for pre-funding letter
of credit draws related to certain syndicated borrowing relationships in
which it is involved. These RJ Bank deposits are occasionally pledged as
collateral for Federal Home Loan Bank (“FHLB”)
advances.
|
(3)
|
Consists
of deposits of cash and cash equivalents or other short-term securities
held by other clearing organizations or
exchanges.
|
NOTE 3 - FAIR
VALUE:
For a
further discussion of our valuation methodologies for assets, liabilities
measured at fair value, and the fair value hierarchy, see Note 1 pages 79 - 82
in our 2009 Form 10-K.
During
the first quarter of fiscal year 2010, there were no material changes to our
valuation models.
Effective
October 1, 2009 we adopted new FASB accounting guidance regarding the method of
determination of the fair value of certain of our investments within our Private
Equity Investments. The application of the new accounting valuation guidance did
not result in a significant change in the fair value determinations of our
Private Equity Investments during the three months ended December 31,
2009.
Our
Private Equity Investments include various direct and third-party private equity
and merchant banking investments. Private Equity Investments include
approximately 45 private equity funds and Raymond James Employee Investment
Funds I and II (collectively, the “Private Funds”). See Note 7 of these Notes to
Condensed Consolidated Financial Statements for further discussion of the
consolidation of the employee investment funds I and II which are variable
interest entities. These Private Funds invest primarily in new and developing
companies. Our investments in these funds cannot be redeemed directly with the
funds; our investment is monetized through distributions received through the
liquidation of the underlying assets of these funds. We estimate that the
underlying assets of these funds will be liquidated over the life of these funds
(typically 10 to 15 years). Approval by the management of these funds is
required for us to sell or transfer these investments. Merchant banking
investments include ownership interests in private companies with long-term
growth potential. See Note 12 of these Notes to Condensed Consolidated Financial
Statements for information regarding our unfunded commitments to these
funds.
Assets
and liabilities measured at fair value on a recurring basis as of December 31,
2009 and September 30, 2009 are presented below:
|
Quoted
Prices in Active
|
|
|
|
|
|
Markets
for
|
Significant
Other
|
Significant
|
|
|
|
Identical
|
Observable
|
Unobservable
|
|
Balance
as of
|
|
Assets
|
Inputs
|
Inputs
|
Netting
|
December
31,
|
December 31, 2009
(in 000’s)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Adjustments(1)
|
2009
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Trading
Instruments:
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
Obligations
|
$ 88
|
$ 86,756
|
$ 5,323
|
$ -
|
$ 92,167
|
Corporate
Obligations
|
5,072
|
47,930
|
-
|
-
|
53,002
|
Government
and Agency Obligations
|
26,589
|
15,704
|
-
|
-
|
42,293
|
Agency
Mortgage Backed Securities (“MBS”) and
|
|
|
|
|
|
Collateralized
Mortgage Obligations (“CMOs”)
|
744
|
123,683
|
-
|
-
|
124,427
|
Non-Agency
CMOs and ABS
|
-
|
1,017
|
9,176
|
-
|
10,193
|
Total
Debt Securities
|
32,493
|
275,090
|
14,499
|
-
|
322,082
|
Derivative
Contracts
|
-
|
87,423
|
-
|
(64,054)
|
23,369
|
Equity
Securities
|
13,991
|
929
|
-
|
-
|
14,920
|
Other
Securities
|
384
|
727
|
1,460
|
-
|
2,571
|
Total
Trading Instruments
|
46,868
|
364,169
|
15,959
|
(64,054)
|
362,942
|
|
|
|
|
|
|
Available
for Sale Securities:
|
|
|
|
|
|
Agency
MBS and CMOs
|
-
|
250,806
|
-
|
-
|
250,806
|
Non-Agency
CMOs
|
-
|
230,531
|
2,621
|
-
|
233,152
|
Other
Securities
|
9
|
5,030
|
-
|
-
|
5,039
|
Total
Available for Sale Securities
|
9
|
486,367
|
2,621
|
-
|
488,997
|
|
|
|
|
|
|
Private
Equity and Other Investments:
|
|
|
|
|
|
Private
Equity Investments
|
-
|
-
|
144,967(2)
|
-
|
144,967
|
Other
Investments
|
145,241
|
5,625
|
223
|
-
|
151,089
|
Total
Private Equity and Other
|
|
|
|
|
|
Investments
|
145,241
|
5,625
|
145,190
|
-
|
296,056
|
|
|
|
|
|
|
Other
Assets
|
-
|
248
|
-
|
-
|
248
|
Total
|
$ 192,118
|
$ 856,409
|
$ 163,770
|
$ (64,054)
|
$ 1,148,243
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Trading
Instruments Sold but
|
|
|
|
|
|
Not
Yet Purchased:
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
Obligations
|
$ 110
|
$ 1,083
|
$ -
|
$ -
|
$ 1,193
|
Corporate
Obligations
|
-
|
16
|
-
|
-
|
16
|
Government
Obligations
|
81,563
|
-
|
-
|
-
|
81,563
|
Agency
MBS and CMOs
|
10
|
-
|
-
|
-
|
10
|
Total
Debt Securities
|
81,683
|
1,099
|
-
|
-
|
82,782
|
Derivative
Contracts
|
-
|
66,838
|
117
|
(63,932)
|
3,023
|
Equity
Securities
|
5,674
|
9
|
-
|
-
|
5,683
|
Other
Securities
|
-
|
5
|
-
|
-
|
5
|
Total
Trading Instruments Sold
|
|
|
|
|
|
but
Not Yet Purchased
|
87,357
|
67,951
|
117
|
(63,932)
|
91,493
|
|
|
|
|
|
|
Other
Liabilities
|
-
|
-
|
46
|
-
|
46
|
Total
|
$ 87,357
|
$ 67,951
|
$ 163
|
$ (63,932)
|
$ 91,539
|
(1)
|
We
have elected to net derivative receivables and derivative payables and the
related cash collateral received and paid when a legally enforceable
master netting agreement exists.
|
(2)
|
Includes
$75.2 million in private equity investments of which the weighted average
portion we own is approximately 20%. The portion of this
investment we do not own becomes a component of Noncontrolling Interests
on our Condensed Consolidated Statements of Financial Condition, and
amounted to $60.4 million of that total as of December 31,
2009.
|
|
Quoted
Prices in Active
|
|
|
|
|
|
Markets
for
|
Significant
Other
|
Significant
|
|
|
|
Identical
|
Observable
|
Unobservable
|
|
Balance
as of
|
|
Assets
|
Inputs
|
Inputs
|
Netting
|
September
30,
|
September 30, 2009
(in 000’s)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Adjustments(1)
|
2009
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Trading
Instruments:
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
Obligations
|
$ 21
|
$ 129,897
|
$ 5,316
|
$ -
|
$ 135,234
|
Corporate
Obligations
|
4,369
|
16,317
|
-
|
-
|
20,686
|
Government
and Agency Obligations
|
39,365
|
7,660
|
-
|
-
|
47,025
|
Agency
MBS and CMOs
|
10
|
95,336
|
-
|
-
|
95,346
|
Non-Agency
CMOs and ABS
|
-
|
37,852
|
10,915
|
-
|
48,767
|
Total
Debt Securities
|
43,765
|
287,062
|
16,231
|
-
|
347,058
|
Derivative
Contracts
|
-
|
104,956
|
222
|
(74,255)
|
30,923
|
Equity
Securities
|
49,006
|
1,337
|
-
|
-
|
50,343
|
Other
Securities
|
37
|
2,165
|
919
|
-
|
3,121
|
Total
Trading Instruments
|
92,808
|
395,520
|
17,372
|
(74,255)
|
431,445
|
|
|
|
|
|
|
Available
for Sale Securities:
|
|
|
|
|
|
Agency
MBS and CMOs
|
-
|
272,892
|
-
|
-
|
272,892
|
Non-Agency
CMOs
|
-
|
228,567
|
2,596
|
-
|
231,163
|
Other
Securities
|
8
|
5,010
|
-
|
-
|
5,018
|
Total
Available for Sale Securities
|
8
|
506,469
|
2,596
|
-
|
509,073
|
|
|
|
|
|
|
Private
Equity and Other Investments:
|
|
|
|
|
|
Private
Equity Investments
|
-
|
-
|
142,671(2)
|
-
|
142,671
|
Other
Investments
|
143,545
|
4,946
|
227
|
-
|
148,718
|
Total
Private Equity and Other
|
|
|
|
|
|
Investments
|
143,545
|
4,946
|
142,898
|
-
|
291,389
|
|
|
|
|
|
|
Other
Assets
|
-
|
322
|
-
|
-
|
322
|
Total
|
$ 236,361
|
$ 907,257
|
$ 162,866
|
$ (74,255)
|
$ 1,232,229
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Trading
Instruments Sold but
|
|
|
|
|
|
Not
Yet Purchased:
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
Obligations
|
$ -
|
$ 241
|
$ -
|
$ -
|
$ 241
|
Corporate
Obligations
|
-
|
478
|
-
|
-
|
478
|
Government
Obligations
|
55,327
|
-
|
-
|
-
|
55,327
|
Agency
MBS and CMOs
|
302
|
360
|
-
|
-
|
662
|
Total
Debt Securities
|
55,629
|
1,079
|
-
|
-
|
56,708
|
Derivative
Contracts
|
-
|
85,375
|
-
|
(81,518)
|
3,857
|
Equity
Securities
|
29,367
|
3,353
|
-
|
-
|
32,720
|
Other
Securities
|
-
|
91
|
-
|
-
|
91
|
Total
Trading Instruments Sold
|
|
|
|
|
|
but
Not Yet Purchased
|
84,996
|
89,898
|
-
|
(81,518)
|
93,376
|
|
|
|
|
|
|
Other
Liabilities
|
-
|
6
|
59
|
-
|
65
|
Total
|
$ 84,996
|
$ 89,904
|
$ 59
|
$ (81,518)
|
$ 93,441
|
(1)
|
We
have elected to net derivative receivables and derivative payables and the
related cash collateral received and paid when a legally enforceable
master netting agreement exists.
|
(2)
|
Includes
$76.1 million in private equity investments of which the weighted average
portion we own is approximately 19% as of September 30, 2009. The portion
of this investment we do not own becomes a component of Noncontrolling
Interests on our Condensed Consolidated Statements of Financial Condition,
and amounted to $61.3 million of that total as of September 30,
2009.
|
Changes
in Level 3 recurring fair value measurements
The
realized and unrealized gains and losses for assets and liabilities within the
Level 3 category presented in the tables below may include changes in fair value
that were attributable to both observable and unobservable
inputs.
The
following tables present additional information about Level 3 assets and
liabilities measured at fair value on a recurring basis for the three months
ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
|
|
|
|
|
Unrealized
|
|
Level
3 Financial Assets at Fair Value
|
Gains/
|
|
|
|
Total
|
|
|
|
(Losses)
|
|
|
|
Unrealized
|
|
|
|
Related
to
|
|
|
Total
Realized
|
Gains/(Losses)
|
Purchases,
|
|
|
Financial
|
|
|
/Unrealized
|
Included
in
|
Issuances,
|
Transfers
|
|
Instruments
|
|
Fair
Value,
|
Gains/(Losses)
|
Other
|
and
|
In
and/
|
Fair
Value,
|
Held
at
|
Three
Months Ended
|
September
30,
|
Included
in
|
Comprehensive
|
Settlements,
|
or
Out of
|
December
31,
|
December
31,
|
December
31, 2009 (in 000’s)
|
2009
|
Earnings
|
Income
|
Net
|
Level
3
|
2009
|
2009
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Trading
Instruments:
|
|
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
|
|
Obligations
|
$ 5,316
|
$ 7
|
$ -
|
$ -
|
$ -
|
$ 5,323
|
$ 7
|
Non-Agency
CMOs and ABS
|
10,915
|
(340)
|
-
|
(1,399)
|
-
|
9,176
|
(426)
|
Derivative
Contracts
|
222
|
(222)
|
-
|
-
|
-
|
-
|
-
|
Other
Securities
|
919
|
524
|
-
|
17
|
-
|
1,460
|
523
|
|
|
|
|
|
|
|
|
Available
for Sale Securities:
|
|
|
|
|
|
|
|
Non-Agency
CMOs
|
2,596
|
(552)
|
711
|
(134)
|
-
|
2,621
|
(552)
|
|
|
|
|
|
|
|
|
Private
Equity and Other
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Private
Equity Investments
|
142,671
|
(302)
|
-
|
2,598
|
-
|
144,967
|
(302)
|
Other
Investments
|
227
|
(4)
|
-
|
-
|
-
|
223
|
(4)
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative
Contracts
|
$ -
|
$ (117)
|
$ -
|
$ -
|
$ -
|
$ (117)
|
$ (205)
|
Other
Liabilities
|
(59)
|
13
|
-
|
-
|
-
|
(46)
|
(7)
|
|
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
|
|
|
|
|
Unrealized
|
|
Level
3 Financial Assets at Fair Value
|
Gains/
|
|
|
|
Total
|
|
|
|
(Losses)
|
|
|
|
Unrealized
|
|
|
|
Related
to
|
|
|
Total
Realized
|
Gains/(Losses)
|
Purchases,
|
|
|
Financial
|
|
|
/Unrealized
|
Included
in
|
Issuances,
|
Transfers
|
|
Instruments
|
|
Fair
Value,
|
Gains/(Losses)
|
Other
|
and
|
In
and/
|
Fair
Value,
|
Held
at
|
Three
Months Ended
|
September
30,
|
Included
in
|
Comprehensive
|
Settlements,
|
or
Out of
|
December
31,
|
December
31,
|
December
31, 2008 (in 000’s)
|
2008
|
Earnings
|
Income
|
Net
|
Level
3
|
2008
|
2008
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Trading
Instruments:
|
|
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
|
|
Obligations
|
$ 7,107
|
$ (350)
|
$ -
|
$ 1,271
|
$ -
|
$ 8,028
|
$ (350)
|
Non-Agency
CMOs and ABS
|
20,220
|
(1,029)
|
-
|
384
|
-
|
19,575
|
(1,033)
|
|
|
|
|
|
|
|
|
Available
for Sale Securities:
|
|
|
|
|
|
|
|
Non-Agency
CMOs
|
8,710
|
(571)
|
(648)
|
(57)
|
-
|
7,434
|
(571)
|
|
|
|
|
|
|
|
|
Private
Equity and Other
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Private
Equity Investments
|
153,282
|
(330)
|
-
|
4,224
|
-
|
157,176
|
(247)
|
Other
Investments
|
844
|
33
|
-
|
(163)
|
-
|
714
|
(130)
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Other
Liabilities
|
$ (178)
|
$ (89)
|
$ -
|
$ -
|
$ -
|
$ (267)
|
$ (89)
|
|
|
|
|
|
|
|
|
As of
December 31, 2009, 7.8% of our assets and 0.7% of our liabilities are
instruments measured at fair value on a recurring basis. Instruments measured at
fair value on a recurring basis categorized as Level 3 as of December 31, 2009
represent 14.3% of our assets measured at fair value. As of December
31, 2008, 5.4% and 0.5% of our assets and liabilities, respectively, represented
instruments measured at fair value on a recurring basis. Instruments measured at
fair value on a recurring basis categorized as Level 3 as of December 31, 2008
represented 19.6% of our assets measured at fair value.
Gains and
losses (realized and unrealized) included in net income for the three months
ended December 31, 2009 and 2008 are reported in net trading profits and other
revenues in our Condensed Consolidated Statements of Income as
follows:
|
Net
Trading
|
Other
|
For
the Three Months Ended December 31, 2009 (in 000’s)
|
Profits
|
Revenues
|
|
|
|
Total
gains or (losses) included in earnings
|
$ 187
|
$ (1,180)
|
|
|
|
Change
in unrealized gains or (losses) relating to assets still held at reporting
date
|
$ 100
|
$ (1,066)
|
|
Net
Trading
|
Other
|
For
the Three Months Ended December 31, 2008 (in 000’s)
|
Profits
|
Revenues
|
|
|
|
Total
losses included in earnings
|
$ (1,379)
|
$ (957)
|
|
|
|
Change
in unrealized losses relating to assets still held at reporting
date
|
$ (1,383)
|
$ (1,037)
|
Nonrecurring
Fair Value Measurements
Certain
assets and liabilities are not measured at fair value on an ongoing basis but
are subject to fair value measurement only in certain circumstances, for
example, when there is evidence of impairment or in other situations where the
lower of cost or fair value method of accounting is applied. Our financial
instruments which are measured at fair value on a nonrecurring basis include
certain RJ Bank loans that have been deemed impaired and certain loans
classified as held for sale.
Effective
October 1, 2009, we adopted new accounting guidance regarding the application of
certain fair value accounting pronouncements applicable to nonfinancial assets
(such as Other Real Estate Owned) and nonfinancial liabilities that are not
measured at fair value on a recurring basis. Accordingly, the table below
provides information, by level within the fair value hierarchy, for both
financial and nonfinancial assets measured at fair value on a nonrecurring basis
during the period and held at December 31, 2009.
|
|
|
|
|
|
Fair
Value Measurements
|
|
Quoted
Prices in
|
Significant
Other
|
Significant
|
|
|
Active
Markets for
|
Observable
|
Unobservable
|
Balance
as of
|
|
Identical
Assets
|
Inputs
|
Inputs
|
December
31,
|
December 31, 2009 (in
000’s)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
2009
|
|
|
|
|
|
Assets
at fair value on a nonrecurring basis:
|
|
|
|
|
Bank
Loans, Net(1)
|
$ -
|
$ 49,815
|
$ 51,348
|
$ 101,163
|
Other
Real Estate Owned (2)
|
-
|
2,590
|
-
|
2,590
|
(1)
|
Includes
individual loans classified as held for sale, which were measured at a
fair value lower than cost at December 31,
2009.
|
(2)
|
Represents
the fair value of foreclosed properties which were measured at a fair
value subsequent to their initial classification as other real estate
owned. The recorded value in the Condensed Consolidated Statements of
Financial Condition is net of the estimated selling
costs.
|
The
following table presents financial instruments by level within the fair value
hierarchy at September 30, 2009, for which a nonrecurring charge in fair value
was recorded.
|
|
|
|
|
|
Fair
Value Measurements
|
|
Quoted
Prices in
|
Significant
Other
|
Significant
|
|
|
Active
Markets for
|
Observable
|
Unobservable
|
Balance
as of
|
|
Identical
Assets
|
Inputs
|
Inputs
|
September
30,
|
September 30, 2009 (in
000’s)
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
2009
|
|
|
|
|
|
Assets
at fair value on a nonrecurring basis:
|
|
|
|
|
Bank
Loans, Net
|
$ -
|
$ -
|
$ 69,193
|
$ 69,193
|
The
adjustment to fair value of the nonrecurring fair value measures for the three
months ended December 31, 2009 resulted in $8.7 million in additional loan loss
provision expense and charge-offs as well as $309,000 in other losses during the
quarter.
For a
discussion of our accounting policies for impairment of loans held for
investment, loans held for sale, and other real estate owned, see Note 1 on
pages 83 - 85 of our 2009 Form 10-K.
Fair
Value Option
The fair
value option is an accounting election that allows the reporting entity to apply
fair value accounting for certain financial assets and liabilities on an
instrument by instrument basis. As of December 31, 2009, we have
elected not to choose the fair value option for any of our financial assets or
liabilities not already recorded at fair value.
OTHER
FAIR VALUE DISCLOSURES
Many, but
not all of the financial instruments we hold are recorded at fair value in the
Condensed Consolidated Statements of Financial Condition. Refer to
Note 3 pages 92 - 93 of our 2009 Form 10-K for discussion of the methods and
assumptions we apply to the determination of fair value of our financial
instruments that are not otherwise recorded at fair value.
The
carrying amounts and estimated fair values of our financial instruments that are
not carried at fair value at December 31, 2009 and September 30, 2009,
respectively, are as follows:
|
|
|
December
31, 2009
|
September
30, 2009
|
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|
Amount
|
Fair
Value
|
Amount
|
Fair
Value
|
|
(in
000’s)
|
|
|
|
|
|
Financial
Assets:
|
|
|
|
|
Bank
Loans, Net(1)
|
$
6,452,530
|
$
6,480,904
|
$
6,593,973
|
$
6,597,496
|
Financial
Liabilities:
|
|
|
|
|
Bank
Deposits
|
7,007,069
|
7,012,034
|
9,423,387
|
9,428,892
|
Other
Borrowings
|
51,027
|
53,284
|
980,000
|
982,741
|
Corporate
Debt
|
358,282
|
388,546
|
359,034
|
398,108
|
|
|
|
|
|
(1)
|
Carrying
amount and estimated fair value at December 31, 2009 excludes all loans
recorded at fair value at the respective
period-end.
|
NOTE 4 – TRADING INSTRUMENTS
AND TRADING INSTRUMENTS SOLD BUT NOT YET PURCHASED:
|
December
31, 2009
|
September
30, 2009
|
|
|
Instruments
|
|
Instruments
|
|
|
Sold
but
|
|
Sold
but
|
|
Trading
|
Not
Yet
|
Trading
|
Not
Yet
|
|
Instruments
|
Purchased
|
Instruments
|
Purchased
|
|
(in
000's)
|
Provincial
and Municipal Obligations
|
$ 92,167
|
$ 1,193
|
$
135,234
|
$ 241
|
Corporate
Obligations
|
53,002
|
16
|
20,686
|
478
|
Government
and Agency Obligations
|
42,293
|
81,563
|
47,025
|
55,327
|
Agency
MBS and CMOs
|
124,427
|
10
|
95,346
|
662
|
Non-Agency
CMOs and ABS
|
10,193
|
-
|
48,767
|
-
|
Total
Debt Securities
|
322,082
|
82,782
|
347,058
|
56,708
|
|
|
|
|
|
Derivative
Contracts
|
23,369
|
3,023
|
30,923
|
3,857
|
Equity
Securities
|
14,920
|
5,683
|
50,343
|
32,721
|
Other
Securities
|
2,571
|
5
|
3,121
|
90
|
Total
|
$
362,942
|
$
91,493
|
$
431,445
|
$
93,376
|
Auction
rate securities totaling $6 million and $5.8 million at December 31, 2009 and
September 30, 2009, respectively, are predominately included within Provincial
and Municipal Obligations presented in the table above. There were no auction
rate securities in Trading Instruments Sold but Not Yet Purchased as of either
December 31, 2009 or September 30, 2009.
See Note
3 of these Notes to Condensed Consolidated Financial Statements for additional
information regarding the fair value of Trading Instruments and Trading
Instruments Sold but Not Yet Purchased.
NOTE 5 - AVAILABLE FOR SALE
SECURITIES:
Available
for sale securities are comprised primarily of CMOs and other mortgage-related
debt securities owned by RJ Bank, and certain equity securities owned by our
non-broker-dealer subsidiaries. There were no proceeds from the sale of
available for sale securities for either of the three month periods ended
December 31, 2009 or 2008.
The
amortized cost and fair values of securities available for sale at December 31,
2009 and September 30, 2009 are as follows:
|
December
31, 2009
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Available
for Sale Securities:
|
|
|
|
|
Agency
Mortgage Backed Securities and CMOs
|
$
252,229
|
$
298
|
$ (1,721)
|
$
250,806
|
Non-Agency
CMOs(1)
|
308,656
|
15
|
(75,519)
|
233,152
|
Other
Securities
|
5,000
|
30
|
-
|
5,030
|
|
|
|
|
|
Total
RJ Bank Available for Sale Securities
|
565,885
|
343
|
(77,240)
|
488,988
|
|
|
|
|
|
Other
Securities
|
3
|
6
|
-
|
9
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
565,888
|
$
349
|
$
(77,240)
|
$
488,997
|
(1)
|
As
of December 31, 2009, the non-credit portion of other-than-temporary
impairment (“OTTI”) recorded in Accumulated Other Comprehensive Income
(“AOCI”) was $33 million (before
taxes).
|
|
September
30, 2009
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Available
for Sale Securities:
|
|
|
|
|
Agency
Mortgage-Backed Securities and CMOs
|
$
275,995
|
$
213
|
$ (3,316)
|
$
272,892
|
Non-Agency
CMOs (1)
|
325,823
|
-
|
(94,660)
|
231,163
|
Other
Securities
|
5,000
|
10
|
-
|
5,010
|
|
|
|
|
|
Total
RJ Bank Available for Sale Securities
|
606,818
|
223
|
(97,976)
|
509,065
|
|
|
|
|
|
Other
Securities
|
3
|
5
|
-
|
8
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
606,821
|
$
228
|
$
(97,976)
|
$
509,073
|
(1)
|
As
of September 30, 2009, the non-credit portion of OTTI recorded in AOCI was
$20.5 million (before taxes).
|
See Note
3 of these Notes to Condensed Consolidated Financial Statements for additional
information regarding the fair value of Available for Sale
Securities.
Since RJ Bank’s available for sale securities are backed by mortgages, actual
maturities will differ from contractual maturities because borrowers may have
the right to prepay obligations without prepayment penalties. The contractual
maturities, carrying values, and current yields for RJ Bank's available for sale
securities at December 31, 2009 are as follows:
|
|
After
One But
|
After
Five But
|
|
|
|
Within
One Year
|
Within
Five Years
|
Within
Ten Years
|
After
Ten Years
|
Total
|
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
|
Due
|
Yield
|
Due
|
Yield
|
Due
|
Yield
|
Due
|
Yield
|
Due
|
Yield
|
|
($
in 000’s)
|
Agency
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Backed
|
|
|
|
|
|
|
|
|
|
|
Securities
|
$ -
|
-
|
$ 6,397
|
0.92%
|
$
100,380
|
0.93%
|
$
144,029
|
0.99%
|
$
250,806
|
0.96%
|
|
|
|
|
|
|
|
|
|
|
|
Non-Agency
CMOs
|
-
|
-
|
-
|
-
|
-
|
-
|
233,152
|
7.63%
|
233,152
|
7.63%
|
Other
Securities
|
-
|
-
|
5,030
|
0.35%
|
-
|
-
|
-
|
-
|
5,030
|
0.35%
|
|
$ -
|
|
$
11,427
|
|
$
100,380
|
|
$
377,181
|
|
$
488,988
|
|
Impaired
Securities
For a
further discussion of our Available for Sale Securities’ accounting policies,
including the fair value determination processes, see Note 1 pages 80 - 81 in
our 2009 Form 10-K.
RJ Bank’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 December 31, 2009 and September 30, 2009 are as
follows:
|
December
31, 2009
|
|
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 and CMOs
|
$
65,037
|
$
(296)
|
$
148,298
|
$ (1,425)
|
$
213,335
|
$ (1,721)
|
|
|
|
|
|
|
|
Non-Agency
CMOs
|
-
|
-
|
233,124
|
(75,519)
|
233,124
|
(75,519)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Impaired Securities
|
$
65,037
|
$
(296)
|
$
381,422
|
$ (76,944)
|
$
446,459
|
$
(77,240)
|
|
September
30, 2009
|
|
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 and CMOs
|
$
85,500
|
$ (873)
|
$
167,952
|
$ (2,443)
|
$
253,452
|
$ (3,316)
|
|
|
|
|
|
|
|
Non-Agency
CMOs
|
-
|
-
|
231,163
|
(94,660)
|
231,163
|
(94,660)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Impaired Securities
|
$
85,500
|
$ (873)
|
$
399,115
|
$ (97,103)
|
$
484,615
|
$ (97,976)
|
The
reference point for determining when securities are in a loss position is
quarter end. As such, it is possible that a security had a fair value that
exceeded its amortized cost on other days during the period.
Agency
MBS and CMOs
The
Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage
Corporation (“FHLMC”), both of which were placed under the conservatorship of
the U.S. Government on September 7, 2008, as well as the Government National
Mortgage Association (“GNMA”), guarantee the contractual cash flows of the
agency mortgage-backed securities. At December 31, 2009, of the 92 U.S.
government-sponsored enterprise mortgage-backed securities in a continuous
unrealized loss position, 15 were in a continuous unrealized loss position for
less than 12 months and 77 for 12 months or more. The unrealized losses at
December 31, 2009 were primarily due to the continued illiquidity and
uncertainty in the markets. We do not consider these securities
other-than-temporarily impaired due to the guarantee provided by FNMA, FHLMC,
and GNMA as to the full payment of principal and interest, and the fact that we
have the ability and intent to hold these securities to maturity.
Non-Agency
CMOs
As of
December 31, 2009 and including subsequent ratings changes, $18.5 million of the
non-agency CMOs were rated AAA by two rating agencies, and $214.7 million were
rated less than AAA by at least one rating agency. At December 31, 2009, of the
28 non-agency CMOs, 27 were in a continuous unrealized loss position for 12
months or more. 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 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. Only those non-agency CMOs whose entire
amortized cost basis we do not expect to recover are considered to be
other-than-temporarily impaired as we have the ability and intent to hold these
securities to maturity.
Other-Than-Temporarily
Impaired Securities
Based on
the expected cash flows derived from our valuation model, we expect to recover
the remaining unrealized losses on non-agency CMOs. However, it is possible that
the underlying loan collateral of these securities will perform worse than
current expectations, which may lead to adverse changes in the cash flows
expected to be collected on these securities and potential future OTTI
securities losses. Significant assumptions used in the valuation of non-agency
CMOs include default rates, loss severity, and prepayment rates.
The
significant assumptions used in the valuation of non-agency CMOs for the period
ended December 31, 2009 are as follows:
|
December
31, 2009
|
|
Range
|
Weighted
Average (1)
|
|
|
|
Default
Rate
|
1.6%
- 36.3%
|
12.5%
|
Loss
Severity
|
10.0%
- 54.7%
|
31.8%
|
Prepayment
Rate
|
7.9%
- 27.6%
|
16.6%
|
|
|
|
(1)
|
Represents
the expected activity for the next twelve
months.
|
Although
there is no intent to sell our non-agency CMOs and it is not more likely than
not that we will be required to sell these securities, we do not expect to
recover the entire amortized cost basis of certain securities within this
portfolio, and therefore, we recorded $3 million of OTTI in other revenue and
recorded $12.5 million in AOCI for the three months ended December 31, 2009. We
recognized $571,000 of OTTI in other revenue for the three months ended December
31, 2008 for certain securities which were identified as other-than-temporarily
impaired during the first quarter of fiscal 2009.
Changes
in the amount related to credit losses recognized in earnings on available for
sale securities are as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000’s)
|
|
|
|
Amount
related to credit losses on securities we held
|
|
|
at
the beginning of the period
|
$ 17,762
|
$ 4,869
|
Additions
to the amount related to credit loss for
|
|
|
which
an OTTI was not previously recognized
|
1,556
|
-
|
Additional
increases to the amount related to credit loss for
|
|
|
which
an OTTI was previously recognized
|
1,443
|
571
|
Decreases
to the amount related to credit losses for
|
|
|
worthless
securities
|
(3,331)
|
-
|
Amount
related to credit losses on securities held
|
|
|
by
us at the end of the period
|
$ 17,430
|
$ 5,440
|
NOTE 6 – BANK LOANS,
NET:
Bank
client receivables are primarily comprised of loans originated or purchased by
RJ Bank 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.
For a
discussion of our accounting policies regarding bank loans, including the
policies regarding the allowance for loan losses, nonaccrual and impaired loans,
charge-offs and other real estate owned, see Note 1 pages 83 - 85 in our 2009
Form 10-K.
The
following table presents the balance and associated percentage of each major
loan category in RJ Bank's portfolio, including loans receivable and loans held
for sale as of December 31, 2009 and September 30, 2009:
|
|
|
|
December
31, 2009
|
September
30, 2009
|
|
Balance
|
%
|
Balance
|
%
|
|
($
in 000’s)
|
|
|
|
|
|
Commercial
Loans
|
$ 857,792
|
13%
|
$ 851,657
|
13%
|
Real
Estate Construction Loans
|
101,005
|
2%
|
163,951
|
3%
|
Commercial
Real Estate Loans (1)
|
3,385,056
|
51%
|
3,343,989
|
49%
|
Residential
Mortgage Loans
|
2,272,861
|
34%
|
2,398,822
|
35%
|
Consumer
Loans
|
18,251
|
-
|
22,816
|
-
|
|
|
|
|
|
Total
Loans
|
6,634,965
|
100%
|
6,781,235
|
100%
|
|
|
|
|
|
Net
Unearned Income and Deferred Expenses (2)
|
(33,271)
|
|
(36,990)
|
|
Allowance
for Loan Losses
|
(149,164)
|
|
(150,272)
|
|
|
|
|
|
|
|
(182,435)
|
|
(187,262)
|
|
|
|
|
|
|
Loans,
Net
|
$ 6,452,530
|
|
$ 6,593,973
|
|
(1)
|
Of
this amount, $1.2 billion is secured by non-owner occupied commercial real
estate properties or their repayment is dependent upon the operation or
sale of commercial real estate properties as of December 31, 2009 and
September 30, 2009. The remainder is wholly or partially secured by real
estate, the majority of which is also secured by other assets of the
borrower.
|
(2)
|
Includes
purchase premiums, purchase discounts, and net deferred origination fees
and costs.
|
At
December 31, 2009 and September 30, 2009, RJ Bank had $50 million and $950
million, respectively, in FHLB advances outstanding which were secured by a
blanket lien on RJ Bank's residential mortgage loan portfolio. See Note 9 of
these Notes to Condensed Consolidated Financial Statements for more information
regarding the FHLB advances.
At
December 31, 2009 and September 30, 2009, RJ Bank had $100.4 million and $40.5
million in loans held for sale, respectively. RJ Bank's gain from the sale of
these loans held for sale was $112,000 and $49,000, which was recorded in Other
Revenues on our Condensed Consolidated Statements of Income for the three months
ended December 31, 2009 and 2008, respectively.
The
following table shows the contractual maturities of RJ Bank’s loan portfolio at
December 31, 2009, 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
|
$ 42,533
|
$ 681,023
|
$ 134,236
|
$ 857,792
|
Real
Estate Construction Loans
|
7,062
|
93,943
|
-
|
101,005
|
Commercial
Real Estate Loans (1)
|
532,289
|
2,683,812
|
168,955
|
3,385,056
|
Residential
Mortgage Loans
|
1,005
|
11,244
|
2,260,612
|
2,272,861
|
Consumer
Loans
|
339
|
422
|
17,490
|
18,251
|
|
|
|
|
|
Total
Loans
|
$
583,228
|
$
3,470,444
|
$
2,581,293
|
$
6,634,965
|
(1)
|
Of
this amount, $1.2 billion is secured by non-owner occupied commercial real
estate properties or their repayment is dependent upon the operation or
sale of commercial real estate properties as of December 31, 2009. The
remainder is wholly or partially secured by real estate, the majority of
which is also secured by other assets of the
borrower.
|
The
following table shows the comparative data for nonperforming loans and
assets:
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
($
in 000’s)
|
Nonaccrual
Loans:
|
|
|
Corporate
|
$ 53,094
|
$ 73,961
|
Residential/Consumer(1)
|
65,911
|
55,097
|
Total
|
119,005
|
129,058
|
|
|
|
Accruing
Loans Which are 90 Days
|
|
|
Past
Due:
|
|
|
Corporate
|
-
|
12,461
|
Residential/Consumer
|
16,372
|
16,863
|
Total
|
16,372
|
29,324
|
|
|
|
Total
Nonperforming Loans
|
135,377
|
158,382
|
|
|
|
Real
Estate Owned and Other
(2)
|
|
|
Repossessed
Assets, Net:
|
|
|
Corporate
|
804
|
4,646
|
Residential/Consumer
|
7,568
|
4,045
|
Total
|
8,372
|
8,691
|
|
|
|
Total
Nonperforming Assets, Net
|
$
143,749
|
$
167,073
|
Total
Nonperforming Assets as a % of Total Loans, Net and Other Real
Estate
|
|
|
Owned,
Net
|
2.22%
|
2.53%
|
|
|
|
(1)
|
Of
the total residential/consumer nonaccrual loans, there are residential
mortgage loans totaling $54 million and $43.8 million as of December 31,
2009 and September 30, 2009, respectively, for which a charge-off had
previously been recorded.
|
(2)
|
RJ
Bank has two properties totaling $484,000 out of the 30 total properties
it owns, which are still subject to redemption; however, no properties
have ever been redeemed from RJ
Bank.
|
As of
December 31, 2009, RJ Bank did not have any commitments to lend to borrowers
whose loans were classified as nonperforming.
The gross
interest income related to the nonperforming loans reflected in the above table,
which would have been recorded had these loans been current in accordance with
their original terms, totaled $3.5 million for the three months ended December
31, 2009 or $11.6 million since origination. The interest income recognized on
nonaccrual loans for the three months ended December 31, 2009 was
$107,000.
The
following table provides a summary of RJ Bank’s impaired loans, troubled debt
restructurings included in these impaired loans, and commitments to lend
additional funds as of December 31, 2009 and September 30, 2009:
|
December
31, 2009
|
|
September
30, 2009
|
|
Gross
|
Allowance
|
|
Gross
|
Allowance
|
|
Recorded
|
For
Loan
|
|
Recorded
|
For
Loan
|
|
Investment
|
Losses
(1)
|
|
Investment
|
Losses
(1)
|
|
(in
000’s)
|
Impaired
Loans with Allowance for Loan Losses:
|
|
|
|
|
|
Corporate
|
$
26,884
|
$
4,784
|
|
$
68,549
|
$ 7,383
|
Residential/Consumer
|
3,320
|
1,178
|
|
2,879
|
1,507
|
Total
|
30,204
|
5,962
|
|
71,428
|
8,890
|
|
|
|
|
|
|
Impaired
Loans without Allowance for Loan Losses: (2)
|
|
|
|
|
|
Corporate
|
$
26,210
|
$ -
|
|
$ 5,411
|
$ -
|
Residential/Consumer
|
896
|
-
|
|
1,244
|
-
|
Total
|
27,106
|
-
|
|
6,655
|
-
|
Total
Impaired Loans
|
$
57,310
|
$
5,962
|
|
$
78,083
|
$ 8,890
|
|
|
|
|
|
|
Troubled
Debt Restructurings:
|
|
|
|
|
|
Corporate
|
$ 9,204
|
$
1,398
|
|
$ 3,479
|
$ 202
|
Residential/Consumer
|
3,584
|
711
|
|
1,325
|
186
|
Total
|
$12,788
|
$
2,109
|
|
$ 4,804
|
$ 388
|
(1)
|
All
recorded impaired loan balances have had reserves established based upon
management’s analysis.
|
(2)
|
When
the discounted cash flows, collateral value or market value equals or
exceeds the carrying value of the loan, then the loan does not require an
allowance.
|
As of
December 31, 2009 and September 30, 2009, RJ Bank did not have any commitments
to lend to borrowers whose existing loans were troubled debt
restructurings.
The
average balance of the impaired loans above and the related interest income
recognized in the Condensed Consolidated Statements of Income for the three
months ended December 31, 2009 and 2008 were as follows:
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000’s)
|
|
|
|
Average
Impaired Loan Balance:
|
|
|
Corporate
|
$
60,548
|
$
36,454
|
Residential/Consumer
|
3,646
|
474
|
Total
|
$
64,194
|
$
36,928
|
|
|
|
Interest
Income Recognized:
|
|
|
Corporate
|
$ -
|
$ -
|
Residential/Consumer
|
28
|
-
|
Total
|
$ 28
|
$ -
|
|
|
|
Changes
in the allowance for loan losses at RJ Bank were as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
($
in 000’s)
|
Allowance
for Loan Losses, Beginning of Period
|
$
150,272
|
$ 88,155
|
Provision
For Loan Losses
|
22,835
|
24,870
|
Charge-Offs:
|
|
|
Commercial
Real Estate Loans
|
(16,601)
|
(3,141)
|
Residential
Mortgage Loans
|
(9,531)
|
(3,744)
|
Total
Charge-Offs
|
(26,132)
|
(6,885)
|
Recoveries:
|
|
|
Commercial
Real Estate Loans
|
2,004
|
-
|
Residential
Mortgage Loans
|
185
|
-
|
Total
Recoveries
|
2,189
|
-
|
Net
Charge-Offs
|
(23,943)
|
(6,885)
|
Allowance
for Loan Losses, End of Period
|
$
149,164
|
$
106,140
|
|
|
|
Net
Charge-Offs to Average Bank Loans, Net Outstanding
|
0.37%
|
0.09%
|
The
reserves for unfunded lending commitments, included in Trade and Other Payables
on our Condensed Consolidated Statements of Financial Condition, were $10
million and $9.4 million at December 31, 2009 and September 30, 2009,
respectively.
RJ Bank’s
net interest income after provision for loan losses for the quarter ended
December 31, 2009 and 2008 was $42.8 million and $69.6 million,
respectively.
NOTE 7 - VARIABLE INTEREST
ENTITIES:
A VIE
requires consolidation by the entity’s primary
beneficiary. Refer to Note 1 page 86 and Note 8 pages 102 - 105
in our 2009 Form 10-K for a further description of our policies regarding
consolidation of VIEs and our principal involvement with VIEs.
We
evaluate all of the entities in which we are involved to determine if the entity
is a VIE and if so, whether we are the primary beneficiary. We hold variable
interests in the following entities: Raymond James Employee Investment Funds I
and II (the “EIF Funds”), a trust fund established for employee retention
purposes, certain low income housing tax credit fund entities in which Raymond
James Tax Credit Funds, Inc. (“RJTCF”) holds an interest, and various other
partnerships involving real estate.
VIEs
where we are the Primary Beneficiary
Of the
VIEs in which we hold an interest, we have determined that the EIF Funds, the
trust fund established for retention purposes, and certain of RJTCF’s low income
housing tax credit fund entities are required to be consolidated in our
financial statements as we are the primary beneficiary of those
VIEs.
The
following table presents information about the assets, liabilities, and equity
of the VIEs which we consolidate and are included within our Condensed
Consolidated Statements of Financial Condition. The Noncontrolling Interests
presented in this table represents the portion of these net assets which is not
ours:
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
(in
000's)
|
Assets:
|
|
|
Cash
and Cash Equivalents
|
$ 12,328
|
$ 12,393
|
Receivables,
Other
|
2,505
|
2,803
|
Investments
in Real Estate Partnerships – Held by Variable Interest
Entities
|
276,335
|
270,139
|
Trust
Fund Investment in Raymond James Financial, Inc. Common Stock(1)
|
15,362
|
12,120
|
Prepaid
Expenses and Other Assets
|
16,379
|
17,195
|
|
|
|
Total
Assets
|
$ 322,909
|
$ 314,650
|
|
|
|
Liabilities
And Equity:
|
|
|
Loans
Payable Related to Investments by Variable Interest Entities in
Real
|
|
|
Estate
Partnerships(2)
|
$ 81,821
|
$ 89,244
|
Trade
and Other Payable
|
1,704
|
1,964
|
Intercompany
Payable
|
15,368
|
20,033
|
|
|
|
Total
Liabilities
|
98,893
|
111,241
|
|
|
|
RJF
Equity
|
54,188
|
55,092
|
Noncontrolling
Interests
|
169,828
|
148,317
|
|
|
|
Total
Equity
|
224,016
|
203,409
|
|
|
|
Total
Liabilities and Equity
|
$ 322,909
|
$ 314,650
|
(1)
|
Included
in common shares in treasury in our Condensed Consolidated Statements of
Financial Condition.
|
(2)
|
Comprised
of several non-recourse loans. We are not contingently liable under any of
these loans.
|
The
following table presents information about the net loss of the VIEs for the
quarter ended December 31, 2009 and 2008, which we consolidate and are included
within our Condensed Consolidated Statements of Income. The Noncontrolling
Interests presented in this table represents the portion of the net loss from
these VIEs which is not ours.
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000’s)
|
Revenues:
|
|
|
Interest
|
$ 6
|
$ 121
|
Other
|
1,043
|
1,421
|
|
|
|
Total
Revenues
|
1,049
|
1,542
|
|
|
|
Interest
Expense
|
1,113
|
1,397
|
Net
(Expense) Revenues
|
(64)
|
145
|
|
|
|
Non-Interest
Expenses
|
3,693
|
3,458
|
|
|
|
Net
Loss Before Attribution of Noncontrolling Interests
|
(3,757)
|
(3,313)
|
|
|
|
Net
Loss Attributable to Noncontrolling Interests
|
(2,853)
|
(3,069)
|
|
|
|
Net
Loss Attributable to RJF
|
$ (904)
|
$ (244)
|
EIF
Funds
We are
deemed to be the primary beneficiary, and accordingly, we consolidate the EIF
Funds, which have combined assets of approximately $18.1 million at December 31,
2009. None of those assets act as collateral for any obligations of the EIF
Funds. Our exposure to loss is limited to our contributions and the non-recourse
loans funded to the employee investors, for which their partnership interests
serve as collateral. This exposure is approximately $800,000 at December 31,
2009.
Restricted
Stock Trust Fund
We are
deemed to be the primary beneficiary, and accordingly, consolidate this trust
fund used in connection with one of our restricted stock plans. The trust fund
has assets of approximately $15.4 million at December 31, 2009. None of those
assets are specifically pledged as collateral for any obligations of the trust
fund. Our exposure to loss is limited to our contributions to the trust fund and
that exposure is approximately $15.4 million at December 31, 2009.
Low
Income Housing Partnerships
RJTCF is
the managing member or general partner in approximately 59 separate tax credit
housing funds having one or more investor members or limited
partners.
RJTCF has
concluded that it is the primary beneficiary in approximately 12 of the 56 low
income housing tax credit funds it has determined to be VIEs, and accordingly,
consolidates these funds, which have combined assets of approximately $289.4
million at December 31, 2009. None of these assets act as collateral for any
obligations of these funds. The investor member(s) or limited partner(s) of the
VIEs bear the risk of loss on their investments. Our exposure to loss is limited
to our investments in, advances to, and receivables due from these funds and
that exposure is approximately $56.5 million at December 31, 2009.
VIEs
where we hold a variable interest but we are not the Primary
Beneficiary
Low
Income Housing Partnerships
RJTCF is
not the primary beneficiary of the remaining 44 low income housing tax credit
funds it determined to be VIEs, and accordingly, we do not consolidate these
funds. These funds have combined assets of approximately $1.15 billion at
December 31, 2009. Our exposure to loss is limited to our investments in,
advances to, and receivables due from these funds and that exposure is
approximately $4.6 million at December 31, 2009.
Other
Real Estate Limited Partnerships
As of
December 31, 2009, we have a variable interest in several limited partnerships
involved in various real estate activities in which one of our subsidiaries is
the general partner. Given that we are not entitled to receive the majority of
any residual returns and we do not have the ability to significantly influence
the financial results of these partnerships, we have determined that we are not
the primary beneficiary of these VIEs. Accordingly, we do not consolidate these
partnerships which have assets of approximately $11 million at December 31,
2009. The carrying value of our investment in these partnerships, and therefore
our exposure to any of their losses, is insignificant at December 31,
2009.
Entities
evaluated but determined not to be VIEs
RJTCF has
determined that three of its low income housing tax credit funds are not VIEs.
These funds are held 99% by RJTCF. At December 31, 2009, only one 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
$1.6 million, which are included in Other Assets in our Condensed Consolidated
Statements of Financial Condition at December 31, 2009, which also represents
our exposure to losses as of that date.
See Note
12 of the Notes to Condensed Consolidated Financial Statements for discussion of
our commitments related to RJTCF.
NOTE 8 - BANK
DEPOSITS:
For
further discussion of bank deposits, see Note 10 pages 106 - 107 in our 2009
Form 10-K.
The
following table presents a summary of bank deposits at December 31, 2009 and
September 30, 2009:
|
December 31, 2009
|
September
30, 2009
|
|
|
Weighted
|
|
Weighted
|
|
|
Average
|
|
Average
|
|
Balance
|
Rate
(1)
|
Balance
|
Rate
(1)
|
|
($
in 000's)
|
|
|
|
|
|
Bank
Deposits:
|
|
|
|
|
Negotiable
Order of Withdrawal (“NOW”) Accounts
|
$ 4,623
|
0.01%
|
$ 3,413
|
0.01%
|
Demand
Deposits (Non-Interest Bearing)
|
2,576
|
-
|
3,672
|
-
|
Savings
and Money Market Accounts (2)
|
6,796,616
|
0.15%
|
9,222,823
|
0.12%
|
Certificates
of Deposit
|
203,254
|
3.30%
|
193,479
|
3.45%
|
Total
Bank Deposits
|
$
7,007,069
|
0.24%
|
$ 9,423,387
|
0.19%
|
(1)
|
Weighted
average rate calculation is based on the actual deposit balances at
December 31, 2009 and September 30, 2009,
respectively.
|
(2)
|
The
balance sheet at September 30, 2009 included additional deposits received
through the Raymond James Bank Deposit Program (“RJBDP”) as part of the
transactions associated with the point-in-time regulatory balance sheet
composition requirements of RJ Bank. See Note 21 on page 127 of our 2009
Form 10-K for discussion of the September 30, 2009 point-in-time
test.
|
RJ Bank’s
savings and money market accounts in the table above consist primarily of
deposits that are cash balances swept from the investment accounts maintained at
RJ&A. These balances are held in the Federal Deposit Insurance Corporation
(“FDIC”) insured bank accounts through the RJBDP administered by
RJ&A.
RJ Bank
had direct deposits from RJF executive officers and directors of $614,000 and
$512,000 at December 31, 2009 and September 30, 2009, respectively.
Scheduled
maturities of certificates of deposit at December 31, 2009 and September 30,
2009 were as follows:
|
December 31, 2009
|
September
30, 2009
|
|
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
|
$
12,965
|
$ 18,230
|
$ 13,061
|
$ 16,097
|
Over
Three Through Six Months
|
6,046
|
14,741
|
6,886
|
17,454
|
Over
Six Through Twelve Months
|
11,746
|
26,754
|
12,156
|
30,128
|
Over
One Through Two Years
|
15,406
|
30,047
|
13,580
|
29,632
|
Over
Two Through Three Years
|
3,017
|
10,136
|
2,720
|
10,226
|
Over
Three Through Four Years
|
9,147
|
10,323
|
8,993
|
10,507
|
Over
Four Years
|
15,764
|
18,932
|
8,742
|
13,297
|
Total
|
$
74,091
|
$
129,163
|
$
66,138
|
$
127,341
|
Interest
expense on deposits is summarized as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000's)
|
Certificates
of Deposit
|
$ 1,658
|
$ 2,448
|
Money
Market, Savings and
|
|
|
NOW
Accounts
|
2,603
|
12,635
|
Total
Interest Expense on Deposits
|
$ 4,261
|
$ 15,083
|
NOTE 9 – OTHER
BORROWINGS:
The
following table details the components of Other Borrowings at December 31, 2009
and September 30, 2009:
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
(in
000's)
|
Short-Term
Other Borrowings:
|
|
|
Federal
Home Loan Bank Advances (1)
|
$ 20,000
|
$ 905,000
|
Borrowings
on Secured Lines of Credit (2)
|
-
|
30,000
|
Borrowings
on Unsecured Lines of Credit (3)
|
1,027
|
-
|
Total
Short-Term Other Borrowings
|
21,027
|
935,000
|
|
|
|
Long-Term
Other Borrowings:
|
|
|
Federal
Home Loan Bank Advances (1)
|
30,000
|
45,000
|
|
|
|
Total
Other Borrowings
|
$ 51,027
|
$ 980,000
|
(1)
|
RJ
Bank has $50 million and $950 million in FHLB advances outstanding at
December 31, 2009 and September 30, 2009, respectively. These borrowings
at December 31, 2009 are comprised of several short-term and long-term
fixed rate advances. The September 30, 2009 FHLB advances included $900
million in overnight advances to meet point-in-time regulatory balance
sheet composition requirements related to its qualifying as a thrift
institution. These borrowed funds were invested in qualifying assets and
the necessary qualification was met. The overnight advance was repaid on
October 1, 2009. There were no overnight advances outstanding as of
December 31, 2009.
|
All FHLB
advances are secured by a blanket lien on RJ Bank's residential loan portfolio
granted to FHLB. The FHLB has the right to convert advances totaling $35 million
at December 31, 2009 to a floating rate at one or more future dates. RJ Bank has
the right to prepay these advances without penalty if the FHLB exercises its
right.
(2)
|
Secured
borrowings are day-to-day and are generally utilized to finance fixed
income securities. We had no secured bank loans outstanding at December
31, 2009. At September 30, 2009, there were $30 million in outstanding
secured borrowings.
|
(3)
|
We
maintain two unsecured settlement lines of credit available to our
Argentina joint venture in the aggregate amount of $4.5 million. At
December 31, 2009 there were $1 million in outstanding borrowings on these
lines of credit. There were no borrowings outstanding on these lines of
credit as of September 30, 2009.
|
As of
December 31, 2009 and September 30, 2009, we maintained a $100 million committed
unsecured revolving line of credit with no outstanding borrowings. This facility
expired under its terms on February 4, 2010. We elected not to renew this
revolving credit facility upon its expiration. There were no borrowings made
under this facility since its inception on February 6, 2009.
The
short-term borrowings as of December 31, 2009 all mature during the following 12
months. The long-term borrowings as of December 31, 2009, based on their
contractual terms, mature in their entirety during fiscal year
2011.
As of
December 31, 2009, there were collateralized financings outstanding in the
amount of $23 million. These collateralized financings are included in
Securities Sold Under Agreement to Repurchase on the Consolidated Statements of
Financial Condition. As of September 30, 2009, in addition to the $30 million of
secured borrowings which are described above, there were $74.3 million of
collateralized financings outstanding which are included in Securities Sold
Under Agreements to Repurchase on the Condensed Consolidated Statements of
Financial Condition. These financings were collateralized by non-customer,
RJ&A-owned securities and were repaid during the quarter ended December 31,
2009.
NOTE 10 – DERIVATIVE
FINANCIAL INSTRUMENTS:
We enter
into interest rate swaps and futures contracts as part of our fixed income
business to facilitate customer transactions and to hedge a portion of our
trading inventory. The majority of our derivative positions are executed in the
over-the-counter market with financial institutions. These positions are
recorded at fair value with the related gain or loss and interest recorded in
earnings within the Condensed Consolidated Statements of Income. The revenue
related to the interest rate contracts includes realized and unrealized gains
and losses on derivative instruments. Cash flows related to these fixed income
interest rate contracts are included as Operating Activities (the “Trading
Instruments, Net” line) on the Condensed Consolidated Statements of Cash Flows
for the period.
We elect
to net-by-counterparty the fair value of interest rate swap contracts entered
into by our Fixed Income Trading group. Certain of these contracts contain a
legally enforceable master netting arrangement and therefore, the fair value of
those swap contracts are netted by counterparty in the Condensed Consolidated
Statements of Financial Condition. As we elect to net-by-counterparty the fair
value of interest rate swap contracts, we also net-by-counterparty any
collateral exchanged as part of the swap agreement. This cash collateral is
recorded net-by-counterparty at the related fair value. The cash collateral
included in the net fair value of all open derivative asset positions at
December 31, 2009 and September 30, 2009, is $1.9 million and $(2.2) million,
respectively. The cash collateral included in the net fair value of all open
derivative liability positions at December 31, 2009 and September 30, 2009, is
$(1.3) million and $10.3 million, respectively. The master netting agreement
referenced above allows for netting of all individual swap receivables and
payables with each counterparty. The credit support annex allows parties to the
master agreement to mitigate their credit risk by requiring the party which is
out of the money to post collateral. Our maximum loss exposure under these
interest rate swap contracts at December 31, 2009 is $24.5 million.
To
mitigate interest rate risk in a significantly rising rate environment during
the year ended September 30, 2008, RJ Bank purchased three-year term interest
rate caps with high strike rates (more than 300 basis points higher than rates
in effect as of their date of purchase). These interest rate caps will increase
in value over time if interest rates rise and will entitle RJ Bank to cash flows
if interest rates rise above their strike rates. In addition, RJ Bank, in the
ordinary course of business, enters into commitments to sell originated
fixed-rate mortgages as well as Small Business Administration (“SBA”) loans.
These derivative instruments are recorded at fair value with any changes in fair
value recorded in earnings within the Condensed Consolidated Statements of
Income for the period. Cash flows related to these derivative instruments are
included in Operating Activities on the Condensed Consolidated Statements of
Cash Flows for the period. Our maximum loss exposure under these derivative
instruments is $223,000 at December 31, 2009.
A
subsidiary of RJTCF has made commitments to provide certain loans of a
relatively long duration at a fixed rate of interest (“Permanent Loan
Commitments”) directly to certain low income housing project partnerships
subject only to those project partnerships meeting certain qualifying criteria
within a prospective two-year period. These Permanent Loan Commitments meet the
criteria of a derivative. As such, the Permanent Loan Commitments are recorded
at fair value with any changes in fair value recorded in earnings within the
Condensed Consolidated Statements of Income. Cash flows related to these
commitments are reflected in Operating Activities on the Condensed Consolidated
Statements of Cash Flows. Our maximum loss exposure under these Permanent Loan
Commitments at December 31, 2009 is $3.7 million.
None of
our derivatives meet the criteria for designation as a fair value or cash flow
hedge.
See the
table below for the notional and fair value amounts of both the asset and
liability derivatives at December 31, 2009 and September 30, 2009:
|
Asset
Derivatives
|
|
December
31, 2009
|
|
September
30, 2009
|
|
Balance
|
|
|
|
Balance
|
|
|
|
Sheet
|
Notional
|
Fair
|
|
Sheet
|
Notional
|
Fair
|
|
Location
|
Amount
|
Value
(1)
|
|
Location
|
Amount
|
Value
(1)
|
|
(in
000’s)
|
Derivatives
Not Designated
|
|
|
|
|
|
|
|
As
Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts:
|
Trading
Instruments
|
$1,319,739
|
$87,423
|
|
Trading
Instruments
|
$1,311,262
|
$104,956
|
|
Other
Assets
|
1,500,000
|
191
|
|
Other
Assets
|
1,500,000
|
297
|
Forward
sale contracts:
|
Trading
Instruments
|
-
|
-
|
|
Trading
Instruments
|
5,861
|
222
|
|
Other
Assets
|
8,937
|
32
|
|
Other
Assets
|
-
|
-
|
(1)
|
The
fair value in this table is presented on a gross basis before netting of
cash collateral and by counterparty according to our legally enforceable
master netting arrangements. The fair value in the Condensed Consolidated
Statements of Financial Condition is presented
net.
|
|
Liability
Derivatives
|
|
December
31, 2009
|
|
September
30, 2009
|
|
Balance
|
|
|
|
Balance
|
|
|
|
Sheet
|
Notional
|
Fair
|
|
Sheet
|
Notional
|
Fair
|
|
Location
|
Amount
|
Value
(1)
|
|
Location
|
Amount
|
Value
(1)
|
|
(in
000’s)
|
Derivatives
Not Designated
|
|
|
|
|
|
|
|
As
Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts:
|
Trading
Instruments
|
|
|
|
Trading
Instruments
|
|
|
|
Sold
|
$1,252,773
|
$66,838
|
|
Sold
|
$1,125,501
|
$85,375
|
Forward
sale contracts:
|
Trade
and Other
|
|
|
|
Trade
and Other
|
|
|
|
Payables
|
-
|
-
|
|
Payables
|
2,489
|
6
|
|
Trading
Instruments
|
|
|
|
Trading
Instruments
|
|
|
|
Sold
|
3,680
|
117
|
|
Sold
|
-
|
-
|
(1)
|
The
fair value in this table is presented on a gross basis before netting of
cash collateral and by counterparty according to our legally enforceable
master netting arrangements. The fair value in the Condensed Consolidated
Statements of Financial Condition is presented
net.
|
See the
table below for the impact of the derivatives not designated as hedging
instruments on the Condensed Consolidated Statements of Income for the three
months ended December 31, 2009 and 2008, respectively:
|
|
|
Amount
of Gain (Loss) on
|
|
Location
of Gain (Loss)
|
|
Derivatives
Recognized In Income
|
|
Recognized
on Derivatives
|
|
Three
Months Ended December 31,
|
|
In
Income
|
|
2009
|
2008
|
|
|
|
(in
000’s)
|
Derivatives
Not Designated As Hedging Instruments
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts:
|
Net
Trading Profits
|
|
$1,853
|
$(4,323)
|
|
Other
Revenues
|
|
(106)
|
(1,212)
|
Forward
sale contracts:
|
Other
Revenues
|
|
(339)
|
(89)
|
|
Other
Expenses
|
|
38
|
2
|
|
|
|
|
|
We are
exposed to credit losses in the event of nonperformance by the counterparties to
our interest rate derivative agreements. We perform a credit evaluation of
counterparties prior to entering into derivative transactions and we monitor
their credit standings. Currently, we anticipate that all of the counterparties
will be able to fully satisfy their obligations under those agreements. We may
require collateral in the form of cash deposits 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. We are also exposed to interest rate risk related to our
interest rate derivative agreements. For the derivatives included in
trading instruments and trading instruments sold on our Condensed Consolidated
Statements of Financial Condition, we monitor exposure in our derivative
agreements daily based on established limits with respect to a number of
factors, including interest rate, spread, ratio, basis, and volatility risks.
These exposures are monitored both on a total portfolio basis and separately for
each agreement for selected maturity periods.
NOTE 11 - INCOME
TAXES:
For
further discussion of income tax matters, see Note 15 pages 111 - 113 in our
2009 Form 10-K.
As of
December 31, 2009 and September 30, 2009 our liability for unrecognized tax
benefits was $4.7 million and $4.6 million, respectively. The total amount of
unrecognized tax benefits that, if recognized, would affect the effective tax
rate for income from continuing operations was $3.6 million and $3.4 million at
December 31, 2009 and September 30, 2009, respectively.
We
recognize the accrual of interest and penalties related to income tax matters in
interest expense and other expense, respectively. As of December 31, 2009 and
September 30, 2009, accrued interest and penalties included in the unrecognized
tax benefits liability were approximately $1.7 million and $1.6 million,
respectively.
The
decrease in our effective income tax rate of 1.7% since the prior year was
predominately attributable to our forecast of the non-taxable investment
performance of our Company Owned Life Insurance investments.
We file
U.S. federal income tax returns as well as returns with various state, local and
foreign jurisdictions. With few exceptions, we are no longer subject to U.S.
federal, state and local, or foreign income tax examination by tax authorities
for years prior to fiscal year 2009 for federal tax returns, fiscal year 2005
for state and local tax returns, and fiscal year 2001 for foreign tax returns.
Our fiscal year 2009 federal income tax return is currently being examined under
the Internal Revenue Service (“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 fiscal year 2009 IRS audit and state audits
in process are expected to be completed during fiscal year 2010. We anticipate
that the unrecognized tax benefit may increase by an estimated $600,000 over the
next 12 months.
NOTE 12 – COMMITMENTS AND
CONTINGENCIES:
As of
December 31, 2009, RJ Bank had $1 billion in immediate credit available from the
FHLB and total available credit of 40% of total assets with the pledging of
additional collateral to the FHLB.
RJ Bank
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 December 31, 2009, the current exposure under these guarantees was
$10.8 million, which was underwritten as part of the larger corporate credit
relationship. At September 30, 2009, the exposure under these guarantees was
$12.1 million. The estimated total potential exposure under these guarantees is
$13.8 million at December 31, 2009.
As of
December 31, 2009, RJ Bank had not settled purchases of $14.2 million in
syndicated loans. These loan purchases are expected to be settled within 90
days. As of September 30, 2009, there were no purchases of syndicated loans that
had not settled.
See Note
16 of these Notes to Condensed Consolidated Financial Statements for additional
information regarding RJ Bank’s commitments to extend credit and other
credit-related off-balance sheet financial instruments such as standby letters
of credit and loan purchases.
In the
normal course of business we enter into underwriting commitments. RJ&A had
no open transactions related to underwriting commitments as of December 31,
2009. Transactions relating to underwriting commitments of RJ Ltd. that were
open at December 31, 2009 were approximately CDN $12.3 million.
We
utilize client marginable securities to satisfy deposits with clearing
organizations. At December 31, 2009, we had client margin securities valued at
$98.7 million pledged with a clearing organization to meet the point-in-time
requirement of $87.9 million. At September 30, 2009, we had client margin
securities valued at $212.4 million pledged with a clearing organization to meet
the point-in-time requirement of $110 million.
We offer
loans and transition assistance to our financial advisors mainly for recruiting
or retention purposes. These commitments are contingent upon certain events
occurring, including but not limited to the financial advisor joining us and
meeting certain production requirements. In certain circumstances, we may make
commitments prior to funding them. As of December 31, 2009, we made commitments
of approximately $28.9 million in loans and transition assistance that have not
yet been funded.
We have
committed a total of $62.3 million, in amounts ranging from $200,000 to $5
million, to 45 different independent venture capital or private equity
partnerships. In addition, we have a commitment totaling $38.2 million to two
additional private equity limited partnerships. As of December 31, 2009, we have
invested $54.7 million of the committed amounts and have received $37.3 million
in distributions. We also control the general partner in two internally
sponsored private equity limited partnerships to which we have committed and
invested $6.5 million. We have received $4.3 million in distributions from these
two partnerships as of December 31, 2009.
We are
the general partner in EIF Funds. These limited partnerships invest in certain
of our merchant banking and private equity activities as well as other
unaffiliated venture capital limited partnerships. The EIF Funds were
established as compensation and retention measures for certain of our qualified
key employees. At December 31, 2009, the funds have unfunded commitments of
$900,000.
At
December 31, 2009, the approximate market values of collateral received that can
be repledged by us, were:
Sources
of Collateral (in 000's):
|
|
Securities
Purchased Under Agreements to Resell and Other
|
|
Collateralized
Financings
|
$ 79,973
|
Securities
Received in Securities Borrowed vs. Cash Transactions
|
612,314
|
Collateral
Received for Margin Loans
|
1,155,363
|
Total
|
$
1,847,650
|
During
the year certain collateral was repledged. At December 31, 2009, the approximate
market values of this portion of collateral and financial instruments owned that
were pledged by us, were:
Uses
of Collateral and Trading Securities (in 000's):
|
|
Securities
Sold Under Agreements to Repurchase
|
$ 22,690
|
Securities
Delivered in Securities Loaned vs. Cash Transactions
|
974,795
|
Collateral
Used for Deposits at Clearing Organizations
|
113,255
|
Total
|
$
1,110,740
|
We have
from time to time authorized performance guarantees for the completion of trades
with counterparties in Argentina. At December 31, 2009, there were no
outstanding performance guarantees in Argentina.
We
guarantee the existing mortgage debt of RJ&A of approximately $58.3 million.
We guarantee interest rate swap obligations of RJCS.
We have
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.
RJTCF has
provided certain specific performance guarantees to third-party investors of one
of its fund offerings (“Fund 34”). In turn, we are guaranteeing RJTCF’s
performance on those guarantees.
RJTCF may
make short-term loans or advances to project partnerships on behalf of the tax
credit funds in which it serves as managing member or general partner. At
December 31, 2009, cash funded to invest in either loans or investments in
project partnerships was $12.4 million. RJTCF also issues certain guarantees to
various third parties related to project partnerships whose interests have been
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 $2.2 million as of
December 31, 2009.
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. Two permanent loan
commitments were outstanding as of December 31, 2009. 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 unfunded permanent loan commitments as of December
31, 2009 was $3.7 million.
As a
result of the extensive regulation of the financial services industry, our
broker-dealer and investment advisory 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 conducting 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.
We are a
defendant or co-defendant in various lawsuits and arbitrations incidental to our
securities business as well as other corporate litigation. We are contesting the
allegations in these cases and believe that there are meritorious defenses in
each of these lawsuits and arbitrations. In view of the number and diversity of
claims against us, the number of jurisdictions in which litigation is pending,
and the inherent difficulty of predicting the outcome of litigation and other
claims, we cannot state with certainty what the eventual outcome of pending
litigation or other claims will be. In the opinion of our management, based on
current available information, review with outside legal counsel, and
consideration of amounts provided for in the accompanying consolidated financial
statements with respect to these matters, ultimate resolution of these matters
will not have a material adverse impact on our financial position or 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.
For
further information on our accounting policies regarding legal reserves, see
Note 1 page 86 of our 2009 Form 10-K.
NOTE 13 – OPERATING INTEREST
INCOME AND OPERATING INTEREST EXPENSE:
The
components of operating interest income and operating interest expense are as
follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000’s)
|
Operating
Interest Income:
|
|
|
Margin
Balances
|
$ 11,048
|
$ 11,738
|
Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
|
1,757
|
6,317
|
Bank
Loans, Net of Unearned Income
|
64,856
|
99,645
|
Available
for Sale Securities
|
4,914
|
7,514
|
Trading
Instruments
|
3,958
|
4,307
|
Stock
Borrow
|
1,765
|
3,290
|
Interest
Income of Variable Interest Entities
|
6
|
121
|
Other
|
3,068
|
10,680
|
Total
Operating Interest Income
|
91,372
|
143,612
|
|
|
|
Operating
Interest Expense:
|
|
|
Brokerage
Client Liabilities
|
965
|
8,405
|
Retail
Bank Deposits
|
4,261
|
15,083
|
Stock
Loan
|
549
|
1,439
|
Borrowed
Funds
|
1,533
|
1,823
|
Senior
Notes
|
6,522
|
-
|
Interest
Expense of VIEs
|
1,113
|
1,397
|
Other
|
759
|
3,744
|
Total
Operating Interest Expense
|
15,702
|
31,891
|
|
|
|
Net
Operating Interest Income
|
$ 75,670
|
$ 111,721
|
NOTE 14 – SHARE-BASED
COMPENSATION:
For a
discussion of our accounting policies and other information relating to employee
and our Board of Director share-based compensation, see Note 19 pages 117 - 121
of our 2009 Form 10-K.
Expense
and income tax benefits related to our share-based compensation plans available
for grants to employees and members of our Board of Directors are presented
below:
|
Three
Months Ended December 31,
|
|
2009
|
2008
|
|
(in
000’s)
|
|
|
|
Total
share-based expense
|
$ 11,567
|
$ 11,074
|
Income
tax benefits related to share-based expense
|
3,209
|
3,462
|
For the
three months ended December 31, 2009, we reversed $457,000 of excess tax
benefits resulting in a reduction of additional paid-in capital.
During
the three months ended December 31, 2009, we granted 1,516,400 stock options,
480,927 shares of restricted stock, and 130,601 restricted stock units to
employees under our share-based employee compensation plans. During the three
months ended December 31, 2009, no stock options were granted to outside
directors. Restricted stock grants under the 2007 Stock Bonus Plan and the 2005
Restricted Stock Plan are limited to 750,000 and 2,000,000 shares, respectively,
per fiscal year.
Pre-tax
unrecognized expense for share-based awards granted to employees and directors,
net of estimated forfeitures, and the remaining period over which the expense
will be recognized as of December 31, 2009 are presented below:
|
Pre-Tax
Unrecognized
|
Remaining
Weighted-
|
|
Expense
(in 000’s)
|
Average
Period
|
|
|
|
Stock
Options
|
$ 21,921
|
3.9
years
|
Restricted
Stock
|
52,582
|
3.3
years
|
Restricted
Stock Units
|
7,250
|
1.9
years
|
The
weighted average grant-date fair value of share-based awards granted to
employees and directors for the three months ended December 31, 2009 is
presented below:
|
|
|
Weighted-Average
Grant-Date
|
|
Fair
Value (per share)
|
|
|
Stock
Options
|
$ 10.83
|
Restricted
Stock
|
23.95
|
Restricted
Stock Units
|
24.24
|
For a
discussion of our accounting policies and other information relating to
non-employee stock-based and other compensation, see Note 20 pages 122 - 124 of
our 2009 Form 10-K.
Expense
and income tax benefits related to our share-based compensation plans available
for grants to independent contractor financial advisors are presented
below:
|
Three
Months Ended December 31,
|
|
2009
|
2008
|
|
(in
000’s)
|
|
|
|
Total
share-based expense (expense reduction)
|
$ 1,087
|
$ (8,709)
|
Income
tax benefits related to share-based expense
|
408
|
(3,309)
|
During
the three months ended December 31, 2009, we granted 46,500 stock options and
5,858 shares of restricted stock to independent contractor financial
advisors.
Pre-tax
unrecognized expense for share-based awards granted to independent contractor
financial advisors, net of estimated forfeitures, and the remaining period over
which the expense will be recognized as of December 31, 2009 are presented
below:
|
Pre-Tax
Unrecognized
|
Remaining
Weighted-
|
|
Expense
(in 000’s)
|
Average
Period
|
|
|
|
Stock
Options
|
$ 1,486
|
2.5
years
|
Restricted
Stock
|
2,147
|
3.4
years
|
The
weighted average fair value of unvested share-based awards granted to
independent contractor financial advisors at December 31, 2009 is presented
below:
|
Weighted-Average
|
|
Fair
Value
|
|
on
December 31, 2009
|
|
(per
share)
|
|
|
Stock
Options
|
$ 6.53
|
Restricted
Stock
|
23.77
|
NOTE 15 - REGULATIONS AND
CAPITAL REQUIREMENTS:
For a
discussion of the various regulations and capital requirements applicable to
certain of our businesses and subsidiaries, see Note 21 pages 124 - 127 of our
2009 Form 10-K.
The net
capital position of RJ&A at December 31, 2009 and September 30, 2009 was as
follows:
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
($
in 000's)
|
Raymond
James & Associates, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital as a Percent of Aggregate
|
|
|
Debit
Items
|
27.87%
|
20.42%
|
Net
Capital
|
$
399,283
|
$
278,092
|
Less:
Required Net Capital
|
(28,656)
|
(27,233)
|
Excess
Net Capital
|
$
370,627
|
$
250,859
|
The net
capital position of Raymond James Financial Services, Inc. at December 31, 2009
and September 30, 2009 was as follows:
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
(in
000's)
|
Raymond
James Financial Services, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital
|
$
18, 124
|
$
18,882
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$
17,874
|
$
18,632
|
The Risk
Adjusted Capital of our Canadian broker-dealer subsidiary Raymond James Ltd. at
December 31, 2009 and September 30, 2009 was as follows (in Canadian
dollars):
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
(in
000’s)
|
Raymond
James Ltd.:
|
|
|
Risk
Adjusted Capital before minimum
|
$
44,569
|
$
35,575
|
Less:
Required Minimum Capital
|
(250)
|
(250)
|
Risk
Adjusted Capital
|
$
44,319
|
$
35,325
|
At
December 31, 2009, our other active domestic and international broker-dealers
are in compliance with and met all net capital requirements.
As of
December 31, 2009, the most recent notification from the Office of Thrift
Supervision (“OTS”) categorized RJ Bank as “well capitalized” under the
regulatory framework for prompt corrective action. To be categorized as “well
capitalized”, RJ Bank 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 RJ Bank's category.
|
|
|
To
be well capitalized
|
|
|
Requirement
for capital
|
under
prompt
|
|
|
adequacy
|
corrective
action
|
|
Actual
|
purposes
|
provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
($
in 000's)
|
As
of December 31, 2009:
|
|
|
|
|
|
|
Total
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
$
925,357
|
13.0%
|
$
571,043
|
8.0%
|
$
713,804
|
10.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
835,465
|
11.7%
|
285,521
|
4.0%
|
428,282
|
6.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Adjusted
Assets)
|
835,465
|
10.5%
|
317,795
|
4.0%
|
397,244
|
5.0%
|
|
|
|
|
|
|
|
As
of September 30, 2009 :
|
|
|
|
|
|
|
Total
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
$
909,959
|
12.7%
|
$
573,153
|
8.0%
|
$
716,441
|
10.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
819,747
|
11.4%
|
286,576
|
4.0%
|
429,864
|
6.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Adjusted
Assets)
|
819,747
|
7.3%
|
448,672
|
4.0%
|
560,841
|
5.0%
|
NOTE 16 - FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
For a
discussion of our financial instruments with off-balance sheet risk, see Note 22
pages 127 - 129 of our 2009 Form 10-K.
RJ Bank
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. Fixed-rate commitments are also subject to market risk
resulting from fluctuations in interest rates and RJ Bank’s exposure is limited
to the replacement value of those commitments. A summary of commitments to
extend credit and other credit-related off-balance sheet financial instruments
outstanding at December 31, 2009 and September 30, 2009 is as
follows:
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
(in
000's)
|
|
|
|
Standby
Letters of Credit (1)
|
$ 243,705
|
$ 242,486
|
Open
End Consumer Lines of Credit
|
32,937
|
35,369
|
Commercial
Lines of Credit
|
1,562,825
|
1,479,260
|
Unfunded
Loan Commitments - Variable Rate
|
316,519
|
155,518
|
Unfunded
Loan Commitments - Fixed Rate
|
7,911
|
7,553
|
(1)
|
Of
the letters of credit outstanding at December 31, 2009, $241.7 million are
underwritten as part of a larger corporate credit
relationship.
|
Because
many lending commitments expire without being funded in whole or part, the
contract amounts are not estimates of our actual future credit exposure or
future liquidity requirements. We maintain a reserve to provide for potential
losses related to the unfunded lending commitments. See Note 6 of these Notes to
Condensed Consolidated Financial Statements for further information regarding
the allowance for loan losses.
RJ Bank
had commitments to sell SBA loan pool securitizations totaling $33.1 million as
of December 31, 2009.
RJ Ltd.
is subject to foreign exchange risk primarily due to financial instruments
denominated 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 not
significant. As of December 31, 2009, forward contracts outstanding to buy and
sell U.S. dollars totaled CDN $1.8 million and CDN $1 million,
respectively.
NOTE 17 – EARNINGS PER
SHARE:
Effective
October 1, 2009, we implemented new FASB guidance that changes the manner in
which earnings per share is computed. The new guidance requires
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) to be considered
participating securities and, therefore, included in the earnings allocation in
computing earnings per share under the two-class method. Our unvested restricted
shares and restricted stock units granted as part of our share-based
compensation are considered participating securities. Earnings per
share for the prior periods were revised as required by this new
guidance. As a result, earnings per basic and diluted shares have
been reduced by $0.02 for the quarter ended December 31, 2008, compared with
amounts previously reported.
The
following table presents the computation of basic and diluted earnings per
share:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000’s, except per share amounts)
|
Income
for basic earnings per common share:
|
|
|
Net
income attributable to Raymond James Financial, Inc.
|
$ 42,903
|
$ 61,093
|
Less
allocation of earnings and dividends to participating securities
(1)
|
1,789
|
2,403
|
Net
income attributable to Raymond James Financial, Inc. common
shareholders
|
$ 41,114
|
$ 58,690
|
|
|
|
Income
for diluted earnings per common share:
|
|
|
Net
income attributable to Raymond James Financial, Inc.
|
$ 42,903
|
$ 61,093
|
Less
allocation of earnings and dividends to participating securities
(1)
|
1,787
|
2,399
|
Net
income attributable to Raymond James Financial, Inc. common
shareholders
|
$ 41,116
|
$ 58,694
|
|
|
|
Common
shares:
|
|
|
Average
common shares in basic computation
|
118,763
|
116,307
|
Dilutive
effect of outstanding stock options
|
220
|
252
|
Average
common shares used in diluted computation
|
118,983
|
116,559
|
|
|
|
Earnings
per common share:
|
|
|
Basic
|
$ 0.35
|
$ 0.50
|
Diluted
|
$ 0.35
|
$ 0.50
|
|
|
|
Stock
options excluded from weighted average diluted common
shares
|
|
|
because
their effect would be antidilutive
|
3,840
|
4,087
|
(1)
|
Represents
dividends paid during the period to participating securities plus an
allocation of undistributed earnings to participating securities.
Participating securities represent unvested restricted stock and
restricted stock units and amounted to weighted average shares of 5.3
million and 4.8 million for the three months ended December 31, 2009 and
2008, respectively. Dividends paid to participating securities amounted to
$547,000 and $489,000 during the three months ended December 31, 2009 and
2008, respectively. Undistributed earnings are allocated to participating
securities based upon their right to share in earnings if all earnings for
the period had been distributed.
|
NOTE 18 – SEGMENT
ANALYSIS:
We
currently operate through the following eight business segments: Private Client
Group; Capital Markets; Asset Management; RJ Bank; 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 we assess performance and determine how to allocate our resources throughout
our subsidiaries. For a further discussion of our business segments, see Note 24
pages 130 - 132 of our 2009 Form 10-K
Information
concerning operations in these segments of business is as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000’s)
|
Revenues:
|
|
|
Private
Client Group
|
$ 454,824
|
$ 414,544
|
Capital
Markets
|
133,773
|
128,706
|
Asset
Management
|
49,998
|
51,291
|
RJ
Bank
|
68,922
|
109,239
|
Emerging
Markets
|
3,718
|
4,323
|
Stock
Loan/Borrow
|
1,875
|
3,290
|
Proprietary
Capital
|
(35)
|
538
|
Other
|
1,758
|
1,086
|
Intersegment
Eliminations
|
(12,164)
|
(17,184)
|
Total
Revenues
|
$ 702,669
|
$ 695,833
|
|
|
|
Income
(Loss) Before Provision for Income Taxes
and
Noncontrolling Interests:
|
Private
Client Group
|
$ 31,712
|
$ 32,585
|
Capital
Markets
|
11,394
|
14,289
|
Asset
Management
|
12,066
|
9,074
|
RJ
Bank
|
24,637
|
54,626
|
Emerging
Markets
|
(1,412)
|
(465)
|
Stock
Loan/Borrow
|
687
|
1,223
|
Proprietary
Capital
|
(812)
|
(544)
|
Other
|
(8,884)
|
(9,124)
|
Pre-Tax
Income
|
69,388
|
101,664
|
Add:
Net Loss Attributable to
Noncontrolling
Interests
|
(2,275)
|
(5,007)
|
Income
Before Provision for Income Taxes
and
Noncontrolling Interests
|
$ 67,113
|
$ 96,657
|
Net
Interest Income (Expense):
|
Private
Client Group
|
$ 12,783
|
$ 12,161
|
Capital
Markets
|
883
|
1,328
|
Asset
Management
|
24
|
113
|
RJ
Bank
|
65,611
|
94,463
|
Emerging
Markets
|
(1)
|
237
|
Stock
Loan/Borrow
|
1,216
|
1,851
|
Proprietary
Capital
|
1
|
149
|
Other
|
(4,847)
|
1,419
|
Net
Interest Income
|
$ 75,670
|
$
111,721
|
The
following table presents our total assets on a segment basis:
|
|
|
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
(in
000’s)
|
Total
Assets:
|
|
|
Private
Client Group (1)
|
$ 4,280,265
|
$ 4,900,852
|
Capital
Markets (2)
|
1,184,831
|
1,246,472
|
Asset
Management
|
62,613
|
59,847
|
RJ
Bank
|
7,882,574
|
11,137,440
|
Emerging
Markets
|
46,298
|
47,201
|
Stock
Loan/Borrow
|
1,010,383
|
491,650
|
Proprietary
Capital
|
150,681
|
147,832
|
Other
|
74,350
|
195,434
|
Total
|
$ 14,691,995
|
$
18,226,728
|
(1)
|
Includes
$46 million of goodwill.
|
(2) Includes
$17 million of goodwill.
We have
operations in the U.S., Canada, and Europe, and joint ventures in Latin America.
Substantially all long-lived assets are located in the U.S. Revenues and income
before provision for income taxes, classified by major geographic areas in which
they are earned, are as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000’s)
|
Revenues:
|
|
|
United
States
|
$ 627,148
|
$ 634,122
|
Canada
|
57,527
|
45,069
|
Europe
|
14,240
|
12,488
|
Other
|
3,754
|
4,154
|
Total
|
$ 702,669
|
$ 695,833
|
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000’s)
|
Income (Loss) Before Provision
for Income Taxes:
|
|
|
|
|
|
United
States
|
$
69,671
|
$
100,570
|
Canada
|
1,560
|
1,255
|
Europe
|
(472)
|
1,574
|
Other
|
(1,371)
|
(1,735)
|
Total
|
$
69,388
|
$
101,664
|
Our total
assets, classified by major geographic area in which they are held, were as
follows:
|
|
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
(in
000’s)
|
Total
Assets:
|
|
|
United
States (1)
|
$
13,430,610
|
$
16,894,460
|
Canada
(2)
|
1,193,898
|
1,265,149
|
Europe
|
26,083
|
25,011
|
Other
|
41,404
|
42,108
|
Total
|
$
14,691,995
|
$
18,226,728
|
(1)
|
Includes
$30 million of goodwill.
|
(2)
|
Includes
$33 million of goodwill.
|
|
Item
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following Management’s Discussion and Analysis is intended to help the reader
understand our results of operations and our financial condition. Management’s
Discussion and Analysis is provided as a supplement to, and should be read in
conjunction with, our unaudited condensed consolidated financial statements and
unaudited accompanying notes to the condensed consolidated financial
statements.
Factors Affecting
“Forward-Looking Statements”
From time
to time, Raymond James Financial, Inc., together with its subsidiaries
hereinafter collectively referred to as “our”, “we” or “us”, may
publish “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, or make oral statements that constitute
forward-looking statements. These forward-looking statements may relate to such
matters as anticipated financial performance, future revenues or earnings,
business prospects, projected ventures, new products, anticipated market
performance, recruiting efforts, and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, we caution
readers that a variety of factors could cause our actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements. These risks and uncertainties, many of which are
beyond our control, are discussed in the section entitled “Risk Factors” of Item
1A of Part I included in our in our Annual Report on Form 10-K for the year
ended September 30, 2009, as filed with the United States of America (“U.S.”)
Securities and Exchange Commission (the “2009 Form 10-K”) and in Item 1A of Part
II of this report on Form 10-Q. We do not undertake any obligation to publicly
update or revise any forward-looking statements.
Executive
Overview
Our
financial results continue to be positively 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. As a result of the improving markets during the three
months ended December 31, 2009, our net revenues increased by 3.5% to $687
million. Non-interest expenses increased by 9.3% to $620 million, primarily from
higher compensation costs resulting from the increase in commission revenue
generated by the increased number of financial advisors since the prior year. We
generated net income of $43 million, a 29.8% decrease compared to the prior year
quarter.
Our
financial results were most significantly impacted by a 10% increase in revenue
from our Private Client Group (“PCG”), one of our operations that is highly
dependent upon the health of the financial markets. The favorable impact of this
PCG revenue growth was offset by the unfavorable impact of an unanticipated
arbitration panel decision which resulted in a $10.8 million increase in PCG
expenses. Net interest earnings decreased 32%, or $36 million, resulting from
the intentional reduction of the loan portfolio coupled with lower interest
spreads in our bank subsidiary, Raymond James Bank (“RJ Bank”). PCG’s strategy
of adding financial advisors, despite poor market conditions during the past
year, positions us well for future growth as the markets improve. Fixed Income
trading profits remained significant, albeit at lower levels than the most
recent quarters. The RJ Bank results reflect some stabilization in the
commercial real estate sector during the quarter allowing RJ Bank to produce
solid operating results of $24.6 million in pre-tax earnings. The capital
position of RJ Bank is strong as evidenced by a 13% total risk based capital
ratio as of December 31, 2009. We benefitted from a $9.1 million adjustment in
the quarter ended December 31, 2009 to our estimate of incentive compensation at
September 30, 2009; this is comparable to the $11.7 million adjustment in the
prior year quarter. The succession plan for our Chief Executive Officer that
will take effect in May 2010, continues to progress in a manner that is
providing for an orderly transition of our executive leadership.
Segments
We
operate through the following eight business segments: PCG; Capital Markets;
Asset Management; RJ Bank; Emerging Markets; Stock Loan/Borrow, Proprietary
Capital, and various corporate activities in the Other segment.
The
following table presents our gross revenues and pre-tax income on a segment
basis for the periods indicated:
|
Three
Months Ended
|
|
December
31,
|
|
December
31,
|
|
Percentage
|
|
2009
|
|
2008
|
|
Change
|
|
($
in 000’s)
|
Total
Company
|
|
|
|
|
|
Revenues
|
$ 702,669
|
|
$ 695,833
|
|
1%
|
Pre-tax
Income
|
69,388
|
|
101,664
|
|
(32%)
|
|
|
|
|
|
|
Private
Client Group
|
|
|
|
|
|
Revenues
|
$ 454,824
|
|
$ 414,544
|
|
10%
|
Pre-tax
Income
|
31,712
|
|
32,585
|
|
(3%)
|
|
|
|
|
|
|
Capital
Markets
|
|
|
|
|
|
Revenues
|
133,773
|
|
128,706
|
|
4%
|
Pre-tax
Income
|
11,394
|
|
14,289
|
|
(20%)
|
|
|
|
|
|
|
Asset
Management
|
|
|
|
|
|
Revenues
|
49,998
|
|
51,291
|
|
(3%)
|
Pre-tax
Income
|
12,066
|
|
9,074
|
|
33%
|
|
|
|
|
|
|
Raymond
James Bank
|
|
|
|
|
|
Revenues
|
68,922
|
|
109,239
|
|
(37%)
|
Pre-tax
Income
|
24,637
|
|
54,626
|
|
(55%)
|
|
|
|
|
|
|
Emerging
Markets
|
|
|
|
|
|
Revenues
|
3,718
|
|
4,323
|
|
(14%)
|
Pre-tax
Loss
|
(1,412)
|
|
(465)
|
|
(204%)
|
|
|
|
|
|
|
Stock
Loan/Borrow
|
|
|
|
|
|
Revenues
|
1,875
|
|
3,290
|
|
(43%)
|
Pre-tax
Income
|
687
|
|
1,223
|
|
(44%)
|
|
|
|
|
|
|
Proprietary
Capital
|
|
|
|
|
|
Revenues
|
(35)
|
|
538
|
|
(107%)
|
Pre-tax
Loss
|
(812)
|
|
(544)
|
|
(49%)
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Revenues
|
1,758
|
|
1,086
|
|
62%
|
Pre-tax
Loss
|
(8,884)
|
|
(9,124)
|
|
3%
|
|
|
|
|
|
|
Intersegment
Eliminations
|
|
|
|
|
|
Revenues
|
(12,164)
|
|
(17,184)
|
|
29%
|
Pre-tax
Income
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
Results of Operations –
Three Months Ended December 31, 2009 Compared with the Three Months Ended
December 31, 2008
Net Interest
Analysis
The
following table presents our average balance and interest income and expense
data, as well as the related net interest income. The respective average rates
are presented on an annualized basis.
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
Interest
|
|
Yield/
|
Average
|
Interest
|
|
Yield/
|
|
Balance
|
Inc./Exp.
|
|
Cost
|
Balance
|
Inc./Exp.
|
|
Cost
|
|
($
in 000’s)
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
Margin
Balances
|
$
1,286,699
|
$
11,048
|
|
3.43%
|
$
1,245,963
|
$ 11,738
|
|
3.77%
|
Assets
Segregated Pursuant
|
|
|
|
|
|
|
|
|
to
Regulations and Other
|
|
|
|
|
|
|
|
|
Segregated
Assets
|
1,859,621
|
1,757
|
|
0.38%
|
4,142,295
|
6,317
|
|
0.61%
|
Bank
Loans, Net
|
|
|
|
|
|
|
|
|
of
Unearned Income(1)
|
6,664,513
|
64,856
|
|
3.89%
|
7,637,064
|
99,645
|
|
5.22%
|
Available
for Sale Securities
|
|
4,914
|
|
|
|
7,514
|
|
|
Trading
Instruments
|
|
3,958
|
|
|
|
4,307
|
|
|
Stock
Borrow
|
|
1,765
|
|
|
|
3,290
|
|
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
Variable Interest Entities
|
|
6
|
|
|
|
121
|
|
|
Other
|
|
3,068
|
|
|
|
10,680
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
|
$
91,372
|
|
|
|
$
143,612
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
Brokerage
Client Liabilities
|
$
3,086,957
|
$ 965
|
|
0.13%
|
$
5,383,546
|
$ 8,405
|
|
0.62%
|
Retail
Bank Accounts (1)
|
7,769,360
|
4,261
|
|
0.22%
|
9,040,857
|
15,083
|
|
0.67%
|
Stock
Loan
|
|
549
|
|
|
|
1,439
|
|
|
Borrowed
Funds
|
|
1,533
|
|
|
|
1,823
|
|
|
Senior
Notes
|
|
6,522
|
|
|
|
-
|
|
|
Interest-Expense
of
|
|
|
|
|
|
|
|
|
Variable
Interest Entities
|
|
1,113
|
|
|
|
1,397
|
|
|
Other
|
|
759
|
|
|
|
3,744
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Expense
|
|
15,702
|
|
|
|
31,891
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$
75,670
|
|
|
|
$
111,721
|
|
|
(1)
|
See
RJ Bank portion of this management’s discussion and analysis of financial
condition and results of operations for further
information.
|
Net
interest income decreased $36 million, or 32%, versus the same quarter in the
prior year. RJ Bank’s net interest income decreased $28.9 million, or 31%,
resulting from a decline in both average interest earning bank assets and net
interest spreads. In addition to an overall decline in spreads from the prior
year’s unusually high levels, net interest spreads were negatively impacted by
the interest costs of our Senior Notes issued in August, 2009 and by
approximately 0.33% for the quarter ended December 31, 2009 due to excess
Raymond James Bank Deposit Program (“RJBDP”) deposits held by RJ Bank for the
majority of October 2009 and into early November 2009 as the new multi-bank
sweep aspect of the RJBDP was implemented. These deposits were invested in
short-term liquid investments during that time producing minimal interest rate
spreads.
In spite
of the decline in average brokerage client deposits and the related assets
segregated in the PCG segment as a result of the implementation of the new
multi-bank sweep aspect of the RJBDP, net interest income in the PCG segment
increased $622,000, or 5%, versus the same quarter in the prior year due to
increased net interest spreads. Net interest income decreased $1 million, or 7%,
versus the immediately preceding quarter primarily due to the decline in average
assets segregated as a result of the implementation of the multi-bank program.
This decrease in net interest income from the immediately preceding quarter was
more than offset by a $6.4 million increase in fee income reported in the PCG
segment that was generated by the new multi-bank sweep aspect of the RJBDP
during the quarter ended December 31, 2009.
Private
Client Group
The
following table presents consolidated financial information for our PCG segment
for the periods indicated:
|
Three
Months Ended
|
|
|
December
31,
|
|
%
Incr.
|
|
December
31,
|
|
|
2009
|
|
(Decr.)
|
|
2008
|
|
|
($
in 000’s)
|
|
Revenues:
|
|
|
|
|
|
|
Securities
Commissions and Fees
|
$
378,517
|
|
16%
|
|
$
326,983
|
|
Interest
|
14,658
|
|
(33%)
|
|
21,907
|
|
Financial
Service Fees
|
35,645
|
|
(1%)
|
|
35,966
|
|
Other
|
26,004
|
|
(12%)
|
|
29,688
|
|
Total
Revenues
|
$
454,824
|
|
10%
|
|
$
414,544
|
|
|
|
|
|
|
|
|
Interest
Expense
|
1,875
|
|
(81%)
|
|
9,746
|
|
Net
Revenues
|
$
452,949
|
|
12%
|
|
$
404,798
|
|
|
|
|
|
|
|
|
Non-Interest
Expenses:
|
|
|
|
|
|
|
Sales
Commissions
|
$
278,059
|
|
19%
|
|
$
233,319
|
|
Admin
& Incentive Comp and Benefit Costs
|
70,079
|
|
1%
|
|
70,018
|
|
Communications
and Information Processing
|
13,091
|
|
(31%)
|
|
19,053
|
|
Occupancy
and Equipment
|
20,774
|
|
2%
|
|
20,276
|
|
Business
Development
|
13,735
|
|
(26%)
|
|
18,451
|
|
Clearance
and Other
|
25,590
|
|
129%
|
|
11,163
|
|
Total
Non-Interest Expenses
|
$
421,328
|
|
13%
|
|
$
372,280
|
|
Income
Before Taxes and Noncontrolling Interest
|
31,621
|
|
(3%)
|
|
32,518
|
|
Noncontrolling
Interest
|
(91)
|
|
|
|
(67)
|
|
Pre-tax
Income
|
$ 31,712
|
|
(3%)
|
|
$ 32,585
|
|
Margin
on Net Revenues
|
7.0%
|
|
|
|
8.0%
|
|
The PCG
segment includes the retail branches of our broker-dealer subsidiaries located
throughout the United States, Canada, and the United Kingdom. These branches
provide securities brokerage services including the sale of equities, mutual
funds, fixed income products and insurance products to their individual clients.
This segment accounted for 65% of our revenues for the three months ended
December 31, 2009. It generates revenues principally through commissions charged
on securities transactions, fees from wrap fee investment accounts and the
interest revenue generated from client margin loans and cash balances. We
primarily charge for the services provided to our PCG clients based on
commission schedules or through asset-based advisory fees.
The
success of the PCG segment is dependent upon the quality and integrity of our
financial advisors and support personnel and our ability to attract, retain, and
motivate a sufficient number of these associates. We face competition for
qualified associates from major financial services companies, including other
brokerage firms, insurance companies, banking institutions, and discount
brokerage firms. We currently offer several affiliation alternatives for
financial advisors ranging from the traditional branch setting, under which the
financial advisors are our employees and we incur the costs associated with
running the branch, to the independent contractor model, under which the
financial advisors are responsible for all of their own direct costs.
Accordingly, the independent contractor financial advisors are paid a larger
percentage of commissions and fees. By offering alternative models to potential
and existing financial advisors, we are able to effectively compete with a wide
variety of other brokerage firms for qualified financial advisors, as financial
advisors can choose the model that best suits their practice and profile. For
the past several years, we have focused on increasing our minimum production
standards and recruiting financial advisors with high average production. The
following table presents a summary of PCG financial advisors as of the periods
indicated:
|
|
|
December
31,
|
December
31,
|
|
|
Independent
|
2009
|
2008
|
|
Employee
|
Contractors
|
Total
|
Total
|
Private
Client Group - Financial Advisors:
|
|
|
|
|
Raymond
James & Associates (“RJ&A”)
|
1,266
|
-
|
1,266
|
1,206
|
Raymond
James Financial Services, Inc.(“RJFS”)
|
-
|
3,262
|
3,262
|
3,123
|
Raymond
James Limited (“RJ Ltd.”)
|
200
|
240
|
440
|
418
|
Raymond
James Investment Services Limited (“RJIS”)
|
-
|
116
|
116
|
101
|
Total
Financial Advisors
|
1,466
|
3,618
|
5,084
|
4,848
|
PCG
revenues increased 10% over the prior year quarter, reflecting the impact of
improved market conditions. Securities commissions and fees increased 16% as a
result of the increase in the underlying assets on which mutual fund and asset
management fees are earned and a 5% increase in the number of financial advisors
during the year. All of our broker-dealers experienced positive results in
recruiting successful financial advisors. Average annual production per
financial advisor decreased from $323,000 to $268,000 in RJFS and from $493,000
to $428,000 in RJ&A since the same quarter in the prior year.
PCG
results also include the interest revenue and fees earned on client margin
balances and cash segregated for regulatory purposes net of the interest expense
paid on client cash balances. The $622,000 increase in net interest was
complemented by the $6.4 million increase in financial service fees from the new
multi-bank sweep aspect of the RJBDP. Interest results are further discussed in
the Net Interest section of this Management Discussion and
Analysis.
While net
revenues increased 12% from the prior year, pre-tax earnings decreased 3%, with
non-interest expenses increasing 13%. This increase was primarily a result of an
increase in compensation expense related to the increase in commission revenue
and increased number of financial advisors, and a $14.4 million increase in
clearance and other expenses. The other expenses included $10.8 million arising
from a Financial Industry Regulatory Authority (“FINRA”) arbitration panel’s
decision against RJ&A. We do not agree with the panel’s decision pertaining
to a claim of raiding of the financial advisors of four branch offices brought
against RJ&A by one of our competitors. We believe that the financial
advisors concerned were evaluating other affiliation alternatives at the time
the competitor announced they were being taken over by another competitor. In
any case, it is difficult to appeal arbitration panel decisions and the current
year quarter includes the expense associated with this unanticipated panel
decision. Offsetting these increases, communication expense decreased as the
prior year quarter included a $6 million write-off of capitalized software that
was determined not to be a viable asset. In addition, business development
expense decreased due to cost control measures and because the prior year
included significant recruiting costs not incurred in the current year
quarter.
Capital
Markets
The
following table presents consolidated financial information for our Capital
Markets segment for the periods indicated:
|
Three
Months Ended
|
|
December
31,
|
|
%
Incr.
|
|
December
31,
|
|
2009
|
|
(Decr.)
|
|
2008
|
|
($
in 000’s)
|
Revenues:
|
|
Institutional
Sales Commissions:
|
|
|
|
|
|
Equity
|
$ 57,069
|
|
9%
|
|
$ 52,142
|
Fixed
Income
|
34,571
|
|
(12%)
|
|
39,317
|
Underwriting
Fees
|
16,160
|
|
233%
|
|
4,859
|
Mergers
& Acquisitions Fees
|
9,530
|
|
(39%)
|
|
15,569
|
Private
Placement Fees
|
50
|
|
11%
|
|
45
|
Trading
Profits
|
9,750
|
|
30%
|
|
7,493
|
Interest
|
3,860
|
|
(19%)
|
|
4,758
|
Other
|
2,783
|
|
(38%)
|
|
4,523
|
Total
Revenue
|
$
133,773
|
|
4%
|
|
$
128,706
|
|
|
|
|
|
|
Interest
Expense
|
2,977
|
|
(13%)
|
|
3,430
|
Net
Revenues
|
130,796
|
|
4%
|
|
125,276
|
|
|
|
|
|
|
Non-Interest
Expenses
|
|
|
|
|
|
Sales
Commissions
|
33,837
|
|
4%
|
|
32,586
|
Admin
& Incentive Comp and Benefit Costs
|
58,964
|
|
12%
|
|
52,664
|
Communications
and Information Processing
|
8,948
|
|
3%
|
|
8,727
|
Occupancy
and Equipment
|
4,841
|
|
5%
|
|
4,622
|
Business
Development
|
6,255
|
|
8%
|
|
5,814
|
Clearance
and Other
|
9,410
|
|
(2%)
|
|
9,644
|
Total
Non-Interest Expense
|
122,255
|
|
7%
|
|
114,057
|
Income
Before Taxes and Noncontrolling Interest
|
8,541
|
|
(24%)
|
|
11,219
|
Noncontrolling
Interest
|
(2,853)
|
|
|
|
(3,070)
|
Pre-tax
Income
|
$ 11,394
|
|
(20%)
|
|
$ 14,289
|
The
Capital Markets segment includes institutional sales and trading in the U.S.,
Canada, and Europe; management of and participation in underwritings; financial
advisory services including private placements and merger and acquisition
services; public finance activities; and the syndication and related management
of investment partnerships designed to yield returns in the form of low-income
housing tax credits to institutions. We provide securities brokerage services to
institutions with an emphasis on the sale of U.S. and Canadian equities and
fixed income products. Institutional sales commissions accounted for 69% of the
segment’s revenues and are driven primarily through trade volume, resulting from
a combination of general market activity and by the Capital Markets group’s
ability to find attractive investment opportunities and promote those
opportunities to potential and existing clients. Revenues from investment
banking activities are driven principally by the number and the dollar value of
the transactions with which we are involved. This segment also includes trading
of taxable and tax-exempt fixed income products, as well as equity securities in
the OTC and Canadian markets. This trading involves the purchase of securities
from, and the sale of securities to, our clients, other dealers who may be
purchasing or selling securities for their own account or acting as agent for
their clients. Profits and losses related to this trading activity are primarily
derived from the spreads between bid and ask prices in the relevant
market.
Capital
Markets pre-tax results decreased 20%. Net revenues were up $5.5 million, or 4%.
There were significant increases in underwriting fees of $11 million, or 233%,
and commissions from institutional equity sales of $5 million, or 9%. These were
offset by decreases in merger and acquisition fees of $6 million, or 39%, and
fixed income sales commissions of $5 million, or 12%. Trading profits increased
$2 million, or 30%, primarily arising from fixed income products. The number of
underwritings during the quarter was up significantly versus the prior year
quarter, a time when underwritings were down dramatically due to the then
existing market conditions. The improving equity market conditions were
conducive to generating the increased equity market commissions. Trading profits
from fixed income products continued the recent trend of producing solid net
trading profits, albeit at lower levels than the immediately preceding quarters.
Of the fixed income trading profits, 55% were generated from municipal
tax-exempt products and 45% from domestic taxable products.
Non-interest
expenses increased $8 million, or 7%, primarily resulting from administrative
related costs. The current year quarter includes incremental
personnel as compared to the prior year quarter including a number of investment
bankers added in the Lane Berry acquisition, which occurred in the third quarter
of the prior year.
Asset
Management
The
following table presents consolidated financial information for our Asset
Management segment for the periods indicated:
|
Three
Months Ended
|
|
December
31,
|
%
Incr.
|
December
31,
|
|
2009
|
(Decr.)
|
2008
|
|
($
in 000’s)
|
Revenues
|
|
|
|
Investment
Advisory Fees
|
$ 40,201
|
(2%)
|
$ 40,882
|
Other
|
9,797
|
(6%)
|
10,409
|
Total
Revenues
|
49,998
|
(3%)
|
51,291
|
|
|
|
|
Expenses
|
|
|
|
Admin
& Incentive Comp and Benefit Costs
|
17,553
|
9%
|
16,049
|
Communications
and Information Processing
|
4,597
|
(11%)
|
5,160
|
Occupancy
and Equipment
|
990
|
(5%)
|
1,039
|
Business
Development
|
1,413
|
(28%)
|
1,956
|
Investment
Advisory Fees
|
9,748
|
(11%)
|
10,960
|
Other
|
2,762
|
(61%)
|
7,041
|
Total
Expenses
|
37,063
|
(12%)
|
42,205
|
|
|
|
|
Income
Before Taxes And Noncontrolling Interest
|
12,935
|
42%
|
9,086
|
Noncontrolling
Interest
|
869
|
|
12
|
Pre-tax
Income
|
$ 12,066
|
33%
|
$ 9,074
|
The Asset
Management segment includes investment portfolio management services, mutual
fund management, private equity management, and trust
services. Investment portfolio management services include both
proprietary and selected outside money managers. The majority of the revenue for
this segment is generated by the investment advisory fees related to asset
management services for individual investment portfolios and mutual funds. These
accounts are billed a fee based on a percentage of assets. Investment advisory
fees are computed based on assets under management either at a single point in
time within the quarter, typically the beginning or end of a quarter, or the
“average daily” balances. Approximately 63% of our investment advisory fees
recorded in a quarter are billed based on balances at the beginning of the
quarter, approximately 13% are based on balances at the end of the quarter and
approximately 24% are computed based on average assets under management
throughout the quarter. The balance of assets under management is affected by
both the performance of the underlying investments and the new sales and
redemptions of client accounts/funds. Increasing equity markets positively
impact revenues from investment advisory fees as existing accounts increase in
value, and individuals and institutions typically commit additional funds in
rising equity markets.
The
following table presents the assets under management as of the dates
indicated:
|
December
31,
|
September
30,
|
December
31,
|
|
2009
|
2009
|
2008
|
|
(in
000’s)
|
Assets
Under Management:
|
|
|
|
|
|
|
|
Eagle
Asset Management, Inc.
|
$
14,406,828
|
$
13,582,832
|
$
11,467,978
|
Eagle
Money Market Funds
|
2,747,226
|
2,966,819
|
6,568,296
|
Raymond
James Consulting Services (“RJCS”)
|
8,024,506
|
7,833,081
|
6,600,908
|
Unified
Managed Accounts
|
414,690
|
247,721
|
-
|
Freedom
Accounts & Other Managed Programs
|
7,800,988
|
7,256,673
|
6,091,529
|
Total Assets
Under Management
|
$
33,394,238
|
$
31,887,126
|
$
30,728,711
|
|
|
|
|
Less:
Assets Managed for Affiliated Entities
|
(3,137,973)
|
(3,008,675)
|
(2,385,412)
|
|
|
|
|
Net
Assets Under Management
|
$
30,256,265
|
$
28,878,451
|
$
28,343,299
|
|
|
|
|
Non-Managed
Fee Based Assets:
|
|
|
|
|
|
|
|
Passport
|
$
20,556,250
|
$
19,451,710
|
$
19,390,165
|
Ambassador
|
8,328,755
|
7,327,402
|
4,008,411
|
Other
Non-Managed Fee-based Assets
|
1,800,653
|
1,671,029
|
1,425,393
|
Total
|
$
30,685,658
|
$
28,450,141
|
$
24,823,969
|
Although
the Asset Management segment’s financial assets under management increased 7%,
revenues decreased 3% from December 2008. The increase in assets under
management is a combined result of an increase in market values of the
investment portfolios and an inflow of client investments, as investors have
begun making new or additional investments as the markets have stabilized. For
the most part, the revenue related to asset values at December 2009 will be
reflected in the March 2010 quarter.
Even
though the majority of investment advisory fees recognized in the December 2009
quarter are based on September 2009 total asset values, which increased slightly
from September 2008, $3.5 million in money market fee waivers offset revenue
produced by new assets and market value appreciation of the non-money market
assets. The money market funds were significantly impacted by the low interest
rates and resulting spread compression along with the $3.8 billion reduction in
money market balances due to the transfer of client funds to the new multi-bank
sweep aspect of the RJBDP in September 2009. As a result, fund management fees
decreased $3.4 million. This decline in revenue was offset in part by a
significant increase in fees on non-managed fee based accounts, which generate a
lower fee to this segment.
Raymond
James Bank
The
following table presents consolidated financial information for RJ Bank for the
periods indicated:
|
Three
Months Ended
|
|
December
31,
|
%
Incr.
|
December
31,
|
|
2009
|
(Decr.)
|
2008
|
|
($
in 000’s)
|
Interest
Earnings
|
|
|
|
Interest
Income
|
$
70,535
|
(36%)
|
$
110,247
|
Interest
Expense
|
4,924
|
(69%)
|
15,784
|
Net
Interest Income
|
65,611
|
(31%)
|
94,463
|
|
|
|
|
Other
(Loss) Income
|
(1,613)
|
(60%)
|
(1,008)
|
Net
Revenues
|
63,998
|
(32%)
|
93,455
|
|
|
|
|
Non-Interest
Expense
|
|
|
|
Employee
Compensation and Benefits
|
2,732
|
4%
|
2,618
|
Communications
and Information Processing
|
475
|
75%
|
271
|
Occupancy
and Equipment
|
194
|
(23%)
|
251
|
Provision
for Loan Losses
|
22,835
|
(8%)
|
24,870
|
Other
|
13,125
|
21%
|
10,819
|
Total
Non-Interest Expense
|
39,361
|
1%
|
38,829
|
Pre-tax
Income
|
$
24,637
|
(55%)
|
$ 54,626
|
RJ Bank
provides residential, consumer, and corporate loans, as well as Federal Deposit
Insurance Corporation (“FDIC”) insured deposit accounts, to clients of our
broker-dealer subsidiaries and to the general public. RJ Bank also
purchases residential whole loan packages and is active in bank participations
and corporate loan syndications. RJ Bank generates revenue principally through
the interest income earned on loans and investments, which is offset by the
interest expense it incurs on client deposits and on its
borrowings.
Net
revenues decreased 32% and pre-tax profits decreased 55% during the quarter
ended December 31, 2009 compared to the same quarter in the prior year. The
decrease is primarily due to a $28.9 million, or 31%, decrease in net interest
income resulting from a decline in both average interest earning banking assets
and net interest spread. Loan interest and fees at RJ Bank decreased $34.8
million due to lower interest rates and average loans outstanding decreasing
from $7.6 billion to $6.7 billion, or 13%, as part of our strategy to reduce the
balance of loans outstanding in order to strengthen our capital position.
Corresponding to the decrease in average loans, average deposits decreased 14%
from $9 billion to $7.8 billion. The reduced deposit balances combined with
lower interest rates led to a $10.9 million or 69% decrease in interest expense.
The average cost of funds decreased from 0.69% to 0.25%. Net interest spread and
net interest margin percentages were negatively impacted by 0.33% for the
quarter ended December 31, 2009 due to excess RJBDP deposits held through early
November, 2009 as the new multi-bank sweep aspect of the RJBDP was implemented.
During this time, these deposits were invested in short-term liquid investments
providing very little interest rate spread. As of December 31, 2009, the excess
deposits have been swept to third-party banks participating in the new
multi-bank sweep aspect of the RJBDP.
The
provision for loan losses continues to be impacted by the current economic
downturn and related high unemployment. The provision for loan losses totaled
$22.8 million compared to $24.9 million in the prior year quarter. Increasing
delinquencies in the residential loan portfolio and the downgrade of certain
loans in the corporate portfolio were the primary factors driving the provision
for loan losses during the quarter. Also impacting the provision expense during
the quarter to a lesser extent, the performing residential portfolio was further
stratified based upon updated loan to value (“LTV”) estimates with higher
reserve percentages allocated to the higher LTV loans.
Net loan
charge-offs for the quarter totaled $23.9 million compared to $6.9 million for
the prior year quarter. Corporate charge-offs included $7.9 million related to
the sale of distressed debt in the secondary market with the balance taken
almost exclusively on commercial acquisition and development loans. An increase
in residential/consumer charge-offs resulted from the continued high level of
residential delinquencies and declines in home values in many
markets.
The
amount of nonperforming loans decreased $23 million or 15% during the quarter
ended December 31, 2009 compared to the amount of nonperforming loans at
September 30, 2009. Corporate nonperforming loans decreased $33.3 million
primarily due to the return of two loans to performing status, loan repayments
and charge-offs. This improvement in corporate nonperforming loans was partially
offset by an increase of $10.3 million in nonperforming residential loans due to
the ongoing economic impact on residential delinquencies. However, the quarterly
growth in total delinquent residential loans (30+ days or more delinquent)
slowed substantially with an increase of only $1.4 million during the quarter
compared to a $17 million increase in the prior quarter. The balance of both the
provision for loan losses and loan charge-offs for the December 31, 2009
quarter-end were at their lowest quarterly amount in the 2009 calendar
year.
Other
Loss includes an other-than-temporary impairment loss of $3 million compared to
$571,000 loss in the prior year quarter related to our available for sale
securities portfolio. At December 31, 2009, the unrealized pre-tax loss on the
available for sales securities portfolio was $76.9 million; a significant
improvement from the $173.5 million pre-tax loss at December 31, 2008. Other
Non-Interest Expense increased $2.3 million, or 21%, compared to the prior year
quarter due to $1.5 million in increased expense for the unfunded lending
commitments reserve and an $836,000 increase in FDIC insurance
premiums.
The
tables below present certain credit quality trends for corporate loans and
residential/consumer loans:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000’s)
|
|
|
|
Net
Loan Charge-offs:
|
|
|
Corporate
Loans
|
$ 14,597
|
$ 3,141
|
Residential/Consumer
Loans
|
9,346
|
3,744
|
|
|
|
Total
|
$ 23,943
|
$ 6,885
|
|
|
|
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
(in
000’s)
|
Allowance
for Loan Loss:
|
|
|
Corporate
Loans
|
$ 115,276
|
$ 122,096
|
Residential/Consumer
Loans
|
33,888
|
28,176
|
|
|
|
Total
|
$ 149,164
|
$ 150,272
|
|
|
|
Nonperforming
Assets:
|
|
|
Corporate
|
$ 53,898
|
$ 91,068
|
Residential/Consumer
|
89,851
|
76,005
|
|
|
|
Total
|
$ 143,749
|
$ 167,073
|
|
|
|
Total
Loans (1):
|
|
|
Corporate
Loans
|
$
4,313,538
|
$
4,325,876
|
Residential/Consumer
Loans
|
2,288,156
|
2,418,369
|
|
|
|
Total
|
$
6,601,694
|
$
6,744,245
|
(1) Net
of unearned income and deferred expenses.
The
following table presents average balance data and interest income and expense
data for our banking operations, as well as the related interest yields/costs,
rates and interest spread for the periods indicated. The respective average
rates are presented on an annualized basis.
|
Three
Months Ended
|
|
|
|
|
December
31, 2009
|
December
31, 2008
|
|
|
|
Average
|
|
|
Average
|
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued
on next page)
|
Interest-Earning
Banking Assets:
|
|
|
|
|
|
|
Loans,
Net of Unearned Income (1)
|
|
|
|
|
|
|
Commercial
Loans
|
$ 812,113
|
$ 5,948
|
2.93%
|
$ 709,884
|
$ 9,620
|
5.42%
|
Real
Estate Construction Loans
|
101,701
|
269
|
1.06%
|
359,745
|
4,275
|
4.75%
|
Commercial
Real Estate Loans
|
3,403,607
|
30,806
|
3.62%
|
3,752,377
|
47,830
|
5.10%
|
Residential
Mortgage Loans
|
2,327,649
|
27,742
|
4.77%
|
2,795,330
|
37,760
|
5.40%
|
Consumer
Loans
|
19,443
|
91
|
1.87%
|
19,728
|
160
|
3.24%
|
Total
Loans, Net
|
6,664,513
|
64,856
|
3.89%
|
7,637,064
|
99,645
|
5.22%
|
Reverse
Repurchase
|
|
|
|
|
|
|
Agreements
|
680,435
|
147
|
0.09%
|
507,554
|
545
|
0.43%
|
Agency
Mortgage backed
|
|
|
|
|
|
|
Securities
|
262,031
|
503
|
0.77%
|
252,276
|
1,885
|
2.99%
|
Non-agency
Collateralized
|
|
|
|
|
|
|
Mortgage
Obligations
|
231,233
|
4,411
|
7.63%
|
277,159
|
5,629
|
8.12%
|
Money
Market Funds, Cash and
|
|
|
|
|
|
|
Cash
Equivalents
|
632,956
|
475
|
0.30%
|
929,728
|
2,426
|
1.04%
|
FHLB
Stock and Other
|
111,853
|
143
|
0.51%
|
34,598
|
117
|
1.35%
|
Total
Interest-Earning
|
|
|
|
|
|
|
Banking
Assets
|
$
8,583,021
|
$
70,535
|
3.29%
|
$
9,638,379
|
$
110,247
|
4.58%
|
|
|
|
|
|
|
|
Non-Interest-Earning
Banking Assets Allowance for Loan Losses
|
39,562
|
|
|
47,255
|
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
$
8,622,583
|
|
|
$
9,685,634
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
|
|
|
Retail
Deposits:
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 195,263
|
$ 1,658
|
3.40%
|
$ 239,685
|
$ 2,448
|
4.09%
|
Money
Market, Savings,
|
|
|
|
|
|
|
and
NOW(2)
Accounts
|
7,574,097
|
2,603
|
0.14%
|
8,801,172
|
12,635
|
0.57%
|
FHLB
Advances and Other
|
51,539
|
663
|
5.15%
|
56,493
|
701
|
4.96%
|
|
|
|
|
|
|
|
Total
Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
$
7,820,899
|
$ 4,924
|
0.25%
|
$
9,097,350
|
$ 15,784
|
0.69%
|
|
|
|
|
|
|
|
Non-Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
19,245
|
|
|
5,956
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
|
7,840,144
|
|
|
9,103,306
|
|
|
Total
Banking
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
782,439
|
|
|
582,328
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
and
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
$
8,622,583
|
|
|
$
9,685,634
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
December
31, 2009
|
December
31, 2008
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Interest
|
Yield/
|
Average
|
|
Interest
|
Yield/
|
|
Balance
|
|
Inc./Exp.
|
Cost
|
Balance
|
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued)
|
Excess
of Interest-
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
Over Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities/Net
|
|
|
|
|
|
|
|
|
Operating
Interest Income
|
$
762,122
|
|
$
65,611
|
|
$
541,029
|
|
$
94,463
|
|
|
|
|
|
|
|
|
|
|
Bank
Net Interest:
|
|
|
|
|
|
|
|
|
Spread
|
|
|
|
3.04%
|
|
|
|
3.89%
|
Margin
(Net Yield on
|
|
|
|
|
|
|
|
|
Interest-
Earning
|
|
|
|
|
|
|
|
|
Bank
Assets)
|
|
|
|
3.06%
|
|
|
|
3.92%
|
Ratio
of Interest
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
to Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
109.74%
|
|
|
|
105.95%
|
Return
On Average:
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
|
|
|
0.72%
|
|
|
|
1.42%
|
Total
Banking
|
|
|
|
|
|
|
|
|
Shareholder's
Equity
|
|
|
|
7.99%
|
|
|
|
23.59%
|
Average
Equity to
|
|
|
|
|
|
|
|
|
Average
Total
|
|
|
|
|
|
|
|
|
Banking
Assets
|
|
|
|
9.07%
|
|
|
|
6.01%
|
(1)
|
Nonaccrual
loans are included in the average loan balances. Payments or income
received on impaired nonaccrual loans are applied to
principal. Income on other nonaccrual loans is recognized on a
cash basis. Fee income on loans included in interest income for the three
months ended December 31, 2009 and 2008 was $8.3 million and $4.4 million,
respectively.
|
(2)
|
Negotiable
Order of Withdrawal (“NOW”)
account.
|
Increases
and decreases in operating interest income and interest expense result from
changes in average balances (volume) of interest-earning banking assets and
liabilities, as well as changes in average interest rates. The following table
shows the effect that these factors had on the interest earned on RJ Bank's
interest-earning assets and the interest incurred on its interest-bearing
liabilities. The effect of changes in volume is determined by multiplying the
change in volume by the previous year's average yield/cost. Similarly, the
effect of rate changes is calculated by multiplying the change in average
yield/cost by the previous year's volume. Changes applicable to both volume and
rate have been allocated proportionately.
|
Three
Months Ended December 31,
|
|
2009
Compared to 2008
|
|
Increase
(Decrease) Due To
|
|
Volume
|
Rate
|
Total
|
|
(in
000’s)
|
Interest
Revenue
|
|
|
|
Interest-Earning
Banking Assets:
|
|
|
|
Loans,
Net of Unearned Income:
|
|
|
|
Commercial
Loans
|
$ 1,385
|
$ (5,057)
|
$ (3,672)
|
Real
Estate Construction Loans
|
(3,067)
|
(939)
|
(4,006)
|
Commercial
Real Estate Loans
|
(4,446)
|
(12,578)
|
(17,024)
|
Residential
Mortgage Loans
|
(6,318)
|
(3,700)
|
(10,018)
|
Consumer
Loans
|
(2)
|
(67)
|
(69)
|
Reverse
Repurchase Agreements
|
186
|
(584)
|
(398)
|
Agency
Mortgage Backed Securities
|
73
|
(1,455)
|
(1,382)
|
Non-agency
Collateralized Mortgage Obligations
|
(933)
|
(285)
|
(1,218)
|
Money
Market Funds, Cash and Cash Equivalents
|
(774)
|
(1,177)
|
(1,951)
|
FHLB
Stock and Other
|
261
|
(235)
|
26
|
|
|
|
|
Total
Interest-Earning Banking Assets
|
$ (13,635)
|
$
(26,077)
|
$
(39,712)
|
|
|
|
|
Interest
Expense
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
Retail
Deposits:
|
|
|
|
Certificates
Of Deposit
|
$ (454)
|
$ (336)
|
$ (790)
|
Money
Market,Savings and
|
|
|
|
NOW
Accounts
|
(1,762)
|
(8,270)
|
(10,032)
|
FHLB
Advances and Other
|
(60)
|
22
|
(38)
|
|
|
|
|
Total
Interest-Bearing Banking Liabilities
|
$ (2,276)
|
$ (8,584)
|
$
(10,860)
|
|
|
|
|
Change
in Net Interest Income
|
$
(11,359)
|
$
(17,493)
|
$
(28,852)
|
Emerging
Markets
The
following table presents consolidated financial information of our Emerging
Markets segment for the periods indicated:
|
Three
Months Ended
|
|
December
31,
|
%
Incr.
|
December
31,
|
|
2009
|
(Decr.)
|
2008
|
|
($
in 000’s)
|
Revenues
|
|
|
|
Securities
Commissions and
|
|
|
|
Investment
Banking Fees
|
$ 1,608
|
(22%)
|
$ 2,069
|
Investment
Advisory Fees
|
632
|
113%
|
297
|
Interest
Income
|
79
|
(72%)
|
278
|
Trading
Profits
|
1,399
|
(14%)
|
1,632
|
Other
|
-
|
(100%)
|
47
|
Total
Revenues
|
3,718
|
(14%)
|
4,323
|
|
|
|
|
Interest
Expense
|
80
|
95%
|
41
|
Net
Revenues
|
3,638
|
(15%)
|
4,282
|
|
|
|
|
Non-Interest
Expense
|
|
|
|
Compensation
Expense
|
3,327
|
(6%)
|
3,536
|
Other
Expense
|
1,949
|
(15%)
|
2,299
|
Total
Non-Interest Expense
|
5,276
|
(10%)
|
5,835
|
|
|
|
|
Loss
Before Taxes
|
|
|
|
and
Noncontrolling Interest
|
(1,638)
|
(5%)
|
(1,553)
|
|
|
|
|
Noncontrolling
Interest
|
(226)
|
|
(1,088)
|
Pre-tax
Loss
|
$ (1,412)
|
(204%)
|
$ (465)
|
The
Emerging Markets segment includes the results from our joint ventures in Latin
America including Argentina, Uruguay and Brazil. The net results in the emerging
markets segment were $1 million lower than the comparable period, declining to a
$1.4 million pre-tax loss. This decline results from a decrease in commission
revenues of approximately $500,000 which was offset by a $600,000 decrease in
non-interest expense. The amount of losses from these joint ventures
attributable to our venture partners decreased, as a greater portion of the
current year results were generated by ventures in which we have a greater
percentage ownership. Losses attributed to noncontrolling interests in the prior
year included losses associated with a joint venture in Turkey, which ceased
conducting business in the prior year quarter.
Stock
Loan/Stock Borrow
The
following table presents consolidated financial information of our Stock
Loan/Borrow segment for the periods indicated:
|
Three
Months Ended
|
|
December
31,
|
%
Incr.
|
December
31,
|
|
2009
|
(Decr.)
|
2008
|
|
($
in 000’s)
|
Interest
Income and Expense
|
|
|
|
Interest
Income
|
$
1,765
|
(46%)
|
$
3,290
|
Interest
Expense
|
549
|
(62%)
|
1,439
|
Net
Interest Income
|
1,216
|
(34%)
|
1,851
|
|
|
|
|
Other
Income
|
110
|
100%
|
-
|
Net
Revenue
|
1,326
|
|
1,851
|
|
|
|
|
|
|
|
|
Non-Interest
Expenses
|
639
|
2%
|
628
|
Pre-tax
Income
|
$ 687
|
(44%)
|
$
1,223
|
This
segment conducts its business through the borrowing and lending of securities
from and to other broker-dealers, financial institutions and other
counterparties, generally as an intermediary. The borrower of the securities
puts up a cash deposit 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 of the underlying securities. The net
revenues of this operation are the interest spreads generated.
Stock
Loan revenues declined 46%, with net revenues declining 34%. Both gross interest
revenue and expense declined due to both lower rates and average balances. The
average interest rate spread declined 35 basis points or 54%. Non-interest
expenses were well controlled, down 16% from the prior year’s comparable
quarter. As a result, the segment’s pre-tax income is down 44% from the same
quarter in the prior year.
Due to
market conditions, stock loan balances have begun to increase as we have been
able to increase the lending of more liquid securities in higher
volume.
Proprietary
Capital
The
following table presents consolidated financial information of our Proprietary
Capital segment for the periods indicated:
|
Three
Months Ended
|
|
December
31,
|
%
Incr.
|
December
31,
|
|
2009
|
(Decr.)
|
2008
|
|
($
in 000’s)
|
|
Revenues
|
|
|
|
|
Interest
|
$ 1
|
(100%)
|
$ 149
|
|
Investment
Advisory Fees
|
275
|
29%
|
214
|
|
Other
|
(311)
|
278%
|
175
|
|
Total
Revenues
|
(35)
|
(107%)
|
538
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Compensation
Expense
|
522
|
(14%)
|
605
|
|
Other
Expenses
|
229
|
(82%)
|
1,272
|
|
Total
Expenses
|
751
|
(60%)
|
1,877
|
|
|
|
|
|
|
Income
(Loss) Before Taxes
|
|
|
|
|
and
Noncontrolling Interest
|
(786)
|
41%
|
(1,339)
|
|
Noncontrolling
Interest
|
26
|
|
(795)
|
|
Pre-tax
Income
|
$ (812)
|
(49%)
|
$ (544)
|
|
This
segment consists of our 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 a private equity Fund which we sponsor “Raymond James Capital
Partners L.P.” As of December 31, 2009, certain of our merchant banking
investments at fair value include a $22 million investment in a manufacturer of
crime investigation and forensic supplies, a $16 million investment in an event
photography business, and a $14 million indirect investment in an allergy
immunotherapy testing and treatment supply company.
We
participate in profits or losses through both general and limited partnership
interests. Additionally, we incur profits or losses as a result of direct
merchant banking investments and Special Situation Investments. The EIF Funds
are limited partnerships for which we are the general partner, that invest in
our merchant banking and private equity activities and other unaffiliated
venture capital limited partnerships. The EIF Funds were established as
compensation and retention measures for certain of our qualified key employees.
During the three months ended March 31, 2009, we relinquished control over the
general partners of certain internally sponsored private equity partnerships and
as a result, we deconsolidated seven entities during that quarter.
Pre-tax
income decreased due to a decrease in interest income and transaction fee income
(included in other income). Total expenses and the portion of the net loss
attributable to noncontrolling interests decreased primarily as a result of the
deconsolidation later in fiscal 2009 of certain entities.
Other
The
following table presents consolidated financial information of our Other segment
for the periods indicated:
|
Three
Months Ended
|
|
December
31,
|
%
Incr.
|
December
31,
|
|
|
2009
|
(Decr.)
|
2008
|
|
|
($
in 000’s)
|
|
Revenues
|
|
|
|
|
Interest
Income
|
$ 1,816
|
(57%)
|
$ 4,254
|
|
Other
|
(58)
|
98%
|
(3,168)
|
|
Total
Revenues
|
1,758
|
62%
|
1,086
|
|
Interest
Expense
|
6,663
|
135%
|
2,835
|
|
Net
Revenues
|
(4,905)
|
(180%)
|
(1,749)
|
|
|
|
|
|
|
Other
Expense
|
3,979
|
(46%)
|
7,375
|
|
Pre-tax
Loss
|
$
(8,884)
|
3%
|
$
(9,124)
|
|
This
segment includes various corporate overhead costs, including during the quarter
ended December 31, 2009 interest expense on our senior debt issued in August
2009.
Net
revenues in this segment decreased due to lower interest earnings. Interest
expense on our senior debt approximated $6.5 million in the current year
quarter; there was no senior debt in the prior year quarter. Our pre-tax loss
declined slightly as non-interest expense which is primarily comprised of
executive compensation was lower than in the prior year.
Liquidity and Capital
Resources
Senior
management establishes our liquidity and capital policies. These policies
include senior management’s review of short-term 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 our significant subsidiaries. Our decisions on the allocation of
capital to our business units consider, among other factors, projected
profitability and cash flow, risk and impact on future liquidity needs. Our
treasury department assists in evaluating, monitoring and controlling the impact
that our business activities have on our financial condition, liquidity and
capital structure as well as maintains the relationships with various lenders.
The objectives of these policies are to support the successful execution of our
business strategies while ensuring ongoing and sufficient
liquidity.
Liquidity
is provided primarily through our business operations and financing
activities.
Cash used
in operating activities during the three months ended December 31, 2009 was
approximately $139 million, which was primarily attributable to the increase in
brokerage client receivables, the decrease in brokerage client deposits
(directly correlated to the decrease in segregated assets), the increase in
stock borrowed receivables, and the decrease in accrued compensation payable.
This was partially offset by the decrease in segregated assets, and the increase
in stock loaned payables.
Investing
activities provided $2.2 billion, which was primarily due to a decrease in net
loans at RJ Bank, and a decrease in the purchases of securities purchased under
agreements to resell at RJ Bank.
Financing
activities used $3.3 billion, predominantly the result of a decrease in bank
deposits and repayments on borrowed funds. These financing activities arose
primarily from the transactions associated with the point-in-time regulatory
balance sheet composition requirements related to RJ Bank’s qualifying as a
thrift institution at September 30, 2009.
We
believe our existing assets, most of which are liquid in nature, together with
funds generated from operations and committed and uncommitted credit facilities,
should provide adequate funds for continuing operations at current levels of
activity.
Sources
of Liquidity
In
addition to the liquidity provided through our business operations, we have
various potential sources of capital.
Liquidity
Available from Subsidiaries
Our 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 December 31, 2009, both of these
brokerage subsidiaries far exceeded their minimum net capital requirements. At
that date, these subsidiaries had excess net capital of $388.5 million, of which
approximately $117 million is available for dividend (after taking into account
regulatory or other restrictions) while still maintaining a capital level well
above regulatory guidelines.
Subject
to 30-day notification and in some cases approval by the Office of Thrift
Supervision (“OTS”), RJ Bank may pay dividends to the parent company as long as
RJ Bank maintains its “well capitalized” status under bank regulatory capital
guidelines. RJ Bank has approximately $70 million of capital in excess of the
amount it would need as of December 31, 2009 to maintain a total capital to
risk-weighted assets ratio of 12%, which is our internal target ratio. See
further discussion of RJ Bank’s abilty to pay dividends in Note 25 pages 132 -
135 in our 2009 Form 10-K.
Liquidity
available to us from our subsidiaries, other than our broker-dealer subsidiaries
and RJ Bank, is not limited by regulatory requirements, but is relatively
insignificant.
Borrowings
and Financing Arrangements
The
following table presents our domestic financing arrangements as of December 31,
2009:
|
Committed
|
Committed
|
Uncommitted
|
Uncommitted
|
Total
Financing
|
|
Unsecured
|
Collateralized
|
Collateralized
|
Unsecured
|
Arrangements
|
|
(in
000’s)
|
|
|
|
|
|
|
RJ&A
(with third party lenders)
|
$ -
|
$
325,000
|
$
285,100
|
$
150,000
|
$
760,100
|
RJF
|
100,000
|
-
|
-
|
-
|
100,000
|
RJ
Bank
|
10,000
|
-
|
-
|
-
|
10,000
|
|
|
|
|
|
|
Total
Company
|
$
110,000
|
$
325,000
|
$
285,100
|
$
150,000
|
$
870,100
|
At
December 31, 2009, we maintained five 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 December 31, 2009, the
aggregate domestic facilities were $870.1 million and the Canadian line of
credit was CDN $20 million. Lenders are under no obligation to lend to us under
uncommitted lines. Committed facilities provided by commercial banks
in the name of RJ&A include a $75 million bilateral repurchase agreement, a
$150 million tri-party repurchase agreement and a $100 million secured line of
credit.
The $100
million committed and unsecured revolving credit facility in the name of RJF
expired under its terms on February 4, 2010. We elected not to renew this
revolving credit facility upon its expiration. There were no outstanding
borrowings made under this facility since its inception on February 6,
2009.
RJ&A
maintains $285.1 million in uncommitted secured facilities provided by
commercial banks. Unsecured, uncommitted loan facilities available to
RJ&A totaled $150 million.
RJ Bank
has a $10 million committed unsecured line of credit provided by a commercial
bank for the sole purpose of purchasing Fed Funds to meet short-term and
unexpected funding needs.
At
December 31, 2009, there were collateralized financings outstanding in the
amount of $23 million which are included in Securities Sold Under Agreements to
Repurchase on the Condensed Consolidated Statements of Financial Condition. Such
financings are collateralized by non-customer, RJ&A owned
securities.
We have
guaranteed a settlement line of credit associated with our joint venture entity
in Argentina for $9 million. There are also two unsecured settlement lines of
credit available to the Argentina joint venture entity in the amount of $4.5
million. At December 31, 2009, there were no outstanding balances on these
lines.
RJ Bank
had $50 million and $950 million in FHLB advances outstanding at December 31,
2009 and September 30, 2009, respectively. The advances balance outstanding at
December 31, 2009 is comprised of several short-term, and long-term, fixed rate
advances. The advances balance outstanding as of September 30, 2009 included a
$900 million overnight advance made to meet point-in-time regulatory balance
sheet composition requirements related to its qualifying as a thrift
institution. This $900 million advance was repaid on October 1,
2009. RJ Bank had $1 billion in immediate credit available from the
FHLB on December 31, 2009 and total available credit of 40% of total assets from
the FHLB with the pledge of additional collateral. See Note 9 of the Notes to
Condensed Consolidated Financial Statements within this Form 10-Q for more
information.
At
December 31, 2009 and September 30, 2009, we had corporate debt of $358 million
and $359 million, respectively. This debt balance at December 31, 2009 is
comprised of $300 million in senior notes which are due August, 2019 and a $58
million mortgage loan associated with the financing of our home-office
complex.
Our
current senior long-term debt ratings are:
Rating
Agency
|
Rating
|
Outlook
|
Standard
and Poor’s
|
BBB
|
Negative
|
Moody’s
Investors Services
|
Baa2
|
Negative
|
The
Standard and Poor’s rating and outlook were unchanged in their latest report
dated January 19, 2010. The Moody’s rating and outlook have been unchanged since
the issuance of their initial report in August, 2009. Our current long-term debt
ratings are dependent upon a number of factors including industry dynamics,
operating and economic environment, operating results, operating margins,
earnings trends and volatility, balance sheet composition, liquidity and
liquidity management, our capital structure, our overall risk management,
business diversification and our market share and competitive position in the
markets in which we operate. Deteriorations in any of these factors could impact
our credit ratings thereby increasing our costs in the event we were to pursue
obtaining additional financing.
Other
Sources of Liquidity
We own a
significant number of life insurance policies utilized to fund certain
non-qualified deferred compensation plans. We are able to borrow up to 90% of
the cash surrender value of these policies which have a recorded value of $129.8
million as of December 31, 2009. There are no borrowings outstanding against
these policies as of December 31, 2009.
Availability
of Capital for RJ Bank
Our
ability to provide additional capital to RJ Bank is limited by our available
liquidity. At December 31, 2009, our available liquidity from which to provide
capital to RJ Bank was approximately $214 million, consisting predominantly of
the excess capital at our broker-dealer subsidiary, RJ&A, that was available
from time to time for dividends to the parent company and other undeployed cash.
See Note 15 of the Notes to Condensed Consolidated Financial Statements in this
Form 10-Q for additional information regarding the capitalization of RJ Bank as
of December 31, 2009.
Statement of Financial
Condition Analysis
Our
statement of financial condition consists primarily of cash and cash equivalents
(a large portion of which are segregated for the benefit of customers),
receivables and payables. The items presented in our statement of financial
condition are primarily liquid in nature, providing us with flexibility in
financing our business. Total assets of $14.7 billion at December 31, 2009 were
down approximately 19% from September 30, 2009. Most of this decrease is due to
the transactions associated with the point-in-time regulatory balance sheet
composition requirements of RJ Bank. See Note 21 on page 127 of our 2009 Form
10-K for discussion of the September 30, 2009 point-in-time test.
As of
December 31, 2009, our liabilities are comprised primarily of deposits of $7
billion at RJ Bank and brokerage client payables of $3.1 billion at the
broker-dealer subsidiaries, as well as deposits held on stock loan transactions
of $1 billion. To meet our obligations to clients, at December 31, 2009 we had
approximately $3 billion in cash and segregated assets. We also have $6.5
billion in loans at RJ Bank and client brokerage receivables of $1.5
billion.
Contractual
Obligations, Commitments and Contingencies
RJ&A
and RJFS have been subject to ongoing investigations in connection with their
sale of Auction Rate Securities (“ARS”). Refer to the discussion of this matter
on page 48 of our 2009 Form 10-K and in Part II, Item 1, “Legal Proceedings” of
this Form 10-Q. As of December 31, 2009, approximately two-thirds of the
remaining $777 million of ARS currently held by our clients have been issued by
funds of Nuveen Investments, a large mutual fund sponsor. Nuveen is currently
pursuing alternatives to refinance the ARS issued by its funds. Although there
can be no assurance that Nuveen's refinancing plans will be successful, their
refinancing would significantly reduce our clients' holdings of
ARS.
Other
than the update to the ARS matter described above, there has been no material
change in our contractual obligations other than in the ordinary course of
business since the end of fiscal 2009. See Note 16 pages 114 - 116 of the Notes
to the Consolidated Financial Statements in our 2009 Form 10-K, Contractual
Obligations, Commitments and Contingencies on pages 47 - 49 in our 2009 Form
10-K and Note 12 of these Notes to Condensed Consolidated Financial Statements
in this Form 10-Q for further information on our commitments and
contingencies. In addition, see Part II, Item 1, “Legal Proceedings,”
of this Form 10-Q for additional discussion of the ARS matter and the potential
implications of its resolution on our current liquidity position.
Regulatory
The
following discussion should be read in conjunction with the Regulatory section
on pages 49 - 50 of our 2009 Form 10-K.
RJ&A,
RJFS, Eagle Fund Distributors, Inc. and Raymond James (USA) Ltd. all had net
capital in excess of minimum requirements as of December 31, 2009.
RJ Ltd.
was not in Early Warning Level 1 or Level 2 as of or during the three-month
period ended December 31, 2009.
Management
believes that RJ Bank meets all capital adequacy requirements to which it is
subject as of December 31, 2009. At December 31, 2009, our available liquidity
from which to provide capital to RJ Bank was $214 million, consisting
predominantly of the excess capital at our broker-dealer subsidiary, RJ&A,
that was available from time to time for dividends to the parent company and
other undeployed cash.
RJ Bank
applied to the OCC to convert from a federal savings bank to a national bank on
November 29, 2008 and RJF applied to the Federal Reserve Board to become a bank
holding company on December 5, 2008. There has been no significant change in the
status of the conversion process from that reported on page 49 in our 2009 Form
10-K.
Our
intention for RJ Bank to become a commercial bank, enabling it to have a
majority of its loan portfolio composed of corporate and commercial real estate
loans remains unchanged. If RJ Bank were to remain a thrift, its business mix
would be required to be oriented to loans related to residential real estate and
other qualifying thrift assets.
See Note
15 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q
for additional information on regulatory and capital requirements.
Off-Balance Sheet
Arrangements
For
information regarding our off-balance sheet arrangements, see Note 16 of the
Notes to the Condensed Consolidated Financial Statements in this Form
10-Q.
Effects of
Inflation
For
information regarding the Effects of Inflation on our business, see the Effects
of Inflation section on page 59 of our 2009 Form 10-K.
Factors Affecting
“Forward-Looking Statements”
From time
to time, we 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, liquidity, business prospects, allowance for loan loss levels at RJ
Bank, projected ventures, new products, anticipated market performance,
recruiting efforts, and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, we caution readers that a
variety of factors could cause our actual results to differ materially from the
anticipated results or other expectations expressed in our forward-looking
statements. These risks and uncertainties, many of which are beyond our control,
are discussed in the section entitled “Risk Factors” of Item 1A of Part I on
pages 15 - 22 included in the 2009 Form 10-K and in Item 1A of Part II of this
report on Form 10-Q. We do not undertake any obligation to publicly update or
revise any forward-looking statements.
Critical Accounting
Policies
The
condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. For a
full description of these and other accounting policies, see Note 1 of the Notes
to the Consolidated Financial Statements included on pages 77 - 88 in the 2009
Form 10-K. We believe that of our significant accounting policies, those
described below involve a high degree of judgment and complexity. These critical
accounting policies require estimates and assumptions that affect the amounts of
assets, liabilities, revenues and expenses reported in the condensed
consolidated financial statements. Due to their nature, estimates involve
judgment based upon available information. Actual results or amounts could
differ from estimates and the difference could have a material impact on the
condensed consolidated financial statements. Therefore, understanding these
policies is important in understanding our reported results of operations and
our financial position.
Valuation of Financial
Instruments, Investments and Other Assets
The use
of fair value to measure financial instruments, with related gains or losses
recognized in our Condensed Consolidated Statements of Income and Comprehensive
Income, is fundamental to our financial statements and our risk management
processes. See Note 1 pages 79 - 82 of our 2009 Form 10-K for a
discussion of our fair value accounting policies regarding financial instruments
owned and financial instruments sold but not yet purchased. We have not
implemented any material changes in the accounting policies described therein
during the period covered by this report.
“Trading
instruments” and “Available for sale securities” are reflected in the Condensed
Consolidated Statements of Financial Condition at fair value or amounts that
approximate fair value. Unrealized gains and losses related to these financial
instruments are reflected in our net income or our other comprehensive income,
depending on the underlying purpose of the instrument.
As of
December 31, 2009, 7.8% of our total assets and 0.7% of our total liabilities
are instruments measured at fair value on a recurring basis.
Financial
instruments measured at fair value on a recurring basis categorized as Level 3
amount to $164 million as of December 31, 2009 and represent 14.3% of our assets
measured at fair value. Our investments in Private Equity comprise $145 million
or 89% of those Level 3 assets. Financial instruments which are
liabilities categorized as Level 3 amount to $163 thousand as of December 31,
2009 and represent less than 1% of liabilities measured at fair
value.
See Notes
3, 4 and 5 of the Notes to Condensed Consolidated Financial Statements in this
Form 10-Q for additional information on our financial instruments.
Goodwill
Goodwill
involves the application of significant management judgment. For a
discussion of the judgments involved in testing goodwill for impairment, see the
goodwill section on page 54 of our 2009 Form 10-K.
We
perform goodwill 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 value. No events occurred during
the three-month period ended December 31, 2009 that would cause us to update the
annual impairment testing we last performed as of December 31,
2008.
Allowance
for Loan Losses and Other Provisions for Losses
Refer to
the discussion of the allowance for loan losses and other provisions for losses
on pages 54 - 56 of our 2009 Form 10-K.
RJ Bank
provides an allowance for loan losses which reflects our continuing evaluation
of the probable losses inherent in the loan portfolio. The allowance for loan
losses is comprised of two components: allowances calculated based on formulas
for homogeneous classes of loans and specific allowances assigned to certain
classified loans individually evaluated for impairment. The calculation of the
allowance based on formulas is subjective as we segregate the loan portfolio
into homogeneous classes. Each class is then assigned an allowance percentage
based on the perceived risk associated with that class of loans, which is then
further segregated by loan grade. See Note 6 of the Notes to Condensed
Consolidated Financial Statements in this Form 10-Q for additional
information.
At
December 31, 2009, the amortized cost of all RJ Bank loans was $6.6 billion and
an allowance for loan losses of $149.2 million was recorded against that
balance. The total allowance for loan losses is equal to 2.26% of the amortized
cost of the loan portfolio.
The
following table allocates RJ Bank’s allowance for loan losses by loan
category:
|
December
31,
|
|
September
30,
|
|
2009
|
|
2009
|
|
|
Loan
Category
|
|
|
Loan
Category
|
|
|
as
a % of
|
|
|
as
a % of
|
|
|
Total
Loans
|
|
|
Total
Loans
|
|
Allowance
|
Receivable
|
|
Allowance
|
Receivable
|
|
($
in 000’s)
|
|
|
|
|
|
|
Commercial
Loans
|
$ 11,091
|
13%
|
|
$ 15,279
|
13%
|
|
|
|
|
|
|
Real
Estate Construction Loans
|
2,145
|
2%
|
|
3,237
|
3%
|
|
|
|
|
|
|
Commercial
Real Estate Loans (1)
|
102,040
|
51%
|
|
103,580
|
49%
|
|
|
|
|
|
|
Residential
Mortgage Loans
|
33,828
|
34%
|
|
28,088
|
35%
|
|
|
|
|
|
|
Consumer
Loans
|
60
|
-
|
|
88
|
-
|
|
|
|
|
|
|
Total
|
$
149,164
|
100%
|
|
$
150,272
|
100%
|
(1)
|
Loans
wholly or partially secured by real
estate.
|
The
current condition of the real estate and credit markets has substantially
increased the complexity and uncertainty involved in estimating the losses
inherent in RJ Bank’s loan portfolio. If our underlying assumptions and
judgments prove to be inaccurate, the allowance for loan losses could be
insufficient to cover actual losses. In such an event, any losses would result
in a decrease in our net income as well as a decrease in the level of regulatory
capital at RJ Bank.
Income
Taxes
For a
description of the significant assumptions, judgments and interpretations
associated with the accounting for income taxes, see Income Taxes on page 57 of
the 2009 Form 10-K.
Effects of recently issued
accounting standards, and accounting standards not yet
adopted
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued new
guidance on accounting for business combinations which includes the fundamental
principle of recording the acquired business at fair value as well as requiring
acquisition-related costs to be recognized separately from the acquisition and
expensed as incurred. In addition, this new pronouncement requires extensive
disclosures about the acquisition’s quantitative and qualitative effects
including validation of the fair value of goodwill. This new guidance 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. Accordingly, we will apply this pronouncement to any of our
business combinations occurring after October 1, 2009. This pronouncement did
not affect our Condensed Consolidated Financial Statements, but may have an
effect on accounting for future business combinations.
In
December 2007, the FASB issued new guidance requiring noncontrolling interests
to be treated as a separate component of equity, not as a liability or other
item outside of permanent equity. This new guidance 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. Accordingly, we have
adopted this new pronouncement as of October 1, 2009. See Note 1 of the Notes to
Condensed Consolidated Financial Statements in this Form 10-Q for more
information on the impact of the adoption of this new accounting
guidance.
In
February 2008, the FASB delayed the effective date of the application of certain
fair value pronouncements applicable to 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. Accordingly, we
have adopted this pronouncement effective October 1, 2009. The adoption of this
pronouncement did not have a material impact on our consolidated financial
statements. See Note 3 of the Notes to Condensed Consolidated Financial
Statements in this Form 10-Q for the additional disclosures resulting from the
adoption of this new accounting guidance.
In
February 2008, the FASB issued new guidance applicable to the accounting for
transfers of financial assets and repurchase financing transactions. This new
guidance addresses the issue of whether these transactions should be viewed as
two separate transactions or as one "linked" transaction. The guidance includes
a "rebuttable presumption" that presumes linkage of the two transactions unless
the presumption can be overcome by meeting certain criteria. This new
pronouncement is effective for fiscal years beginning after November 15, 2008.
Accordingly, we have adopted this new guidance effective October 1, 2009. This
new guidance applies only to original transfers made after that date. As of
October 1, 2009, we had no positions for which this guidance was
applicable.
In June
2008, the FASB issued new guidance for determining whether instruments granted
in share-based payment transactions are participating securities. This new
guidance requires unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents to be treated as
participating securities under the two-class method and, therefore, included in
the earnings allocation in computing earnings per share. This new guidance is
effective for fiscal years beginning after December 15, 2008. Accordingly, we
have adopted this pronouncement effective October 1, 2009. See
Note 17 of the Notes to Condensed Consolidated Financial Statements in this Form
10-Q for the application of this new pronouncement.
In June
2009, the FASB issued new guidance regarding the accounting for transfers of
financial assets, as an amendment of previously issued guidance. This new
guidance eliminates the Qualified Special Purpose Entity (“QSPE”) concept,
creates more stringent conditions for reporting a transfer of a portion of a
financial asset as a sale, clarifies the derecognition criteria, revises how
retained interests are initially measured, and removes the guaranteed mortgage
securitization recharacterization provisions. This new guidance requires
additional year-end and interim disclosures and is not effective for us until
October 1, 2010, and for subsequent interim and annual reporting periods
thereafter. Early adoption is prohibited. We are currently evaluating the impact
that the adoption of this new guidance will have on our consolidated financial
statements.
In June
2009, the FASB issued new guidance amending the existing pronouncement related
to the consolidation of variable interest entities. This new guidance requires
the reporting entities to evaluate former QSPE’s for consolidation, changes the
approach to determine a variable interest entity’s primary beneficiary from a
quantitative assessment to a qualitative assessment designed to identify a
controlling financial interest, and increases the frequency of required
assessments to determine whether we are the primary beneficiary of any variable
interest entities to which we are a party. This new guidance is not effective
for us until October 1, 2010 and earlier adoption is prohibited. We are
currently evaluating the impact the adoption of this new guidance will have on
our consolidated financial statements.
Item
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For a
description of our risk management policies, including a discussion of our
primary market risk exposures, which include interest rate risk and equity price
risk, as well as a discussion of our foreign exchange risk, credit risk
including a discussion of our loan underwriting policies and risk monitoring
processes applicable to RJ Bank, liquidity risk, operational risk, and
regulatory and legal risk and a discussion of how these exposures are managed,
refer to pages 59 - 70 of our 2009 Form 10-K.
Market
Risk
See Notes
3 and 4 of the Notes to the Condensed Consolidated Financial Statements in this
Form 10-Q for information regarding the fair value of trading inventories
associated with our broker-dealer client facilitation, market-making and
proprietary trading activities.
As of
December 31, 2009, the absolute fixed income and equity inventory limits
excluding contractual underwriting commitments for our domestic subsidiaries,
were $1.96 billion and $69.8 million, respectively. These same inventory limits
for RJ Ltd. as of December 31, 2009, were CDN $46.3 million and CDN $74.7
million, respectively. Our trading activities in the aggregate were
significantly below these limits at December 31, 2009.
Interest
Rate Risk
We are
exposed to interest rate risk as a result of maintaining trading inventories of
fixed income instruments and actively manage this risk using hedging techniques
that involve swaps, futures, and U.S. Treasury obligations. We monitor, on a
daily basis, the Value-at-Risk (“VaR”) in our 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, we use 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 we 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 three months ended December 31,
2009, the reported daily loss in the institutional Fixed Income trading
portfolio never exceeded the predicted VaR.
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 our overall
institutional portfolio during the three months ended December 31, 2009, with
the corresponding dollar value of our portfolio:
|
Three
Months Ended December 31, 2009
|
|
VaR
at
|
|
|
|
|
|
|
December
31,
|
|
September
30,
|
|
High
|
Low
|
|
Daily Average
|
|
2009
|
|
2009
|
|
($
in 000's)
|
|
|
|
|
|
|
|
|
|
Daily
VaR
|
$ 812
|
$ 421
|
|
$ 611
|
|
$ 611
|
|
$ 710
|
Related
Portfolio Value
|
|
|
|
|
|
|
|
|
(Net) (1)
|
$
95,870
|
$
114,631
|
|
$
141,216
|
|
$
151,796
|
|
$
180,047
|
VaR
as a Percent
|
|
|
|
|
|
|
|
|
of
Portfolio Value
|
0.85%
|
0.37%
|
|
0.47%
|
|
0.40%
|
|
0.39%
|
(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.
In
addition, see Note 10 of the Notes to the Condensed Consolidated Financial
Statements in this Form 10-Q for additional information regarding our derivative
financial instruments.
RJ Bank
maintains an earning asset portfolio that is comprised of mortgage, corporate
and consumer loans, as well as mortgage backed securities, collateralized
mortgage obligations, securities purchased under resale agreements, Small
Business Administration (“SBA”) loan securitizations, deposits at other banks
and other investments. Those earning assets are funded by RJ Bank’s obligations
to customers and FHLB advances. Based on the current earning asset portfolio of
RJ Bank, market risk for RJ Bank is limited primarily to interest rate
risk. The current economic environment has led to an extended period
of low market interest rates. As a result, the majority of RJ Bank’s
adjustable rate assets and liabilities have experienced a reduction in interest
rate yields and costs that reflect these very low market interest
rates. During the quarter, RJ Bank has focused its interest rate risk
analysis on the risk of market interest rates rising should the economic
environment begin to improve. RJ Bank 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 is an analysis of RJ Bank’s estimated net interest income over a
twelve month period based on instantaneous shifts in interest rates (expressed
in basis points) using RJ Bank’s own internal asset/liability
model:
Changes
|
Net
Interest
|
Projected
Change in
|
in
Rate
|
Income
|
Net
Interest Income
|
|
($
in 000s)
|
|
+300
|
$
224,177
|
(8.33%)
|
+200
|
232,894
|
(4.76%)
|
+100
|
239,521
|
(2.05%)
|
-
|
244,536
|
-%
|
|
|
|
The
following table presents the amount of RJ Bank’s interest earning assets and
interest bearing liabilities expected to reprice, prepay or mature in each of
the indicated periods at December 31, 2009:
|
Repricing
Opportunities
|
|
0
- 6 Months
|
7
– 12 Months
|
1
– 5 Years
|
5
or More Years
|
|
(in
000’s)
|
Interest
Earning Assets:
|
|
|
|
|
Loans
|
$ 5,004,329
|
$ 573,962
|
$
1,021,434
|
$ 35,240
|
Available
for sale securities
|
292,350
|
37,078
|
120,866
|
115,591
|
Other
earning assets
|
704,653
|
-
|
-
|
-
|
Total
Interest Earning Assets
|
6,001,332
|
611,040
|
1,142,300
|
150,831
|
Interest
Bearing Liabilities:
|
|
|
|
|
Transaction
and savings accounts
|
6,803,815
|
-
|
-
|
-
|
Certificates
of deposit
|
51,982
|
38,500
|
112,772
|
-
|
Federal
Home Loan Bank Advances
|
-
|
20,000
|
30,000
|
-
|
Total
Interest Bearing Liabilities
|
$ 6,855,797
|
$ 58,500
|
$ 142,772
|
$ -
|
GAP
|
$ (854,465)
|
$ 552,540
|
$ 999,528
|
$
150,831
|
Cumulative
GAP
|
$ (854,465)
|
$ (301,925)
|
$ 697,603
|
$
848,434
|
The
following table shows the distribution of those RJ Bank loans that mature in
more than one year between fixed and adjustable interest rate loans at December
31, 2009:
|
Interest
Rate Type
|
|
Fixed
|
Adjustable
|
Total
|
|
(in
000’s)
|
Commercial
Loans
|
$ 3,056
|
$ 812,203
|
$ 815,259
|
Real
Estate Construction Loans
|
-
|
93,943
|
93,943
|
Commercial
Real Estate Loans (1)
|
9,349
|
2,843,418
|
2,852,767
|
Residential
Mortgage Loans
|
27,685
|
2,244,171
|
2,271,856
|
Consumer
Loans
|
-
|
17,912
|
17,912
|
|
|
|
|
Total
Loans
|
$
40,090
|
$
6,011,647
|
$
6,051,737
|
(1)
|
Of
this amount, $1.2 billion is secured by non-owner occupied commercial real
estate properties or their repayment is dependent upon the operation or
sale of commercial real estate properties as of December 31, 2009. The
remainder is wholly or partially secured by real estate, the majority of
which is also secured by other assets of the
borrower.
|
To
mitigate interest rate risk in a significantly rising rate environment, RJ Bank
purchased three year term interest rate caps. See Note 10 of the Notes to the
Condensed Consolidated Financial Statements in this Form 10-Q for further
discussion.
Equity
Price Risk
We are
exposed to equity price risk as a consequence of making markets in equity
securities and the investment activities of RJ&A 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. We attempt 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. RJ
Ltd. has a proprietary trading business; the average aggregate inventory held
for proprietary trading by RJ Ltd. during the three months ended December 31,
2009 was CDN $8 million.
Foreign Exchange
Risk
RJ Ltd.
is subject to foreign exchange risk primarily due to financial instruments
denominated 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
December 31, 2009, forward contracts outstanding to buy and sell U.S. dollars
totaled CDN $1.8 million and CDN $1 million, respectively.
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 and duration of that transaction and the parties
involved. Credit risk is an integral component of the profit assessment of
lending and other financing activities. Refer to the discussion of our credit
risk on pages 62 - 69 of our 2009 Form 10-K.
Changes
in the allowance for loan losses of RJ Bank were as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
(in
000’s)
|
Allowance
for Loan Losses,
|
|
|
Beginning
of Period
|
$
150,272
|
$ 88,155
|
Provision
For Loan Losses
|
22,835
|
24,870
|
Net
Charge-Offs
|
(23,943)
|
(6,885)
|
Allowance
for Loan Losses End of Period
|
$
149,164
|
$
106,140
|
|
|
|
Allowance
for Loan Losses to Total Bank Loans Outstanding
|
2.26%
|
1.36%
|
Increasing
delinquencies in the residential loan portfolio resulting from the continued
economic downturn, including the high unemployment rate and the downgrade of
certain loans in the corporate portfolio, were the primary factors impacting the
provision for loan losses during the quarter. Also during the quarter the
performing residential portfolio was further stratified based upon updated loan
to value (“LTV”) estimates with higher reserve percentages allocated to the
higher LTV loans. This increase in the provision for loan losses was partially
offset by several corporate loan upgrades during the quarter.
The
following table presents net loan charge-offs and the percentage of these net
loan charge-offs to the average outstanding loan balances by loan category for
the quarters ended December 31, 2009 and 2008:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2009
|
2008
|
|
Net
Loan
|
%
of Avg.
|
Net
Loan
|
%
of Avg.
|
|
Charge-off
|
Outstanding
|
Charge-off
|
Outstanding
|
|
Amount
|
Loans
|
Amount
|
Loans
|
|
($
in 000’s)
|
Corporate
|
$ (14,597)
|
0.34%
|
$ (3,141)
|
0.07%
|
Residential/Consumer
|
(9,346)
|
0.40%
|
(3,744)
|
0.13%
|
|
|
|
|
|
Total
|
$ (23,943)
|
0.36%
|
$ (6,885)
|
0.09%
|
Both
corporate and residential/consumer loan charge-offs decreased slightly from the
immediately preceding quarter. Corporate charge-offs included $7.9 million
related to the sale of distressed debt in the secondary market with the balance
taken almost exclusively on commercial acquisition and development loans. An
increase in residential/consumer charge-offs resulted from the continued high
level of residential delinquencies and declines in home values in many
markets.
The table
below presents nonperforming loans and total allowance for loan losses by loan
category at December 31, 2009 and September 30, 2009:
|
December
31, 2009
|
September
30, 2009
|
|
|
Allowance
for
|
|
Allowance
for
|
|
Nonperforming
|
Loan
Losses
|
Nonperforming
|
Loan
Losses
|
|
Loan
Balance
|
Balance
|
Loan
Balance
|
Balance
|
|
(in
000’s)
|
|
|
|
|
|
Corporate
|
$ 53,094
|
$ (115,276)
|
$ 86,422
|
$ (122,096)
|
Residential/Consumer
|
82,283
|
(33,888)
|
71,960
|
(28,176)
|
Total
|
$ 135,377
|
$ (149,164)
|
$ 158,382
|
$ (150,272)
|
The
amount of nonperforming loans decreased nearly $23 million or 15% during the
quarter ended December 31, 2009. Corporate nonperforming loans decreased $33.3
million primarily due to the return of two loans to performing status, loan
repayments and charge-offs. This improvement in corporate nonperforming loans
was partially offset by an increase of $10.3 million in nonperforming
residential loans due to the ongoing economic impact on residential
delinquencies. However, the quarterly growth in total delinquent
residential loans (30+ days or more delinquent) slowed substantially with an
increase of $1.4 million during the quarter compared to a $17 million increase
in the prior quarter. Included in nonperforming residential/consumer loans are
$54 million in loans for which $29.9 million in charge-offs were previously
recorded.
Loan
Underwriting Policies
RJ Bank’s
underwriting policies for the major types of loans are described on pages 65 -
66 of our 2009 Form 10-K. There have been no material changes in RJ Bank’s
underwriting policies during the three months ended December 31,
2009.
Risk
Monitoring Process
RJ Bank’s
credit risk strategy regarding ongoing risk monitoring
and review process for all of its residential, consumer and corporate credit
exposures is discussed on pages 66 - 69 of our 2009 Form 10-K. There have been
no material changes to those processes and policies during the three month
period ended December 31, 2009.
Residential
and Consumer Loans
Residential
mortgage and consumer loan delinquency levels have been increasing at RJ Bank
due to the current economic downturn and the high level of unemployment. At
December 31, 2009, loans over 30 days delinquent (including nonperforming loans)
increased to 3.89% of residential and consumer loans outstanding, compared to
3.62% over 30 days delinquent at September 30, 2009. The total
over 30 day delinquent loans increased to $89 million or by 2% as compared to
the prior quarter. However, delinquent loans in the 30 -89 day
category decreased significantly to $11.9 million or 40% as the loans rolling
into this category slowed relative to the loans rolling out of the
category.
The
following table presents a summary of delinquent residential and consumer loans
at December 31, 2009 and September 30, 2009:
|
Delinquent
Residential and Consumer Loans (Amount)
|
Delinquent
Residential and Consumer Loans As a Percentage of Outstanding Loan
Balances
|
|
December
31,
|
September
30,
|
December
31,
|
September
30,
|
|
2009
|
2009
|
2009
|
2009
|
|
($
in 000’s)
|
30-89
days
|
$ 11,932
|
$ 19,767
|
0.52%
|
0.82%
|
90
days or more
|
77,088
|
67,640
|
3.37%
|
2.80%
|
The geographic concentrations (top five
states) of RJ Bank’s one-to-four family residential mortgage loans are as
follows as of December 31, 2009 and September 30, 2009:
December
31,
|
September
30,
|
2009
|
2009
(1)
|
($
outstanding as a % of RJ Bank total assets)
|
5.6%
CA
|
6.1%
CA
|
4.1%
NY
|
4.3%
NY
|
3.4%
FL
|
3.5%
FL
|
1.8%
NJ
|
1.9%
NJ
|
1.3%
VA
|
1.4%
VA
|
(1)
|
Concentration
ratios are presented as a percentage of adjusted RJ Bank total assets of
$7.9 billion. Adjusted RJ Bank total assets (non-GAAP) at September 30,
2009 exclude short-term qualifying investments purchased with $2.3 billion
of proceeds from additional deposits received through the RJBDP, the
majority of which were redirected to other third-party banks participating
in the multi-bank program in October 2009, and a $900 million FHLB advance
which was repaid on October 1,
2009.
|
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 December 31, 2009 and September 30, 2009,
these loans totaled $1.6 billion and $1.7 billion, respectively, or
approximately 70% of the respective residential mortgage portfolio. 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 low interest
rate environment. The outstanding balance of interest-only loans at December 31,
2009, based on their contractual terms, are scheduled to reprice and begin
amortizing as follows (in 000’s):
|
December
31, 2009
|
|
|
One
year or less
|
$ 363,361
|
Over
one year through two years
|
481,416
|
Over
two years through three years
|
352,795
|
Over
three years through four years
|
150,883
|
Over
four years through five years
|
180,306
|
Over
five years
|
56,857
|
Total
Outstanding Interest-Only Loan Balance
|
$
1,585,618
|
A
component of credit risk management for the residential portfolio is the LTV and
borrower credit score at origination or purchase. The LTV/FICO scores of RJ
Bank’s residential first mortgage loan portfolio are as follows:
|
December
31,
|
September
30,
|
|
2009
|
2009
|
|
|
Residential
First Mortgage
|
|
|
Loan
Weighted Average
|
|
|
LTV/FICO
(1)
|
64%
/ 751
|
64%
/ 751
|
(1) At
origination. Small group of local loans representing less than 0.5% of
residential portfolio excluded.
In
addition, RJ Bank obtains the most recently available information to estimate
current LTV ratios on the individual loans in the residential
portfolio. Current LTV’s are estimated based on the initial appraisal
obtained at the time of origination, adjusted using relevant market indices for
housing price changes that have occurred since origination. The value
of the homes could vary from actual market values due to change in the condition
of the underlying property, variations in housing price changes within
metropolitan statistical areas and other factors.
RJ Bank
estimates that loans with LTV’s between 100% and 120% represent approximately
15% of the residential mortgage loan portfolio and loans with LTV’s in excess of
120% represent approximately 10% of the residential mortgage
portfolio. The average estimated LTV is approximately 80% for the
total residential loan portfolio. Credit risk management for the
residential portfolio utilizes this data in conjunction with delinquency
statistics, loss experience and economic circumstances to establish appropriate
allowance for loan losses for the residential mortgage portfolio, which is based
upon an estimate for the probability of default and loss given default for each
homogeneous class of loans.
Corporate
Loans
At
December 31, 2009, excluding loans classified as nonperforming, there were no
corporate loans delinquent greater than 30 days except for four loans totaling
$9.6 million of which $6.9 million is commercial real estate or real estate
construction and $2.7 million is secured by marketable securities.
The
industry concentrations (top five categories) of RJ Bank’s corporate loans at
December 31, 2009 and September 30, 2009 were as follows:
December
31,
|
September
30,
|
2009
|
2009
(1)
|
($
outstanding as a % of RJ Bank total assets)
|
|
|
3.5% Telecommunications
|
3.7% Healthcare
(excluding hospitals)
|
3.3% Retail
Real Estate
|
3.5% Retail
Real Estate
|
3.2% Media
Communications
|
3.3% Telecommunications
|
3.1% Hospitality
|
3.3% Media
Communications
|
3.0% Consumer
Products/Services
|
3.1% Office
Properties
|
(1)
|
Concentration
ratios are presented as a percentage of adjusted RJ Bank total assets of
$7.9 billion. Adjusted RJ Bank total assets (non-GAAP) at September 30,
2009 exclude $2.3 billion in additional deposits received through the
RJBDP, the majority of which were redirected to other third party banks
participating in the multi-bank program in October 2009, and a $900
million FHLB advance which was repaid on October 1,
2009.
|
See Note
6 of the Notes to the Condensed Consolidated Financial Statements in this Form
10-Q for more information.
Liquidity
Risk
See Item
2, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources,” in this Form 10-Q for more
information regarding our liquidity and how we manage liquidity
risk.
Item
4. CONTROLS AND
PROCEDURES
DISCLOSURE
CONTROLS AND PROCEDURES
Disclosure controls are procedures designed to ensure
that information required to be disclosed in our reports filed under the
Exchange Act, such as this report, are 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 our 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 ours 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 our management, including
our Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our 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, our Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are
effective.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II OTHER INFORMATION
Item
1. LEGAL
PROCEEDINGS
The
following information supplements and amends the disclosure set forth under Part
I, Item 3 “Legal Proceedings” on pages 22 - 23 of our 2009 Form
10-K.
In Woodard vs. Raymond James Financial,
Inc., et al., an amended complaint was filed in November, 2009 naming as
additional defendants the President and a Senior Credit Risk Executive of RJ
Bank. We filed a motion to dismiss this amended complaint in January,
2010.
In
connection with Auction Rate Securities (“ARS”), we announced in April, 2008
that customers held approximately $1.9 billion of ARS, which as of December 31,
2009, had declined to approximately $777 million 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.
In Defer LP vs. Raymond James
Financial, Inc., et al., we filed a motion to dismiss the first amended
complaint in December, 2009. The information on our Internet site is not
incorporated by reference.
We are a
defendant or co-defendant in various lawsuits and arbitrations incidental to our
securities business. We are contesting the allegations in these cases and
believe that there are meritorious defenses in each of these lawsuits and
arbitrations. In view of the number and diversity of claims against us, the
number of jurisdictions in which litigation is pending, and the inherent
difficulty of predicting the outcome of litigation and other claims, we cannot
state with certainty what the eventual outcome of pending litigation or other
claims will be. In the opinion of our management, based on current available
information, review with outside legal counsel, and consideration of amounts
provided for in the accompanying condensed consolidated financial statements
with respect to these matters, ultimate resolution of these matters will not
have a material adverse impact on our financial position or results of
operations. However, resolution of one or more of these matters may have a
material effect on the results of operations in any future period, depending
upon the ultimate resolution of those matters and upon the level of income for
such period.
Item
1A. RISK
FACTORS
See Item
1A: Risk Factors, on pages 15 - 22 of our 2009 Form 10-K for a discussion of
risk factors that impact our operations and financial results. There
have been no material changes in the risk factors as discussed
therein.
Item 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following table presents information on our purchases of our own stock, on a
monthly basis during the quarter ended December 31, 2009:
|
Number
of
|
|
Average
|
Period
|
Shares
Purchased (1)
|
|
Price
Per Share
|
|
|
|
|
October
1, 2009 – October 31, 2009
|
1,207
|
|
$
25.29
|
November
1, 2009 – November 30, 2009
|
135,940
|
|
24.20
|
December
1, 2009 – December 31, 2009
|
170
|
|
24.29
|
Total
|
137,317
|
|
$
24.21
|
(1)
|
We
do not have a formal stock repurchase plan. Since May 2004, our Board of
Directors has authorized $150 million for repurchases at the discretion of
our Board’s Share Repurchase Committee. As a result, 3,867,344 shares have
been repurchased for a total of $87.9 million, leaving $62.1 million
available to repurchase shares. Historically we have considered such
purchases when the price of our 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, we purchased no shares in open market transactions
during the quarter ended December 31, 2009. During the quarter ended
December 31, 2009, 135,223 shares were purchased for the trust fund that
was established and funded to acquire our common stock in the open market
to be used to settle restricted stock units granted as a retention vehicle
for certain employees of our wholly owned Canadian subsidiary (see Note 19
page 120 of our 2009 Form 10-K for more information on this trust fund).
We received 2,094 shares that were surrendered by employees as payment for
option exercises during the quarter ended December 31,
2009.
|
We expect
to continue paying cash dividends. However, the payment and rate of dividends on
our common stock is subject to several factors including operating results, our
financial requirements, and the availability of funds from our subsidiaries,
including the broker-dealer subsidiaries, which may be subject to restrictions
under the net capital rules of the SEC, FINRA and the IIROC; and RJ Bank, which
may be subject to restrictions by federal banking agencies. Such restrictions
have never become applicable with respect to our dividend payments. (See Note 15
of the Notes to the Condensed Consolidated Financial Statements in this Form
10-Q for more information on the capital restrictions placed on RJ Bank and our
broker-dealer subsidiaries).
Item
3. DEFAULTS UPON
SENIOR SECURITIES
None.
Item
5. OTHER
INFORMATION
None.
Item
6. EXHIBITS
10.15
|
|
Agreement
dated December 23, 2009, between Raymond James Financial, Inc. and Thomas
A. James regarding service as Chairman of the Board after his retirement
as Chief Executive Officer, filed herewith.
|
|
|
|
|
|
11
|
|
Statement
Re: Computation of per Share Earnings (The calculation of per share
earnings is included in Part I, Item 1 in the Notes to Condensed
Consolidated Financial Statements (Earnings Per Share) and is omitted here
in accordance with Section (b)(11) of Item 601 of Regulation
S-K).
|
|
|
|
|
|
12.1
|
|
Statement
of Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends, filed herewith.
|
|
|
|
|
|
31.1
|
|
Principal
Executive Officer Certification as required by Rule 13a-14(a)/15d-14(a),
filed herewith.
|
|
|
|
|
|
31.2
|
|
Principal
Financial Officer Certification as required by Rule 13a-14(a)/15d-14(a),
filed herewith.
|
|
|
|
|
|
32
|
|
Certification
by Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
|
|
|
|
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
RAYMOND
JAMES FINANCIAL, INC.
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: February 8, 2010
|
|
/s/
Thomas A. James
|
|
|
Thomas
A. James
|
|
|
Chairman
and Chief
|
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jeffrey P. Julien
|
|
|
Jeffrey
P. Julien
|
|
|
Executive
Vice President - Finance
|
|
|
and
Chief Financial
|
|
|
Officer
|