q1063007.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 June 30, 2007
or
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
File Number: 1-9109
RAYMOND
JAMES FINANCIAL, INC.
(Exact
name of registrant as specified in its charter)
Florida
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No. 59-1517485
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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880
Carillon Parkway, St. Petersburg, Florida 33716
(Address
of principal executive offices) (Zip Code)
(727)
567-1000
(Registrant's
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
x
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the close of the latest practicable date.
119,578,344
shares of Common Stock as of August 6, 2007
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RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
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Form
10-Q for the Quarter Ended June 30, 2007
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PART
I.
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FINANCIAL
INFORMATION
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PAGE
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Item
1.
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Financial
Statements (unaudited)
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3
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4
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4
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5
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7
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Item
2.
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22
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Item
3.
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33
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Item
4.
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35
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PART
II.
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OTHER
INFORMATION
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Item
1.
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36
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Item
1A.
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36
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Item
2.
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36
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Item
6.
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37
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38
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PART
I FINANCIAL INFORMATION
Item
1. FINANCIAL STATEMENTS
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
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June
30,
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September
30,
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2007
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2006
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(in
thousands)
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Assets:
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Cash
and cash equivalents
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$ |
745,003
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$ |
641,691
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Assets
segregated pursuant to federal regulations
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3,749,872
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3,189,900
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Securities
purchased under agreements to resell
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1,723,172
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776,863
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Securities
owned:
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Trading
securities, at fair value
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737,580
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485,771
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Available
for sale securities, at fair value
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527,585
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280,580
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Other
investments, at fair value
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85,160
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66,726
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Receivables:
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Brokerage
clients, net
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1,708,549
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1,504,607
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Stock
borrowed
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1,382,233
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1,068,102
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Bank
loans, net
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3,427,240
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2,262,832
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Brokers-dealers
and clearing organizations
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449,175
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210,443
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Other
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299,103
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290,294
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Investments
in real estate partnerships- held by variable interest
entities
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219,887
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227,963
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Property
and equipment, net
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155,055
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142,780
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Deferred
income taxes, net
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96,132
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94,957
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Deposits
with clearing organizations
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31,350
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30,780
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Goodwill
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62,575
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62,575
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Investment
in leveraged lease, net
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10,150
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10,882
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Prepaid
expenses and other assets
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261,380
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168,904
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$ |
15,671,201
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$ |
11,516,650
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Liabilities
and Shareholders' Equity:
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Loans
payable
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$ |
552,104
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$ |
141,638
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Loans
payable related to investments by variable interest entities in real
estate partnerships
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114,937
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193,647
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Payables:
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Brokerage
clients
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5,331,386
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4,552,227
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Stock
loaned
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1,502,335
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1,235,104
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Bank
deposits
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5,024,546
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2,806,880
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Brokers-dealers
and clearing organizations
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228,101
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79,646
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Trade
and other
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141,324
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138,091
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Trading
securities sold but not yet purchased, at fair value
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342,919
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94,009
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Securities
sold under agreements to repurchase
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197,627
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301,110
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Accrued
compensation, commissions and benefits
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304,538
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321,224
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Income
taxes payable
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9,864
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34,294
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13,749,681
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9,897,870
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Minority
interests
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241,356
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154,911
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Shareholders'
equity:
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Preferred
stock; $.10 par value; authorized
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10,000,000
shares; issued and outstanding -0- shares
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-
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-
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Common
stock; $.01 par value; authorized 180,000,000 shares; issued 120,508,583
at
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June
30, 2007 and 117,655,883 at September 30, 2006
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1,173
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1,150
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Shares
exchangeable into common stock; 273,042
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at
June 30, 2007 and 362,197 at September 30, 2006
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3,504
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4,649
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Additional
paid-in capital
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262,357
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205,198
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Retained
earnings
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1,409,498
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1,258,446
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Accumulated
other comprehensive income
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19,103
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12,095
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1,695,635
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1,481,538
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Less:
989,691 and 1,270,015 common shares in treasury, at cost
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15,471
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17,669
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1,680,164
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1,463,869
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$ |
15,671,201
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$ |
11,516,650
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See
accompanying Notes to Condensed Consolidated Financial
Statements.
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RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
(In
thousands, except per share amounts)
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Three
Months Ended
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Nine
Months Ended
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June
30,
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June
30,
|
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June
30,
|
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June
30,
|
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2007
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2006
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2007
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2006
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Revenues:
|
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Securities
commissions and fees
|
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$ |
462,047
|
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|
$ |
424,594
|
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$ |
1,281,204
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$ |
1,186,079
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Investment
banking
|
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|
51,818
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|
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44,075
|
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131,682
|
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112,645
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|
Investment
advisory fees
|
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|
51,754
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46,371
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152,487
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132,603
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Interest
|
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|
191,691
|
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|
125,860
|
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514,727
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|
320,532
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|
Net
trading profits
|
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|
7,050
|
|
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|
5,671
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16,434
|
|
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|
19,717
|
|
Financial
service fees
|
|
|
30,285
|
|
|
|
41,596
|
|
|
|
91,683
|
|
|
|
96,004
|
|
Other
|
|
|
28,108
|
|
|
|
26,498
|
|
|
|
82,436
|
|
|
|
85,505
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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Total
revenues
|
|
|
822,753
|
|
|
|
714,665
|
|
|
|
2,270,653
|
|
|
|
1,953,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
134,093
|
|
|
|
81,689
|
|
|
|
352,374
|
|
|
|
194,516
|
|
Net
revenues
|
|
|
688,660
|
|
|
|
632,976
|
|
|
|
1,918,279
|
|
|
|
1,758,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Non-Interest
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation,
commissions and benefits
|
|
|
462,459
|
|
|
|
429,224
|
|
|
|
1,299,862
|
|
|
|
1,195,488
|
|
Communications
and information processing
|
|
|
28,828
|
|
|
|
25,858
|
|
|
|
83,080
|
|
|
|
77,152
|
|
Occupancy
and equipment costs
|
|
|
19,983
|
|
|
|
18,701
|
|
|
|
59,849
|
|
|
|
54,213
|
|
Clearance
and floor brokerage
|
|
|
8,180
|
|
|
|
8,781
|
|
|
|
22,662
|
|
|
|
19,607
|
|
Business
development
|
|
|
22,416
|
|
|
|
21,782
|
|
|
|
66,252
|
|
|
|
58,608
|
|
Investment
advisory fees
|
|
|
12,111
|
|
|
|
10,616
|
|
|
|
34,615
|
|
|
|
30,024
|
|
Other
|
|
|
29,156
|
|
|
|
23,685
|
|
|
|
60,686
|
|
|
|
67,064
|
|
Total
non-interest expenses
|
|
|
583,133
|
|
|
|
538,647
|
|
|
|
1,627,006
|
|
|
|
1,502,156
|
|
|
|
|
|
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|
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|
|
|
|
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Income
before minority interest and provision for income taxes
|
|
|
105,527
|
|
|
|
94,329
|
|
|
|
291,273
|
|
|
|
256,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Minority
interest
|
|
|
(4,371 |
) |
|
|
(2,173 |
) |
|
|
(5,346 |
) |
|
|
(6,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income
before provision for income taxes
|
|
|
109,898
|
|
|
|
96,502
|
|
|
|
296,619
|
|
|
|
263,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
41,545
|
|
|
|
39,728
|
|
|
|
109,156
|
|
|
|
99,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
68,353
|
|
|
$ |
56,774
|
|
|
$ |
187,463
|
|
|
$ |
163,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share-basic
|
|
$ |
0.59
|
|
|
$ |
0.50
|
|
|
$ |
1.63
|
|
|
$ |
1.45
|
|
Net
income per share-diluted
|
|
$ |
0.57
|
|
|
$ |
0.48
|
|
|
$ |
1.58
|
|
|
$ |
1.41
|
|
Weighted
average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding-basic
|
|
|
116,135
|
|
|
|
113,464
|
|
|
|
115,353
|
|
|
|
112,376
|
|
Weighted
average common and common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equivalent
shares outstanding-diluted
|
|
|
119,140
|
|
|
|
116,960
|
|
|
|
118,425
|
|
|
|
115,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend declared per common share
|
|
$ |
0.10
|
|
|
$ |
0.08
|
|
|
$ |
0.30
|
|
|
$ |
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
68,353
|
|
|
$ |
56,774
|
|
|
$ |
187,463
|
|
|
$ |
163,414
|
|
Other
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized (loss) gain on available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
sale securities, net of tax
|
|
|
(954 |
) |
|
|
35
|
|
|
|
(834 |
) |
|
|
(88 |
) |
Net
unrealized gain on interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounted
for as cash flow hedges, net of tax
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
44
|
|
Net
change in currency translations
|
|
|
9,190
|
|
|
|
2,689
|
|
|
|
7,842
|
|
|
|
1,348
|
|
Total
comprehensive income
|
|
$ |
76,589
|
|
|
$ |
59,500
|
|
|
$ |
194,471
|
|
|
$ |
164,718
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
(in
thousands)
(continued
on next page)
|
|
Nine
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
Flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
187,463
|
|
|
$ |
163,414
|
|
Adjustments
to reconcile net income to net
|
|
|
|
|
|
|
|
|
cash
used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
16,310
|
|
|
|
14,474
|
|
Excess
tax benefits from stock-based payment arrangements
|
|
|
(1,781 |
) |
|
|
(1,312 |
) |
Deferred
income taxes
|
|
|
(2,673 |
) |
|
|
(6,441 |
) |
Unrealized
loss, premium and discount amortization
|
|
|
|
|
|
|
|
|
on
available for sale securities and other securities
|
|
|
673
|
|
|
|
123
|
|
Loss
on sale of property and equipment
|
|
|
13
|
|
|
|
1,046
|
|
Gain
on sale of loans available for sale
|
|
|
(397 |
) |
|
|
(303 |
) |
Gain
on sale of joint venture interest
|
|
|
(2,559 |
) |
|
|
-
|
|
Provision
for loan loss, legal proceedings, bad debts and other
accruals
|
|
|
17,169
|
|
|
|
26,607
|
|
Stock-based
compensation expense
|
|
|
27,089
|
|
|
|
17,253
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
Assets
segregated pursuant to federal regulations
|
|
|
(559,972 |
) |
|
|
(874,439 |
) |
Receivables:
|
|
|
|
|
|
|
|
|
Brokerage
clients, net
|
|
|
(205,536 |
) |
|
|
(105,090 |
) |
Stock
borrowed
|
|
|
(314,131 |
) |
|
|
29,696
|
|
Brokers-dealers
and clearing organizations
|
|
|
(238,732 |
) |
|
|
(109,516 |
) |
Other
|
|
|
(87,014 |
) |
|
|
(46,280 |
) |
Securities
purchased under agreements to resell, net
|
|
|
|
|
|
|
|
|
of
securities sold under agreements to repurchase
|
|
|
(154,792 |
) |
|
|
102,613
|
|
Trading
securities, net
|
|
|
(4,854 |
) |
|
|
(257,494 |
) |
Prepaid
expenses and other assets
|
|
|
(17,781 |
) |
|
|
(44,174 |
) |
|
|
|
|
|
|
|
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Payables:
|
|
|
|
|
|
|
|
|
Brokerage
clients
|
|
|
779,159
|
|
|
|
877,422
|
|
Stock
loaned
|
|
|
267,231
|
|
|
|
218,603
|
|
Brokers-dealers
and clearing organizations
|
|
|
148,455
|
|
|
|
(57,972 |
) |
Trade
and other
|
|
|
27,507
|
|
|
|
8,607
|
|
Accrued
compensation, commissions and benefits
|
|
|
(15,941 |
) |
|
|
(24,646 |
) |
Income
taxes payable
|
|
|
(23,073 |
) |
|
|
15,873
|
|
Minority
interest
|
|
|
(5,346 |
) |
|
|
(6,734 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(163,513 |
) |
|
|
(58,670 |
) |
See
accompanying Notes to Condensed Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in
thousands)
(continued
from previous page)
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
|
2007
|
2006
|
|
|
|
Cash
Flows from investing activities:
|
|
|
Additions
to property and equipment, net
|
(30,062)
|
(22,409)
|
Proceeds
from sale of joint venture interest, net of cash disposed
|
3,514
|
-
|
Loan
originations and purchases
|
(2,594,200)
|
(1,623,799)
|
Loan
repayments
|
1,388,809
|
699,807
|
Proceeds
from sale of loans available for sale
|
29,396
|
11,613
|
Purchases
of other investments
|
(18,434)
|
(66,815)
|
Investments
in real estate partnerships-held by variable
|
|
|
interest
entities
|
(16,818)
|
(48,665)
|
Loans
to investor member of variable interest entities related
to
|
|
|
investments
in real estate partnerships
|
-
|
(3,985)
|
Repayments
of loans by investor members of variable interest entities
|
|
|
related
to investments in real estate partnerships
|
12,780
|
10,898
|
Securities
purchased under agreements to resell, net
|
(895,000)
|
-
|
Sales
of available for sale securities
|
81
|
227
|
Purchases
of available for sale securities
|
(325,096)
|
(9,721)
|
Available
for sale securities maturations and repayments
|
75,995
|
45,945
|
|
|
|
Net
cash used in investing activities
|
(2,369,035)
|
(1,006,904)
|
|
|
|
Cash
Flows from financing activities:
|
|
|
Proceeds
from borrowed funds, net
|
426,900
|
413,033
|
Repayments
of mortgage and borrowings, net
|
(15,233)
|
(2,820)
|
Proceeds
from borrowed funds related to investments by variable
interest
|
|
|
entities
in real estate partnerships
|
5,202
|
4,820
|
Repayments
of borrowed funds related to investments by variable
interest
|
|
|
entities
in real estate partnerships
|
(36,339)
|
(5,384)
|
Proceeds
from capital contributed to variable interest entities related
to
|
|
|
investments
in real estate partnerships
|
58,816
|
56,011
|
Minority
interest
|
(29,479)
|
(19,731)
|
Exercise
of stock options and employee stock purchases
|
32,811
|
28,321
|
Increase
in bank deposits
|
2,217,666
|
372,384
|
Purchase
of treasury stock
|
(1,350)
|
(5,100)
|
Cash
dividends on common stock
|
(36,411)
|
(27,841)
|
Excess
tax benefits from stock-based payment arrangements
|
1,781
|
1,312
|
|
|
|
Net
cash provided by financing activities
|
2,624,364
|
815,005
|
|
|
|
Currency
adjustment:
|
|
|
Effect
of exchange rate changes on cash
|
7,842
|
1,348
|
Net
increase (decrease) in cash and cash equivalents
|
99,658
|
(249,221)
|
Cash
reduced by deconsolidation of variable interest entity related
to
|
|
|
investments
in real estate partnerships
|
(291)
|
-
|
Cash
resulting from consolidation of limited partnerships
|
3,945
|
-
|
Cash
and cash equivalents at beginning of period
|
641,691
|
881,133
|
|
|
|
Cash
and cash equivalents at end of period
|
$ 745,003
|
$ 631,912
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Cash
paid for interest
|
$ 349,101
|
$ 191,274
|
Cash
paid for taxes
|
$ 128,364
|
$ 90,329
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
June
30, 2007
Note
1 - Basis of Presentation:
The
accompanying unaudited condensed consolidated financial statements include
the
accounts of Raymond James Financial, Inc. (“RJF”) and its consolidated
subsidiaries that are generally controlled through a majority voting
interest. RJF is a holding company headquartered in Florida whose
subsidiaries are engaged in various financial service businesses; as used
herein, the term “the Company” refers to RJF and/or one or more of its
subsidiaries. In accordance with Financial Accounting Standards Board
(“FASB”) Interpretation (“FIN”) No. 46R, “Consolidation of Variable Interest
Entities” (“FIN 46R”), the Company also consolidates any variable interest
entities (“VIEs”) for which it is the primary beneficiary. Additional
information is provided in Note 5. When the Company does not have a
controlling interest in an entity, but exerts significant influence over the
entity, the Company applies the equity method of accounting. All
material intercompany balances and transactions have been eliminated in
consolidation.
Effective
October 1, 2006, the Company adopted Emerging Issues Task Force (“EITF”) Issue
04-5, “Determining Whether a General Partner, or the General Partners as a
Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights,” for partnerships created before and not
subsequently modified after June 29, 2005. As a result, the Company
consolidated three partnerships beginning in the three months ended December
31,
2006. As of June 30, 2007, these partnerships had assets of
approximately $81.8 million.
Certain
financial information that is normally included in annual financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America ("GAAP") but not required for interim reporting
purposes has been condensed or omitted. These unaudited condensed
consolidated financial statements reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods
presented. The nature of the Company's business is such that the
results of any interim period are not necessarily indicative of results for
a
full year. These unaudited condensed consolidated financial statements should
be
read in conjunction with Management’s Discussion and Analysis and the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended September 30, 2006. To
prepare consolidated financial statements in conformity with GAAP, management
must estimate certain amounts that affect the reported assets and liabilities,
disclosure of contingent assets and liabilities, and reported revenues and
expenses. Actual results could differ from those
estimates. Certain revisions and reclassifications have been made to
the unaudited condensed consolidated financial statements of the prior period
to
conform to the current period presentation. As a result, financial
service fees revenue and investment advisory fees expense increased by
approximately $3.3 million and $9.6 million, respectively, for the three and
nine months ended June 30, 2006. These revisions did not impact the
Company’s net income for the three or nine months ended June 30,
2006.
The
Company’s quarters end on the last day of each calendar quarter.
Note
2 - Effects of Recently Issued Accounting Standards, Not Yet
Adopted:
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 establishes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. This interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006 (October 1, 2007 for the
Company). The Company is currently evaluating the impact the adoption
of this interpretation will have on its consolidated financial statements for
the fiscal year ending September 30, 2008.
In
July
2006, the FASB issued Staff Position (“FSP”) No. FAS 13-2, “Accounting for a
Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes
Generated by a Leveraged Lease Transaction” (“FSP FAS 13-2”). This
FSP addresses how a change in the timing of cash flows relating to income taxes
generated by a leveraged lease transaction affects the accounting by a lessor
for that lease. FSP FAS 13-2 is effective for fiscal years beginning
after December 15, 2006 (October 1, 2007 for the Company). The
Company does not expect this FSP to have a material impact on its consolidated
financial statements for the fiscal year ending September 30, 2008.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements” (“SAB 108”). SAB 108
addresses how the effects of prior year uncorrected misstatements should be
considered when quantifying misstatements in current year financial statements.
SAB 108 requires an entity to quantify misstatements using a balance sheet
and
income statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. The guidance is effective for annual financial
statements covering the first fiscal year ending after November 15,
2006. The Company is currently evaluating the impact this guidance
will have on its consolidated financial statements for the fiscal year ending
September 30, 2007.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair-value measurements required under other accounting pronouncements
but
does not change existing guidance as to whether or not an instrument is carried
at fair value. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 (October 1, 2008 for the
Company), and interim periods within those fiscal years. The Company does not
expect SFAS 157 to have a material impact on the consolidated financial
statements of the Company.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). SFAS 159 allows companies to elect to follow fair
value accounting for certain financial assets and liabilities on an instrument
by instrument basis. SFAS 159 is applicable only to certain financial
instruments and is effective for fiscal years beginning after November 15,
2007 (October 1, 2008 for the Company). The Company has not yet
completed its assessment of what impact, if any, SFAS 159 will have on its
consolidated financial statements.
In
April
2007, the FASB issued Staff Position FIN No. 39-1, "Amendment of FASB
Interpretation No. 39." FSP FIN No. 39-1 defines "right of setoff" and specifies
what conditions must be met for a derivative contract to qualify for this right
of setoff. FSP FIN No. 39-1 also addresses the applicability of a
right of setoff to derivative instruments and clarifies the circumstances in
which it is appropriate to offset amounts recognized for those instruments
in
the statement of financial position. In addition, this FSP permits offsetting
of
fair value amounts recognized for multiple derivative instruments executed
with
the same counterparty under a master netting arrangement and fair value amounts
recognized for the right to reclaim cash collateral (a receivable) or the
obligation to return cash collateral (a payable) arising from the same master
netting arrangement as the derivative instruments. This interpretation is
effective for fiscal years beginning after November 15, 2007 (October 1, 2008
for the Company), with early application permitted. The Company is
currently evaluating the impact the adoption of FSP FIN No. 39-1 will have
on
its consolidated financial statements.
In
May
2007, the FASB issued FSP FIN No. 46R-7, "Application of FASB Interpretation
No.
46(R) to Investment Companies." FSP FIN No. 46R-7 amends the scope of the
exception to FIN 46R to state that investments accounted for at fair value
in
accordance with the specialized accounting guidance in the American Institute
of
Certified Public Accountants ("AICPA") Audit and Accounting Guide, Investment
Companies, are not subject to consolidation under FIN 46R. This interpretation
is effective for fiscal years beginning on or after December 15, 2007 (October
1, 2008 for the Company). The Company is currently evaluating the impact the
adoption of FSP FIN No. 46R-7 will have on its consolidated financial
statements.
In
June
2007, the Accounting Standards Executive Committee of the AICPA issued Statement
of Position ("SOP") 07-1, "Clarification of the Scope of the Audit and
Accounting Guide Investment Companies and Accounting by Parent Companies and
Equity Method Investors for Investments in Investment Companies." This SOP
provides guidance for determining whether an entity is within the scope of
the
AICPA Audit and Accounting Guide Investment Companies (the "Guide").
Additionally, it provides guidance as to whether a parent company or an equity
method investor can apply the specialized industry accounting principles of
the
Guide (referred to as investment company accounting). This SOP is effective
for
fiscal years beginning on or after December 15, 2007 (October 1, 2008 for the
Company), with early application encouraged. The Company is currently evaluating
the impact the adoption of SOP 07-1 will have on its consolidated financial
statements.
Note
3 – Trading Securities and Trading Securities Sold But Not Yet
Purchased:
|
June
30, 2007
|
|
September
30, 2006
|
|
|
|
Securities
|
|
|
|
Securities
|
|
|
|
Sold
but
|
|
|
|
Sold
but
|
|
Trading
|
|
Not
yet
|
|
Trading
|
|
Not
yet
|
|
Securities
|
|
Purchased
|
|
Securities
|
|
Purchased
|
|
(in
000's)
|
|
|
|
|
|
|
|
|
Marketable:
|
|
|
|
|
|
|
|
Municipal
obligations
|
$ 296,289
|
|
$ -
|
|
$ 192,028
|
|
$ 5
|
Corporate
obligations
|
113,761
|
|
90
|
|
134,431
|
|
968
|
Government
obligations
|
53,903
|
|
158,684
|
|
37,793
|
|
31,636
|
Agencies
|
184,282
|
|
123,984
|
|
68,380
|
|
34,023
|
Total
debt securities
|
648,235
|
|
282,758
|
|
432,632
|
|
66,632
|
|
|
|
|
|
|
|
|
Derivative
contracts
|
39,295
|
|
12,292
|
|
20,904
|
|
8,309
|
Equity
securities
|
45,509
|
|
47,869
|
|
29,532
|
|
19,068
|
Other
securities
|
4,541
|
|
-
|
|
2,703
|
|
-
|
Total
|
$ 737,580
|
|
$ 342,919
|
|
$ 485,771
|
|
$ 94,009
|
Mortgage-backed
securities of $192.7 million and $77.1 million at June 30, 2007 and September
30, 2006, respectively, are included in Corporate obligations and Agencies
in
the table above. Mortgage-backed securities sold but not yet
purchased of $124 million and $34 million at June 30, 2007 and September 30,
2006, respectively, are included in Agencies in the table above.
Note
4 – Available For Sale Securities:
Available
for sale securities are comprised primarily of collateralized mortgage
obligations, mortgage related debt, and certain equity securities held by the
Company's non-broker-dealer subsidiaries, principally Raymond James Bank, F.S.B.
(“RJBank”). There were no material proceeds from the sale of
securities available for sale for the three and nine months ended June 30,
2007
and 2006.
The amortized cost and estimated market values of securities available for
sale
at June 30, 2007 are as follows:
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
(in
000's)
|
|
|
|
|
|
|
|
|
|
|
Agency
collateralized mortgage obligations
|
$
202,764
|
$ 481
|
$ (77)
|
$
203,168
|
Non-agency
collateralized mortgage obligations
|
324,471
|
59
|
(1,205)
|
323,325
|
Other
|
1,073
|
20
|
(1)
|
1,092
|
|
$
528,308
|
$ 560
|
$
(1,283)
|
$
527,585
|
The
amortized cost and estimated market values of securities available for sale
at
September 30, 2006 are as follows:
|
|
Gross
|
Gross
|
Estimated
|
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
(in
000's)
|
|
|
|
|
|
|
|
|
|
|
Agency
collateralized mortgage obligations
|
$
140,888
|
$ 461
|
$ (27)
|
$
141,322
|
Non-agency
collateralized mortgage obligations
|
137,753
|
330
|
(156)
|
137,927
|
Other
|
1,306
|
26
|
(1)
|
1,331
|
|
$
279,947
|
$ 817
|
$ (184)
|
$
280,580
|
Note
5 – Variable Interest Entities (“VIEs”):
Under
the
provisions of FIN 46R the Company has determined that Raymond James Employee
Investment Funds I and II (the “EIF Funds”), Comprehensive Software Systems,
Inc. (“CSS”), certain entities in which Raymond James Tax Credit Funds, Inc.
(“RJTCF”) owns variable interests, various partnerships involving real estate,
and a trust fund established for employee retention purposes are
VIEs. Of these, the Company has determined that the EIF Funds,
certain tax credit fund partnerships/LLCs, and the trust fund should be
consolidated in the financial statements as the Company is the primary
beneficiary.
The
EIF
Funds are limited partnerships, for which the Company is the general partner,
that invest in the merchant banking and private equity activities of the Company
and other unaffiliated venture capital limited partnerships. The EIF
Funds were established as compensation and retention measures for certain
qualified key employees of the Company. The Company makes
non-recourse loans to these employees for two-thirds of the purchase price
per
unit. The loans and applicable interest are to be repaid based on the
earnings of the EIF Funds. The Company is deemed to be the primary beneficiary,
and accordingly, consolidates the EIF Funds, which had combined assets of
approximately $16.3 million at June 30, 2007. None of those assets
act as collateral for any obligations of the EIF Funds. The Company's
exposure to loss is limited to its contributions and the non-recourse loans
funded to the employee investors, for which their partnership interests serve
as
collateral. At June 30, 2007 that exposure is approximately $5.7
million.
CSS
was
formed by a group of broker-dealer firms, including the Company, to develop
a
back-office software system. CSS had assets of $3.8 million at June 30,
2007. As of June 30, 2007, the Company owns approximately 42% of
CSS. The Company's exposure to loss is limited to its capital
contributions. The Company is not the primary beneficiary of CSS and
accounts for its investment using the equity method of
accounting. The carrying value of the Company’s investment in CSS is
zero at June 30, 2007.
RJTCF
is
a wholly owned subsidiary of RJF and is the managing member or general partner
in approximately 47 separate tax credit housing funds having one or more
investor members or limited partners. These tax credit housing funds are
organized as limited liability companies or limited partnerships for the purpose
of investing in limited partnerships which purchase and develop low income
housing properties qualifying for tax credits. As of June 30, 2007,
44 of these tax credit housing funds are VIEs as defined by FIN 46R, and RJTCF’s
interest in these tax credit housing funds which are VIEs range from .01% to
1.0%.
RJTCF
has
concluded that it is the primary beneficiary in approximately one quarter of
these tax credit housing funds, and accordingly, consolidates these funds,
which
have combined assets of approximately $271.2 million at June 30, 2007. None
of
those assets act as collateral for any obligations of these
funds. The Company's exposure to loss is limited to its investments
in, advances to, and receivables due from these funds and at June 30, 2007,
that
exposure is approximately $5.3 million.
RJTCF
is
not the primary beneficiary of the remaining tax credit housing funds it
determined to be VIEs and accordingly the Company does not consolidate these
funds. The Company's exposure to loss is limited to its investments
in, advances to, and receivables due from these funds and at June 30, 2007,
that
exposure is approximately $24.6 million.
The
three
remaining tax credit housing funds that have been determined not to be VIEs
are
wholly owned by RJTCF and are included in the Company’s consolidated financial
statements. As of June 30, 2007, only two of these funds had any
material activity. These funds typically hold interests in certain
tax credit limited partnerships for less than 90 days and had assets of
approximately $8.4 million at June 30, 2007.
As
of
June 30, 2007, the Company has a variable interest in several limited
partnerships involved in various real estate activities, in which a subsidiary
is the general partner. The Company is not the primary beneficiary of
these partnerships and accordingly the Company does not consolidate these
partnerships. These partnerships have assets of approximately $22.3
million at June 30, 2007. The Company's exposure to loss is limited
to its capital contributions. The carrying value of the Company's
investment in these partnerships is not material at June 30, 2007.
One
of
the Company’s restricted stock plans is associated with a trust fund which was
established through the Company’s wholly owned Canadian
subsidiary. This trust fund was established and funded to enable the
trust fund to acquire Company common stock in the open market to be used to
settle restricted stock units granted as a retention vehicle for certain
employees of the Canadian subsidiary. For financial statement
purposes, the Company is deemed to be the primary beneficiary in accordance
with
FIN 46R, and accordingly, consolidates this trust fund, which has assets of
approximately $6.5 million at June 30, 2007. None of those assets are
specifically pledged as collateral for any obligations of the trust
fund. The Company's exposure to loss is limited to its contributions
to the trust fund and at June 30, 2007, that exposure is approximately $6.5
million.
Note
6 – Bank Loans, Net and Deposits:
Bank
Loans, Net
Bank
client receivables are comprised of loans originated or purchased by RJBank
and
include commercial and residential mortgage loans, as well as consumer
loans. These receivables are generally collateralized by first or
second mortgages on residential property, real property, or assets of the
borrower. The following table provides a summary of RJBank's loans
receivable at June 30, 2007 and September 30, 2006:
|
June
30,
|
September
30,
|
|
2007
|
2006
|
|
(in
000's)
|
|
|
|
Residential
mortgage loans
|
$ 1,775,821
|
$ 1,322,911
|
Commercial
loans
|
1,683,552
|
960,977
|
Consumer
loans
|
3,970
|
1,917
|
|
3,463,343
|
2,285,805
|
|
|
|
Allowance
for loan losses
|
(30,553)
|
(18,694)
|
Unearned
income, net of deferred expenses
|
(5,550)
|
(4,279)
|
|
|
|
|
$ 3,427,240
|
$ 2,262,832
|
Changes
in the allowance for loan losses and reserve for unfunded lending commitments
at
RJBank for the nine months ended June 30, 2007 and June 30, 2006 are as
follows:
|
June
30,
|
June
30,
|
|
2007
|
2006
|
|
(in
000's)
|
|
|
|
Balance,
beginning of year
|
$
22,738
|
$ 9,030
|
Provision
charged to operations
|
13,064
|
9,677
|
Charge-offs
|
(176)
|
-
|
Recoveries
|
-
|
9
|
Balance,
end of period
|
$
35,626
|
$
18,716
|
Charge-offs for the three months ended June 30, 2007 were $131,000.
Bank
Deposits
Bank
deposits include demand deposits, savings and money market accounts and
certificates of deposit. The following table presents a summary of
bank deposits at June 30, 2007 and September 30, 2006:
|
June
30,
|
September
30,
|
|
2007
|
2006
|
|
Balance
|
Weighted
Average Rate
|
Balance
|
Weighted
Average Rate
|
|
($
in 000's)
|
|
|
|
|
|
Bank
deposits:
|
|
|
|
|
Demand
deposits - interest bearing
|
$ 4,504
|
1.58%
|
$ 6,088
|
1.95%
|
Demand
deposits - non-interest bearing
|
3,354
|
-
|
2,538
|
-
|
Savings
and money market accounts
|
4,777,171
|
4.60%
|
2,542,894
|
4.59%
|
Certificates
of deposit (1)
|
239,517
|
4.70%
|
255,360
|
4.49%
|
Total
bank deposits
|
$
5,024,546
|
4.60%
|
$
2,806,880
|
4.57%
|
(1)
|
Certificates
of deposit in amounts of $100,000 or more at June 30, 2007 and September
30, 2006 were $70,410,944 and $72,067,000,
respectively.
|
Certificates
of deposit issued have remaining maturities at June 30, 2007 and September
30,
2006, as follows:
|
June
30,
|
September
30,
|
|
2007
|
2006
|
|
(in
000's)
|
|
|
|
One
year or less
|
$
126,693
|
$
125,622
|
One
to two years
|
44,271
|
50,427
|
Two
to three years
|
37,765
|
36,306
|
Three
to four years
|
15,354
|
24,885
|
Four
to five years and thereafter
|
15,434
|
18,120
|
Total
|
$
239,517
|
$
255,360
|
Note
7 - Borrowings:
Loans
payable at June 30, 2007 and September 30, 2006 are presented
below:
|
June
30,
|
September
30,
|
|
2007
|
2006
|
|
(in
000's)
|
Short-term
Borrowings:
|
|
|
Borrowings
on lines of credit (1)
|
$
431,490
|
$ 13,040
|
Current
portion of mortgage note payable
|
2,693
|
2,746
|
Federal
Home Loan Bank advances (3)
|
5,000
|
-
|
Total
short-term borrowings
|
439,183
|
15,786
|
|
|
|
Long-term
Borrowings:
|
|
|
Mortgage
note payable
(2)
|
62,921
|
65,852
|
Federal
Home Loan Bank advances (3)
|
50,000
|
60,000
|
Total
long-term borrowings
|
112,921
|
125,852
|
|
|
|
Total
loans payable
|
$
552,104
|
$
141,638
|
|
(1)
|
The
Company and its subsidiaries maintain one committed and several
uncommitted lines of credit denominated in U.S. dollars and one
uncommitted line of credit denominated in Canadian dollars
(“CDN”). At June 30, 2007, the aggregate domestic lines were
$1.21 billion and CDN $40 million, respectively. During the
three months ended June 30, 2007, the Company entered into a $500
million
uncommitted tri-party repurchase agreement line of
credit. Under this agreement, the Company pledges certain of
its trading inventory as collateral against borrowings on this
line. The required market value of the collateral is
generally 102% of the cash borrowed. The rate is set each day
at 20 basis points over the opening Fed Funds rate and this agreement
can
be terminated by either party on any business day. The
outstanding balances against these lines of credit at June 30, 2007
were
$426.9 million and CDN $3.5 million, respectively. The interest
rates for the lines of credit are variable and are based on the Fed
Funds
rate, LIBOR, and Canadian prime rate. For the three months ended
June 30,
2007, interest rates on the lines of credit ranged from 5.25% to
6.259%.
For the three months ended June 30, 2006, interest rates on the lines
of
credit ranged from 4.75% to 6.763%. In addition, the
Company’s joint ventures in Turkey and Argentina have multiple settlement
lines of credit. The Company has guaranteed certain of these
settlement lines of credit as follows: four in Turkey totaling $22.5
million and one in Argentina for $3 million. On June 30, 2007, there
was
an outstanding balance of $313,000 on the settlement lines in
Turkey. At June 30, 2007 the aggregate unsecured settlement
lines of credit available were $77.5 million, and there were outstanding
balances of $989,000 on these lines. The interest rates for
these lines of credit ranged from 9% to
21%.
|
|
(2)
|
Mortgage
note payable evidences a mortgage loan for the financing of the Company's
home office complex. The mortgage loan bears interest at 5.7%
and is secured by land, buildings, and improvements with a net book
value
of $71.5 million at June 30, 2007.
|
|
(3)
|
RJBank
has $55 million in FHLB advances outstanding at June 30, 2007, which
are
comprised of one short-term, fixed rate advance and several long-term,
fixed rate advances. The short-term, fixed rate advance bears
interest at 5.67% and the long-term, fixed rate advances bear interest
at
rates ranging from 4.90% to 5.65%. The outstanding FHLB advances
mature
between May 2008 and February 2011. These advances are secured
by a blanket lien on RJBank's residential loan portfolio granted
to
FHLB. The FHLB has the right to convert advances totaling $35
million and $50 million at June 30, 2007 and September 30, 2006,
respectively, to a floating rate at one or more future dates. RJBank
has
the right to prepay these advances without penalty if the FHLB exercises
its right.
|
Note
8 – Stock Based Compensation:
Effective
October 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payment”, which
requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors based on estimated
fair values. The Company’s share-based employee and outside director
compensation plans are described more fully in Note 17 of the Notes to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2006. The Company’s net
income for the three and nine months ended June 30, 2007 includes $7.1 million
and $20.7 million, respectively, of compensation costs and $2.3 million and
$6.2
million, respectively, of income tax benefits related to the Company’s
share-based plans available for awards to employees and members of its Board
of
Directors. The Company’s net income for the three and nine months
ended June 30, 2006 includes $5.4 million and $14.9 million, respectively,
of
compensation costs and $1.4 million and $4.1 million, respectively, of income
tax benefits related to the Company’s share-based plans available for awards to
employees and members of its Board of Directors.
During
the three months ended June 30, 2007, the Company granted 16,500 stock options,
131,588 shares of restricted stock and no restricted stock units to employees
under its stock-based employee compensation plans. During the three months
ended
June 30, 2007, no options were granted to outside directors. During the nine
months ended June 30, 2007, the Company granted 242,100 stock options, 1,089,015
shares of restricted stock and 60,959 restricted stock units to employees under
its stock-based employee compensation plans. During the nine months
ended June 30, 2007, 12,500 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 1,000,000 shares,
respectively, per fiscal year.
The
weighted-average grant-date fair value of stock options granted to employees
and
directors during the three and nine months ended June 30, 2007 was $9.14 and
$9.37 per share, respectively. Pre-tax unrecognized compensation expense for
stock options granted to employees and outside directors, net of estimated
forfeitures, was $10.6 million as of June 30, 2007, and will be recognized
as
expense over a weighted-average period of approximately 2.7 years.
The
weighted-average grant-date fair value of restricted stock granted to employees
during the three and nine months ended June 30, 2007 was $30.72 and $30.64
per
share, respectively. Pre-tax unrecognized compensation expense for unvested
restricted stock granted to employees, net of estimated forfeitures, was $53.8
million as of June 30, 2007, and will be recognized as expense over a
weighted-average period of approximately 2.9 years.
The
weighted-average grant-date fair value of restricted stock units granted to
employees during the nine months ended June 30, 2007 was $31.78 per
share. Pre-tax unrecognized compensation expense for unvested
restricted stock units granted to employees, net of estimated forfeitures,
was
$3.4 million as of June 30, 2007, and will be recognized as expense over a
weighted-average period of approximately 1.6 years.
Under
one
of its non-qualified fixed stock option plans, the Company may grant stock
options to its independent contractor Financial Advisors. In
addition, the Company may grant restricted stock units or restricted shares
of
common stock to its independent contractor Financial Advisors under one of
its
restricted stock plans. The Company accounts for share-based awards
to its independent contractor Financial Advisors in accordance with EITF No.
96-18, “Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and
EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (see Note 18 of the Notes to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2006 for more
information). The Company’s net income for the three and nine months
ended June 30, 2007 includes $1.9 million and $4.8 million, respectively, of
compensation costs and $0.7 million and $1.8 million, respectively, of income
tax benefits related to the Company’s share-based plans available for awards to
its independent contractor Financial Advisors. The Company’s net
income for the three and nine months ended June 30, 2006 includes $0.4 million
and $1.2 million, respectively, of compensation costs and $0.2 million and
$0.4
million, respectively, of income tax benefits related to the Company’s
share-based plans available for awards to its independent contractor Financial
Advisors.
During
the three months ended June 30, 2007, the Company granted no stock options
and
25,734 shares of restricted stock to its independent contractor Financial
Advisors. During the nine months ended June 30, 2007, the Company granted
343,600 stock options and 47,482 shares of restricted stock to its independent
contractor Financial Advisors.
The
weighted-average grant-date fair value of stock options granted to independent
contractor Financial Advisors during the nine months ended June 30, 2007 was
$8.96 per share. As of June 30, 2007, there was $8.1 million of total
unrecognized pre-tax compensation cost related to unvested stock options granted
to its independent contractor Financial Advisors based on estimated fair value
at that date. These costs are expected to be recognized over a
weighted average period of approximately 3.3 years.
The
weighted-average grant-date fair value of restricted stock granted to
independent contractor Financial Advisors during the three months ended June
30,
2007 was $30.90 per share. The weighted-average grant-date fair value of
restricted stock granted to independent contractor Financial Advisors during
the
nine months ended June 30, 2007 was $30.91 per share. As of June 30,
2007, here was $1.2 million of total unrecognized pre-tax compensation cost
related to unvested restricted shares granted to its independent contractor
Financial Advisors based on estimated fair value at that date. These
costs are expected to be recognized over a weighted average period of
approximately 4.9 years.
Note
9 - Commitments and Contingencies:
The
Company is the lessor in a leveraged commercial aircraft transaction with
Continental Airlines, Inc. (“Continental"). The Company's ability to
realize its expected return is dependent upon this airline’s ability to fulfill
its lease obligation. In the event that this airline defaults on its
lease commitment and the Trustee for the debt holders is unable to re-lease
or
sell the plane with adequate terms, the Company would suffer a loss of some
or
all of its investment. The value of this leveraged lease with
Continental was approximately $10.1 million as of June 30, 2007. The
Company's equity investment represented 20% of the aggregate purchase price;
the
remaining 80% was funded by public debt issued in the form of equipment trust
certificates. The residual value of the aircraft at the end of the
lease term of approximately 17 years is projected to be 15% of the original
cost. This lease expires in May 2014.
Although
Continental remains current on its lease payments to the Company, the inability
of Continental to make its lease payments, or the termination or modification
of
the lease through a bankruptcy proceeding, could result in the write-down of
the
Company's investment and the acceleration of certain income tax
payments. The Company continues to monitor this lessee for specific
events or circumstances that would increase the likelihood of a default on
Continental’s obligations under this lease.
The
Company was also the lessor in a leveraged commercial aircraft transaction
with
Delta Air Lines, Inc. (“Delta”). Delta filed for bankruptcy
protection on September 14, 2005. Accordingly, the Company recorded a
$6.5 million pre-tax charge in 2005 to fully reserve the balance of its
investment in the leveraged lease of an aircraft to Delta. The
Company had taken a $4 million pre-tax charge in 2004 to partially reserve
for
this investment. No amount of these charges represented a cash
expenditure. During the second quarter of fiscal 2007, the Company
sold its interest in the Delta transaction for $2 million, which was recognized
as a pre-tax gain within Other Revenue. Upon closing, certain income
tax obligations of approximately $8.5 million were accelerated and paid during
the quarter. These tax payments did not impact net earnings, as these
amounts were previously recorded as deferred tax liabilities.
RJBank
has outstanding at any time a significant number of commitments to extend credit
or purchase loans. These arrangements are subject to strict credit control
assessments and each client's credit worthiness is evaluated on a case-by-case
basis. A summary of commitments to extend credit, purchase loans and letters
of
credit outstanding is as follows:
|
|
June
30,
|
|
September
30,
|
|
|
2007
|
|
2006
|
|
|
(in
000's)
|
|
|
|
|
|
Standby
letters of credit
|
|
$ 100,397
|
|
$ 55,193
|
Consumer
lines of credit
|
|
30,426
|
|
25,772
|
Commercial
lines of credit
|
|
1,173,526
|
|
760,253
|
Unfunded
loan commitments - variable rate
|
|
561,862
|
|
264,663
|
Unfunded
loan commitments - fixed rate
|
|
14,235
|
|
6,412
|
Because
many commitments expire without being funded in whole or part, the contract
amounts are not estimates of future cash flows.
In
the
normal course of business, RJBank issues, or participates in the issuance of,
financial standby letters of credit whereby it provides an irrevocable guarantee
of payment in the event the letter of credit is drawn down by the
beneficiary. As of June 30, 2007, $100.4 million of such letters of
credit were outstanding. Of the letters of credit outstanding, $100
million are underwritten as part of a larger corporate credit
relationship. In the event that a letter of credit is drawn down,
RJBank would pursue repayment from the account party under the existing
borrowing relationship, or would liquidate collateral, or both. The
proceeds from repayment or liquidation of collateral are expected to satisfy
the
maximum potential future amount of any payments of amounts drawn down under
the
existing letters of credit.
At
June
30, 2007 and September 30, 2006, no securities were pledged by RJBank as
collateral with the FHLB for advances. In lieu of pledging securities
as collateral for advances, RJBank provided the FHLB with a blanket lien against
RJBank's entire portfolio of residential mortgage loans.
As
of
June 30, 2007, RJBank has entered into $1.35 billion in reverse repurchase
agreements, ranging from $355 million to $500 million, with three different
counterparties. Although RJBank is exposed to risk that these
counterparties may not fulfill their contractual obligations, the risk of
default is minimal due to the creditworthiness of these counterparties,
collateral received and the short duration of these agreements.
As
part
of an effort to increase brand awareness, the Company entered into a stadium
naming rights contract in July 1998. The contract expires in 2016 and has a
4%
annual escalator. Expenses of $765,000 and $736,000 were recognized
in the three months ended June 30, 2007 and 2006. Expenses of
$2,266,000 and $2,179,000 were recognized in the nine months ended June 30,
2007
and 2006.
In the normal course of business, the Company enters into underwriting
commitments. Transactions relating to such commitments that were open
at June 30, 2007 and were subsequently settled had no material effect on the
consolidated financial statements as of that date.
The
Company utilizes client marginable securities to satisfy deposits with clearing
organizations. At June 30, 2007, the Company had client margin
securities valued at $107.2 million pledged with a clearing organization to
meet
the point in time requirement of $68.6 million. At September 30, 2006, the
Company had client margin securities valued at $93.5 million pledged with a
clearing organization to meet the point in time requirement of $57.4
million.
The
Company has committed a total of $42.6 million, in amounts ranging from $200,000
to $2.0 million, to 40 different independent venture capital or private equity
partnerships. As of June 30, 2007, the Company has invested $31.7
million of that amount and has received $29.6 million in
distributions. Additionally, the Company is the general partner in
two internally sponsored private equity limited partnerships to which it has
committed $14 million. Of that amount, the Company has invested $12.2
million and has received $8.7 million in distributions as of June 30,
2007.
The
Company is the general partner in EIF Funds. These limited
partnerships invest in the merchant banking and private equity activities of
the
Company and other unaffiliated venture capital limited
partnerships. The EIF Funds were established as compensation and
retention measures for certain qualified key employees of the
Company. At June 30, 2007, the funds have unfunded commitments of
$3.6 million.
At
June
30, 2007, the approximate market values of collateral received that can be
repledged by the Company, were:
Sources
of collateral (in 000's):
|
|
Securities
purchased under agreements to resell
|
$
1,749,430
|
Securities
received in securities borrowed vs. cash transactions
|
1,379,195
|
Collateral
received for margin loans
|
1,426,932
|
Total
|
$
4,555,557
|
During
the quarter certain collateral was repledged and at June 30, 2007, the
approximate market values of this portion of collateral and financial
instruments owned that were repledged by the Company were:
Uses
of collateral and trading securities (in 000's):
|
|
Securities
purchased under agreements to resell
|
$
1,749,430
|
Securities
received in securities borrowed vs. cash transactions
|
1,348,284
|
Collateral
received for margin loans
|
219,873
|
Total
|
$
3,317,587
|
In
the
normal course of business, certain subsidiaries of the Company act as general
partner and may be contingently liable for activities of various limited
partnerships. These partnerships engaged primarily in real estate
activities. In the opinion of the Company, such liabilities, if any, for the
obligations of the partnerships will not in the aggregate have a material
adverse effect on the Company's consolidated financial position.
The
Company and its subsidiaries maintain one committed and several uncommitted
lines of credit denominated in U.S. dollars and one uncommitted line of credit
denominated in Canadian dollars. At June 30, 2007, the aggregate
domestic lines were $1.21 billion and CDN $40 million,
respectively. During the three months ended June 30, 2007, the
Company entered into a $500 million uncommitted tri-party repurchase agreement
line of credit. Under this agreement, the Company pledges certain of
its trading inventory as collateral against borrowings on this
line. The required market value of the collateral is generally
102% of the cash borrowed. The rate is set each day at 20 basis
points over the opening Fed Funds rate and this agreement can be terminated
by
either party on any business day. The outstanding balances against
these lines of credit at June 30, 2007 were $426.9 million and CDN $3.5 million,
respectively. The interest rates for the lines of credit are variable
and are based on the Fed Funds rate, LIBOR, and Canadian prime
rate. The Company’s committed $200 million line of credit is subject
to a 0.125% per annum facility fee. RJBank has $55 million in FHLB
advances outstanding at June 30, 2007, which are comprised of one short-term,
fixed rate advance and several long-term, fixed rate advances. RJBank
had $1.21 billion in credit available from the FHLB at June 30,
2007.
The
Company’s joint ventures in Turkey and Argentina have multiple settlement lines
of credit. The Company has guaranteed certain of these settlement
lines of credit as follows: four in Turkey totaling $22.5 million and one in
Argentina for $3 million. On June 30, 2007, there was an outstanding
balance of $313,000 on the settlement lines in Turkey. At June 30,
2007 the aggregate unsecured settlement lines of credit available were $77.5
million, and there were outstanding balances of $989,000 on these
lines. The Company has also from time to time authorized performance
guarantees for the completion of trades with counterparties in Argentina and
Turkey. At June 30, 2007, there were no outstanding performance guarantees
in
Turkey or Argentina.
The
Company guarantees the existing mortgage debt of RJA of approximately $65.6
million. The Company guarantees interest rate swap obligations of RJ
Capital Services, Inc. The Company has also committed to lend to or
guarantee obligations of RJTCF of up to $100 million upon request, subject
to
certain limitations as well as annual review and renewal. RJTCF
borrows in order to invest in partnerships which purchase and develop properties
qualifying for tax credits. These investments in project partnerships are then
sold to various tax credit funds, which have third party investors, and for
which RJTCF serves as the managing member or general partner. RJTCF
typically sells these investments within 90 days of their acquisition, and
the
proceeds from the sales are used to repay RJTCF’s borrowings. Additionally,
RJTCF may make short-term loans or advances to project partnerships on behalf
of
the tax credit funds in which it serves as managing member or general
partner. At June 30, 2007, cash funded to invest in either loans or
investments in project partnerships was $42.1 million. In addition,
at June 30, 2007, RJTCF is committed to additional future fundings of $79.2
million related to project partnerships that have not yet been sold to various
tax credit funds. RJTCF has also issued certain guarantees to various
third parties related to elements of specific performance of certain project
partnerships which have been sold to various tax credit funds. RJTCF
is not the primary guarantor of these obligations which aggregate to a
cumulative maximum obligation of approximately $5.7 million as of June 30,
2007.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately $6.8 million by the Turkish tax
authorities. The authorities applied a significantly different
methodology than in the prior year’s audit. RJY is vigorously
contesting most aspects of this assessment and has filed an appeal with the
Turkish tax court. Audits of 2002 through 2004 are anticipated and
their outcome is unknown in light of the change in methodology and the pending
litigation. The Company has recorded a provision for loss in its consolidated
financial statements for its net equity interest in this joint
venture. As of June 30, 2007, RJY had total capital of approximately
$12.4 million, of which the Company owns approximately 73%.
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. The Company is contesting the
allegations in these cases and believes that there are meritorious defenses
in
each of these lawsuits and arbitrations. In view of the number and
diversity of claims against the Company, the number of jurisdictions in which
litigation is pending and the inherent difficulty of predicting the outcome
of
litigation and other claims, the Company cannot state with certainty what the
eventual outcome of pending litigation or other claims will be. In the
opinion of the Company's management, based on current available information,
review with outside legal counsel, and consideration of amounts provided for
in
the accompanying consolidated financial statements with respect to these
matters, ultimate resolution of these matters will not have a material adverse
impact on the Company's financial position or results of operations.
However, resolution of one or more of these matters may have a material effect
on the results of operations in any future period, depending upon the ultimate
resolution of those matters and upon the level of income for such
period.
Note
10 – Capital Transactions:
The
Company does not have a formal stock repurchase plan. Shares are
repurchased at the discretion of management pursuant to prior authorization
from
the Board of Directors. On May 20, 2004, the Board of Directors
authorized purchases of up to $75 million. Since that date 417,334
shares have been repurchased for a total of $8.2 million, leaving $66.8 million
available to repurchase shares. Historically the Company has
considered such purchases when the price of its stock reaches or approaches
1.5
times book value or when employees surrender shares as payment for option
exercises. The decision to repurchase shares is subject to cash
availability and other factors. The Company did not repurchase any
stock during the three months ended June 30, 2007. During the nine
months ended June 30, 2007, the Company only purchased shares that were
surrendered by employees as payment for option exercises.
Note
11 - Regulation and Capital Requirements:
Certain
broker-dealer subsidiaries of the Company are subject to the requirements of
the
Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of
1934. Raymond James & Associates, Inc. (“RJA”), a member firm of
the New York Stock Exchange (“NYSE”), is also subject to the rules of the NYSE,
whose requirements are substantially the same. Rule 15c3-1 requires that
aggregate indebtedness, as defined, not exceed fifteen times net capital, as
defined. Rule 15c3-1 also provides for an “alternative net capital requirement”,
which RJA, Raymond James Financial Services, Inc. (“RJFS”) and Heritage Fund
Distributors, Inc. (“HFD”) have elected. It requires that minimum net
capital, as defined, be equal to the greater of $250,000 or two percent of
Aggregate Debit Items arising from client transactions. The NYSE may
require a member firm to reduce its business if its net capital is less than
four percent of Aggregate Debit Items and may prohibit a member firm from
expanding its business and declaring cash dividends if its net capital is less
than five percent of Aggregate Debit Items. The net capital position
of RJA at June 30, 2007 and September 30, 2006 was as follows:
|
June
30,
|
|
September
30,
|
|
2007
|
|
2006
|
Raymond
James & Associates, Inc.:
|
($
in 000's)
|
(alternative
method elected)
|
|
|
|
Net
capital as a percent of Aggregate
|
|
|
|
Debit
Items
|
21.43%
|
|
27.58%
|
Net
capital
|
$
302,038
|
|
$
369,443
|
Less:
required net capital
|
(28,182)
|
|
(26,793)
|
Excess
net capital
|
$
273,856
|
|
$
342,650
|
At
June
30, 2007 and September 30, 2006, RJFS had no Aggregate Debit Items and therefore
the minimum net capital of $250,000 was applicable. The net capital
position of RJFS at June 30, 2007 and September 30, 2006 was as
follows:
|
June
30,
|
|
September
30,
|
|
2007
|
|
2006
|
Raymond
James Financial Services, Inc.:
|
(in
000's)
|
(alternative
method elected)
|
|
|
|
Net
capital
|
$
74,717
|
|
$
41,200
|
Less:
required net capital
|
(250)
|
|
(250)
|
Excess
net capital
|
$
74,467
|
|
$
40,950
|
At
June
30, 2007 and September 30, 2006, HFD had no Aggregate Debit Items and therefore
the minimum net capital of $250,000 was applicable. The net capital
position of HFD at June 30, 2007 and September 30, 2006 was as
follows:
|
June
30,
|
|
September
30,
|
|
2007
|
|
2006
|
Heritage
Fund Distributors, Inc.:
|
(in
000’s)
|
(alternative
method elected)
|
|
|
|
Net
capital
|
$
5,562
|
|
$
1,669
|
Less:
required net capital
|
(250)
|
|
(250)
|
Excess
net capital
|
$
5,312
|
|
$
1,419
|
RJ
Ltd.
is subject to the Minimum Capital Rule (By-Law No. 17 of the Investment Dealers
Association ("IDA")) and the Early Warning System (By-Law No. 30 of the
IDA). The Minimum Capital Rule requires that every member shall have
and maintain at all times Risk Adjusted Capital greater than zero calculated
in
accordance with Form 1 (Joint Regulatory Financial Questionnaire and Report)
and
with such requirements as the Board of Directors of the IDA may from time to
time prescribe. Insufficient Risk Adjusted Capital may result in
suspension from membership in the stock exchanges or the IDA.
The
Early
Warning System is designed to provide advance warning that a member firm is
encountering financial difficulties. This system imposes certain sanctions
on
members who are designated in Early Warning Level 1 or Level 2 according to
their capital, profitability, liquidity position, frequency of designation
or at
the discretion of the IDA. Restrictions on business activities and
capital transactions, early filing requirements, and mandated corrective
measures are sanctions that may be imposed as part of the Early Warning
System. RJ Ltd. was not in Early Warning Level 1 or Level 2 at June
30, 2007 or September 30, 2006.
The
Risk
Adjusted Capital of RJ Ltd. was CDN$33,797,073 and CDN$42,841,000 at June 30,
2007 and September 30, 2006, respectively.
RJBank
is
subject to various regulatory and capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions
by
regulators. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, RJBank must meet specific capital
guidelines that involve quantitative measures of RJBank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. RJBank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require RJBank
to
maintain minimum amounts and ratios (set forth in the table below) of total
and
Tier I Capital (as defined in the regulations) to risk-weighted assets (as
defined). Management believes that, as of June 30, 2007 and September
30, 2006, the RJBank meets all capital adequacy requirements to which it is
subject.
As
of
June 30, 2007, the most recent notification from the Office of Thrift
Supervision categorized RJBank as “well capitalized” under the regulatory
framework for prompt corrective action. To be categorized as “well capitalized”,
RJBank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed RJBank's category.
|
|
|
To
be well capitalized
|
|
|
Requirement
for capital
|
under
prompt
|
|
|
adequacy
|
corrective
action
|
|
Actual
|
purposes
|
provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
($
in 000's)
|
As
of June 30, 2007:
|
|
|
|
|
|
|
Total
capital (to
|
|
|
|
|
|
|
risk-weighted
assets)
|
$
367,681
|
11.8%
|
$
249,470
|
8.0%
|
$
311,838
|
10.0%
|
Tier I
capital (to
|
|
|
|
|
|
|
risk-weighted
assets)
|
332,054
|
10.7%
|
124,735
|
4.0%
|
187,103
|
6.0%
|
Tier I
capital (to
|
|
|
|
|
|
|
adjusted
assets)
|
332,054
|
6.1%
|
216,956
|
4.0%
|
271,194
|
5.0%
|
|
|
|
To
be well capitalized
|
|
|
Requirement
for capital
|
under
prompt
|
|
|
adequacy
|
corrective
action
|
|
Actual
|
purposes
|
Provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
($
in 000's)
|
As
of September 30, 2006:
|
|
|
|
|
|
|
Total
capital (to
|
|
|
|
|
|
|
risk-weighted
assets)
|
$
219,339
|
12.0%
|
$ 146,716
|
8.0%
|
$ 183,396
|
10.0%
|
Tier I
capital (to
|
|
|
|
|
|
|
risk-weighted
assets)
|
196,415
|
10.7%
|
73,358
|
4.0%
|
110,037
|
6.0%
|
Tier I
capital (to
|
|
|
|
|
|
|
adjusted
assets)
|
196,415
|
6.4%
|
122,975
|
4.0%
|
153,719
|
5.0%
|
Note
12 - Earnings Per Share:
The
following table presents the computation of basic and diluted earnings per
share
(in 000’s, except per share amounts):
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
|
June
30,
|
June
30,
|
|
2007
|
2006
|
|
2007
|
2006
|
|
|
|
|
|
|
Net
income
|
$ 68,353
|
$
56,774
|
|
$
187,463
|
$
163,414
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
|
|
|
outstanding
during the period
|
116,135
|
113,464
|
|
115,353
|
112,376
|
|
|
|
|
|
|
Dilutive
effect of stock options and awards (1)
|
3,005
|
3,496
|
|
3,072
|
3,180
|
|
|
|
|
|
|
Weighted
average diluted common
|
|
|
|
|
|
shares
(1)
|
119,140
|
116,960
|
|
118,425
|
115,556
|
|
|
|
|
|
|
Net
income per share – basic
|
$ 0.59
|
$ 0.50
|
|
$ 1.63
|
$ 1.45
|
|
|
|
|
|
|
Net
income per share - diluted (1)
|
$ 0.57
|
$ 0.48
|
|
$ 1.58
|
$ 1.41
|
|
|
|
|
|
|
Securities
excluded from weighted average
|
|
|
|
|
|
diluted
common shares because their
|
|
|
|
|
|
effect
would be antidulitive
|
694
|
-
|
|
1,247
|
-
|
(1)
|
Diluted
earnings per share is computed on the basis of the weighted average
number
of shares of common stock plus the effect of dilutive potential common
shares outstanding during the period using the treasury stock
method. Dilutive potential common shares include stock options,
units and awards.
|
Note
13 - Derivative Financial Instruments:
The
Company uses interest rate swaps as well as futures contracts as part of its
fixed income business. These positions are marked to market with the
gain or loss and the related interest recorded in Net Trading Profits within
the
statement of income for the period. Any collateral exchanged as part
of the swap agreement is recorded in Broker Receivables and Payables in the
consolidated statement of financial condition for the period. At June
30, 2007 and September 30, 2006, the Company had outstanding interest rate
derivative contracts with notional amounts of $3.0 billion and $2.3 billion,
respectively. The notional amount of a derivative contract does not
change hands; it is simply used as a reference to calculate
payments. Accordingly, the notional amount of the Company’s
derivative contracts outstanding at June 30, 2007 vastly exceeds the possible
losses that could arise from such transactions. The net market value
of all open swap positions at June 30, 2007 and September 30, 2006 was $27
million and $13 million, respectively.
The
Company is exposed to credit losses in the event of nonperformance by the
counterparties to its interest rate swap agreements. The Company
performs a credit evaluation of counterparties prior to entering into swap
transactions and monitors their credit standings. Currently, the Company
anticipates that all counterparties will be able to fully satisfy their
obligations under those agreements. The Company may require collateral from
counterparties to support these obligations as established by the credit
threshold specified by the agreement and/or as a result of monitoring the credit
standing of the counterparties. The Company is also exposed to
interest rate risk related to its interest rate swap agreements. The
Company monitors exposure in its derivatives subsidiary daily based on
established limits with respect to a number of factors, including interest
rate,
spread, ratio and basis, and volatility risks. These exposures are
monitored both on a total portfolio basis and separately for selected maturity
periods.
Note
14 - Segment Information:
SFAS
No.
131, Disclosures about Segments of an Enterprise and Related Information,
establishes standards for reporting information about operating
segments. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing
performance. Revisions have been made in the segment disclosures for
the three and nine months ended June 30, 2006 to conform to the current period
presentation. As a result, financial service fees revenue and
investment advisory fees expense increased by approximately $3.3 million and
$9.6 million, respectively, for the three and nine months ended June 30, 2006
in
the Asset Management segment. These revisions did not impact the
Company’s net income for the three or nine months ended June 30,
2006.
The
Company currently operates through the following seven business segments:
Private Client Group; Capital Markets; Asset Management; RJBank; Emerging
Markets; Stock Loan/Borrow and various corporate investments combined in the
"Other" segment. The business segments are based upon factors such as
the services provided and the distribution channels served and are consistent
with how the Company assesses performance and determines how to allocate
resources throughout the Company and its subsidiaries. The financial
results of the Company's segments are presented using the same policies as
those
described in Note 1 of the Notes to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2006. Segment data includes charges allocating
corporate overhead and benefits to each segment. Intersegment revenues, charges,
receivables and payables are eliminated between segments upon
consolidation.
The
Private Client Group segment includes the retail branches of the Company's
broker-dealer subsidiaries located throughout the United States, Canada and
the
United Kingdom. These branches provide securities brokerage services
including the sale of equities, mutual funds, fixed income products and
insurance products to their individual clients. The segment includes
net interest earnings on client margin loans and cash
balances. Additionally, this segment includes the correspondent
clearing services that the Company provides to other broker-dealer
firms.
The
Capital Markets segment includes institutional sales and trading in the United
States, Canada and Europe. It provides securities brokerage, trading, and
research services to institutions with an emphasis on the sale of U.S. and
Canadian equities and fixed income products. This segment also
includes the Company's management of and participation in underwritings, merger
and acquisition services, public finance activities, and the operations of
Raymond James Tax Credit Funds.
The
Asset
Management segment includes investment portfolio management services of Eagle
Asset Management, Inc., Awad Asset Management, Inc., and Raymond James
Consulting Services (RJA’s asset management services division), mutual fund
management by Heritage Asset Management, Inc., private equity management by
Raymond James Capital, Inc. and RJ Ventures, LLC, and trust services of Raymond
James Trust Company and Raymond James Trust Company West. In addition
to the asset management services noted above, this segment also offers fee-based
programs to clients who have contracted for portfolio management services from
outside money managers.
RJBank
is
a separate segment, which provides consumer, residential, and commercial loans,
as well as FDIC-insured deposit accounts to clients of the Company's
broker-dealer subsidiaries and to the general public.
The
Emerging Markets segment includes various joint ventures in Latin America and
Turkey. These joint ventures operate in securities brokerage,
investment banking and asset management.
The
Stock
Loan/Borrow segment involves the borrowing and lending of securities from and
to
other broker-dealers, financial institutions and other counterparties, generally
as an intermediary.
The
Other
segment includes various investment and corporate activities of the
Company.
Information
concerning operations in these segments of business is as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
2007
|
2006
|
2007
|
2006
|
|
(in
000’s)
|
(in
000’s)
|
Revenues:
|
|
|
|
|
Private
Client Group
|
$
499,475
|
$
458,622
|
$
1,421,824
|
$
1,251,272
|
Capital
Markets
|
146,383
|
133,004
|
373,508
|
361,796
|
Asset
Management
|
59,667
|
54,692
|
182,497
|
156,022
|
RJBank
|
79,221
|
28,457
|
186,000
|
68,975
|
Emerging
Markets
|
14,676
|
17,511
|
43,126
|
43,360
|
Stock
Loan/Borrow
|
19,573
|
16,850
|
49,284
|
42,605
|
Other
|
3,758
|
5,529
|
14,414
|
29,055
|
Total
|
$
822,753
|
$
714,665
|
$
2,270,653
|
$
1,953,085
|
|
|
|
|
|
Income
Before Provision for Income Taxes:
|
|
Private
Client Group
|
$ 56,158
|
$ 54,246
|
$ 161,527
|
$ 129,588
|
Capital
Markets
|
25,571
|
20,904
|
53,022
|
57,564
|
Asset
Management
|
15,778
|
12,955
|
47,233
|
35,072
|
RJBank
|
8,729
|
4,632
|
24,962
|
10,058
|
Emerging
Markets
|
(2,931)
|
3,830
|
1,674
|
7,393
|
Stock
Loan/Borrow
|
1,421
|
2,422
|
2,995
|
6,970
|
Other
|
5,172
|
(2,487)
|
5,206
|
16,502
|
Pre-tax
Income
|
$
109,898
|
$ 96,502
|
$ 296,619
|
$ 263,147
|
The
following table presents the Company's total assets on a segment
basis:
|
|
|
|
June
30,
|
September
30,
|
|
2007
|
2006
|
|
(in
000’s)
|
Total
Assets:
|
|
|
Private
Client Group *
|
$ 6,211,344
|
$ 5,370,018
|
Capital
Markets **
|
1,932,088
|
1,369,479
|
Asset
Management
|
156,863
|
76,684
|
RJBank
|
5,422,301
|
3,074,782
|
Emerging
Markets
|
63,953
|
58,950
|
Stock
Loan/Borrow
|
1,519,575
|
1,250,857
|
Other
|
365,077
|
315,880
|
Total
|
$
15,671,201
|
$
11,516,650
|
|
*
|
Includes
$46 million of goodwill allocated pursuant to SFAS No. 142 "Goodwill
and
Other Intangible Assets".
|
|
**
|
Includes
$17 million of goodwill allocated pursuant to SFAS No.
142.
|
The
Company has operations in the United States, Canada, Europe and joint ventures
in Latin America and Turkey. Substantially all long-lived assets are
located in the United States. The following table represents revenue
by geographic region:
|
Three
Months Ended
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
2007
|
2006
|
2007
|
2006
|
|
(in
000’s)
|
(in
000’s)
|
Revenues:
|
|
|
|
|
United
States
|
$ 732,547
|
$ 627,219
|
$
2,013,485
|
$
1,697,039
|
Canada
|
63,551
|
59,157
|
177,651
|
175,756
|
Europe
|
12,682
|
11,814
|
38,957
|
39,760
|
Other
|
13,973
|
16,475
|
40,560
|
40,530
|
Total
|
$ 822,753
|
$ 714,665
|
$
2,270,653
|
$
1,953,085
|
The
Company has $17.7 million of equity in emerging market joint ventures, which
carry greater risk than amounts invested in developed markets.
Business
and Total Company Overview
The
following Management’s Discussion and Analysis is intended to help the reader
understand the results of operations and the financial condition of the
Company. Management’s Discussion and Analysis is provided as a
supplement to, and should be read in conjunction with, the Company’s financial
statements and accompanying notes to the financial statements.
The
Company’s overall financial results continue to be highly and directly
correlated to the direction and activity levels of the U.S. equity
markets. Improved Financial Advisor metrics in the Private Client
Group, continued activity levels in investment banking, improved results in
Fixed Income, increased assets under management, dramatic growth at RJBank,
and
the recent improvement in the U.S. equity markets are all positive factors
which
contributed to the record results for the June 2007 quarter.
Results
of Operations – Three Months Ended June 30, 2007 Compared with the Three Months
Ended June 30, 2006
Total
Company
Gross
revenues, net revenues and earnings all established quarterly
records. Net revenues of $688.7 million represented a 9% increase
over the prior year. All revenue line items were up over the same quarter of
the
prior year with the exception of financial service fees. Financial
service fees in the prior year included a one time adjustment to increase
revenue by approximately $8.2 million. Net interest of $57.6 million was also
a
quarterly record and 30% above the prior year quarter. Diluted
earnings per share increased to $0.57, up 19% from $0.48 in the prior
year. Excluding the one time adjustment to financial service fees,
the prior year figure would have been $0.44.
Segments
The
Company currently operates through the following seven business segments:
Private Client Group; Capital Markets; Asset Management; RJBank; Emerging
Markets; Stock Loan/Borrow and various corporate investments and expenses
combined in the "Other" segment.
The
following tables present the gross revenues and pre-tax income of the Company
on
a segment basis:
|
Three
Months Ended
|
|
|
June
30,
|
June
30,
|
Percentage
|
|
2007
|
2006
|
Change
|
|
($
in 000's)
|
|
Revenues:
|
|
|
|
Private
Client Group
|
$
499,475
|
$
458,622
|
9%
|
Capital
Markets
|
146,383
|
133,004
|
10%
|
Asset
Management
|
59,667
|
54,692
|
9%
|
RJBank
|
79,221
|
28,457
|
178%
|
Emerging
Markets
|
14,676
|
17,511
|
(16%)
|
Stock
Loan/Borrow
|
19,573
|
16,850
|
16%
|
Other
|
3,758
|
5,529
|
(32%)
|
Total
|
$
822,753
|
$
714,665
|
15%
|
|
|
|
|
Income
Before Provision for Income Taxes:
|
|
Private
Client Group
|
$ 56,158
|
$ 54,246
|
4%
|
Capital
Markets
|
25,571
|
20,904
|
22%
|
Asset
Management
|
15,778
|
12,955
|
22%
|
RJBank
|
8,729
|
4,632
|
88%
|
Emerging
Markets
|
(2,931)
|
3,830
|
(177%)
|
Stock
Loan/Borrow
|
1,421
|
2,422
|
(41%)
|
Other
|
5,172
|
(2,487)
|
308%
|
Pre-tax
Income
|
$
109,898
|
$ 96,502
|
14%
|
Net
Interest Analysis
The
following table presents the net interest income of the Company for the periods
indicated. The respective average rates are presented on an
annualized basis:
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
($
in 000's)
|
|
($
in 000's)
|
Interest
Revenue
|
|
|
|
|
|
|
|
Margin
balances:
|
|
|
|
|
|
|
|
Average
balance
|
$
1,423,603
|
|
$
1,346,085
|
|
$
1,387,138
|
|
$
1,312,279
|
Average
rate
|
7.6%
|
|
7.6%
|
|
7.7%
|
|
7.1%
|
Interest
revenue - margin balances
|
27,116
|
|
25,458
|
|
80,622
|
|
70,047
|
|
|
|
|
|
|
|
|
Assets
segregated pursuant to federal regulations:
|
|
|
|
|
|
|
|
Average
balance
|
3,732,500
|
|
3,239,519
|
|
3,630,428
|
|
2,926,372
|
Average
rate
|
5.3%
|
|
5.0%
|
|
5.3%
|
|
4.6%
|
Interest
revenue - segregated assets
|
49,269
|
|
40,413
|
|
143,678
|
|
99,999
|
|
|
|
|
|
|
|
|
Raymond
James Bank, FSB interest revenue:
|
|
|
|
|
|
|
|
Average
earning assets
|
5,243,314
|
|
1,942,746
|
|
4,036,846
|
|
1,653,812
|
Average
rate
|
6.0%
|
|
5.8%
|
|
6.1%
|
|
5.5%
|
Interest
revenue – Raymond James Bank, FSB
|
78,939
|
|
28,254
|
|
185,438
|
|
68,518
|
|
|
|
|
|
|
|
|
Stock
borrowed interest revenue
|
19,573
|
|
16,850
|
|
49,284
|
|
42,605
|
|
|
|
|
|
|
|
|
Interest
revenue- variable interest entities
|
174
|
|
224
|
|
727
|
|
737
|
Other
interest revenue
|
16,620
|
|
14,661
|
|
54,978
|
|
38,626
|
|
|
|
|
|
|
|
|
Total
interest revenue
|
$ 191,691
|
|
$ 125,860
|
|
$ 514,727
|
|
$ 320,532
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
Client
interest program:
|
|
|
|
|
|
|
|
Average
balance
|
$
4,616,939
|
|
$
4,002,013
|
|
$
4,509,811
|
|
$
3,740,787
|
Average
rate
|
4.4%
|
|
4.0%
|
|
4.4%
|
|
3.5%
|
Interest
expense - client interest program
|
50,795
|
|
39,711
|
|
149,086
|
|
98,208
|
|
|
|
|
|
|
|
|
Raymond
James Bank, FSB interest expense:
|
|
|
|
|
|
|
|
Average
interest bearing liabilities
|
4,897,454
|
|
1,757,348
|
|
3,761,105
|
|
1,474,569
|
Average
rate
|
4.6%
|
|
4.2%
|
|
4.6%
|
|
3.8%
|
Interest
expense – Raymond James Bank, FSB
|
56,441
|
|
18,501
|
|
129,726
|
|
41,765
|
|
|
|
|
|
|
|
|
Stock
loaned interest expense
|
17,229
|
|
13,297
|
|
42,788
|
|
32,556
|
|
|
|
|
|
|
|
|
Interest
expense- variable interest entities
|
1,842
|
|
2,732
|
|
5,494
|
|
5,261
|
Other
interest expense
|
7,786
|
|
7,448
|
|
25,280
|
|
16,726
|
|
|
|
|
|
|
|
|
Total
interest expense
|
$ 134,093
|
|
$ 81,689
|
|
$ 352,374
|
|
$ 194,516
|
|
|
|
|
|
|
|
|
Net
interest income
|
$ 57,598
|
|
$ 44,171
|
|
$ 162,353
|
|
$ 126,016
|
Private
Client Group
The
Private Client Group (“PCG”) segment includes the retail branches of the
Company's broker-dealer subsidiaries located throughout the United States,
Canada, and the United Kingdom. The Private Client Group Financial
Advisors provide securities brokerage services including the sale of equity
securities, mutual funds, fixed income instruments, annuities and insurance
products. This segment accounts for the majority of the Company's
revenues (61% of total company revenues for the three months ended June 30,
2007). It generates revenues principally through commissions charged
on securities transactions, fees from wrap fee investment accounts and the
interest revenue generated from client margin loans and cash
balances. The Company primarily charges for the services provided to
its Private Client Group clients based on commission schedules or through asset
based advisory fees.
The
success of the Private Client Group is dependent upon the quality and integrity
of its Financial Advisors and support personnel and the Company's ability to
attract, retain, and motivate a sufficient number of these
associates. The Company faces competition for qualified associates
from major financial services companies, including other brokerage firms,
insurance companies, banking institutions, and discount brokerage
firms. The Company currently offers several affiliation alternatives
for Financial Advisors ranging from the traditional branch setting, under which
the Financial Advisors are employees of the Company and the costs associated
with running the branch are incurred by the Company, to the independent
contractor model, under which the Financial Advisors are responsible for all
of
their own direct costs. Accordingly, the independent contractor
Financial Advisors are paid a larger percentage of commissions and
fees. By offering alternative models to potential and existing
Financial Advisors, the Company is able to effectively compete with a wide
variety of other brokerage firms for qualified Financial Advisors, as Financial
Advisors can choose the model that best suits their practice and
profile. For the past several years, the Company has focused on
increasing its minimum production standards and recruiting Financial Advisors
with high average production. The following table presents a summary
of Private Client Group Financial Advisors as of the periods
indicated:
|
June
30,
|
|
March
31,
|
|
June
30,
|
|
2007
|
|
2007
|
|
2006
|
Private
Client Group - Financial Advisors:
|
|
|
|
|
|
Traditional
Branch
|
1,244
|
|
1,235
|
|
1,219
|
Independent
Contractor
|
3,209
|
|
3,263
|
|
3,439
|
Total Financial Advisors
|
4,453
|
|
4,498
|
|
4,658
|
PCG
profits were up 4% on a 9% increase in revenues over the same quarter in the
prior year. The $41 million increase in revenues is attributable to
increased commission and fee revenue, with 56% of the increase in commissions
generated by RJA’s employee Financial Advisors. RJA continues to
successfully recruit high producing Financial Advisors, with an increase of
24
individuals over the prior year. In addition to a greater number of Financial
Advisors, the average annual production per Financial Advisor increased to
$465,000 from $402,000. Raymond James Financial Services had a decline of 246
in
the number of Financial Advisors, which was more than offset by an increase
in
the average annual production levels of the over 3,000 Financial Advisors to
approximately $300,000 from $270,000. The increased productivity led
to an 8% increase in commission and fee revenue. RJ Ltd. has
added 17 Financial Advisors since the prior year and had a 6% increase in
commission and fee revenue. Net interest for this segment was $32 million and
represented approximately 56% of the segment’s pretax results.
Private
Client Group net interest represented 55% of the Company’s total net interest,
down from 63% in the prior year despite the fact that the actual dollar amount
of net interest increased to $32 million from $28 million in the prior
year. Total Company net interest has increased at a higher rate due
largely to increases at RJBank. Net interest in the Private Client Segment
is
generated by customer balances, predominantly the earnings on margin loans
and
assets segregated pursuant to federal regulations less interest paid on customer
cash balances. Higher balances have generated increased interest
earnings.
Capital
Markets
The
Capital Markets segment includes institutional sales and trading in the United
States, Canada, and Europe; management of and participation in underwritings;
financial advisory services including private placements and merger and
acquisition services; public finance activities; and the syndication and related
management of investment partnerships designed to yield returns in the form
of
low-income housing tax credits to institutions. The Company provides
securities brokerage services to institutions with an emphasis on the sale
of
U.S. and Canadian equities and fixed income products. Institutional sales
commissions account for 52% of the segment’s revenues and are driven primarily
through trade volume, resulting from a combination of general market activity
and by the Capital Markets group’s ability to find attractive investment
opportunities and promote those opportunities to potential and existing
clients. Revenues from investment banking activities are driven
principally by the number and the dollar value of the transactions with which
the Company is involved. This segment also includes trading of
taxable and tax-exempt fixed income products, as well as equity securities
in
the OTC and Canadian markets. This trading involves the purchase of
securities from, and the sale of securities to, clients of the Company or other
dealers who may be purchasing or selling securities for their own account or
acting as agent for their clients. Profits and losses related to this trading
activity are primarily derived from the spreads between bid and ask prices
in
the relevant market.
Revenues
in the Capital Markets segment were 10% above the prior year with the increase
predominantly related to increased investment banking revenues. This
increase included a 65% increase in domestic mergers and acquisition fee revenue
and a 22% increase in domestic underwriting fees over the same quarter in the
prior year. RJ Ltd. investment banking fees increased 13% as this quarter
included the largest underwriting in its history. Investment banking
revenues contribute significantly to the bottom line; as a result, the segment’s
pre-tax earnings increased 22%. Institutional commission revenue was
flat with the prior year, with an increase in fixed income commissions
offsetting a decline in equity commissions. Trading profits have
increased 24% over the prior year with improved results in fixed
income.
|
Three
Months Ended
|
|
June
30,
|
|
June
30,
|
|
2007
|
|
2006
|
Number
of managed/co-managed public equity offerings:
|
|
|
|
United
States
|
22
|
|
27
|
Canada
|
14
|
|
7
|
|
|
|
|
Total
dollars raised (in 000's):
|
|
|
|
United
States
|
$
5,948,290
|
|
$6,899,588
|
Canada
(in U.S. dollars)
|
$ 362,909
|
|
$ 134,770
|
Asset
Management
The
Asset
Management segment includes investment portfolio management services, mutual
fund management, private equity management, and trust
services. Investment portfolio management services include both
proprietary and selected outside money managers. The majority of the
revenue for this segment is generated by the investment advisory fees related
to
asset management services for individual investment portfolios and mutual
funds. These accounts are billed a fee based on a percentage of
assets. Investment advisory fees are charged based on either a single
point in time within the quarter, typically the beginning or end of a quarter,
or the “average daily” balances of assets under management. The balance of
assets under management is affected by both the performance of the underlying
investments and the new sales and redemptions of client accounts/funds.
Improving equity markets provide the Asset Management segment with the potential
to improve revenues from investment advisory fees as existing accounts
appreciate in value, in addition to individuals and institutions being more
likely to commit new funds to the equity markets. The following table
presents the assets under management as of the dates indicated:
|
June
30,
|
|
March
31,
|
|
Dec.
31,
|
|
June
30,
|
|
2007
|
|
2007
|
|
2006
|
|
2006
|
Assets
Under Management (in 000's):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eagle
Asset Management, Inc.
|
$
14,266,727
|
|
$
13,289,695
|
|
$
12,951,956
|
|
$
12,335,316
|
Heritage
Family of Mutual Funds
|
9,171,175
|
|
8,884,563
|
|
9,842,757
|
|
9,910,089
|
Raymond
James Consulting Services
|
9,500,542
|
|
8,810,559
|
|
8,508,212
|
|
7,484,119
|
Awad
Asset Management
|
704,398
|
|
755,685
|
|
1,028,454
|
|
1,071,161
|
Freedom
Accounts
|
7,558,255
|
|
6,728,802
|
|
5,920,265
|
|
4,471,471
|
Total Assets Under Management
|
$
41,201,097
|
|
$
38,469,304
|
|
$
38,251,644
|
|
$
35,272,156
|
|
|
|
|
|
|
|
|
Less:
Assets Managed for Affiliated Entities
|
5,069,619
|
|
4,575,138
|
|
4,320,643
|
|
3,628,540
|
|
|
|
|
|
|
|
|
Total Third Party Assets Under Management
|
$
36,131,478
|
|
$
33,894,166
|
|
$
33,931,001
|
|
$
31,643,616
|
Investment
Advisory fees increased 12% over the same quarter in the prior year, with assets
under management up 14%. Assets under management increased over the
prior year in all managed account types except for the Heritage money market
funds and Awad asset management. There have been two transfers of
$1.3 billion in the past twelve months moving cash balances from the Heritage
Cash Trust to RJBank. The most significant increases in assets under management
continue to be in Freedom, the managed mutual fund program, which is up $3
billion, or 69%, over the prior year. The increases in managed
account balances are largely driven by the increase in overall client assets,
a
significant portion of which have been brought in by recently affiliated
Financial Advisors.
RJBank
RJBank
provides residential, consumer, and corporate loans, as well as FDIC-insured
deposit accounts, to clients of the Company's broker-dealer subsidiaries and
to
the general public. RJBank also purchases residential whole loan
pools, and participates with other banks in corporate loan
syndications. RJBank generates revenue principally through the
interest income earned on the loans noted above and other investments, offset
by
the interest expense it incurs on client deposits and borrowings. RJBank’s
objective is to maintain a substantially duration-matched portfolio of assets
and liabilities.
Revenues
at RJBank increased $51 million, or 178%, net interest income increased over
$12
million, or 131%, and pre-tax income increased $4 million, or 88%, over the
same
quarter in the prior year. These dramatic increases are the result of
the increased earning asset and deposit balances at RJBank. In July 2006, RJA
began to utilize a new RJBank sweep option for client cash balances that had
been held in Heritage Cash Trust or in client brokerage accounts. The
second phase of the RJBank sweep program was completed on March 24, 2007. In
these first two phases, $2.6 billion was transferred to the RJBank sweep option
from other sweep alternatives. This increase in customer deposits has
enabled RJBank to increase its loan portfolio, both by the purchase of
residential loan pools and through commercial loan participations. At
June 30, 2007, RJBank had assets totaling $5.4 billion and has been growing
by
nearly $100 million per month in addition to the RJBank
transfers. The pre-tax earnings did not increase proportionately to
revenues as results are suppressed in periods of rapid loan growth due to the
related increase in loan loss reserves.
RJBank
has not been impacted by the recent subprime loan crisis as it has not
originated or invested in subprime loans.
Emerging
Markets
Emerging
Markets includes the results of the Company’s joint ventures in Latin America
and Turkey. The loss in the quarter reflects an additional reserve
taken related to unsettled tax matters in the Turkish joint
venture.
Stock
Loan/Stock Borrow
This
segment conducts its business through the borrowing and lending of securities
from and to other broker-dealers, financial institutions and other
counterparties, generally as an intermediary. The borrower of the
securities puts up a cash deposit, commonly 102% of the market value of the
securities, on which interest is earned. Accordingly, the lender receives cash
and pays interest. These cash deposits are adjusted daily to reflect changes
in
current market value. The net revenues of this operation are the
interest spreads generated.
Stock
Loan revenue is 16% above the prior year, the result of higher rates on
increased balances. However, spreads have
narrowed approximately 45 basis points over the prior year,
negatively impacting this segment’s results. Pre-tax income is down
41% from the prior year.
Other
The
other
segment consists of earnings on corporate cash, private equity investments
and
other investments offset by expenses, predominantly holding company executive
compensation. Current quarter results include $3.5 million in gains on RJF’s
private equity portfolio, and $1.7 million in Company owned life insurance
proceeds.
Results
of Operations – Nine Months Ended June 30, 2007 Compared with the Nine Months
Ended June 30, 2006
Except as discussed below, the underlying reasons for the variances to the
prior
year period are substantially the same as the comparative quarterly discussion
above and the statements contained in such foregoing discussion also apply
for
the nine month comparison.
Total
Company
For
the
nine months ended June 30, 2007, the Company’s net revenues increased 9% to a
record $1.92 billion, with net income increasing 15% to $187
million. Both periods included gains on nonrecurring
sales. Fiscal 2006 included $16 million in pre-tax gains on the sale
of NYSE and Montreal Stock Exchange seats, while fiscal 2007 includes $4.5
million in pre-tax gains on the sale of the Company’s interest in its joint
venture in India and its Delta airplane leveraged lease.
Segments
The
following tables present the revenues and pre-tax income of the Company on
a
segment basis:
|
Nine
Months Ended
|
|
June
30,
|
|
June
30,
|
|
Percentage
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
($
in 000’s)
|
|
|
Revenues:
|
|
|
|
|
|
Private
Client Group
|
$
1,421,824
|
|
$
1,251,272
|
|
14%
|
Capital
Markets
|
373,508
|
|
361,796
|
|
3%
|
Asset
Management
|
182,497
|
|
156,022
|
|
17%
|
RJBank
|
186,000
|
|
68,975
|
|
170%
|
Emerging
Markets
|
43,126
|
|
43,360
|
|
(1%)
|
Stock
Loan/Stock Borrow
|
49,284
|
|
42,605
|
|
16%
|
Other
|
14,414
|
|
29,055
|
|
(50%)
|
Total
|
$
2,270,653
|
|
$
1,953,085
|
|
16%
|
|
|
|
|
|
Income
Before Provision for Income Taxes:
|
|
|
|
|
Private
Client Group
|
$ 161,527
|
|
$ 129,588
|
|
25%
|
Capital
Markets
|
53,022
|
|
57,564
|
|
(8%)
|
Asset
Management
|
47,233
|
|
35,072
|
|
35%
|
RJBank
|
24,962
|
|
10,058
|
|
148%
|
Emerging
Markets
|
1,674
|
|
7,393
|
|
(77%)
|
Stock
Loan/Stock Borrow
|
2,995
|
|
6,970
|
|
(57%)
|
Other
|
5,206
|
|
16,502
|
|
(68%)
|
Pre-tax
Income
|
$ 296,619
|
|
$ 263,147
|
|
13%
|
Capital
Markets year to date results lag prior year results for the nine months by
8%. Trading profits are $3 million below prior year.
Statement
of Financial Condition Analysis
The
Company’s statement of financial condition consists primarily of cash and cash
equivalents (a large portion of which are segregated for the benefit of
customers), receivables and payables. The items represented in the
statement of financial condition are primarily liquid in nature, providing
the
Company with flexibility in financing its business. Total assets of
$15.7 billion at June 30, 2007 were up approximately 36% over September 30,
2006. Most of this increase is due to the significant increases in
reverse repurchase agreements, brokerage client cash deposits (leading to a
similar increase in segregated cash balances on the asset side), and growth
of
RJBank, with the increased loan balances being largely funded by
deposits. RJBank loan balances increased significantly as the Company
continued to increase its use of a newly introduced bank sweep offering to
brokerage customers. The Company initiated the first phase of this
option in July 2006 and the second phase took place in March
2007. The Company plans to continue to expand use of this offering
for the next several years, which will result in continued growth in RJBank
balances. Other significant increases in assets were in trading and
available for sale securities. The broker-dealer gross assets and
liabilities, including trading inventory, stock loan/stock borrow, receivables
and payables from/to brokers, dealers and clearing organizations and clients
fluctuate with the Company's business levels and overall market
conditions.
Liquidity
and Capital Resources
Cash
used
in operating activities during the nine months ended June 30, 2007 was
approximately $163.5 million, primarily attributable to the increase in
segregated assets (directly correlated to the increase in brokerage client
deposits), an increase in receivables associated with the Company’s stock
loan/borrowed business, an increase in receivables from broker-dealers and
clearing organizations, and an increase in receivables from brokerage
clients. This was partially offset by an increase in payables to
brokerage clients, payables associated with the Company’s stock loan/borrowed
business, and payables to broker-dealers and clearing
organizations.
Investing
activities used $2.37 billion, which is primarily due to activity at RJBank,
including loans originated and purchased, purchases of securities under
agreements to resell, and purchases of available for sale
securities. This was partially offset by loan repayments at
RJBank.
Financing
activities provided $2.62 billion, the result of an increase in deposits at
RJBank, an increase in borrowings, and cash provided from the exercise of stock
options and employee stock purchases. This was partially offset by
the payment of cash dividends and the repayments of borrowings.
At
June
30, 2007 and September 30, 2006, the Company had loans payable of $552.1 million
and $141.6 million, respectively. The balance at June 30, 2007 is
comprised primarily of a $65.6 million loan for its home-office complex, $55
million in Federal Home Loan Bank advances (RJBank), and various short-term
borrowings totaling $431.5 million (used to fund increased levels of trading
securities).
In
addition, the Company and its subsidiaries have the following lines of credit:
RJF has a committed $200 million line of credit, RJA has uncommitted bank lines
of credit aggregating $985.1 million with commercial banks, Raymond James Credit
Corporation has a line of credit for $25 million, and RJ Ltd. has a CDN$40
million uncommitted line of credit (see Note 7 of the Notes to the Condensed
Consolidated Financial Statements for further information on the Company's
lines
of credit). During the three months ended June 30, 2007, the Company entered
into a $500 million uncommitted tri-party repurchase agreement line of
credit. Under this agreement, the Company pledges certain of its
trading inventory as collateral against borrowings on this
line. The required market value of the collateral is generally
102% of the cash borrowed. The rate is set each day at 20 basis
points over the opening Fed Funds rate and this agreement can be terminated
by
either party on any business day. The outstanding balances against
these lines of credit at June 30, 2007 were $426.9 million and CDN $3.5 million,
respectively. The Company’s committed $200 million line of credit is
subject to a 0.125% per annum facility fee. RJBank has $55 million in
FHLB advances outstanding at June 30, 2007, which are comprised of one
short-term, fixed rate advance and several long-term, fixed rate
advances. RJBank had $1.21 billion in credit available from the FHLB
at June 30, 2007.
The
Company’s joint ventures in Turkey and Argentina have multiple settlement lines
of credit. The Company has guaranteed certain of these settlement
lines of credit as follows: four in Turkey totaling $22.5 million and one in
Argentina for $3 million. On June 30, 2007, there was an outstanding
balance of $313,000 on the settlement lines in Turkey. At June 30,
2007, the aggregate unsecured settlement lines of credit available were $77.5
million, and there were outstanding balances of $989,000 on these
lines. The Company has also from time to time authorized performance
guarantees for the completion of trades with counterparties in Argentina and
Turkey. At June 30, 2007, there were no outstanding performance guarantees
in
Turkey or Argentina.
As
of June 30, 2007, the Company's liabilities are comprised primarily of brokerage
client payables of $5.33 billion at the broker-dealer subsidiaries and deposits
of $5.02 billion at RJBank, as well as deposits held on stock loan transactions
of $1.50 billion. The Company primarily acts as an intermediary in
stock borrowed/loan transactions. As a result, the liability
associated with the stock loan transactions is related to the $1.38 billion
receivable comprised of the Company's cash deposits for stock borrowed
transactions. To meet its obligations to clients, the Company has
approximately $4.49 billion in cash and assets segregated pursuant to federal
regulations. The Company also has client brokerage receivables of
$1.71 billion and $3.43 billion in loans at RJBank.
The
Company will continue its implementation of a new cash sweep option available
to
its clients from RJBank. This new cash sweep option will require
substantial capital to be contributed to RJBank to meet regulatory requirements,
and therefore may require the Company to infuse an additional $150 to $200
million over the next several years for this purpose.
The
Company has committed a total of $42.6 million, in amounts ranging from $200,000
to $2.0 million, to 40 different independent venture capital or private equity
partnerships. As of June 30, 2007, the Company has invested $31.7
million of that amount and has received $29.6 million in
distributions. The Company expects to increase its net investment in
external private equity funds up to $50 million.
Additionally,
the Company is the general partner in two internally sponsored private equity
limited partnerships to which it has committed $14 million. Of that
amount, the Company has invested $12.2 million and has received $8.7 million
in
distributions as of June 30, 2007.
The
Company’s Board of Directors approved the use of up to $200 million in mezzanine
financing to facilitate investment banking transactions. As of June
30, 2007, there were no outstanding transactions. The Board of
Directors also approved the use of up to $50 million for investment in
proprietary merchant banking opportunities. As of June 30, 2007, the
Company has invested $12.3 million.
Management
has been authorized by the Board of Directors to repurchase its common stock
at
their discretion for general corporate purposes. There is no formal
stock repurchase plan at this time. In May 2004 the Board authorized
the repurchase of up to $75 million of shares. As of June 30, 2007
the unused portion of this authorization was $66.8 million.
The
Company has committed to lend to or guarantee obligations of its wholly owned
subsidiary, RJTCF, of up to $100 million upon request, subject to certain
limitations as well as annual review and renewal. RJTCF borrows in
order to invest in partnerships which purchase and develop properties qualifying
for tax credits. These investments in project partnerships are then sold to
various tax credit funds, which have third party investors, and for which RJTCF
serves as the managing member or general partner. RJTCF typically
sells these investments within 90 days of their acquisition, and the proceeds
from the sales are used to repay RJTCF’s borrowings. Additionally, RJTCF may
make short-term loans or advances to project partnerships on behalf of the
tax
credit funds in which it serves as managing member or general
partner. At June 30, 2007, cash funded to invest in either loans or
investments in project partnerships was $42.1 million. In addition,
at June 30, 2007, RJTCF is committed to additional future fundings of $79.2
million related to project partnerships that have not yet been sold to various
tax credit funds.
The
Company believes its existing assets, which are highly liquid in nature,
together with funds generated from operations, should provide adequate funds
for
continuing operations.
The
Company is the lessor in a leveraged commercial aircraft transaction with
Continental. The Company's ability to realize its expected return is
dependent upon this airline’s ability to fulfill its lease
obligation. In the event that this airline defaults on its lease
commitment and the Trustee for the debt holders is unable to re-lease or sell
the plane with adequate terms, the Company would suffer a loss of some or all
of
its investment. The value of this leveraged lease with Continental
was approximately $10.1 million as of June 30, 2007. The Company's
equity investment represented 20% of the aggregate purchase price; the remaining
80% was funded by public debt issued in the form of equipment trust
certificates. The residual value of the aircraft at the end of the
lease term of approximately 17 years is projected to be 15% of the original
cost. This lease expires in May 2014.
Although
Continental remains current on its lease payments to the Company, the inability
of Continental to make its lease payments, or the termination or modification
of
the lease through a bankruptcy proceeding, could result in the write-down of
the
Company's investment and the acceleration of certain income tax
payments. The Company continues to monitor this lessee for specific
events or circumstances that would increase the likelihood of a default on
Continental’s obligations under this lease.
The
Company was also the lessor in a leveraged commercial aircraft transaction
with
Delta. Delta filed for bankruptcy protection on September 14,
2005. Accordingly, the Company recorded a $6.5 million pre-tax charge
in 2005 to fully reserve the balance of its investment in the leveraged lease
of
an aircraft to Delta. The Company had taken a $4 million pre-tax
charge in 2004 to partially reserve for this investment. No amount of
these charges represented a cash expenditure. During the second
quarter of fiscal 2007, the Company sold its interest in the Delta transaction
for $2 million, which was recognized as a pre-tax gain within Other
Revenue. Upon closing, certain income tax obligations of
approximately $8.5 million were accelerated and paid during the
quarter. These tax payments did not impact net earnings, as these
amounts were previously recorded as deferred tax liabilities.
The
Company’s Turkish affiliate was assessed for the year 2001 approximately $6.8
million by the Turkish tax authorities. This affiliate is vigorously
contesting most aspects of this assessment and has filed an appeal with the
Turkish tax court. Audits of 2002 through 2004 are anticipated and
their outcome is unknown in light of the change in methodology from the prior
year’s audit and the pending litigation. As of June 30, 2007, this
affiliate had total capital of approximately $12.4 million, of which the Company
owns approximately 73%.
As
of
June 30, 2007 all of the Company's domestic broker-dealer subsidiaries exceeded
the net capital requirements of the Uniform Net Capital Rule under the
Securities Exchange Act of 1934, RJ Ltd. exceeded the Risk Adjusted Capital
required under the Minimum Capital Rule of the IDA, and RJBank was “well
capitalized” under the regulatory framework for prompt corrective
action. There have been no significant changes in circumstances since
year-end that have affected the capital of any of the broker-dealer subsidiaries
or RJBank with respect to their respective regulatory capital
requirements.
The
Company has contractual obligations of approximately $3.02 billion, with $2.59
billion coming due in the next twelve months related to its short and long-term
debt, non-cancelable lease agreements, partnership investments, unfunded
commitments to extend credit and a stadium naming rights
agreement. Included in the obligations due within the next twelve
months are $1.88 billion in commitments related to RJBank’s letters of credit
and lines of credit. Commitments related to letters of credit and
lines of credit may expire without being funded in whole or part, therefore
these amounts are not estimates of future cash flows (see Note 9 of the Notes
to
the Condensed Consolidated Financial Statements for further information on
the
Company’s commitments).
Effects
of Inflation
The
Company's assets are primarily liquid in nature and are not significantly
affected by inflation. However, the rate of inflation affects the
Company's expenses, including employee compensation, communications and
occupancy, which may not be readily recoverable through charges for services
provided by the Company.
Factors
Affecting “Forward-Looking Statements”
From
time
to time, the Company may publish “forward-looking statements” within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the
Securities and Exchange Act of 1934, as amended, or make oral statements that
constitute forward-looking statements. These forward-looking
statements may relate to such matters as anticipated financial performance,
future revenues or earnings, business prospects, projected ventures, new
products, anticipated market performance, recruiting efforts, and similar
matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company cautions readers that
a
variety of factors could cause the Company's actual results to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. These risks and uncertainties, many of which are
beyond the Company's control, are discussed in the section entitled “Risk
Factors” of Item 1A of Part I included in the Company's Annual Report on Form
10-K for the year ended September 30, 2006 and in Item 1A of Part II of this
report on Form 10-Q. The Company does not undertake any obligation to
publicly update or revise any forward-looking statements.
Critical
Accounting Policies
The
condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America. For a full description of these and other accounting
policies, see Note 1 of the Notes to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2006. The Company believes that of its significant accounting
policies, those described below involve a high degree of judgment and
complexity. These critical accounting policies require estimates and assumptions
that affect the amounts of assets, liabilities, revenues and expenses reported
in the condensed consolidated financial statements. Due to their nature,
estimates involve judgment based upon available information. Actual
results or amounts could differ from estimates and the difference could have
a
material impact on the condensed consolidated financial
statements. Therefore, understanding these policies is important in
understanding the reported results of operations and the financial position
of
the Company.
Valuation
of Securities and Other Assets
“Trading
securities” and “Available for sale securities” are reflected in the Condensed
Consolidated Statements of Financial Condition at fair value or amounts that
approximate fair value. In accordance with SFAS 115, “Accounting for
Certain Investments in Debt and Equity Securities”, unrealized gains and losses
related to these financial instruments are reflected in net earnings or other
comprehensive income, depending on the underlying purpose of the
instrument. The following table presents the Company’s trading and
available for sale securities segregated into cash (i.e., non-derivative)
trading instruments, derivative contracts, and available for sale
securities:
|
June
30, 2007
|
|
Financial
Instruments
Owned
at
Fair Value
|
|
Financial
Instruments
Sold
but
not yet Purchased
at
Fair Value
|
|
(in
000’s)
|
|
|
|
|
Cash
trading instruments
|
$ 698,285
|
|
$
330,627
|
Derivative
contracts
|
39,295
|
|
12,292
|
Available
for sale securities
|
527,585
|
|
-
|
Total
|
$
1,265,165
|
|
$
342,919
|
Cash
Trading Instruments, Available for Sale Securities and Derivative
Contracts
When
available, the Company uses prices from independent sources such as listed
market prices, or broker or dealer price quotations to derive the fair value
of
the instruments. For investments in illiquid, privately held or other
securities that do not have readily determinable fair values, the Company uses
estimated fair values as determined by management. Fair values for
derivative contracts are obtained from pricing models that consider current
market and contractual prices for the underlying financial instruments, as
well
as time value and yield curve or volatility factors underlying the
positions. The following table presents the carrying value of cash
trading instruments, available for sale securities, and derivative contracts
for
which fair value is measured based on quoted prices or other independent sources
versus those for which fair value is determined by management:
|
June
30, 2007
|
|
Financial
Instruments
Owned
at
Fair Value
|
|
Financial
Instruments
Sold
but
not yet Purchased
at
Fair Value
|
|
(in
000’s)
|
|
|
|
|
Fair
value based on quoted prices and independent sources
|
$
1,225,870
|
|
$
330,627
|
Fair
value determined by Management
|
39,295
|
|
12,292
|
Total
|
$
1,265,165
|
|
$
342,919
|
Investment
in Leveraged Lease
The
Company is the lessor in a leveraged commercial aircraft transaction with
Continental. The Company's ability to realize its expected return is
dependent upon this airline’s ability to fulfill its lease
obligation. In the event that this airline defaults on its lease
commitment and the Trustee for the debt holders is unable to re-lease or sell
the plane with adequate terms, the Company would suffer a loss of some or all
of
its investment. The value of this leveraged lease with Continental
was approximately $10.1 million as of June 30, 2007. The Company's
equity investment represented 20% of the aggregate purchase price; the remaining
80% was funded by public debt issued in the form of equipment trust
certificates. The residual value of the aircraft at the end of the
lease term of approximately 17 years is projected to be 15% of the original
cost. This lease expires in May 2014.
Although
Continental remains current on its lease payments to the Company, the inability
of Continental to make its lease payments, or the termination or modification
of
the lease through a bankruptcy proceeding, could result in the write-down of
the
Company's investment and the acceleration of certain income tax
payments. The Company continues to monitor this lessee for specific
events or circumstances that would increase the likelihood of a default on
Continental’s obligations under this lease.
The
Company was also the lessor in a leveraged commercial aircraft transaction
with
Delta. Delta filed for bankruptcy protection on September 14,
2005. Accordingly, the Company recorded a $6.5 million pre-tax charge
in 2005 to fully reserve the balance of its investment in the leveraged lease
of
an aircraft to Delta. The Company had taken a $4 million pre-tax
charge in 2004 to partially reserve for this investment. No amount of
these charges represented a cash expenditure. During the second
quarter of fiscal 2007, the Company sold its interest in the Delta transaction
for $2 million, which was recognized as a pre-tax gain within Other
Revenue. Upon closing, certain income tax obligations of
approximately $8.5 million were accelerated and paid during the
quarter. These tax payments did not result in a charge to earnings,
as these amounts were previously recorded as deferred tax
liabilities.
Goodwill
Goodwill
is related to the acquisitions of Roney & Co. (now part of RJA) and Goepel
McDermid, Inc. (now called Raymond James Ltd.). This goodwill,
totaling $63 million, was allocated to the reporting units within the Private
Client Group and Capital Markets segments pursuant to SFAS No. 142, “Goodwill
and Other Intangible Assets”. Goodwill represents the excess cost of
a business acquisition over the fair value of the net assets
acquired. In accordance with SFAS No. 142, indefinite-life intangible
assets and goodwill are not amortized. Rather they are subject to
impairment testing on an annual basis, or more often if events or circumstances
indicate there may be impairment. This test involves assigning
tangible assets and liabilities, identified intangible assets and goodwill
to
reporting units and comparing the fair value of each reporting unit to its
carrying amount. If the fair value is less than the carrying amount,
a further test is required to measure the amount of the impairment.
When
available, the Company uses recent, comparable transactions to estimate the
fair
value of the respective reporting units. The Company calculates an
estimated fair value based on multiples of revenues, earnings, and book value
of
comparable transactions. However, when such comparable transactions
are not available or have become outdated, the Company uses discounted cash
flow
scenarios to estimate the fair value of the reporting units. As of
June 30, 2007, goodwill had been allocated to the Private Client Group of RJA,
and both the Private Client Group and Capital Markets segments of RJ
Ltd. As of the most recent impairment test, the Company determined
that the carrying value of the goodwill for each reporting unit had not been
impaired. However, changes in current circumstances or business
conditions could result in an impairment of goodwill. As required,
the Company will continue to perform impairment testing on an annual basis
or
when an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying
amount.
Reserves
The
Company recognizes liabilities for contingencies when there is an exposure
that,
when fully analyzed, indicates it is both probable that a liability has been
incurred and the amount of loss can be reasonably estimated. When a
range of probable loss can be estimated, the Company accrues the most likely
amount; if not determinable, the Company accrues at least the minimum of the
range of probable loss.
The
Company records reserves related to legal proceedings in "other
payables". Such reserves are established and maintained in accordance
with SFAS No. 5, "Accounting for Contingencies" (“SFAS 5”), and Financial
Interpretation No. 14. The determination of these reserve amounts
requires significant judgment on the part of management. Management
considers many factors including, but not limited to: the amount of the claim;
the amount of the loss in the client's account; the basis and validity of the
claim; the possibility of wrongdoing on the part of an employee of the Company;
previous results in similar cases; and legal precedents and case
law. Each legal proceeding is reviewed with counsel in each
accounting period and the reserve is adjusted as deemed appropriate by
management. Lastly, each case is reviewed to determine if it is
probable that insurance coverage will apply, in which case the reserve is
reduced accordingly. Any change in the reserve amount is recorded in
the consolidated financial statements and is recognized as a charge/credit
to
earnings in that period.
The
Company also records reserves or allowances for doubtful accounts related to
client receivables and loans. Client receivables at the
broker-dealers are generally collateralized by securities owned by the brokerage
clients. Therefore, when a receivable is considered to be impaired,
the amount of the impairment is generally measured based on the fair value
of
the securities acting as collateral, which is measured based on current prices
from independent sources such as listed market prices or broker-dealer price
quotations.
Client
loans at RJBank are generally collateralized by real estate or other
property. RJBank provides for both an allowance for losses in
accordance with SFAS 5, and a reserve for individually impaired loans in
accordance with SFAS No. 114, “Accounting by a Creditor for Impairment of a
Loan”. The calculation of the SFAS 5 allowance is subjective as
management segregates the loan portfolio into different homogeneous classes
and
assigns each class an allowance percentage based on the perceived risk
associated with that class of loans. The factors taken into
consideration when assigning the reserve percentage to each reserve category
include estimates of borrower default probabilities and collateral values;
trends in delinquencies; volume and terms; changes in geographic distribution,
lending policies, local, regional, and national economic conditions;
concentrations of credit risk and past loss history. In addition, the
Company provides for potential losses inherent in RJBank’s unfunded lending
commitments using the criteria above, further adjusted for an estimated
probability of funding. For individual loans identified as impaired,
RJBank measures impairment based on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral if the loan is collateral
dependent. At June 30, 2007, the amortized cost of all RJBank loans
was $3.5 billion and an allowance for loan losses of $30.5 million was recorded
against that balance. RJBank also has $5.1 million in reserves for
off-balance sheet exposures maintained in Trade and Other
Payables. The total allowance for losses and reserves for unfunded
commitments is equal to 1.03% of the amortized cost of the loan
portfolio.
The
Company also makes loans or pays advances to Financial Advisors, primarily
for
recruiting and retention purposes. The Company provides for an allowance for
doubtful accounts based on an evaluation of the Company’s ability to collect
such receivables. The Company’s ongoing evaluation includes the
review of specific accounts of Financial Advisors no longer associated with
the
Company and the Company’s historical collection experience. At June
30, 2007, the receivable from Financial Advisors was $105 million, which is
net
of an allowance of $4.1 million for estimated uncollectibility.
Income
Taxes
SFAS
No.
109, “Accounting for Income Taxes”, establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable
for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company’s financial
statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in the Company’s financial
statements or tax returns. Variations in the actual outcome of these future
tax
consequences could materially impact the Company’s financial position, results
of operations, or cash flows.
For
a
description of the Company’s risk management policies, including a discussion of
the Company’s primary market risk exposures, which include interest rate risk
and equity price risk, as well as a discussion of the Company’s credit risk,
operational risk, and regulatory and legal risk and a discussion of how these
exposures are managed, refer to the Company’s Annual Report on Form 10-K for the
year ended September 30, 2006.
Market
Risk
Market
risk is the risk of loss to the Company resulting from changes in interest
rates
and equity prices. The Company has exposure to market risk primarily
through its broker-dealer and banking operations. The Company's
broker-dealer subsidiaries, primarily RJA, trade tax exempt and taxable debt
obligations and act as an active market maker in approximately 350
over-the-counter equity securities. In connection with these
activities, the Company maintains inventories in order to ensure availability
of
securities and to facilitate client transactions. Additionally, the
Company, primarily within its Canadian broker-dealer subsidiary, invests for
its
own proprietary equity investment account.
See
Note
3 of the Notes to the Condensed Consolidated Financial Statements for
information regarding the fair value of trading inventories associated with
the
Company's broker-dealer client facilitation, market-making and proprietary
trading activities.
Changes
in value of the Company's trading inventory may result from fluctuations in
interest rates, credit ratings of the issuer, equity prices and the correlation
among these factors. The Company manages its trading inventory by
product type and has established trading divisions that have responsibility
for
each product type. The Company's primary method of controlling risk
in its trading inventory is through the establishment and monitoring of limits
on the dollar amount of securities positions that can be entered into and other
risk-based limits; limits are established both for categories of securities
(e.g., OTC equities, high yield securities, municipal bonds) and for individual
traders. As of June 30, 2007, the absolute fixed income and equity
inventory limits were $1,955,000,000 and $82,275,000, respectively. The
Company's trading activities were well within these limits at June 30,
2007. Position limits in trading inventory accounts are monitored on
a daily basis. Consolidated position and exposure reports are
prepared and distributed to senior management. Limit violations are
carefully monitored. Management also monitors inventory levels and
trading results, as well as inventory aging, pricing, concentration and
securities ratings. For derivatives, primarily interest rate swaps,
the Company monitors exposure in its derivatives subsidiary daily based on
established limits with respect to a number of factors, including interest
rate
risk, spread, ratio and basis risk and volatility. These exposures
are monitored both on a total portfolio basis and separately for selected
maturity periods.
Interest
Rate Risk
The
Company is exposed to interest rate risk as a result of maintaining trading
inventories of fixed income instruments and actively manages this risk using
hedging techniques that involve swaps, futures, and U.S. Treasury
obligations. The Company monitors, on a daily basis, the
Value-at-Risk (“VaR”) in its institutional Fixed Income trading portfolios (cash
instruments and interest rate derivatives). VaR is an appropriate
statistical technique for estimating the potential loss in trading portfolios
due to typical adverse market movements over a specified time horizon with
a
suitable confidence level.
To
calculate VaR, the Company uses historical simulation. This approach
assumes that historical changes in market conditions are representative of
future changes. The simulation is based upon daily market data for
the previous twelve months. VaR is reported at a 99% confidence
level, based on a one-day time horizon. This means that the Company
could expect to incur losses greater than those predicted by the VaR estimates
only once in every 100 trading days, or about 2.5 times a
year. During the nine months ended June 30, 2007, the reported daily
loss in the institutional Fixed Income trading portfolio exceeded the predicted
VaR two times. This is consistent with the model and its
business-as-usual assumptions.
However,
trading losses on a single day could exceed the reported VaR by significant
amounts in unusually volatile markets and might accumulate over a longer time
horizon, such as a number of consecutive trading days. Accordingly, management
employs additional interest rate risk controls including position limits, a
daily review of trading results, review of the status of aged inventory,
independent controls on pricing, monitoring of concentration risk, and review
of
issuer ratings.
The
following tables set forth the high, low, and daily average VaR for the
Company's overall institutional fixed income portfolio during the nine months
ended June 30, 2007, with the corresponding dollar value of the Company's
portfolio.
|
Nine
months ended June 30, 2007
|
|
VaR
at
|
($
in 000's)
|
High
|
Low
|
|
DailyAverage
|
|
June
30, 2007
|
|
September
30, 2006
|
Daily
VaR
|
$ 1,062
|
$ 295
|
|
$ 502
|
|
$ 969
|
|
$ 483
|
Related
Portfolio Value (net)*
|
$
331,291
|
$
397,861
|
|
$
379,586
|
|
$
315,350
|
|
$
312,917
|
VaR
as a percent of
Portfolio Value
|
0.32%
|
0.07%
|
|
0.13%
|
|
0.31%
|
|
0.15%
|
* Portfolio
value achieved on the day of the VAR calculation.
The
modeling of the risk characteristics of trading positions involves a number
of
assumptions and approximations. While management believes that its assumptions
and approximations are reasonable, there is no uniform industry methodology
for
estimating VaR, and different assumptions or approximations could produce
materially different VaR estimates. As a result, VaR statistics are
more reliable when used as indicators of risk levels and trends within a firm
than as a basis for inferring differences in risk-taking across
firms.
Additional
information is discussed under Derivative Financial Instruments in Note 13
of
the Notes to the Condensed Consolidated Financial Statements.
RJBank
maintains an earning asset portfolio that is comprised of mortgage, corporate
and consumer loans, as well as mortgage-backed securities, securities purchased
under resale agreements, and other investments. Those earning assets
are funded in part by its obligations to clients, including demand deposits,
money market accounts, savings accounts, and certificates of deposit as well
as
by FHLB advances. Based on the current earning asset portfolio of
RJBank, market risk for RJBank is limited primarily to interest rate
risk. RJBank analyzes interest rate risk based on forecasted net
interest income, which is the net amount of interest received and interest
paid,
and the net portfolio valuation, both in a range of interest rate
scenarios. The following table represents the carrying value of
RJBank's assets and liabilities that are subject to market risk. This
table does not include financial instruments with limited market risk exposure
due to offsetting asset and liability positions, short holding periods or short
periods of time until the interest rate resets.
RJBank
Financial Instruments with Market Risk (as described above, in
000's):
|
|
|
|
|
|
|
|
June
30, 2007
|
|
September
30, 2006
|
|
|
|
|
|
Mortgage-backed
securities
|
|
$ 333,234
|
|
$ 151,437
|
Loans
receivable, net
|
|
1,735,112
|
|
1,282,504
|
Total
assets with market risk
|
|
$
2,068,346
|
|
$
1,433,941
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$ 239,517
|
|
$ 255,360
|
Federal
Home Loan Bank advances
|
|
55,000
|
|
60,000
|
Total
liabilities with market risk
|
|
$ 294,517
|
|
$ 315,360
|
One
of
the core objectives of RJBank's Asset/Liability Management Committee is to
manage the sensitivity of net interest income to changes in market interest
rates. The Asset/Liability Management Committee uses several measures to monitor
and limit RJBank's interest rate risk including scenario analysis, interest
repricing gap analysis and limits, and net portfolio value
limits. Simulation models and estimation techniques are used to
assess the sensitivity of the net interest income stream to movements in
interest rates. Assumptions about consumer behavior play an important
role in these calculations; this is particularly relevant for loans such as
mortgages where the client has the right, but not the obligation, to repay
before the scheduled maturity.
The
sensitivity of net interest income to interest rate conditions is estimated
for
a variety of scenarios. Assuming an immediate and lasting shift of 100 basis
points in the term structure of interest rates, RJBank's sensitivity analysis
indicates that an upward movement would decrease RJBank's net interest income
by
11.21% in the first year after the rate increase, whereas a downward shift
of
the same magnitude would increase RJBank's net interest income by
7.39%. These sensitivity figures are based on positions as of June
30, 2007, and are subject to certain simplifying assumptions, including that
management takes no corrective action.
Equity
Price Risk
The
Company is exposed to equity price risk as a consequence of making markets
in
equity securities and the investment activities of RJA and RJ
Ltd. The U.S. broker-dealer activities are primarily client-driven,
with the objective of meeting clients' needs while earning a trading profit
to
compensate for the risk associated with carrying inventory. The Company attempts
to reduce the risk of loss inherent in its inventory of equity securities by
monitoring those security positions constantly throughout each day and
establishing position limits. The Company's Canadian broker-dealer
has a proprietary trading business with 26 traders. The average
aggregate inventory held for proprietary trading during the three months ended
June 30, 2007 was CDN$11,266,788. The Company's equity securities
inventories are priced on a regular basis and there are no material unrecorded
gains or losses.
Disclosure
controls are procedures designed to ensure that information required to be
disclosed in the Company's reports filed under the Exchange Act, such as this
report, is recorded, processed, summarized, and reported within the time periods
specified in the SEC's rules and forms. Disclosure controls are also
designed to ensure that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable, not absolute,
assurance of achieving the desired control objectives, as the Company's are
designed to do, and management necessarily was required to apply its judgment
in
evaluating the cost-benefit relationship of possible controls and
procedures.
Under
the
supervision and with the participation of the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, the Company has
evaluated the effectiveness of its disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(b) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures
are effective. There were no changes in the Company’s internal control over
financial reporting during the quarter ended June 30, 2007 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately $6.8 million by the Turkish tax
authorities. The authorities applied a significantly different
methodology than in the prior year’s audit. RJY is vigorously
contesting most aspects of this assessment and has filed an appeal with the
Turkish tax court. Audits of 2002 through 2004 are anticipated and
their outcome is unknown in light of the change in methodology and the pending
litigation. The Company has recorded a provision for loss in its consolidated
financial statements for its net equity interest in this joint
venture. As of June 30, 2007, RJY had total capital of approximately
$12.4 million, of which the Company owns approximately 73%.
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. The Company is contesting the
allegations in these cases and believes that there are meritorious defenses
in
each of these lawsuits and arbitrations. In view of the number and
diversity of claims against the Company, the number of jurisdictions in which
litigation is pending and the inherent difficulty of predicting the outcome
of
litigation and other claims, the Company cannot state with certainty what the
eventual outcome of pending litigation or other claims will be. In the
opinion of the Company's management, based on current available information,
review with outside legal counsel, and consideration of amounts provided for
in
the accompanying consolidated financial statements with respect to these
matters, ultimate resolution of these matters will not have a material adverse
impact on the Company's financial position or results of operations.
However, resolution of one or more of these matters may have a material effect
on the results of operations in any future period, depending upon the ultimate
resolution of those matters and upon the level of income for such
period.
Item
1A. RISK FACTORS
In
addition to the “Risk Factors” included in the Company’s Annual Report on Form
10-K for the year ended September 30, 2006, the Company’s operations and
financial results are also subject to risks and uncertainties related to its
use
of a combination of insurance, self-insured retention and self-insurance for
a
number of risks, including, without limitation, workers’ compensation, general
liability, and the Company-funded portion of employee-related health care
benefits. The Company’s exposure to these risks and uncertainties
could adversely affect its business, financial condition, results of operations,
cash flows, and the trading price of its common stock.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Reference
is made to information contained under “Capital Transactions” in Note 10 of the
Notes to Condensed Consolidated Financial Statements for the information
required by Part II, Item 2(c).
The
Company expects to continue paying cash dividends. However, the
payment and rate of dividends on the Company's common stock is subject to
several factors including operating results, financial requirements of the
Company, compliance with the net worth covenant in the Company's line of credit
agreement, and the availability of funds from the Company's subsidiaries,
including the broker-dealer subsidiaries, which may be subject to restrictions
under the net capital rules of the SEC, NYSE and the IDA; and RJBank, which
may
be subject to restrictions by federal banking agencies. Such
restrictions have never become applicable with respect to the Company's dividend
payments. (See Note 11 of the Notes to the Condensed Consolidated
Financial Statements for more information on the capital restrictions placed
on
RJBank and the Company's broker-dealer subsidiaries).
3(ii).1
|
|
Amended
and Restated By-Laws of Raymond James Financial, Inc. reflecting
amendments adopted by the Board of Directors on May 24, 2007, incorporated
by reference to Exhibit 3(ii) as filed with Form 8-K on May 29,
2007.
|
|
|
|
|
|
3(ii).2
|
|
Amended
and Restated By-Laws of Raymond James Financial, Inc. reflecting
amendments adopted by the Board of Directors on June 28, 2007,
incorporated by reference to Exhibit 3(ii) as filed with Form 8-K
on July
2, 2007.
|
|
|
|
|
|
10.9.4
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
31.1
|
|
|
|
|
|
|
|
31.2
|
|
|
|
|
|
|
|
32.1
|
|
|
|
|
|
|
|
32.2
|
|
|
|
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: August
9, 2007
|
|
/s/
Thomas A. James
|
|
|
Thomas
A. James
|
|
|
Chairman
and Chief
|
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jeffrey P. Julien
|
|
|
Jeffrey
P. Julien
|
|
|
Senior
Vice President - Finance
|
|
|
and
Chief Financial
|
|
|
Officer
|
38