q101208.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-Q
(Mark
one)
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the
quarterly period ended December 31,
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 latest practicable date.
121,288,531
shares of Common
Stock as of February 6, 2008
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RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
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Form
10-Q for the Quarter Ended December 31, 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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5
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7
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Item
2.
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29
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Item
3.
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45
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Item
4.
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48
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PART
II.
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OTHER
INFORMATION
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Item
1.
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48
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Item
1A.
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48
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Item
2.
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49
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Item
6.
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49
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50
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PART
I FINANCIAL INFORMATION
Item
1. FINANCIAL
STATEMENTS
RAYMOND
JAMES FINANCIAL,
INC. AND SUBSIDIARIES
(Unaudited)
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December
31,
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September
30,
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2007
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2007
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(in
000’s)
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Assets:
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Cash
and Cash Equivalents
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$ 679,820
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$ 644,943
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Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
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4,540,869
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4,127,667
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Securities
Purchased under Agreements to Resell and Other Collateralized
Financings
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652,358
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1,295,004
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Financial
Instruments:
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Trading
Instruments, at Fair Value
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685,091
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467,761
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Available
for Sale Securities, at Fair Value
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569,006
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569,952
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Other
Investments, at Fair Value
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90,845
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90,637
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Receivables:
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Brokerage
Clients, Net
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1,816,695
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1,704,300
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Stock
Borrowed
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949,535
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1,292,265
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Bank
Loans, Net
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5,653,503
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4,664,209
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Brokers-Dealers
and Clearing Organizations
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209,181
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228,865
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Other
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308,866
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315,227
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Investments
in Real Estate Partnerships - Held by Variable Interest
Entities
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226,346
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221,147
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Property
and Equipment, Net
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171,426
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166,963
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Deferred
Income Taxes, Net
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112,901
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107,922
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Deposits
With Clearing Organizations
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40,469
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36,416
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Goodwill
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62,575
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62,575
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Prepaid
Expenses and Other Assets
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328,232
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258,315
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$
17,097,718
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$
16,254,168
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Liabilities
And Shareholders' Equity:
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Loans
Payable
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$ 123,480
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$ 122,640
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Loans
Payable Related to Investments by Variable Interest Entities in Real
Estate Partnerships
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108,536
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116,479
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Payables:
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Brokerage
Clients
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6,173,498
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5,675,860
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Stock
Loaned
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939,713
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1,280,747
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Bank
Deposits
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6,208,862
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5,585,259
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Brokers-Dealers
and Clearing Organizations
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188,065
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128,298
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Trade
and Other
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265,456
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450,008
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Trading
Instruments Sold but Not Yet Purchased, at Fair Value
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244,870
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149,729
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Securities
Sold Under Agreements to Repurchase
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502,995
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393,282
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Accrued
Compensation, Commissions and Benefits
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252,165
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356,627
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Income
Taxes Payable
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36,286
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7,755
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15,043,926
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14,266,684
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Minority
Interests
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248,109
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229,670
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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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Common
Stock; $.01 Par Value; Authorized
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180,000,000
Shares; Issued 122,146,339 at
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December
31,
2007 and
120,903,331 at September
30, 2007
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1,184
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1,176
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Shares
Exchangeable into Common Stock; 273,042
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at
December 31, 2007 and September 30, 2007
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3,504
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3,504
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Additional
Paid-In Capital
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294,468
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277,095
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Retained
Earnings
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1,500,620
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1,461,898
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Accumulated
Other Comprehensive Income
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29,364
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30,191
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1,829,140
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1,773,864
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Less:
1,228,268 and
1,005,668 Common Shares in Treasury, at Cost
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(23,457)
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(16,050)
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1,805,683
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1,757,814
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$
17,097,718
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$
16,254,168
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See
accompanying Notes to Condensed Consolidated Financial
Statements.
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RAYMOND
JAMES FINANCIAL,
INC. AND SUBSIDIARIES
(in
000’s, except per share
amounts)
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Three
Months
Ended
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December
31,
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December
31,
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2007
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2006
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Revenues:
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Securities
Commissions and
Fees
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$ 472,605
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$ 400,865
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Investment
Banking
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23,855
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41,839
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Investment
Advisory
Fees
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56,605
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50,136
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Interest
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212,950
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158,224
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Net
Trading
Profits
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1,102
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6,293
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Financial
Service
Fees
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32,975
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29,966
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Other
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29,099
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22,306
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Total
Revenues
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829,191
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709,629
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Interest
Expense
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143,364
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105,729
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Net
Revenues
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685,827
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603,900
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Non-Interest
Expenses:
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Compensation,
Commissions and
Benefits
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470,604
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408,509
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Communications
and Information
Processing
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31,011
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25,974
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Occupancy
and Equipment
Costs
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21,397
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20,150
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Clearance
and Floor
Brokerage
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8,586
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7,536
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Business
Development
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23,859
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21,762
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Investment
Advisory
Fees
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12,930
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11,066
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Other
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26,138
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18,112
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Total
Non-Interest
Expenses
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594,525
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513,109
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Minority
Interest in
Subsidiaries
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545
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(2,975)
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Income
Before Provision for Income
Taxes
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90,757
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93,766
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Provision
for Income
Taxes
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34,515
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34,371
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Net
Income
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$ 56,242
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$ 59,395
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Net
Income per
Share-Basic
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$ 0.48
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$ 0.52
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Net
Income per
Share-Diluted
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$ 0.47
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$ 0.50
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Weighted
Average Common
Shares
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Outstanding-Basic
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116,881
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114,339
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Weighted
Average Common and
Common
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Equivalent
Shares
Outstanding-Diluted
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120,241
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117,893
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Cash
Dividend per Common
Share
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$ 0.11
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$ 0.10
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Net
Income
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$
56,242
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$ 59,395
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Other
Comprehensive
Income:
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Net
Unrealized (Loss) Gain on
Available
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for
SaleSecurities,
Net of
Tax
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(2,893)
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85
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Net
Change in Currency
Translations, Net of Tax
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2,066
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(2,758)
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Total
Comprehensive
Income
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$
55,415
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$ 56,722
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See
accompanying Notes to Condensed
Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
(Unaudited)
(in
000’s)
(continued
on next
page)
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Three
Months
Ended
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December
31,
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December
31,
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2007
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2006
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Cash
Flows From Operating
Activities:
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Net
Income
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$
56,242
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$ 59,395
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Adjustments
to Reconcile Net
Income to Net
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Cash
Provided by (Used in)
Operating Activities:
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Depreciation
and
Amortization
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6,993
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5,294
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Excess
Tax Benefits from
Stock-Based Payment Arrangements
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(360)
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(969)
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Deferred
Income
Taxes
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(1,808)
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2,192
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Unrealized
Gains, Premium and
Discount Amortization
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on
Available for Sale Securities
and Other
Securities
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68
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212
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Loss
on Sale of
Property and
Equipment
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19
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17
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Gain
on Sale of
Loans Available for
Sale
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(97)
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(70)
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Provision
for Loan Loss, Legal
Proceedings, Bad Debts and Other Accruals
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14,077
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6,198
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Stock-Based
Compensation
Expense
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12,504
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10,568
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(Increase)
Decrease in Operating
Assets:
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Assets
Segregated Pursuant to
Regulations and Other Segregated Assets
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(413,202)
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(468,897)
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Receivables:
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Brokerage
Clients,
Net
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(115,516)
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(66,646)
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Stock
Borrowed
|
342,730
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190,391
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Brokers-Dealers
and Clearing
Organizations
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19,684
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37,545
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Other
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3,243
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(40,120)
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Securities
Purchased Under
Agreements to Resell and Other Collateralized
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Financings,
Net of Securities Sold
Under Agreements to Repurchase
|
152,359
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(55,787)
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Trading
Instruments,
Net
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(122,189)
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(152,698)
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Proceeds
from Sale of
Loans Available for
Sale
|
9,640
|
1,209
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Origination
of Loans Available for
Sale
|
(10,545)
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(4,439)
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Prepaid
Expenses and Other
Assets
|
(76,348)
|
3,198
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Minority
Interest
|
545
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(2,975)
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Increase
(Decrease) in Operating
Liabilities:
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Payables:
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Brokerage
Clients
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497,638
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492,170
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Stock
Loaned
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(341,034)
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(276,854)
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Brokers-Dealers
and Clearing
Organizations
|
59,767
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84,989
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Trade
and
Other
|
18,560
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6,416
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Accrued
Compensation, Commissions
and Benefits
|
(107,245)
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(93,332)
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Income
Taxes
Payable
|
22,811
|
10,847
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Net
Cash Provided by
(Used in)Operating
Activities
|
28,536
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(252,146)
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See
accompanying Notes to Condensed
Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in
000’s)
(continued
from previous
page)
|
Three
Months
Ended
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December
31,
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December
31,
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|
2007
|
2006
|
|
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|
Cash
Flows from Investing
Activities:
|
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|
Additions
to Property and
Equipment, Net
|
(8,329)
|
(11,738)
|
Loan
Originations and
Purchases
|
(1,798,220)
|
(800,575)
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Loan
Repayments
|
596,411
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373,633
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Purchases
of Other
Investments
|
(208)
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(12,348)
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Investments
in Real Estate
Partnerships-Held by Variable
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Interest
Entities
|
(5,199)
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(7,900)
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Repayments
of Loans by Investor
Members of Variable Interest Entities Related
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to
Investments in Real Estate
Partnerships
|
1,797
|
2,356
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Securities
Purchased Under
Agreements to Resell, Net
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600,000
|
205,000
|
Purchases
of Available for
Sale Securities
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(23,754)
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(80,226)
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Available
for Sale Securities
Maturations and
Repayments
|
20,125
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24,745
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Net
Cash Used in Investing
Activities
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(617,377)
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(307,053)
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Cash
Flows from Financing
Activities:
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Proceeds
from Borrowed Funds,
Net
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1,509
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284,600
|
Repayments
of Mortgage and
Borrowings, Net
|
(668)
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(18,146)
|
Proceeds
from Borrowed Funds
Related to Investments by Variable Interest
|
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Entities
in Real Estate
Partnerships
|
1,435
|
1,846
|
Repayments
of Borrowed Funds
Related to Investments by Variable Interest
|
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Entities
in Real Estate
Partnerships
|
(9,378)
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(7,445)
|
Proceeds
from Capital Contributed
to Variable Interest Entities Related to
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Investments
in Real Estate
Partnerships
|
11,716
|
18,359
|
Minority
Interest
|
6,179
|
(19,920)
|
Exercise
of Stock Options and
Employee Stock Purchases
|
7,107
|
13,247
|
Increase
in Bank
Deposits
|
623,603
|
259,844
|
Purchase
of Treasury
Stock
|
(6,854)
|
(1,350)
|
Cash
Dividends on Common
Stock
|
(13,357)
|
(11,825)
|
Excess
Tax Benefits from
Stock-Based Payment Arrangements
|
360
|
969
|
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Net
Cash Provided by Financing
Activities
|
621,652
|
520,179
|
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Currency
Adjustment:
|
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Effect
of Exchange Rate Changes on
Cash
|
2,066
|
(2,758)
|
Net
Increase (Decrease) in Cash
and Cash Equivalents
|
34,877
|
(41,778)
|
Cash
Resulting from Consolidation
of Variable Interest Entities Related to
|
|
|
Investments
in Real Estate
Partnerships
|
-
|
(291)
|
Cash
Resulting from Consolidation
of Limited Partnerships
|
-
|
3,945
|
Cash
and Cash Equivalents at
Beginning of Year
|
644,943
|
392,418
|
|
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Cash
and Cash Equivalents at End
of Period
|
$
679,820
|
$
354,294
|
|
|
|
Supplemental
Disclosures of Cash
Flow Information:
|
|
|
Cash
Paid for
Interest
|
$
144,769
|
$
102,877
|
Cash
Paid for Income
Taxes
|
$
14,147
|
$ 19,331
|
See
accompanying Notes to Condensed
Consolidated Financial Statements.
RAYMOND
JAMES FINANCIAL,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December
31,
2007
The
accompanying unaudited condensed consolidated financial statements include
the
accounts of Raymond James Financial, Inc. (“RJF”) and its consolidated
subsidiaries that are generally controlled through a majority voting
interest. RJF is a holding company headquartered in Florida whose
subsidiaries are engaged in various financial service businesses; as used
herein, the term “the Company” refers to RJF and/or one or more of its
subsidiaries. In accordance with Financial Accounting Standards Board
(“FASB”) Interpretation (“FIN”) No. 46R, “Consolidation of Variable Interest
Entities” (“FIN 46R”), the Company also consolidates any variable interest
entities (“VIEs”) for which it is the primary beneficiary. Additional
information is provided in Note 6. When the Company does not have a
controlling interest in an entity, but exerts significant influence over the
entity, the Company applies the equity method of accounting. All
material intercompany balances and transactions have been eliminated in
consolidation.
Certain
financial information that is normally included in annual financial statements
prepared in accordance with generally accepted accounting principles in
the
United States of America ("GAAP") but not required for interim reporting
purposes has been condensed or omitted. These unaudited condensed
consolidated financial statements reflect, in the opinion of management,
all
adjustments necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods
presented. The nature of the Company's business is such that the
results of any interim period are not necessarily indicative of results
for a
full year. These unaudited condensed consolidated financial statements
should be
read in conjunction with Management’s Discussion and Analysis and the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended September 30, 2007. To
prepare consolidated financial statements in conformity with GAAP, management
must estimate certain amounts that affect the reported assets and liabilities,
disclosure of contingent assets and liabilities, and reported revenues
and
expenses. Actual results could differ from those estimates. Certain revisions
and reclassifications have been made to the unaudited condensed consolidated
financial statements of the prior period to conform to the current period
presentation. For the three months ended December 31, 2006, the Company
reclassed certain segregated assets and reverse repurchase agreements from
cash
and cash equivalents. The Condensed Consolidated Statements of Cash Flows
for
the respective period were adjusted for this reclass, which resulted in
an
increase in cash flows provided by operating activities of $38.5 million.
This
increase was partially offset by a reclassification of $3.3 million related
to
loans available for sale to net cash used in investing activities. In the
quarter ended September 30, 2007, a new segment was established: Proprietary
Capital. The components of this segment were previously included in the
Asset
Management and Other segments. Reclassifications have been made in the
segment
disclosure for the three months ended December 31, 2006 to conform to this
presentation. Additional information is provided in Note 17 below.
The
Company’s quarters end on the last day of each calendar quarter.
NOTE
2 – EFFECTS OF RECENTLY
ISSUED ACCOUNTING STANDARDS:
In
June
2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”), which clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income
Taxes”. FIN 48 establishes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. Under FIN 48, evaluation of income
tax
benefits is a two-step process. First, income tax benefits can be recognized
in
financial statements for a tax position if it is considered “more likely than
not” (as defined in SFAS 5, “Accounting for Contingecies”) of being sustained on
audit based solely on the technical merits of the income tax position. Second,
if the recognition criteria are met, the amount of income tax benefits to
be
recognized is measured based on the largest income tax benefit that is more
than
50 percent likely to be realized on ultimate resolution of the tax position. This interpretation
also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The Company adopted
the provisions of FIN 48 on October 1, 2007. See Note 10 below for information
regarding the impact the adoption of FIN 48 had on the Company’s consolidated
financial statements.
In
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 adoption of FSP FAS 13-2 did not have
a
material impact on the Company’s consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair-value measurements required under
other accounting pronouncements, but does not change existing guidance as to
whether or not an instrument is carried at fair value. SFAS 157 is effective
for
financial statements issued for fiscal years beginning after November 15, 2007
(October 1, 2008 for the Company), and interim periods within those fiscal
years. 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 SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows
companies to elect to follow fair value accounting for certain financial assets
and liabilities on an instrument by instrument basis. SFAS 159 is applicable
only to certain financial instruments and is effective for fiscal years
beginning after November 15, 2007 (October 1, 2008 for the Company). The
Company does not expect SFAS 159 to have a material impact on the consolidated
financial statements of the Company.
In
April
2007, the FASB issued Staff Position FIN No. 39-1, "Amendment of FASB
Interpretation No. 39” (“FSP FIN No. 39-1”). FSP FIN No. 39-1 defines "right of
setoff" and specifies what conditions must be met for a derivative contract
to
qualify for this right of setoff. FSP FIN No. 39-1 also addresses the
applicability of a right of setoff to derivative instruments and clarifies
the
circumstances in which it is appropriate to offset amounts recognized for those
instruments in the statement of financial position. In addition, this FSP
permits offsetting of fair value amounts recognized for multiple derivative
instruments executed with the same counterparty under a master netting
arrangement and fair value amounts recognized for the right to reclaim cash
collateral (a receivable) or the obligation to return cash collateral (a
payable) arising from the same master netting arrangement as the derivative
instruments. This interpretation is effective for fiscal years beginning after
November 15, 2007 (October 1, 2008 for the Company), with early application
permitted. The Company is currently evaluating the impact the adoption of FSP
FIN No. 39-1 will have on its consolidated financial statements.
In
May
2007, the FASB issued FSP FIN No. 46R-7, "Application of FASB Interpretation
No.
46(R) to Investment Companies". FSP FIN No. 46R-7 amends the scope of the
exception to FIN 46R to state that investments accounted for at fair value
in
accordance with the specialized accounting guidance in the American Institute
of
Certified Public Accountants ("AICPA") Audit and Accounting Guide, Investment
Companies, (the “Guide”) are not subject to consolidation under FIN 46R. This
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
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 continues
to evaluate the impact the adoption of SOP 07-1 will have on its consolidated
financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires
noncontrolling interests to be treated as a separate component of equity, not
as
a liability or other item outside of permanent equity. This statement is
applicable to the accounting for noncontrolling interests and transactions
with
noncontrolling interest holders in consolidated financial statements and is
effective for fiscal years beginning on or after December 15, 2008 (October
1,
2009 for the Company). The Company is currently evaluating the impact the
adoption of SFAS 160 will have on its consolidated financial
statements.
NOTE
3 – TRADING INSTRUMENTS
AND TRADING INSTRUMENTS SOLD BUT NOT YET PURCHASED:
|
December
31, 2007
|
September
30, 2007
|
|
|
Instruments
|
|
Instruments
|
|
|
Sold
but
|
|
Sold
but
|
|
Trading
|
Not
Yet
|
Trading
|
Not
Yet
|
|
Instruments
|
Purchased
|
Instruments
|
Purchased
|
|
(in
000's)
|
|
|
|
|
|
Municipal
Obligations
|
$
318,396
|
$ 54
|
$
200,024
|
$ 54
|
Corporate
Obligations
|
56,771
|
580
|
56,069
|
952
|
Government
Obligations
|
84,368
|
132,016
|
83,322
|
45,275
|
Agencies
|
128,194
|
71,222
|
47,123
|
60,829
|
Total
Debt Securities
|
587,729
|
203,872
|
386,538
|
107,110
|
|
|
|
|
|
Derivative
Contracts
|
40,271
|
18,589
|
30,603
|
8,445
|
Equity
Securities
|
55,634
|
22,409
|
46,913
|
34,174
|
Other
Securities
|
1,457
|
-
|
3,707
|
-
|
Total
|
$
685,091
|
$
244,870
|
$
467,761
|
$
149,729
|
Mortgage
backed securities of $136.9 million and $48.9 million at December 31, 2007
and
September 30, 2007, respectively, are included in Corporate Obligations and
Agencies in the table above. Mortgage backed securities sold but not yet
purchased of $71.2 million and $60.8 million at December 31, 2007 and September
30, 2007, 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 (“CMOs”) and mortgage-related debt securities, principally owned by
Raymond James Bank (“RJBank”), and certain equity securities owned by the
Company's non-broker-dealer subsidiaries. There were no proceeds from the sale
of available for sale securities for the three months ended December 31, 2007
and 2006.
The
amortized cost and estimated market values of securities available for sale
at
December 31, 2007 and September 30, 2007 are as follows:
|
December
31, 2007
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Available
for Sale Securities:
|
|
|
|
|
Agency
Mortgage Backed Securities
|
$
183,060
|
$
181
|
$ (617)
|
$
182,624
|
Non-Agency
Collateralized Mortgage Obligations
|
393,297
|
459
|
(7,398)
|
386,358
|
|
|
|
|
|
Total
RJBank Available for Sale Securities
|
576,357
|
640
|
(8,015)
|
568,982
|
|
|
|
|
|
Other
Securities
|
3
|
21
|
-
|
24
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
576,360
|
$
661
|
$
(8,015)
|
$
569,006
|
|
September
30, 2007
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Available
for Sale Securities:
|
|
|
|
|
Agency
Mortgage Backed Securities
|
$
189,816
|
$
283
|
$ (404)
|
$
189,695
|
Non-Agency
Collateralized Mortgage Obligations
|
382,980
|
239
|
(3,003)
|
380,216
|
|
|
|
|
|
Total
RJBank Available for Sale Securities
|
572,796
|
522
|
(3,407)
|
569,911
|
|
|
|
|
|
Other
Securities
|
3
|
38
|
-
|
41
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
572,799
|
$
560
|
$(3,407)
|
$
569,952
|
Because
the decline in fair value is attributable to changes in interest rates and
market irregularities and not credit quality, and because the Company has the
ability and intent to hold these investments until a fair value recovery or
maturity, these investments are not considered "other-than-temporarily"
impaired.
NOTE
5 – BANK LOANS,
NET:
Bank
client receivables are primarily comprised of loans originated or purchased
by
RJBank and include commercial and residential real estate loans, as well as
commercial and consumer loans. These receivables are collateralized by first
or
second mortgages on residential or other real property, by other assets of
the
borrower, or are unsecured. The following table presents the balance and
associated percentage of each major loan category in RJBank's portfolio,
including loans receivable and loans available for sale:
|
December
31,
|
September
30,
|
|
2007
|
2007
|
|
Balance
|
%
|
Balance
|
%
|
|
($
in 000’s)
|
|
|
|
|
|
Commercial
|
|
|
|
|
Loans
(1)
|
$ 639,767
|
11%
|
$ 343,783
|
7%
|
Real
Estate
|
|
|
|
|
Construction
|
|
|
|
|
Loans
|
198,606
|
3%
|
123,664
|
3%
|
Commercial
|
|
|
|
|
Real
Estate
|
|
|
|
|
Loans
(2)
|
2,628,902
|
46%
|
2,317,840
|
49%
|
Residential
|
|
|
|
|
Mortgage
|
|
|
|
|
Loans
|
2,258,904
|
40%
|
1,934,645
|
41%
|
Consumer
|
|
|
|
|
Loans
|
4,938
|
0%
|
4,541
|
0%
|
|
|
|
|
|
Total
Loans
|
5,731,117
|
100%
|
4,724,473
|
100%
|
|
|
|
|
|
|
|
|
|
|
Net
Unearned
|
|
|
|
|
Income
and
|
|
|
|
|
Deferred
|
|
|
|
|
Expenses
(3)
|
(18,358)
|
|
(13,242)
|
|
Allowance
for
|
|
|
|
|
Loan
Losses
|
(59,256)
|
|
(47,022)
|
|
|
|
|
|
|
|
(77,614)
|
|
(60,264)
|
|
|
|
|
|
|
Loans,
Net
|
$5,653,503
|
|
$4,664,209
|
|
(1)
Loans
not secured by real estate.
(2)
Loans
wholly or partially secured by real estate.
(3)
Includes purchase premiums, purchase discounts, and net deferred origination
fees and costs.
At
December 31, 2007 and September 30, 2007, $55 million in Federal Home Loan
Bank
(“FHLB”) advances were secured by a blanket lien on RJBank's residential
mortgage loan portfolio.
At
December 31, 2007 and September 30, 2007, RJBank had $2.6 million and $5.1
million in loans available for sale, respectively. RJBank's gain from the sale
of originated loans available for sale was $97,000 and $70,000 for the three
months ended December 31, 2007 and 2006, respectively.
Certain
officers, directors, and affiliates, and their related interests were indebted
to RJBank for $986,000 and $999,000 at December 31, 2007 and September 30,
2007,
respectively. All such loans were made in the ordinary course
of business.
Loan
interest and fee income for the three months ended December 31, 2007 and 2006
was $84.3 million and $40.3 million, respectively.
The
following table shows the contractual maturities of RJBank’s loan portfolio at
December 31, 2007, including contractual principal repayments. This table does
not, however, include any estimates of prepayments. These prepayments could
significantly shorten the average loan lives and cause the actual timing of
the
loan repayments to differ from those shown in the following table:
|
Due
in
|
|
|
1
Year or Less
|
1
Year – 5 Years
|
>5
Years
|
Total
|
|
(in
000’s)
|
|
|
|
|
|
Commercial
Loans (1)
|
$ 1,029
|
$ 257,207
|
$ 381,531
|
$ 639,767
|
Real
Estate Construction Loans
|
36,025
|
155,549
|
7,032
|
198,606
|
Commercial
Real Estate Loans (2)
|
134,228
|
1,591,830
|
902,844
|
2,628,902
|
Residential
Mortgage Loans
|
1,051
|
4,311
|
2,253,542
|
2,258,904
|
Consumer
Loans
|
1,521
|
3,417
|
-
|
4,938
|
|
|
|
|
|
Total
Loans
|
$
173,854
|
$
2,012,314
|
$
3,544,949
|
$
5,731,117
|
(1)
Loans
not secured by real estate.
(2)
Loans
wholly or partially secured by real estate.
RJBank
classifies loans as nonperforming when full and timely collection of interest
or
principal becomes uncertain or when they are 90 days past due. The following
table shows the comparative data for nonperforming loans and
assets:
|
December
31,
|
September
30,
|
|
2007
|
2007
|
|
($
in 000’s)
|
|
|
|
Nonaccrual
Loans
|
$
4,015
|
$
1,391
|
Accruing
Loans Which are 90 Days
|
|
|
Past
Due
|
2,207
|
2,674
|
|
|
|
Total
Nonperforming Loans
|
6,222
|
4,065
|
|
|
|
Real
Estate Owned and Other
|
|
|
Repossessed
Assets, Net
|
2,423
|
1,653
|
|
|
|
Total
Nonperforming Assets, Net
|
$
8,645
|
$
5,718
|
|
|
|
Total
Nonperforming Assets as a
|
|
|
Percentage
of
|
|
|
Total
Loans, Net and Other Real Estate Owned, Net
|
0.15%
|
0.12%
|
The
gross
interest income related to non-performing loans, which would have been recorded
had these loans been current in accordance with their original terms and had
been outstanding throughout the period or since origination, and the interest
income recognized on these loans for the quarter ended December 31, 2007 were
immaterial to the consolidated financial statements. As of December 31, 2007,
there was one impaired loan for $1.9 million included in nonaccrual loans with
a
reserve of $948,000 established against this loan. To date, there have been
no
charge-offs related to this impaired loan. There were no troubled debt
restructurings for any of the periods presented above.
Changes
in the allowance for loan losses at RJBank were as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2007
|
2006
|
|
($
in 000’s)
|
|
|
|
Allowance
for Loan Losses,
|
|
|
Beginning
of Period
|
$
47,022
|
$
18,694
|
Provision
For Loan Losses
|
12,820
|
4,262
|
Charge-Offs:
|
|
|
Commercial
Loans (1)
|
-
|
-
|
Real
Estate Construction Loans
|
-
|
-
|
Commercial
Real Estate Loans (2)
|
(372)
|
-
|
Residential
Mortgage Loans
|
(214)
|
(45)
|
Consumer
Loans
|
-
|
-
|
|
|
|
Total
Charge-Offs
|
(586)
|
(45)
|
|
|
|
Recoveries
|
-
|
-
|
|
|
|
Net
Charge-Offs
|
(586)
|
(45)
|
|
|
|
Allowance
for Loan Losses,
|
|
|
End
of Period
|
$
59,256
|
$
22,911
|
|
|
|
Net
Charge-Offs to Average Bank
|
|
|
Loans,
Net Outstanding
|
0.01%
|
0.00%
|
(1)
Loans
not secured by real estate.
(2)
Loans
wholly or partially secured by real estate.
The
calculation of the allowance is subjective as management segregates the loan
portfolio into different homogeneous classes and assigns each class an allowance
percentage based on the perceived risk associated with that class of loans.
The
factors taken into consideration when assigning the reserve percentage to each
reserve category include estimates of borrower default probabilities and
collateral values; trends in delinquencies; volume and terms; changes in
geographic distribution, lending policies, local, regional, and national
economic conditions; concentrations of credit risk and past loss history. In
addition, the Company provides for potential losses inherent in RJBank’s
unfunded lending commitments using the criteria above, further adjusted for
an
estimated probability of funding. The provision for loan loss is included in
other expenses in the Condensed Consolidated Statements of Income and
Comprehensive Income.
In
addition to the allowance for loan losses, RJBank had reserves for unfunded
lending commitments included in Trade and Other Payables of $6.0 million and
$6.8 million at December 31, 2007 and September 30, 2007,
respectively.
RJBank’s
net interest income after provision for loan losses for the quarters ended
December 31, 2007 and 2006 was $22.4 million and $11.6 million,
respectively.
RJBank
originates and purchases portfolios of loans that have certain features that
may
be viewed as increasing its exposure to nonpayment risk by the borrower.
Specifically, RJBank originates and purchases residential loans that subject
the
borrower to payment increases over the life of the loan or have high
loan-to-value (“LTV”) ratios. These features, including interest-only features
and high LTV ratios, may be considered non-traditional for residential
mortgages. RJBank does not originate or purchase residential loans that have
terms that permit negative amortization features or are option adjustable rate
mortgages.
The
table
below summarizes the balances outstanding for each type of loan at December
31,
2007 and September 30, 2007:
|
December
31,
|
September
30,
|
|
2007
|
2007
|
|
(in
000’s)
|
|
|
|
Interest-Only
Adjustable Rate Mortgage Loans Where Borrowers May
|
|
|
Be
Subject to Payment Increases
|
$
1,823,219
|
$
1,614,576
|
Residential
Mortgage Loans with High Loan-to-Value Ratios
|
$ 673
|
$ 734
|
Loans
where borrowers may be subject to payment increases include adjustable rate
mortgage loans with terms that initially require payment of interest only,
that
may result in payments increasing significantly when the interest-only period
ends and the loan principal begins to amortize. These loans are underwritten
based on a variety of factors including the borrower’s credit history, debt to
income ratio, employment, the LTV ratio, and the borrower’s disposable income
and cash reserves. In instances where the borrower is of lower credit standing,
the loans are typically underwritten to have a lower LTV ratio and/or other
mitigating factors.
Management
does not believe these loans, collateralized by real estate, represent any
unusual concentrations of risk, as evidenced by low net charge-offs and past
due
loans. All of these loans are secured by mortgages on one-to-four family
residential real estate and are diversified geographically. Interest-only loans
are underwritten at the time of application based on the amortizing payment
amount, and borrowers are required to meet stringent parameters regarding debt
ratios, loan to value levels, and credit score.
High
LTV
loans include all mortgage loans where the LTV is greater than 90% and the
borrower has not purchased private mortgage insurance (“PMI”). High LTV loans
may also include residential mortgage products where a mortgage and home equity
loan are simultaneously established for the same property. The maximum original
LTV ratio for the mortgage portfolio with no PMI or other security is 100%.
NOTE
6 - VARIABLE INTEREST
ENTITIES (“VIEs”):
Under
the
provisions of FIN 46R the Company has determined that Raymond James Employee
Investment Funds I and II (the “EIF Funds”), 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 $17.0 million at
December 31, 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 December 31, 2007 that exposure
is
approximately $4.7 million.
CSS
was
formed by a group of broker-dealer firms, including the Company, to develop
a
back-office software system. During the first quarter of fiscal year 2008,
CSS
was acquired by an affiliate of a CSS shareholder. As a result of this
transaction, the Company sold its interest in CSS for an immaterial amount.
This
transaction did not have a material impact on the Company’s financial
statements.
RJTCF
is
a wholly owned subsidiary of RJF and is the managing member or general partner
in approximately 50 separate tax credit housing funds having one or more
investor members or limited partners. These tax credit housing funds are
organized as limited liability companies or limited partnerships for the purpose
of investing in limited partnerships which purchase and develop low income
housing properties qualifying for tax credits. As of December 31, 2007, 47
of
these tax credit housing funds are VIEs as defined by FIN 46R, and RJTCF’s
interest in these tax credit housing funds which are VIEs range from .01% to
1.0%.
RJTCF
has
concluded that it is the primary beneficiary in approximately one fifth of
these
tax credit housing funds, and accordingly, consolidates these funds, which
have
combined assets of approximately $270.5 million at December 31, 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 December 31, 2007, that exposure is approximately
$6.7 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 December 31, 2007, that exposure
is approximately $18.6 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. During December 31, 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. These funds had assets of approximately
$7.9
million at December 31, 2007.
As
of
December 31, 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 $11 million at
December 31, 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 December 31, 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 $13.3 million at December 31, 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 December 31, 2007, that exposure is approximately
$13.3
million.
NOTE
7 - BANK
DEPOSITS:
Bank
deposits include Negotiable Order of Withdrawal (“NOW”) accounts, demand
deposits, savings and money market accounts and certificates of deposit. The
following table presents a summary of bank deposits at December 31, 2007 and
September 30, 2007:
|
December
31, 2007
|
September
30, 2007
|
|
|
Weighted
|
|
Weighted
|
|
|
Average
|
|
Average
|
|
Balance
|
Rate
(1)
|
Balance
|
Rate
(1)
|
|
($
in 000's)
|
|
|
|
|
|
Bank
Deposits:
|
|
|
|
|
NOW
Accounts
|
$ 5,410
|
1.62%
|
$ 4,493
|
1.57%
|
Demand
Deposits (Non-Interest Bearing)
|
2,001
|
-
|
3,645
|
-
|
Savings
and Money Market Accounts
|
5,961,639
|
4.12%
|
5,337,587
|
4.59%
|
Certificates
of Deposit
|
239,812
|
4.72%
|
239,534
|
4.75%
|
Total
Bank Deposits
|
$6,208,862
|
4.14%
|
$5,585,259
|
4.59%
|
(1)
Weighted average rate calculation is based on the actual deposit balances at
December 31, 2007 and September 30, 2007.
RJBank
had deposits from officers and directors of $3.8 million and $1.8 million at
December 31, 2007 and September 30, 2007, respectively.
Scheduled
maturities of certificates of deposit and brokered certificates of deposit
at
December 31, 2007 and September 30, 2007 were as follows:
|
December
31, 2007
|
September
30, 2007
|
|
Denominations
|
|
Denominations
|
|
|
Greater
than
|
Denominations
|
Greater
than
|
Denominations
|
|
or
Equal
|
Less
than
|
or
Equal
|
Less
than
|
|
to
$100,000
|
$100,000
|
to
$100,000
|
$100,000
|
|
(in
000's)
|
|
|
|
|
|
Three
Months or Less
|
$
14,157
|
$ 32,880
|
$
14,386
|
$ 23,922
|
Over
Three Through Six Months
|
13,428
|
25,572
|
10,949
|
28,980
|
Over
Six Through Twelve Months
|
10,224
|
31,477
|
11,790
|
38,005
|
Over
One Through Two Years
|
15,744
|
41,393
|
14,706
|
36,997
|
Over
Two Through Three Years
|
6,476
|
18,777
|
7,978
|
22,345
|
Over
Three Through Four Years
|
7,872
|
14,752
|
7,857
|
14,103
|
Over
Four Years
|
1,679
|
5,381
|
1,802
|
5,714
|
Total
|
$
69,580
|
$
170,232
|
$
69,468
|
$
170,066
|
Interest
expense on deposits is
summarized as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2007
|
2006
|
|
(in
000's)
|
|
|
|
Certificates
of Deposit
|
$ 2,816
|
$ 2,806
|
Money
Market, Savings and
|
|
|
NOW
Accounts
|
60,620
|
30,965
|
Total
Interest Expense
|
$
63,436
|
$
33,771
|
NOTE
8 – LOANS
PAYABLE:
Loans
payable at December 31, 2007 and September 30, 2007 are presented
below:
|
December
31,
|
September
30,
|
|
2007
|
2007
|
|
(in
000's)
|
Short-Term
Borrowings:
|
|
|
Borrowings
on Lines of Credit (1)
|
$ 4,194
|
$ 2,685
|
Current
Portion of Mortgage Notes Payable
|
2,770
|
2,731
|
Federal
Home Loan Bank Advances (2)
|
5,000
|
5,000
|
Total
Short-Term Borrowings
|
11,964
|
10,416
|
|
|
|
Long-Term
Borrowings:
|
|
|
Mortgage
Notes Payable
(3)
|
61,516
|
62,224
|
Federal
Home Loan Bank Advances (2)
|
50,000
|
50,000
|
Total
Long-Term Borrowings
|
111,516
|
112,224
|
|
|
|
Total
Loans Payable
|
$
123,480
|
$
122,640
|
(1)
|
The
Company and its subsidiaries maintain one committed and several
uncommitted lines of credit denominated in U.S. dollars and one
uncommitted line of credit denominated in Canadian dollars (“CDN”). At
December 31, 2007, the aggregate domestic lines were $1.21 billion
and CDN
$40 million, respectively. The interest rates for these lines of
credit
are variable and are based on the Fed Funds rate, LIBOR, and Canadian
prime rate. For the three months ended December 31, 2007, interest
rates
on the lines of credit ranged from 4.75% to 6.13%. For the three
months
ended December 31, 2006, interest rates on the lines of credit ranged
from
5.00% to 6.52%. The Company’s committed $200 million line of credit is
subject to a 0.125% per annum facility fee. The Company maintains
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 ranges from 102% to 105% of the cash borrowed. The
interest
rate is set each day at 25 basis points over the opening Fed Funds
rate
and this agreement can be terminated by any party on any business
day.
Under this agreement, there were secured short-term borrowings of
$375
million outstanding at December 31, 2007 which are included in Securities
Sold Under Agreements to Repurchase. In addition, the Company’s joint
ventures in Turkey and Argentina have multiple settlement lines of
credit.
The Company has guaranteed certain of these settlement lines of credit
as
follows: three in Turkey totaling $18 million and one in Argentina
for $3
million. On December 31, 2007, there were no outstanding balances
on the
settlement lines in Argentina and Turkey. At December 31, 2007 the
aggregate unsecured settlement lines of credit available were $95
million,
and there were outstanding balances of $4.2 million on these lines.
The
interest rates for these lines of credit ranged from 9% to
18%.
|
(2)
|
RJBank
had $55 million in FHLB advances outstanding at December 31, 2007,
which
were comprised of one short-term, fixed rate advance and several
long-term, fixed rate advances. The weighted average interest rate
on
these fixed rate advances at December 31, 2007 was 5.23%. The outstanding
FHLB advances mature between May 2008 and February 2011. The maximum
amount of FHLB advances outstanding at any month-end during the three
months ended December 31, 2007 and 2006 was $69 million and $50 million,
respectively. The average amounts of FHLB advances outstanding and
the
weighted average interest rate thereon for the three months ended
December
31, 2007 and 2006 were $58.2 million at a rate of 5.32% and $53.8
million
at a rate of 5.15%, respectively. These advances are secured by a
blanket
lien on RJBank's residential loan portfolio granted to FHLB. The
FHLB has
the right to convert advances totaling $35 million at December 31,
2007 to
a floating rate at one or more future dates. RJBank has the right
to
prepay these advances without penalty if the FHLB exercises its
right.
|
(3)
|
Mortgage
notes payable evidences a mortgage loan for the financing of the
Company's
home office complex. The mortgage loan bears interest at 5.7% and
is
secured by land, buildings, and improvements with a net book value
of $70
million at December 31, 2007.
|
NOTE
9 – DERIVATIVE
FINANCIAL INSTRUMENTS:
The
Company enters into interest rate swaps and 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 Condensed
Consolidated Statements of Financial Condition for the period. At December
31,
2007 and September 30, 2007, the Company had outstanding interest rate
derivative contracts with notional amounts of $3.8 billion and $3.5 billion,
respectively. The notional amount of a derivative contract does not change
hands; it is simply used as a reference to calculate payments. Accordingly,
the
notional amount of the Company’s derivative contracts outstanding at December
31, 2007 vastly exceeds the possible losses that could arise from such
transactions. The net market value of all open swap positions at December 31,
2007 and September 30, 2007 was $21.9 million and $22.2 million,
respectively.
The
Company is exposed to credit losses in the event of nonperformance by the
counterparties to its interest rate swap agreements. The Company performs a
credit evaluation of counterparties prior to entering into swap transactions
and
monitors their credit standings. Currently, the Company anticipates that all
counterparties will be able to fully satisfy their obligations under those
agreements. The Company may require collateral from counterparties to support
these obligations as established by the credit threshold specified by the
agreement and/or as a result of monitoring the credit standing of the
counterparties. The Company is also exposed to interest rate risk related to
its
interest rate swap agreements. The Company monitors exposure in its derivatives
subsidiary daily based on established limits with respect to a number of
factors, including interest rate, spread, ratio and basis, and volatility risks.
These exposures are monitored both on a total portfolio basis and separately
for
selected maturity periods.
NOTE
10 – INCOME
TAXES:
The
Company adopted the provisions of FIN 48 on October 1, 2007. The
impact of the adoption of FIN 48 resulted in a decrease to beginning retained
earnings and an increase to the liability for unrecognized tax benefits of
approximately $4.2 million.
The
total
amount of gross unrecognized tax benefits as of the date of adoption was
approximately $8.6 million. Of this total, approximately $6.9 million
(net of the federal benefit on state issues) represents the amount of
unrecognized tax benefits that, if recognized, would favorably affect the
effective tax rate in future periods.
The
Company recognizes the accrual of interest and penalties related to income
tax
matters in interest expense and other expense, respectively. Interest
and penalties accrued as of the beginning of the year were approximately $1.6
million.
The
Company’s tax liability does not include any accrual for potential taxes,
interest or penalties related to tax assessments of the Company’s Turkish joint
venture. The Company has fully reserved for its equity interest in
this joint venture (see Note 11 below for additional information).
The
Company files income tax returns in the U. S. federal jurisdiction and various
states, local and foreign jurisdictions. With few exceptions, the
Company is no longer subject to U.S. federal, state and local, or foreign income
tax examination by tax authorities for years prior to 2004 for federal tax
returns, 2004 for state and local tax returns and 2000 for foreign tax
returns. The Company is under Limited Issue Focused Examinations by
the Internal Revenue Service for fiscal years
2005 and 2006. The fiscal year 2007 federal income
tax return is being examined under the IRS Compliance Assurance
Program. This program accelerates the examination of key issues in an
attempt to resolve them before the tax return is filed. Certain state and local
returns are also currently under various stages of audit. The IRS and
state audits in process are expected to be completed in 2008. It is
anticipated that the net unrecognized tax benefits may be reduced by up to
one-half as a result of the audit settlements.
NOTE
11 – COMMITMENTS AND
CONTINGENCIES:
The
Company is the lessor in a leveraged commercial aircraft transaction with
Continental Airlines, Inc. (“Continental"). The Company's ability to
realize its expected return is dependent upon this airline’s ability to fulfill
its lease obligation. In the event that this airline defaults on its
lease commitment and the Trustee for the debt holders is unable to re-lease
or
sell the plane with adequate terms, the Company would suffer a loss of some
or
all of its investment. The value of this leveraged lease with
Continental was approximately $10.3 million as of December 31,
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.
RJBank
had $55 million in FHLB advances outstanding at December 31, 2007, which were
comprised of one short-term, fixed rate advance and several long-term, fixed
rate advances. RJBank had $1.4 billion in credit available from the FHLB at
December 31, 2007.
At
December 31, 2007 and September 30, 2007, no securities other than FHLB stock
were pledged by RJBank as collateral with the FHLB for advances. In addition
to
the FHLB stock pledged as collateral for advances, RJBank provided the FHLB
with
a blanket lien against RJBank's entire portfolio of residential mortgage
loans.
As
of
December 31, 2007, RJBank has entered into reverse repurchase agreements
totaling $305 million with two counterparties, with individual exposures of
$125
million and $180 million. Although RJBank is exposed to risk that these
counterparties may not fulfill their contractual obligations, the Company
believes the risk of default is minimal due to the creditworthiness of these
counterparties, collateral received and the short duration of these
agreements.
As
of
September 30, 2007, RJBank had not settled purchases of $300.6 million in
syndicated loans (included in Bank Loans, Net) due to the sellers’ delays in
finalizing settlement. As of December, 31, 2007, RJBank had not settled the
purchases of $100.7 million in syndicated loans, which includes $33.2 million
of
syndicated loans purchased but not settled at September 30, 2007 due to seller
delays (all but $5.6 million of these loans were subsequently settled during
January 2008). The remaining loans are expected to be settled during the three
months ended March 31, 2008.
See
Note
15 of the Notes to Condensed Consolidated Financial Statements with respect
to
RJBank’s commitments to extend credit and other credit-related off-balance sheet
financial instruments such as standby letters of credit and loan
purchases.
As
part
of an effort to increase brand awareness, the Company entered into a stadium
naming rights contract in July 1998. The contract expires in 2016 and has a
4%
annual escalator. Expenses of $765,000 and $736,000 were recognized in the
three
months ended December 31, 2007 and 2006, respectively.
In
the
normal course of business, the Company enters into underwriting commitments.
Transactions relating to such commitments of Raymond James & Associates
(“RJA”) that were open at December 31, 2007 and were subsequently settled had no
material effect on the consolidated financial statements as of that date.
Transactions relating to such commitments of Raymond James Ltd. (“RJ Ltd.”) that
were recorded and open at December 31, 2007 were approximately CDN $3.2
million.
The
Company utilizes client marginable securities to satisfy deposits with clearing
organizations. At December 31, 2007, the Company had client margin securities
valued at $122.7 million pledged with a clearing organization to meet the point
in time requirement of $59.1 million. At September 30, 2007, the Company had
client margin securities valued at $135.7 million pledged with a clearing
organization to meet the point in time requirement of $67.5
million.
In
January 2008, Sirchie Acquisition Company, LLC (“SAC”), an 80% owned indirect
subsidiary of the Company, acquired substantially all of the business, assets,
and properties of Sirchie Finger Print Laboratories, Inc., the assets or stock
of several other companies and certain real estate. The Company’s equity
investment in SAC was approximately $20 million. SAC also acquired 51% of the
common stock of Law Enforcement Associates Corporation as part of the
transaction. This acquisition is one of the Company’s recent merchant banking
initiatives.
The
Company has committed a total of $56.5 million, in amounts ranging from $200,000
to $5 million, to 43 different independent venture capital or private equity
partnerships. As of December 31, 2007, the Company has invested $32.2 million
of
that amount and has received $28.1 million in distributions. Additionally,
the
Company controls the general partner in two internally sponsored private equity
limited partnerships to which it has committed $14.3 million. Of that amount,
the Company has invested $13 million and has received $8.8 million in
distributions as of December 31, 2007. The Company is not the controlling
general partner in another internally sponsored private equity limited
partnership to which it has committed $30 million. As of December 31, 2007,
the
Company has not invested or received any distributions.
The
Company is the general partner in the EIF Funds. These limited partnerships
invest in the merchant banking and private equity activities of the Company
and
other unaffiliated venture capital limited partnerships. The EIF Funds were
established as compensation and retention measures for certain qualified key
employees of the Company. At December 31, 2007, the funds have unfunded
commitments of $2.7 million.
In
the
normal course of business, certain subsidiaries of the Company act as general
partner and may be contingently liable for activities of various limited
partnerships. These partnerships engaged primarily in real estate activities.
In
the opinion of the Company, such liabilities, if any, for the obligations of
the
partnerships will not in the aggregate have a material adverse effect on the
Company's consolidated financial position.
At
December 31, 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 and Other
|
|
Collateralized
Financings
|
$ 658,022
|
Securities
Received in Securities Borrowed Vs. Cash Transactions
|
1,003,240
|
Collateral
Received for Margin Loans
|
1,491,143
|
Total
|
$
3,152,405
|
During
the quarter certain collateral was repledged. At December 31, 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 and Other
|
|
Collateralized
Financings
|
$ 193,849
|
Securities
Received in Securities Borrowed Vs. Cash Transactions
|
968,124
|
Collateral
Received for Margin Loans
|
122,676
|
Total
|
$
1,284,649
|
The
Company and its subsidiaries maintain one committed and several uncommitted
lines of credit denominated in U.S. dollars and one uncommitted line of credit
denominated in Canadian dollars. At December 31, 2007, the aggregate domestic
lines were $1.21 billion and CDN $40 million. The interest rates for these
lines
of credit are variable and are based on the Fed Funds rate, LIBOR, and Canadian
prime rate. The Company’s committed $200 million line of credit is subject to a
0.125% per annum facility fee. The Company maintains 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 ranges from 102% to
105%
of the cash borrowed. The interest rate is set each day at 25 basis points
over
the opening Fed Funds rate and this agreement can be terminated by any party
on
any business day. Under this agreement, there were secured short-term borrowings
of $375 million outstanding at December 31, 2007 which are included in
Securities Sold Under Agreements to Repurchase.
The
Company’s joint ventures in Turkey and Argentina have multiple settlement lines
of credit. The Company has guaranteed certain of these settlement lines of
credit as follows: three in Turkey totaling $18 million and one in Argentina
for
$3 million. On December 31, 2007, there were no outstanding balances on the
settlement lines in Argentina and Turkey. At December 31, 2007 the aggregate
unsecured settlement lines of credit available were $95 million, and there
were
outstanding balances of $4.2 million on these lines. The Company has also from
time to time authorized performance guarantees for the completion of trades
with
counterparties in Argentina and Turkey. At December 31, 2007, there were no
outstanding performance guarantees in Argentina or Turkey.
The
Company guarantees the existing mortgage debt of RJA of approximately $64.3
million. The Company guarantees interest rate swap obligations of RJ Capital
Services, Inc. The Company has also committed to lend to RJTCF, or guarantee
obligations in connection with RJTCF’s low income housing
development/rehabilitation and syndication activities, aggregating up to $125
million upon request, subject to certain limitations as well as annual review
and renewal. RJTCF borrows in order to invest in partnerships which purchase
and
develop properties qualifying for tax credits. These investments in project
partnerships are then sold to various tax credit funds, which have third party
investors, and for which RJTCF serves as the managing member or general partner.
RJTCF typically sells these investments within 90 days of their acquisition,
and
the proceeds from the sales are used to repay RJTCF’s borrowings. Additionally,
RJTCF may make short-term loans or advances to project partnerships on behalf
of
the tax credit funds in which it serves as managing member or general partner.
At December 31, 2007, cash funded to invest in either loans or investments
in
project partnerships was $38.7 million. In addition, at December 31, 2007,
RJTCF
is committed to additional future fundings of $44.0 million related to project
partnerships that have not yet been sold to various tax credit funds. The
Company and RJTCF also issue certain guarantees to various third parties related
to project partnerships which have been or are expected to be sold to one or
more tax credit funds under RJTCF’s management. In some instances, RJTCF is not
the primary guarantor of these obligations which aggregate to a cumulative
maximum obligation of approximately $5.4 million as of December 31,
2007.
The
Company was required to enter into a pair of agreements, both with Raymond
James
Trust, National Association and one with the Office of the Controller of the
Currency (“OCC”), as a condition to the conversion of Raymond James Trust
Company, now known as Raymond James Trust, National Association, (‘RJT”) from a
state to a federally chartered institution. The conversion was effective January
1, 2008. Under those agreements, the Company is obligated to provide
RJT with sufficient capital in a form acceptable to the OCC to meet and maintain
the capital and liquidity requirements commensurate with RJT’s risk profile for
its conversion and any subsequent requirements of the OCC. The conversion
expands RJT’s market nationwide, while substituting federal for multiple state
regulatory oversight. RJT’s federal charter limits it to fiduciary activities.
Thus, capital requirements are not expected to be significant. Based on current
projections, RJT’s existing capital is expected to be sufficient for the
foreseeable future.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately $6.8 million by the Turkish tax
authorities. The authorities applied a significantly different methodology
than
in the prior year’s audit which the Turkish tax court affirmed. RJY
is vigorously contesting most aspects of this assessment and has filed an appeal
with the Turkish Council of State. The Turkish tax authorities, utilizing the
2001 methodology assessed RJY $5.7 million for 2002, which is also being
challenged. Audits of 2003 and 2004 are anticipated and their outcome is unknown
in light of the change in methodology and the pending litigation. The Company
has recorded a provision for loss in its consolidated financial statements
for
its net equity interest in this joint venture. As of December 31, 2007, RJY
had
total capital of approximately $13.2 million, of which the Company owns
approximately 50%.
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. The Company is contesting the allegations
in these cases and believes that there are meritorious defenses in each of
these
lawsuits and arbitrations. In view of the number and diversity of claims against
the Company, the number of jurisdictions in which litigation is pending and
the
inherent difficulty of predicting the outcome of litigation and other claims,
the Company cannot state with certainty what the eventual outcome of pending
litigation or other claims will be. In the opinion of the Company's management,
based on current available information, review with outside legal counsel,
and
consideration of amounts provided for in the accompanying consolidated financial
statements with respect to these matters, ultimate resolution of these matters
will not have a material adverse impact on the Company's financial position
or
results of operations. However, resolution of one or more of these matters
may
have a material effect on the results of operations in any future period,
depending upon the ultimate resolution of those matters and upon the level
of
income for such period.
NOTE
12 - CAPITAL
TRANSACTIONS:
The
following table presents information on a monthly basis for purchases of the
Company’s stock for the quarter ended December 31, 2007:
|
Number
of
|
|
Average
|
Period
|
Shares
Purchased (1)
|
|
Price
Per Share
|
|
|
|
|
October
1, 2007 – October 31, 2007
|
3,986
|
|
$35.47
|
November
1, 2007 – November 30, 2007
|
80,266
|
|
32.40
|
December
1, 2007 – December 31, 2007
|
137,064
|
|
33.11
|
Total
|
221,316
|
|
$32.90
|
(1)
|
The
Company does not have a formal stock repurchase plan. Shares are
repurchased at the discretion of management pursuant to prior
authorization from the Board of Directors. On May 20, 2004, the Board
of
Directors authorized purchases of up to $75 million. Since that date
682,816 shares have been repurchased for a total of $16.8 million,
leaving
$58.2 million available to repurchase shares. Historically the Company
has
considered such purchases when the price of its stock approaches
1.5 times
book value or when employees surrender shares as payment for option
exercises. The decision to repurchase shares is subject to cash
availability and other factors. During the three months ended December
31,
2007, 208,651 shares were purchased for the trust fund that was
established and funded to acquire Company common stock in the open
market
to be used to settle restricted stock units granted as a retention
vehicle
for certain employees of the Company’s wholly owned Canadian subsidiary
(see Note 17 of the Notes to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year
ended
September 30, 2007 for more information on this trust fund). With
the
exception of the shares purchased through this trust fund, the Company
only purchased shares that were surrendered by employees as a payment
for
option exercises during the three months ended December 31,
2007.
|
NOTE
13 – STOCK BASED
COMPENSATION:
The
Company applies the provisions of SFAS No. 123R, “Share-Based Payment”, to
account for share-based awards made to employees and directors. This
pronouncement requires the measurement and recognition of compensation expense
for all share-based awards made to employees and directors to be based on
estimated fair values. The Company’s share-based employee and outside
director compensation plans are described more fully in Note 17 of the Notes
to
the Consolidated Financial Statements included in the Company's Annual Report
on
Form 10-K for the year ended September 30, 2007. The Company’s net
income for the three months ended December 31, 2007 and 2006 includes $10.3
million and $7.8 million, respectively, of compensation costs and $3.0 million
and $2.1 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 December 31, 2007, the Company granted 1,466,450 stock
options, 811,696 shares of restricted stock and 206,295 restricted stock units
to employees under its stock-based employee compensation plans. During the
three
months ended December 31, 2007, no 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 1,200,000 shares, respectively, per fiscal
year.
The
weighted-average grant-date fair value of stock options granted to employees
and
directors during the three months ended December 31, 2007 was $8.27 per share.
Pre-tax unrecognized compensation expense for stock options granted to employees
and outside directors, net of estimated forfeitures, was $18.4 million as of
December 31, 2007, and will be recognized as expense over a weighted-average
period of approximately 3.1 years.
The
weighted-average grant-date fair value of restricted stock granted to employees
during the three months ended December 31, 2007 was $31.75 per share. Pre-tax
unrecognized compensation expense for unvested restricted stock granted to
employees, net of estimated forfeitures, was $68.2 million as of December 31,
2007, and will be recognized as expense over a weighted-average period of
approximately 3.2 years.
The
weighted-average grant-date fair value of restricted stock units granted to
employees during the three months ended December 31, 2007 was $30.44 per
share. Pre-tax unrecognized compensation expense for unvested
restricted stock units granted to employees, net of estimated forfeitures,
was
$7.8 million as of December 31, 2007, and will be recognized as expense over
a
weighted-average period of approximately 2 years.
Under
one
of its non-qualified fixed stock option plans, the Company may grant stock
options to its independent contractor Financial Advisors. In
addition, the Company may grant restricted stock units or restricted shares
of
common stock to its independent contractor Financial Advisors under one of
its
restricted stock plans. The Company accounts for share-based awards
to its independent contractor Financial Advisors in accordance with EITF No.
96-18, “Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and
EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (see Note 18 of the Notes to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2007 for more
information). The Company’s net income for the three months ended
December 31, 2007 and 2006 includes $1.5 million and $2.4 million, respectively,
of compensation costs and $0.6 million and $0.9 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 December 31, 2007, the Company granted 48,000 stock
options and 19,472 shares of restricted stock to its independent contractor
Financial Advisors.
The
weighted-average grant-date fair value of stock options granted to independent
contractor Financial Advisors during the three months ended December 31, 2007
was $10.38 per share. As of December 31, 2007, there was $6.8 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 3.2
years.
The
weighted-average grant-date fair value of restricted stock granted to
independent contractor Financial Advisors during the three months ended December
31, 2007 was $32.66 per share. As of December 31, 2007, there was
$2.1 million of total unrecognized pre-tax compensation cost related to unvested
restricted stock 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 years.
NOTE
14 - REGULATIONS AND
CAPITAL REQUIREMENTS:
Certain
broker-dealer subsidiaries of the Company are subject to the requirements of
the
Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of
1934. RJA, a member firm of the Financial Industry Regulatory
Authority (“FINRA”), is also subject to the rules of FINRA, whose
requirements are substantially the same. Rule 15c3-1 requires that aggregate
indebtedness, as defined, not exceed 15 times net capital, as defined. Rule
15c3-1 also provides for an “alternative net capital requirement”, which RJA,
Raymond James Financial Services, Inc. (“RJFS”) and Heritage Fund Distributors,
Inc. (“HFD”) have elected. It requires that minimum net capital, as defined, be
equal to the greater of $250,000 or two percent of Aggregate Debit Items arising
from client transactions. FINRA may require a member firm to reduce its business
if its net capital is less than four percent of Aggregate Debit Items and may
prohibit a member firm from expanding its business and declaring cash dividends
if its net capital is less than five percent of Aggregate Debit Items. The
net
capital position of RJA at December 31, 2007 and September 30, 2007 was as
follows:
|
December
31,
|
September
30,
|
|
2007
|
2007
|
|
($
in 000's)
|
Raymond
James & Associates, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital as a Percent of Aggregate
|
|
|
Debit
Items
|
19.35%
|
21.94%
|
Net
Capital
|
$
320,847
|
$
332,873
|
Less:
Required Net Capital
|
(33,163)
|
(30,344)
|
Excess
Net Capital
|
$
287,684
|
$
302,529
|
At
December 31, 2007 and September 30, 2007, RJFS had no Aggregate Debit Items
and
therefore the minimum net capital of $250,000 was applicable. The net capital
position of RJFS at December 31, 2007 and September 30, 2007 was as
follows:
|
December
31,
|
September
30,
|
|
2007
|
2007
|
|
(in
000's)
|
Raymond
James Financial Services, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital
|
$
51,491
|
$
70,583
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$
51,241
|
$
70,333
|
At
December 31, 2007 and September 30, 2007, HFD had no Aggregate Debit Items
and
therefore the minimum net capital of $250,000 was applicable. The net capital
position of HFD at December 31, 2007 and September 30, 2007 was as
follows:
|
December
31,
|
September
30,
|
|
2007
|
2007
|
|
(in
000’s)
|
Heritage
Fund Distributors, Inc.
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital
|
$
5,156
|
$
6,039
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$
4,906
|
$
5,789
|
RJ
Ltd.
is subject to the Minimum Capital Rule (By-Law No. 17 of the Investment Dealers
Association ("IDA") and the Early Warning System (By-Law No. 30 of the IDA)).
The Minimum Capital Rule requires that every member shall have and maintain
at
all times Risk Adjusted Capital greater than zero calculated in accordance
with
Form 1 (Joint Regulatory Financial Questionnaire and Report) and with such
requirements as the Board of Directors of the IDA may from time to time
prescribe. Insufficient Risk Adjusted Capital may result in suspension from
membership in the stock exchanges or the IDA.
The
Early
Warning System is designed to provide advance warning that a member firm is
encountering financial difficulties. This system imposes certain sanctions
on
members who are designated in Early Warning Level 1 or Level 2 according to
their capital, profitability, liquidity position, frequency of designation
or at
the discretion of the IDA. Restrictions on business activities and capital
transactions, early filing requirements, and mandated corrective measures are
sanctions that may be imposed as part of the Early Warning System. RJ Ltd.
was
not in Early Warning Level 1 or Level 2 at December 31, 2007 or September 30,
2007.
The
Risk
Adjusted Capital of RJ Ltd. was CDN $48,759,341 and CDN $47,724,293 at December
31, 2007 and September 30, 2007, respectively.
The
Company’s other domestic and international broker-dealers are in compliance with
and meet all net capital requirements.
RJBank
is
subject to various regulatory and capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions
by
regulators. Under capital adequacy guidelines and the regulatory framework
for
prompt corrective action, RJBank must meet specific capital guidelines that
involve quantitative measures of RJBank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
RJBank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require RJBank
to
maintain minimum amounts and ratios (set forth in the table below) of total
and
Tier I Capital (as defined in the regulations) to risk-weighted assets (as
defined). Management believes that, as of December 31, 2007, RJBank meets all
capital adequacy requirements to which it is subject.
As
of
December 31, 2007, the most recent notification from the Office of Thrift
Supervision categorized RJBank as “well capitalized” under the regulatory
framework for prompt corrective action. To be categorized as “well capitalized”,
RJBank must maintain minimum total risk-based, Tier I risk-based, and Tier
I
leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed RJBank's
category.
|
|
|
To
be well
capitalized
|
|
|
Requirement
for
capital
|
under
prompt
|
|
|
adequacy
|
corrective
action
|
|
Actual
|
purposes
|
provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
($
in
000's)
|
As
of December31,
2007:
|
|
|
|
|
|
|
Total
Capital
(to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
$
509,943
|
10.3%
|
$
395,200
|
8.0%
|
$
494,000
|
10.0%
|
Tier I
Capital
(to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
448,193
|
9.1%
|
197,600
|
4.0%
|
296,400
|
6.0%
|
Tier I
Capital
(to
|
|
|
|
|
|
|
AdjustedAssets)
|
448,193
|
6.6%
|
273,197
|
4.0%
|
341,497
|
5.0%
|
|
|
|
|
|
|
|
As
of September 30,
2007:
|
|
|
|
|
|
|
Total
Capital
(to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
$
420,704
|
10.1%
|
$
332,832
|
8.0%
|
$
416,040
|
10.0%
|
Tier I
Capital
(to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
368,699
|
8.9%
|
166,416
|
4.0%
|
249,624
|
6.0%
|
Tier I
Capital
(to
|
|
|
|
|
|
|
AdjustedAssets)
|
368,699
|
5.8%
|
253,048
|
4.0%
|
316,309
|
5.0%
|
NOTE
15 - FINANCIAL
INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
RJBank
has outstanding at any time a significant number of commitments to extend credit
and other credit-related off-balance sheet financial instruments such as standby
letters of credit and loan purchases. These arrangements are subject to strict
credit control assessments and each customer’s credit worthiness is evaluated on
a case-by-case basis. A summary of commitments to extend credit and other
credit-related off-balance sheet financial instruments outstanding at December
31, 2007 and September 30, 2007, is as follows:
|
December
31,
|
September
30,
|
|
2007
|
2007
|
|
(in
000's)
|
|
|
|
Standby
Letters of Credit
|
$ 146,517
|
$ 100,397
|
Open
End Consumer Lines of Credit
|
31,320
|
27,871
|
Commercial
Lines of Credit
|
1,329,702
|
1,218,690
|
Unfunded
Loan Commitments - Variable Rate
|
487,162
|
397,752
|
Unfunded
Loan Commitments - Fixed Rate
|
12,005
|
12,831
|
Because
many loan commitments expire without being funded in whole or part, the contract
amounts are not estimates of future cash flows.
Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted. The credit
risk amounts are equal to the contractual amounts, assuming that the amounts
are
fully advanced and that the collateral or other security is of no value. RJBank
uses the same credit approval and monitoring process in extending loan
commitments and other credit-related off-balance sheet instruments as it does
in
making loans.
RJBank’s
policy is generally to require customers to provide collateral at the time
of
closing. The amount of collateral obtained, if it is deemed necessary by RJBank
upon extension of credit, is based on RJBank’s credit evaluation of the
borrower. Collateral held varies but may include accounts receivable, inventory,
real estate, and income producing commercial properties.
In
the
normal course of business, RJBank issues, or participates in the issuance of,
financial standby letters of credit whereby it provides an irrevocable guarantee
of payment in the event the letter of credit is drawn down by the beneficiary.
As of December 31, 2007, $146.5 million of such letters of credit were
outstanding. Of the letters of credit outstanding, $145.8 million are
underwritten as part of a larger corporate credit relationship. In the event
that a letter of credit is drawn down, RJBank would pursue repayment from the
account party under the existing borrowing relationship, or would liquidate
collateral, or both. The proceeds from repayment or liquidation of collateral
are expected to satisfy the maximum potential future amount of any payments
of
amounts drawn down under the existing letters of credit. At December 31, 2007,
RJBank had $1.8 million in unearned fees related to these instruments. The
credit risk involved in issuing letters of credit is essentially the same as
that involved with extending loan commitments to clients, and accordingly,
RJBank uses a credit evaluation process and collateral requirements similar
to
those for loan commitments.
See
Note
20 of the Notes to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended September 30, 2007
for
more information regarding the Company’s financial instruments with off-balance
sheet risk.
NOTE
16 – EARNINGS PER
SHARE:
The
following table presents the computation of basic and diluted earnings per
share:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2007
|
2006
|
|
(in
000’s, except per share amounts)
|
|
|
|
Net
Income
|
$ 56,242
|
$ 59,395
|
|
|
|
Weighted
Average Common Shares
|
|
|
Outstanding
During the Period
|
116,881
|
114,339
|
|
|
|
Dilutive
Effect of Stock Options and Awards (1)
|
3,360
|
3,554
|
|
|
|
Weighted
Average Diluted Common
|
|
|
Shares
(1)
|
120,241
|
117,893
|
|
|
|
Net
Income per Share – Basic
|
$ 0.48
|
$ 0.52
|
|
|
|
Net
Income per Share - Diluted (1)
|
$ 0.47
|
$ 0.50
|
|
|
|
Securities
Excluded from Weighted Average
|
|
|
Diluted
Common Shares Because Their Effect
|
|
|
Would
Be Antidilutive
|
1,382
|
-
|
(1)
|
Diluted
earnings per share is computed on the basis of the weighted average
number
of shares of common stock plus the effect of dilutive potential common
shares outstanding during the period using the treasury stock method.
Dilutive potential common shares include stock options, units and
awards.
|
NOTE
17 – SEGMENT
ANALYSIS:
SFAS
No.
131, “Disclosures about Segments of an Enterprise and Related Information”,
establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance.
The
Company currently operates through the following eight business segments:
Private Client Group; Capital Markets; Asset Management; RJBank; Emerging
Markets; Stock Loan/Borrow; Proprietary Capital and various corporate activities
combined in the "Other" segment. In the quarter ended September 30, 2007, a
new
segment was established: Proprietary Capital. The components of this segment
were previously included in Asset Management and Other. Reclassifications have
been made in the segment disclosure for previous periods to conform to this
presentation. The business segments are based upon factors such as the services
provided and the distribution channels served and are consistent with how the
Company assesses performance and determines how to allocate resources throughout
the Company and its subsidiaries. The financial results of the Company's
segments are presented using the same policies as those described in Note 1
of
the Notes to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended September 30,
2007. Segment data includes charges allocating corporate overhead and
benefits to each segment. Intersegment revenues, charges, receivables and
payables are eliminated between segments upon consolidation.
The
Private Client Group segment includes the retail branches of the Company's
broker-dealer subsidiaries located throughout the U.S., Canada and the United
Kingdom. These branches provide securities brokerage services including the
sale
of equities, mutual funds, fixed income products and insurance products to
their
individual clients. The segment includes net interest earnings on client margin
loans and cash balances. Additionally, this segment includes the correspondent
clearing services that the Company provides to other broker-dealer
firms.
The
Capital Markets segment includes institutional sales and trading in the U.S.,
Canada and Europe. It provides securities brokerage, trading, and research
services to institutions with an emphasis on the sale of U.S. and Canadian
equities and fixed income products. This segment also includes the Company's
management of and participation in underwritings, merger and acquisition
services, public finance activities, and the operations of Raymond James Tax
Credit Funds, Inc.
The
Asset
Management segment includes investment portfolio management services of Eagle
Asset Management, Inc., Eagle Boston Investment Management, Inc., and Raymond
James Consulting Services (RJA’s asset management services division), mutual
fund management by Heritage Asset Management, Inc., and trust services of
Raymond James Trust Company, N.A. and Raymond James Trust Company West. In
addition to the asset management services noted above, this segment also offers
fee-based programs to clients who have contracted for portfolio management
services from outside money managers.
RJBank
is
a separate segment, which provides consumer, residential, and commercial loans,
as well as FDIC-insured deposit accounts to clients of the Company's
broker-dealer subsidiaries and to the general public.
The
Emerging Markets segment includes various joint ventures in Turkey and Latin
America. These joint ventures operate in securities brokerage, investment
banking and asset management.
The
Stock
Loan/Borrow segment involves the borrowing and lending of securities from and
to
other broker-dealers, financial institutions and other counterparties, generally
as an intermediary.
The
Proprietary Capital segment consists of the Company’s principal capital and
private equity activities including: various direct and third party private
equity and merchant banking investments (including Raymond James Capital, Inc.
a
captive merchant banking business), short-term special situation and bridge
investments, the EIF Funds, and two private equity funds sponsored by the
Company: Raymond James Capital Partners, L.P. and Ballast Point Ventures,
L.P.
The
Other
segment includes certain corporate activities of the Company.
Information
concerning operations in these segments of business is as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2007
|
2006
|
|
(in
000’s)
|
Revenues:
|
|
|
Private
Client Group
|
$ 516,022
|
$ 449,133
|
Capital
Markets
|
114,760
|
120,454
|
Asset
Management
|
63,181
|
57,646
|
RJBank
|
102,589
|
50,402
|
Emerging
Markets
|
12,658
|
11,797
|
Stock
Loan/Borrow
|
13,876
|
15,059
|
Proprietary
Capital
|
1,129
|
(1,618)
|
Other
|
4,976
|
6,756
|
Total
Revenues
|
$ 829,191
|
$ 709,629
|
|
|
|
Income
Before Provision for Income Taxes:
|
Private
Client Group
|
$ 55,154
|
$ 54,010
|
Capital
Markets
|
6,363
|
16,714
|
Asset
Management
|
17,515
|
14,948
|
RJBank
|
14,774
|
6,439
|
Emerging
Markets
|
(1,546)
|
936
|
Stock
Loan/Borrow
|
1,643
|
196
|
Proprietary
Capital
|
(639)
|
(1,395)
|
Other
|
(2,507)
|
1,918
|
Pre-Tax
Income
|
$ 90,757
|
$ 93,766
|
|
Net
Interest Income (Expense):
|
Private
Client Group
|
$ 28,304
|
$ 30,968
|
Capital
Markets
|
(326)
|
(2,228)
|
Asset
Management
|
524
|
356
|
RJBank
|
35,204
|
15,829
|
Emerging
Markets
|
904
|
708
|
Stock
Loan/Borrow
|
2,571
|
2,076
|
Proprietary
Capital
|
724
|
85
|
Other
|
1,681
|
4,701
|
Net
Interest Income (Expense)
|
$ 69,586
|
$ 52,495
|
The
following table presents the Company's total assets on a segment
basis:
|
|
|
|
December
31,
|
September
30,
|
|
2007
|
2007
|
|
(in
000’s)
|
Total
Assets:
|
|
|
Private
Client Group *
|
$ 7,070,266
|
$ 6,608,059
|
Capital
Markets **
|
1,868,248
|
1,533,273
|
Asset
Management
|
92,385
|
95,894
|
RJBank
|
6,819,063
|
6,312,966
|
Emerging
Markets
|
119,105
|
104,238
|
Stock
Loan/Borrow
|
952,111
|
1,302,937
|
Proprietary
Capital
|
117,060
|
115,062
|
Other
|
59,480
|
181,739
|
Total
|
$
17,097,718
|
$
16,254,168
|
*
Includes $46 million of goodwill allocated pursuant to SFAS No. 142, "Goodwill
and Other Intangible Assets".
**
Includes $17 million of goodwill allocated pursuant to SFAS No.
142.
The
Company has operations in the U.S., Canada, Europe and joint ventures in Turkey
and Latin America. Substantially all long-lived assets are located in the U.S.
Revenues, classified by the major geographic areas in which they are earned,
were as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2007
|
2006
|
|
(in
000’s)
|
Revenues:
|
|
|
United
States
|
$
730,910
|
$ 629,465
|
Canada
|
68,618
|
56,391
|
Europe
|
16,088
|
12,648
|
Other
|
13,575
|
11,125
|
Total
|
$
829,191
|
$ 709,629
|
The
Company has $11.3 million invested, net of a $6.6 million reserve for its
Turkish joint venture interest, in emerging market joint ventures, which carry
greater risk than amounts invested in developed markets.
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Business
and Total Company
Overview
The
following Management’s Discussion and Analysis is intended to help the reader
understand the results of operations and the financial condition of the Company.
Management’s Discussion and Analysis is provided as a supplement to, and should
be read in conjunction with, the Company’s financial statements and accompanying
notes to the financial statements.
The
Company’s overall results continue to be highly correlated to the activity
levels in the U.S. equity markets; however, as RJBank continues to grow and
a
greater percentage of the firm’s revenues come from asset-based fees and
interest earnings, results have become somewhat insulated from these markets.
The Company is currently operating in a challenging environment: indications
of
a possible recession are negatively impacting client activity levels, declining
interest rates are having a negative impact on near term spreads, and the
current equity market conditions have severely dampened investment banking
activity. However, positive Financial Advisor recruiting results (especially
in
the employee subsidiary), increased client assets, and loan growth at RJBank
should position the Company well for future periods.
Segments
The
Company currently operates through the following eight business segments:
Private Client Group; Capital Markets; Asset Management; RJBank; Emerging
Markets; Stock Loan/Borrow, Proprietary Capital and certain corporate activities
in the Other segment.
The
following table presents the gross revenues and pre-tax earnings of the Company
on a segment basis for the periods indicated:
|
Three
Months
Ended
|
|
December
31,
|
|
December
31,
|
|
Percentage
|
|
2007
|
|
2006
|
|
Change
|
|
(in
000’s)
|
|
Total
Company
|
|
|
|
|
|
Revenues
|
$
829,191
|
|
$
709,629
|
|
17%
|
Pre-tax
Earnings
|
90,757
|
|
93,766
|
|
(3%)
|
|
|
|
|
|
|
Private
Client
Group
|
|
|
|
|
|
Revenues
|
$
516,022
|
|
449,133
|
|
15%
|
Pre-tax
Earnings
|
55,154
|
|
54,010
|
|
2%
|
|
|
|
|
|
|
Capital
Markets
|
|
|
|
|
|
Revenues
|
114,760
|
|
120,454
|
|
(5%)
|
Pre-tax
Earnings
|
6,363
|
|
16,714
|
|
(62%)
|
|
|
|
|
|
|
Asset
Management
|
|
|
|
|
|
Revenues
|
63,181
|
|
57,646
|
|
10%
|
Pre-tax
Earnings
|
17,515
|
|
14,948
|
|
17%
|
|
|
|
|
|
|
RJBank
|
|
|
|
|
|
Revenues
|
102,589
|
|
50,402
|
|
104%
|
Pre-tax
Earnings
|
14,774
|
|
6,439
|
|
129%
|
|
|
|
|
|
|
Emerging
Markets
|
|
|
|
|
|
Revenues
|
12,658
|
|
11,797
|
|
7%
|
Pre-tax
(Loss)
Earnings
|
(1,546)
|
|
936
|
|
(265%)
|
|
|
|
|
|
|
Stock
Loan/Borrow
|
|
|
|
|
|
Revenues
|
13,876
|
|
15,059
|
|
(8%)
|
Pre-tax
Earnings
|
1,643
|
|
196
|
|
738%
|
|
|
|
|
|
|
Proprietary
Capital
|
|
|
|
|
|
Revenues
|
1,129
|
|
(1,618)
|
|
170%
|
Pre-tax
(Loss)
|
(639)
|
|
(1,395)
|
|
54%
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Revenues
|
4,976
|
|
6,756
|
|
(26%)
|
Pre-tax
(Loss)Earnings
|
(2,507)
|
|
1,918
|
|
(231%)
|
Results
of Operations –
Three Months Ended December 31, 2007 Compared with the Three Months Ended
December 31, 2006
Total
Company
Total
Company net revenues increased 14% to $685.8 million from $603.9 million in
the
prior year. Revenues increased in each line item except Investment Banking
and
Net Trading Profits. Despite a 33% increase in net interest earnings, net income
declined 5% versus the prior year quarter, as the prior year results included
a
$10 million benefit from the reversal of over accrued incentive compensation
and
a much more active investment banking environment. Diluted net income was $0.47
per share, down 6% from the prior year’s $0.50 per share.
Net
Interest
Analysis
The
following table presents average balance data and interest income and expense
data for the Company, as well as the related net interest income. The respective
average rates are presented on an annualized basis.
|
Three
Months Ended
|
|
December
31, 2007
|
December
31, 2006
|
|
|
Operating
|
|
Average
|
|
Operating
|
|
Average
|
|
Average
|
Interest
|
|
Yield/
|
Average
|
Interest
|
|
Yield/
|
|
Balance
|
Inc./Exp.
|
|
Cost
|
Balance
|
Inc./Exp.
|
|
Cost
|
|
($
in 000’s)
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
Margin
Balances
|
$1,513,852
|
$
26,321
|
|
6.95%
|
$1,368,875
|
$ 27,254
|
|
7.96%
|
Assets
Segregated Pursuant
|
|
|
|
|
|
|
|
|
to
Regulations and Other
|
|
|
|
|
|
|
|
|
Segregated
Assets
|
4,208,850
|
47,560
|
|
4.52%
|
3,478,406
|
45,828
|
|
5.27%
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
RJBank (1)
|
6,467,707
|
101,719
|
|
6.29%
|
3,217,623
|
50,293
|
|
6.25%
|
Stock
Borrow
|
|
13,876
|
|
|
|
15,059
|
|
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
Variable Interest Entities
|
|
207
|
|
|
|
256
|
|
|
Other
|
|
23,267
|
|
|
|
19,534
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
|
212,950
|
|
|
|
158,224
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
Client
Interest Program
|
$5,303,582
|
53,642
|
|
4.05%
|
$4,341,141
|
48,139
|
|
4.44%
|
Interest-Bearing
Liabilities
|
|
|
|
|
|
|
|
|
of
RJBank (1)
|
6,079,863
|
66,515
|
|
4.38%
|
2,992,054
|
34,464
|
|
4.61%
|
Stock
Loan
|
|
11,305
|
|
|
|
12,983
|
|
|
Interest-Bearing
Liabilities of
|
|
|
|
|
|
|
|
|
Variable
Interest Entities
|
|
1,619
|
|
|
|
1,743
|
|
|
Other
|
|
10,283
|
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Expense
|
|
143,364
|
|
|
|
105,729
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$
69,586
|
|
|
|
$
52,495
|
|
|
(1)
|
See
RJBank in Item 2 of Part I for
details.
|
Net
interest at RJBank increased 122% versus the same quarter prior year and
represented 51% of the Company’s net interest earnings. Average interest earning
assets increased 101% versus the same quarter prior year as RJBank took
advantage of quality loans available for purchase at discounted prices. RJBank
has added approximately $1 billion in loans in each of the last two quarters,
which were funded entirely by deposit growth. The deployment of deposits into
loan balances has increased the spreads earned at RJBank.
Average
customer margin balances have increased 11% versus the same quarter prior year.
Combined with a 22% increase in customer cash balances held in the Client
Interest Program, assets segregated pursuant to regulations have increased
21%.
Declining interest rates result in temporarily lower spreads on
customer balances and assets segregated pursuant to
regulations.
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 (62% of total company revenues for the three months ended December
31,
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:
|
|
Independent
|
Dec.
31, 2007
|
Dec.
31, 2006
|
|
Employee
|
Contractors
|
Total
|
Total
|
Private
Client Group - Financial Advisors:
|
|
|
|
|
RJA
|
1,109
|
-
|
1,109
|
1,025
|
RJFS
|
-
|
3,060
|
3,060
|
3,156
|
RJ
Ltd
|
187
|
144
|
331
|
318
|
RJIS
|
-
|
82
|
82
|
67
|
Total
Financial Advisors
|
1,296
|
3,286
|
4,582
|
4,566
|
The
Private Client Segment continues to be positively impacted by the successful
recruiting of employee Financial Advisors and increased productivity. The 17%
increase in PCG commissions accounted for 79% of the increase in the Company’s
commission revenue. RJA added a net 84 Financial Advisors versus
December of the prior year, as the Company continues to benefit from Financial
Advisor unrest caused by industry consolidation. Average annual production
per
RJA Financial Advisor increased 23% from $419,000 to $514,000 and average annual
production per RJFS Financial Advisor increased 15% from $286,000 to $328,000
from the same quarter prior year. RJ Ltd. added 13 Financial Advisors versus
the
prior December and their average annual production increased 15% from $117,000
to $135,000. Financial service fee revenue increased 12% as a result of the
continued growth in client assets and number of client accounts.
The
pre-tax segment results increased only 2% versus the prior year on a 15%
increase in net revenues, a result of a $4.5 million adjustment to the incentive
compensation accrual in the prior year. Excluding the impact of that adjustment
pre-tax income increased 12%. The segment results were also impacted by a $2.7
million decline in net interest income from the prior year. The business’s
margins are negatively impacted by the expenses associated with successful
recruiting including commission concessions, the expense associated with the
amortization of advances, account transfer fees, new branch expenses and
additional support staff.
Capital
Markets
The
Capital Markets segment includes institutional sales and trading in the United
States, Canada, and Europe; management of and participation in underwritings;
financial advisory services including private placements and merger and
acquisition services; public finance activities; and the syndication and related
management of investment partnerships designed to yield returns in the form
of
low-income housing tax credits to institutions. The Company provides
securities brokerage services to institutions with an emphasis on the sale
of
U.S. and Canadian equities and fixed income products. Institutional sales
commissions account for 65% of the segment’s revenues and are driven primarily
through trade volume, resulting from a combination of general market activity
and by the Capital Markets group’s ability to find attractive investment
opportunities and promote those opportunities to potential and existing
clients. Revenues from investment banking activities are driven
principally by the number and the dollar value of the transactions with which
the Company is involved. This segment also includes trading of
taxable and tax-exempt fixed income products, as well as equity securities
in
the OTC and Canadian markets. This trading involves the purchase of
securities from, and the sale of securities to, clients of the Company or other
dealers who may be purchasing or selling securities for their own account or
acting as agent for their clients. Profits and losses related to this trading
activity are primarily derived from the spreads between bid and ask prices
in
the relevant market.
Capital
Market’s quarterly results declined approximately $10 million, or 62%, from the
comparable prior year quarter. While volatile market conditions led to increased
commissions, these conditions also contributed to less investment banking
activity. Investment banking revenues were down nearly $16 million, as the
prior
year quarter included record merger and acquisitions (“M&A”) fees of $20
million versus $6.9 million in the current period. Commission revenues increased
23% or nearly $14 million versus the prior year quarter. Commission expense
increased proportionately. Total Company trading profits declined 82% as fixed
income trading profits were 50% lower than the prior year. Domestic equity
trading continued to incur trading losses facilitating customer
trades.
|
Three
Months Ended
|
|
December
31,
|
|
December
31,
|
|
2007
|
|
2006
|
Number
of managed/co-managed public equity offerings:
|
|
|
|
United
States
|
19
|
|
27
|
Canada
|
8
|
|
2
|
|
|
|
|
Total
dollars raised (in 000's):
|
|
|
|
United
States
|
$
7,522,000
|
|
$6,088,000
|
Canada
(in U.S. dollars)
|
$ 234,000
|
|
158,000
|
Asset
Management
The
Asset
Management segment includes investment portfolio management services, mutual
fund management, private equity management, and trust
services. Investment portfolio management services include both
proprietary and selected outside money managers. The majority of the
revenue for this segment is generated by the investment advisory fees related
to
asset management services for individual investment portfolios and mutual
funds. These accounts are billed a fee based on a percentage of
assets. Investment advisory fees are charged based on either a single
point in time within the quarter, typically the beginning or end of a quarter,
or the “average daily” balances of assets under management. The balance of
assets under management is affected by both the performance of the underlying
investments and the new sales and redemptions of client accounts/funds.
Improving equity markets provide the Asset Management segment with the potential
to improve revenues from investment advisory fees as existing accounts
appreciate in value, in addition to individuals and institutions being more
likely to commit new funds to the equity markets. The following table
presents the assets under management as of the dates indicated:
|
December
31,
|
September
30,
|
December
31,
|
|
2007
|
2007
|
2006
|
Assets
Under Management (in 000's):
|
|
|
|
|
|
|
|
Eagle
Asset Management, Inc.
|
$
14,224,337
|
$
14,527,304
|
$
12,951,956
|
Heritage
Family of Mutual Funds
|
9,746,392
|
9,481,275
|
9,842,757
|
Raymond
James Consulting Services
|
9,424,142
|
9,638,691
|
8,508,212
|
Eagle
Boston Investment Management, Inc.
|
740,069
|
622,860
|
1,028,454
|
Freedom
Accounts
|
8,388,208
|
8,144,920
|
5,920,265
|
Total Assets
Under Management
|
$
42,523,148
|
$
42,415,050
|
$ 38,251,644
|
|
|
|
|
Less:
Assets Managed for Affiliated Entities
|
(5,249,550)
|
(5,305,506)
|
4,320,643
|
|
|
|
|
Total
Third Party Assets
|
|
|
|
Under
Management
|
$
37,273,598
|
$
37,109,544
|
$ 33,931,001
|
Total
Company investment advisory fees increased 13% versus the prior year quarter,
resulting primarily from the 10% increase in assets under management. The
increases in assets under management were driven primarily by the increase
in
total client assets from positive PCG recruiting results. The increased balances
are predominantly in Raymond James Consulting Services, Eagle retail and
Freedom, the Company’s managed mutual fund program. Expenses for the segment
increased 7% versus the prior year quarter, with the majority of the increase
in
investment advisory fee expense which are the fees paid to external subadvisors,
which increased proportionately to the increase in those assets.
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.
Gross
revenues and pre-tax profits at RJBank more than doubled compared to the same
quarter in the prior year. Interest revenue at RJBank increased over 100% with
the loan balances increasing from $2.7 billion to $5.7 billion and total assets
doubling from $3.4 billion to $6.8 billion. Interest expense increased 93%
with
deposits doubling from $3.1 billion to $6.2 billion. The growth in loan balances
at RJBank gave rise to an attendant increase in loan loss provisions; the
provision for loan loss was $12.8 million compared to $4.3 million in the prior
year quarter. Actual loan charge-offs continue to be
minimal. RJBank has no exposure to subprime loans.
The
following table presents average balance data and operating interest income
and
expense data for the Company's banking operations, as well as the related
interest yields/costs, rates and interest spread for the periods
indicated. The respective average rates are presented on an
annualized basis.
|
Three
Months Ended
|
|
December
31, 2007
|
December
31, 2006
|
|
|
Operating
|
Average
|
|
Operating
|
Average
|
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued
on next page)
|
Interest-Earning
Banking Assets:
|
|
|
|
|
|
|
Loans,
Net of Unearned
|
|
|
|
|
|
|
Income
(1)
|
$
5,096,938
|
$ 84,259
|
6.61%
|
$
2,483,334
|
$ 40,339
|
6.50%
|
Reverse
Repurchase
|
|
|
|
|
|
|
Agreements
|
665,326
|
7,868
|
4.73%
|
387,500
|
5,210
|
5.38%
|
Agency
Mortgage backed
|
|
|
|
|
|
|
Securities
|
188,604
|
2,474
|
5.25%
|
173,200
|
2,395
|
5.53%
|
Non-agency
Collateralized
|
|
|
|
|
|
|
Mortgage
Obligations
|
388,896
|
5,580
|
5.74%
|
142,406
|
1,932
|
5.43%
|
Money
Market Funds, Cash and
|
|
|
|
|
|
|
Cash
Equivalents
|
119,280
|
1,407
|
4.72%
|
25,782
|
337
|
5.23%
|
FHLB
Stock
|
8,663
|
131
|
6.05%
|
5,401
|
80
|
5.92%
|
Total
Interest-Earning
|
|
|
|
|
|
|
Banking
Assets
|
6,467,707
|
101,719
|
6.29%
|
3,217,623
|
50,293
|
6.25%
|
Non-Interest-Earning
|
|
|
|
|
|
|
Banking
Assets
|
18,247
|
|
|
(2,015)
|
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
$
6,485,954
|
|
|
$
3,215,608
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
|
|
|
Retail
Deposits:
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 241,888
|
$ 2,816
|
4.66%
|
$ 247,175
|
$ 2,806
|
4.54%
|
Money
Market, Savings,
|
|
|
|
|
|
|
and
NOW (2) Accounts
|
5,595,959
|
60,620
|
4.33%
|
2,691,075
|
30,965
|
4.60%
|
Loans
purchased, not yet settled
|
183,837
|
2,305
|
5.02%
|
-
|
-
|
-
|
FHLB
Advances
|
58,179
|
774
|
5.32%
|
53,804
|
693
|
5.15%
|
|
|
|
|
|
|
|
Total
Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
6,079,863
|
66,515
|
4.38%
|
2,992,054
|
34,464
|
4.61%
|
|
|
|
|
|
|
|
Non-Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
21,855
|
|
|
22,079
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
|
6,101,718
|
|
|
3,014,133
|
|
|
Total
Banking
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
384,236
|
|
|
201,475
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
and
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
$
6,485,954
|
|
|
$
3,215,608
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
December
31, 2007
|
December
31, 2006
|
|
|
|
Operating
|
Average
|
|
|
Operating
|
Average
|
|
Average
|
|
Interest
|
Yield/
|
Average
|
|
Interest
|
Yield/
|
|
Balance
|
|
Inc./Exp.
|
Cost
|
Balance
|
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued)
|
Excess
of Interest-
|
|
|
|
|
|
|
|
|
Earning Banking
|
|
|
|
|
|
|
|
|
Assets Over Interest-
|
|
|
|
|
|
|
|
|
Bearing Banking
|
|
|
|
|
|
|
|
|
Liabilities/Net
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
|
|
Interest
Income
|
$ 387,844
|
|
$ 35,204
|
|
$ 225,569
|
|
$
15,829
|
|
|
|
|
|
|
|
|
|
|
Bank
Net Operating
|
|
|
|
|
|
|
|
|
Interest:
|
|
|
|
|
|
|
|
|
Spread
|
|
|
|
1.91%
|
|
|
|
1.64%
|
Margin
(Net Yield on
|
|
|
|
|
|
|
|
|
Interest-
Earning
|
|
|
|
|
|
|
|
|
Bank
Assets)
|
|
|
|
2.18%
|
|
|
|
1.97%
|
Ratio
of Interest
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
to Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
106.38%
|
|
|
|
107.54%
|
Return
On Average (3):
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
|
|
|
0.57%
|
|
|
|
0.49%
|
Total
Banking
|
|
|
|
|
|
|
|
|
Shareholder's Equity
|
|
|
|
9.80%
|
|
|
|
7.94%
|
Average
Equity to
|
|
|
|
|
|
|
|
|
Average
Total
|
|
|
|
|
|
|
|
|
Banking
Assets
|
|
|
|
5.92%
|
|
|
|
6.27%
|
(1)
|
Nonaccrual
loans are included in
the average loan balances. Payments or
income received on
impaired nonaccrual loans are applied to
principal. Income on othernonaccrual
loans is recognized on
a cash basis. Fee income on loans included in interest income for the three
monthsended
December 31, 2007 and 2006
was$3.0
million and $1.9 million,
respectively.
|
(2)
|
Negotiable
Order of Withdrawal
(“NOW”) account.
|
(3)
|
RJBank
has gone through a period
of rapid loan growth and accordingly established allowances for loan
losses for potential losses inherent in the loan portfolios. These
charges
to earnings have a negative impact on returns during periods of loan
growth.
|
Increases
and decreases in operating
interest income and operating interest expense result from changes in average
balances (volume) of interest-earning banking assets and liabilities, as well
as
changes in average interest rates. The following table shows the effect that
these factors had on the interest earned on RJBank's interest-earning assets
and
the interest incurred on its interest-bearing liabilities. The effect of changes
in volume is determined by multiplying the change in volume by the previous
year's average yield/cost. Similarly, the effect of rate changes is calculated
by multiplying the change in average yield/cost by the previous year's volume.
Changes applicable to both volume and rate have been allocated
proportionately.
|
Three
Months Ended December 31,
|
|
2007
Compared to 2006
|
|
Increase
(Decrease) Due To
|
|
Volume
|
Rate
|
Total
|
|
(in
000’s)
|
Interest
Revenue
|
|
|
|
Interest-Earning
Banking Assets:
|
|
|
|
Loans,
Net of Unearned Income
|
$
42,454
|
$ 1,466
|
$
43,920
|
Reverse
Repurchase Agreements
|
3,736
|
(1,078)
|
2,658
|
Agency
Mortgage Backed Securities
|
213
|
(134)
|
79
|
Non-agency
Collateralized Mortgage Obligations
|
3,343
|
305
|
3,648
|
Money
Market Funds, Cash and Cash Equivalents
|
1,223
|
(153)
|
1,070
|
FHLB
Stock
|
49
|
2
|
51
|
|
|
|
|
Total
Interest-Earning Banking Assets
|
$
51,018
|
$ 408
|
$
51,426
|
|
|
|
|
Interest
Expense
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
Retail
Deposits:
|
|
|
|
Certificates
Of Deposit
|
$ (60)
|
$ 70
|
$ 10
|
Money
Market, Savings and
|
|
|
|
NOW
Accounts
|
33,426
|
(3,771)
|
29,655
|
Loans
purchased, not yet settled
|
2,305
|
-
|
2,305
|
FHLB
Advances
|
56
|
25
|
81
|
|
|
|
|
Total
Interest-Bearing Banking Liabilities
|
35,727
|
(3,676)
|
32,051
|
|
|
|
|
Change
in Net Operating Interest Income
|
$
15,291
|
$ 4,084
|
$
19,375
|
Emerging
Markets
This
segment includes the results of the Company’s joint ventures in Latin America
and Turkey. Commission revenues increased 21% versus the same quarter prior
year, with an increase of $400,000 in Latin America and $1 million in Turkey.
Investment banking fees declined as activity in the Turkish joint venture was
not comparable to the prior year. Investment advisory fees increased in Latin
America and trading profits declined from the same quarter prior year. The
segment’s results were negatively impacted by the weakening of the US
dollar. The Company records a reserve, included in other expense, for
its portion of any profits in the Turkish joint venture (see Note 11 of the
Notes to the Condensed Consolidated Financial Statements for further
information).
Stock
Loan/Stock Borrow
This
segment conducts its business through the borrowing and lending of securities
from and to other broker-dealers, financial institutions and other
counterparties, generally as an intermediary. The borrower of the securities
puts up a cash deposit, commonly 102% of the market value of the securities,
on
which interest is earned. Accordingly, the lender receives cash and pays
interest. These cash deposits are adjusted daily to reflect changes in current
market value. The net revenues of this operation are the interest
spreads generated.
Stock
Loan net revenues are 24% higher than for the same quarter in the prior
year. This was the result of slightly higher balances and a
consistent interest rate spread. Pre-tax profits for the segment were up 735%
as
the prior year was negatively impacted by legal expenses.
Proprietary
Capital
This
segment consists of the Company’s principal capital and private equity
activities including: various direct and third party private equity and merchant
banking investments, short-term special situations and bridge investments,
Raymond James Employee Investment Funds I and II (the “EIF Funds”), and two
private equity funds sponsored by the Company: Raymond James Capital Partners,
L.P., a merchant banking limited partnership, and Ballast Point Ventures, L.P.,
a venture capital limited partnership (the “Funds”) and their management
companies. The Company, through wholly owned subsidiaries, earns management
fees
for services provided to the Funds and participates in profits or losses through
both general and limited partnership interests. Additionally, the Company incurs
profits or losses as a result of direct merchant banking investments and
short-term special situations and bridge investments. The EIF Funds are limited
partnerships, for which the Company is the general partner, that invest in
the
merchant banking and private equity activities of the Company and other
unaffiliated venture capital limited partnerships. The EIF Funds were
established as compensation and retention measures for certain qualified key
employees of the Company.
Proprietary
Capital results are improved versus the same quarter prior year as that quarter
was negatively impacted by the write down of certain investments.
Other
This
segment includes various corporate activities of Raymond James Financial,
Inc.
Despite
a
14% decrease in non-interest expense, the pre-tax results for this segment
declined dramatically. This decline is the result of the utilization of
corporate cash in the growth of other segments of the Company, predominantly
RJBank. As a result there are no longer large corporate cash balances generating
interest in the other segment and net revenues declined 65%.
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 $17.1 billion at December
31, 2007 were up approximately 5% over September 30, 2007. Most of this increase
is due to the significant increase in brokerage client cash deposits (leading
to
a similar increase in segregated cash balances on the asset side) and growth
of
RJBank, with the increased loan balances being entirely funded by deposits.
RJBank loan balances increased significantly as the Company took advantage
of
quality loans available for purchase at discounted prices. The Company plans
to
continue to expand use of the bank sweep offering to brokerage
customers for the next several years, which will result in steady growth in
RJBank balances. The other significant increase in assets was in trading
instruments. Significant decreases in assets were in reverse repurchase
agreements and stock borrowed receivables (stock loaned payables experienced
a
similar decrease on the liability side). The broker-dealer gross assets and
liabilities, including trading inventory, stock loan/borrow, receivables and
payables from/to brokers, dealers and clearing organizations and clients
fluctuate with the Company's business levels and overall market
conditions.
Liquidity
and Capital
Resources
Cash
provided by operating activities during the three months ended December 31,
2007
was $28.5 million, which was primarily attributable to an increase in segregated
assets (directly correlated to the increase in brokerage client deposits),
an
increase in receivables from brokerage clients, and an increase in trading
instruments. This was offset by an increase in securities sold under agreements
to repurchase.
Investing
activities used $617.4 million, which is primarily due to loans originated
and
purchased by RJBank. This was partially offset by loan repayments and a decrease
in reverse repurchase agreements at RJBank.
Financing
activities provided $621.7 million, predominantly the result of an increase
in
deposits at RJBank.
At
December 31, 2007 and September 30, 2007, the Company had loans payable of
$123.5 million and $122.6 million, respectively. The balance at December 31,
2007 is comprised of a $64.3 million loan for its home-office complex, $55.0
million in Federal Home Loan Bank advances (RJBank), and various short-term
borrowings totaling $4.2 million (used to fund increased levels of trading
instruments).
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 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 8 of the Notes to the Condensed
Consolidated Financial Statements for further information on the Company's
lines
of credit). The Company’s committed $200 million line of credit is subject to a
0.125% per annum facility fee. The Company maintains a $500 million uncommitted
tri-party repurchase agreement line of credit (increased to $600 million in
January 2008). Under this agreement, the Company pledges certain of its trading
inventory as collateral against borrowings on this line. The required market
value of the collateral ranges from 102% to 105% of the cash borrowed. The
interest rate is set each day at 25 basis points over the opening Fed Funds
rate
and this agreement can be terminated by any party on any business day. Under
this agreement, there were secured short-term borrowings of $375 million
outstanding at December 31, 2007 which are included in Securities Sold Under
Agreements to Repurchase. The Company expects to utilize its lines of credit
to
finance its trading inventory during the three months ended March 31,
2008.
RJBank
had $55 million in FHLB advances outstanding at December 31, 2007, which was
comprised of one short-term, fixed rate advance and several long-term, fixed
rate advances. RJBank had $1.4 billion in credit available from the FHLB at
December 31, 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: three in Turkey totaling $18 million and one in Argentina
for
$3 million. At December 31, 2007, there were no outstanding balances on the
settlement lines in Argentina or Turkey. At December 31, 2007, the aggregate
unsecured settlement lines of credit available were $95 million, and there
were
outstanding balances of $4.2 million on these lines. The Company has also from
time to time authorized performance guarantees for the completion of trades
with
counterparties in Argentina and Turkey. At December 31, 2007, there were no
outstanding performance guarantees in Argentina or Turkey.
As
of
December 31, 2007, the Company's liabilities are comprised primarily of
brokerage client payables of $6.2 billion at the broker-dealer subsidiaries
and
deposits of $6.2 billion at RJBank, as well as deposits held on stock loan
transactions of $940 million. The Company primarily acts as an intermediary
in
stock loan/borrow transactions. As a result, the liability associated with
the
stock loan transactions is related to the $950 million receivable comprised
of
the Company's cash deposits for stock borrowed transactions. To meet its
obligations to clients, the Company has approximately $5.2 billion in cash
and
segregated assets. The Company also has client brokerage receivables of $1.8
billion and $5.7 billion in loans at RJBank.
The
Company will continue its implementation of the cash sweep option available
to
its clients from RJBank. This cash sweep option will require substantial
capital to be contributed to RJBank to meet regulatory requirements, and
therefore may require the Company to infuse an additional $150 to $200 million
over the next several years for this purpose.
As
of
September 30, 2007, RJBank had not settled purchases of $300.6 million in
syndicated loans (included in Bank Loans, Net) due to the sellers’ delays in
finalizing settlement. As of December, 31, 2007, RJBank had not settled the
purchases of $100.7 million in syndicated loans, which includes $33.2 million
of
syndicated loans purchased but not settled at September 30, 2007 due to seller
delays (all but $5.6 million of these loans were subsequently settled during
January 2008). The remaining loans are expected to be settled during the three
months ended March 31, 2008.
The
Company has committed a total of $56.5 million, in amounts ranging from $200,000
to $5 million, to 43 different independent venture capital or private equity
partnerships. As of December 31, 2007, the Company has invested $32.2 million
of
that amount and has received $28.2 million in distributions.
Additionally,
the Company controls the general partner in two internally sponsored private
equity limited partnerships to which it has committed $14.3 million. Of that
amount, the Company has invested $13 million and has received $8.8 million
in
distributions as of December 31, 2007. The Company is not the controlling
general partner in another internally sponsored private equity limited
partnership to which it has committed $30 million. As of December 31, 2007,
the
Company has not invested or received any distributions.
The
Company’s Board of Directors approved the use of up to $200 million in mezzanine
financing to facilitate investment banking transactions. During the three months
ended December 31, 2007, the Company entered into a credit agreement and
pursuant to this agreement, the Company funded a $37.5 million loan
participation. This loan participation was repaid with interest as of December
31, 2007. The Board of Directors has approved the use of up to $75 million
for
investment in proprietary merchant banking opportunities. As of December 31,
2007, the Company had invested $12.3 million.
In
January 2008, Sirchie Acquisition Company, LLC (“SAC”), an 80% owned indirect
subsidiary of the Company, acquired substantially all of the business, assets,
and properties of Sirchie Finger Print Laboratories, Inc., the assets or stock
of several other companies and certain real estate. The Company’s equity
investment in SAC was approximately $20 million. SAC also acquired 51% of the
common stock of Law Enforcement Associates Corporation as part of the
transaction. This acquisition is one of the Company’s recent merchant banking
initiatives.
Management
has been authorized by the Board of Directors to repurchase its common stock
at
their discretion for general corporate purposes. There is no formal stock
repurchase plan at this time. In May 2004 the Board authorized the repurchase
of
up to $75 million of shares. As of December 31, 2007 the unused portion of
this
authorization was $58.2 million.
The
Company has committed to lend to RJTCF, or guarantee obligations in connection
with RJTCF’s low income housing development/rehabilitation and syndication
activities, aggregating up to $125 million upon request, subject to certain
limitations as well as annual review and renewal. RJTCF borrows in order to
invest in partnerships which purchase and develop properties qualifying for
tax
credits. These investments in project partnerships are then sold to various
tax
credit funds, which have third party investors, and for which RJTCF serves
as
the managing member or general partner. RJTCF typically sells these investments
within 90 days of their acquisition, and the proceeds from the sales are used
to
repay RJTCF’s borrowings. Additionally, RJTCF may make short-term loans or
advances to project partnerships on behalf of the tax credit funds in which
it
serves as managing member or general partner. At December 31, 2007, cash funded
to invest in either loans or investments in project partnerships was $38.7
million. In addition, at December 31, 2007, RJTCF is committed to additional
future fundings of $44.0 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 Airlines, Inc. (“Continental”). The Company's ability to realize its
expected return is dependent upon this airline’s ability to fulfill its lease
obligation. In the event that this airline defaults on its lease commitment
and
the Trustee for the debt holders is unable to re-lease or sell the plane with
adequate terms, the Company would suffer a loss of some or all of its
investment. The value of the Company’s leveraged lease with Continental was
approximately $10.3 million as of December 31, 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.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately $6.8 million by the Turkish tax
authorities. The authorities applied a significantly different methodology
than
in the prior year’s audit which the Turkish tax court affirmed. RJY
is vigorously contesting most aspects of this assessment and has filed an appeal
with the Turkish Council of State. The Turkish tax authorities, utilizing the
2001 methodology assessed RJY $5.7 million for 2002, which is also being
challenged. Audits of 2003 and 2004 are anticipated and their outcome is unknown
in light of the change in methodology and the pending litigation. The Company
has recorded a provision for loss in its consolidated financial statements
for
its net equity interest in this joint venture. As of December 31, 2007, RJY
had
total capital of approximately $13.2 million, of which the Company owns
approximately 50%.
As
of
December 31, 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 $2.8 billion, with $2.4
billion coming due in the next twelve months related to its short and long-term
debt, non-cancelable lease agreements, partnership investments, unfunded
commitments to extend credit, unsettled loan purchases, underwriting commitments
and a stadium naming rights agreement. Included in the obligations
due within the next twelve months are $1.5 billion in commitments related to
RJBank’s letters of credit and lines of credit. Commitments related
to letters of credit and lines of credit may expire without being funded in
whole or part, therefore these amounts are not estimates of future cash flows
(see Notes 11 and 15 of the Notes to the Condensed Consolidated Financial
Statements for further information on the Company’s commitments).
Effects
of
Inflation
The
Company's assets are primarily liquid in nature and are not significantly
affected by inflation. However, the rate of inflation affects the
Company's expenses, including employee compensation, communications and
occupancy, which may not be readily recoverable through charges for services
provided by the Company.
Factors
Affecting
“Forward-Looking Statements”
From
time
to time, the Company may publish “forward-looking statements” within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the
Securities and Exchange Act of 1934, as amended, or make oral statements that
constitute forward-looking statements. These forward-looking
statements may relate to such matters as anticipated financial performance,
future revenues or earnings, business prospects, projected ventures, new
products, anticipated market performance, recruiting efforts, and similar
matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to
comply with the terms of the safe harbor, the Company cautions readers that
a
variety of factors could cause the Company's actual results to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. These risks and uncertainties, many of which are
beyond the Company's control, are discussed in the section entitled “Risk
Factors” of Item 1A of Part I included in the Company's Annual Report on Form
10-K for the year ended September 30, 2007 and in Item 1A of Part II of this
report on Form 10-Q. The Company does not undertake any obligation to
publicly update or revise any forward-looking statements.
Critical
Accounting
Policies
The
condensed consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America. For a full description of these and other accounting
policies, see Note 1 of the Notes to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2007. The Company believes that of its significant accounting
policies, those described below involve a high degree of judgment and
complexity. These critical accounting policies require estimates and assumptions
that affect the amounts of assets, liabilities, revenues and expenses reported
in the condensed consolidated financial statements. Due to their nature,
estimates involve judgment based upon available information. Actual
results or amounts could differ from estimates and the difference could have
a
material impact on the condensed consolidated financial statements. Therefore,
understanding these policies is important in understanding the reported results
of operations and the financial position of the Company.
Valuation
of Securities and Other Assets
“Trading
instruments” and “Available for sale securities” are reflected in the Condensed
Consolidated Statements of Financial Condition at fair value or amounts that
approximate fair value. In accordance with SFAS 115, “Accounting for Certain
Investments in Debt and Equity Securities”, unrealized gains and losses related
to these financial instruments are reflected in net income or other
comprehensive income, depending on the underlying purpose of the instrument.
The
following table presents the Company’s trading instruments and available for
sale securities segregated into trading securities (i.e., non-derivative),
derivative contracts, and available for sale securities:
|
December
31, 2007
|
|
|
Financial
|
|
Financial
|
Instruments
Sold
|
|
Instruments
Owned
|
but
not yet Purchased
|
|
at
Fair Value
|
at
Fair Value
|
|
(in
000’s)
|
|
|
|
Trading
Securities
|
$ 644,820
|
$
226,281
|
Derivative
Contracts
|
40,271
|
18,589
|
Available
for Sale Securities
|
569,006
|
-
|
Total
|
$
1,254,097
|
$
244,870
|
Trading
Securities, 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 trading securities, available for sale
securities, and derivative contracts for which fair value is measured based
on
quoted prices or other independent sources versus those for which fair value
is
determined by management:
|
December
31, 2007
|
|
|
Financial
|
|
Financial
|
Instruments
Sold
|
|
Instruments
Owned
|
but
not yet Purchased
|
|
at
Fair Value
|
at
Fair Value
|
|
(in
000’s)
|
|
|
|
Fair
Value Based on Quoted Prices and Independent Sources
|
$
1,193,861
|
$
226,281
|
Fair
Value Determined by Management
|
60,236
|
18,589
|
Total
|
$
1,254,097
|
$
244,870
|
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 $10.3 million as of December 31, 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.
Goodwill
Goodwill
is related to the acquisitions of Roney & Co. (now part of RJA) and Goepel
McDermid, Inc. (now called Raymond James Ltd.). This goodwill, totaling $63
million, was allocated to the reporting units within the Private Client Group
and Capital Markets segments pursuant to SFAS No. 142, “Goodwill and Other
Intangible Assets”. Goodwill represents the excess cost of a business
acquisition over the fair value of the net assets acquired. In accordance with
this pronouncement, indefinite-life intangible assets and goodwill are not
amortized. Rather, they are subject to impairment testing on an annual basis,
or
more often if events or circumstances indicate there may be impairment. This
test involves assigning tangible assets and liabilities, identified intangible
assets and goodwill to reporting units and comparing the fair value of each
reporting unit to its carrying amount. If the fair value is less than the
carrying amount, a further test is required to measure the amount of the
impairment.
When
available, the Company uses recent, comparable transactions to estimate the
fair
value of the respective reporting units. The Company calculates an estimated
fair value based on multiples of revenues, earnings, and book value of
comparable transactions. However, when such comparable transactions are not
available or have become outdated, the Company uses discounted cash flow
scenarios to estimate the fair value of the reporting units. As of December
31,
2007, goodwill had been allocated to the Private Client Group of RJA, and both
the Private Client Group and Capital Markets segments of Raymond James Limited.
As of the most recent impairment test performed in March 2007, the Company
determined that the carrying value of the goodwill for each reporting unit
had
not been impaired. However, changes in current circumstances or business
conditions could result in an impairment of goodwill. As required, the Company
will continue to perform impairment testing on an annual basis or when an event
occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. There were no events that
triggered a reassessment in the current quarter.
Reserves
The
Company recognizes liabilities for contingencies when there is an exposure
that,
when fully analyzed, indicates it is both probable that a liability has been
incurred and the amount of loss can be reasonably estimated. When a range of
probable loss can be estimated, the Company accrues the most likely amount;
if
not determinable, the Company accrues at least the minimum of the range of
probable loss.
The
Company records reserves related to legal proceedings in Trade and Other
Payables. Such reserves are established and maintained in accordance with SFAS
No. 5, "Accounting for Contingencies" (“SFAS 5”), and Financial Interpretation
No. 14, “Reasonable Estimation of the Amount of a Loss”. The determination of
these reserve amounts requires significant judgment on the part of management.
Management considers many factors including, but not limited to: the amount
of
the claim; the amount of the loss in the client's account; the basis and
validity of the claim; the possibility of wrongdoing on the part of an employee
of the Company; previous results in similar cases; and legal precedents and
case
law. Each legal proceeding is reviewed with counsel in each accounting period
and the reserve is adjusted as deemed appropriate by management. Lastly, each
case is reviewed to determine if it is probable that insurance coverage will
apply, in which case the reserve is reduced accordingly. Any change in the
reserve amount is recorded in the consolidated financial statements and is
recognized as a charge/credit to earnings in that period.
The
Company also records reserves or allowances for doubtful accounts related to
client receivables and loans. Client receivables at the broker-dealers are
generally collateralized by securities owned by the brokerage clients.
Therefore, when a receivable is considered to be impaired, the amount of the
impairment is generally measured based on the fair value of the securities
acting as collateral, which is measured based on current prices from independent
sources such as listed market prices or broker-dealer price
quotations.
Client
loans at RJBank are generally collateralized by real estate or other property.
RJBank provides for both an allowance for losses in accordance with SFAS 5
and a
reserve for individually impaired loans in accordance with SFAS No. 114,
“Accounting by a Creditor for Impairment of a Loan”. The calculation of the SFAS
5 allowance is subjective as management segregates the loan portfolio into
different homogeneous classes and assigns each class an allowance percentage
based on the perceived risk associated with that class of loans. The loan
grading process provides specific and detailed risk measurement across the
corporate loan portfolio. The factors taken into consideration when assigning
the reserve percentage to each reserve category include estimates of borrower
default probabilities and collateral values; trends in delinquencies; volume
and
terms; changes in geographic distribution, lending policies, local, regional,
and national economic conditions; concentrations of credit risk and past loss
history. In addition, the Company provides for potential losses inherent in
RJBank’s unfunded lending commitments using the criteria above, further adjusted
for an estimated probability of funding. For individual loans identified as
impaired, RJBank measures impairment based on the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
observable market price, or the fair value of the collateral if the loan is
supported by collateral. At December 31, 2007, the amortized cost of all RJBank
loans was $5.7 billion and an allowance for loan losses of $59.3 million was
recorded against that balance. The total allowance for loan losses, including
$6.0 million in reserves for off-balance sheet exposures maintained in Trade
and
Other Payables, is equal to 1.14% of the amortized cost of the loan
portfolio.
The
following table allocates RJBank’s allowance for loan losses by loan
category:
|
December
31, 2007
|
September
30, 2007
|
|
($
in 000’s)
|
Commercial
Loans (1):
|
|
|
Allowance
|
$ 8,833
|
$ 4,471
|
Total
Commercial Loans
|
|
|
as
a % of Loans Receivable
|
11%
|
7%
|
|
|
|
Real
Estate Construction Loans:
|
|
|
Allowance
|
$ 3,345
|
$ 2,121
|
Total
Real Estate Construction Loans
|
|
|
as
a % of Loans Receivable
|
3%
|
3%
|
|
|
|
Commercial
Real Estate Loans (2):
|
|
|
Allowance
|
$
41,311
|
$
35,766
|
Total
Commercial Real Estate Loans
|
|
|
as
a % of Loans Receivable
|
46%
|
49%
|
|
|
|
Residential
Mortgage Loans:
|
|
|
Allowance
|
$ 5,762
|
$ 4,659
|
Total
Residential Mortgage Loans
|
|
|
as
a % of Loans Receivable
|
40%
|
41%
|
|
|
|
Consumer
Loans:
|
|
|
Allowance
|
$ 5
|
$ 5
|
Total
Consumer Loans
|
|
|
as
a % of Loans Receivable
|
-
|
-
|
|
|
|
Total:
|
|
|
Allowance
|
$
59,256
|
$
47,022
|
%
of Total Loans Receivable
|
100%
|
100%
|
(1)
Loans
not secured by real estate.
(2)
Loans
wholly or partially secured by real estate.
The
Company also makes loans or pays advances to Financial Advisors, primarily
for
recruiting and retention purposes. The Company provides for an allowance for
doubtful accounts based on an evaluation of the Company’s ability to collect
such receivables. The Company’s ongoing evaluation includes the review of
specific accounts of Financial Advisors no longer associated with the Company
and the Company’s historical collection experience. At December 31, 2007 the
receivable from Financial Advisors was $132.6 million, which is net of an
allowance of $3.1 million for estimated uncollectibility.
Income
Taxes
SFAS
No.
109, “Accounting for Income Taxes”, as interpreted by FIN 48, establishes
financial accounting and reporting standards for the effect of income taxes.
The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized
in
the Company’s financial statements or tax returns. Judgment is required in
assessing the future tax consequences of events that have been recognized in
the
Company’s financial statements or tax returns. Variations in the actual outcome
of these future tax consequences could materially impact the Company’s financial
position, results of operations, or cash flows. See Note 10 of the Notes to
the
Condensed Consolidated Financial Statements for further information on the
Company’s income taxes.
Item
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For
a
description of the Company’s risk management policies, including a discussion of
the Company’s primary market risk exposures, which include interest rate risk
and equity price risk, as well as a discussion of the Company’s credit risk,
operational risk, and regulatory and legal risk and a discussion of how these
exposures are managed, refer to the Company’s Annual Report on Form 10-K for the
year ended September 30, 2007.
Market
Risk
Market
risk is the risk of loss to the Company resulting from changes in interest
rates
and security prices. The Company has exposure to market risk
primarily through its broker-dealer and banking operations. The
Company's broker-dealer subsidiaries, primarily RJA, trade tax exempt and
taxable debt obligations and act as an active market maker in approximately
341
over-the-counter equity securities. In connection with these
activities, the Company maintains inventories in order to ensure availability
of
securities and to facilitate client transactions. Additionally, the
Company, primarily within its Canadian broker-dealer subsidiary, invests for
its
own proprietary equity investment account.
See
Note
3 of the Notes to the Condensed Consolidated Financial Statements for
information regarding the fair value of trading inventories associated with
the
Company's broker-dealer client facilitation, market-making and proprietary
trading activities.
Changes
in value of the Company's trading inventory may result from fluctuations in
interest rates, credit ratings of the issuer, equity prices and the correlation
among these factors. The Company manages its trading inventory by product type
and has established trading divisions that have responsibility for each product
type. The Company's primary method of controlling risk in its trading inventory
is through the establishment and monitoring of limits on the dollar amount
of
securities positions that can be entered into and other risk-based limits;
limits are established both for categories of securities (e.g., OTC equities,
corporate bonds, municipal bonds) and for individual traders. As of December
31,
2007, the absolute fixed income and equity inventory limits were $1,955,000,000
and $83,600,000, respectively. The Company's trading activities were well within
these limits at December 31, 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, spread, ratio, basis, and volatility
risk. These exposures are monitored both on a total portfolio basis and
separately for selected maturity periods.
Interest
Rate Risk
The
Company is exposed to interest rate risk as a result of maintaining trading
inventories of fixed income instruments and actively manages this risk using
hedging techniques that involve swaps, futures, and U.S. Treasury obligations.
The Company monitors, on a daily basis, the Value-at-Risk (“VaR”) in its
institutional Fixed Income trading portfolios (cash instruments and interest
rate derivatives). VaR is an appropriate statistical technique for estimating
the potential loss in trading portfolios due to typical adverse market movements
over a specified time horizon with a suitable confidence level.
To
calculate VaR, the Company uses historical simulation. This approach assumes
that historical changes in market conditions are representative of future
changes. The simulation is based upon daily market data for the previous twelve
months. VaR is reported at a 99% confidence level, based on a one-day time
horizon. This means that the Company could expect to incur losses greater than
those predicted by the VaR estimates only once in every 100 trading days, or
about 2.5 times a year under “business as usual” conditions. During the three
months ended December 31, 2007, the reported daily loss in the institutional
Fixed Income trading portfolio exceeded the predicted VaR three times, due
in
part, to greater volatility in interest rates and in bond prices experienced
during the quarter as compared to conditions prevailing in the previous months
during the one year historical modeling period.
However,
trading losses on a single day could exceed the reported VaR by significant
amounts in unusually volatile markets and might accumulate over a longer time
horizon, such as a number of consecutive trading days. Accordingly, management
employs additional interest rate risk controls including position limits, a
daily review of trading results, review of the status of aged inventory,
independent controls on pricing, monitoring of concentration risk, and review
of
issuer ratings.
The
following tables set forth the high, low, and daily average VaR for the
Company's overall institutional portfolio during the three months ended December
31, 2007, with the corresponding dollar value of the Company's
portfolio:
|
Three
Months Ended December 31, 2007
|
|
VaR
at
|
|
|
|
|
|
|
December
31,
|
|
September
30,
|
|
High
|
Low
|
|
DailyAverage
|
|
2007
|
|
2007
|
|
($
in 000's)
|
|
|
|
|
|
|
|
|
|
Daily
VaR
|
$ 1,143
|
$ 166
|
|
$ 490
|
|
$ 1,143
|
|
$ 232
|
Related
Portfolio Value (Net)*
|
$371,614
|
$344,824
|
|
$351,712
|
|
$371,614
|
|
$
278,605
|
VaR
as a Percent
|
|
|
|
|
|
|
|
|
of
Portfolio Value
|
0.31%
|
0.05%
|
|
0.14%
|
|
0.31%
|
|
0.08%
|
*
Portfolio value achieved on the day of the VaR calculation.
The
modeling of the risk characteristics of trading positions involves a number
of
assumptions and approximations. While management believes that its assumptions
and approximations are reasonable, there is no uniform industry methodology
for
estimating VaR, and different assumptions or approximations could produce
materially different VaR estimates. As a result, VaR statistics are more
reliable when used as indicators of risk levels and trends within a firm than
as
a basis for inferring differences in risk-taking across firms.
Additional
information is discussed under Derivative Financial Instruments in Note 9 of
the
Notes to the Condensed Consolidated Financial Statements.
RJBank
maintains an earning asset portfolio that is comprised of mortgage, corporate
and consumer loans, as well as mortgage backed securities, securities purchased
under resale agreements, and other investments. Those earning assets are funded
in part by its obligations to clients, including NOW accounts, demand deposits,
money market accounts, savings accounts, and certificates of deposit; and FHLB
advances. Based on the current earning asset portfolio of RJBank, 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):
|
December
31,
|
September
30,
|
|
2007
|
2007
|
|
(in
000's)
|
|
|
|
Mortgage
Backed Securities
|
$ 374,900
|
$ 382,455
|
Loans
Receivable, Net
|
2,121,545
|
2,020,530
|
Total
Assets with Market Risk
|
$2,496,445
|
$
2,402,985
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 186,643
|
$ 185,729
|
Federal
Home Loan Bank Advances
|
50,000
|
50,000
|
Total
Liabilities with Market Risk
|
$ 236,643
|
$ 235,729
|
The
following table shows the distribution of those RJBank loans that mature in
more
than one year between fixed and adjustable interest rate loans at December
31,
2007:
|
Interest
Rate Type
|
|
Fixed
|
Adjustable
|
Total
|
|
(in
000’s)
|
|
|
|
|
Commercial
Loans (1)
|
$ 2,167
|
$ 636,571
|
$ 638,738
|
Real
Estate Construction Loans
|
-
|
162,581
|
162,581
|
Commercial
Real Estate Loans (2)
|
7,061
|
2,487,613
|
2,494,674
|
Residential
Mortgage Loans
|
23,884
|
2,233,969
|
2,257,853
|
Consumer
Loans
|
-
|
3,417
|
3,417
|
|
|
|
|
Total
Loans
|
$
33,112
|
$
5,524,151
|
$
5,557,263
|
(1)
Loans
not secured by real estate.
(2)
Loans
wholly or partially secured by real estate.
One
of
the core objectives of RJBank's Asset/Liability Management Committee is to
manage the sensitivity of net interest income to changes in market interest
rates. The Asset/Liability Management Committee uses several measures to monitor
and limit RJBank's interest rate risk including scenario analysis, interest
repricing gap analysis and limits, and net portfolio value limits. Simulation
models and estimation techniques are used to assess the sensitivity of the
net
interest income stream to movements in interest rates. Assumptions about
consumer behavior play an important role in these calculations; this is
particularly relevant for loans such as mortgages where the client has the
right, but not the obligation, to repay before the scheduled
maturity.
The
sensitivity of net interest income to interest rate conditions is estimated
for
a variety of scenarios. Assuming an immediate and lasting shift of 100 basis
points in the term structure of interest rates, RJBank's sensitivity analysis
indicates that an upward movement would decrease RJBank's net interest income
by
7.96% in the first year after the rate increase, whereas a downward shift of
the
same magnitude would increase RJBank's net interest income by 7.07%. These
sensitivity figures are based on positions as of December 31, 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
year ended December 31, 2007 was CDN$20,411,607. The Company's equity securities
inventories are priced on a regular basis and there are no material unrecorded
gains or losses.
Item
4. CONTROLS AND
PROCEDURES
Disclosure
controls are procedures designed to ensure
that information required to be disclosed in the Company's reports filed under
the Exchange Act, such as this report, is recorded, processed, summarized,
and
reported within the time periods specified in the SEC's rules and forms.
Disclosure controls are also designed to ensure that such information is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance of achieving the desired control objectives, as the
Company's are designed to do, and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
Under
the
supervision and with the participation of the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, the Company has
evaluated the effectiveness of its disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(b) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures
are effective. There were no changes in the Company’s internal control over
financial reporting during the quarter ended December 31, 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 which the Turkish tax court affirmed. RJY
is vigorously contesting most aspects of this assessment and has filed an appeal
with the Turkish Council of State. The Turkish tax authorities, utilizing the
2001 methodology assessed RJY $5.7 million for 2002, which is also being
challenged. Audits of 2003 and 2004 are anticipated and their outcome is unknown
in light of the change in methodology and the pending litigation. The Company
has recorded a provision for loss in its consolidated financial statements
for
its net equity interest in this joint venture. As of December 31, 2007, RJY
had
total capital of approximately $13.2 million, of which the Company owns
approximately 50%.
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. The Company is contesting the allegations
in these cases and believes that there are meritorious defenses in each of
these
lawsuits and arbitrations. In view of the number and diversity of claims against
the Company, the number of jurisdictions in which litigation is pending and
the
inherent difficulty of predicting the outcome of litigation and other claims,
the Company cannot state with certainty what the eventual outcome of pending
litigation or other claims will be. In the opinion of the Company's management,
based on current available information, review with outside legal counsel,
and
consideration of amounts provided for in the accompanying consolidated financial
statements with respect to these matters, ultimate resolution of these matters
will not have a material adverse impact on the Company's financial position
or
results of operations. However, resolution of one or more of these matters
may
have a material effect on the results of operations in any future period,
depending upon the ultimate resolution of those matters and upon the level
of
income for such period.
Item
1A. RISK
FACTORS
There
were no changes to Item 1A, “Risk Factors” included in the Company’s Annual
Report on Form 10-K for the year ended September 30, 2007.
Reference
is made to information contained under “Capital Transactions” in Note 12 of the
Notes to Condensed Consolidated Financial Statements for the information
required by Part II, Item 2(c).
The
Company expects to continue paying cash dividends. However, the payment and
rate
of dividends on the Company's common stock is subject to several factors
including operating results, financial requirements of the Company, compliance
with the net worth covenant in the Company's line of credit agreement, and
the
availability of funds from the Company's subsidiaries, including the
broker-dealer subsidiaries, which may be subject to restrictions under the
net
capital rules of the SEC, FINRA and the IDA; and RJBank, which may be subject
to
restrictions by federal banking agencies. Such restrictions have
never become applicable with respect to the Company's dividend payments. (See
Note 14 of the Notes to the Condensed Consolidated Financial Statements for
more
information on the capital restrictions placed on RJBank and the Company's
broker-dealer subsidiaries).
Item
6. EXHIBITS
11
|
|
Statement
Re: Computation of per Share Earnings (The calculation of per share
earnings is included in Part I, Item 1 in the Notes to Condensed
Consolidated Financial Statements (Earnings Per Share) and is omitted
here
in accordance with Section (b)(11) of Item 601 of Regulation
S-K).
|
|
|
|
|
|
31.1
|
|
|
|
|
|
|
|
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.
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RAYMOND
JAMES FINANCIAL, INC.
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(Registrant)
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Date: February
11, 2008
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/s/
Thomas A. James
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Thomas
A. James
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Chairman
and Chief
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Executive
Officer
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/s/
Jeffrey P. Julien
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Jeffrey
P. Julien
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Senior
Vice President - Finance
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and
Chief Financial
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Officer
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