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,
2008
or
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
File Number: 1-9109
RAYMOND JAMES FINANCIAL,
INC.
(Exact
name of registrant as specified in its charter)
Florida
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No. 59-1517485
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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, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company o
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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.
122,352,787 shares of Common
Stock as of February 4, 2009
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RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
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Form
10-Q for the Quarter Ended December 31, 2008
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INDEX
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PAGE
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PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements (unaudited)
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Condensed
Consolidated Statements of Financial Condition as of December 31, 2008 and
September 30, 2008 (unaudited)
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3
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Condensed
Consolidated Statements of Income and Comprehensive Income for the three
months ended December 31, 2008 and December 31, 2007
(unaudited)
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4
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Condensed
Consolidated Statements of Cash Flows for the three months ended December
31, 2008 and December 31, 2007 (unaudited)
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5
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Notes
to Condensed Consolidated Financial Statements (unaudited)
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7
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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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37
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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59
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Item
4.
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Controls
and Procedures
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64
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PART
II.
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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64
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Item
1A.
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Risk
Factors
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66
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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66
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Item
5.
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Other
Information
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66
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Item
6.
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Exhibits
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66
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Signatures
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67
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PART
I FINANCIAL INFORMATION
Item
1. FINANCIAL
STATEMENTS
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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December
31,
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September
30,
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2008
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2008
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(in
000’s)
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Assets
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Cash
and Cash Equivalents
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$ 480,982
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$ 3,207,493
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Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
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4,654,266
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4,311,933
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Securities
Purchased under Agreements to Resell and Other Collateralized
Financings
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1,302,588
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950,546
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Financial
Instruments, at Fair Value:
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Trading
Instruments
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259,674
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314,008
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Available
for Sale Securities
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467,844
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577,933
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Private
Equity and Other Investments
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212,814
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209,915
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Receivables:
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Brokerage
Clients, Net
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1,309,054
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1,850,464
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Stock
Borrowed
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557,536
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675,080
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Bank
Loans, Net
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7,676,791
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7,095,227
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Brokers-Dealers
and Clearing Organizations
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73,191
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186,841
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Other
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358,018
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344,594
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Investments
in Real Estate Partnerships - Held by Variable Interest
Entities
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264,475
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239,714
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Property
and Equipment, Net
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190,743
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192,450
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Deferred
Income Taxes, Net
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156,400
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108,765
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Deposits
With Clearing Organizations
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88,374
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94,242
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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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166,991
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287,836
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$
18,282,316
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$
20,709,616
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Liabilities
And Shareholders' Equity
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Loans
Payable
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$ 161,278
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$
2,212,224
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Loans
Payable Related to Investments by Variable Interest Entities in Real
Estate Partnerships
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94,694
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102,564
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Payables:
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Brokerage
Clients
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5,934,448
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5,789,952
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Stock
Loaned
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549,054
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695,739
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Bank
Deposits
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8,792,982
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8,774,457
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Brokers-Dealers
and Clearing Organizations
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68,229
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266,272
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Trade
and Other
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149,589
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154,915
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Trading
Instruments Sold but Not Yet Purchased, at Fair Value
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82,665
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123,756
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Securities
Sold Under Agreements to Repurchase
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60,817
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122,728
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Accrued
Compensation, Commissions and Benefits
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229,909
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345,782
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Income
Taxes Payable
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48,416
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-
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16,172,081
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18,588,389
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Minority
Interests
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244,816
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237,322
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Shareholders'
Equity:
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Preferred
Stock; $.10 Par Value; Authorized
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10,000,000
Shares; Issued and Outstanding -0- Shares
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-
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-
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Common
Stock; $.01 Par Value; Authorized 350,000,000 Shares;
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Issued
125,217,461 at December 31, 2008 and 124,078,129
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at
September 30, 2008
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1,210
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1,202
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Shares
Exchangeable into Common Stock; 260,937
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at
December 31, 2008 and 273,042 at September 30, 2008
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3,349
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3,504
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Additional
Paid-In Capital
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367,695
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355,274
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Retained
Earnings
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1,687,390
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1,639,662
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Accumulated
Other Comprehensive Income
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(107,173)
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(33,976)
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1,952,471
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1,965,666
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Less: 4,103,946 and
3,825,619 Common Shares in Treasury, at Cost
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(87,052)
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(81,761)
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1,865,419
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1,883,905
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$
18,282,316
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$
20,709,616
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See
accompanying Notes to Condensed Consolidated Financial
Statements.
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RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(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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2008
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2007
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Revenues:
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Securities
Commissions and Fees
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$ 418,225
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$ 472,605
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Investment
Banking
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20,733
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23,855
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Investment
Advisory Fees
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44,435
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56,605
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Interest
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143,612
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212,950
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Net
Trading Profits
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9,175
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1,102
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Financial
Service Fees
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33,135
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32,975
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Other
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26,518
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29,099
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Total
Revenues
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695,833
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829,191
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Interest
Expense
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31,891
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143,364
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Net
Revenues
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663,942
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685,827
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Non-Interest
Expenses:
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Compensation,
Commissions and Benefits
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419,254
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470,604
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Communications
and Information Processing
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35,223
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31,011
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Occupancy
and Equipment Costs
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26,435
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21,397
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Clearance
and Floor Brokerage
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8,588
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8,586
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Business
Development
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24,724
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23,859
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Investment
Advisory Fees
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9,722
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12,930
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Bank
Loan Loss Provision
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24,870
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12,820
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Other
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18,469
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13,318
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Total
Non-Interest Expenses
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567,285
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594,525
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Minority
Interest in (Losses) Earnings of Subsidiaries
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(5,007)
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545
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Income
Before Provision for Income Taxes
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101,664
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90,757
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Provision
for Income Taxes
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40,571
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34,515
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Net
Income
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$ 61,093
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$ 56,242
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Net
Income per Share-Basic
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$ 0.52
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$ 0.48
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Net
Income per Share-Diluted
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$ 0.52
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$ 0.47
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Weighted
Average Common Shares
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Outstanding-Basic
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116,575
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116,881
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Weighted
Average Common and Common
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Equivalent
Shares Outstanding-Diluted
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118,087
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120,241
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Dividends
Paid per Common Share
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$ 0.11
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$ 0.11
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Net
Income
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$ 61,093
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$ 56,242
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Other
Comprehensive Income:
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Change
in Unrealized Loss on Available
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for Sale Securities, Net of Tax
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(53,387)
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(2,893)
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Change
in Currency Translations
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(19,810)
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2,066
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Total
Comprehensive (Loss) Income
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$ (12,104)
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$ 55,415
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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
on next page)
|
Three
Months Ended
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December
31,
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December
31,
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2008
|
2007
|
Cash
Flows From Operating Activities:
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Net
Income
|
$ 61,093
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$
56,242
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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
|
8,345
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6,993
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Excess
Tax Benefits from Stock-Based Payment Arrangements
|
(3,754)
|
(360)
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Deferred
Income Taxes
|
(16,423)
|
(1,808)
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Premium
and Discount Amortization on Available for Sale Securities
|
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and
Unrealized/Realized Gain on Other Investments
|
(1,192)
|
(2,128)
|
Other-than-Temporary
Impairment on Available for Sale Securities
|
571
|
-
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Impairment
of and Loss on Sale of Property and Equipment
|
6,197
|
19
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Gain
on Sale of Loans Available for Sale
|
(49)
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(97)
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Provision
for Loan Loss, Legal Proceedings, Bad Debts and Other
Accruals
|
30,153
|
14,077
|
Stock-Based
Compensation Expense
|
2,769
|
12,504
|
Loss
on Company-Owned Life Insurance
|
13,505
|
876
|
|
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|
(Increase)
Decrease in Operating Assets:
|
|
|
Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
|
(342,333)
|
(413,202)
|
Receivables:
|
|
|
Brokerage
Clients, Net
|
539,995
|
(115,516)
|
Stock
Borrowed
|
117,544
|
342,730
|
Brokers-Dealers
and Clearing Organizations
|
113,650
|
21,118
|
Other
|
(16,320)
|
3,243
|
Securities
Purchased Under Agreements to Resell and Other
Collateralized
|
|
|
Financings,
Net of Securities Sold Under Agreements to Repurchase
|
(68,953)
|
152,359
|
Trading
Instruments, Net
|
13,243
|
(119,022)
|
Proceeds
from Sale of Loans Available for Sale
|
3,540
|
9,640
|
Origination
of Loans Available for Sale
|
(3,217)
|
(10,545)
|
Prepaid
Expenses and Other Assets
|
95,798
|
(26,954)
|
Minority
Interest
|
(5,007)
|
545
|
|
|
|
Increase
(Decrease) in Operating Liabilities:
|
|
|
Payables:
|
|
|
Brokerage
Clients
|
144,496
|
497,638
|
Stock
Loaned
|
(146,685)
|
(341,034)
|
Brokers-Dealers
and Clearing Organizations
|
(198,043)
|
55,166
|
Trade
and Other
|
(13,989)
|
18,560
|
Accrued
Compensation, Commissions and Benefits
|
(115,086)
|
(107,245)
|
Income
Taxes Payable
|
52,171
|
22,811
|
|
|
|
Net
Cash Provided by Operating Activities
|
272,019
|
76,610
|
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)
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2008
|
2007
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
Additions
to Property and Equipment, Net
|
(15,138)
|
(8,329)
|
Bank
Loan Originations and Purchases
|
(1,196,108)
|
(1,798,220)
|
Bank
Loan Repayments and Increase in Unearned Fees, net
|
571,148
|
596,411
|
Purchases
of Private Equity and Other Investments, Net
|
(1,703)
|
(464)
|
Investments
in Company-Owned Life Insurance
|
(8,836)
|
(47,818)
|
Investments
in Real Estate Partnerships-Held by Variable Interest
Entities
|
(24,761)
|
(5,199)
|
Repayments
of Loans by Investor Members of Variable Interest Entities
Related
|
|
|
to
Investments in Real Estate Partnerships
|
783
|
1,797
|
Securities
Purchased Under Agreements to Resell, Net
|
(345,000)
|
600,000
|
Purchases
of Available for Sale Securities
|
-
|
(23,754)
|
Available
for Sale Securities Maturations and Repayments
|
24,907
|
20,125
|
|
|
|
Net
Cash Used in Investing Activities
|
(994,708)
|
(665,451)
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
Proceeds
from Borrowed Funds, Net
|
-
|
1,509
|
Repayments
of Borrowings, Net
|
(2,050,946)
|
(668)
|
Proceeds
from Borrowed Funds Related to Company-Owned Life
Insurance
|
38,120
|
-
|
Proceeds
from Borrowed Funds Related to Investments by Variable
Interest
|
|
|
Entities
in Real Estate Partnerships
|
1,260
|
1,435
|
Repayments
of Borrowed Funds Related to Investments by Variable
Interest
|
|
|
Entities
in Real Estate Partnerships
|
(9,130)
|
(9,378)
|
Proceeds
from Capital Contributed to Variable Interest Entities
|
|
|
Related
to Investments in Real Estate Partnerships
|
10,685
|
11,716
|
Minority
Interest
|
1,816
|
6,179
|
Exercise
of Stock Options and Employee Stock Purchases
|
4,135
|
7,107
|
Increase
in Bank Deposits
|
18,525
|
623,603
|
Purchase
of Treasury Stock
|
(4,462)
|
(6,854)
|
Dividends
on Common Stock
|
(13,365)
|
(13,357)
|
Excess
Tax Benefits from Stock-Based Payment Arrangements
|
3,754
|
360
|
|
|
|
Net
Cash (Used in) Provided by Financing Activities
|
(1,999,608)
|
621,652
|
|
|
|
Currency
Adjustment:
|
|
|
Effect
of Exchange Rate Changes on Cash
|
(4,214)
|
2,066
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
(2,726,511)
|
34,877
|
Cash
and Cash Equivalents at Beginning of Year
|
3,207,493
|
644,943
|
|
|
|
Cash
and Cash Equivalents at End of Period
|
$ 480,982
|
$
679,820
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
Cash
Paid for Interest
|
$
33,601
|
$
144,769
|
Cash
Paid for Income Taxes
|
$
1,197
|
$
14,147
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31,
2008
NOTE 1 - BASIS OF
PRESENTATION:
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Raymond James Financial, Inc. (“RJF”) and its consolidated
subsidiaries that are generally controlled through a majority voting
interest. RJF is a holding company headquartered in Florida whose
subsidiaries are engaged in various financial service businesses; as used
herein, the term “the Company” refers to RJF and/or one or more of its
subsidiaries. In accordance with Financial Accounting Standards Board
(“FASB”) Interpretation (“FIN”) No. 46R, “Consolidation of Variable Interest
Entities” (“FIN 46R”), the Company also consolidates any variable interest
entities (“VIEs”) for which it is the primary beneficiary. Additional
information is provided in Note 7 below. When the Company does not have a
controlling interest in an entity, but exerts significant influence over the
entity, the Company applies the equity method of accounting. All material
intercompany balances and transactions have been eliminated in
consolidation.
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, 2008. 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, 2008, the Company
reclassified cash collateral related to interest rate swap contracts in
accordance with FASB Staff Position (“FSP”) FIN No. 39-1, “Amendment of FASB
Interpretation No. 39” (“FSP FIN No. 39-1”). See Note 2 below for further
discussion of the Company’s adoption of this accounting pronouncement. The
Condensed Consolidated Statements of Financial Condition were adjusted for the
period ended September 30, 2008, which resulted in reclassifications between
Brokers-Dealers and Clearing Organizations Receivables and Payables, Trading
Instruments, and Trading Instruments Sold but Not Yet Purchased, netting to a
$22.2 million adjustment between total assets and total liabilities. This
reclassification had an immaterial impact on the Condensed Consolidated
Statements of Cash Flows for the three months ended December 31, 2007. In the
quarter ended December 31, 2008, a new intersegment component to the Company’s
segment reporting was added to reflect total gross revenues by segment with the
elimination of intersegment transactions in this new segment. In addition, the
methodology for allocating the Company’s corporate bonus pool expense to
individual segments was changed. Reclassifications have been made in the segment
disclosure for the three months ended December 31, 2007 to conform to this
presentation. Additional information is provided in Note 18 below. In the
quarter ended December 31, 2008, the Condensed Consolidated Statements of
Financial Condition were adjusted to reflect the reclassification of certain
other investments from Prepaid Expenses and Other Assets to Other Investments.
This reclassification included the Company’s private equity investments and
other miscellaneous investments recorded at fair value and totaled $157.2
million at September 30, 2008. The Condensed Consolidated Statements of Cash
Flows for the three months ended, December 31, 2007 were adjusted for this
reclassification, which resulted in a net increase of $300,000 in cash flows
provided by operating activities with the offset to cash flows used in investing
activities. In addition, for the three months ended, December 31, 2007 the
Condensed Consolidated Statements of Cash Flows were adjusted for a $47.8
million reclassification of investments in company-owned life insurance from an
operating activity to an investing activity.
The
Company’s quarters end on the last day of each calendar quarter.
NOTE 2 – EFFECTS OF RECENTLY
ISSUED ACCOUNTING STANDARDS:
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. The Company adopted SFAS
157 on October 1, 2008. See Note 3 below for the additional disclosure
requirements of this pronouncement and for information regarding the impact the
adoption of SFAS 157 had on the financial position and operating results of the
Company.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows
companies to elect to follow fair value accounting for certain financial assets
and liabilities on an instrument by instrument basis. SFAS 159 is applicable
only to certain financial instruments and was effective for the Company on
October 1, 2008. The Company elected not to adopt the fair value option for any
other financial assets and liabilities as permitted by SFAS 159. See Note 3
below for further discussion of the impact the provisions of this pronouncement
had on the Company’s consolidated financial statements.
In April
2007, the FASB issued 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 was adopted by the Company on October 1, 2008.
See Note 10 below for information regarding the impact the adoption of FSP FIN
No. 39-1 had on the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”). SFAS 141R provides new guidance on accounting for business
combinations which includes the fundamental principle of recording the acquired
business at fair value. In addition, this statement requires extensive
disclosures about the acquisition’s quantitative and qualitative effects
including validation of the fair value of goodwill. This statement is effective
for all business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008 (October 1, 2009 for the Company). Earlier application is
prohibited.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires
noncontrolling interests to be treated as a separate component of equity, not as
a liability or other item outside of permanent equity. This statement is
applicable to the accounting for noncontrolling interests and transactions with
noncontrolling interest holders in consolidated financial statements and is
effective for fiscal years beginning on or after December 15, 2008 (October 1,
2009 for the Company). The Company is currently evaluating the impact the
adoption of SFAS 160 will have on its consolidated financial
statements.
In
February 2008, the FASB issued FSP SFAS No. 157-2, “Effective Date of FASB
Statement No. 157” (“FSP SFAS No. 157-2”). FSP SFAS No. 157-2 delays the
effective date of SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities that are not remeasured at fair value on a recurring basis (at least
annually) until fiscal years beginning after November 15, 2008 (October 1, 2009
for the Company), and interim periods within those fiscal years. The Company
does not expect the adoption of FSP SFAS No. 157-2 will have a material impact
on its consolidated financial statements.
In
October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active” (“FSP SFAS No.
157-3”). FSP SFAS No. 157-3 clarifies the application of SFAS 157 in a market
that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. The Company adopted FSP SFAS No 157-3 on October
1, 2008. See Note 3 below for information regarding the impact the
adoption of this interpretation had on the Company’s consolidated financial
statements.
In
February 2008, the FASB issued FSP SFAS No. 140-3, “Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions” (“FSP SFAS No. 140-3”).
FSP SFAS No. 140-3 addresses the issue of whether these transactions should be
viewed as two separate transactions or as one "linked" transaction. The FSP
includes a "rebuttable presumption" that presumes linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria.
The FSP will be effective for fiscal years beginning after November 15, 2008
(October 1, 2009 for the Company) and will apply only to original transfers made
after that date; early adoption will not be allowed. The Company is currently
evaluating the impact the adoption of FSP SFAS No. 140-3 will have on its
consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 requires companies to expand its
disclosures regarding derivative instruments and hedging activities to include
how and why an entity is using a derivative instrument or hedging activity, an
explanation of its accounting under SFAS 133, and how this instrument affects
the entity’s financial position and performance as well as cash flows. SFAS 161
also clarifies that derivative instruments are subject to
concentration-of-credit-risk disclosures which amends SFAS 107, “Disclosures
about Fair Value of Financial Instruments”. This statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008 (quarter ending March 31, 2009 for the Company) with early
adoption permitted. Although the Company will have to comply with additional
disclosure requirements, it does not expect the adoption of SFAS No. 161 will
have a material impact on its consolidated financial statements.
In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents to be treated as participating securities as defined in
EITF Issue No. 03-6, "Participating Securities and the Two-Class Method under
FASB Statement No. 128," and, therefore, included in the earnings allocation in
computing earnings per share under the two-class method described in FASB
Statement No. 128, “Earnings per Share”. This FSP is effective for fiscal years
beginning after December 15, 2008 (October 1, 2009 for the Company), and interim
periods within those fiscal years. The Company is currently evaluating the
impact the adoption of FSP EITF 03-6-1 will have on its consolidated financial
statements.
In
December 2008, the FASB issued FSP SFAS No. 140-4 and FIN 46R-8, “Disclosures
about Transfers of Financial Assets and Interest in Variable Interest Entities”.
FSP SFAS No. 140-4 and FIN 46R-7 require companies to provide additional
disclosures about transfers of financial assets and their involvement with VIEs
in addition to certain disclosures which apply to companies acting as the
transferor, sponsor, servicer, primary beneficiary, or qualifying special
purpose entity. These disclosures are intended to provide greater transparency
to financial statement users regarding a company’s involvement with transferred
financial assets and VIEs. The Company adopted this interpretation on October 1,
2008. See Note 7 below for the required disclosures under FSP SFAS No. 140-4 and
FIN 46R-7.
In
January 2009, the FASB issued FSP EITF No. 99-20-1, “Amendments to the
Impairment Guidance of EITF Issue No. 99-20” (“FSP EITF No.99-20-1”). FSP EITF
No. 99-20-1 amends the impairment guidance in EITF No. 99-20, “Recognition of
Interest Income and Impairment on Purchased Beneficial Interest That Continue to
be Held by a Transferor in Securitized Financial Assets,” to achieve more
consistent determination of whether an other-than-temporary impairment (“OTTI”)
has occurred. In addition, this interpretation retains and emphasizes the
objective of an OTTI assessment and the related disclosure requirements in SFAS
No. 115 “Accounting for Certain Investments in Debt and Equity Securities”. The
Company adopted this interpretation on October 1, 2008. See Note 5 below
for the impact the adoption of FSP EITF No. 99-20-1 had on the Company’s
consolidated financial statements.
NOTE 3 - FAIR
VALUE:
The
Company adopted SFAS 157 and FSP SFAS 157-3 on October 1, 2008. The adoption of
these pronouncements did not have any impact on the financial position or
operating results of the Company. 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.
Fair value is defined as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The Company determines the fair
values of its financial instruments and assets and liabilities recognized at
fair value in the financial statements on a recurring basis in accordance with
SFAS 157. FSP SFAS No. 157-2 delays the effective date of SFAS 157 (until
October 1, 2009 for the Company) for nonfinancial assets and nonfinancial
liabilities, except for items recognized or disclosed at fair value on a
recurring basis. As such, the Company has not applied SFAS 157 to the impairment
tests or assessments under SFAS No. 142, “Goodwill and Other Intangible Assets
(“SFAS 142”), real estate owned and nonfinancial long-lived assets measured at
fair value for an impairment assessment under SFAS No.144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).
In
determining fair value, the Company uses various valuation approaches, including
market, income and/or cost approaches. Fair value is a market-based measure
considered from the perspective of a market participant. As such, even when
market assumptions are not readily available, the Company’s own assumptions
reflect those that market participants would use in pricing the asset or
liability at the measurement date. The standard describes the following three
levels used to classify fair value measurements:
Level 1—Quoted prices
(unadjusted) in active markets for identical assets or liabilities.
Level 2— Observable inputs
other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3—Prices or valuation
techniques that require inputs that are both significant to the fair value
measurement and unobservable.
SFAS 157
requires the Company to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The availability of
observable inputs can vary from instrument to instrument and in certain cases,
the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, an instrument’s level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair
value measurement. The Company’s assessment of the significance of a particular
input to the fair value measurement of an instrument requires judgment and
consideration of factors specific to the instrument.
Valuation
Techniques
The
fair value for certain financial instruments is derived using pricing models and
other valuation techniques that involve significant management judgment. The
price transparency of financial instruments is a key determinant of the degree
of judgment involved in determining the fair value of the Company’s financial
instruments. Financial instruments for which actively quoted prices or pricing
parameters are available will generally have a higher degree of price
transparency than financial instruments that are thinly traded or not quoted. In
accordance with SFAS 157, the criteria used to determine whether the market for
a financial instrument is active or inactive is based on the particular asset or
liability. For equity securities, the Company’s definition of actively traded
was based on average daily volume and other market trading statistics. The
Company considered the market for other types of financial instruments,
including certain non-U.S. agency government securities and certain
collateralized debt obligations, to be inactive as of December 31, 2008. As a
result, the valuation of these financial instruments included significant
management judgment in determining the relevance and reliability of market
information available. The Company considered the inactivity of the market to be
evidenced by several factors, including decreased price transparency caused by
decreased volume of trades relative to historical levels, stale transaction
prices and transaction prices that varied significantly either over time or
among market makers.
Cash Equivalents
Cash
equivalents consist of investments in money market mutual funds. Such
instruments are classified within Level 1 of the fair value hierarchy.
Trading Instruments and Trading
Instruments Sold but Not Yet Purchased
Trading Securities
Trading
securities are comprised primarily of the financial instruments held by the
Company's broker-dealer subsidiaries (see Note 4 to the Condensed Consolidated
Financial Statements for more information). When available, the Company uses
quoted prices in active markets to determine the fair value of securities. Such
instruments are classified within Level 1 of the fair value hierarchy. Examples
include exchange traded equity securities and liquid government debt securities.
When
instruments are traded in secondary markets and quoted market prices do not
exist for such securities, the Company employs valuation techniques, including
matrix pricing to estimate fair value. Matrix pricing generally
utilizes spread-based models periodically re-calibrated to observable inputs
such as market trades or to dealer price bids in similar securities in order to
derive the fair value of the instruments. Valuation techniques may also rely on
other observable inputs such as yield curves, interest rates and expected
principal repayments, and default probabilities. Instruments valued using these
inputs are typically classified within Level 2 of the fair value hierarchy.
Examples include certain municipal debt securities, corporate debt securities,
agency mortgage backed securities, and restricted equity securities in public
companies. Management
utilizes prices from independent services to corroborate its estimate of fair
value. Depending upon the type of security, the pricing service may provide a
listed price, a matrix price, or use other methods including broker-dealer price
quotations.
Positions
in illiquid securities that do not have readily determinable fair values require
significant management judgment or estimation. For these securities the Company
uses pricing models, discounted cash flow methodologies, or similar techniques.
Securities valued using these techniques are classified within Level 3 of the
fair value hierarchy. Examples include certain municipal debt securities,
certain mortgage backed securities and equity securities in private companies.
For certain collateralized mortgage obligations (“CMOs”), where there has been
limited activity or less transparency around significant inputs to the
valuation, such as assumptions regarding performance of the underlying
mortgages, securities are currently classified as Level 3 even though the
Company believes that Level 2 inputs could likely be obtainable should markets
for these securities become more active in the future.
Derivative
Contracts
The
Company enters into interest rate swaps and futures contracts as part of its
fixed income business to facilitate customer transactions and to hedge a portion
of the Company’s trading inventory. In addition, to mitigate interest rate risk
should there be a significantly rising rate environment, Raymond James Bank
(“RJBank”) purchases interest rate caps. See Note 10 of the Notes to the
Condensed Consolidated Financial Statements for more information. Fair values
for derivative contracts are obtained from counterparties, pricing models that
consider current market trading levels and the contractual prices for the
underlying financial instruments, as well as time value and yield curve or other
volatility factors underlying the positions. Where model inputs can be observed
in a liquid market and the model does not require significant judgment, such
derivative contracts are typically classified within Level 2 of the fair value
hierarchy.
Available
for Sale Securities
Available
for sale securities are comprised primarily of CMOs and other mortgage related
debt securities. Debt and equity securities classified as available for sale are
reported at fair value with unrealized gains and losses, net of deferred taxes,
reported in shareholders' equity as a component of accumulated other
comprehensive income. See Note 5 of the Notes to the Condensed Consolidated
Financial Statements for more information. The fair value of available for sale
securities is determined by obtaining third party bid quotations based upon
observable data including benchmark yields, reported trades, other broker-dealer
quotes, issuer spreads, two-sided markets, benchmark securities, other
bids,offers, new issue data, monthly payment information, collateral
performance, and reference data including market research publications.
Changes to fair value are recognized in Other Comprehensive Income.
Securities measured using these valuation techniques are generally classified
within Level 2 of the fair value hierarchy.
If these
sources are not available, are deemed unreliable, or when an active market does
not exist, then the fair value is estimated using pricing models or
discounted cash flow analyses, using observable market data where available as
well as unobservable inputs provided by management. Securities valued using
these valuation techniques are classified within Level 3 of the fair value
hierarchy.
Private
Equity Investments
Private
equity investments, held primarily by the Company’s Proprietary Capital segment,
consist of various direct and third party private equity and merchant banking
investments. The valuation of these investments requires significant management
judgment due to the absence of quoted market prices, inherent lack of liquidity
and long-term nature of these assets. Direct private equity investments are
valued initially at transaction price until significant transactions or
developments indicate that a change in the carrying values of these investments
is appropriate. Generally, the carrying values of these investments will be
adjusted based on financial performance, investment-specific events, financing
and sales transactions with third parties and changes in market outlook.
Investments in funds structured as limited partnerships are generally valued
based on the financial statements of the partnerships which generally use
similar methodologies. Investments valued using these valuation techniques are
classified within Level 3 of the fair value hierarchy.
Other
Investments
Other
investments consist predominantly of Canadian government bonds. The fair value
of these bonds is estimated using recent external market transactions. Such
bonds are classified within Level 2 of the fair value hierarchy as the external
market transactions used are less frequent than those in active
markets.
Recurring
Fair Value Measurements
Assets
and liabilities measured at fair value on a recurring basis as of December 31,
2008 are presented below:
|
|
|
|
FIN
39
|
|
December
31, 2008 (in 000’s)
|
Level
1
|
Level
2
|
Level
3
|
Netting
(1)
|
Total
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Cash
Equivalents
|
$
39,503
|
$ -
|
$ -
|
$ -
|
$ 39,503
|
Trading
Instruments:
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
Obligations
|
46
|
29,111
|
8,028
|
-
|
37,185
|
Corporate
Obligations
|
1,277
|
15,529
|
18,071
|
-
|
34,877
|
Government
Obligations
|
14,790
|
1,924
|
-
|
-
|
16,714
|
Agencies
|
-
|
45,572
|
489
|
-
|
46,061
|
Total
Debt Securities
|
16,113
|
92,136
|
26,588
|
|
134,837
|
Derivative
Contracts
|
-
|
317,896
|
-
|
(213,609)
|
104,287
|
Equity
Securities
|
19,670
|
64
|
-
|
-
|
19,734
|
Other
Securities
|
816
|
-
|
-
|
-
|
816
|
Total
Trading Instruments
|
36,599
|
410,096
|
26,588
|
(213,609)
|
259,674
|
|
|
|
|
|
|
Available
for Sale Securities:
|
|
|
|
|
|
Agency
Mortgage Backed Securities
|
|
|
|
|
|
and
Collateralized Mortgage
|
|
|
|
|
|
Obligations
|
-
|
244,006
|
-
|
-
|
244,006
|
Non-Agency
Collateralized
|
|
|
|
|
|
Mortgage
Obligations
|
-
|
216,398
|
7,434
|
-
|
223,832
|
Other
Securities
|
6
|
-
|
-
|
-
|
6
|
Total
Available for Sale Securities
|
6
|
460,404
|
7,434
|
-
|
467,844
|
|
|
|
|
|
|
Private
Equity and Other Investments:
|
|
|
|
|
|
Private
Equity Investments
|
-
|
-
|
157,176
|
-
|
157,176
|
Other
Investments
|
2,166
|
52,758
|
714
|
-
|
55,638
|
Total
Private Equity and Other
|
|
|
|
|
|
Investments
|
2,166
|
52,758
|
157,890
|
-
|
212,814
|
|
|
|
|
|
|
Other
Assets
|
-
|
89
|
-
|
-
|
89
|
Total
|
$
78,274
|
$
923,347
|
$
191,912
|
$
(213,609)
|
$
979,924
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Trading
Instruments Sold but
|
|
|
|
|
|
Not
Yet Purchased:
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
Obligations
|
$ -
|
$ 720
|
$ -
|
$ -
|
$ 720
|
Corporate
Obligations
|
1,465
|
4,694
|
-
|
-
|
6,159
|
Government
Obligations
|
998
|
-
|
-
|
-
|
998
|
Agencies
|
645
|
-
|
-
|
-
|
645
|
Total
Debt Securities
|
3,108
|
5,414
|
-
|
-
|
8,522
|
Derivative
Contracts
|
-
|
292,916
|
-
|
(230,451)
|
62,465
|
Equity
Securities
|
11,678
|
-
|
-
|
-
|
11,678
|
Total
Trading Instruments Sold
|
|
|
|
|
|
but
Not Yet Purchased
|
14,786
|
298,330
|
-
|
(230,451)
|
82,665
|
|
|
|
|
|
|
Other
Liabilities
|
-
|
-
|
267
|
-
|
267
|
Total
|
$
14,786
|
$
298,330
|
$ 267
|
$
(230,451)
|
$ 82,932
|
|
(1)
As permitted under FIN 39, the Company has elected to net derivative
receivables and derivative payables and the related cash collateral
received and paid when a legally enforceable master netting agreement
exists.
|
Level
3 Items Measured at Fair Value on a Recurring Basis
Assets
and liabilities are considered Level 3 instruments when their value is
determined using pricing models, discounted cash flow methodologies or similar
techniques and at least one significant model assumption or input is
unobservable. Level 3 instruments also include those for which the determination
of fair value requires significant management judgment or estimation. As of
December 31, 2008, 5.4% and 0.5% of the Company’s total assets and total
liabilities, respectively, represented instruments measured at fair value on a
recurring basis. Instruments measured at fair value on a recurring basis
categorized as Level 3 as of December 31, 2008 represented 1.3% of the Company’s
total assets.
The
realized and unrealized gains and losses for assets and liabilities within the
Level 3 category presented in the tables below may include changes in fair value
that were attributable to both observable and unobservable inputs. The following
table presents additional information about Level 3 assets and liabilities
measured at fair value on a recurring basis for the three months ended December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
|
|
|
|
|
Unrealized
|
|
Fair
Value Measurements Using Significant Unobservable Inputs
|
Gains/
|
|
|
|
Total
|
|
|
|
(Losses)
|
|
|
|
Unrealized
|
|
|
|
Related
to
|
|
|
Total
Realized
|
Gains/(Losses)
|
Purchases,
|
|
|
Financial
|
|
|
/Unrealized
|
Included
in
|
Issuances,
|
Transfers
|
|
Instruments
|
|
Fair
Value,
|
Gains/(Losses)
|
Other
|
and
|
In
and/
|
Fair
Value,
|
Held
at
|
Three
Months Ended
|
September
30,
|
Included
in
|
Comprehensive
|
Settlements,
|
or
Out of
|
December
31,
|
December
31,
|
December
31, 2008 (in 000’s)
|
2008
|
Earnings
|
Income
|
Net
|
Level
3
|
2008
|
2008
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Trading
Instruments:
|
|
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
|
|
Obligations
|
$ 7,107
|
$ (350)
|
$ -
|
$ 1,271
|
$ -
|
$ 8,028
|
$ (350)
|
Corporate
Obligations
|
18,716
|
(1,030)
|
-
|
385
|
-
|
18,071
|
(1,033)
|
Agencies
|
489
|
1
|
-
|
(1)
|
-
|
489
|
-
|
|
|
|
|
|
|
|
|
Available
for Sale Securities:
|
|
|
|
|
|
|
|
Non-Agency
Collateralized
|
|
|
|
|
|
|
|
Mortgage
Obligations
|
8,710
|
(571)
|
(648)
|
(57)
|
-
|
7,434
|
(571)
|
|
|
|
|
|
|
|
|
Private
Equity and Other
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Private
Equity Investments
|
153,282
|
(330)
|
-
|
4,224
|
-
|
157,176
|
(247)
|
Other
Investments
|
844
|
33
|
-
|
(163)
|
-
|
714
|
(130)
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Other
Liabilities
|
$ (178)
|
$ (89)
|
$ -
|
$ -
|
$ -
|
$ (267)
|
$ (89)
|
Gains and
losses (realized and unrealized) included in earnings for the three months ended
December 31, 2008 are reported in net trading profits and other revenues in the
Company’s statements of income as follows:
|
Net
Trading
|
Other
|
Three
Months Ended December 31, 2008 (in 000’s)
|
Profits
|
Revenues
|
|
|
|
Total
gains or losses included in earnings
|
$ (1,379)
|
$ (957)
|
|
|
|
Change
in unrealized gains or losses relating to assets
|
|
|
still
held at reporting date
|
$ (1,383)
|
$
(1,037)
|
Nonrecurring
Fair Value Measurements
Certain
assets and liabilities are not measured at fair value on an ongoing basis but
are subject to fair value measurement in certain circumstances, for example,
when there is evidence of impairment. These instruments are measured at fair
value on a nonrecurring basis and include certain loans that have been deemed
impaired.
When a
loan held for investment is deemed impaired, a creditor measures impairment
based on the present value of expected future cash flows discounted at the
loan’s effective interest rate, except that as a practical expedient, impairment
may be measured based on the fair value of the loan or on the fair value of the
underlying collateral if the loan is collateral supported. As of December 31,
2008, loans deemed to be impaired based on a fair value measurement totaled $7.9
million with the portion deemed to be impaired included in the allowance for
loan losses.
The
following table presents financial instruments by level within the fair value
hierarchy at December 31, 2008, for which a nonrecurring change in fair value
was recorded during the three months ended December 31, 2008.
|
|
|
|
|
|
|
Fair
Value Measurements
|
Total
Gains/
|
(in
000’s)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
(Losses)
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Loans
|
$ -
|
$ -
|
$ 7,864
|
$ 7,864
|
$ -
|
Fair
Value Option
Effective
October 1, 2008, the Company adopted 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. The Company elected not to
adopt the fair value option for any other financial assets and liabilities as
permitted by SFAS 159.
NOTE 4 – TRADING INSTRUMENTS
AND TRADING INSTRUMENTS SOLD BUT NOT YET PURCHASED:
|
December
31, 2008
|
September
30, 2008
|
|
|
Instruments
|
|
Instruments
|
|
|
Sold
but
|
|
Sold
but
|
|
Trading
|
Not
Yet
|
Trading
|
Not
Yet
|
|
Instruments
|
Purchased
|
Instruments
|
Purchased
|
|
(in
000's)
|
|
|
|
|
|
Provincial
and Municipal Obligations
|
$ 37,185
|
$ 720
|
$
101,748
|
$ 79
|
Corporate
Obligations
|
34,877
|
6,159
|
43,738
|
-
|
Government
Obligations
|
16,714
|
998
|
28,896
|
82,062
|
Agencies
|
46,061
|
645
|
60,950
|
25
|
Total
Debt Securities
|
134,837
|
8,522
|
235,332
|
82,166
|
|
|
|
|
|
Derivative
Contracts
|
104,287
|
62,465
|
35,315
|
19,302
|
Equity
Securities
|
19,734
|
11,678
|
42,391
|
22,288
|
Other
Securities
|
816
|
-
|
970
|
|
Total
|
$
259,674
|
$
82,665
|
$
314,008
|
$
123,756
|
Mortgage
backed securities of $53.9 million and $70.1 million at December 31, 2008 and
September 30, 2008, respectively, are included in Corporate Obligations and
Agencies in the table above. Mortgage backed securities sold but not yet
purchased were $600,000 at December 31, 2008. There were no material mortgage
backed securities sold but not yet purchased at September 30, 2008. These are
included in Agencies in the table above. Auction rate securities totaling $6.0
million and $16.8 million at December 31, 2008 and September 30, 2008,
respectively, are included in Municipal Obligations and Equity Securities in the
table above. At both December 31, 2008 and September 30, 2008 these securities
were carried at par, which is management’s estimate of fair value. The Company
believes most of the remainder of these securities will be redeemed at par,
within a reasonable time period, by virtue of call provisions, as issuers
refinance their bonds to reduce the higher levels of debt service resulting from
recent failed auctions. There were no auction rate securities in Trading
Instruments Sold but Not Yet Purchased as of December 31, 2008 or as of
September 30, 2008.
See Note
3 above for information regarding the fair value of Trading Instruments and
Trading Instruments Sold but Not Yet Purchased.
NOTE 5 - AVAILABLE FOR SALE
SECURITIES:
Available
for sale securities are comprised primarily of CMOs and other mortgage-related
debt securities owned by 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, 2008
and 2007.
The
amortized cost and fair values of securities available for sale at December 31,
2008 and September 30, 2008 are as follows:
|
December
31, 2008
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Agency
Mortgage Backed Securities and Collateralized Mortgage
|
|
|
|
|
Obligations
|
$
249,347
|
$
70
|
$ (5,411)
|
$
244,006
|
Non-Agency
Collateralized Mortgage Obligations
|
392,030
|
-
|
(168,198)
|
223,832
|
|
|
|
|
|
Total
RJBank Available for Sale Securities
|
641,377
|
70
|
(173,609)
|
467,838
|
|
|
|
|
|
Other
Securities
|
3
|
3
|
-
|
6
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
641,380
|
$
73
|
$(173,609)
|
$
467,844
|
|
September
30, 2008
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Agency
Mortgage Backed Securities and Collateralized Mortgage
|
|
|
|
|
Obligations
|
$
262,823
|
$
82
|
$ (3,907)
|
$
258,998
|
Non-Agency
Collateralized Mortgage Obligations
|
404,044
|
-
|
(85,116)
|
318,928
|
|
|
|
|
|
Total
RJBank Available for Sale Securities
|
666,867
|
82
|
(89,023)
|
577,926
|
|
|
|
|
|
Other
Securities
|
3
|
4
|
-
|
7
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
666,870
|
$
86
|
$
(89,023)
|
$
577,933
|
See Note
3 above for additional information regarding the fair value of available for
sale securities.
The
following table shows RJBank’s investments’ gross unrealized losses and fair
value, aggregated by investment category and length of time the individual
securities have been in a continuous unrealized loss position, at December 31,
2008:
|
Less
than 12 Months
|
12
Months or More
|
Total
|
|
Estimated
|
|
Estimated
|
|
Estimated
|
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|
(in
000’s)
|
Agency
Mortgage Backed Securities and
|
|
|
|
|
|
|
Collateralized
Mortgage Obligations
|
$126,360
|
$ (2,572)
|
$110,678
|
$ (2,839)
|
$237,038
|
$ (5,411)
|
|
|
|
|
|
|
|
Non-Agency
Collateralized Mortgage
|
|
|
|
|
|
|
Obligations
|
121,093
|
(79,811)
|
101,713
|
(88,387)
|
222,806
|
(168,198)
|
|
|
|
|
|
|
|
Total
Temporarily Impaired Securities
|
$247,453
|
$
(82,383)
|
$212,391
|
$
(91,226)
|
$459,844
|
$(173,609)
|
The
reference point for determining when securities are in a loss position is
quarter end. As such, it is possible that a security had a fair value that
exceeded its amortized cost on other days during the period.
Agency
Mortgage Backed Securities and Collateralized Mortgage Obligations
The
Federal National Mortgage Association or Federal Home Loan Mortgage Corporation,
both of which were placed under the conservatorship of the U.S. Government on
September 7, 2008, guarantees the contractual cash flows of the agency mortgage
backed securities. At December 31, 2008, of the 100 U.S.
government-sponsored enterprise mortgage backed securities in a
continuous unrealized loss position, 51 were in a continuous unrealized loss
position for less than 12 months and 49 for 12 months or more. The unrealized
losses at December 31, 2008 were primarily due to the continued illiquidity and
uncertainty in the markets. The Company does not consider these securities other
than temporarily impaired due to the guarantee provided by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation as to the
full payment of principal and interest.
Non-Agency
Collateralized Mortgage Obligations
As of
December 31, 2008 and including subsequent ratings changes, $133.8 million of
the non-agency collateralized mortgage obligations were rated AAA by two rating
agencies and $90.0 million were rated less than AAA by at least one rating
agency. Of the 28 non-agency collateralized mortgage obligations in a continuous
unrealized loss position, 11 were in a continuous unrealized loss position for
less than 12 months and 17 for 12 months or more. All of the
non-agency securities carry various amounts of credit enhancement, and none are
collateralized with subprime loans. These securities were purchased
based on the underlying loan characteristics such as loan to value (“LTV”)
ratio, credit scores, property type, location and the current level of credit
enhancement. Current characteristics of each security owned such as delinquency
and foreclosure levels, credit enhancement, projected losses and coverage are
reviewed monthly by management. When the level of credit loss coverage for an
individual security deteriorates below a specified level, management expands its
analysis of the security to include detailed cash flow projections based upon
loan level credit characteristics and prepayment assumptions. The
resulting cash flows are reviewed to determine whether the company will receive
all of the originally scheduled cash flows. The resulting projected credit
losses are compared to the current level of credit enhancement to determine
whether the security is expected to experience losses during any future period
and therefore become other-than-temporarily impaired.
The
Company has reviewed these securities in accordance with its accounting policy
for other-than-temporary impairment, which is described in Note 1 of the Notes
to the Consolidated Financial Statements included in the Company’s Annual Report
of Form 10-K for the year ended September 30, 2008. In applying FSP EITF
99-20-1, which amended EITF 99-20, the Company estimated future cash flows for
each security based upon its best estimate of future delinquencies, loss
severity and prepayments to determine the probability of future losses resulting
in other-than-temporary impairment. Since the decline in fair value of the
securities presented in the table above is not attributable to credit quality
but to a significant widening of interest rate spreads across market sectors
related to the continued illiquidity and uncertainty in the markets, and because
the Company has the ability and intent to hold these investments until a fair
value recovery or maturity, it does not consider these securities to be
other-than-temporarily impaired as of December 31, 2008. It is possible that the
underlying loan collateral of these securities will perform worse than current
expectations, which may lead to adverse changes in cash flows on these
securities and potential future other-than-temporary impairment losses. Events
that may trigger material declines in fair values for these securities in the
future would include but are not limited to deterioration of credit metrics,
significantly higher levels of default and severity of loss on the underlying
collateral, deteriorating credit enhancement and loss coverage ratios,
or further illiquidity. In prior periods the Company determined that two
securities in the portfolio were other-than-temporarily impaired. The Company
recognized an additional loss of $571,000 on these two securities due to
additional fair value declines in the three months ended December 31, 2008. No
securities were identified as other-than-temporarily impaired during the three
months ended December 31, 2007.
NOTE 6 – BANK LOANS,
NET:
Bank
client receivables are primarily comprised of loans originated or purchased by
RJBank and include commercial and residential real estate loans, as well as
commercial and consumer loans. These receivables are collateralized by first or
second mortgages on residential or other real property, by other assets of the
borrower, or are unsecured. The following table presents the balance and
associated percentage of each major loan category in RJBank's portfolio,
including loans receivable and loans available for sale:
|
|
|
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
Balance
|
%
|
Balance
|
%
|
|
($
in 000’s)
|
|
|
|
|
|
Commercial
Loans
|
$ 727,459
|
9%
|
$ 725,997
|
10%
|
Real
Estate Construction Loans
|
382,806
|
5%
|
346,691
|
5%
|
Commercial
Real Estate Loans (1)
|
3,861,062
|
50%
|
3,528,732
|
49%
|
Residential
Mortgage Loans
|
2,841,190
|
36%
|
2,599,567
|
36%
|
Consumer
Loans
|
15,014
|
-
|
23,778
|
-
|
|
|
|
|
|
Total
Loans
|
7,827,531
|
100%
|
7,224,765
|
100%
|
|
|
|
|
|
Net
Unearned Income and Deferred Expenses (2)
|
(44,600)
|
|
(41,383)
|
|
Allowance
for Loan Losses
|
(106,140)
|
|
(88,155)
|
|
|
|
|
|
|
|
(150,740)
|
|
(129,538)
|
|
|
|
|
|
|
Loans,
Net
|
$
7,676,791
|
|
$
7,095,227
|
|
(1)
|
Loans
wholly or partially secured by real estate. Of this amount, $612.8 million
and $546.7 million is wholly or substantially secured by lien(s) on real
estate as of December 31, 2008 and September 30, 2008, respectively. The
remainder is partially secured by real estate, the majority of which are
also secured by other assets of the borrower, and includes loans to
certain real estate investment
trusts.
|
(2)
|
Includes
purchase premiums, purchase discounts, and net deferred origination fees
and costs.
|
At
December 31, 2008 and September 30, 2008, RJBank had $50 million and $1.7
billion, respectively, in Federal Home Loan Bank of Atlanta (“FHLB”) advances
secured by a blanket lien on RJBank's residential mortgage loan portfolio. See
Note 9 of the Notes to the Condensed Consolidated Financial Statements for more
information regarding the FHLB advances.
At
December 31, 2008 and September 30, 2008, RJBank had $249,000 and $524,000 in
loans available for sale, respectively. RJBank's gain from the sale of
originated residential loans available for sale was $49,000 and $97,000 for the
three months ended December 31, 2008 and 2007, respectively.
Certain
officers, directors, and affiliates, and their related entities were indebted to
RJBank for $1.9 million at December 31, 2008 and September 30, 2008,
respectively. All such loans were made in the ordinary course of
business.
Loan
interest and fee income for the three months ended December 31, 2008 and 2007
was $99.6 million and $84.3 million, respectively.
The
following table shows the contractual maturities of RJBank’s loan portfolio at
December 31, 2008, including contractual principal repayments. This table does
not, however, include any estimates of prepayments. These prepayments could
significantly shorten the average loan lives and cause the actual timing of the
loan repayments to differ from those shown in the following table:
|
Due
in
|
|
|
1
Year or Less
|
1
Year – 5 Years
|
>5
Years
|
Total
|
|
(in
000’s)
|
|
|
|
|
|
Commercial
Loans
|
$ 2,602
|
$ 465,861
|
$ 258,996
|
$ 727,459
|
Real
Estate Construction Loans
|
97,394
|
269,286
|
16,126
|
382,806
|
Commercial
Real Estate Loans (1)
|
184,336
|
3,026,496
|
650,230
|
3,861,062
|
Residential
Mortgage Loans
|
692
|
7,181
|
2,833,317
|
2,841,190
|
Consumer
Loans
|
13,933
|
1,081
|
-
|
15,014
|
|
|
|
|
|
Total
Loans
|
$
298,957
|
$3,769,905
|
$
3,758,669
|
$
7,827,531
|
(1)
|
Loans
wholly or partially secured by real estate. Of this amount, $612.8 million
is wholly or substantially secured by lien(s) on real estate as of
December 31, 2008. The remainder is partially secured by real estate, the
majority of which are also secured by other assets of the borrower, and
includes loans to certain real estate investment
trusts.
|
RJBank
classifies loans as nonperforming when full and timely collection of interest or
principal becomes uncertain or when they are 90 days past due. The following
table shows the comparative data for nonperforming loans and
assets:
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
($
in 000’s)
|
|
|
|
Nonaccrual
Loans
|
$
57,189
|
$
52,033
|
Accruing
Loans Which are 90 Days or more
|
|
|
Past
Due
|
6,734
|
6,131
|
|
|
|
Total
Nonperforming Loans
|
63,923
|
58,164
|
|
|
|
Real
Estate Owned and Other
|
|
|
Repossessed
Assets, Net
|
12,827
|
4,144
|
|
|
|
Total
Nonperforming Assets, Net
|
$
76,750
|
$
62,308
|
|
|
|
Total
Nonperforming Assets as a % of
|
|
|
Total
Loans, Net and Other Real Estate Owned, Net
|
1.00%
|
0.88%
|
The gross
interest income related to non-performing loans, which would have been recorded
had these loans been current in accordance with their original terms totaled
$1.3 million for the quarter ended December 31, 2008 or $2.5 million since
origination. The interest income recognized on nonaccrual loans for the quarter
ended December 31, 2008 was $32,000. As of December 31, 2008, there were five
loans which RJBank considers to be impaired in the corporate loan portfolio
totaling $37.6 million included in nonaccrual loans. In addition, there were two
loans which RJBank considers to be impaired in the residential loan portfolio
for which $474,000 is included in nonaccrual loans. The Company has established
reserves totaling $7.5 million against these seven loans. The average balance of
the impaired loans was $36.6 million for the three months ended December 31,
2008. RJBank considers a loan to be impaired when it is probable that it will be
unable to collect the scheduled payments of principal or interest when due
according to the terms of the loan agreement. Of the $3.1 million in charge-offs
related to corporate loans during the quarter ended December 31, 2008, $1.6
million is related to these impaired loans and $1.5 related to a loan secured by
property that was subsequently foreclosed and carried in other real estate
owned. As of December 31, 2008, four of these impaired loans totaling $14.9
million were classified as a troubled debt restructuring. At the time of this
restructuring, RJBank increased its commitment to one of the borrowers by
$894,000. As of December 31, 2008 RJBank had commitments to lend an additional
$1.6 million to borrowers whose existing loans were classified as troubled debt
restructurings.
Changes
in the allowance for loan losses at RJBank were as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2008
|
2007
|
|
($
in 000’s)
|
|
|
|
Allowance
for Loan Losses,
|
|
|
Beginning
of Period
|
$ 88,155
|
$
47,022
|
Provision
For Loan Losses
|
24,870
|
12,820
|
Charge-Offs:
|
|
|
Commercial
Real Estate Loans
|
(3,141)
|
(372)
|
Residential
Mortgage Loans
|
(3,744)
|
(214)
|
|
|
|
Total
Charge-Offs
|
(6,885)
|
(586)
|
|
|
|
Total
Recoveries
|
-
|
-
|
|
|
|
Net
Charge-Offs
|
(6,885)
|
(586)
|
|
|
|
Allowance
for Loan Losses,
|
|
|
End
of Period
|
$
106,140
|
$
59,256
|
|
|
|
Net
Charge-Offs to Average Bank
|
|
|
Loans,
Net Outstanding
|
0.09%
|
0.01%
|
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.
Additionally, every residential and consumer loan over 60 days
past due is reviewed by RJBank personnel monthly and documented in a written
report detailing delinquency information, balances, collection status, appraised
value, and other data points. RJBank senior management meets monthly to
discuss the status, collection strategy and charge-off/write-down
recommendations on every residential or consumer loan over 60 days past
due. Generally, loans are charged off when determined by management to be
uncollectible. For commercial loans management evaluates all sources of
repayment, including the estimated liquidation value of collateral pledged, to
determine an amount to be charged off. Commercial real estate and real
estate construction loans are charged off to adjusted collateral value based
upon current appraisals reduced by anticipated selling costs. Residential
loans and consumer loans secured by real estate are charged-off to updated
collateral valuations adjusted for anticipated selling expenses.
In
addition to the allowance for loan losses shown net of Bank Loans, Net, RJBank
had reserves for unfunded lending commitments included in Trade and Other
Payables of $8.3 million and $9.2. million at December 31, 2008 and September
30, 2008, respectively.
RJBank’s
net interest income after provision for loan losses for the quarter ended
December 31, 2008 and 2007 was $69.6 million and $22.4 million,
respectively.
RJBank
originates and purchases portfolios of loans that may or may not include
interest only loans that subject the borrower to payment increases over the life
of the loan. RJBank does not originate or purchase residential loans that have
terms that permit negative amortization features or are option adjustable rate
mortgages. RJBank also does not originate or purchase loans with deeply
discounted teaser rates.
Loans
where borrowers may be subject to payment increases include adjustable rate
mortgage loans with terms that initially require payment of interest only;
payments may increase significantly when the interest-only period ends and the
loan principal begins to amortize. At December 31, 2008 and September 30, 2008,
these loans totaled $2.0 billion. These loans are underwritten based on a
variety of factors including the borrower’s credit history, debt to income
ratio, employment, the loan-to-value (“LTV”) ratio, and the borrower’s
disposable income and cash reserves. In instances where the borrower is of lower
credit standing, the loans are typically underwritten to have a lower LTV ratio
and/or other mitigating factors. Loans with aggregate balances totaling $237.3
million at December 31, 2008 were scheduled to re-price within the next six
months. A large percentage of these loans were projected to adjust to a lower
payment than the current payment, and this percentage is likely to increase in a
falling rate environment.
Management
does not believe these loans represent an unusual concentration of risk, as
evidenced by low net charge-offs and past due loans. All of these loans are
secured by mortgages on one-to-four family residential real estate and are
diversified geographically. Interest-only loans are underwritten at the time of
application or purchased based on the amortizing payment amount, and borrowers
are required to meet stringent parameters regarding debt ratios, LTV levels, and
credit score.
High LTV
loans include all mortgage loans where the LTV is greater than or equal to 90%
and the borrower has not provided other credit support or purchased private
mortgage insurance (“PMI”). At December 31, 2008 and September 30, 2008, RJBank
held $461,000 and $472,000, respectively, in total outstanding balances for
these loans.
NOTE 7 - VARIABLE INTEREST
ENTITIES (“VIEs”):
Under the
provisions of FIN 46R the Company has determined that Raymond James Employee
Investment Funds I and II (the “EIF Funds”), certain entities in which Raymond
James Tax Credit Funds, Inc. (“RJTCF”) owns variable interests, various
partnerships involving real estate, and a trust fund established for employee
retention purposes are VIEs. Of these, the Company has determined
that the EIF Funds, certain tax credit fund partnerships/LLCs, and the trust
fund should be consolidated in the financial statements as the Company is the
primary beneficiary.
The EIF
Funds are limited partnerships, for which the Company is the general partner,
that invest in the merchant banking and private equity activities of the Company
and other unaffiliated venture capital limited partnerships. The EIF Funds were
established as compensation and retention measures for certain qualified key
employees of the Company. The Company makes non-recourse loans to these
employees for two-thirds of the purchase price per unit. The loans and
applicable interest are to be repaid based on the earnings of the EIF Funds.
Given the EIF Funds’ purpose and design, the Company is deemed to be the
entity/person most closely associated with these VIEs. As a result, the Company
is deemed to be the primary beneficiary, and accordingly, consolidates the EIF
Funds, which had combined assets of approximately $19.1 million at December 31,
2008. None of those assets act as collateral for any obligations of the EIF
Funds. The Company's exposure to loss is limited to its contributions and the
non-recourse loans funded to the employee investors, for which their partnership
interests serve as collateral. At December 31, 2008 that exposure is
approximately $3.4 million.
RJTCF is
a wholly owned subsidiary of RJF and is the managing member or general partner
in approximately 53 separate tax credit housing funds having one or more
investor members or limited partners. These tax credit housing funds are
organized as limited liability companies or limited partnerships for the purpose
of investing in limited partnerships which purchase and develop low income
housing properties qualifying for tax credits. As of December 31, 2008, 51 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
99%. The Company’s determination of the primary beneficiary of each VIE requires
judgment and is based on an analysis of all relevant facts and circumstances,
including: (1) the existence of a principal-agency relationship between investor
member(s) and managing member, (2) the relationship and significance of the
activities of the VIE to each member, (3) each member’s exposure to the expected
losses of the VIE, and (4) the design of the VIE. In the design of tax credit
fund VIEs, the overriding premise is that the investor members invest solely for
tax attributes associated with the portfolio of low income housing properties
held by the VIE, while the managing member, RJTCF, is responsible for overseeing
the operations of the VIE. In instances where there is a single investor member
that holds 50% or more of the total investor member tax attributes, the managing
member, RJTCF, is not deemed to be the primary beneficiary of such VIEs given
that one investor member has the majority of the exposure to the expected losses
of the VIE. Conversely, for those tax credit fund VIEs where there is not one
single investor member holding a 50% or more interest in the tax attributes,
then the managing member, RJTCF, is deemed to be the primary beneficiary of such
tax credit fund VIEs.
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 $272 million at December 31, 2008. None of
those assets act as collateral for any obligations of these funds. The Company's
exposure to loss is limited to its investments in, advances to, and receivables
due from these funds and at December 31, 2008, that exposure is approximately
$30.2 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, 2008, that exposure
is approximately $7.5 million.
The two
remaining tax credit housing funds that have been determined not to be VIEs are
wholly owned by RJTCF and are included in the Company’s consolidated financial
statements. At December 31, 2008, only one of these funds had any material
activity. These funds typically hold interests in certain tax credit limited
partnerships for less than 90 days, or until beneficial interest in the fund is
sold to third-parties. These funds had assets of approximately $0.4 million at
December 31, 2008, which is also the Company’s exposure to losses as of December
31, 2008.
See Note
12 of the Notes to Condensed Consolidated Financial Statements for information
regarding the Company’s commitments related to RJTCF.
As of
December 31, 2008, the Company has a variable interest in several limited
partnerships involved in various real estate activities, in which a subsidiary
is the general partner. Given that the Company is not entitled to receive the
majority of any residual returns and does not have the ability to significantly
influence the financial results of these partnerships, the Company is not the
primary beneficiary of these VIEs and accordingly does not consolidate these
partnerships. These partnerships have assets of approximately $12 million at
December 31, 2008. The carrying value of the Company's investment in these
partnerships is not material at December 31, 2008.
One of
the Company’s restricted stock plans is associated with a trust fund which was
established through the Company’s wholly owned Canadian subsidiary. This trust
fund was established and funded to enable the trust fund to acquire Company
common stock in the open market to be used to settle restricted stock units
granted as a retention vehicle for certain employees of the Canadian subsidiary.
Given this trust fund’s purpose and design, the Company, through its Canadian
subsidiary, is deemed to be the entity/person most closely associated with this
VIE. As a result, 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 $12.6 million at December 31, 2008. None of those
assets are specifically pledged as collateral for any obligations of the trust
fund. The Company's exposure to loss is limited to its contributions to the
trust fund and at December 31, 2008, that exposure is approximately $12.6
million.
NOTE 8 - BANK
DEPOSITS:
Bank
deposits include Negotiable Order of Withdrawal (“NOW”) accounts, demand
deposits, savings and money market accounts and certificates of deposit. The
following table presents a summary of bank deposits at December 31, 2008 and
September 30, 2008:
|
December 31, 2008
|
September
30, 2008
|
|
|
Weighted
|
|
Weighted
|
|
|
Average
|
|
Average
|
|
Balance
|
Rate
(1)
|
Balance
|
Rate
(1)
|
|
($
in 000's)
|
|
|
|
|
|
Bank
Deposits:
|
|
|
|
|
NOW
Accounts
|
$ 4,857
|
0.01%
|
$ 3,402
|
0.30%
|
Demand
Deposits (Non-Interest Bearing)
|
2,597
|
-
|
2,727
|
-
|
Savings
and Money Market Accounts
|
8,559,798
|
0.01%
|
8,520,121
|
1.58%
|
Certificates
of Deposit
|
225,730
|
4.10%
|
248,207
|
4.12%
|
Total
Bank Deposits
|
$8,792,982
|
0.12%
|
$8,774,457
|
1.65%
|
(1)
Weighted average rate calculation is based on the actual deposit balances at
December 31, 2008 and September 30, 2008, respectively.
RJBank
had deposits from RJF executive officers and directors of $650,000 and $401,000
at December 31, 2008 and September 30, 2008, respectively.
Scheduled
maturities of certificates of deposit and brokered certificates of deposit at
December 31, 2008 and September 30, 2008 were as follows:
|
December 31, 2008
|
September
30, 2008
|
|
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
|
$
13,652
|
$ 29,784
|
$
12,068
|
$ 25,820
|
Over
Three Through Six Months
|
5,604
|
20,344
|
12,971
|
27,996
|
Over
Six Through Twelve Months
|
12,035
|
32,827
|
12,336
|
38,783
|
Over
One Through Two Years
|
13,044
|
35,703
|
14,592
|
39,672
|
Over
Two Through Three Years
|
10,942
|
22,621
|
11,520
|
23,039
|
Over
Three Through Four Years
|
2,109
|
8,630
|
2,442
|
8,853
|
Over
Four Years
|
8,245
|
10,190
|
8,145
|
9,970
|
Total
|
$
65,631
|
$
160,099
|
$
74,074
|
$
174,133
|
Interest
expense on deposits is summarized as follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2008
|
2007
|
|
(in
000's)
|
|
|
|
Certificates
of Deposit
|
$ 2,448
|
$ 2,816
|
Money
Market, Savings and
|
|
|
NOW
Accounts
|
12,635
|
60,620
|
Total
Interest Expense on Deposits
|
$
15,083
|
$
63,436
|
NOTE 9 – LOANS
PAYABLE:
Loans
payable at December 31, 2008 and September 30, 2008 are presented
below:
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
(in
000's)
|
Short-Term
Borrowings:
|
|
|
Borrowings
on Lines of Credit
|
$ 50,000
|
$ 200,000
|
Current
Portion of Mortgage Notes Payable
|
2,694
|
2,891
|
Federal
Home Loan Bank Advances
|
-
|
1,900,000
|
Total
Short-Term Borrowings
|
52,694
|
2,102,891
|
|
|
|
Long-Term
Borrowings:
|
|
|
Mortgage
Notes Payable
|
58,584
|
59,333
|
Federal
Home Loan Bank Advances
|
50,000
|
50,000
|
Total
Long-Term Borrowings
|
108,584
|
109,333
|
|
|
|
Total
Loans Payable
|
$
161,278
|
$
2,212,224
|
At
December 31, 2008, the Company maintained three 364-day committed and several
uncommitted financing arrangements denominated in U.S. dollars and one
uncommitted line of credit denominated in Canadian dollars (“CDN”). At December
31, 2008, the aggregate domestic facilities were $945.1 million and the Canadian
line of credit was CDN $40 million. Lenders are under no obligation to lend to
the Company under uncommitted lines and there have been several recent instances
where they were unwilling to do so.
On
January 8, 2009, RJF amended its revolving credit agreement with JPMorgan Chase
Bank and three other commercial banks. The amendment extended the facility
termination date until January 22, 2009 and continued the aggregate commitment
of the lenders at $50 million, the amount of loans then currently outstanding
under the agreement. RJF repaid the outstanding loan balance on the facility
termination date. On February 6, 2009, RJF closed on a new $100 million
unsecured revolving credit agreement. Drawings on this line are subject to the
Company’s receipt of approval from the U.S. Treasury to participate in the
Capital Purchase Program.
Raymond
James & Associates, Inc. (“RJA”) maintains a $50 million committed secured
line of credit and a $100 million committed tri-party repurchase arrangement,
each with a commercial bank. At December 31, 2008, there were collateralized
financings of $40 million outstanding under the $100 million tri-party
repurchase arrangement. These borrowings are included in Securities Sold Under
Agreements to Repurchase on the Condensed Consolidated Statement of Financial
Condition and are collateralized by RJA-owned securities with a market value of
approximately $64 million. RJA’s committed facilities with the two commercial
banks are subject to 0.15% and 0.125% per annum facility fees,
respectively.
In
addition, RJA maintains $235.1 million in uncommitted secured facilities. At
December 31, 2008, RJA also maintained $360 million in uncommitted tri-party
repurchase facilities with related parties, including an arrangement with
Raymond James Financial Services, Inc. (“RJFS”). RJBank had provided $300
million of those uncommitted arrangements to RJA, which was guaranteed by RJF.
Approximately $240 million was available only until January 30, 2009 under an
exception from affiliate lending regulations granted by the Office of Thrift
Supervision (“OTS”). RJBank has applied for an extension from the OTS until
October 30, 2009, since such an extension was granted by the Federal Reserve on
January 30, 2009. Collateral for loans under secured lines of credit and
securities sold under repurchase agreements (collectively “collateral”) are
RJA-owned and/or client margin securities, as permitted by regulatory
requirements. The required market value of the collateral ranges from 102% to
125% of the cash provided. Although RJA had $510 million committed or related
party collateralized financing arrangements available at December 31, 2008,
RJA’s Fixed Income inventory available to serve as collateral is typically
substantially less. Unsecured loan facilities available to RJA total $150
million of uncommitted unsecured lines of credit.
The
interest rates for all of the Company’s financing facilities are variable and
are based on the Fed Funds rate, LIBOR, or Canadian prime rate as applicable.
Unlike committed credit facilities, uncommitted lenders are not subject to any
formula determining the interest rates they may charge on a loan. For the three
months ended December 31, 2008, interest rates on the financing facilities
ranged from (on a 360 days per year basis) 0.59% to 5.94%. For the three months
ended December 31, 2007, those interest rates ranged from 4.75% to
6.13%.
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: one in Turkey totaling $8 million and one
in Argentina for $9 million. At December 31, 2008, there were no outstanding
balances on the settlement lines in Turkey or Argentina. At December 31, 2008
the aggregate unsecured settlement lines of credit available were $4.4 million,
and there were no outstanding balances on these lines. The interest rates for
these lines of credit ranged from 6% to 25%. On December 5, 2008, the Company’s
Turkish joint venture ceased operations. See Note 12 of the Notes to the
Condensed Consolidated Financial Statements for more information.
RJBank
had $50 million in FHLB advances outstanding at December 31, 2008, which was
comprised of several long-term, fixed rate advances. The weighted average
interest rate on these fixed rate advances at December 31, 2008 was 5.19%. The
outstanding FHLB advances mature between September 2010 and February 2011. The
maximum amount of FHLB advances outstanding at any month-end during the three
months ended December 31, 2008 and 2007 was $50 million and $69 million,
respectively. The average amounts of FHLB advances outstanding and the weighted
average interest rate thereon for the three months ended December 31, 2008 and
2007 were $50 million at a rate of 5.19% and $58.2 million at a rate of 5.32%,
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, 2008 to a floating rate at one or
more future dates. RJBank has the right to prepay these advances without penalty
if the FHLB exercises its right. The September 30, 2008 FHLB advances included
$1.9 billion in overnight advances to meet point in time regulatory balance
sheet composition requirements related to its qualifying as a thrift
institution. These advances were repaid on October 1, 2008.
Mortgage
notes payable evidences a mortgage loan for the financing of the Company's home
office complex. The mortgage loan bears interest at 5.7% and is secured by land,
buildings, and improvements with a net book value of $67.1 million at December
31, 2008.
NOTE 10 – DERIVATIVE
FINANCIAL INSTRUMENTS:
The
Company enters into interest rate swaps and futures contracts as part of its
fixed income business to facilitate customer transactions and to hedge a portion
of the Company’s trading inventory. These positions are marked to fair value
with the gain or loss and the related interest recorded in Net Trading Profits
within the statement of income for the period. Any collateral exchanged as part
of the swap agreement is recorded in Broker Receivables and Payables in the
statement of financial condition for the period.
Under
FASB Interpretation (“FIN”) No. 39, “Offsetting of Amounts Related to Certain
Contracts” (“FIN No. 39”), the Company elects to net-by-counterparty the fair
value of interest rate swap contracts entered into by the Fixed Income Trading
group. Certain contracts contain a legally enforceable master netting
arrangement and therefore, the fair value of those swap contracts are netted by
counterparty in the Condensed Consolidated Statements of Financial Condition. As
of October 1, 2008, the Company adopted FASB Staff Position (“FSP”) FIN No.
39-1, “Amendment of FASB Interpretation No. 39” (“FSP FIN No. 39-1”). As the
Company elects to net-by-counterparty the fair value of interest rate swap
contracts, it also must now net-by-counterparty any collateral exchanged as part
of the swap agreement. This cash collateral is recorded net-by-counterparty in
Trading Instruments or Trading Instruments Sold but Not Yet Purchased in the
Condensed Consolidated Statements of Financial Condition for the period
presented.
The
Company had outstanding interest rate derivative contracts with notional amounts
of $3.7 billion at both December 31, 2008 and September 30, 2008. 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, 2008 greatly exceeds
the possible losses that could arise from such transactions. The net market
value of all open derivative asset positions at December 31, 2008 and September
30, 2008 was $104.3 million, (including cash collateral of $18.3 million) and
$35.3 million (net of cash collateral of $4.1 million), respectively. The net
market value of all open derivative liability positions at December 31, 2008 and
September 30, 2008 was $62.5 million, (including cash collateral of $13.5
million) and $19.3 million (net of cash collateral of $4.0 million),
respectively.
To
mitigate interest rate risk in a significantly rising rate environment, RJBank
purchased three-year term interest rate caps with high strike rates (more than
300 basis points higher than current rates) during the year ended September 30,
2008 that will increase in value if interest rates rise and entitle RJBank to
cash flows if interest rates rise above strike rates. These positions are
recorded at fair value with any changes in fair value recorded in Other Revenue
within the statement of income for the period. At December 31, 2008 and
September 30, 2008, the notional amount of the interest rate caps held by RJBank
was $1.5 billion. The fair value at December 31, 2008 and September 30, 2008 was
$89,000 and $1.3 million, respectively. The Company’s maximum loss
exposure under these interest rate cap contracts was $1.8 million at December
31, 2008.
The
Company is exposed to credit losses in the event of nonperformance by the
counterparties to its interest rate derivative agreements. The Company performs
a credit evaluation of counterparties prior to entering into derivative
transactions and monitors their credit standings. Currently, the Company
anticipates that all counterparties will be able to fully satisfy their
obligations under those agreements. The Company may require collateral from
counterparties to support these obligations as established by the credit
threshold specified by the agreement and/or as a result of monitoring the credit
standing of the counterparties. The Company is also exposed to interest rate
risk related to its interest rate swap agreements. The Company monitors exposure
in its derivatives subsidiary daily based on established limits with respect to
a number of factors, including interest rate, spread, ratio and basis, and
volatility risks. These exposures are monitored both on a total portfolio basis
and separately for selected maturity periods.
NOTE 11 - INCOME
TAXES
As of
December 31, 2008 and September 30, 2008 the liability for unrecognized tax
benefits was $5.1 million and $4.9 million, respectively. The total amount of
unrecognized tax benefits that, if recognized, would affect the effective tax
rate for income from continuing operations was $3.7 million and $3.5 million at
December 31, 2008 and September 30, 2008, respectively.
The
Company recognizes the accrual of interest and penalties related to income tax
matters in interest expense and other expense, respectively. As of
December 31, 2008 and September 30, 2008, accrued interest and penalties
included in the unrecognized tax benefits liability were approximately $1.6
million and $1.5 million, respectively.
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 Item 1, “Legal Proceedings” of Part II below for additional
information).
The
Company files income tax returns in the U. S. federal jurisdiction and various
states, local and foreign jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or foreign income tax
examination by tax authorities for years prior to 2008 for federal tax returns,
2004 for state and local tax returns and 2000 for foreign tax returns. During
this quarter, the Company settled a State of Maine audit for the years 2002
through 2006. As a result, the Company paid approximately $70,000 that was
previously provided for under FIN 48 as an unrecognized tax benefit. During this
quarter, the fiscal year 2004 federal income tax return examined under the IRS
Compliance Assurance Program was finalized resulting in a refund. The
2008 federal income tax return is currently being examined under the IRS
Compliance Assurance Program. This program accelerates the examination of key
issues in an attempt to resolve them before the tax return is filed. Certain
state and local returns are also currently under various stages of audit. The
2008 IRS audit and state audits in process are expected to be completed in
fiscal year ending 2009. It is anticipated that the unrecognized tax benefits
may increase by an estimated $0.3 million over the next 12 months.
NOTE 12 – COMMITMENTS AND
CONTINGENCIES:
The
Company is the lessor in a leveraged commercial aircraft transaction with
Continental Airlines, Inc. (“Continental"). The Company's ability to
realize its expected return is dependent upon this airline’s ability to fulfill
its lease obligation. In the event that this airline defaults on its
lease commitment and the trustee for the debt holders is unable to re-lease or
sell the plane with adequate terms, the Company would suffer a loss of some or
all of its investment. The carrying amount of this leveraged lease with
Continental was approximately $8.8 million as of December 31, 2008. The
Company's equity investment represented 20% of the aggregate purchase price; the
remaining 80% was funded by public debt issued in the form of equipment trust
certificates. The residual value of the aircraft at the end of the lease term of
approximately 17 years was originally projected to be 15% of the original cost
and has not been adjusted since inception. This lease expires in May
2014.
Although
Continental remains current on its lease payments to the Company, the inability
of Continental to make its lease payments, or the termination or modification of
the lease through a bankruptcy proceeding, could result in the write-down of the
Company's investment and the acceleration of certain income tax
payments. The Company continues to monitor this lessee for specific
events or circumstances that would increase the likelihood of a default on
Continental’s obligations under this lease.
RJBank
had $50 million in FHLB advances outstanding at December 31, 2008, comprised of
several long-term, fixed rate advances. RJBank had $1.7 billion in immediate
credit available from the FHLB on December 31, 2008 and total available credit
of 40% of total assets, with the pledge of additional collateral to the FHLB.
See Note 9 of the Notes to the Condensed Consolidated Financial Statements for
more information. At December 31, 2008 and September 30, 2008, no securities
other than FHLB stock were pledged by RJBank as collateral with the FHLB for
advances.
As of
December 31, 2008, RJBank had entered into short-term reverse repurchase
agreements totaling $1.1 billion with four counterparties, with individual
exposures of $400 million, $300 million, $250 million and $100 million. Although
RJBank is exposed to risk that these counterparties may not fulfill their
contractual obligations, the Company believes the risk of loss is minimal due to
the U.S. Treasury securities received as collateral, the creditworthiness of
these counterparties, which is closely monitored, and the short duration of
these agreements.
As of
September 30, 2008, RJBank had not settled purchases of $8.5 million in
syndicated loans (included in Bank Loans, net) due to sellers’ delays in
finalizing settlement, all of which had settled prior to December 31, 2008. As
of December 31, 2008, there were no purchases of syndicated loans that had not
settled.
RJBank
provides to its affiliate, Raymond James Capital Services, Inc. (“RJCS”), on
behalf of certain corporate borrowers, a guarantee of payment in the event of
the borrower’s default for exposure under interest rate swaps entered into with
RJCS. At December 31, 2008 and September 30, 2008, the aggregate exposure under
these guarantees was $14.5 million and $2.5 million, respectively, which was
underwritten as part of RJBank’s larger corporate credit relationships. The
estimated total potential exposure under these guarantees is $16.2 million at
December 31, 2008.
See Note
16 of the Notes to Condensed Consolidated Financial Statements with respect to
RJBank’s and Raymond James Multi-Family Finance, Inc.’s commitments to extend
credit and other RJBank credit-related off-balance sheet financial instruments
such as standby letters of credit and loan purchases.
As part
of an effort to increase brand awareness, the Company entered into a stadium
naming rights contract in July 1998. The contract expires in 2016 and has a 4%
annual escalator. Expenses of $796,000 and $765,000 were recognized in the three
months ended December 31, 2008 and 2007, respectively.
In the
normal course of business, the Company enters into underwriting commitments.
Transactions relating to such commitments of RJA that were open at December 31,
2008 and were subsequently settled had no material effect on the consolidated
financial statements as of that date. There were no material transactions
relating to such commitments of Raymond James Ltd. (“RJ Ltd.”) that were
recorded and open at December 31, 2008.
The
Company utilizes client marginable securities to satisfy deposits with clearing
organizations. At December 31, 2008, the Company had client margin securities
valued at $113.5 million pledged with a clearing organization to meet the point
in time requirement of $63.9 million. At September 30, 2008, the Company had
client margin securities valued at $210 million pledged with a clearing
organization to meet the point in time requirement of $139.9
million.
The
Company has committed a total of $60.3 million, in amounts ranging from $200,000
to $5 million, to 44 different independent venture capital or private equity
partnerships. As of December 31, 2008, the Company had invested $37.3 million of
that amount and had received $30.5 million in distributions. Additionally, the
Company controls the general partner in two internally sponsored private equity
limited partnerships to which it has committed $14 million. Of that amount, the
Company has invested $13.7 million and has received $10 million in distributions
as of December 31, 2008. The Company is not the controlling general partner in
another internally sponsored private equity limited partnership to which it has
committed $30 million. As of December 31, 2008, the Company has invested $3.8
million of that amount and has not received any distributions.
The
Company is the general partner in EIF Funds. These limited partnerships invest
in the merchant banking and private equity activities of the Company and other
unaffiliated venture capital limited partnerships. The EIF Funds were
established as compensation and retention measures for certain qualified key
employees of the Company. At December 31, 2008, the funds have unfunded
commitments of $1.8 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, 2008, the approximate market values of collateral received that can
be repledged by the Company, were:
Sources
of Collateral (In 000's):
|
|
Securities
Purchased Under Agreements to Resell and Other
|
|
Collateralized
Financings
|
$ 1,312,689
|
Securities
Received in Securities Borrowed vs. Cash Transactions
|
556,197
|
Collateral
Received for Margin Loans
|
1,100,699
|
Total
|
$ 2,969,585
|
During
the quarter, certain collateral was repledged. At December 31, 2008, the
approximate market values of this portion of collateral and financial
instruments owned that were repledged by the Company, were:
Uses
of Collateral and Trading Securities (In 000's):
|
|
Securities
Purchased Under Agreements to Resell and Other
|
|
Collateralized
Financings
|
$ -
|
Securities
Delivered in Securities Borrowed vs. Cash Transactions
|
529,807
|
Collateral
Received for Margin Loans
|
113,515
|
Total
|
$ 643,322
|
The
Company has from time to time authorized performance guarantees for the
completion of trades with counterparties in Argentina and Turkey. At December
31, 2008, there were no outstanding performance guarantees in Argentina or
Turkey.
See Note
9 of the Notes to Condensed Consolidated Financial Statements for information
regarding the Company’s other financing arrangements.
The
Company guarantees the existing mortgage debt of RJA of approximately $61.3
million. The Company guarantees interest rate swap obligations of RJCS. The
Company has also committed to lend to RJTCF, or guarantee obligations in
connection with RJTCF’s low income housing development/rehabilitation and
syndication activities, aggregating up to $125 million upon request, subject to
certain limitations as well as annual review and renewal. RJTCF borrows in order
to invest in partnerships which purchase and develop properties qualifying for
tax credits (“project partnerships”). These investments in project partnerships
are then sold to various tax credit funds, which have third party investors, and
for which RJTCF serves as the managing member or general partner. RJTCF
typically sells these investments within 90 days of their acquisition, and the
proceeds from the sales are used to repay RJTCF’s borrowings. During the first
quarter of fiscal year 2009, a subsidiary of the Company purchased 58 units in
one of RJTCF’s current fund offerings for a capital contribution of up to $58
million. At December 31, 2008, $30 million of capital had been contributed by
the subsidiary to this fund. The subsidiary expects to resell these interests to
other investors; however, the holding period of these interests could be much
longer than 90 days. In addition to the 58 unit interest purchased, RJTCF
provided certain specific performance guarantees to the investors of this fund.
The Company has guaranteed the $58 million capital contribution obligation as
well as the specified performance guarantees provided by RJTCF to the fund’s
investors. The unfunded capital contribution obligation is $28 million as of
December 31, 2008. 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, 2008, cash funded to invest
in either loans or investments in project partnerships (excluding the 58 unit
purchase mentioned previously) was $10.3 million. In addition, at December 31,
2008, RJTCF is committed to additional future fundings (excluding the 58 unit
purchase mentioned previously) of $300,000 related to project partnerships that
have not yet been sold to various tax credit funds. The Company and RJTCF also
issue certain guarantees to various third parties related to project
partnerships, interests in which have been or are expected to be sold to one or
more tax credit funds under RJTCF’s management. In some instances, RJTCF is not
the primary guarantor of these obligations which aggregate to a cumulative
maximum obligation of approximately $14.9 million as of December 31, 2008.
Through RJTCF’s wholly owned lending subsidiary, Raymond James Multi-Family
Finance, Inc., certain construction loans or loans of longer duration
(“permanent loans”) may be made directly to certain project partnerships. As of
December 31, 2008 nine such construction loans are outstanding with an unfunded
balance of $13.1 million available for future draws on such loans. Similarly,
five permanent loan commitments are outstanding as of December 31, 2008. Each of
these commitments will only be funded if certain conditions are achieved by the
project partnership and in the event such conditions are not met, generally
expire two years after their issuance. The total amount of such unfunded
permanent loan commitments as of December 31, 2008 is $5.9 million.
The
Company entered into two agreements, both with Raymond James Trust, National
Association (“RJT”) and one with the Office of the Controller of the Currency
(“OCC”), as a condition to RJT’s conversion in January, 2008 from a state to a
federally chartered institution. 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.
As a
result of the extensive regulation of the securities industry, the Company's
broker-dealer subsidiaries are subject to regular reviews and inspections by
regulatory authorities and self regulatory organizations, which can result in
the imposition of sanctions for regulatory violations, ranging from non-monetary
censure to fines and, in serious cases, temporary or permanent suspension from
business. In addition, from time to time regulatory agencies and self-regulatory
organizations institute investigations into industry practices, which can also
result in the imposition of such sanctions.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately $6.8 million by the Turkish tax
authorities. The authorities applied a significantly different methodology than
in the prior year’s audit which the Turkish tax court and Council of State
affirmed. RJY is vigorously contesting most aspects of this assessment and has
sought reconsideration of the Turkish Council of State. The Turkish tax
authorities, utilizing the 2001 methodology, assessed RJY $5.7 million for 2002,
which is also being challenged. Audits of 2003 and 2004 are anticipated and
their outcome is unknown in light of the change in methodology and the pending
litigation. On October 24, 2008, RJY was notified by the Capital Markets Board
of Turkey that the technical capital inadequacy resulting from RJY’s provision
for this case required an additional capital contribution, and as a result, RJY
halted all trading activities. On December 5, 2008, RJY ceased operations and
subsequently filed for protection under Turkish bankruptcy laws. The Company has
recorded a provision for loss in its condensed consolidated financial statements
for its full equity interest in this joint venture. As of December 31, 2008, RJY
had total capital of approximately $4.7 million, of which the Company owns
approximately 50%.
Sirchie
Acquisition Company (“SAC”), an 80% owned indirect unconsolidated subsidiary
acquired as a merchant banking investment, has been advised by the Commerce and
Justice Departments that they intend to seek civil and criminal sanctions
against it, as the purported successor in interest to Sirchie Finger Print
Laboratories, Inc. (“Sirchie”), based upon alleged breaches of Department of
Commerce suspension orders by Sirchie and its former majority shareholder that
occurred prior to the acquisition. Discussions are ongoing and the impact, if
any, on the value of this investment is indeterminate at this time.
In
connection with auction rate securities (“ARS”), the Company's broker-dealers,
RJA and RJFS, have been subject to ongoing investigations, with which they are
cooperating fully, by the Securities and Exchange Commission (“SEC”), the New
York Attorney General's Office and Florida’s Office of Financial Regulation. The
Company is also named in a class action similar to that filed against a number
of brokerage firms alleging various securities law violations, which it is
vigorously defending.
Several
large banks and brokerage firms, most of whom were the primary underwriters of
and supported the auctions for ARS, have announced agreements, usually as part
of a regulatory settlement, to repurchase ARS at par from some of their clients.
Other brokerage firms have entered into similar agreements. The Company, in
conjunction with other industry participants is actively seeking a solution to
ARS’ illiquidity. This includes issuers restructuring and refinancing the ARS,
which has met with some success. Should these restructurings and refinancings
continue, then clients’ holdings could be reduced further, however, there can be
no assurance these events will continue. If the Company were to consider
resolving pending claims, inquiries or investigations by offering to repurchase
all or some portion of these ARS from certain clients, it would have to have
sufficient regulatory capital and cash or borrowing power to do so, and at
present it does not have such capacity. Further, if such repurchases were made
at par value there could be a market loss if the underlying securities’ value is
less than par and any such loss could adversely affect the results of
operations.
NOTE 13 - CAPITAL
TRANSACTIONS:
The
following table presents information on a monthly basis for purchases of the
Company’s stock for the quarter ended December 31, 2008:
|
Number
of
|
Average
|
Period
|
Shares
Purchased
|
Price
Per Share
|
|
|
|
October
1, 2008 - October 31,2008
|
1,448
|
$32.75
|
November
1, 2008 - November 30, 2008
|
242,670
|
17.91
|
December
1, 2008 – December 31, 2008
|
3,696
|
18.42
|
Total
|
247,814
|
$18.00
|
The
Company does not have a formal stock repurchase plan. On May 20, 2004, the Board
of Directors authorized $75 million for repurchases pursuant to prior
authorization from the Board of Directors. During March 2008, the Company
exhausted this authorization. On March 11, 2008, the Board of Directors
authorized an additional $75 million for repurchases at the discretion of the
Board’s Share Repurchase Committee. Since May 2004, 3,620,154 shares have been
repurchased for a total of $82.3 million, leaving $67.7 million available to
repurchase shares. Historically the Company has considered such purchases when
the price of its stock approaches 1.5 times book value or when employees
surrender shares as payment for option exercises. The decision to repurchase
shares is subject to cash availability and other factors. Accordingly, the
Company purchased no shares in open market transactions for the three months
ended December 31, 2008.
During
the three months ended December 31, 2008, 242,670 shares were purchased for the
trust fund that was established and funded to acquire Company common stock in
the open market to be used to settle restricted stock units granted as a
retention vehicle for certain employees of the Company’s wholly owned Canadian
subsidiary (see Note 16 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, 2008 for more information on this trust fund). The Company also
purchased 5,144 shares that were surrendered by employees as payment for option
exercises during the three months ended December 31, 2008.
NOTE 14 – SHARE-BASED
COMPENSATION:
The
Company applies the provisions of SFAS No. 123R, “Share-Based Payment”, to
account for share-based awards made to employees and directors. This
pronouncement requires the measurement and recognition of compensation expense
for all share-based awards made to employees and directors to be based on
estimated fair values. In addition, this pronouncement requires the excess tax
benefit, the resulting realized tax benefit that exceeds the previously
recognized deferred tax asset for share-based awards, to be recognized as
additional paid-in capital. The Company’s share-based employee and outside
director compensation plans are described more fully in Note 16 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, 2008. The Company’s net income for
the three months ended December 31, 2008 and December 31, 2007 includes $11.1
million and $10.3 million, respectively, of compensation costs and $3.4 million
and $3.0 million, respectively of income tax benefits related to the Company’s
share-based awards to employees and members of its Board of Directors. For the
three months ended December 31, 2008, the Company recognized $3.8 million of
excess tax benefits as additional paid-in capital.
During
the three months ended December 31, 2008, the Company granted 254,650 stock
options, 859,486 shares of restricted stock and 220,086 restricted stock units
to employees under its share-based employee compensation plans. During the three
months ended December 31, 2008, no stock options were granted to outside
directors. Restricted stock grants under the 2007 Stock Bonus Plan and the 2005
Restricted Stock Plan are limited to 750,000 and 1,350,000 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, 2008 was $6.23 per share.
Pre-tax unrecognized compensation expense for stock options granted to employees
and outside directors, net of estimated forfeitures, was $13.7 million as of
December 31, 2008, and will be recognized as expense over a weighted-average
period of approximately 3.3 years.
The
weighted-average grant-date fair value of restricted stock granted to employees
during the three months ended December 31, 2008 was $18.84 per share. Pre-tax
unrecognized compensation expense for unvested restricted stock granted to
employees, net of estimated forfeitures, was $63.6 million as of December 31,
2008, and will be recognized as expense over a weighted-average period of
approximately 3.6 years.
The
weighted-average grant-date fair value of restricted stock units granted to
employees during the three months ended December 31, 2008 was $17.91 per
share. Pre-tax unrecognized compensation expense for unvested
restricted stock units granted to employees, net of estimated forfeitures, was
$8.4 million as of December 31, 2008, and will be recognized as expense over a
weighted-average period of approximately 2.1 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 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, 2008 for more information). Due to
the decline in the value of the Company’s common stock during the three months
ended December 31, 2008, the Company’s net income for the three months ended
December 31, 2008 includes $8.7 million and $3.3 million, respectively, of
reductions in compensation expense and income tax benefits related to the
Company’s share-based awards to its independent contractor Financial Advisors.
The Company’s net income for the three months ended December 31, 2007 includes
$1.5 million of compensation costs and $0.6 million 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, 2008, the Company granted 45,500 stock
options and 6,317 shares of restricted stock to its independent contractor
Financial Advisors.
As of
December 31, 2008, there was $1.1 million of total unrecognized pre-tax
compensation cost related to unvested stock options granted to its independent
contractor Financial Advisors based on an estimated weighted-average fair value
of $6.08 per share at that date. These costs are expected to be
recognized over a weighted average period of approximately 2.6
years.
As of
December 31, 2008, there was $2.0 million of total unrecognized pre-tax
compensation cost related to unvested restricted stock granted to its
independent contractor Financial Advisors based on an estimated fair value of
$17.13 per share at that date. These costs are expected to be recognized over a
weighted average period of approximately 4.1 years.
NOTE 15 - 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”), Eagle Fund Distributors, Inc. (“EFD”), formerly
Heritage Fund Distributors, Inc., and Raymond James (USA) Ltd. (“RJ(USA)”) have
elected. It requires that minimum net capital, as defined, be equal to the
greater of $250,000 or two percent of Aggregate Debit Items arising from client
transactions. FINRA may require a member firm to reduce its business if its net
capital is less than four percent of Aggregate Debit Items and may prohibit a
member firm from expanding its business and declaring cash dividends if its net
capital is less than five percent of Aggregate Debit Items. The net capital
position of RJA at December 31, 2008 and September 30, 2008 was as
follows:
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
($
in 000's)
|
Raymond
James & Associates, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital as a Percent of Aggregate
|
|
|
Debit
Items
|
23.07%
|
18.32%
|
Net
Capital
|
$275,491
|
$
303,192
|
Less:
Required Net Capital
|
(23,886)
|
(33,096)
|
Excess
Net Capital
|
$
251,605
|
$
270,096
|
At
December 31, 2008 and September 30, 2008, 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, 2008 and September 30, 2008 was as
follows:
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
(in
000's)
|
Raymond
James Financial Services, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital
|
$
35,456
|
$
54,225
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$
35,206
|
$
53,975
|
At
December 31, 2008 and September 30, 2008, EFD had no Aggregate Debit Items and
therefore the minimum net capital of $250,000 was applicable. The net capital
position of EFD at December 31, 2008 and September 30, 2008 was as
follows:
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
(in
000’s)
|
Eagle
Fund Distributors, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital
|
$
1,840
|
$
2,326
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$
1,590
|
$
2,076
|
The net
capital position of RJ(USA) at December 31, 2008 and September 30, 2008 was as
follows:
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
($
in 000's)
|
Raymond
James (USA) Ltd.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital as a Percent of Aggregate
|
|
|
Debit
Items
|
34,016%
|
749.6%
|
Net
Capital
|
$
4,504
|
$
4,507
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$
4,254
|
$
4,257
|
RJ Ltd.
is subject to the Minimum Capital Rule (Dealer Member Rule No. 17 of the
Investment Industry Regulatory Organization of Canada ("IIROC")) and the Early
Warning System (Dealer Member Rule No. 30 of the IIROC). The Minimum Capital
Rule requires that every member shall have and maintain at all times Risk
Adjusted Capital greater than zero calculated in accordance with Form 1 (Joint
Regulatory Financial Questionnaire and Report) and with such requirements as the
Board of Directors of the IIROC may from time to time prescribe. Insufficient
Risk Adjusted Capital may result in suspension from membership in the stock
exchanges or the IIROC.
The Early
Warning System is designed to provide advance warning that a member firm is
encountering financial difficulties. This system imposes certain sanctions on
members who are designated in Early Warning Level 1 or Level 2 according to
their capital, profitability, liquidity position, frequency of designation or at
the discretion of the IIROC. Restrictions on business activities and capital
transactions, early filing requirements, and mandated corrective measures are
sanctions that may be imposed as part of the Early Warning System. The Company
was not in Early Warning Level 1 or Level 2 at December 31, 2008 or September
30, 2008. The Risk Adjusted Capital of RJ Ltd. at December 31, 2008 and
September 30, 2008 was as follows (in Canadian dollars):
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
(in
000’s)
|
Raymond
James Ltd.:
|
|
|
Risk
Adjusted Capital before minimum
|
$
36,911
|
$
48,520
|
Less:
Required Minimum Capital
|
(250)
|
(250)
|
Risk
Adjusted Capital
|
$
36,661
|
$
48,270
|
At
December 31, 2008, the Company’s other active domestic and international
broker-dealers are in compliance with and met 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, 2008, RJBank meets all
capital adequacy requirements to which it is subject.
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.
|
|
|
To
be well capitalized
|
|
|
Requirement
for capital
|
under
prompt
|
|
|
adequacy
|
corrective
action
|
|
Actual
|
purposes
|
provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
($
in 000's)
|
As
of December 31, 2008:
|
|
|
|
|
|
|
Total
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
$ 806,385
|
10.3%
|
$
622,513
|
8.0%
|
$
778,142
|
10.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
708,624
|
8.9%
|
311,257
|
4.0%
|
466,885
|
6.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Adjusted
Assets)
|
708,624
|
7.4%
|
382,695
|
4.0%
|
478,368
|
5.0%
|
|
|
|
|
|
|
|
As
of September 30, 2008 (1):
|
|
|
|
|
|
|
Total
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
$
786,599
|
9.7%
|
$
649,518
|
8.0%
|
$
811,897
|
10.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
689,281
|
8.5%
|
324,759
|
4.0%
|
487,138
|
6.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Adjusted
Assets)
|
689,281
|
6.0%
|
458,052
|
4.0%
|
572,564
|
5.0%
|
(1)
|
The
actual Total Capital (to Risk-Weighted Assets), Tier I Capital (to
Risk-Weighted Assets) and Tier I Capital (to Adjusted Assets) amounts
previously reported for September 30, 2008 was $778,624,000, $689,281,000,
and $689,281,000 with a ratio of 10.9%, 9.6% and 6.0%, respectively.
Subsequent to filing the Company’s Annual Report on Form 10-K, the Company
discovered that its wholly owned subsidiary, RJBank, had misinterpreted an
instruction related to the calculation of RJBank’s risk weighted capital
ratio. As a result, despite the Company’s intention and ability to
maintain RJBank at a “well capitalized” level under the bank regulatory
framework, RJBank was “adequately capitalized” rather than “well
capitalized” at September 30, 2008. Upon discovery of the
misinterpretation, the Company recalculated the ratio, determined the
amount of additional capital that needed to be contributed and made a $30
million capital contribution to RJBank, an amount that would have
increased the bank's September 30, 2008 total risk based capital ratio
above the 10% level necessary to be considered well capitalized. The
Company has notified the OTS and filed an amended Thrift Financial Report
as of September 30, 2008. As the Company was able to and did contribute
additional capital and it did not impact clients, the Company’s management
does not consider this to be material and does not expect any additional
ramifications of the
misinterpretation.
|
Raymond
James Trust, N.A., is regulated by the OCC and is required to maintain
sufficient capital and meet capital and liquidity requirements. As of December
31, 2008, RJT met the requirements.
The
Company expects to continue paying cash dividends. However, the payment and rate
of dividends on the Company's common stock is subject to several factors
including operating results, financial requirements of the Company, and the
availability of funds from the Company's subsidiaries, including the
broker-dealer subsidiaries, which may be subject to restrictions under the net
capital rules of the SEC, FINRA and the IIROC; and RJBank, which may be subject
to restrictions by federal banking agencies. Such restrictions have never
limited the Company's dividend payments.
NOTE 16 - 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, 2008 and September 30, 2008, is as follows:
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
(in
000's)
|
|
|
|
Standby
Letters of Credit
|
$ 240,573
|
$ 239,317
|
Open
End Consumer Lines of Credit
|
43,358
|
43,544
|
Commercial
Lines of Credit
|
1,392,974
|
1,384,941
|
Unfunded
Loan Commitments - Variable Rate (1)
|
330,156
|
1,055,686
|
Unfunded
Loan Commitments - Fixed Rate
|
3,995
|
4,005
|
(1)
|
Includes
commitments to purchase pools of adjustable rate whole first mortgage
loans.
|
Because
many loan commitments expire without being funded in whole or part, the contract
amounts are not estimates of the Company’s future liquidity
requirements.
Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted. The credit
risk amounts are equal to the contractual amounts, assuming that the amounts are
fully advanced and that the collateral or other security is of no value. RJBank
uses the same credit approval and monitoring process in extending loan
commitments and other credit-related off-balance sheet instruments as it does in
making loans.
RJBank’s
policy is generally to require customers to provide collateral at the time of
closing. The amount of collateral obtained, if it is deemed necessary by RJBank
upon extension of credit, is based on RJBank’s credit evaluation of the
borrower. Collateral held varies but may include accounts receivable, inventory,
real estate, and income producing commercial properties.
In the
normal course of business, RJBank issues, or participates in the issuance of,
financial standby letters of credit whereby it provides an irrevocable guarantee
of payment in the event the letter of credit is drawn down by the beneficiary.
As of December 31, 2008, $240.6 million of such letters of credit were
outstanding. Of the letters of credit outstanding, $239.0 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. 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.
The
Company, through RJTCF’s wholly owned lending subsidiary, Raymond James
Multi-Family Finance, Inc., may have at any time unfunded commitments to extend
credit to certain project partnerships for either construction or permanent
loans. At December 31, 2008, the unfunded portion of executed
commitments to extend credit was $19 million. See Note 12 of the Notes to the
Consolidated Financial Statements for more information regarding these
commitments.
RJ Ltd.
is subject to foreign exchange risk primarily due to financial instruments held
in U.S. dollars that may be impacted by fluctuation in foreign exchange rates.
In order to mitigate this risk, RJ Ltd. enters into forward foreign exchange
contracts. The fair value of these contracts is immaterial. As of December 31,
2008, forward contracts outstanding to buy and sell U.S. dollars totaled CDN
$1.2 million and CDN $0.9 million, respectively.
See Note
19 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, 2008 for
more information regarding the Company’s financial instruments with off-balance
sheet risk.
NOTE 17 – EARNINGS PER
SHARE:
The
following table presents the computation of basic and diluted earnings per
share:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2008
|
2007
|
|
(in
000’s, except per share amounts)
|
|
|
|
Net
Income
|
$ 61,093
|
$ 56,242
|
|
|
|
Weighted
Average Common Shares
|
|
|
Outstanding
During the Period
|
116,575
|
116,881
|
|
|
|
Dilutive
Effect of Stock Options and Awards (1)
|
1,512
|
3,360
|
|
|
|
Weighted
Average Diluted Common
|
|
|
Shares
(1)
|
118,087
|
120,241
|
|
|
|
Net
Income per Share – Basic
|
$ 0.52
|
$ 0.48
|
|
|
|
Net
Income per Share - Diluted (1)
|
$ 0.52
|
$ 0.47
|
|
|
|
Securities
Excluded from Weighted Average
|
|
|
Diluted
Common Shares Because Their Effect
|
|
|
Would
Be Antidilutive
|
4,087
|
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 18 – 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 (“PCG”); 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 December 31,
2008, a new intersegment component to the Company’s segment reporting was added
to reflect total gross revenues by segment with the elimination of intersegment
transactions in this new segment. In addition, the methodology for allocating
the Company’s corporate bonus pool expense to individual segments was changed.
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, 2008. Segment data includes charges allocating
corporate overhead and benefits to each segment.
Intersegment receivables and payables are eliminated between segments
upon consolidation.
The PCG
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 Eagle Fund Services, Inc., and trust services of Raymond
James Trust, National Association. In addition to the asset management services
noted above, this segment also offers fee-based programs to clients who have
contracted for portfolio management services from outside money
managers.
RJBank is
a separate segment, which provides consumer, residential, and commercial loans,
as well as Federal Deposit Insurance Corporation (“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. On December 5, 2008, the Company’s
Turkish joint venture ceased operations. See Item 1, “Legal
Proceedings” of Part II below for more information.
The Stock
Loan/Borrow segment involves the borrowing and lending of securities from and to
other broker-dealers, financial institutions and other counterparties, generally
as an intermediary.
The
Proprietary Capital segment consists of the Company’s principal capital and
private equity activities including: various direct and third party private
equity and merchant banking investments (including Raymond James Capital, Inc.,
a captive merchant banking business), short-term special situation mezzanine and
bridge investments, the EIF Funds, and three private equity funds sponsored by
the Company: Raymond James Capital Partners, L.P., Ballast Point Ventures, L.P.,
and Ballast Point Ventures II, L.P.
The Other
segment includes certain corporate activities of the Company.
Information
concerning operations in these segments of business is as
follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2008
|
2007
|
|
(in
000’s)
|
Revenues:
|
|
|
Private
Client Group
|
$ 414,544
|
$ 530,007
|
Capital
Markets
|
128,706
|
114,523
|
Asset
Management
|
51,291
|
64,629
|
RJBank
|
109,239
|
102,589
|
Emerging
Markets
|
4,323
|
12,786
|
Stock
Loan/Borrow
|
3,290
|
13,876
|
Proprietary
Capital
|
538
|
1,171
|
Other
|
1,086
|
8,492
|
Intersegment
Eliminations
|
(17,184)
|
(18,882)
|
Total
Revenues
|
$ 695,833
|
$ 829,191
|
|
|
|
Income
Before Provision for Income Taxes:
|
Private
Client Group
|
$ 32,585
|
$ 56,084
|
Capital
Markets
|
14,289
|
4,696
|
Asset
Management
|
9,074
|
18,555
|
RJBank
|
54,626
|
14,774
|
Emerging
Markets
|
(465)
|
(1,555)
|
Stock
Loan/Borrow
|
1,223
|
1,643
|
Proprietary
Capital
|
(544)
|
(657)
|
Other
|
(9,124)
|
(2,783)
|
Pre-Tax
Income
|
$ 101,664
|
$ 90,757
|
Net
Interest Income (Expense):
|
Private
Client Group
|
$ 12,161
|
$
28,114
|
Capital
Markets
|
1,328
|
(564)
|
Asset
Management
|
113
|
524
|
RJBank
|
94,463
|
35,204
|
Emerging
Markets
|
237
|
904
|
Stock
Loan/Borrow
|
1,851
|
2,571
|
Proprietary
Capital
|
149
|
724
|
Other
|
1,419
|
2,109
|
Net
Interest Income
|
$
111,721
|
$
69,586
|
The
following table presents the Company's total assets on a segment
basis:
|
|
|
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
(in
000’s)
|
Total
Assets:
|
|
|
Private
Client Group (1)
|
$
6,979,895
|
$
6,861,688
|
Capital
Markets (2)
|
984,082
|
1,400,658
|
Asset
Management
|
66,172
|
75,339
|
RJBank
|
9,450,337
|
11,356,939
|
Emerging
Markets
|
47,248
|
52,786
|
Stock
Loan/Borrow
|
555,576
|
698,926
|
Proprietary
Capital
|
174,008
|
169,652
|
Other
|
24,998
|
93,628
|
Total
|
$ 18,282,316
|
$
20,709,616
|
(1)
Includes $46 million of goodwill allocated pursuant to SFAS No. 142,
"Goodwill and Other Intangible Assets".
(2) Includes
$17 million of goodwill allocated pursuant to SFAS No. 142.
The
Company has operations in the U.S., Canada, Europe and joint ventures in Turkey
and Latin America. Substantially all long-lived assets are located in the U.S.
The percentage of total assets associated with foreign activities is
5.4%. The percentages of pre-tax income and net income associated
with foreign activities are 1.1% and 0.7%, respectively. Revenues, classified by
the major geographic areas in which they are earned, were as
follows:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2008
|
2007
|
|
(in
000’s)
|
Revenues:
|
|
|
United
States
|
$ 634,122
|
$ 730,910
|
Canada
|
45,069
|
68,618
|
Europe
|
12,488
|
16,088
|
Other
|
4,154
|
13,575
|
Total
|
$ 695,833
|
$ 829,191
|
The
Company has investments of $6.7 million, net of a $2.3 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.
Historically,
the Company’s overall results have been highly correlated to the activity levels
in the U.S. equity markets. Active securities markets, a steep, positively
sloping yield curve and upward movements in equity indices have a positive
impact, while volatile interest rates and disruption in credit markets have a
negative impact on brokerage results. As RJBank continues to grow and a greater
percentage of the firm’s revenues come from interest earnings, the Company is
somewhat insulated from these market influences. The Company is currently
operating in a challenging environment: a recession and financial services
industry issues related to credit quality, auction rate securities and liquidity
are negatively impacting activity levels, and the current equity market
conditions are continuing to dampen investment banking activity. However,
positive Financial Advisor recruiting results, increased institutional
commissions, and continued loan growth coupled with improved interest rate
spreads at RJBank had a positive impact on results and should continue to
support results for at least the next one or two quarters.
Segments
The
Company currently operates through the following eight business segments:
Private Client Group (“PCG”); 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 income of the Company on
a segment basis for the periods indicated:
|
Three
Months Ended
|
|
December
31,
|
|
December
31,
|
|
Percentage
|
|
2008
|
|
2007
|
|
Change
|
|
(in
000’s)
|
Total
Company
|
|
|
|
|
|
Revenues
|
$ 695,833
|
|
$
829,191
|
|
(16%)
|
Pre-tax
Income
|
101,664
|
|
90,757
|
|
12%
|
|
|
|
|
|
|
Private
Client Group
|
|
|
|
|
|
Revenues
|
$ 414,544
|
|
$
530,007
|
|
(22%)
|
Pre-tax
Income
|
32,585
|
|
56,084
|
|
(42%)
|
|
|
|
|
|
|
Capital
Markets
|
|
|
|
|
|
Revenues
|
128,706
|
|
114,523
|
|
12%
|
Pre-tax
Income
|
14,289
|
|
4,696
|
|
204%
|
|
|
|
|
|
|
Asset
Management
|
|
|
|
|
|
Revenues
|
51,291
|
|
64,629
|
|
(21%)
|
Pre-tax
Income
|
9,074
|
|
18,555
|
|
(51%)
|
|
|
|
|
|
|
Raymond
James Bank
|
|
|
|
|
|
Revenues
|
109,239
|
|
102,589
|
|
6%
|
Pre-tax
Income
|
54,626
|
|
14,774
|
|
270%
|
|
|
|
|
|
|
Emerging
Markets
|
|
|
|
|
|
Revenues
|
4,323
|
|
12,786
|
|
(66%)
|
Pre-tax
Loss
|
(465)
|
|
(1,555)
|
|
70%
|
|
|
|
|
|
|
Stock
Loan/Borrow
|
|
|
|
|
|
Revenues
|
3,290
|
|
13,876
|
|
(76%)
|
Pre-tax
Income
|
1,223
|
|
1,643
|
|
(26%)
|
|
|
|
|
|
|
Proprietary
Capital
|
|
|
|
|
|
Revenues
|
538
|
|
1,171
|
|
(54%)
|
Pre-tax
Loss
|
(544)
|
|
(657)
|
|
17%
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Revenues
|
1,086
|
|
8,492
|
|
(87%)
|
Pre-tax
Loss
|
(9,124)
|
|
(2,783)
|
|
(228%)
|
|
|
|
|
|
|
Intersegment
Eliminations
|
|
|
|
|
|
Revenues
|
(17,184)
|
|
(18,882)
|
|
9%
|
Pre-tax
Income
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
Results of Operations –
Three Months Ended December 31, 2008 Compared with the Three Months Ended
December 31, 2007
Total
Company
Total
Company net revenues decreased 3% to $664 million from $686 million in the
comparable quarter of the prior year. Net interest earnings increased 61%, or
$42 million, with net income up 9% from the prior year quarter. The current year
results include increased net interest income, positive trading results and
increased institutional commissions, partially offset by lower private client
commissions, lower investment advisory fee revenue and increased non-interest,
non-compensation expenses. The Company also benefitted from an $11.7 million
adjustment to its estimate of incentive compensation at September 30, 2008, in
comparison to a $5 million adjustment in the first quarter of the prior year.
The Company’s effective tax rate for the quarter continues to be higher than it
had been in a rising equity market primarily as a result of a larger
nondeductible unrealized loss on the Company’s corporate owned life insurance
investment than in the prior year. Diluted net income was $0.52 per share,
versus $0.47 per share in the prior year quarter.
Net Interest
Analysis
The
following table presents average balance data and interest income and expense
data for the Company, as well as the related net interest income. The respective
average rates are presented on an annualized basis.
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2008
|
2007
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
Interest
|
|
Yield/
|
Average
|
Interest
|
|
Yield/
|
|
Balance
|
Inc./Exp.
|
|
Cost
|
Balance
|
Inc./Exp.
|
|
Cost
|
|
($
in 000’s)
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
Margin
Balances
|
$1,245,963
|
$
11,738
|
|
3.77%
|
$
1,513,852
|
$ 26,321
|
|
6.95%
|
Assets
Segregated Pursuant
|
|
|
|
|
|
|
|
|
to
Regulations and Other
|
|
|
|
|
|
|
|
|
Segregated
Assets
|
4,142,295
|
6,317
|
|
0.61%
|
4,208,850
|
47,560
|
|
4.52%
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
RJBank (1)
|
9,638,379
|
110,247
|
|
4.58%
|
6,467,707
|
101,719
|
|
6.29%
|
Stock
Borrow
|
|
3,290
|
|
|
|
13,876
|
|
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
Variable Interest Entities
|
|
121
|
|
|
|
207
|
|
|
Other
|
|
11,899
|
|
|
|
23,267
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
|
$143,612
|
|
|
|
$212,950
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
Client
Interest Program
|
$5,383,546
|
$ 8,405
|
|
0.62%
|
$
5,303,582
|
$ 53,642
|
|
4.05%
|
Interest-Bearing
Liabilities
|
|
|
|
|
|
|
|
|
of
RJBank (1)
|
9,097,350
|
15,784
|
|
0.69%
|
6,079,863
|
66,515
|
|
4.38%
|
Stock
Loan
|
|
1,439
|
|
|
|
11,305
|
|
|
Interest-Bearing
Liabilities of
|
|
|
|
|
|
|
|
|
Variable
Interest Entities
|
|
1,397
|
|
|
|
1,619
|
|
|
Other
|
|
4,866
|
|
|
|
10,283
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Expense
|
|
31,891
|
|
|
|
143,364
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$111,721
|
|
|
|
$ 69,586
|
|
|
(1)
|
See
RJBank section below in Part I for
details.
|
Net
interest income increased $42 million, or 61%, over the same quarter in the
prior year. RJBank’s net interest income increased $59 million, or 168%, while
net interest income in the PCG segment declined $16 million, or 57%. RJBank
benefitted not only from the continued growth of its loan portfolio but also
from increased spreads. There were two specific factors which enhanced the
interest rate spreads at RJBank as follows: (1) as rates were declining over the
quarter, a larger spread was realized on the large portion of the 5/1 adjustable
rate mortgage portfolio that is still in its fixed rate period; and (2) RJBank
benefitted from a historically low Fed rate which lowered RJBank’s cost of
funds, as RJBank sets interest rates on deposits consistent with the Fed rate.
As a result, RJBank had an interest rate spread of 3.9% which is not sustainable
for the long term.
Average
client margin balances declined $268 million (18%) and assets segregated
pursuant to regulations decreased $67 million over the same quarter of the prior
year. Customer cash balances held in the Client Interest Program increased $80
million. Net interest income in the PCG segment was negatively impacted by lower
margin balances and by lower spreads. This segment is negatively impacted by
interest rate cuts as the rate is lowered immediately on the interest earning
assets while the lowering of the interest rate paid to clients occurs over a
period of weeks to remain competitive with money market fund
yields.
Private
Client Group
The
PCG segment includes the retail branches of the Company's broker-dealer
subsidiaries located throughout the United States, Canada, and the United
Kingdom. These branches provide securities brokerage services
including the sale of equities, mutual funds, fixed income products and
insurance products to their individual clients. This segment
accounted for 60% of the Company's revenues for the three months ended December
31, 2008. It generates revenues principally through commissions charged on
securities transactions, fees from wrap fee investment accounts and the interest
revenue generated from client margin loans and cash balances. The
Company primarily charges for the services provided to its PCG clients based on
commission schedules or through asset based advisory fees.
The
success of the PCG segment is dependent upon the quality and integrity of 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:
|
|
|
December
31,
|
December
31,
|
|
|
Independent
|
2008
|
2007
|
|
Employee
|
Contractors
|
Total
|
Total
|
Private
Client Group - Financial Advisors:
|
|
|
|
|
RJA
|
1,206
|
-
|
1,206
|
1,109
|
RJFS
|
-
|
3,123
|
3,123
|
3,060
|
RJ
Ltd.
|
204
|
214
|
418
|
331
|
Raymond
James Investment Services Limited (“RJIS”)
|
-
|
101
|
101
|
82
|
Total
Financial Advisors
|
1,410
|
3,438
|
4,848
|
4,582
|
Private
Client Group revenues were 22% below the prior year quarter, reflecting the
impact of negative market conditions on this segment. Securities commissions and
fees declined 17% despite a 6% increase in the number of Financial
Advisors. All of the Company’s broker-dealers experienced positive
results in recruiting successful Financial Advisors as the brokerage industry
continues to be in a state of unrest. Unfortunately, the financial
markets themselves have been in a decline and clients are not investing as
actively. As a result average annual production per Financial Advisor
declined from $328,000 to $323,000 in RJFS and from $514,000 to $493,000 in RJA
since the same quarter in the prior year. In addition, the lower
equity values in the marketplace result in lower asset under management balances
and therefore lower fees are earned on those assets.
Private
Client Group results also include the interest revenue earned on client margin
balances and cash segregated for regulatory purposes net of the interest expense
paid on client cash balances. The net interest from these balances declined $16
million, or 57%, from the prior year as interest rates fell to record low
levels, thus compressing spreads. In addition, client margin balances have
declined $357 million since the prior year.
While net
revenues declined 15% from the prior year, pre-tax earnings declined 42%, with
non-interest expenses declining only 11%. The expenses include increased
occupancy related to RJA’s growth and a $6 million write-off of capitalized
software that was determined not to be a viable asset during the
quarter. Increased payouts or front money associated with recruiting
was offset by a $2 million bonus reversal and other cost saving
measures.
Capital
Markets
The
Capital Markets segment includes institutional sales and trading in the United
States, Canada, and Europe; management of and participation in underwritings;
financial advisory services including private placements and merger and
acquisition services; public finance activities; and the syndication and related
management of investment partnerships designed to yield returns in the form of
low-income housing tax credits to institutions. The Company provides securities
brokerage services to institutions with an emphasis on the sale of U.S. and
Canadian equities and fixed income products. Institutional sales commissions
accounted for 71% 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
Markets pre-tax results increased over 200% from the prior year as trading
results shifted from a nominal loss to a $7.5 million gain and fixed income
commissions increased over 150%. All of the segment’s trading profits were
generated by fixed income, as the bond market was volatile and active. The fixed
income markets’ volatility has generated activity as clients are attracted to
the possibility of better yields and others are selling holdings to obtain
liquidity. The segment results also included increased mergers and acquisition
fees over the prior year’s comparable quarter. The negative market conditions
that impacted the Private Client Group also impacted Capital Markets as there
were only three domestic and three Canadian underwritings in the quarter. An
improvement in the overall equity markets will likely be necessary to realize a
significant increase in underwritings and the related commissions and fees. The
segment benefitted from a $6 million reversal of a bonus accrual.
|
Three
Months Ended
|
|
December
31,
|
|
December
31,
|
|
2008
|
|
2007
|
Number
of managed/co-managed public equity offerings:
|
|
|
|
United
States
|
3
|
|
19
|
Canada
|
3
|
|
8
|
|
|
|
|
Total
dollars raised (in 000's):
|
|
|
|
United
States
|
$12,752,000
|
|
$
7,522,000
|
Canada
(in U.S. dollars)
|
$ 47,000
|
|
$ 234,000
|
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. Declining equity markets negatively impact revenues
from investment advisory fees as existing accounts depreciate in value, in
addition to individuals and institutions being less 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,
|
|
2008
|
2008
|
2007
|
Assets
Under Management (in 000's):
|
|
|
|
|
|
|
|
Eagle
Asset Management, Inc.
|
$
11,154,995
|
$
12,606,186
|
$
14,224,337
|
Eagle
Family of Mutual Funds (formerly Heritage)
|
8,723,899
|
9,151,787
|
9,746,392
|
Raymond
James Consulting Services
|
6,600,908
|
7,989,510
|
9,424,142
|
Eagle
Boston Investment Management, Inc.
|
312,983
|
633,646
|
740,069
|
Freedom
Accounts
|
5,926,010
|
7,603,840
|
8,388,208
|
Total Assets
Under Management
|
$
32,718,795
|
$ 37,984,969
|
$
42,523,148
|
|
|
|
|
Less:
Assets Managed for Affiliated Entities
|
(5,012,341)
|
(4,675,129)
|
(5,249,550)
|
|
|
|
|
Total
Third Party Assets
|
|
|
|
Under
Management
|
$
27,706,454
|
$
33,309,840
|
$
37,273,598
|
|
|
|
|
Non-Managed
Fee Based Assets:
|
|
|
|
|
|
|
|
Passport
|
$
15,180,929
|
$
17,681,201
|
$
20,147,134
|
IMPAC
|
7,122,251
|
8,436,116
|
8,675,982
|
Total
|
$
22,303,180
|
$
26,117,317
|
$
28,823,116
|
The Asset
Management segment’s revenues declined 21% as financial assets under management
declined 26% from the previous year. The decline is a combined result of the
decline in market values of the equity portfolios and fewer clients investing,
as they are hesitant to make new or additional investments in the uncertain
markets.
Raymond
James Bank
RJBank
provides residential, consumer, and corporate loans, as well as FDIC-insured
deposit accounts, to clients of the Company's broker-dealer subsidiaries and to
the general public. RJBank also purchases residential whole loan
pools, and participates with other banks in corporate loan syndications. RJBank
generates revenue principally through the interest income earned on the loans
noted above and other investments, offset by the interest expense it incurs on
client deposits and borrowings. RJBank’s objective is to maintain a
substantially duration-matched portfolio of assets and liabilities.
Gross
revenues increased 6% and pre-tax profits at RJBank increased 270% during the
quarter ended December 31, 2008 compared to the same quarter in the prior year.
Loan interest and fees at RJBank increased $15 million despite lower interest
rates, with the net loan balances increasing from $5.7 billion to $7.7 billion
and total assets increasing from $6.8 billion to $9.5
billion. Deposits increased 42% from $6.2 billion to $8.8 billion.
Interest expense decreased 76% due to the average cost of funds decreasing from
4.38% to 0.69%. The growth in loan balances at RJBank combined with
deteriorating market conditions gave rise to an attendant increase in loan loss
provisions; the provisions for loan loss were $24.9 million compared to $12.8
million in the prior year quarter. Net loan charge-offs for the quarter totaled
$6.9 million. RJBank recorded an unrealized pre-tax loss of $85 million during
the quarter related to their available for sale securities
portfolio.
The
tables below present certain credit quality trends for corporate loans and
residential/consumer loans:
|
Three
Months Ended
|
|
December
31,
|
December
31,
|
|
2008
|
2007
|
|
(in
000’s)
|
|
|
|
Net
Loan Charge-offs:
|
|
|
Corporate
Loans
|
$
3,141
|
$
372
|
Residential/Consumer
Loans
|
3,744
|
214
|
|
|
|
Total
|
$
6,885
|
$
586
|
|
|
|
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
(in
000’s)
|
Allowance
for Loan Loss:
|
|
|
Corporate
Loans
|
$ 94,082
|
$ 79,404
|
Residential/Consumer
Loans
|
12,058
|
8,751
|
|
|
|
Total
|
$ 106,140
|
$ 88,155
|
|
|
|
Nonperforming
Assets:
|
|
|
Corporate
|
$ 47,336
|
$ 39,390
|
Residential/Consumer
|
29,414
|
22,918
|
|
|
|
Total
|
$ 76,750
|
$ 62,308
|
|
|
|
Total
Loans (1):
|
|
|
Corporate
Loans (1)
|
$
4,930,866
|
$
4,563,065
|
Residential/Consumer
Loans (1)
|
2,852,065
|
2,620,317
|
|
|
|
Total
|
$
7,782,931
|
$
7,183,382
|
(1) Net of
unearned income and deferred expenses.
The
following table presents average balance data and interest income and expense
data for the Company's banking operations, as well as the related interest
yields/costs, rates and interest spread for the periods
indicated. The respective average rates are presented on an
annualized basis.
|
Three
Months Ended
|
|
December
31, 2008
|
December
31, 2007
|
|
|
|
Average
|
|
|
Average
|
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued
on next page)
|
Interest-Earning
Banking Assets:
|
|
|
|
|
|
|
Loans,
Net of Unearned
|
|
|
|
|
|
|
Income
(1)
|
$
7,637,064
|
$ 99,645
|
5.22%
|
$
5,096,938
|
$ 84,259
|
6.61%
|
Reverse
Repurchase
|
|
|
|
|
|
|
Agreements
|
507,554
|
545
|
0.43%
|
665,326
|
7,868
|
4.73%
|
Agency
Mortgage backed
|
|
|
|
|
|
|
Securities
|
252,276
|
1,885
|
2.99%
|
188,604
|
2,474
|
5.25%
|
Non-agency
Collateralized
|
|
|
|
|
|
|
Mortgage
Obligations
|
277,159
|
5,629
|
8.12%
|
388,896
|
5,580
|
5.74%
|
Money
Market Funds, Cash and
|
|
|
|
|
|
|
Cash
Equivalents
|
929,728
|
2,426
|
1.04%
|
119,280
|
1,407
|
4.72%
|
FHLB
Stock and Other
|
34,598
|
117
|
1.35%
|
8,663
|
131
|
6.05%
|
Total
Interest-Earning
|
|
|
|
|
|
|
Banking
Assets
|
$9,638,379
|
$
110,247
|
4.58%
|
$
6,467,707
|
$
101,719
|
6.29%
|
Non-Interest-Earning
Banking Assets
|
|
|
|
|
|
|
and
Allowance for Loan Losses
|
47,255
|
|
|
18,247
|
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
$
9,685,634
|
|
|
$
6,485,954
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
|
|
|
Retail
Deposits:
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 239,685
|
$ 2,448
|
4.09%
|
$ 241,888
|
$ 2,816
|
4.66%
|
Money
Market, Savings,
|
|
|
|
|
|
|
and
NOW (2) Accounts
|
8,801,172
|
12,635
|
0.57%
|
5,595,959
|
60,620
|
4.33%
|
FHLB
Advances and Other
|
56,493
|
701
|
4.96%
|
242,016
|
3,079
|
5.09%
|
|
|
|
|
|
|
|
Total
Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
$
9,097,350
|
$ 15,784
|
0.69%
|
$
6,079,863
|
$ 66,515
|
4.38%
|
|
|
|
|
|
|
|
Non-Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
5,956
|
|
|
21,855
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
|
9,103,306
|
|
|
6,101,718
|
|
|
Total
Banking
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
582,328
|
|
|
384,236
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
and
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
$
9,685,634
|
|
|
$
6,485,954
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
December
31, 2008
|
December
31, 2007
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Interest
|
Yield/
|
Average
|
|
Interest
|
Yield/
|
|
Balance
|
|
Inc./Exp.
|
Cost
|
Balance
|
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued)
|
Excess
of Interest-
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
Over Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities/Net
|
|
|
|
|
|
|
|
|
Operating
Interest Income
|
$ 541,029
|
|
$ 94,463
|
|
$ 387,844
|
|
$ 35,204
|
|
|
|
|
|
|
|
|
|
|
Bank
Net Interest (3):
|
|
|
|
|
|
|
|
|
Spread
|
|
|
|
3.89%
|
|
|
|
1.91%
|
Margin
(Net Yield on
|
|
|
|
|
|
|
|
|
Interest-
Earning
|
|
|
|
|
|
|
|
|
Bank
Assets)
|
|
|
|
3.92%
|
|
|
|
2.18%
|
Ratio
of Interest
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
to Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
105.95%
|
|
|
|
106.38%
|
Return
On Average:
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
|
|
|
1.42%
|
|
|
|
0.57%
|
Total
Banking
|
|
|
|
|
|
|
|
|
Shareholder's
Equity
|
|
|
|
23.59%
|
|
|
|
9.80%
|
Average
Equity to
|
|
|
|
|
|
|
|
|
Average
Total
|
|
|
|
|
|
|
|
|
Banking
Assets
|
|
|
|
6.01%
|
|
|
|
5.92%
|
(1)
|
Nonaccrual
loans are included in the average loan balances. Payments or income
received on impaired nonaccrual loans are applied to
principal. Income on other nonaccrual loans is recognized on a
cash basis. Fee income on loans included in interest income for the three
months ended December 31, 2008 and 2007 was $4.4 million and $3.0 million,
respectively.
|
(2)
|
Negotiable
Order of Withdrawal (“NOW”)
account.
|
(3)
|
The
increase in interest spreads is due to a rapid decline in short-term
interest rates, which led to a decline in RJBank’s cost of
funds.
|
Increases
and decreases in interest income and operating interest expense result from
changes in average balances (volume) of interest-earning banking assets and
liabilities, as well as changes in average interest rates. The following table
shows the effect that these factors had on the interest earned on RJBank's
interest-earning assets and the interest incurred on its interest-bearing
liabilities. The effect of changes in volume is determined by multiplying the
change in volume by the previous year's average yield/cost. Similarly, the
effect of rate changes is calculated by multiplying the change in average
yield/cost by the previous year's volume. Changes applicable to both volume and
rate have been allocated proportionately.
|
Three
Months Ended December 31,
|
|
2008
Compared to 2007
|
|
Increase
(Decrease) Due To
|
|
Volume
|
Rate
|
Total
|
|
(in
000’s)
|
Interest
Revenue
|
|
|
|
Interest-Earning
Banking Assets:
|
|
|
|
Loans,
Net of Unearned Income
|
$
41,991
|
$
(26,605)
|
$
15,386
|
Reverse
Repurchase Agreements
|
(1,866)
|
(5,457)
|
(7,323)
|
Agency
Mortgage Backed Securities
|
836
|
(1,425)
|
(589)
|
Non-agency
Collateralized Mortgage Obligations
|
(1,604)
|
1,653
|
49
|
Money
Market Funds, Cash and Cash Equivalents
|
9,560
|
(8,541)
|
1,019
|
FHLB
Stock and Other
|
392
|
(406)
|
(14)
|
|
|
|
|
Total
Interest-Earning Banking Assets
|
$
49,309
|
$
(40,781)
|
$
8,528
|
|
|
|
|
Interest
Expense
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
Retail
Deposits:
|
|
|
|
Certificates
Of Deposit
|
$ (26)
|
$ (342)
|
$
(368)
|
Money
Market, Savings and
|
|
|
|
NOW
Accounts
|
34,723
|
(82,708)
|
(47,985)
|
FHLB
Advances and Other
|
(2,360)
|
(18)
|
(2,378)
|
|
|
|
|
Total
Interest-Bearing Banking Liabilities
|
$
32,337
|
$
(83,068)
|
$
(50,731)
|
|
|
|
|
Change
in Net Interest Income
|
$
16,972
|
$
42,287
|
$
59,259
|
Emerging
Markets
The
Emerging Markets segment includes the Company’s joint ventures in Latin America
and Turkey. The Company’s joint venture in Turkey ceased conducting
business during the quarter and has filed for bankruptcy. This
accounts for 80% of the decline in revenues within this segment. The remaining
decline was due to the global market conditions resulting in declines in
commission and investment advisory revenue in Latin America.
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 revenues declined 76%, with net revenues declining 28%. Both
gross interest revenue and expense declined due to both lower rates and average
balances, down over 50% from the prior year. The average interest rate spread
increased a modest 10%. Non-interest expenses were well controlled,
down 32% from the prior year’s comparable quarter. As a result, the
segments pre-tax income is down 26% from the same quarter in the prior
year.
Proprietary
Capital
This
segment consists of the Company’s principal capital and private equity
activities including: various direct and third party private equity and merchant
banking investments, short-term special situation mezzanine and bridge
investments, Raymond James Employee Investment Funds I and II (the “EIF Funds”),
and three private equity funds sponsored by the Company: Raymond James Capital
Partners, L.P., a merchant banking limited partnership, and Ballast Point
Ventures, L.P. and Ballast Point Ventures II, L.P., venture capital limited
partnerships (the “Funds”). The Company earns management fees for services
provided to two of the Funds and participates in profits or losses through both
general and limited partnership interests. Additionally, the Company incurs
profits or losses as a result of direct merchant banking investments and
short-term special situation mezzanine and bridge investments. The EIF Funds are
limited partnerships, for which the Company is the general partner, that invest
in the merchant banking and private equity activities of the Company and other
unaffiliated venture capital limited partnerships. The EIF Funds were
established as compensation and retention measures for certain qualified key
employees of the Company.
Proprietary
Capital results improved modestly from the prior year due to higher advisory
fees.
Other
This
segment includes various corporate activities of Raymond James Financial, Inc.
including certain compensation accruals, interest on corporate cash and
corporate expenses. Revenues in the segment declined due to lower interest
earnings. Pre-tax earnings were also impacted by 22% higher non-interest
expenses.
Liquidity and Capital
Resources
The
Company’s senior management establishes the liquidity and capital policies of
the Company. These policies include senior management’s review of short- and
long-term cash flow forecasts, review of monthly capital expenditures, the
monitoring of the availability of alternative sources of financing, and the
daily monitoring of liquidity in the Company’s significant subsidiaries.
Decisions on the allocation of capital to business units considers, among other
factors, projected profitability and cash flow, risk and impact on future
liquidity needs. The Company’s Treasury Department assists in evaluating,
monitoring and controlling the impact that the Company’s business activities
have on its financial condition, liquidity and capital structure as well as
maintains the relationships the Company has with various lenders. The objectives
of these policies are to support the successful execution of the Company’s
business strategies while ensuring ongoing and sufficient
liquidity.
The
unprecedented volatility of the financial markets, accompanied by a severe
deterioration of economic conditions worldwide, has had a pronounced adverse
affect on the availability of credit through traditional sources. As a result of
concern about the stability of the markets generally and the strength of
counterparties specifically, many lenders have reduced and, in some cases,
ceased to provide funding to the Company. See Sources of Liquidity-Borrowings
section below for additional information. Further, the current environment is
not conducive to most types of financings.
Liquidity
is provided primarily through the Company’s business operations and financing
activities.
Cash
provided by operating activities during the three months ended December 31, 2008
was approximately $272.0 million, which was primarily attributable to the
decrease in brokerage client receivables, the increase in brokerage client
deposits (directly correlated to the increase in segregated assets), the
decrease in stock borrowed receivables, and the decrease in receivables from
broker-dealers and clearing organizations. This was partially offset by the
increase in segregated assets, the decrease in payables to broker-dealers and
clearing organizations, the decrease in stock loaned payables, and the decrease
in accrued compensation payable.
Investing
activities used $994.7 million, which was primarily due to loans originated and
purchased by RJBank, purchases of securities purchased under agreements to
resell at RJBank, and to additional investments made in real estate partnerships
held by VIEs. This was partially offset by loan repayments to
RJBank.
Financing
activities used $2.0 billion, predominantly the result of repayments on borrowed
funds, including the $1.9 billion overnight borrowing to meet point-in-time
regulatory balance sheet composition requirements related to RJBank’s qualifying
as a thrift institution at September 30, 2008, and the payment of cash
dividends. This was partially offset by the proceeds from borrowed funds related
to company-owned life insurance (see more information in the Other Sources of
Liquidity section below) and an increase in deposits at RJBank.
The
Company believes its existing assets, most of which are liquid in nature,
together with funds generated from operations and potential external financing,
should provide adequate funds for continuing operations at current levels of
activity.
Sources
of Liquidity
In
addition to the liquidity provided through the Company’s business operations,
the Company has various potential sources of capital.
Liquidity
Available from Subsidiaries
The
Company’s two principal domestic broker-dealer subsidiaries are required to
maintain net capital equal to the greater of $250,000 or 2% of aggregate debit
balances arising from customer transactions. At December 31, 2008, both of these
brokerage subsidiaries far exceeded their minimum net capital requirements. At
that date, these subsidiaries had excess net capital of $286.8 million, of which
approximately $150 to $200 million is available for dividend (subject to cash
availability and possibly to regulatory approval) while still maintaining a
capital level well above regulatory “early warning” guidelines.
Subject
to notification and in some cases approval by the Office of Thrift Supervision
(“OTS”), RJBank may dividend to the Company as long as RJBank maintains its
“well capitalized” status under bank regulatory capital guidelines.
Liquidity
available to the Company from its subsidiaries, other than its broker-dealer
subsidiaries and RJBank, is not limited by regulatory requirements.
Borrowings
and Financing Arrangements
The
following table presents the Company’s domestic financing arrangements as
of December 31, 2008:
|
Committed
|
Committed
|
Uncommitted
|
Uncommitted
|
Total
Financing
|
|
Unsecured
|
Collateralized
|
Collateralized
|
Unsecured
|
Arrangements
|
|
(in
000’s)
|
|
|
|
|
|
|
RJA
(with third party lenders)
|
$ -
|
$
150,000
|
$
235,100
|
$
150,000
|
$
535,100
|
RJA
(with related parties)
|
-
|
-
|
360,000
|
-
|
360,000
|
RJF
|
50,000
|
-
|
-
|
-
|
50,000
|
|
|
|
|
|
|
Total
Company
|
$
50,000
|
$
150,000
|
$ 595,100
|
$
150,000
|
$
945,100
|
At
December 31, 2008, the Company maintained three 364-day committed and several
uncommitted financing arrangements denominated in U.S. dollars and one
uncommitted line of credit denominated in Canadian dollars (“CDN”). At December
31, 2008, the aggregate domestic facilities were $945.1 million and the Canadian
line of credit was CDN $40 million. Lenders are under no obligation to lend to
the Company under uncommitted lines and there have been several recent instances
where they were unwilling to do so.
On
January 8, 2009, RJF amended its revolving credit agreement with JPMorgan Chase
Bank and three other commercial banks. The amendment extended the facility
termination date until January 22, 2009 and continued the aggregate commitment
of the lenders at $50 million, the amount of loans then currently outstanding
under the agreement. RJF repaid the outstanding loan balance on the facility
termination date. On February 6, 2009, RJF closed on a new $100 million
unsecured revolving credit agreement. Drawings on this line are subject to the
Company’s receipt of approval from the U.S. Treasury to participate in the
Capital Purchase Program (“CPP”).
RJA
maintains a $50 million committed secured line of credit and a $100 million
committed tri-party repurchase arrangement, each with a commercial bank. At
December 31, 2008, there were collateralized financings of $40 million
outstanding under the $100 million tri-party repurchase arrangement. These
borrowings are included in Securities Sold Under Agreements to Repurchase on the
Condensed Consolidated Statement of Financial Condition and are collateralized
by RJA-owned securities with a market value of approximately $64 million. RJA’s
committed facilities with the two commercial banks are subject to 0.15% and
0.125% per annum facility fees, respectively.
In
addition, RJA maintains $235.1 million in uncommitted secured facilities. At
December 31, 2008, RJA also maintained $360 million in uncommitted tri-party
repurchase arrangements with related parties, including an arrangement with
RJFS. RJBank had provided $300 million of those uncommitted arrangements to RJA,
which was guaranteed by RJF. Approximately $240 million was available until
January 30, 2009 under an exception from affiliate lending regulations granted
by the OTS. RJBank has applied for an extension from the OTS until October 30,
2009, since such an extension was granted by the Federal Reserve on January 30,
2009. Collateral for loans under secured lines of credit and securities sold
under repurchase agreements (collectively “collateral”) are RJA-owned and/or
client margin securities, as permitted by regulatory requirements. The required
market value of the collateral ranges from 102% to 125% of the cash provided.
Although RJA had $510 million committed or related party collateralized
financing arrangements available, at December 31, 2008, RJA’s Fixed Income
inventory available to serve as collateral is typically substantially less.
Unsecured loan facilities available to RJA total $150 million of uncommitted
unsecured lines of credit.
In
addition, the Company’s joint ventures in Turkey and Argentina have multiple
settlement lines of credit. The Company has guaranteed certain of these
settlement lines of credit as follows: one in Turkey totaling $8 million and one
in Argentina for $9 million. At December 31, 2008, there were no outstanding
balances on the settlement lines in Turkey or Argentina. At December 31, 2008
the aggregate unsecured settlement lines of credit available were $4.4 million,
and there were no outstanding balances on these lines. On December 5, 2008, the
Company’s Turkish joint venture ceased operations. See Note 12 of the Notes to
the Condensed Consolidated Financial Statements for more
information.
RJBank
had $50 million in FHLB advances outstanding at December 31, 2008, which
comprises several long-term, fixed rate advances. RJBank had $1.7 billion in
immediate credit available from the FHLB on December 31, 2008 and total
available credit of 40% of total assets, with the pledge of additional
collateral to the FHLB. See Note 9 of the Notes to Condensed Consolidated
Financial Statements for more information.
At
December 31, 2008 and September 30, 2008, the Company had loans payable of
$161.3 million and $2.2 billion, respectively. The balance at December 31, 2008
is comprised of a $61.3 million mortgage loan for its home-office complex, $50
million in FHLB advances (RJBank), and $50 million outstanding on its committed
line of credit.
Other
Sources of Liquidity
The
Company owns a significant number of life insurance policies utilized to fund
certain non-qualified deferred compensation plans. The Company is able to borrow
up to 90% of the cash surrender value of these policies. To further solidify its
cash position, the Company borrowed the full 90%, or $38 million, against these
policies in December 2008. There is no specified maturity for this
loan.
The
Company believes that it qualifies to participate in the U.S. Treasury’s CPP and
submitted an application through its primary regulator in November 2008. While
there is no guarantee that the Company will be approved, the Company estimates
that this program could provide up to approximately $300 million in new
preferred equity. While the Company views additional capital as beneficial in
the current environment, it would also have the potential to significantly
improve the Company’s liquidity position, which would be important in the event
that Temporary Liquidity Guarantee Program (“TLGP”) debt is not
issued.
Once the
Company has become a Bank Holding Company, which is anticipated in the next few
months, it intends to apply for the FDIC’s TLGP. Participation in the TLGP would
be expected to assist the Company in obtaining several hundred million dollars
of senior unsecured debt financing at the holding company level. The Company may
also pursue other forms of debt financing that would not benefit from the TLGP.
There is no assurance that any form of financing will be obtained.
If the
Company were unable to obtain external financing, it may be necessary to reduce
cash contributions to its subsidiaries, extract capital from its subsidiaries to
the extent permitted to maintain continued compliance with regulatory
requirements or reduce investments in private equity and venture capital
endeavors. Those courses of action could result in foregoing opportunities to
recruit additional Financial Advisors or acquire new business operations,
reducing inventory levels of carried securities or scaling back of current
business operations. A consequence of any of those courses of action would
likely be a negative impact on near term earnings.
Statement of Financial
Condition Analysis
The
Company’s statement of financial condition consists primarily of cash and cash
equivalents (a large portion of which are segregated for the benefit of
customers), receivables and payables. The items represented in the statement of
financial condition are primarily liquid in nature, providing the Company with
flexibility in financing its business. Total assets of $18.3 billion at December
31, 2008 were down approximately 3% from September 30, 2008 (excluding the
cash received in the prior year from the $1.9 billion overnight borrowing at
RJBank). Most of this modest decrease is due to changes in brokers-dealers gross
assets and liabilities, including trading inventory, stock loan/borrow,
receivables and payables from/to broker-dealers and clearing organizations which
fluctuate with the Company's business levels and overall market conditions. Due
to the Company’s decision to decrease the rate of growth of RJBank’s loan
portfolio, the change in bank loans has had less of an impact on the
Company’s total assets during recent fiscal quarters than in the prior
year.
As of
December 31, 2008, the Company's liabilities are comprised primarily of
brokerage client payables of $5.9 billion at the broker-dealer subsidiaries and
deposits of $8.8 billion at RJBank, as well as deposits held on stock loan
transactions of $549 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 $558 million receivable comprised of
the Company's cash deposits for stock borrowed transactions. To meet its
obligations to clients, the Company has approximately $5.1 billion in cash and
segregated assets. The Company also has client brokerage receivables of $1.3
billion and $7.7 billion in loans at RJBank.
Contractual
Obligations, Commitments and Contingencies
The
Company has contractual obligations of approximately $2.8 billion, with $2.3
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 $2.0 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 12 and
16 of the Notes to the Condensed Consolidated Financial Statements for further
information on the Company’s commitments).
The
Company’s Board of Directors approved up to $200 million in short-term or
mezzanine financing investments, primarily related to investment banking
transactions. As of December 31, 2008, the Company did not have any such
investments. The Board of Directors has approved the use of up to $75 million
for investment in proprietary merchant banking opportunities. As of December 31,
2008, the Company has invested $32.3 million. The use of this capital is subject
to availability of funds.
The
Company is authorized by the Board of Directors to repurchase its common stock
for general corporate purposes. There is no formal stock repurchase plan at this
time. In May 2004 the Board authorized the repurchase of up to $75 million of
shares. During March 2008, the Company exhausted this authorization. On March
11, 2008, the Board of Directors authorized an additional $75 million for
repurchases at the discretion of the Board’s Share Repurchase Committee. As of
December 31, 2008 the unused portion of this authorization was $67.7
million.
RJBank
provides to its affiliate, RJCS, on behalf of certain corporate borrowers, a
guarantee of payment in the event of the borrower’s default for exposure under
interest rate swaps entered into with RJCS. At December 31, 2008 and September
30, 2008, the aggregate exposure under these guarantees was $14.5 million and
$2.5 million respectively, which was underwritten as part of RJBank’s larger
corporate credit relationships. The estimated total potential exposure under
these guarantees is $16.2 million at December 31, 2008.
RJBank
has outstanding at any time a significant number of commitments to extend
credit, and other credit-related off-balance sheet financial instruments such as
standby letters of credit and loan purchases. Because many loan commitments
expire without being funded in whole or part, the contract amounts are not
estimates of the Company’s future liquidity requirements. Based on the
underlying terms and conditions of these loans, management believes it is highly
unlikely that a material percentage of these commitments would be drawn. Many of
these loan commitments have fixed expiration dates or other termination clauses
and, historically, a large percentage of the letters of credit expire without
being funded.
As of
December 31, 2008, RJBank had entered into short-term reverse repurchase
agreements totaling $1.1 billion with four counterparties, with individual
exposures of $400 million, $300 million, $250 million and $100 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 U.S. Treasury securities received as collateral, the creditworthiness of
these counterparties, which is closely monitored, and the short duration of
these agreements.
The
Company has also committed to lend to RJTCF, or guarantee obligations in
connection with RJTCF’s low income housing development/rehabilitation and
syndication activities, aggregating up to $125 million upon request, subject to
certain limitations as well as annual review and renewal. RJTCF borrows in order
to invest in partnerships which purchase and develop properties qualifying for
tax credits (“project partnerships”). These investments in project partnerships
are then sold to various tax credit funds, which have third party investors, and
for which RJTCF serves as the managing member or general partner. RJTCF
typically sells these investments within 90 days of their acquisition, and the
proceeds from the sales are used to repay RJTCF’s borrowings. During the first
quarter of fiscal year 2009, a subsidiary of the Company purchased 58 units in
one of RJTCF’s current fund offerings for a capital contribution of up to $58
million. At December 31, 2008, $30 million of capital had been contributed by
the subsidiary to this fund. The subsidiary expects to resell these interests to
other investors; however, the holding period of these interests could be much
longer than 90 days. In addition to the 58 unit interest purchased, RJTCF
provided certain specific performance guarantees to the investors of this fund.
The Company has guaranteed the $58 million capital contribution obligation as
well as the specified performance guarantees provided by RJTCF to the fund’s
investors. The unfunded capital contribution obligation is $28 million as of
December 31, 2008. 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, 2008, cash funded to invest
in either loans or investments in project partnerships (excluding the 58 unit
purchase mentioned previously) was $10.3 million. In addition, at December 31,
2008, RJTCF is committed to additional future fundings (excluding the 58 unit
purchase mentioned previously) of $300,000 related to project partnerships that
have not yet been sold to various tax credit funds. The Company and RJTCF also
issue certain guarantees to various third parties related to project
partnerships, interests in which have been or are expected to be sold to one or
more tax credit funds under RJTCF’s management. In some instances, RJTCF is not
the primary guarantor of these obligations which aggregate to a cumulative
maximum obligation of approximately $14.9 million as of December 31, 2008.
Through RJTCF’s wholly owned lending subsidiary, Raymond James Multi-Family
Finance, Inc., certain construction loans or loans of longer duration
(“permanent loans”) may be made directly to certain project partnerships. As of
December 31, 2008 nine such construction loans are outstanding with an unfunded
balance of $13.1 million available for future draws on such loans. Similarly,
five permanent loan commitments are outstanding as of December 31, 2008. Each of
these commitments will only be funded if certain conditions are achieved by the
project partnership and in the event such conditions are not met, generally
expire two years after their issuance. The total amount of such unfunded
permanent loan commitments as of December 31, 2008 is $5.9 million.
The
Company is the lessor in a leveraged commercial aircraft transaction with
Continental Airlines, Inc. (“Continental”). The Company's ability to realize its
expected return is dependent upon this airline’s ability to fulfill its lease
obligation. In the event that this airline defaults on its lease commitment and
the Trustee for the debt holders is unable to re-lease or sell the plane with
adequate terms, the Company would suffer a loss of some or all of its
investment. The value of the Company’s leveraged lease with Continental was
approximately $8.8 million as of December 31, 2008. The Company's equity
investment represented 20% of the aggregate purchase price; the remaining 80%
was funded by public debt issued in the form of equipment trust certificates.
The residual value of the aircraft at the end of the lease term of approximately
17 years is projected to be 15% of the original cost. This lease expires in May
2014. Although Continental remains current on its lease payments to the Company,
the inability of Continental to make its lease payments, or the termination or
modification of the lease through a bankruptcy proceeding, could result in the
write-down of the Company's investment and the acceleration of certain income
tax payments. The Company continues to monitor this lessee for specific events
or circumstances that would increase the likelihood of a default on
Continental’s obligations under this lease.
The
Company utilizes client marginable securities to satisfy deposits with clearing
organizations. At December 31, 2008, the Company had client margin securities
valued at $113.5 million pledged with a clearing organization to meet the point
in time requirement of $63.9 million. At September 30, 2008, the Company had
client margin securities valued at $210.0 million pledged with a clearing
organization to meet the point in time requirement of $139.9
million.
In the
normal course of business, certain subsidiaries of the Company act as general
partner and may be contingently liable for activities of various limited
partnerships. These partnerships engaged primarily in real estate activities. In
the opinion of the Company, such liabilities, if any, for the obligations of the
partnerships will not in the aggregate have a material adverse effect on the
Company's consolidated financial position.
The
Company entered into two agreements, both with Raymond James Trust, National
Association (“RJT”) and one with the Office of the Controller of the Currency
(“OCC”), as a condition to RJT’s conversion in January, 2008 from a state to a
federally chartered institution. 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.
See Note
12 of the Notes to the Consolidated Financial Statements for further information
on the Company's commitments and contingencies.
In
addition, see Item 1, “Legal Proceedings,” in Part II of this report for
discussion of auction rate securities (“ARS”) and the potential implications of
the Company’s current liquidity position on its ability to resolve these
matters.
Regulatory
The
Company's broker-dealer subsidiaries are subject to requirements of the SEC in
the United States and the IIROC in Canada relating to liquidity and capital
standards. The domestic broker-dealer subsidiaries of the Company are subject to
the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the
Securities Exchange Act of 1934. RJA, a member firm of FINRA, is also subject to
the rules of FINRA, whose requirements are substantially the same. Rule 15c3-1
requires that aggregate indebtedness, as defined, not exceed 15 times net
capital, as defined. Rule 15c3-1 also provides for an “alternative net capital
requirement”, which RJA, RJFS, Eagle Distribution Fund, Inc. (“EFD”) and Raymond
James (USA) Ltd. have elected. It requires that minimum net capital, as defined,
be equal to the greater of $250,000 or 2% of Aggregate Debit Items arising from
client transactions. FINRA may require a member firm to reduce its business if
its net capital is less than four percent of Aggregate Debit Items and may
prohibit a member firm from expanding its business and declaring cash dividends
if its net capital is less than 5% of Aggregate Debit Items. RJA, RJFS, EFD,
Raymond James (USA) Ltd. all had net capital in excess of minimum requirements
as of December 31, 2008.
RJ Ltd.
is subject to the Minimum Capital Rule (By-Law No. 17 of the IIROC) and the
Early Warning System (By-Law No. 30 of the IIROC). The Minimum Capital Rule
requires that every member shall have and maintain at all times Risk Adjusted
Capital greater than zero calculated in accordance with Form 1 (Joint Regulatory
Financial Questionnaire and Report) and with such requirements as the Board of
Directors of the IIROC may from time to time prescribe. Insufficient Risk
Adjusted Capital may result in suspension from membership in the stock exchanges
or the IIROC. The Early Warning System is designed to provide advance warning
that a member firm is encountering financial difficulties. This system imposes
certain sanctions on members who are designated in Early Warning Level 1 or
Level 2 according to its capital, profitability, liquidity position, frequency
of designation or at the discretion of the IIROC. Restrictions on business
activities and capital transactions, early filing requirements, and mandated
corrective measures are sanctions that may be imposed as part of the Early
Warning System. RJ Ltd. was not in Early Warning Level 1 or Level 2 during the
quarter ended December 31, 2008 or 2007.
RJBank is
subject to various regulatory and capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly, additional discretionary actions by
regulators. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, RJBank must meet specific capital guidelines that
involve quantitative measures of RJBank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
RJBank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Quantitative measures established by regulation to ensure capital
adequacy require RJBank to maintain minimum amounts and ratios of Total and Tier
I Capital (as defined in the regulations) to risk-weighted assets (as defined).
Management believes, as of December 31, 2008, that RJBank meets all capital
adequacy requirements to which it is subject.
The
Company has announced its plans to seek financial holding company status as a
result of RJBank’s planned conversion from a thrift to a nationally-chartered
commercial bank. The Company has filed to become a bank holding company, and
then upon approval would elect to become a financial holding company. Once the
financial holding company status is achieved, the Company would be under
regulation of the Federal Reserve.
See Note
15 of the Notes to the Condensed Consolidated Financial Statements for further
information on the Company’s regulatory environment.
Off-Balance Sheet
Arrangements
Information
concerning the Company’s off balance sheet arrangements is included in Note 16
of the Notes to the Condensed Consolidated Financial Statements. Such
information is hereby incorporated by reference.
Effects of
Inflation
The
Company's assets are primarily liquid in nature and are not significantly
affected by inflation. However, the rate of inflation affects the Company's
expenses, including employee compensation, communications and occupancy, which
may not be readily recoverable through charges for services provided by the
Company.
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,
2008 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, 2008. 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 Financial Instruments 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
Company adopted SFAS 157 and FSP SFAS 157-3 on October 1, 2008. The adoption of
these pronouncements did not have any material impact on the financial position
or operating results of the Company. 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.
Fair value is defined as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The Company determines the fair
values of its financial instruments and assets and liabilities recognized at
fair value in the financial statements on a recurring basis in accordance with
SFAS 157. FSP SFAS No. 157-2 delays the effective date of SFAS 157 (until
October 1, 2009 for the Company) for nonfinancial assets and nonfinancial
liabilities, except for items recognized or disclosed at fair value on a
recurring basis. As such, the Company has not applied SFAS 157 to the impairment
tests or assessments under SFAS 142, real estate owned and nonfinancial
long-lived assets measured at fair value for an impairment assessment under SFAS
144.
In
determining fair value, the Company uses various valuation approaches, including
market, income and/or cost approaches. Fair value is a market-based measure
considered from the perspective of a market participant. As such, even when
market assumptions are not readily available, the Company’s own assumptions
reflect those that market participants would use in pricing the asset or
liability at the measurement date. The standard describes the following three
levels used to classify fair value measurements:
Level 1—Quoted prices
(unadjusted) in active markets for identical assets or liabilities.
Level 2— Observable inputs
other than Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3—Prices or valuation
techniques that require inputs that are both significant to the fair value
measurement and unobservable.
SFAS 157
requires the Company to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The availability of
observable inputs can vary from instrument to instrument and in certain cases,
the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, an instrument’s level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair
value measurement. The Company’s assessment of the significance of a particular
input to the fair value measurement of an instrument requires judgment and
consideration of factors specific to the instrument.
Valuation
Techniques
The fair
value for certain financial instruments is derived using pricing models and
other valuation techniques that involve significant management judgment. The
price transparency of financial instruments is a key determinant of the degree
of judgment involved in determining the fair value of the Company’s financial
instruments. Financial instruments for which actively quoted prices or pricing
parameters are available will generally have a higher degree of price
transparency than financial instruments that are thinly traded or not quoted. In
accordance with SFAS 157, the criteria used to determine whether the market for
a financial instrument is active or inactive is based on the particular asset or
liability. For equity securities, the Company’s definition of actively traded
was based on average daily volume and other market trading statistics. The
Company considered the market for other types of financial instruments,
including certain non-U.S. agency government securities and certain
collateralized debt obligations, to be inactive as of December 31, 2008. As a
result, the valuation of these financial instruments included significant
management judgment in determining the relevance and reliability of market
information available. The Company considered the inactivity of the market to be
evidenced by several factors, including decreased price transparency caused by
decreased volume of trades relative to historical levels, stale transaction
prices and transaction prices that varied significantly either over time or
among market makers.
Cash
Equivalents
Cash
equivalents consist of investments in money market mutual funds. Such
instruments are classified within Level 1 of the fair value
hierarchy.
Trading
Instruments and Trading Instruments Sold but Not Yet Purchased
Trading
Securities
Trading
securities are comprised primarily of the financial instruments held by the
Company's broker-dealer subsidiaries (see Note 4 of the Notes to the Condensed
Consolidated Financial Statements for more information). When available, the
Company uses quoted prices in active markets to determine the fair value of
securities. Such instruments are classified within Level 1 of the fair value
hierarchy. Examples include exchange traded equity securities and liquid
government debt securities.
When
instruments are traded in secondary markets and quoted market prices do not
exist for such securities, the Company employs valuation techniques, including
matrix pricing to estimate fair value. Matrix pricing generally utilizes
spread-based models periodically re-calibrated to observable inputs such as
market trades or to dealer price bids in similar securities in order to derive
the fair value of the instruments. Valuation techniques may also rely on other
observable inputs such as yield curves, interest rates and expected principal
repayments, and default probabilities. Instruments valued using these
inputs are typically classified within Level 2 of the fair value hierarchy.
Examples include certain municipal debt securities, corporate debt securities,
agency mortgage backed securities, and restricted equity securities in public
companies. Management
utilizes prices from independent services to corroborate its estimate of fair
value. Depending upon the type of security, the pricing service may provide a
listed price, a matrix price, or use other methods including broker-dealer price
quotations.
Positions
in illiquid securities that do not have readily determinable fair values require
significant management judgment or estimation. For these securities the Company
uses pricing models, discounted cash flow methodologies, or similar techniques.
Securities valued using these techniques are classified within Level 3 of the
fair value hierarchy. Examples include certain municipal debt securities,
certain mortgage backed securities and equity securities in private companies.
For certain collateralized mortgage obligations (“CMOs”), where there has been
limited activity or less transparency around significant inputs to the
valuation, such as assumptions regarding performance of the underlying
mortgages, securities are currently classified as Level 3 even though the
Company believes that Level 2 inputs could likely be obtainable should markets
for these securities become more active in the future.
Derivative
Contracts
The
Company enters into interest rate swaps and futures contracts as part of its
fixed income business to facilitate customer transactions and to hedge a portion
of the Company’s trading inventory. In addition, to mitigate interest rate risk
should there be a significantly rising rate environment, Raymond James Bank
(“RJBank”) purchases interest rate caps. See Note 10 of the Notes to the
Condensed Consolidated Financial Statements for more information. Fair values
for derivative contracts are obtained from counterparties, pricing models that
consider current market trading levels and the contractual prices for the
underlying financial instruments, as well as time value and yield curve or other
volatility factors underlying the positions. Where model inputs can be observed
in a liquid market and the model does not require significant judgment, such
derivative contracts are typically classified within Level 2 of the fair value
hierarchy.
Available
for Sale Securities
Available
for sale securities are comprised primarily of CMOs and other mortgage related
debt securities. Debt and equity securities classified as available for sale are
reported at fair value with unrealized gains and losses, net of deferred taxes,
reported in shareholders' equity as a component of accumulated other
comprehensive income. See Note 5 of the Notes to the Condensed Consolidated
Financial Statements for more information. The fair value of available for sale
securities is determined by obtaining third party bid quotations based upon
observable data including benchmark yields, reported trades, other broker-dealer
quotes, issuer spreads, two-sided markets, benchmark securities, other
bids,offers, new issue data, monthly payment information, collateral
performance, and reference data including market research
publications. Changes to fair value are recognized in Other
Comprehensive Income. Securities measured using these valuation techniques are
generally classified within Level 2 of the fair value hierarchy.
If these
sources are not available, are deemed unreliable, or when an active market does
not exist, then the fair value is estimated using pricing models or
discounted cash flow analyses, using observable market data where available as
well as unobservable inputs provided by management. Securities valued using
these valuation techniques are classified within Level 3 of the fair value
hierarchy.
The
reference point for determining when securities are in a loss position is
quarter end. As such, it is possible that a security had a fair value that
exceeded its amortized cost on other days during the period. Unrealized losses
deemed to be other-than-temporary for available for sale securities are included
in current period earnings within Other Revenue and a new cost basis for the
security is established. In order to evaluate the Company’s risk exposure and
any potential impairment of these securities, characteristics of each security
owned such as collateral type, delinquency and foreclosure levels, credit
enhancement, projected loan losses and collateral coverage are reviewed monthly
by management. These factors, in addition to the Company’s intent and ability to
hold the investment for a time period sufficient to allow for the anticipated
valuation recovery to the Company’s cost basis, are also considered in
determining whether these securities are other-than-temporarily impaired.
Evidence considered in this assessment includes the reasons for the impairment,
the severity and duration of the impairment, changes in value subsequent to
year-end, and forecasted performance of the security. See Note 5 of the Notes to
the Condensed Consolidated Financial Statements for more
information.
Private
Equity Investments
Private
equity investments, held primarily by the Company’s Proprietary Capital segment,
consist of various direct and third party private equity and merchant banking
investments. The valuation of these investments requires significant management
judgment due to the absence of quoted market prices, inherent lack of liquidity
and long-term nature of these assets. Direct private equity investments are
valued initially at transaction price until significant transactions or
developments indicate that a change in the carrying values of these investments
is appropriate. Generally, the carrying values of these investments will be
adjusted based on financial performance, investment-specific events, financing
and sales transactions with third parties and changes in market outlook.
Investments in funds structured as limited partnerships are generally valued
based on the financial statements of the partnerships which generally use
similar methodologies. Investments valued using these valuation techniques are
classified within Level 3 of the fair value hierarchy.
Other
Investments
Other
investments consist predominantly of Canadian government bonds. The fair value
of these bonds is estimated using recent external market transactions. Such
bonds are classified within Level 2 of the fair value hierarchy as the external
market transactions used are less frequent than those in active
markets.
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 142. 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,
2008, goodwill had been allocated to the Private Client Group of RJA, and both
the Private Client Group and Capital Markets segments of Raymond James Ltd. Due
to the impact of negative market conditions on the Private Client Group and
Capital Market segments the Company performed an analysis of the carrying value
of the goodwill for each reporting unit. This analysis did not result in
impairment. The Company will be performing its annual testing for impairment of
goodwill during the quarter ending March 31, 2009. The results of this testing
could result in the impairment of goodwill.
Allowance
for Loan Losses and Other Provisions
The
Company recognizes liabilities for contingencies when there is an exposure that,
when fully analyzed, indicates it is both probable that a liability has been
incurred or an asset has been impaired and the amount of loss can be reasonably
estimated. When a range of probable loss can be estimated, the Company accrues
the most likely amount; if not determinable, the Company accrues 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, 2008, the amortized cost of all RJBank
loans was $7.8 billion and an allowance for loan losses of $106.1 million was
recorded against that balance. The total allowance for loan losses is equal to
1.36% of the amortized cost of the loan portfolio.
The
following table allocates RJBank’s allowance for loan losses by loan
category:
|
December
31,
|
|
September
30,
|
|
2008
|
|
2008
|
|
|
Loan
Category
|
|
|
Loan
Category
|
|
|
as
a % of
|
|
|
as
a % of
|
|
|
Total
Loans
|
|
|
Total
Loans
|
|
Allowance
|
Receivable
|
|
Allowance
|
Receivable
|
|
($
in 000’s)
|
|
|
|
|
|
|
Commercial
Loans
|
$
10,138
|
9%
|
|
$ 10,147
|
10%
|
|
|
|
|
|
|
Real
Estate Construction Loans
|
8,192
|
5%
|
|
7,061
|
5%
|
|
|
|
|
|
|
Commercial
Real Estate Loans (1)
|
75,752
|
50%
|
|
62,197
|
49%
|
|
|
|
|
|
|
Residential
Mortgage Loans
|
11,965
|
36%
|
|
8,589
|
36%
|
|
|
|
|
|
|
Consumer
Loans
|
93
|
-
|
|
161
|
-
|
|
|
|
|
|
|
Total
|
$
106,140
|
100%
|
|
$
88,155
|
100%
|
(1)
|
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, 2008 the
receivable from Financial Advisors was $215.8 million, which is net of an
allowance of $2.9 million for estimated uncollectibility.
Income
Taxes
SFAS No.
109, “Accounting for Income Taxes”, as interpreted by FIN 48, establishes
financial accounting and reporting standards for the effect of income taxes. The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in
the Company’s financial statements or tax returns. Judgment is required in
assessing the future tax consequences of events that have been recognized in the
Company’s financial statements or tax returns. Variations in the actual outcome
of these future tax consequences could materially impact the Company’s financial
position, results of operations, or cash flows. See Note 10 of the Notes to the
Condensed Consolidated Financial Statements for further information on the
Company’s income taxes.
For
discussion of the effects recently issued accounting standards not yet adopted
will have on the Company’s accounting policies and consolidated financial
statements, see Note 2 of the Notes to the Condensed Consolidated Financial
Statements.
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 foreign exchange
risk, credit risk, liquidity 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, 2008.
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 687 listed and over-the-counter
equity securities. In connection with these activities, the Company maintains
inventories in order to ensure availability of securities and to facilitate
client transactions. Additionally, the Company, primarily within its Canadian
broker-dealer subsidiary, invests for its own proprietary equity investment
account.
See Notes
3 and 4 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,
2008, the absolute fixed income and equity inventory limits excluding
contractual underwriting commitments for the Company’s domestic subsidiaries,
were $1.96 billion and $59.8 million, respectively. These same inventory limits
for RJ Ltd. as of December 31, 2008, were $47.3 million and $62.5 million,
respectively. The Company's trading activities in the aggregate were
significantly below these limits at December 31, 2008. Position limits in
trading inventory accounts are monitored on a daily basis. Consolidated position
and exposure reports are prepared and distributed to senior management. Limit
violations are carefully monitored. Management also monitors inventory levels
and trading results, as well as inventory aging, pricing, concentration and
securities ratings. For derivatives, primarily interest rate swaps, the Company
monitors exposure in its derivatives subsidiary daily based on established
limits with respect to a number of factors, including interest rate, spread,
ratio, basis, and volatility risk. These exposures are monitored both on a total
portfolio basis and separately for selected maturity periods.
In the
normal course of business, the Company enters into underwriting commitments. RJA
and RJ Ltd., as a lead, co-lead or syndicate member in the underwriting deal,
may be subject to market risk on any unsold shares issued in the offering to
which they are committed. Risk exposure is controlled by limiting participation,
the deal size or through the syndication process.
Interest
Rate Risk
The
Company is exposed to interest rate risk as a result of maintaining trading
inventories of fixed income instruments and actively manages this risk using
hedging techniques that involve swaps, futures, and U.S. Treasury obligations.
The Company monitors, on a daily basis, the Value-at-Risk (“VaR”) in its
institutional Fixed Income trading portfolios (cash instruments and interest
rate derivatives). VaR is an appropriate statistical technique for estimating
the potential loss in trading portfolios due to typical adverse market movements
over a specified time horizon with a suitable confidence level.
To
calculate VaR, the Company uses historical simulation. This approach assumes
that historical changes in market conditions are representative of future
changes. The simulation is based upon daily market data for the previous twelve
months. VaR is reported at a 99% confidence level, based on a one-day time
horizon. This means that the Company could expect to incur losses greater than
those predicted by the VaR estimates only once in every 100 trading days, or
about 2.5 times a year on average over the course of time. During the three
months ended December 31, 2008, the reported daily loss in the institutional
Fixed Income trading portfolio exceeded the predicted VaR one time.
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, 2008, with the corresponding dollar value of the Company's
portfolio:
|
Three
Months Ended December 31, 2008
|
|
VaR
at
|
|
|
|
|
|
|
December
31,
|
|
September
30,
|
|
High
|
Low
|
|
Daily Average
|
|
2008
|
|
2008
|
|
($
in 000's)
|
|
|
|
|
|
|
|
|
|
Daily
VaR
|
$ 901
|
$ 296
|
|
$ 603
|
|
$ 446
|
|
$ 586
|
Related
Portfolio Value
|
|
|
|
|
|
|
|
|
(Net) (1)
|
$ 98,176
|
$ 97,195
|
|
$
110,295
|
|
$ 86,215
|
|
$
103,047
|
VaR
as a Percent
|
|
|
|
|
|
|
|
|
of
Portfolio Value
|
0.92%
|
0.30%
|
|
0.55%
|
|
0.52%
|
|
0.57%
|
(1)
Portfolio value achieved on the day of the VaR calculation.
The
modeling of the risk characteristics of trading positions involves a number of
assumptions and approximations. While management believes that its assumptions
and approximations are reasonable, there is no uniform industry methodology for
estimating VaR, and different assumptions or approximations could produce
materially different VaR estimates. As a result, VaR statistics are more
reliable when used as indicators of risk levels and trends within a firm than as
a basis for inferring differences in risk-taking across firms.
Additional
information is discussed under Derivative Financial Instruments in Note 10 of
the Notes to the Condensed Consolidated Financial Statements.
RJ Ltd.’s
net income is sensitive to changes in interest rate conditions. Assuming a shift
of 100 basis points in interest rates and using interest-bearing asset and
liability balances as of December 31, 2008, RJ Ltd.'s sensitivity analysis
indicates that an upward movement would increase RJ Ltd.'s net income by
approximately CDN$46,000 for the quarter, whereas a downward shift of the same
magnitude would decrease RJ Ltd.'s net income by approximately this same amount
for the quarter. This sensitivity analysis is based on the assumption that all
other variables remain constant.
RJBank
maintains an earning asset portfolio that is comprised of mortgage, corporate
and consumer loans, as well as mortgage backed securities, securities purchased
under resale agreements, deposits at other banks and other investments. Those
earning assets are funded in part by: its obligations to clients, including NOW
accounts, demand deposits, money market accounts, savings accounts, and
certificates of deposit; and FHLB advances. Based on the current earning asset
portfolio of RJBank, market risk for RJBank is limited primarily to interest
rate risk. In the current market and economic environment, short term
interest rate risk has been severely impacted as credit conditions have rapidly
deteriorated and financial markets have experienced widespread illiquidity and
elevated levels of volatility. RJBank analyzes interest rate risk
based on forecasted net interest income, which is the net amount of interest
received and interest paid, and the net portfolio valuation, both in a range of
interest rate scenarios. The following table represents the carrying value of
RJBank's assets and liabilities that are subject to market risk. This table does
not include financial instruments with limited market risk exposure due to
offsetting asset and liability positions, short holding periods or short periods
of time until the interest rate resets.
RJBank
Financial Instruments with Market Risk (as described above):
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
(in
000's)
|
|
|
|
Mortgage
Backed Securities
|
$
184,662
|
$ 301,329
|
Loans
Receivable, Net
|
2,414,404
|
2,314,884
|
Total
Assets with Market Risk
|
$
2,599,066
|
$
2,616,213
|
|
|
|
|
|
|
Certificates
of Deposit
|
$
111,483
|
$ 118,233
|
Federal
Home Loan Bank Advances
|
50,000
|
50,000
|
Total
Liabilities with Market Risk
|
$
161,483
|
$ 168,233
|
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,
2008:
|
Interest
Rate Type
|
|
Fixed
|
Adjustable
|
Total
|
|
(in
000’s)
|
|
|
|
|
Commercial
Loans
|
$ 1,424
|
$ 723,433
|
$ 724,857
|
Real
Estate Construction Loans
|
-
|
285,412
|
285,412
|
Commercial
Real Estate Loans (1)
|
28,983
|
3,647,743
|
3,676,726
|
Residential
Mortgage Loans
|
21,867
|
2,818,631
|
2,840,498
|
Consumer
Loans
|
-
|
1,081
|
1,081
|
|
|
|
|
Total
Loans
|
$
52,274
|
$
7,476,300
|
$
7,528,574
|
(1)
|
Loans
wholly or partially secured by real estate. Of this amount, $612.8 million
is wholly or substantially secured by lien(s) on real estate. The
remainder is partially secured by real estate, the majority of which are
also secured by other assets of the borrower, and includes loans to
certain real estate investment
trusts.
|
One of
the core objectives of RJBank's Asset/Liability Management Committee is to
manage the sensitivity of net interest income to changes in market interest
rates. The Asset/Liability Management Committee uses several measures to monitor
and limit RJBank's interest rate risk including scenario analysis, interest
repricing gap analysis and limits, and net portfolio value limits. Simulation
models and estimation techniques are used to assess the sensitivity of the net
interest income stream to movements in interest rates. Assumptions about
consumer behavior play an important role in these calculations; this is
particularly relevant for loans such as mortgages where the client has the
right, but not the obligation, to repay before the scheduled
maturity.
The
sensitivity of net interest income to interest rate conditions is estimated for
a variety of scenarios. Assuming an immediate and lasting shift of 100 basis
points in the term structure of interest rates, RJBank's sensitivity analysis
indicates that an upward movement would decrease RJBank's net interest income by
3.24% in the first year after the rate increase. This sensitivity figure is
based on positions as of December 31, 2008, and is subject to certain
simplifying assumptions, including that management takes no corrective
action.
To
mitigate interest rate risk in a significantly rising rate environment, RJBank
purchased three year term interest rate caps with high strike rates (more than
300 basis points higher than current rates) during the year ended September 30,
2008 that will increase in value if interest rates rise and entitle RJBank to
cash flows if interest rates rise above strike rates. RJBank minimizes the
credit or repayment risk of derivative instruments by entering into transactions
only with high-quality counterparties whose credit rating is investment grade.
See Note 10 of the Notes to the Condensed Consolidated Financial Statements for
further information.
Equity
Price Risk
The
Company is exposed to equity price risk as a consequence of making markets in
equity securities and the investment activities of RJA and RJ Ltd. The U.S.
broker-dealer activities are primarily client-driven, with the objective of
meeting clients' needs while earning a trading profit to compensate for the risk
associated with carrying inventory. The Company attempts to reduce the risk of
loss inherent in its inventory of equity securities by monitoring those security
positions constantly throughout each day and establishing position limits. The
Company's Canadian broker-dealer has a proprietary trading business with 26
traders. The average aggregate inventory held for proprietary trading during the
three months ended December 31, 2008 was CDN$8.1 million. The Company's equity
securities inventories are priced on a regular basis and there are no material
unrecorded gains or losses.
Foreign Exchange
Risk
RJ Ltd.
is subject to foreign exchange risk primarily due to financial instruments
denominated in U.S. dollars that may be impacted by fluctuation in foreign
exchange rates. In order to mitigate this risk, RJ Ltd. enters into forward
foreign exchange contracts. The fair value of these contracts is immaterial. As
of December 31, 2008, forward contracts outstanding to buy and sell U.S. dollars
totaled CDN $1.2 million and CDN $0.9 million, respectively.
Credit
Risk
Credit
risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or
counterparty’s ability to meet its financial obligations under contractual or
agreed upon terms. The nature and amount of credit risk depends on the type of
transaction, the structure and duration of that transaction and the parties
involved. Credit risk is an integral component of the profit assessment of
lending and other financing activities.
The
Company is engaged in various trading and brokerage activities whose
counterparties primarily include broker-dealers, banks and other financial
institutions. The Company is exposed to risk that these counterparties may not
fulfill their obligations. The risk of default depends on the creditworthiness
of the counterparty and/or the issuer of the instrument. The Company manages
this risk by imposing and monitoring individual and aggregate position limits
within each business segment for each counterparty, conducting regular credit
reviews of financial counterparties, reviewing security and loan concentrations,
holding and marking to market collateral on certain transactions and conducting
business through clearing organizations, which guarantee
performance.
The
Company's client activities involve the execution, settlement, and financing of
various transactions on behalf of its clients. Client activities are transacted
on either a cash or margin basis. Credit exposure associated with the Company's
Private Client Group results primarily from customer margin accounts, which are
monitored daily and are collateralized. When clients execute a purchase, the
Company is at some risk that the client will renege on the trade. If this
occurs, the Company may have to liquidate the position at a loss. However, most
private clients have available funds in the account before the trade is
executed. The Company monitors exposure to industry sectors and individual
securities and performs analysis on a regular basis in connection with its
margin lending activities. The Company adjusts its margin requirements if it
believes its risk exposure is not appropriate based on market
conditions.
The
Company is subject to concentration risk if it holds large positions, extends
large loans to, or has large commitments with a single counterparty, borrower,
or group of similar counterparties or borrowers (e.g. in the same industry).
Securities purchased under agreements to resell consist primarily of securities
issued by the U.S. government or its agencies. Receivables from and payables to
clients and stock borrow and lending activities are conducted with a large
number of clients and counterparties and potential concentration is carefully
monitored. Inventory and investment positions taken and commitments made,
including underwritings, may involve exposure to individual issuers and
businesses. The Company seeks to limit this risk through careful review of the
underlying business and the use of limits established by senior management,
taking into consideration factors including the financial strength of the
counterparty, the size of the position or commitment, the expected duration of
the position or commitment and other positions or commitments
outstanding.
The
Company is also the lessor in a leveraged commercial aircraft transaction with
Continental. The Company's ability to realize its expected return is dependent
upon the airline’s ability to fulfill its lease obligation. In the event that
the airline defaults on its lease commitments and the trustee for the debt
holders is unable to re-lease or sell the plane with adequate terms, the Company
would suffer a loss of some or all of its investment. Although Continental
remains current on its lease payments to the Company, the inability of
Continental to make its lease payments, or the termination or modification of
the lease through a bankruptcy proceeding, could result in the write-down of the
Company's investment and the acceleration of certain income tax payments. The
Company continues to monitor this lessee for specific events or circumstances
that would increase the likelihood of a default on Continental’s obligations
under this lease.
RJBank
manages risks inherent in its lending activities through policies and procedures
which incorporate strong lending standards and management oversight. The
underwriting policies are described in the section below.
Loan
Underwriting Policies
The
Company’s credit risk is managed through its policies and procedures. There have
been no material changes in the Company’s underwriting policies during the three
months ended December 31, 2008. For a description of RJBank’s underwriting
policies for both the residential and corporate loan portfolios, refer to the
Company’s Annual Report on Form 10-K for the year ended September 30,
2008.
Loan
Portfolio
The
Company tracks and reviews many factors to monitor credit risk in RJBank’s loan
portfolios. These factors include, but are not limited to: loan performance
trends, loan product parameters and qualification requirements, geographic and
industry concentrations, borrower credit scores, LTV ratios, occupancy (i.e.
owner occupied, second home or investment property), collateral value trends,
level of documentation, loan purpose, industry performance trends, average loan
size, and policy exceptions.
The
LTV/FICO scores of RJBank’s residential first mortgage loan portfolio are as
follows:
|
December
31,
|
September
30,
|
|
2008
|
2008
|
|
|
Residential
First Mortgage
|
|
|
Loan
Weighted Average
|
|
|
LTV/FICO
(1)
|
63%
/ 751
|
64%
/ 750
|
(1)
At origination. Small group of local loans representing less than 0.5% of
residential portfolio excluded.
The geographic concentrations (top five
states) of RJBank’s one-to-four family residential mortgage loans are as
follows:
December
31,
|
September
30,
|
2008
|
2008
(1)
|
($
outstanding as a % of RJBank total assets)
|
5.9%
CA
|
5.2%
CA
|
4.1%
NY
|
3.3%
NY
|
3.0%
FL
|
3.0%
FL
|
2.0%
NJ
|
2.1%
NJ
|
1.3%
VA
|
1.3%
VA
|
(1)
|
Concentration
ratios are presented as a percentage of adjusted RJBank total assets of
$9.4 billion. Adjusted RJBank total assets (non-GAAP) at September 30,
2008 exclude the assets associated with the $1.9 billion FHLB advance
repaid on October 1, 2008 and the $60 million return of capital to RJF on
October 2, 2008.
|
The
industry concentrations (top five categories) of RJBank’s corporate loans are as
follows:
December
31,
|
September
30,
|
2008
|
2008
(1)
|
($
outstanding as a % of RJBank total assets)
|
|
|
3.7% Consumer
Products/Services
|
3.3% Telecom
|
3.6% Telecom
|
3.2% Retail
Real Estate
|
3.5% Industrial
Manufacturing
|
3.2% Consumer
Products/Services
|
3.3% Retail
Real Estate
|
3.1% Industrial
Manufacturing
|
3.3% Healthcare
(excluding hospitals)
|
3.0% Healthcare
(excluding
hospitals)
|
(1)
|
Concentration
ratios are presented as a percentage of adjusted RJBank total assets of
$9.4 billion. Adjusted RJBank total assets (non-GAAP) at September 30,
2008 exclude the assets associated with the $1.9 billion FHLB advance
repaid on October 1, 2008 and the $60 million return of capital to RJF on
October 2, 2008.
|
To manage
and limit credit losses, the Company maintains a rigorous process to manage its
loan delinquencies. With all whole loans purchased on a servicing-retained basis
and all originated first mortgages serviced by a third party, the primary
collection effort resides with the servicer. RJBank personnel direct and
actively monitor the servicers’ efforts through extensive communications
regarding individual loan status changes and requirements of timely and
appropriate collection or property management actions and reporting, including
management of other third parties used in the collection process (appraisers,
attorneys, etc.). Additionally, every residential and consumer loan over 60 days
past due is reviewed by RJBank personnel monthly and documented in a written
report detailing delinquency information, balances, collection status, appraised
value, and other data points. RJBank senior management meets monthly to discuss
the status, collection strategy and charge-off/write-down recommendations on
every residential or consumer loan over 60 days past due.
See Note
6 of the Notes to the Condensed Consolidated Financial Statements for more
information.
Liquidity
Risk
See Item
2, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources,” in this report for more
information regarding the Company’s liquidity and how it manages its liquidity
risk.
Item
4. CONTROLS AND
PROCEDURES
DISCLOSURE
CONTROLS AND PROCEDURES
Disclosure controls are procedures designed to ensure
that information required to be disclosed in the Company's reports filed under
the Exchange Act, such as this report, is recorded, processed, summarized, and
reported within the time periods specified in the SEC's rules and forms.
Disclosure controls are also designed to ensure that such information is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance of achieving the desired control objectives, as the
Company's are designed to do, and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
Under the
supervision and with the participation of the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, the Company has
evaluated the effectiveness of its disclosure controls and procedures pursuant
to Exchange Act Rule 13a-15(b) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures
are effective.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes in the Company’s internal control over financial reporting
during the quarter ended December 31, 2008 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
As a
result of the extensive regulation of the securities industry, the Company’s
broker-dealer subsidiaries are subject to regular reviews and inspections by
regulatory authorities and self-regulatory organizations, which can result in
the imposition of sanctions for regulatory violations, ranging from non-monetary
censure to fines and, in serious cases, temporary or permanent suspension from
business. In addition, from time to time regulatory agencies and
self-regulatory organizations institute investigations into industry practices,
which can also result in the imposition of such sanctions.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate,
was assessed for the year 2001 approximately $6.8 million by the Turkish tax
authorities. The authorities applied a significantly different methodology than
in the prior year’s audit which the Turkish tax court and Council of State
affirmed. RJY is vigorously contesting most aspects of this assessment and has
sought reconsideration of the Turkish Council of State. The Turkish tax
authorities, utilizing the 2001 methodology, assessed RJY $5.7 million for 2002,
which is also being challenged. Audits of 2003 and 2004 are anticipated and
their outcome is unknown in light of the change in methodology and the pending
litigation. On October 24, 2008, RJY was notified by the Capital Markets Board
of Turkey that the technical capital inadequacy resulting from RJY’s provision
for this case required an additional capital contribution, and as a result, RJY
halted all trading activities. On December 5, 2008 RJY ceased
operations and subsequently filed for protection under Turkish bankruptcy laws.
The Company has recorded a provision for loss in its consolidated financial
statements for its full equity interest in this joint venture. As of December
31, 2008, RJY had total capital of approximately $4.7 million, of which the
Company owns approximately 50%.
Sirchie
Acquisition Company, LLC (“SAC”), an 80% owned indirect unconsolidated
subsidiary acquired as a merchant banking investment has been advised
by the Commerce and Justice Departments that they intend to seek civil and
criminal sanctions against it, as the purported successor in interest to Sirchie
Finger Print Laboratories, Inc. (“Sirchie”), based upon alleged breaches of
Department of Commerce suspension orders by Sirchie and its former majority
shareholder that occurred prior to the acquisition. Discussions are ongoing, and
the impact, if any, on the value of this investment is indeterminate at this
time.
In
connection with auction rate securities (“ARS”), the Company's primary
broker-dealers, RJA and RJFS, have been subject to ongoing investigations, with
which they are cooperating fully, by the Securities and Exchange Commission
(“SEC”), the New York Attorney General's Office and Florida’s Office of
Financial Regulation. The Company is also named in a class action lawsuit
similar to that filed against a number of brokerage firms alleging various
securities law violations, which it is vigorously defending. The Company
announced in April 2008 that customers held approximately $1.9 billion of ARS,
which as of December 31, 2008, had declined to approximately $919 million due to
the redemption and refinancing of such securities by the issuers of the ARS.
Additional information regarding ARS can be found at http://www.raymondjames.com/auction_rate_preferred.htm.
The information on the Company’s Internet site is not incorporated by
reference.
Several
large banks and brokerage firms, most of whom were the primary underwriters of
and supported the auctions for ARS, have announced agreements, usually as part
of a regulatory settlement, to repurchase ARS at par from some of their clients.
Other brokerage firms have entered into similar agreements. The Company, in
conjunction with other industry participants is actively seeking a solution to
ARS’ illiquidity. This includes issuers restructuring and refinancing the ARS,
which has met with some success. Should these restructurings and refinancings
continue, then clients’ holdings could be reduced further, however, there can be
no assurance these events will continue. If the Company were to consider
resolving pending claims, inquiries or investigations by offering to repurchase
all or some portion of these ARS from certain clients, it would have to have
sufficient regulatory capital and cash or borrowing power to do so, and at
present it does not have such capacity. Further, if such repurchases were made
at par value there could be a market loss if the underlying securities’ value is
less than par and any such loss could adversely affect the results of
operations.
The
Company is a defendant or co-defendant in various lawsuits and arbitrations
incidental to its securities business. The Company is contesting the allegations
in these cases and believes that there are meritorious defenses in each of these
lawsuits and arbitrations. In view of the number and diversity of claims against
the Company, the number of jurisdictions in which litigation is pending and the
inherent difficulty of predicting the outcome of litigation and other claims,
the Company cannot state with certainty what the eventual outcome of pending
litigation or other claims will be. In the opinion of the Company's management,
based on current available information, review with outside legal counsel, and
consideration of amounts provided for in the accompanying consolidated financial
statements with respect to these matters, ultimate resolution of these matters
will not have a material adverse impact on the Company's financial position or
results of operations. However, resolution of one or more of these matters may
have a material effect on the results of operations in any future period,
depending upon the ultimate resolution of those matters and upon the level of
income for such period.
Item
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, 2008.
Item 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Reference
is made to information contained under “Capital Transactions” in Note 13 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 IIROC; 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 15 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 5. OTHER
INFORMATION
On
February 6, 2009, RJF entered into a new 364-day credit agreement with six
commercial banks, JPMorgan Chase Bank, National Association also acting in the
capacity of Administrative Agent for the lenders. The new agreement provides for
up to $100 million of revolving borrowings outstanding from time to time. In
addition to representations, warranties and covenants that are comparable to the
RJF credit agreement that recently terminated, the new agreement contains
additional provisions related to RJBank. Borrowings under this new agreement are
subject to RJF’s receipt of approval from the U.S. Treasury to participate in
the CPP. The Comapny conducts other commercial banking business with the
six lenders.
Item
6. EXHIBITS
10.9.8
|
|
$100,000,000
CREDIT AGREEMENT, dated as of February 6, 2009, among RAYMOND JAMES
FINANCIAL, INC., as Borrower, THE LENDERS NAMED HEREIN, JPMORGAN CHASE
BANK, NATIONAL ASSOCIATION, as Administrative Agent, REGIONS BANK, as
Co-Syndication Agent, FIFTH THIRD BANK, as Co-Syndication Agent, and PNC
BANK, NATIONAL ASSOCIATION, as Co-Syndication agent, filed
herewith.
|
|
|
|
|
|
11
|
|
Statement
Re: Computation of per Share Earnings (The calculation of per share
earnings is included in Part I, Item 1 in the Notes to Condensed
Consolidated Financial Statements (Earnings Per Share) and is omitted here
in accordance with Section (b)(11) of Item 601 of Regulation
S-K).
|
|
|
|
|
|
31.1
|
|
Principal
Executive Officer Certification as required by Rule 13a-14(a)/15d-14(a),
filed herewith.
|
|
|
|
|
|
31.2
|
|
Principal
Financial Officer Certification as required by Rule 13a-14(a)/15d-14(a),
filed herewith.
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
|
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
RAYMOND
JAMES FINANCIAL, INC.
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: February 9, 2009
|
|
/s/
Thomas A. James
|
|
|
Thomas
A. James
|
|
|
Chairman
and Chief
|
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Jeffrey P. Julien
|
|
|
Jeffrey
P. Julien
|
|
|
Senior
Vice President - Finance
|
|
|
and
Chief Financial
|
|
|
Officer
|