UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
one)
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For the
quarterly period ended June 30,
2009
or
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from
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to
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Commission
File Number: 1-9109
RAYMOND JAMES FINANCIAL,
INC.
(Exact
name of registrant as specified in its charter)
Florida
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No. 59-1517485
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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880 Carillon Parkway, St.
Petersburg, Florida 33716
(Address
of principal executive offices) (Zip Code)
(727)
567-1000
(Registrant's
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files). Yes o No x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x
|
Accelerated
filer o
|
|
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
123,232,700 shares of Common
Stock as of August 5, 2009
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RAYMOND
JAMES FINANCIAL, INC. AND SUBSIDIARIES
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Form
10-Q for the Quarter Ended June 30, 2009
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INDEX
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PAGE
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PART
I.
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements (unaudited)
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Condensed
Consolidated Statements of Financial Condition as of June 30, 2009 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 June 30, 2009 and June 30, 2008 (unaudited)
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4
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Condensed
Consolidated Statements of Income and Comprehensive Income for the nine
months ended June 30, 2009 and June 30, 2008 (unaudited)
|
4
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Condensed
Consolidated Statements of Cash Flows for the nine months ended June 30,
2009 and June 30, 2008 (unaudited)
|
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
|
48
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
|
81
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Item
4.
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Controls
and Procedures
|
86
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PART
II.
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
|
87
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Item
1A.
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Risk
Factors
|
88
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
88
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Item
5.
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Other
Information
|
88
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Item
6.
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Exhibits
|
89
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Signatures
|
90
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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)
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
(in
000’s)
|
Assets
|
|
|
Cash
and Cash Equivalents
|
$ 539,346
|
$ 3,207,493
|
Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
|
5,156,139
|
4,311,933
|
Securities
Purchased under Agreements to Resell and Other Collateralized
Financings
|
564,245
|
950,546
|
Financial
Instruments, at Fair Value:
|
|
|
Trading
Instruments
|
304,032
|
314,008
|
Available
for Sale Securities
|
537,148
|
577,933
|
Private
Equity and Other Investments
|
234,775
|
209,915
|
Receivables:
|
|
|
Brokerage
Clients, Net
|
1,386,060
|
1,850,464
|
Stock
Borrowed
|
559,307
|
675,080
|
Bank
Loans, Net
|
7,075,572
|
7,095,227
|
Broker-Dealers
and Clearing Organizations
|
126,681
|
186,841
|
Other
|
421,469
|
344,594
|
Investments
in Real Estate Partnerships - Held by Variable Interest
Entities
|
272,975
|
239,714
|
Property
and Equipment, Net
|
187,569
|
192,450
|
Deferred
Income Taxes, Net
|
148,949
|
108,765
|
Deposits
With Clearing Organizations
|
84,222
|
94,242
|
Goodwill
|
62,575
|
62,575
|
Prepaid
Expenses and Other Assets
|
169,766
|
287,836
|
|
|
|
|
$
17,830,830
|
$
20,709,616
|
|
|
|
Liabilities
And Shareholders' Equity
|
|
|
Loans
Payable
|
$ 110,294
|
$ 2,212,224
|
Loans
Payable Related to Investments by Variable Interest Entities in Real
Estate Partnerships
|
88,055
|
102,564
|
Payables:
|
|
|
Brokerage
Clients
|
6,549,238
|
5,789,952
|
Stock
Loaned
|
577,906
|
695,739
|
Bank
Deposits
|
7,637,558
|
8,774,457
|
Broker-Dealers
and Clearing Organizations
|
62,790
|
266,272
|
Trade
and Other
|
243,423
|
154,915
|
Trading
Instruments Sold but Not Yet Purchased, at Fair Value
|
45,241
|
123,756
|
Securities
Sold Under Agreements to Repurchase
|
84,081
|
122,728
|
Accrued
Compensation, Commissions and Benefits
|
258,369
|
345,782
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|
15,656,955
|
18,588,389
|
|
|
|
Minority
Interests
|
211,767
|
237,322
|
Commitments
and Contingencies (See Note 12)
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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
|
-
|
-
|
Common
Stock; $.01 Par Value; Authorized 350,000,000 Shares;
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|
Issued
126,695,580 at June 30, 2009 and 124,078,129
|
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at
September 30, 2008
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1,222
|
1,202
|
Shares
Exchangeable into Common Stock; 249,168
|
|
|
at
June 30, 2009 and 273,042 at September 30, 2008
|
3,198
|
3,504
|
Additional
Paid-In Capital
|
402,271
|
355,274
|
Retained
Earnings
|
1,708,475
|
1,639,662
|
Accumulated
Other Comprehensive Income
|
(67,174)
|
(33,976)
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|
2,047,992
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1,965,666
|
Less: 4,020,603 and
3,825,619 Common Shares in Treasury, at Cost
|
(85,884)
|
(81,761)
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1,962,108
|
1,883,905
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$
17,830,830
|
$
20,709,616
|
|
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|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(in
000’s, except per share amounts)
|
Three
Months Ended
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Nine
Months Ended
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|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
2009
|
2008
|
2009
|
2008
|
Revenues:
|
|
|
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Securities
Commissions and Fees
|
$ 405,925
|
$
483,225
|
$
1,193,855
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$
1,437,327
|
Investment
Banking
|
20,586
|
36,236
|
59,320
|
87,323
|
Investment
Advisory Fees
|
27,558
|
51,492
|
110,954
|
161,416
|
Interest
|
98,037
|
156,935
|
349,722
|
561,199
|
Net
Trading Profits
|
13,272
|
11,100
|
35,213
|
5,256
|
Financial
Service Fees
|
30,909
|
31,774
|
94,849
|
97,512
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Other
|
35,965
|
37,986
|
80,583
|
95,040
|
Total
Revenues
|
632,252
|
808,748
|
1,924,496
|
2,445,073
|
|
|
|
|
|
Interest
Expense
|
7,453
|
66,724
|
46,088
|
325,535
|
Net
Revenues
|
624,799
|
742,024
|
1,878,408
|
2,119,538
|
|
|
|
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|
Non-Interest
Expenses:
|
|
|
|
|
Compensation,
Commissions and Benefits
|
406,809
|
490,479
|
1,217,965
|
1,434,389
|
Communications
and Information Processing
|
26,690
|
30,899
|
91,869
|
93,140
|
Occupancy
and Equipment Costs
|
26,299
|
26,102
|
77,679
|
71,600
|
Clearance
and Floor Brokerage
|
8,377
|
7,969
|
24,429
|
23,648
|
Business
Development
|
18,652
|
24,527
|
62,193
|
70,130
|
Investment
Advisory Fees
|
7,114
|
12,997
|
24,058
|
38,490
|
Bank
Loan Loss Provision
|
29,790
|
12,366
|
129,639
|
36,299
|
Other
|
24,378
|
21,992
|
71,003
|
51,253
|
Total
Non-Interest Expenses
|
548,109
|
627,331
|
1,698,835
|
1,818,949
|
Minority
Interest in (Losses) Earnings of Subsidiaries
|
(4,381)
|
425
|
7,318
|
3,104
|
Income
Before Provision for Income Taxes
|
72,309
|
115,118
|
186,891
|
303,693
|
Provision
for Income Taxes
|
29,714
|
45,180
|
77,110
|
117,723
|
|
|
|
|
|
Net
Income
|
$ 42,595
|
$
69,938
|
$ 109,781
|
$ 185,970
|
|
|
|
|
|
Net
Income per Share-Basic
|
$
0.36
|
$
0.60
|
$
0.94
|
$
1.59
|
Net
Income per Share-Diluted
|
$
0.36
|
$
0.59
|
$
0.93
|
$
1.56
|
Weighted
Average Common Shares
|
|
|
|
|
Outstanding-Basic
|
118,177
|
115,633
|
117,239
|
116,573
|
Weighted
Average Common and Common
|
|
|
|
|
Equivalent
Shares Outstanding-Diluted
|
119,460
|
118,272
|
118,411
|
119,212
|
|
|
|
|
|
Dividends
Paid per Common Share
|
$
0.11
|
$
0.11
|
$
0.33
|
$
0. 33
|
Net
Income
|
$
42,595
|
$
69,938
|
$ 109,781
|
$
185,970
|
Other
Comprehensive Income:
|
|
|
|
|
Change
in Unrealized Gain/(Loss) on Available
|
|
|
|
|
for
Sale Securities, Net of Tax
|
17,256
|
1,834
|
(19,399)
|
(35,383)
|
Change
in Currency Translations
|
10,608
|
874
|
(13,800)
|
(3,503)
|
Total
Comprehensive (Loss) Income
|
$ 70,459
|
$
72,646
|
$ 76,582
|
$ 147,084
|
|
|
|
|
|
Other-Than-Temporary
Impairment:
|
|
|
|
|
Total
Other-Than-Temporary Impairment Losses
|
$ (12,057)
|
$ (2,823)
|
$
(23,582)
|
$ (2,823)
|
Portion
of Losses Recognized in Other
|
|
|
|
|
Comprehensive
Income (Before Taxes)
|
10,597
|
-
|
15,386
|
-
|
Net
Impairment Losses Recognized in
|
|
|
|
|
Other
Revenue
|
$ (1,460)
|
$ (2,823)
|
$
(8,196)
|
$ (2,823)
|
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)
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
|
2009
|
2008
|
Cash
Flows From Operating Activities:
|
|
|
Net
Income
|
$ 109,781
|
$ 185,970
|
Adjustments
to Reconcile Net Income to Net
|
|
|
Cash
Provided by (Used in) Operating Activities:
|
|
|
Depreciation
and Amortization
|
25,339
|
20,240
|
Deferred
Income Taxes
|
(28,977)
|
17,351
|
Premium
and Discount Amortization on Available for Sale Securities
|
|
|
and
Unrealized/Realized Gain on Other Investments
|
(9,680)
|
(17,290)
|
Other-than-Temporary
Impairment on Available for Sale Securities
|
8,196
|
2,823
|
Impairment
of and Loss on Sale of Property and Equipment
|
7,278
|
40
|
Gain
on Sale of Loans Available for Sale
|
(637)
|
(304)
|
Provision
for Loan Loss, Legal Proceedings, Bad Debts and Other
Accruals
|
141,800
|
43,465
|
Stock-Based
Compensation Expense
|
19,498
|
27,102
|
Loss
on Company-Owned Life Insurance
|
11,807
|
9,199
|
|
|
|
(Increase)
Decrease in Operating Assets:
|
|
|
Assets
Segregated Pursuant to Regulations and Other Segregated
Assets
|
(844,206)
|
6,407
|
Receivables:
|
|
|
Brokerage
Clients, Net
|
462,877
|
(264,674)
|
Stock
Borrowed
|
115,773
|
125,352
|
Broker-Dealers
and Clearing Organizations
|
60,160
|
91,702
|
Other
|
(80,442)
|
(35,921)
|
Securities
Purchased Under Agreements to Resell and Other
Collateralized
|
|
|
Financings,
Net of Securities Sold Under Agreements to Repurchase
|
(17,346)
|
(162,567)
|
Trading
Instruments, Net
|
(68,539)
|
61,680
|
Proceeds
from Sale of Loans Available for Sale
|
79,163
|
26,907
|
Origination
of Loans Available for Sale
|
(102,888)
|
(26,111)
|
Excess
Tax Benefits from Stock-Based Payment Arrangements
|
(2,693)
|
(392)
|
Prepaid
Expenses and Other Assets
|
100,085
|
(63,469)
|
Minority
Interest
|
7,318
|
(3,104)
|
|
|
|
Increase
(Decrease) in Operating Liabilities:
|
|
|
Payables:
|
|
|
Brokerage
Clients
|
759,286
|
149,579
|
Stock
Loaned
|
(117,833)
|
(103,559)
|
Broker-Dealers
and Clearing Organizations
|
(203,482)
|
71,282
|
Trade
and Other
|
92,984
|
9,428
|
Accrued
Compensation, Commissions and Benefits
|
(86,301)
|
(44,241)
|
|
|
|
Net
Cash Provided by Operating Activities
|
438,321
|
126,895
|
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)
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
|
2009
|
2008
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
Additions
to Property and Equipment, Net
|
(28,996)
|
(35,348)
|
Bank
Loan Originations and Purchases
|
(2,173,221)
|
(4,342,767)
|
Bank
Loan Repayments and Increase in Unearned Fees, net
|
2,066,685
|
2,006,563
|
Purchases
of Private Equity and Other Investments, Net
|
(34,240)
|
(23,654)
|
Investments
in Company-Owned Life Insurance
|
(12,000)
|
(47,818)
|
Investments
in Real Estate Partnerships-Held by Variable Interest
Entities
|
(33,261)
|
(1,545)
|
Repayments
of Loans by Investor Members of Variable Interest Entities
Related
|
|
|
to
Investments in Real Estate Partnerships
|
1,661
|
6,112
|
Securities
Purchased Under Agreements to Resell, Net
|
365,000
|
180,000
|
Purchases
of Available for Sale Securities
|
(102,516)
|
(189,565)
|
Available
for Sale Securities Maturations and Repayments
|
104,583
|
81,376
|
|
|
|
Net
Cash Provided by (Used in) Investing Activities
|
153,695
|
(2,366,646)
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
Proceeds
from Borrowed Funds, Net
|
468
|
200,000
|
Repayments
of Borrowings, Net
|
(2,102,398)
|
(9,736)
|
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
|
3,712
|
4,237
|
Repayments
of Borrowed Funds Related to Investments by Variable
Interest
|
|
|
Entities
in Real Estate Partnerships
|
(18,221)
|
(19,519)
|
Proceeds
from Capital Contributed to Variable Interest Entities
|
|
|
Related
to Investments in Real Estate Partnerships
|
28,266
|
28,264
|
Minority
Interest
|
(34,020)
|
(15,336)
|
Exercise
of Stock Options and Employee Stock Purchases
|
22,385
|
26,140
|
(Decrease)
Increase in Bank Deposits
|
(1,136,899)
|
2,160,880
|
Purchase
of Treasury Stock
|
(6,563)
|
(67,243)
|
Dividends
on Common Stock
|
(40,464)
|
(40,227)
|
Excess
Tax Benefits from Stock-Based Payment Arrangements
|
2,693
|
392
|
|
|
|
Net
Cash (Used in) Provided by Financing Activities
|
(3,242,921)
|
2,267,852
|
|
|
|
Currency
Adjustment:
|
|
|
Effect
of Exchange Rate Changes on Cash
|
(11,025)
|
(3,503)
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
(2,661,930)
|
24,598
|
Cash
Reduced by Deconsolidation of Certain Internally Sponsored
|
|
|
Private
Equity Limited Partnerships
|
(6,217)
|
-
|
Cash
and Cash Equivalents at Beginning of Year
|
3,207,493
|
644,943
|
|
|
|
Cash
and Cash Equivalents at End of Period
|
$ 539,346
|
$ 669,541
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
Cash
Paid for Interest
|
$
47,914
|
$ 330,370
|
Cash
Paid for Income Taxes
|
$
98,078
|
$ 109,942
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
RAYMOND JAMES FINANCIAL,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30,
2009
NOTE 1 - BASIS OF
PRESENTATION:
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Raymond James Financial, Inc. (“RJF”) and its consolidated
subsidiaries that are generally controlled through a majority voting
interest. RJF is a holding company headquartered in Florida whose
subsidiaries are engaged in various financial service businesses; as used
herein, the 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.
During
the three months ended March 31, 2009, the Company relinquished control over the
general partners of certain internally sponsored private equity limited
partnerships. As a result, the Company deconsolidated seven entities during the
three months ended March 31, 2009, which had assets of approximately $47.6
million. No such deconsolidation of entities occurred during the most recent
quarter ended June 30, 2009.
Certain
financial information that is normally included in annual financial statements
prepared in accordance with generally accepted accounting principles in the
United States of America ("GAAP") but not required for interim reporting
purposes has been condensed or omitted. These unaudited condensed consolidated
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the consolidated financial position and
results of operations for the interim periods presented. Subsequent events have
been evaluated for either recognition in these interim financial statements, or
for disclosure purposes herein as appropriate, through August 10, 2009 which is
the date the unaudited condensed consolidated financial statements were issued,
in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 165,
“Subsequent Events”. 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. During the quarter 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
Broker-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 to the Condensed Consolidated
Statements of Cash Flows for the nine months ended June 30, 2008. 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 nine months ended June 30, 2008 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 Private Equity and
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 nine months ended June 30, 2008 were adjusted
for this reclassification, which resulted in a net increase of $26.1 million in
cash flows provided by operating activities with the offset to cash flows used
in investing activities. In addition, for the nine months ended June 30, 2008
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 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 to 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 April
2009, the FASB issued FSP SFAS No.157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” (“FSP SFAS No. 157-4”). FSP
SFAS No. 157-4 provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. FSP SFAS
No. 157-4 emphasizes that even if there has been a significant decrease in the
volume and level of activity for the asset or liability and regardless of the
valuation technique used, the objective of a fair value measurement remains the
same. Fair value is still the price that would be received to sell the asset in
an orderly transaction between market participants as of the measurement date
under current market conditions. Although this FSP is effective for the Company
on April 1, 2009, the Company adopted FSP SFAS No. 157-4 on January 1, 2009 as
early adoption is permitted. See Note 3 below for the impact the adoption of FSP
SFAS No. 157-4 had on the Company’s consolidated financial
statements.
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 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 No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“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 No. 107, “Disclosures
about Fair Value of Financial Instruments” (“SFAS 107”). The Company adopted
SFAS 161 for the quarter ended March 31, 2009. See Note 10 below for information
regarding the impact the adoption of SFAS 161 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 April
2009, the FASB issued FSP SFAS No. 141R-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies”
(“FSP SFAS No. 141R-1”). FSP SFAS No. 141R-1 amends the provisions in
SFAS 141R for the initial recognition and measurement, subsequent measurement
and accounting, and disclosures for assets and liabilities arising from
contingencies in business combinations. This FSP eliminates the distinction
between contractual and noncontractual contingencies, including the initial
recognition and measurement criteria in SFAS 141R. FSP SFAS No. 141R-1 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. 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
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-8”). FSP SFAS No. 140-4 and FIN 46R-8 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 effective October 1, 2008. See Note 7 below for the required
disclosures under FSP SFAS No. 140-4 and FIN 46R-8.
In June
2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) No. 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
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 effective 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.
In April
2009, the FASB issued FSP SFAS No. 115-2 and SFAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (“FSP SFAS No. 115-2 and SFAS
124-2”). FSP SFAS No. 115-2 and SFAS 124-2 amends the other-than-temporary
impairment guidance for debt securities classified as available for sale and
held-to-maturity to shift the focus from an entity’s intent to hold until
recovery to its intent or requirement to sell. This guidance is to be applied to
previously other-than-temporarily impaired debt securities existing as of the
effective date by making a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption. The cumulative-effect
adjustment, if material, would reclassify the non-credit portion of a previously
other-than-temporarily impaired debt security held as of the date of initial
adoption from retained earnings to accumulated other comprehensive income. In
addition, this interpretation includes expanded presentation and disclosure
requirements. Although this FSP is effective for the Company on April 1, 2009,
the Company adopted FSP SFAS No. 115-2 and SFAS 124-2 on January 1, 2009 as
early adoption is permitted. See Note 5 below for the impact the adoption of FSP
SFAS No. 115-2 and SFAS 124-2 had on the Company’s consolidated financial
statements.
In April
2009, the FASB issued FSP SFAS No. 107-1 and APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments” (“FSP SFAS No. 107-1 and APB 28-1”).
FSP SFAS No. 107-1 and APB 28-1 expands the fair value disclosures required for
all financial instruments within the scope of SFAS 107 to interim reporting
periods. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting”
to require those disclosures in summarized financial information at interim
reporting periods. This interpretation is effective for interim reporting
periods ending after June 15, 2009 (April 1, 2009 for the Company). The Company
adopted FSP SFAS No. 107-1 and APB 28-1 for the quarter ended June 30,
2009. See Note 3 below for the required disclosures under FSP SFAS
No. 107-1 and APB 28-1.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets, an Amendment of FASB Statement No. 140” (SFAS 166”). SFAS 166 eliminates
the Qualified Special Purpose Entity (QSPE) concept, creates more stringent
conditions for reporting a transfer of a portion of a financial asset as a sale,
clarifies the derecognition criteria, revises how retained interests are
initially measured, and removes the guaranteed mortgage securitization
recharacterization provisions. SFAS 166 requires additional year-end and interim
disclosures that are similar to the disclosures required by FSP SFAS No. 140-4
and FIN 46R-8. SFAS 166 is effective for the Company on October 1,
2010, and for subsequent interim and annual reporting periods. Early adoption is
prohibited. SFAS 166’s disclosure requirements must be applied to transfers that
occurred before and after its effective date. The Company is currently
evaluating the impact the adoption of SFAS 166 will have on its consolidated
financial statements.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No 46(R)”
(“SFAS 167”). SFAS 167 amends the guidance in FASB Interpretation 46R related to
the consolidation of variable interest entities. SFAS 167 requires
the reporting entities to evaluate former QSPE’s for consolidation, changes the
approach to determine a variable interest entity’s primary beneficiary from a
quantitative assessment to a qualitative assessment designed to identify a
controlling financial interest, and increases the frequency of required
assessments to determine whether a company is the primary beneficiary of a
variable interest entity. SFAS 167 is effective for the Company on October 1,
2010 and earlier adoption is prohibited. The Company is currently
evaluating the impact the adoption of SFAS 167 will have on its consolidated
financial statements.
NOTE 3 - FAIR
VALUE:
The
Company adopted SFAS 157 and FSP SFAS No. 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
value 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 April
2009, the FASB issued FSP SFAS No. 157-4. See Note 2 above for additional
information. Although this FSP is effective for the Company on April 1, 2009,
the Company elected to early adopt FSP SFAS No. 157-4 on January 1, 2009. As a
result, the Company changed the valuation technique used for certain available
for sale securities and redefined its major security types used in its trading
instruments disclosure by separating mortgage backed securities (“MBS”) and
collateralized mortgage obligations (“CMOs”) from corporate obligations and
agency securities.
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. SFAS 157 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
Notwithstanding
the valuation approach utilized as discussed above, 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 CMOs, asset
backed securities (“ABS”) and certain collateralized debt obligations, to be
inactive as of June 30, 2009. 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. The specific
valuation techniques utilized for the category of financial instruments
presented in the unaudited Condensed Consolidated Statements of Financial
Condition are described below.
Cash
Equivalents
Cash
equivalents consist of investments in U.S. Treasury bills and 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
MBS, 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.
Assumptions utilized by these techniques include estimates of future
delinquencies, loss severities, defaults and prepayments. Securities valued
using these techniques are classified within Level 3 of the fair value
hierarchy. Examples include certain municipal debt securities, certain CMOs, ABS
and equity securities in private companies. For certain 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, these 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 (“RJ
Bank”) 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 residential
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 (“OCI”) unless the loss is considered to
be other-than-temporary, in which case, the related credit loss portion is
recognized as a loss in other revenue. 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
pricing service bid quotations and third party broker-dealer quotes. Third party
pricing service bid quotations are based on current market data. The third party
pricing service utilizes evaluated pricing models that vary by asset class and
incorporate available trade, bid and other current market information as well as
cash flow expectations and, when available, loan performance data. The market
inputs the third party pricing service normally seeks for these price
evaluations are based upon observable data including benchmark yields, reported
trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark
securities, bids, offers, and reference data including market research
publications. Securities valued using these valuation techniques are generally
classified within Level 2 of the fair value hierarchy.
For all
subordinated non-agency CMOs, the Company estimates fair value by utilizing
discounted cash flow analyses, using observable market data where available as
well as unobservable inputs provided by management. The unobservable inputs
utilized in these valuation techniques reflect the Company’s own supposition
about the assumptions that market participants would use in pricing a security,
including those about future delinquencies, loss severities, defaults and
prepayments. Securities valued using these valuation techniques are classified
within Level 3 of the fair value hierarchy.
Upon
adopting FSP SFAS No. 157-4 during the quarter ended March 31, 2009, the Company
changed the valuation technique used for senior non-agency CMOs as a result of
the significant decrease in the volume and level of activity for these
securities. The Company utilizes a discounted cash flow analysis to determine
which price quote is most representative of fair value under the current market
conditions. In most cases (16 of 25 senior securities), third party pricing
service bid quotations based upon observable data as described above was
determined to be the most representative indication of fair value for these
securities. For the remaining senior securities, the Company’s discounted cash
flow analysis indicated third party broker-dealer quotes as more representative
and accordingly, the Company gave correspondingly more weight to that indicator
of fair value. In order to validate that the inputs used by the third party
pricing service are observable, management requests on a quarterly basis, the
inputs for a sample of senior securities and compares these inputs to those used
in the Company’s discounted cash flow analysis. Securities measured using these
valuation techniques are generally classified within Level 2 of the fair value
hierarchy.
If these
sources are not available or are deemed unreliable, then a security’s fair value
is estimated using the Company’s discounted cash flow analyses as is used for
the subordinated non-agency CMOs. In such instances, the securities measured are
generally 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 the 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 typically 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 1 of the fair value hierarchy.
Recurring
Fair Value Measurements
Assets
and liabilities measured at fair value on a recurring basis as of June 30, 2009
are presented below:
|
|
|
|
FIN
39
|
|
June
30, 2009 (in 000’s)
|
Level
1
|
Level
2
|
Level
3
|
Netting
(1)
|
Total
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Cash
Equivalents
|
$ 122,385
|
$ -
|
$ -
|
$ -
|
$ 122,385
|
Trading
Instruments:
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
Obligations
|
350
|
53,646
|
7,772
|
-
|
61,768
|
Corporate
Obligations
|
4,920
|
16,102
|
3,264
|
-
|
24,286
|
Government
Obligations
|
27,741
|
-
|
-
|
-
|
27,741
|
Agency
MBS and CMOs
|
18
|
93,745
|
-
|
-
|
93,763
|
Non-Agency
CMOs and ABS
|
-
|
1,064
|
12,896
|
-
|
13,960
|
Total
Debt Securities
|
33,029
|
164,557
|
23,932
|
-
|
221,518
|
Derivative
Contracts
|
-
|
106,704
|
-
|
(80,519)
|
26,185
|
Equity
Securities
|
52,463
|
1,046
|
-
|
-
|
53,509
|
Other
Securities
|
174
|
2,625
|
21
|
-
|
2,820
|
Total
Trading Instruments
|
85,666
|
274,932
|
23,953
|
(80,519)
|
304,032
|
|
|
|
|
|
|
Available
for Sale Securities:
|
|
|
|
|
|
Agency
MBS and CMOs
|
-
|
297,796
|
-
|
-
|
297,796
|
Non-Agency
CMOs
|
-
|
229,485
|
4,853
|
-
|
234,338
|
Other
Securities
|
5
|
5,009
|
-
|
-
|
5,014
|
Total
Available for Sale Securities
|
5
|
532,290
|
4,853
|
-
|
537,148
|
|
|
|
|
|
|
Private
Equity and Other Investments:
|
|
|
|
|
|
Private
Equity Investments
|
-
|
-
|
140,108
|
-
|
140,108
|
Other
Investments
|
89,284
|
5,157
|
226
|
-
|
94,667
|
Total
Private Equity and Other
|
|
|
|
|
|
Investments
|
89,284
|
5,157
|
140,334
|
-
|
234,775
|
|
|
|
|
|
|
Other
Assets
|
-
|
388
|
-
|
-
|
388
|
Total
|
$ 297,340
|
$ 812,767
|
$ 169,140
|
$ (80,519)
|
$
1,198,728
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Trading
Instruments Sold but
|
|
|
|
|
|
Not
Yet Purchased:
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
Obligations
|
$ -
|
$ 254
|
$ -
|
$ -
|
$ 254
|
Corporate
Obligations
|
-
|
399
|
-
|
-
|
399
|
Government
Obligations
|
30,517
|
-
|
-
|
-
|
30,517
|
Agency
MBS and CMOs
|
555
|
1
|
-
|
-
|
556
|
Total
Debt Securities
|
31,072
|
654
|
-
|
-
|
31,726
|
Derivative
Contracts
|
-
|
74,166
|
-
|
(70,181)
|
3,985
|
Equity
Securities
|
9,392
|
20
|
-
|
-
|
9,412
|
Other
Securities
|
-
|
118
|
-
|
-
|
118
|
Total
Trading Instruments Sold
|
|
|
|
|
|
but
Not Yet Purchased
|
40,464
|
74,958
|
-
|
(70,181)
|
45,241
|
|
|
|
|
|
|
Other
Liabilities
|
-
|
-
|
184
|
-
|
184
|
Total
|
$ 40,464
|
$ 74,958
|
$ 184
|
$
(70,181)
|
$ 45,425
|
|
(1) As permitted under FSP
FIN No. 39-1, 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 in the fair value hierarchy 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 June
30, 2009, 6.72% and 0.29% of the Company’s total assets and total liabilities,
respectively, represented in the fair value hierarchy are measured at fair value
on a recurring basis. Instruments measured at fair value on a recurring basis
categorized as Level 3 as of June 30, 2009 represent 0.95% 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
tables present additional information about Level 3 assets and liabilities
measured at fair value on a recurring basis for the three and nine months ended
June 30, 2009:
|
|
|
|
|
|
|
|
|
Level
3 Financial Assets at Fair Value
|
Change
in
|
|
|
|
|
|
|
|
Unrealized
|
|
|
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
|
March
31,
|
Included
in
|
Comprehensive
|
Settlements,
|
or
Out of
|
June
30,
|
June
30,
|
June
30, 2009 (in 000’s)
|
2009
|
Earnings
|
Income
|
Net
|
Level
3
|
2009
|
2009
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Trading
Instruments:
|
|
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
|
|
Obligations
|
$ 7,962
|
$ (52)
|
$ -
|
$
(138)
|
$ -
|
$ 7,772
|
$ (80)
|
Corporate
Obligations
|
3,834
|
(570)
|
-
|
-
|
-
|
3,264
|
(570)
|
Non-Agency
CMOs and
|
|
|
|
|
|
|
|
ABS
|
15,484
|
(2,173)
|
-
|
(415)
|
-
|
12,896
|
-
|
Other
Securities
|
-
|
-
|
-
|
21
|
-
|
21
|
-
|
|
|
|
|
|
|
|
|
Available
for Sale Securities:
|
|
|
|
|
|
|
|
Non-Agency
CMOs
|
5,323
|
(1,312)
|
997
|
(155)
|
-
|
4,853
|
(1,312)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Equity and Other
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Private
Equity Investments
|
130,902
|
9,504 1
|
-
|
(298)
|
-
|
140,108
|
9,504
|
Other
Investments
|
221
|
1
|
-
|
4
|
-
|
226
|
1
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Other
Liabilities
|
$ 253
|
$ 69
|
$ -
|
$ -
|
$ -
|
$ 184
|
$ (2)
|
(1)
|
Includes
$12.1 million of income from the write-up of a private equity investment.
Since the Company only owns a portion of this investment, only $1.8
million of this gain is included in the Company’s income after minority
interest eliminations.
|
|
|
|
|
|
|
|
|
|
Level
3 Financial Assets at Fair Value
|
Change
in
|
|
|
|
|
|
|
|
Unrealized
|
|
|
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
|
Nine
months ended
|
September
30,
|
Included
in
|
Comprehensive
|
Settlements,
|
or
Out of
|
June
30,
|
June
30,
|
June
30, 2009 (in 000’s)
|
2008
|
Earnings
|
Income
|
Net
|
Level
3
|
2009
|
2009
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Trading
Instruments:
|
|
|
|
|
|
|
|
Provincial
and Municipal
|
|
|
|
|
|
|
|
Obligations
|
$ 7,107
|
$ (468)
|
$ -
|
$ 1,133
|
$ -
|
$ 7,772
|
$ (496)
|
Corporate
Obligations
|
-
|
(708)
|
-
|
138
|
3,8341
|
3,264
|
(708)
|
Non-Agency
CMOs and
|
|
|
|
|
-
|
|
|
ABS
|
20,220
|
(4,786)
|
-
|
(2,538)
|
-
|
12,896
|
(2,996)
|
Other
Securities
|
-
|
-
|
-
|
21
|
-
|
21
|
-
|
|
|
|
|
|
|
|
|
Available
for Sale Securities:
|
|
|
|
|
|
|
|
Non-Agency
CMOs
|
8,710
|
(7,279)
|
3,653
|
(231)
|
-
|
4,853
|
(7,279)
|
|
|
|
|
|
|
|
|
Private
Equity and Other
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
Private
Equity Investments
|
153,282
|
9,1292
|
-
|
(22,303)3
|
-
|
140,108
|
9,257
|
Other
Investments
|
844
|
133
|
-
|
(751)
|
-
|
226
|
(129)
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Other
Liabilities
|
$ 178
|
$ (6)
|
$ -
|
$ -
|
$ -
|
$ 184
|
$ (111)
|
1)
|
The
level classification transfer of a corporate obligation was driven by
changes in the price transparency for the security. This classification
transfer occurred as of March 31,
2009.
|
2)
|
Includes
$12.1 million of income from the write-up of a private equity investment.
Since the Company only owns a portion of this investment, only $1.8
million of this gain is included in the Company’s income after minority
interest eliminations.
|
3)
|
Excluding
the impact of the deconsolidation of certain internally sponsored private
equity limited partnerships, the purchases of private equity investments
net of any distributions received was $6.2 million for the period
presented. See Note 1 above for additional
information.
|
Gains and
losses (realized and unrealized) included in earnings for the three and nine
months ended June 30, 2009 are reported in net trading profits and other
revenues in the Company’s statements of income as follows:
|
Net
Trading
|
Other
|
Three
Months Ended June 30, 2009 (in 000’s)
|
Profits
|
Revenues
|
|
|
|
Total
gains or losses included in earnings
|
$ (2,795)
|
$ 8,262
|
|
|
|
Change
in unrealized gains or losses relating to assets
|
|
|
still
held at reporting date
|
$ (650)
|
$ 8,191
|
|
Net
Trading
|
Other
|
Nine
Months Ended June 30, 2009 (in 000’s)
|
Profits
|
Revenues
|
|
|
|
Total
gains or losses included in earnings
|
$ (5,962)
|
$ 1,977
|
|
|
|
Change
in unrealized gains or losses relating to assets
|
|
|
still
held at reporting date
|
$ (4,200)
|
$ 1,738
|
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 cash flow or on the fair
value of the underlying collateral if the loan is collateral supported. As of
June 30, 2009, loans deemed to be impaired were subsequently measured at fair
value totaling $82.2 million, net of amounts charged off and a $13.0 million
allowance for loan losses.
The
following table presents financial instruments by level within the fair value
hierarchy at June 30, 2009, for which a nonrecurring change in fair value was
recorded during the year ended June 30, 2009.
|
|
|
|
|
|
Fair
Value Measurements
|
(in
000’s)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
|
|
|
|
Assets:
|
|
|
|
|
Bank
Loans
|
$ -
|
$ -
|
$ 82,185
|
$ 82,185
|
The
adjustments to fair value of these loans outstanding at June 30, 2009 for the
three and nine months ended June 30, 2009 resulted in $14.9 million and $55.8
million in losses, respectively.
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.
FAIR
VALUE DISCLOSURES
Many but
not all of the financial instruments held by the Company are recorded at fair
value on the Condensed Consolidated Statements of Financial Condition. SFAS 107
requires the disclosure of the estimated fair value of certain financial
instruments and significant assumptions used to estimate their fair value.
Effective for the quarter ended June 30, 2009, the Company has adopted FSP SFAS
No. 107-1 which requires fair value disclosures as detailed within SFAS 107 to
be included in interim reporting periods.
The fair
values of financial instruments for which the Company did not elect the fair
value option or value in accordance with SFAS 157 have been derived, in part, by
management’s assumptions, the estimated amount and timing of future cash flows
and estimated discount rates. Different assumptions could
significantly affect these estimated fair values. Accordingly, the
net realizable values could be materially different from the estimates presented
below. In addition, the estimates are only indicative of the value of
individual financial instruments and should not be considered an indication of
the fair value of the Company. The provisions of SFAS 107 do not
require the disclosure of the fair value of non-financial instruments including
property, equipment and leasehold improvements as well as goodwill.
The
following disclosures represent financial instruments in which the ending
balance at June 30, 2009 are not carried at fair value in accordance with SFAS
157 on the Company’s Consolidated Statements of Financial
Condition:
Short-term Financial
Instruments: The carrying value of short-term financial
instruments, including cash and cash equivalents, assets segregated pursuant to
federal regulations and other segregated assets, securities either purchased or
sold under agreements to resell and other collateralized financings are recorded
at amounts that approximate the fair value of these
instruments. These financial instruments generally expose the Company
to limited credit risk and have no stated maturities or have short-term
maturities and carry interest rates that approximate market rates.
Bank Loans,
Net: These financial instruments are primarily comprised of
loans originated or purchased by RJ Bank and include commercial and residential
real estate loans, as well as commercial and consumer loans intended to be held
until maturity or payoff. In addition, these financial instruments consist of
residential mortgage loans originated by RJ Bank for sale in the secondary
market as well as corporate loans held for sale. The remainder of these balances
includes the guaranteed portions of Small Business Administration (“SBA”) loans
purchased by RJ Bank with the intention to pool for the securitization to the
secondary market.
For
variable-rate loans held for investment, which reprice frequently and have no
significant change in credit risk, fair values approximate carrying values. Fair
values for fixed-rate loans held for investment are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Any loans held for
investment which are deemed to be impaired are disclosed in the nonrecurring
fair value measurements above. The fair value of loans held for sale and those
purchased in the SBA market is estimated using current market prices for loans
with similar terms and borrowers of similar credit quality.
Receivables and Other Assets:
Brokerage client receivables, receivables from broker-dealers and
clearing organizations, stock borrowed receivables, other receivables, and
certain other assets are recorded at amounts that approximate fair value. RJ
Bank holds stock in the Federal Home Loan Bank (“FHLB”) which is not publicly
traded. Cost was used to estimate the fair value, since the FHLB will buy back
at par any holdings of excess stock above that required for
membership. In addition, RJ Bank holds a small Community Reinvestment
Act investment for which cost approximates fair value.
Bank Deposits: The
fair values for demand deposits are, by definition, equal to the amount payable
on demand at the reporting date (that is, their carrying amounts). The carrying
amounts of variable-rate money-market and savings accounts approximate their
fair values at the reporting date as these are short-term in nature. Fair values
for fixed-rate certificate accounts are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of expected monthly maturities on time deposits.
Loans Payable: The
fair value of the FHLB advances held at RJ Bank is based on the discounted value
of contractual cash flows. The discount rate is estimated using the rates
currently offered by creditors for advances of similar terms and remaining
maturities. The fair value of the mortgage note payable associated with the
financing of the Company’s home office complex is based upon an estimate of the
current market rates for similar loans.
Payables: Brokerage client
payables, payables due to broker-dealers and clearing organizations, stock
loaned payables, and trade and other payables are recorded at amounts that
approximate fair value.
The
carrying amounts and estimated fair values of the Company’s financial
instruments that are not carried at fair value at June 30, 2009 are as
follows:
|
|
|
June
30, 2009
|
|
|
|
Carrying
|
Estimated
|
|
|
|
Amount
|
Fair
Value
|
|
|
|
(in
000’s)
|
|
|
|
|
|
Financial
Assets:
|
|
|
|
|
Bank
Loans, Net
|
|
|
$
7,075,572
|
$
7,187,576
|
Financial
Liabilities:
|
|
|
|
|
Loans
Payable
|
|
|
110,294
|
111,175
|
Bank
Deposits
|
|
|
7,637,558
|
7,644,081
|
|
|
|
|
|
NOTE 4 – TRADING INSTRUMENTS
AND TRADING INSTRUMENTS SOLD BUT NOT YET PURCHASED:
|
June
30, 2009
|
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
|
$ 61,768
|
$ 254
|
$
101,748
|
$ 79
|
Corporate
Obligations
|
24,286
|
399
|
34,617
|
-
|
Government
Obligations
|
27,741
|
30,517
|
28,896
|
82,062
|
Agency
MBS and CMOs
|
93,763
|
556
|
60,260
|
25
|
Non-Agency
CMOs and ABS
|
13,960
|
-
|
9,811
|
-
|
Total
Debt Securities
|
221,518
|
31,726
|
235,332
|
82,166
|
|
|
|
|
|
Derivative
Contracts
|
26,185
|
3,985
|
35,315
|
19,302
|
Equity
Securities
|
53,509
|
9,412
|
42,391
|
22,288
|
Other
Securities
|
2,820
|
118
|
970
|
-
|
Total
|
$
304,032
|
$ 45,241
|
$
314,008
|
$
123,756
|
Auction
rate securities totaling $6.1 million and $16.8 million at June 30, 2009 and
September 30, 2008, respectively, are predominately included in Municipal
Obligations in the table above. At both June 30, 2009 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 June 30, 2009 or 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, other residential
mortgage-related debt securities owned by RJ Bank, 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 and nine months
ended June 30, 2009 and 2008.
The
amortized cost and fair values of securities available for sale at June 30, 2009
and September 30, 2008 are as follows:
|
June
30, 2009
|
|
|
Gross
|
Gross
|
|
|
|
Unrealized
|
Unrealized
|
|
|
Cost
Basis
|
Gains
|
Losses
|
Fair
Value
|
|
(in
000's)
|
Agency
Mortgage Backed Securities and Collateralized Mortgage
|
|
|
|
|
Obligations
|
$
301,310
|
$
160
|
$ (3,674)
|
$
297,796
|
Non-Agency
Collateralized Mortgage Obligations
|
350,373
|
3
|
(116,038)
|
234,338
|
Other
Securities
|
5,000
|
9
|
-
|
5,009
|
|
|
|
|
|
Total
RJ Bank Available for Sale Securities
|
656,683
|
172
|
(119,712)
|
537,143
|
|
|
|
|
|
Other
Securities
|
3
|
2
|
-
|
5
|
|
|
|
|
|
Total
Available for Sale Securities
|
$
656,686
|
$
174
|
$
(119,712)
|
$
537,148
|
|
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
RJ Bank 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 the contractual maturities, carrying values and current
yields for RJ Bank's available for sale securities at June 30, 2009. Since RJ
Bank’s available for sale securities are backed by mortgages, actual maturities
will differ from contractual maturities because borrowers may have the right to
prepay obligations without prepayment penalties.
|
|
After
One But
|
After
Five But
|
|
|
|
Within
One Year
|
Withing
Five Years
|
Withing
Ten Years
|
After
Ten Years
|
Total
|
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Weighted
|
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
Balance
|
Average
|
|
Due
|
Yield
|
Due
|
Yield
|
Due
|
Yield
|
Due
|
Yield
|
Due
|
Yield
|
|
($
in 000’s)
|
Agency
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
Backed
|
|
|
|
|
|
|
|
|
|
|
Securities
|
$ -
|
|
$
13,411
|
1.40%
|
$
117,310
|
1.24%
|
$167,075
|
1.36%
|
$297,796
|
1.31%
|
Non-Agency
|
|
|
|
|
|
|
|
|
|
|
Collateralized
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
|
Obligations
|
-
|
|
-
|
-
|
-
|
-
|
234,338
|
8.56%
|
234,338
|
8.56%
|
Other
Securities
|
-
|
|
5,009
|
0.74%
|
-
|
-
|
-
|
-
|
5,009
|
0.74%
|
|
$ -
|
|
$
18,420
|
|
$
117,310
|
|
$401,413
|
|
$537,143
|
|
The
following table shows RJ Bank’s investments’ gross unrealized losses and fair
value, aggregated by investment category and length of time the individual
securities have been in a continuous unrealized loss position at June 30,
2009:
|
Less
than 12 Months
|
12
Months or More
|
Total
|
|
Estimated
|
|
Estimated
|
|
Estimated
|
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|
(in
000’s)
|
Agency
Mortgage Backed Securities and
|
|
|
|
|
|
|
Collateralized
Mortgage Obligations
|
$
148,228
|
$ (1,342)
|
$
140,806
|
$ (2,332)
|
$
289,034
|
$ (3,674)
|
|
|
|
|
|
|
|
Non-Agency
Collateralized Mortgage
|
|
|
|
|
|
|
Obligations
|
45
|
(13)
|
234,152
|
(116,025)
|
234,197
|
(116,038)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Temporarily Impaired Securities
|
$
148,273
|
$ (1,355)
|
$
374,958
|
$ (118,357)
|
$
523,231
|
$
(119,712)
|
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, as well as the Government National Mortgage Association,
guarantee the contractual cash flows of the agency mortgage backed securities.
At June 30, 2009, of the 94 U.S. government-sponsored enterprise mortgage backed
securities in a continuous unrealized loss position, 20 were in a continuous
unrealized loss position for less than 12 months and 74 for 12 months or more.
The unrealized losses at June 30, 2009 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, the Federal Home Loan Mortgage
Corporation, and the Government National Mortgage Association as to the full
payment of principal and interest, and the fact that the Company has the ability
and intent to hold these securities to maturity.
Non-Agency
Collateralized Mortgage Obligations
As of
June 30, 2009 and including subsequent ratings changes, $31.4 million of the
non-agency collateralized mortgage obligations were rated AAA by two rating
agencies and $202.9 million were rated less than AAA by at least one rating
agency. Of the 29 non-agency collateralized mortgage obligations in a continuous
unrealized loss position, one was in a continuous unrealized loss position for
less than 12 months and 28 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.
The
Company adopted FSP SFAS No. 115-2 and SFAS 124-2 on January 1, 2009. See Note 2
above for additional information. The Company did not record a cumulative-effect
adjustment upon adoption of this guidance as the adjustment was deemed to be
immaterial.
For
securities in an unrealized loss position at quarter end, the Company makes an
assessment whether these securities are impaired on an other-than-temporary
basis. In order to evaluate the Company’s risk exposure and any potential
impairment of these securities, characteristics of each security owned such as
collateral type, delinquency and foreclosure levels, credit enhancement,
projected loan losses and collateral coverage are reviewed monthly by
management. The following factors are considered to determine whether an
impairment is other-than-temporary: the Company’s intention to hold the
security, the Company’s assessment of whether it more likely than not will be
required to sell the security before the recovery of its amortized cost basis,
and whether the evidence indicating that the Company will recover the entire
amortized cost basis of a security outweighs evidence to the contrary. Evidence
considered in this assessment includes the reasons for the impairment, the
severity and duration of the impairment, changes in value subsequent to period
end, recent events specific to the issuer or industry, forecasted performance of
the security, and any changes to the rating of the security by a rating
agency.
In
applying FSP SFAS No. 115-2 and SFAS 124-2 and FSP EITF 99-20-1, which amended
EITF 99-20, the Company determines the cash flows expected to be collected 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 (“OTTI”). Since the decline in fair value of
the securities presented in the table above is not primarily 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 does not intend to sell these securities and it
is highly unlikely these securities will have to be sold, it does not consider
these securities to be other-than-temporarily impaired as of June 30, 2009.
Securities on which there is an unrealized loss that is deemed to be
other-than-temporary are written down to fair value with the credit loss portion
of the write-down recorded as a realized loss in other revenue and the
non-credit portion of the write-down recorded in OCI. The credit loss portion of
the write-down is the difference between the present value of the cash flows
expected to be collected and the amortized cost basis of the security. The
previous amortized cost basis of the security less the OTTI recognized in
earnings establishes the new cost basis for the security.
As of
June 30, 2009, those debt securities with other-than-temporary impairment in
which only the amount of loss related to credit was recognized in earnings
consisted entirely of non-agency collateralized mortgage obligations. The
Company estimates the portion of loss attributable to credit using a discounted
cash flow model. The Company’s discounted cash flow model utilizes relevant
assumptions such as prepayment rate, default rate, and loss severity on a loan
level basis. Assumptions used can vary widely from loan to loan, and are
influenced by such factors as loan interest rate, geographical location of the
borrower, borrower characteristics and collateral type. The Company then uses a
third party vendor to obtain information about the structure of the security in
order to determine how the underlying collateral cash flows will be distributed
to each of the security’s tranches. Expected principal and interest cash flows
on the impaired debt security are discounted using the effective interest rate
implicit in the security at the time of acquisition or at the current yield used
to accrete the beneficial interest for securities coming within the scope of
EITF 99-20.
Based on
the expected cash flows derived from the model, the Company expects to recover
the remaining unrealized losses on non-agency collateralized mortgage
obligations. It is possible that the underlying loan collateral of these
securities will perform worse than current expectations, which may lead to
adverse changes in the cash flows expected to be collected on these securities
and potential future OTTI losses. Significant assumptions used in the valuation
of non-agency collateralized mortgage obligations include default rates from
1.4% to 29.8% with a weighted average of 11.7%, loss severity from 10.0% to
58.7% with a weighted average of 36.5% and prepayment rates of 18%. These
assumptions are subject to change depending on a number of factors such as
economic conditions, changes in home prices, delinquency and foreclosure
statistics, among others. 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.
Seven
non-agency CMOs were considered to be other-than-temporarily impaired as of June
30, 2009, including the addition of three non-agency CMOs that were not
previously considered to be OTTI. Even though there is no intent to sell these
securities and it is highly unlikely these securities will have to be sold, the
Company does not expect to recover the entire amortized cost basis of these
securities, and therefore, recorded $1.5 million of OTTI in other revenue and
recognized a $10.6 million charge in accumulated OCI during the three months
ended June 30, 2009. The Company recorded $8.2 million of OTTI charges in other
revenue and recognized a charge of $15.4 million in accumulated OCI for the nine
months ended June 30, 2009. The Company recognized $2.8 million of OTTI in other
revenue for the three and nine months ended June 30, 2008 for one security which
was identified as other-than-temporarily impaired during the third quarter in
fiscal 2008.
Changes
in the amount related to credit losses recognized in earnings on available for
sale debt securities:
|
Three
Months Ended
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
2009
|
2008
|
2009
|
2008
|
|
($
in 000’s)
|
|
|
|
|
|
Amount
related to credit losses on securities held
|
|
|
|
|
by
the Company at the beginning of the period
|
$ 11,605
|
$ -
|
$ 4,869
|
$ -
|
Additions
for the amount related to credit loss for
|
|
|
|
|
which
an OTTI was not previously recognized (1)
|
1,430
|
2,823
|
6,806
|
2,823
|
Additional
increases to the amount related to credit
|
|
|
|
|
loss
for which an OTTI was previously
|
|
|
|
|
recognized
(1)
|
30
|
-
|
1,390
|
-
|
Amount
related to credit losses on securities held
|
|
|
|
|
by
the Company at the end of the period
|
$ 13,065
|
$ 2,823
|
$ 13,065
|
$ 2,823
|
|
|
|
|
|
(1)
|
The
Company does not intend to sell the securities and it is not more likely
than not that the Company will be required to sell the securities before
recovery of its amortized cost
basis.
|
NOTE 6 – BANK LOANS,
NET:
Bank
client receivables are primarily comprised of loans originated or purchased by
RJ Bank and include commercial and residential real estate loans, as well as
commercial and consumer loans. These receivables are collateralized by first or
second mortgages on residential or other real property, by other assets of the
borrower, or are unsecured. The following table presents the balance and
associated percentage of each major loan category in RJ Bank's portfolio,
including loans receivable and loans available for sale:
|
|
|
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
Balance
|
%
|
Balance
|
%
|
|
($
in 000’s)
|
|
|
|
|
|
Commercial
Loans
|
$ 862,499
|
12%
|
$ 725,997
|
10%
|
Real
Estate Construction Loans
|
398,419
|
6%
|
346,691
|
5%
|
Commercial
Real Estate Loans (1)
|
3,359,889
|
46%
|
3,528,732
|
49%
|
Residential
Mortgage Loans
|
2,603,726
|
36%
|
2,599,567
|
36%
|
Consumer
Loans
|
28,194
|
-
|
23,778
|
-
|
|
|
|
|
|
Total
Loans
|
7,252,727
|
100%
|
7,224,765
|
100%
|
|
|
|
|
|
Net
Unearned Income and Deferred Expenses (2)
|
(40,127)
|
|
(41,383)
|
|
Allowance
for Loan Losses
|
(137,028)
|
|
(88,155)
|
|
|
|
|
|
|
|
(177,155)
|
|
(129,538)
|
|
|
|
|
|
|
Loans,
Net
|
$
7,075,572
|
|
$
7,095,227
|
|
(1)
|
Of
this amount, $1.3 billion and $1.2 billion is secured by non-owner
occupied commercial real estate properties or their repayment is dependent
upon the operation or sale of commercial real estate properties as of June
30, 2009 and September 30, 2008, respectively. The remainder is wholly or
partially secured by real estate, the majority of which are also secured
by other assets of the borrower.
|
(2)
|
Includes
purchase premiums, purchase discounts, and net deferred origination fees
and costs.
|
At June
30, 2009 and September 30, 2008, RJ Bank had $50 million and $1.7 billion,
respectively, in FHLB advances secured by a blanket lien on RJ Bank'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 June
30, 2009 and September 30, 2008, RJ Bank had $4.0 million and $524,000 in
residential mortgage loans available for sale, respectively. RJ Bank's gain from
the sale of originated residential loans available for sale was $438,000 and
$304,000 for the nine months ended June 30, 2009 and 2008,
respectively.
During
the March 31, 2009 quarter, RJ Bank became a participant in the SBA loan market
by purchasing the guaranteed portions of SBA Section 7(a) loans. Most SBA 7(a)
loans have adjustable rates and float at a spread over prime or LIBOR and reset
monthly or quarterly. Once purchased, RJ Bank will typically hold the guaranteed
loan for up to 180 days and classify them as held for sale. RJ Bank will
aggregate like SBA loans by similar characteristics into pools for
securitization to the secondary market. Occasionally, an individual loan may be
sold prior to securitization. At June 30, 2009, RJ Bank had $21.5 million in SBA
loans held for sale. There was one SBA loan securitization during the quarter
ended June 30, 2009, which was subsequently sold during the same quarter. The
proceeds from the sale of this SBA loan securitization were $18.8 million. See
Note 16 of the Notes to the Condensed Consolidated Financial Statements for
further information regarding RJ Bank’s committed sales of SBA loan
securitizations. In addition to the SBA loan securitization mentioned above, RJ
Bank had sales of individual SBA loans during the three months ended June 30,
2009 totaling $26.8 million. The gains from the sale of both the SBA loan
securitization and the individual SBA loans were immaterial for the three and
nine months ended June 30, 2009.
Certain
officers, directors, and affiliates, and their related entities were indebted to
RJ Bank for a total of $1.8 million and $1.9 million at June 30, 2009 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 June 30, 2009 and 2008 was
$73.2 million and $83.3 million, respectively. Loan interest and fee income for
the nine months ended June 30, 2009 and 2008 was $253.9 million and $257.0
million, respectively.
The
following table shows the contractual maturities of RJ Bank’s loan portfolio at
June 30, 2009, including contractual principal repayments. This table does not,
however, include any estimates of prepayments. These prepayments could
significantly shorten the average loan lives and cause the actual timing of the
loan repayments to differ from those shown in the following table:
|
Due
in
|
|
|
1
Year or Less
|
1
Year – 5 Years
|
>5
Years
|
Total
|
|
(in
000’s)
|
|
|
|
|
|
Commercial
Loans
|
$ 11,650
|
$ 702,366
|
$ 148,483
|
$ 862,499
|
Real
Estate Construction Loans
|
159,857
|
220,922
|
17,640
|
398,419
|
Commercial
Real Estate Loans (1)
|
288,562
|
2,932,296
|
139,031
|
3,359,889
|
Residential
Mortgage Loans
|
426
|
9,452
|
2,593,848
|
2,603,726
|
Consumer
Loans
|
2,137
|
817
|
25,240
|
28,194
|
|
|
|
|
|
Total
Loans
|
$
462,632
|
$
3,865,853
|
$
2,924,242
|
$
7,252,727
|
(1)
|
Of
this amount, $1.3 billion and $1.2 billion is secured by non-owner
occupied commercial real estate properties or their repayment is dependent
upon the operation or sale of commercial real estate properties as of June
30, 2009 and September 30, 2008, respectively. The remainder is wholly or
partially secured by real estate, the majority of which are also secured
by other assets of the borrower.
|
RJ Bank
classifies loans as nonperforming when full and timely collection of interest or
principal becomes uncertain or when they are 90 days past due. The following
table shows the comparative data for nonperforming loans and
assets:
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
($
in 000’s)
|
|
|
|
Nonaccrual
Loans
|
$ 134,305
|
$ 52,033
|
Accruing
Loans Which are 90 Days or more
|
|
|
Past
Due
|
16,091
|
6,131
|
|
|
|
Total
Nonperforming Loans
|
150,396
|
58,164
|
|
|
|
Real
Estate Owned and Other
|
|
|
Repossessed
Assets, Net
|
9,300
|
4,144
|
|
|
|
Total
Nonperforming Assets, Net
|
$ 159,696
|
$ 62,308
|
|
|
|
Total
Nonperforming Assets as a % of
|
|
|
Total
Loans, Net and Other Real Estate Owned, Net
|
2.25%
|
0.88%
|
The gross
interest income related to nonperforming loans, which would have been recorded
had these loans been current in accordance with their original terms, totaled
$3.6 million for the quarter ended June 30, 2009 or $6.4 million since
origination. The interest income recognized on nonaccrual loans for the quarter
ended June 30, 2009 was $233,000.
RJ Bank
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. At June 30, 2009, the gross recorded investment
in impaired loans was $95.2 million with a related allowance for loan losses of
$13.0 million. At September 30, 2008, the gross recorded investment in impaired
loans was $37.5 million with a related allowance for loan losses of $5.0
million. All recorded impaired loan balances have had reserves established based
upon management’s analysis.
The
average impaired loan balance for the three and nine months ended June 30, 2009
was $85.9 million and $59.4 million, respectively. The average impaired loan
balance for the three and nine months ended June 30, 2008 was $12.9 million and
$6.3 million, respectively.
Nonaccrual
loans at June 30, 2009 and September 30, 2008 include residential mortgage loans
totaling $33.1 million and $7.4 million, respectively for which a charge-off had
previously been recorded. A charge-off is generally recorded when a loan is 90
days past due and is based upon the difference between the loan amount and the
estimated value of the loan collateral.
RJ Bank
recognizes interest income on impaired loans using the cash or cost recovery
method. Interest income recognized on impaired loans for the three and nine
months ended June 30, 2009 was $17,000 and $27,000, respectively. No interest
income was recognized on impaired loans for the three and nine months ended June
30, 2008.
As of
June 30, 2009, three of these impaired corporate loans totaling $14.0 million
were classified as troubled debt restructurings. The balance of corporate
troubled debt restructurings was significantly reduced from the prior
quarter-end, via the sale of one of the loans which totaled $27.2 million. As of
June 30, 2009 RJ Bank had commitments to lend an additional $1.3 million to one
borrower whose existing corporate loan was classified as a troubled debt
restructuring. As of June 30, 2009 four of the impaired residential loans
totaling $1.3 million were classified as troubled debt
restructurings.
Changes
in the allowance for loan losses at RJ Bank were as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
2009
|
2008
|
2009
|
2008
|
|
($
in 000’s)
|
|
|
|
|
|
Allowance
for Loan Losses,
|
|
|
|
|
Beginning
of Period
|
$ 141,343
|
$
70,219
|
$ 88,155
|
$
47,022
|
Provision
For Loan Losses
|
29,790
|
12,366
|
129,639
|
36,299
|
Charge-Offs:
|
|
|
|
|
Commercial
Real Estate Loans
|
(27,166)
|
(3,492)
|
(64,460)
|
(3,864)
|
Residential
Mortgage Loans
|
(7,220)
|
(1,509)
|
(16,898)
|
(1,939)
|
|
|
|
|
|
Total
Charge-Offs
|
(34,386)
|
(5,001)
|
(81,358)
|
(5,803)
|
|
|
|
|
|
Total
Recoveries
|
281
|
(2)
|
592
|
64
|
|
|
|
|
|
Net
Charge-Offs
|
(34,105)
|
(5,003)
|
(80,766)
|
(5,739)
|
|
|
|
|
|
Allowance
for Loan Losses,
|
|
|
|
|
End
of Period
|
$ 137,028
|
$
77,582
|
$
137,028
|
$
77,582
|
|
|
|
|
|
Net
Charge-Offs to Average Bank
|
|
|
|
|
Loans,
Net Outstanding (Annualized)
|
1.81%
|
0.31%
|
1.41%
|
0.13%
|
The
calculation of the allowance reflects management’s continuing evaluation of the
probable losses inherent in the loan portfolio. The allowance for loan losses is
comprised of two components: allowances calculated based on formulas for
homogeneous classes of loans and specific allowances assigned to certain
classified loans individually evaluated for impairment. The calculation of the
allowance based on formulas is subjective as management segregates the loan
portfolio into homogeneous classes. Each class is then assigned an allowance
percentage based on the perceived risk associated with that class of loans,
which is then further segregated by loan grade. 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, past loss history and examination
results from regulatory agencies. In addition, the Company provides for
potential losses inherent in RJ Bank’s unfunded lending commitments using the
criteria above, further adjusted for an estimated probability of
funding.
Additionally,
every residential and consumer loan over 60 days past due is reviewed by RJ Bank
personnel monthly and documented in a written report detailing delinquency
information, balances, collection status, appraised value, and other data
points. RJ Bank 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. Charge-offs are considered
on residential mortgage loans once the loans are delinquent 90 days or more. A
charge-off is taken for the difference between the loan amount and the amount
that RJ Bank estimates will ultimately be collected, based on the value of the
underlying collateral less costs to sell. The property values are adjusted for
anticipated selling costs and the balance is charged off against reserves. RJ
Bank predominantly uses broker price opinions (“BPO”) for these valuations as
access to the property is restricted during the foreclosure process and there is
insufficient data available for a full appraisal to be performed. BPOs contain
relevant and timely sale comparisons and listings in the marketplace, and
therefore, management has found these BPOs to be good determinants of market
value in lieu of appraisals and are more reliable than an automated valuation
tool or the use of tax assessed values. A full appraisal is obtained
post-foreclosure. RJ Bank takes further charge-offs against the owned asset if
an appraisal has a lower valuation than the original BPO, but does not reverse
previously charged-off amounts if the appraisal is higher than the original BPO.
If a loan remains in pre-foreclosure status for more than six months, an updated
valuation is obtained and further charge-offs are taken if necessary. In
addition, these loans are reviewed in a monthly delinquency meeting jointly
administered by retail banking and credit risk managers. An initial charge-off
is generally taken when the loan is between 90 and 120 days past
due.
Corporate
loans are monitored on an individual basis, and the loan grade is reviewed at
least quarterly to ensure the reserves are appropriate. When RJ Bank determines
that it is likely that a corporate loan will not be collected in full, reserves
are evaluated in accordance with SFAS No. 114, “Accounting by a Creditor for
Impairment of a Loan” (“SFAS 114”). After consideration of the borrower’s
ability to restructure the loan, alternative sources of repayment, and other
factors affecting the borrower’s ability to repay the debt, the portion of the
reserve deemed to be a confirmed loss, if any, is charged off. For collateral
dependent corporate loans secured by real estate, the amount of the reserve
considered a confirmed loss and charged off is generally equal to the difference
between the recorded investment in the loan and the appraised value less costs
to sell the collateral. These impaired loans are then considered to be in a
workout status and management continually evaluates all factors relevant in
determining the collectability and fair value of the loan. Appraisals on these
impaired loans are obtained early in the impairment process as part of
determining fair value and are updated as deemed necessary given the facts and
circumstances of each individual situation. All individual nonperforming
commercial real estate loans as of June 30, 2009, are closely monitored by RJ
Bank management. Certain factors such as guarantor recourse, additional borrower
cash contributions or stable operations will mitigate the need for more frequent
than annual appraisals. In its continuous evaluation of each individual loan,
management considers more frequent appraisals in geographies where commercial
property values are known to be experiencing a greater amount of volatility. For
other corporate loans, RJ Bank evaluates all sources of repayment, including the
estimated liquidation value of collateral pledged, to arrive at the amount
considered to be a loss and charged off. Similar to retail banking, corporate
banking and credit risk managers also hold a monthly meeting to review
criticized loans. Additional charge-offs are taken when the value of the
collateral changes or there is a change in the expected cash flows.
In
addition to the allowance for loan losses shown reflected in Bank Loans, Net, RJ
Bank had reserves for unfunded lending commitments included in Trade and Other
Payables of $8.8 million and $9.2 million at June 30, 2009 and September 30,
2008, respectively. RJ Bank reserves for its unfunded commitments based upon
product type and expected funding probabilities for fully binding commitments.
This will provide some reserve variability over different periods depending upon
the product type mix of the loan portfolio at the time and future funding
expectations. Impaired loans which have unfunded lending commitments are
analyzed in conjunction with the SFAS 114 impaired reserve process.
RJ Bank’s
net interest income after provision for loan losses for the three months ended
June 30, 2009 and 2008 was $45.8 million and $51.6 million, respectively. RJ
Bank’s net interest income after provision for loan losses for the nine months
ended June 30, 2009 and 2008 was $124.4 million and $110.8 million,
respectively.
RJ Bank
originates and purchases residential 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. RJ Bank does not originate or purchase residential loans
that have terms that permit negative amortization features or are option
adjustable rate mortgages. RJ Bank also does not originate or purchase
residential 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. These loans totaled $1.8 billion and $2.0
billion at June 30, 2009 and September 30, 2008, respectively. These loans are
underwritten based on a variety of factors including the borrower’s credit
history, debt to income ratio, employment, the loan-to-value (“LTV”) ratio, and
the borrower’s disposable income and cash reserves. In instances where the
borrower is of lower credit standing, the loans are typically underwritten to
have a lower LTV ratio and/or other mitigating factors. Loans with aggregate
balances totaling $229.9 million at June 30, 2009 were scheduled to re-price
within the next six months. A large percentage of these loans are projected to
adjust to a lower payment than the current payment.
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 are purchased based on the amortizing payment amount, and
borrowers are required to meet stringent parameters regarding debt ratios, LTV
levels, and credit scores.
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 June 30, 2009 and September 30, 2008, RJ Bank
held $237,000 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 made non-recourse loans to these employees
for two-thirds of the purchase price per unit. The loans and applicable interest
are to be repaid based on the earnings of the EIF Funds. 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 $17.6 million at June 30, 2009. None of those assets act
as collateral for any obligations of the EIF Funds. The Company's exposure to
loss is limited to its contributions and the non-recourse loans funded to the
employee investors, for which their partnership interests serve as collateral.
At June 30, 2009 that exposure is approximately $2.1 million.
RJTCF is
a wholly owned subsidiary of RJF and is the managing member or general partner
in approximately 54 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 other limited partnerships which purchase and develop low income
housing properties qualifying for tax credits (“project partnerships”). These
funds do not invest in property directly and therefore are not directly entitled
to residuals from the sale of property. As of June 30, 2009, 51 of these tax
credit housing funds are VIEs as defined by FIN 46R. RJTCF’s interest in 49 of
these VIEs range from .01% to 1.0% and RJTCF’s interest in one of the VIE’s it
consolidates is 53% (See Note 12 of the Notes to the Condensed Consolidated
Financial Statements for more information regarding the Company’s interest in
Fund 34) and RJTCF’s interest in the remaining VIE which it also consolidates is
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. As the managing member or general partner of the tax credit housing
funds, RJTCF does not provide guarantees related to the delivery or funding of
tax credits or other tax attributes to the investor members or limited partners
of these tax credit funds. The investor member(s) or limited partner(s) of the
VIEs bear the risk of loss on their investment. Additionally, under the tax
credit funds’ designed structure, the investor member(s) or limited partner(s)
also receive a greater proportion of any proceeds upon a sale of a Project
Partnership by a tax credit fund (fund level residuals) than does RJTCF. The
Company concluded that the determination of whether RJTCF is the primary
beneficiary of a tax credit fund is primarily dependent upon each respective
members’ ownership interest in the VIE. In instances where there is a single
investor member that holds 50% or more of the total investor member tax
attributes, 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 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 $287 million at June 30, 2009. None of those
assets act as collateral for any obligations of these funds. The Company's
exposure to loss is limited to its investments in, advances to, and receivables
due from these funds and at June 30, 2009, that exposure is approximately $58.2
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. These funds have combined assets of approximately $1.2 billion. The
Company's exposure to loss is limited to its investments in, advances to, and
receivables due from these funds and at June 30, 2009, that exposure is
approximately $5.4 million.
RJTCF’s
interest in the three remaining tax credit housing funds that have been
determined not to be VIEs are held 99% by RJTCF and are included in the
Company’s consolidated financial statements. At June 30, 2009, only one of these
funds had any material activity. These funds typically hold interests in certain
tax credit limited partnerships for less than 90 days, or until beneficial
interest in the fund is sold to third parties. These funds had assets of
approximately $2 million at June 30, 2009, which is also the Company’s exposure
to losses as of June 30, 2009.
See Note
12 of the Notes to Condensed Consolidated Financial Statements for information
regarding the Company’s commitments related to RJTCF.
As of
June 30, 2009, the Company has a variable interest in several limited
partnerships involved in various real estate activities, in which a subsidiary
of the Company 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
$11.8 million at June 30, 2009. The carrying value of the Company's investment
in these partnerships is not material at June 30, 2009. See Note 12 of the Notes
to Condensed Consolidated Financial Statements for additional information
related to these real estate limited partnerships.
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 $13.1 million at June 30, 2009. None of those assets
are specifically pledged as collateral for any obligations of the trust fund.
The Company's exposure to loss is limited to its contributions to the trust fund
and at June 30, 2009, that exposure is approximately $13.1 million.
NOTE 8 - BANK
DEPOSITS:
Bank
deposits include Negotiable Order of Withdrawal (“NOW”) accounts, demand
deposits, savings and money market accounts and certificates of deposit. The
following table presents a summary of bank deposits at June 30, 2009 and
September 30, 2008:
|
June
30, 2009
|
September
30, 2008
|
|
|
Weighted
|
|
Weighted
|
|
|
Average
|
|
Average
|
|
Balance
|
Rate
(1)
|
Balance
|
Rate
(1)
|
|
($
in 000's)
|
|
|
|
|
|
Bank
Deposits:
|
|
|
|
|
NOW
Accounts
|
$ 3,530
|
0.01%
|
$ 3,402
|
0.30%
|
Demand
Deposits (Non-Interest Bearing)
|
1,974
|
-
|
2,727
|
-
|
Savings
and Money Market Accounts
|
7,431,747
|
0.05%
|
8,520,121
|
1.58%
|
Certificates
of Deposit
|
200,307
|
3.76%
|
248,207
|
4.12%
|
Total
Bank Deposits
|
$ 7,637,558
|
0.15%
|
$
8,774,457
|
1.65%
|
(1)
Weighted average rate calculation is based on the actual deposit balances at
June 30, 2009 and September 30, 2008, respectively.
RJ Bank
had deposits from RJF executive officers and directors of $489,000 and $401,000
at June 30, 2009 and September 30, 2008, respectively.
Scheduled
maturities of certificates of deposit and brokered certificates of deposit at
June 30, 2009 and September 30, 2008 were as follows:
|
June
30, 2009
|
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
|
$ 13,063
|
$ 27,143
|
$
12,068
|
$ 25,820
|
Over
Three Through Six Months
|
6,822
|
15,061
|
12,971
|
27,996
|
Over
Six Through Twelve Months
|
9,688
|
26,806
|
12,336
|
38,783
|
Over
One Through Two Years
|
10,702
|
30,402
|
14,592
|
39,672
|
Over
Two Through Three Years
|
9,044
|
16,276
|
11,520
|
23,039
|
Over
Three Through Four Years
|
3,690
|
9,967
|
2,442
|
8,853
|
Over
Four Years
|
9,979
|
11,664
|
8,145
|
9,970
|
Total
|
$ 62,988
|
$ 137,319
|
$
74,074
|
$
174,133
|
Interest
expense on deposits is summarized as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
2009
|
2008
|
2009
|
2008
|
|
(in
000”s)
|
|
|
|
|
|
|
|
|
|
|
Certificates
of Deposit
|
$
1,951
|
$ 2,570
|
$ 6,475
|
$ 8,233
|
Money
Market, Savings and
|
|
|
|
|
NOW
Accounts
|
975
|
30,348
|
14,539
|
142,692
|
Total
Interest Expense on Deposits
|
$
2,926
|
$
32,918
|
$
21,014
|
$
150,925
|
NOTE 9 – LOANS
PAYABLE:
Loans
payable at June 30, 2009 and September 30, 2008 are presented
below:
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
(in
000's)
|
Short-Term
Borrowings:
|
|
|
Borrowings
on Lines of Credit
|
$ 468
|
$ 200,000
|
Current
Portion of Mortgage Notes Payable
|
3,032
|
2,891
|
Federal
Home Loan Bank Advances
|
-
|
1,900,000
|
Total
Short-Term Borrowings
|
3,500
|
2,102,891
|
|
|
|
Long-Term
Borrowings:
|
|
|
Mortgage
Notes Payable
|
56,794
|
59,333
|
Federal
Home Loan Bank Advances
|
50,000
|
50,000
|
Total
Long-Term Borrowings
|
106,794
|
109,333
|
|
|
|
Total
Loans Payable
|
$ 110,294
|
$
2,212,224
|
At June
30, 2009, the Company maintained three 364-day committed and several uncommitted
financing arrangements denominated in U.S. dollars totaling $780.1 million and
one uncommitted line of credit denominated in Canadian dollars (“CDN”) in the
amount of CDN $20 million. Lenders are under no obligation to lend to the
Company under uncommitted credit facilities. Committed facilities include a $100
million unsecured revolving credit agreement in the name of RJF, which closed in
February 2009. This credit agreement was amended in June 2009 to eliminate the
requirement of approval to participate in the U.S. Treasury’s TARP Capital
Purchase Program (CPP) as a condition to borrowing under the agreement. The
Company withdrew its application to participate in the CPP program in May 2009.
Committed facilities provided by commercial banks in the name of Raymond James
& Associates, Inc. (“RJ&A”) include a $75 million bilateral repurchase
agreement which closed in April 2009 and a $100 million tri-party repurchase
agreement. These facilities are subject to 0.12% and 0.125% commitment fees,
respectively, and the required market value of the collateral ranges from 102%
to 125%.
Additionally,
RJ&A maintains $235.1 million in uncommitted secured facilities provided by
commercial banks. At June 30, 2009, RJ&A also maintained two $60 million
uncommitted tri-party repurchase facilities with Raymond James Financial
Services, Inc. (“RJFS”) and with Raymond James Bank (“RJ Bank”). Unsecured,
uncommitted loan facilities available to RJ&A totaled $150
million.
At June
30, 2009, there were collateralized financings outstanding in the amount of
$84.1 million. Consolidated repurchase agreement financings are included in
Securities Sold Under Agreements to Repurchase on the Condensed Consolidated
Statement of Financial Condition. Such financings are collateralized by
non-customer, RJ&A-owned securities.
The
interest rates for all of the Company’s financing facilities are variable and
are based on the Fed Funds rate, LIBOR, credit default swaps rate, 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 June 30, 2009, interest rates on
the financing facilities ranged from (on a 360 days per year basis) 0.64% to
2.69%. For the three months ended June 30, 2008, those interest rates ranged
from 2.00% to 4.38%.
In
addition, the Company’s joint ventures in Turkey and Argentina have multiple
settlement lines of credit. At June 30, 2009, there was an outstanding balance
of $500,000 on the settlement line in Argentina. There was no outstanding
balance on the settlement line in Turkey. The Company has guaranteed
the settlement line of credit in Argentina for $9 million. The Company did not
renew its guarantee of the settlement line of credit in Turkey. An unsecured
settlement line of credit is available to the Argentina venture in the amount of
$4.4 million, and at June 30, 2009, there was no outstanding balance on this
line. The interest rates for these lines of credit ranged from 4% to 18%. 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.
RJ Bank
had $50 million in FHLB advances outstanding at June 30, 2009, comprised of
several long-term, fixed rate advances. RJ Bank had $1.2 billion in immediate
credit available from the FHLB on June 30, 2009 and total available credit of
40% of total assets, with the pledge of additional collateral to the FHLB. The
weighted average interest rate on these fixed rate advances at June 30, 2009 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 nine months ended June 30, 2009 and 2008 was $170 million and $69 million,
respectively. The average amounts of FHLB advances outstanding and the weighted
average interest rate thereon for the nine months ended June 30, 2009 and 2008
were $52.8 million at a rate of 5.00% and $55.7 million at a rate of 5.28%,
respectively. These advances are secured by a blanket lien on RJ Bank's
residential loan portfolio granted to FHLB. The FHLB has the right to convert
advances totaling $35 million at June 30, 2009 to a floating rate at one or more
future dates. RJ Bank has the right to prepay these advances without penalty if
the FHLB exercises its right. 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
loans payable are 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 $65.6 million at June 30,
2009.
NOTE 10 – DERIVATIVE
FINANCIAL INSTRUMENTS:
The
Company accounts for derivative financial instruments and hedging activities in
accordance with SFAS 133 , as subsequently amended by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statements No. 133", SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", and SFAS No. 149,
"Amendments of Statement 133 on Derivative Instruments and Hedging Activities",
which establish accounting and reporting standards for derivatives and hedging
activities. These statements establish standards for designating a derivative as
a hedge. None of the Company’s derivatives meet the criteria for designation as
a fair value or cash flow hedge under SFAS 133.
The
Company adopted SFAS 161 on January 1, 2009. This pronouncement did not have any
impact on the financial position or operating results of the Company. SFAS 161
expanded the disclosures regarding the use of derivative instruments and hedging
activities.
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. The majority of its derivative positions are
executed in the over-the-counter market with financial institutions. These
positions are marked to fair value with the related gain or loss and interest
recorded in earnings within the statement of income for the period. The revenue
related to each category includes realized and unrealized gains and losses on
derivative instruments. Cash flows related to these fixed income interest rate
contracts are included as Operating Activities (the “Trading Instruments, Net”
line) on the Condensed Consolidated Statements of Cash Flows for the
period.
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 FIN No. 39-1. As the Company elects to
net-by-counterparty the fair value of interest rate swap contracts, it also must
net-by-counterparty any collateral exchanged as part of the swap agreement. This
cash collateral is recorded net-by-counterparty with the related fair value. The
cash collateral included in the net fair value of all open derivative asset
positions at June 30, 2009 and September 30, 2008, was $(800,000) and $4.1
million, respectively. The cash collateral included in the net fair value of all
open derivative liability positions at June 30, 2009 and September 30, 2008, was
$2.6 million and $4.0 million, respectively. The master netting agreement
referenced above allows for netting of all individual swap receivables and
payables with each counterparty. The credit support annex allows parties to the
master agreement to mitigate their credit risk by requiring the party which is
out of the money to post collateral. The Company’s maximum loss exposure under
these interest rate swap contracts at June 30, 2009 is $27 million.
To
mitigate interest rate risk in a significantly rising rate environment, RJ Bank
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 RJ Bank 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 earnings
within the consolidated statement of income for the period. Cash flows related
to these interest rate caps are included as Operating Activities (the Prepaid
Expenses and Other Assets line) on the Condensed Consolidated Statements of Cash
Flows for the period. The Company’s maximum loss exposure under these interest
rate cap contracts was $387,000 at June 30, 2009.
The
Company has made commitments to provide certain loans of a relatively long
duration at a fixed rate of interest (“Permanent Loan Commitments”) directly to
certain low income housing project partnerships subject only to those project
partnerships meeting certain qualifying criteria within a prospective two-year
period. These Permanent Loan Commitments meet the criteria of a derivative per
SFAS 133. As such, the Permanent Loan Commitments are recorded at fair value
with any changes in fair value recorded in earnings within the consolidated
statement of income. Cash flows related to these commitments are reflected in
Operating Activities on the Condensed Consolidated Statements of Cash Flows. The
Company’s maximum loss exposure under these Permanent Loan Commitments at June
30, 2009 is $5.9 million.
See the
table below for the notional and fair value amounts of both the asset and
liability derivatives at June 30, 2009 and September 30, 2008:
|
Asset Derivatives
|
|
June
30, 2009
|
|
September
30, 2008
|
|
Balance
|
|
|
|
Balance
|
|
|
|
Sheet
|
Notional
|
Fair
|
|
Sheet
|
Notional
|
Fair
|
|
Location
|
Amount
|
Value
(1)
|
|
Location
|
Amount
|
Value
(1)
|
|
(in
000’s)
|
|
(in
000’s)
|
Derivatives
Not Designated
|
|
|
|
|
|
|
|
As
Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts:
|
Trading
Instruments
|
$
1,426,642
|
$
106,704
|
|
Trading
Instruments
|
$
2,121,519
|
$
91,521
|
|
Other
Assets
|
1,500,000 |
387 |
|
Other
Assets
|
1,500,000 |
1,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
fair value is shown on a gross basis before netting of cash collateral and
by counterparty according to the Company’s legally enforceable master
netting arrangements, yet the fair value is shown net in the Condensed
Consolidated Statement of Financial
Condition.
|
|
Liability
Derivatives
|
|
June
30, 2009
|
|
September
30, 2008
|
|
Balance
|
|
|
|
Balance
|
|
|
|
Sheet
|
Notional
|
Fair
|
|
Sheet
|
Notional
|
Fair
|
|
Location
|
Amount
|
Value
(1)
|
|
Location
|
Amount
|
Value
(1)
|
|
(in
000’s)
|
|
(in
000’s)
|
Derivatives
Not Designated
|
|
|
|
|
|
|
|
As
Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts:
|
Trading
Instruments
|
|
|
|
Trading
Instruments
|
|
|
|
Sold
|
$
1,256,358
|
$
74,166
|
|
Sold
|
$
1,619,172
|
$
74,486
|
|
Trade
and Other
|
|
|
|
Trade
and Other
|
|
|
|
Payables
|
5,900
|
111
|
|
Payables
|
-
|
-
|
|
|
|
|
|
|
|
|
(1)
|
The
fair value is shown on a gross basis before netting of cash collateral and
by counterparty according to the Company’s legally enforceable master
netting arrangements, yet the fair value is shown net in the Condensed
Consolidated Statement of Financial
Condition.
|
See the
table below for the impact of the derivatives not designated as hedging
instruments on the consolidated income statement for the three and nine months
ended June 30, 2009 and 2008, respectively:
|
Location of
|
|
|
|
|
Gain
(Loss)
|
|
|
|
|
Recognized
In
|
|
|
|
|
Income on
|
|
Amount
of Gain (Loss) Recognized
|
|
Derivatives
|
|
In
Income on Derivatives
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
|
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
|
|
2009
|
2008
|
2009
|
2008
|
|
|
|
(in
000’s)
|
Derivatives
Not Designated as Hedging
|
|
|
|
|
|
|
Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts:
|
Net
Trading Profits
|
|
$
1,749
|
$
4,198
|
$
(1,205)
|
$
(3,390)
|
|
Other
Revenues
|
|
347
|
66
|
(1,025)
|
66
|
The
Company is exposed to credit losses in the event of nonperformance by the
counterparties to its interest rate derivative agreements. The Company performs
a credit evaluation of counterparties prior to entering into derivative
transactions and monitors their credit standings. Currently, the Company
anticipates that all counterparties will be able to fully satisfy their
obligations under those agreements. The Company may require collateral from
counterparties to support these obligations as established by the credit
threshold specified by the agreement and/or as a result of monitoring the credit
standing of the counterparties. The Company is also exposed to interest rate
risk related to its interest rate swap agreements. The Company monitors exposure
in its derivatives subsidiary daily based on established limits with respect to
a number of factors, including interest rate, spread, ratio and basis, and
volatility risks. These exposures are monitored both on a total portfolio basis
and separately for selected maturity periods.
NOTE 11 - INCOME
TAXES
The
Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”) on October 1, 2007. The impact of the adoption of FIN 48
resulted in a decrease to beginning retained earnings and an increase to
reserves for uncertain tax positions of approximately $4.2 million.
As of
June 30, 2009 and September 30, 2008 the total gross unrecognized tax benefits
were $5.6 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 $4.2 million and $3.5 million at
June 30, 2009 and September 30, 2008, respectively.
The
Company calculates an annualized tax rate. The rate calculated as of June 30,
2009 includes the Company’s estimate of the annual nondeductible losses of $10
million in Company Owned Life Insurance (“COLI”) and Business Owned Life
Insurance (“BOLI”). This increased the tax rate by 1.5%.
The
Company recognizes the accrual of interest and penalties related to income tax
matters in interest expense and other expense, respectively. As of June 30, 2009
and September 30, 2008, accrued interest and penalties included in the
unrecognized tax benefits liability were approximately $2 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 Note 12 below for additional information).
The
Company files income tax returns in the U. S. federal jurisdiction and various
state, 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 fiscal years prior to 2008 for federal tax
returns, fiscal year 2004 for state and local tax returns and fiscal year 2000
for foreign tax returns. The fiscal year 2008 and 2009 federal income tax
returns are 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 federal and state audits in
process are expected to be completed in fiscal year 2009. It is anticipated that
the unrecognized tax benefits may decrease by an estimated $107,000 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 $8.2 million as of June 30, 2009. 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.
RJ Bank
had $50 million in FHLB advances outstanding at June 30, 2009, comprised of
several long-term, fixed rate advances. RJ Bank had $1.2 billion in immediate
credit available from the FHLB on June 30, 2009 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 June 30, 2009, all of the FHLB advances outstanding
were secured by a blanket lien on RJ Bank’s residential loan portfolio and FHLB
stock.
As of
June 30, 2009, RJ Bank had entered into two short-term reverse repurchase
agreements totaling $340 million with one counterparty. Although RJ Bank is
exposed to risk that this counterparty may not fulfill its contractual
obligations, the Company believes the risk of loss is minimal due to the U.S.
Treasury or U.S. Agency securities received as collateral, the creditworthiness
of this counterparty, which is closely monitored, and the short duration of
these agreements.
As of
September 30, 2008, RJ Bank 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 June 30, 2009, there were no purchases of syndicated loans that had not
settled.
RJ Bank
provides to its affiliate, Raymond James Capital Services, Inc. (“RJCS”), on
behalf of certain corporate borrowers, a guarantee of payment in the event of
the borrower’s default for exposure under interest rate swaps entered into with
RJCS. At June 30, 2009 and September 30, 2008, the current exposure under these
guarantees was $11.4 million and $2.5 million, respectively, which was
underwritten as part of RJ Bank’s larger corporate credit relationships. The
estimated total potential exposure under these guarantees is $14.6 million at
June 30, 2009.
The FDIC
announced in February 2009 that it was imposing a special assessment on insured
financial institutions in order to ensure the continued strength of its
insurance fund. The amount to be assessed was finalized in April 2009 to
represent five basis points of a financial institution’s total assets less Tier
1 capital at June 30, 2009, which is capped at 10 basis points of domestic
deposits as of the same accounting period. This special assessment of $4.0
million has been expensed as of June 30, 2009 and is payable to the FDIC on
September 30, 2009.
See Note
16 of the Notes to Condensed Consolidated Financial Statements with respect to
RJ Bank’s and Raymond James Multi-Family Finance, Inc.’s commitments to extend
credit and other RJ Bank 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 $827,000 and $796,000 were recognized in the three
months ended June 30, 2009 and 2008, respectively. Expenses of $2.5 million and
$2.4 million were recognized in the nine months ended June 30, 2009 and 2008,
respectively.
In the
normal course of business, the Company enters into underwriting commitments.
Transactions relating to such commitments of Raymond James Ltd. (“RJ Ltd.”) that
were recorded and open at June 30, 2009 were approximately CDN $30 million.
There were no such commitments of RJ&A.
The
Company utilizes client marginable securities to satisfy deposits with clearing
organizations. At June 30, 2009, the Company had client margin securities valued
at $161.4 million pledged with a clearing organization to meet the point in time
requirement of $74 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 offers loans and transition assistance to its Financial Advisors mainly
for recruiting or retention purposes. These commitments are contingent upon
certain events occurring, including but not limited to the Financial Advisor
joining the Company and meeting certain production requirements. In certain
circumstances, the Company may make commitments prior to funding them. As of
June 30, 2009, the Company estimates that it had made commitments of $33.5
million in loans and transition assistance that have not yet been
funded.
The
Company has committed a total of $99 million to 46 different independent venture
capital or private equity partnerships, in amounts ranging from $200,000 to $5
million with the exception of two internally sponsored commitments totaling
$37.5 million. As of June 30, 2009, the Company had invested $50.7 million of
that amount and had received $40.5 million in distributions. Additionally, the
Company controls the general partner in one internally sponsored private equity
limited partnership to which it has committed and invested $6.5 million. The
Company has received $4.3 million in distributions as of June 30,
2009.
The
Company is the general partner in EIF Funds. These limited partnerships invest
in the merchant banking and private equity activities of the Company and other
unaffiliated venture capital limited partnerships. The EIF Funds were
established as compensation and retention measures for certain qualified key
employees of the Company. At June 30, 2009, the EIF Funds have unfunded
commitments of $1.6 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 June
30, 2009, 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
|
$ 571,656
|
Securities
Received in Securities Borrowed vs. Cash Transactions
|
540,952
|
Collateral
Received for Margin Loans
|
1,007,720
|
Total
|
$
2,120,328
|
During
the quarter, certain collateral was repledged. At June 30, 2009, the approximate
market values of this portion of collateral repledged and financial instruments
owned that were pledged by the Company, were:
Uses
of Collateral and Trading Securities (In 000's):
|
|
Securities
Sold Under Agreements to Repurchase and Other
|
|
Collateralized
Financings
|
$ 89,131
|
Securities
Delivered in Securities Loaned vs. Cash Transactions
|
555,176
|
Collateral
Used for Deposits
|
176,098
|
Total
|
$ 820,405
|
The
Company has from time to time authorized performance guarantees for the
completion of trades with counterparties in Argentina. At June 30, 2009, there
were no outstanding performance guarantees in Argentina.
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 RJ&A of approximately $59.8
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 (“Fund 34”) for a capital contribution of
up to $58 million. During the second quarter of fiscal year 2009, the Company
sold five units of Fund 34 to an unrelated third party for approximately $5
million and thus as of June 30, 2009 the Company holds 53 units of Fund 34. At
June 30, 2009, $51.9 million of capital had been contributed by the subsidiary
to Fund 34 in addition to an advance of $5.8 million made by RJTCF to Fund 34 as
of June 30, 2009 (refer to the discussion of short-term advances RJTCF may
provide to project partnerships on behalf of tax credit funds discussed below).
The subsidiary expects to resell its interests in Fund 34 to other investors;
however, the holding period of this interest could be much longer than 90 days.
In addition to the 58 unit interest in Fund 34 initially purchased, RJTCF
provided certain specific performance guarantees to the third-party investors of
Fund 34. The Company had guaranteed a $58 million capital contribution
obligation as well as the specified performance guarantees provided by RJTCF to
Fund 34’s third-party investors. The unfunded capital contribution obligation to
Fund 34 is $300,000 as of June 30, 2009. Additionally, RJTCF may make short-term
loans or advances to project partnerships on behalf of the tax credit funds in
which it serves as managing member or general partner. At June 30, 2009, cash
funded to invest in either loans or investments in project partnerships
(excluding the capital invested in 53 units of Fund 34 mentioned previously) was
$14.9 million. In addition, at June 30, 2009, RJTCF is committed to additional
future fundings (excluding the 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
$12.5 million as of June 30, 2009. Through RJTCF’s wholly owned lending
subsidiary, Raymond James Multi-Family Finance, Inc., certain construction loans
or loans of longer duration (“permanent loans”) may be made directly to certain
project partnerships. As of June 30, 2009 seven such construction loans are
outstanding with an unfunded balance of $2.3 million available for future draws
on such loans. Similarly, five permanent loan commitments are outstanding as of
June 30, 2009. 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 June 30, 2009 is
$5.9 million.
The
Company entered into two agreements with Raymond James Trust, National
Association (“RJT”). The Office of the Controller of the Currency (“OCC”) is
also a party to one of those agreements. The two agreements were a condition to
OCC’s approval of 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.
On July
6, 2009, the Company entered into a Deposit Services Agreement with Promontory
Interfinancial Network, LLC. (“Promontory”). This agreement obligates the
Company to begin utilizing this FDIC-insured cash sweep program for its clients
no later than October 1, 2009. As part of this arrangement, the Company and
Promontory have also entered into a tri-party agreement with a third party
financial institution, which requires a specified amount of client deposits to
be directed to this institution for a period of up to four years.
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.
In June
2009, a purported class action, Woodard vs. Raymond James Financial,
Inc, et al., was filed in the United States District Court for the
Southern District of New York. The case names as defendants the
Company, the Chief Executive Officer, and Chief Financial
Officer. The complaint, brought on behalf of purchasers of the
Company's common stock for the period between and including April 22, 2008 and
April 14, 2009, alleges that various financial statements and press releases
issued by the Company contained material misstatements and omissions relating to
the loan losses at Raymond James Bank, FSB. The complaint seeks class action
status, compensatory damages and costs and disbursements, including attorneys’
fees.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJ MKY”), 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. The Turkish tax authorities, utilizing the 2001
methodology, assessed RJ MKY $5.7 million for 2002. On October 24, 2008, RJ MKY
was notified by the Capital Markets Board of Turkey that the technical capital
inadequacy resulting from RJ MKY’s provision for this case required an
additional capital contribution, and as a result, RJ MKY halted all trading
activities. On December 5, 2008, RJ MKY 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 June 30, 2009, RJ MKY had
total capital of approximately $2.6 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 principal
broker-dealers, RJ&A 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 filed
in April 2008 similar to that filed against a number of brokerage firms in
United States District Court for the Southern District of New York, 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 a significant 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
Company made no purchases of its own stock during the quarter ended June 30,
2009.
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, 3,725,885 shares have been
repurchased for a total of $84.5 million, leaving $65.5 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. The Company purchased
no shares in open market transactions for the nine months ended June 30, 2009.
The RJF revolving credit agreement limits dividends and share repurchases to $60
million in any fiscal year plus any stock repurchases to fund stock
plans.
During
the nine months ended June 30, 2009, 242,251 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 110,875
shares that were surrendered by employees as payment for option exercises during
the nine months ended June 30, 2009.
As
consideration for an increase in its percentage of ownership in various Latin
American joint ventures, the Company issued 162,707 shares at the value of $2.9
million during the quarter ended March 31, 2009.
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 or deficit that exceeds or is less
than 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 and nine months ended June 30, 2009 includes $8.1 million
and $27.2 million, respectively, of compensation costs and $2.6 million and $8.6
million, respectively, of income tax benefits related to the Company’s
share-based awards to employees and members of its Board of Directors. The
Company’s net income for the three and nine months ended June 30, 2008 includes
$8.2 million and $26.7 million, respectively, of compensation costs and $2.7
million and $8.4 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 nine months ended June 30, 2009, the Company recognized $2.7 million of
excess tax benefits as additional paid-in capital.
During
the three months ended June 30, 2009, the Company granted 12,400 stock options
and 305,970 shares of restricted stock to employees under its share-based
employee compensation plans. During the nine months ended June 30, 2009, the
Company granted 275,150 stock options, 1,234,183 shares of restricted stock and
220,086 restricted stock units to employees under its share-based employee
compensation plans. During the nine months ended June 30, 2009, 17,500 stock
options were granted to outside directors. Restricted stock grants under the
2007 Stock Bonus Plan and the 2005 Restricted Stock Plan are limited to 750,000
and 2,000,000 shares, respectively, per fiscal year.
The
weighted-average grant-date fair value of stock options granted to employees and
directors during the three and nine months ended June 30, 2009 was $5.64 and
$6.25 per share, respectively. Pre-tax unrecognized compensation expense for
stock options granted to employees and outside directors, net of estimated
forfeitures, was $11.2 million as of June 30, 2009, and will be recognized as
expense over a weighted-average period of approximately 2.9 years.
The
weighted-average grant-date fair value of restricted stock granted to employees
during the three and nine months ended June 30, 2009 was $15.72 and $17.82 per
share, respectively. Pre-tax unrecognized compensation expense for unvested
restricted stock granted to employees, net of estimated forfeitures, was $56.6
million as of June 30, 2009, and will be recognized as expense over a
weighted-average period of approximately 2.8 years.
The
weighted-average grant-date fair value of restricted stock units granted to
employees during the nine months ended June 30, 2009 was $17.91 per share.
Pre-tax unrecognized compensation expense for unvested restricted stock units
granted to employees, net of estimated forfeitures, was $6.2 million as of June
30, 2009, and will be recognized as expense over a weighted-average period of
approximately 1.6 years.
Under one
of its non-qualified fixed stock option plans, the Company may grant stock
options to its independent contractor Financial Advisors. In
addition, the Company may grant restricted stock units or restricted shares of
common stock to its independent contractor Financial Advisors under one of its
restricted stock plans. The Company accounts for share-based awards
to its independent contractor Financial Advisors in accordance with EITF No.
96-18, “Accounting for Equity Instruments That are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and
EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock” (see Note 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 June 30, 2009, the Company’s net income for the three months ended June
30, 2009 includes $1.2 million and $0.5 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. Due to the
decline in the value of the Company’s common stock during the nine months ended
June 30, 2009, the Company’s net income for the nine months ended June 30, 2009
includes $8.8 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 June 30, 2008 includes $2.6
million and $1.0 million, respectively, of compensation expense and income tax
benefits related to the Company’s share-based awards to its independent
contractor Financial Advisors. Due to the decline in the value of the
Company’s common stock during the nine months ended June 30, 2008, the Company’s
net income for the nine months ended June 30, 2008 includes $2.1 million and
$0.8 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.
During
the three months ended June 30, 2009, the Company granted 350 shares of
restricted stock to its independent contractor Financial
Advisors. During the nine months ended June 30, 2009, the Company
granted 45,500 stock options and 9,392 shares of restricted stock to its
independent contractor Financial Advisors.
As of
June 30, 2009, there was $0.7 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 $2.88
per share at that date. These costs are expected to be recognized
over a weighted average period of approximately 2.3 years.
As of
June 30, 2009, there was $1.8 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 $17.21 per share at that
date. These costs are expected to be recognized over a weighted average period
of approximately 3.5 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. RJ&A, 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 RJ&A, 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 $250,000 or two percent of Aggregate Debit Items arising
from client transactions. FINRA may require a member firm to reduce its business
if its net capital is less than four percent of Aggregate Debit Items and may
prohibit a member firm from expanding its business and declaring cash dividends
if its net capital is less than five percent of Aggregate Debit Items. The net
capital position of RJ&A at June 30, 2009 and September 30, 2008 was as
follows:
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
($
in 000's)
|
Raymond
James & Associates, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital as a Percent of Aggregate
|
|
|
Debit
Items
|
23.55%
|
18.32%
|
Net
Capital
|
$
299,906
|
$
303,192
|
Less:
Required Net Capital
|
(25,472)
|
(33,096)
|
Excess
Net Capital
|
$
274,434
|
$
270,096
|
At June
30, 2009 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 June 30, 2009 and September 30, 2008 was as follows:
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
(in
000's)
|
Raymond
James Financial Services, Inc.:
|
|
(Alternative
Method Elected)
|
|
|
Net
Capital
|
$ 14,492
|
$ 54,225
|
Less:
Required Net Capital
|
(250)
|
(250)
|
Excess
Net Capital
|
$ 14,242
|
$ 53,975
|
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 June 30, 2009 or September 30,
2008. The Risk Adjusted Capital of RJ Ltd. at June 30, 2009 and September 30,
2008 was as follows (in Canadian dollars):
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
(in
000’s)
|
Raymond
James Ltd.:
|
|
|
Risk
Adjusted Capital before minimum
|
$
30,367
|
$
48,520
|
Less:
Required Minimum Capital
|
(250)
|
(250)
|
Risk
Adjusted Capital
|
$
30,117
|
$
48,270
|
At June
30, 2009, all of the Company’s active domestic and international broker-dealers
are in compliance with and meet all net capital requirements.
RJ Bank
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, RJ Bank must meet specific capital guidelines that
involve quantitative measures of RJ Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. RJ
Bank'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 RJ Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and
Tier I Capital (as defined in the regulations) to both risk-weighted assets and
adjusted assets (as defined). Management believes that, as of June 30, 2009, RJ
Bank meets all capital adequacy requirements to which it is
subject.
To be
categorized as “well capitalized”, RJ Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table below.
|
|
|
To
be well capitalized
|
|
|
Requirement
for capital
|
under
prompt
|
|
|
adequacy
|
corrective
action
|
|
Actual
|
purposes
|
provisions
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
($
in 000's)
|
As
of June 30, 2009:
|
|
|
|
|
|
|
Total
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
$
858,248
|
11.4%
|
$
602,072
|
8.0%
|
$
752,590
|
10.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Risk-Weighted
Assets)
|
763,644
|
10.2%
|
301,036
|
4.0%
|
451,554
|
6.0%
|
Tier I
Capital (to
|
|
|
|
|
|
|
Adjusted
Assets)
|
763,644
|
9.0%
|
338,985
|
4.0%
|
423,732
|
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 were $778,624,000,
$689,281,000, and $689,281,000 with ratios of 10.9%, 9.6% and 6.0%,
respectively. On December 5, 2008 subsequent to filing the Company’s
Annual Report on Form 10-K, the Company discovered that its wholly owned
subsidiary, RJ Bank, had misinterpreted an instruction related to the
calculation of RJ Bank’s risk weighted capital ratio. As a result, despite
the Company’s intention and ability to maintain RJ Bank at a “well
capitalized” level under the bank regulatory framework, RJ Bank 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 RJ Bank on
December 12, 2008, 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, as the
FDIC was notified of the circumstances and took no adverse action, and as
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.
|
It
continues to be the Company’s intention to maintain RJ Bank’s “well capitalized”
status. The Company has contributed $435 million during the last 11
quarters. As a result, the Company considers it unlikely that RJ Bank
would experience anything other than “well capitalized” status. In the unlikely
event of such occurrence, the consequences could include a requirement to obtain
a waiver prior to acceptance, renewal, or rollover of brokered deposits and
higher FDIC premiums, but would not have a significant impact on the operations
of the Company.
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 June 30,
2009, 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 RJ Bank, 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:
RJ Bank
has outstanding at any time a significant number of commitments to extend credit
and other credit-related off-balance sheet financial instruments such as standby
letters of credit and loan purchases. These arrangements are subject to strict
credit control assessments and each customer’s credit worthiness is evaluated on
a case-by-case basis. A summary of commitments to extend credit and other
credit-related off-balance sheet financial instruments outstanding at June 30,
2009 and September 30, 2008, is as follows:
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
(in
000's)
|
|
|
|
Standby
Letters of Credit
|
$ 250,459
|
$ 239,317
|
Open
End Consumer Lines of Credit
|
42,419
|
43,544
|
Commercial
Lines of Credit
|
1,449,643
|
1,384,941
|
Unfunded
Loan Commitments - Variable Rate
|
169,910
|
1,055,686(1)
|
Unfunded
Loan Commitments - Fixed Rate
|
22,722
|
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. RJ Bank
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.
RJ Bank’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 RJ Bank
upon extension of credit, is based on RJ Bank’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, RJ Bank issues, or participates in the issuance of,
financial standby letters of credit whereby it provides an irrevocable guarantee
of payment in the event the letter of credit is drawn down by the beneficiary.
As of June 30, 2009, $250.5 million of such letters of credit were outstanding.
Of the letters of credit outstanding, $247.8 million are underwritten as part of
a larger corporate credit relationship. In the event that a letter of credit is
drawn down, RJ Bank 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, RJ Bank uses a credit evaluation process and
collateral requirements similar to those for loan commitments.
As of
June 30, 2009, RJ Bank had commitments to sell and purchase SBA and first
mortgage loans held for sale totaling $3.3 million and $4.0 million,
respectively. As of June 30, 2009, RJ Bank had a commitment to sell one SBA loan
pool securitization of $11.4 million, which had not yet been issued as of the
period end. See Note 6 of the Notes to the Condensed Consolidated Financial
Statements for more information regarding RJ Bank’s participation in SBA loan
pool securitizations.
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 June 30, 2009, the unfunded portion of executed commitments
to extend credit was $8.2 million. See Note 12 of the Notes to the Consolidated
Financial Statements for more information regarding these
commitments.
RJ Ltd.
is subject to foreign exchange risk primarily due to financial instruments held
in U.S. dollars that may be impacted by fluctuation in foreign exchange rates.
In order to mitigate this risk, RJ Ltd. enters into forward foreign exchange
contracts. The fair value of these contracts is nominal. As of June 30, 2009,
forward contracts outstanding to buy and sell U.S. dollars totaled CDN $9.0
million and CDN $19.2 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
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
2009
|
2008
|
2009
|
2008
|
|
(in
000’s, except per share amounts)
|
|
|
|
|
|
Net
Income
|
$ 42,595
|
$ 69,938
|
$
109,781
|
$
185,970
|
|
|
|
|
|
Weighted
Average Common Shares
|
|
|
|
|
Outstanding
During the Period
|
118,177
|
115,633
|
117,239
|
116,573
|
|
|
|
|
|
Dilutive
Effect of Stock Options and Awards (1)
|
1,283
|
2,639
|
1,172
|
2,639
|
|
|
|
|
|
Weighted
Average Diluted Common
|
|
|
|
|
Shares
(1)
|
119,460
|
118,272
|
118,411
|
119,212
|
|
|
|
|
|
Net
Income per Share – Basic
|
$ 0.36
|
$ 0.60
|
$ 0.94
|
$ 1.59
|
|
|
|
|
|
Net
Income per Share - Diluted (1)
|
$ 0.36
|
$ 0.59
|
$ 0.93
|
$ 1.56
|
|
|
|
|
|
Securities
Excluded from Weighted Average
|
|
|
|
|
Diluted
Common Shares Because Their Effect
|
|
|
|
|
Would
Be Antidilutive
|
4,443
|
3,623
|
4,225
|
3,045
|
(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; RJ Bank;
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 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 (RJ&A’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.
RJ Bank
is a separate segment, which provides residential, consumer and commercial
loans, as well as Federal Deposit Insurance Corporation (“FDIC”)-insured deposit
accounts to clients of the Company's broker-dealer subsidiaries and to the
general public.
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 Note 12 of the Notes to Condensed
Consolidated Financial Statements 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. During the quarter ended March 31, 2009, the
Company relinquished its control over the general partners in the two Ballast
Point Ventures funds. The Company retained ownership interest in these entities.
See Note 1 of the Notes to the Condensed Consolidated Financial Statements for
further information.
The Other
segment includes certain corporate activities of the Company.
Information
concerning operations in these segments of business is as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
2009
|
2008
|
2009
|
2008
|
|
(in
000’s)
|
Revenues:
|
|
|
|
|
Private
Client Group
|
$ 370,719
|
$ 485,672
|
$ 1,136,305
|
$ 1,525,135
|
Capital
Markets
|
138,524
|
147,114
|
391,243
|
386,146
|
Asset
Management
|
35,398
|
59,416
|
132,870
|
184,702
|
RJ
Bank
|
80,747
|
96,222
|
273,322
|
303,945
|
Emerging
Markets
|
3,208
|
10,389
|
10,628
|
33,270
|
Stock
Loan/Borrow
|
2,361
|
6,728
|
8,258
|
29,015
|
Proprietary
Capital
|
9,881
|
16,147
|
9,780
|
18,560
|
Other
|
3,203
|
4,320
|
4,587
|
19,378
|
Intersegment
Eliminations
|
(11,789)
|
(17,260)
|
(42,497)
|
(55,078)
|
Total
Revenues
|
$ 632,252
|
$ 808,748
|
$ 1,924,496
|
$ 2,445,073
|
|
|
|
|
|
Income
Before Provision for Income Taxes:
|
Private
Client Group
|
$ 18,321
|
$ 34,909
|
$ 62,587
|
$ 144,227
|
Capital
Markets
|
20,224
|
27,253
|
50,495
|
36,381
|
Asset
Management
|
6,691
|
14,215
|
20,669
|
47,552
|
RJ
Bank
|
27,406
|
37,957
|
69,616
|
78,622
|
Emerging
Markets
|
(1,311)
|
(271)
|
(4,065)
|
(1,720)
|
Stock
Loan/Borrow
|
885
|
1,893
|
2,955
|
4,827
|
Proprietary
Capital
|
(308)
|
5,855
|
(1,354)
|
4,578
|
Other
|
401
|
(6,693)
|
(14,012)
|
(10,774)
|
Pre-Tax
Income
|
$ 72,309
|
$ 115,118
|
$ 186,891
|
$
303,693
|
Net
Interest Income (Expense):
|
Private
Client Group
|
$ 11,503
|
$ 21,790
|
$ 36,893
|
$
70,466
|
Capital
Markets
|
537
|
435
|
2,594
|
(102)
|
Asset
Management
|
11
|
155
|
135
|
938
|
RJ
Bank
|
75,608
|
63,922
|
254,058
|
147,109
|
Emerging
Markets
|
179
|
526
|
901
|
2,236
|
Stock
Loan/Borrow
|
1,575
|
2,338
|
4,911
|
7,027
|
Proprietary
Capital
|
-
|
237
|
173
|
1,245
|
Other
|
1,171
|
808
|
3,969
|
6,745
|
Net
Interest Income
|
$ 90,584
|
$ 90,211
|
$ 303,634
|
$
235,664
|
The
following table presents the Company's total assets on a segment
basis:
|
|
|
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
(in
000’s)
|
Total
Assets:
|
|
|
Private
Client Group (1)
|
$ 7,521,788
|
$ 6,861,688
|
Capital
Markets (2)
|
1,099,126
|
1,400,658
|
Asset
Management
|
54,219
|
75,339
|
RJ
Bank
|
8,311,838
|
11,356,939
|
Emerging
Markets
|
48,386
|
52,786
|
Stock
Loan/Borrow
|
587,179
|
698,926
|
Proprietary
Capital
|
144,306
|
169,652
|
Other
|
63,988
|
93,628
|
Total
|
$
17,830,830
|
$
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. Revenues, Income before Provision for Income Taxes and Net
Income, classified by the major geographic areas in which they are earned, were
as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
June
30,
|
June
30,
|
|
2009
|
2008
|
2009
|
2008
|
|
(in
000’s)
|
Revenues:
|
|
|
|
|
United
States
|
$
572,328
|
$
717,249
|
$
1,749,806
|
$
2,164,936
|
Canada
|
47,753
|
69,804
|
133,627
|
203,832
|
Europe
|
9,100
|
13,159
|
30,476
|
45,764
|
Other
|
3,071
|
8,536
|
10,587
|
30,541
|
Total
|
$
632,252
|
$
808,748
|
$
1,924,496
|
$
2,445,073
|
|
|
|
|
|
Income
Before Provision for
|
|
|
|
|
Income
Taxes:
|
|
|
|
|
United
States
|
$ 74,956
|
$
107,154
|
$ 193,296
|
$ 278,725
|
Canada
|
(201)
|
7,887
|
(1,041)
|
22,157
|
Europe
|
(1,098)
|
1,195
|
(38)
|
7,585
|
Other
|
(1,348)
|
(1,118)
|
(5,326)
|
(4,774)
|
Total
|
$ 72,309
|
$
115,118
|
$ 186,891
|
$ 303,693
|
|
|
|
|
|
Net
Income:
|
|
|
|
|
United
States
|
$ 44,955
|
$ 63,988
|
$ 115,115
|
$ 169,670
|
Canada
|
(415)
|
5,785
|
(692)
|
14,537
|
Europe
|
(1,089)
|
908
|
(506)
|
6,392
|
Other
|
(856)
|
(743)
|
(4,136)
|
(4,629)
|
Total
|
$ 42,595
|
$ 69,938
|
$ 109,781
|
$ 185,970
|
The
Company’s total assets, classified by the major geographic area in which they
are held, were as follows:
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
(in
000’s)
|
Total
Assets:
|
|
|
United
States
|
$ 16,541,052
|
$
19,575,784
|
Canada
|
1,222,143
|
1,061,201
|
Europe
|
24,730
|
25,424
|
Other
|
42,905
|
47,207
|
Total
|
$ 17,830,830
|
$
20,709,616
|
The
Company has investments of $4.9 million, net of a $2.3 million reserve for its
Turkish joint venture interest (see Note 12 to Notes to Condensed Consolidated
Financial Statements for more information), 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
|
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.
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 unaudited financial statements and
unaudited 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, disruption in credit markets and
declining equity markets have a negative impact on brokerage and asset
management results. In contrast, these market conditions often result in a
positive environment for fixed income. As RJ Bank has grown and a greater
percentage of the firm’s income has come from interest earnings, the Company is
somewhat insulated from these market influences; however, there has been an
increase in credit risk as RJ Bank’s loan portfolio has grown. 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 continue to negatively impact activity levels. Nonetheless,
substantially all of the Company’s businesses realized significant improvement
from the preceding quarter, albeit not all at the levels of the prior year, as
the equity markets and overall economy have begun to show signs of recovery.
Positive Financial Advisor recruiting results, increased institutional
commissions, and fixed income trading profits had a positive impact on results.
In addition, RJ Bank net interest income was 18% above the prior year quarter
while the loan loss provision expense was in line with quarters other than the
immediately preceding quarter
Segments
The
Company currently operates through the following eight business segments:
Private Client Group (“PCG”); Capital Markets; Asset Management; RJ Bank;
Emerging Markets; Stock Loan/Borrow, Proprietary Capital and various corporate
activities in the Other segment.
The
following table presents the gross revenues and pre-tax income(loss) of the
Company on a segment basis for the periods indicated:
|
Three
Months Ended
|
|
June
30,
|
|
June
30,
|
|
Percentage
|
|
2009
|
|
2008
|
|
Change
|
|
(in
000’s)
|
Total
Company
|
|
|
|
|
|
Revenues
|
$ 632,252
|
|
$ 808,748
|
|
(22%)
|
Pre-tax
Income
|
72,309
|
|
115,118
|
|
(37%)
|
|
|
|
|
|
|
Private
Client Group
|
|
|
|
|
|
Revenues
|
$ 370,719
|
|
$ 485,672
|
|
(24%)
|
Pre-tax
Income
|
18,321
|
|
34,909
|
|
(48%)
|
|
|
|
|
|
|
Capital
Markets
|
|
|
|
|
|
Revenues
|
138,524
|
|
147,114
|
|
(6%)
|
Pre-tax
Income
|
20,224
|
|
27,253
|
|
(26%)
|
|
|
|
|
|
|
Asset
Management
|
|
|
|
|
|
Revenues
|
35,398
|
|
59,416
|
|
(40%)
|
Pre-tax
Income
|
6,691
|
|
14,215
|
|
(53%)
|
|
|
|
|
|
|
Raymond
James Bank
|
|
|
|
|
|
Revenues
|
80,747
|
|
96,222
|
|
(16%)
|
Pre-tax
Income
|
27,406
|
|
37,957
|
|
(28%)
|
|
|
|
|
|
|
Emerging
Markets
|
|
|
|
|
|
Revenues
|
3,208
|
|
10,389
|
|
(69%)
|
Pre-tax
(Loss)
|
(1,311)
|
|
(271)
|
|
(384%)
|
|
|
|
|
|
|
Stock
Loan/Borrow
|
|
|
|
|
|
Revenues
|
2,361
|
|
6,728
|
|
(65%)
|
Pre-tax
Income
|
885
|
|
1,893
|
|
(53%)
|
|
|
|
|
|
|
Proprietary
Capital
|
|
|
|
|
|
Revenues
|
9,881
|
|
16,147
|
|
(39%)
|
Pre-tax
(Loss)Income
|
(308)
|
|
5,855
|
|
(105%)
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Revenues
|
3,203
|
|
4,320
|
|
(26%)
|
Pre-tax
Income(Loss)
|
401
|
|
(6,693)
|
|
106%
|
|
|
|
|
|
|
Intersegment
Eliminations
|
|
|
|
|
|
Revenues
|
(11,789)
|
|
(17,260)
|
|
32%
|
Pre-tax
Income
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
Results of Operations –
Three Months Ended June 30, 2009 Compared with the Three Months Ended June 30,
2008
Total
Company
Total
Company net revenues decreased 16% to $625 million from the record $742 million
in the comparable prior year quarter. The current year included positive trading
results and increased institutional commissions, offset by lower private client
commissions and lower investment advisory fee revenue. Net income was 39% below
the prior year quarter. Net interest earnings were flat with the prior year,
but, as expected, declined 11%, or $11 million, from the immediately preceding
quarter as interest rate spreads at Raymond James Bank began to narrow, although
they remained above an anticipated sustainable spread. Non-interest expenses
were well controlled, almost matching the percentage decline in net
revenues. The Company’s effective tax rate for the quarter continues
to be higher than it was in the rising equity markets of previous years as
nondeductible items, such as losses on the Company’s Corporate Owned Life
Insurance (“COLI”) investment and qualified stock option expense, had a
magnified impact due to the lower pre-tax earnings in the quarter. Diluted net
income was $0.36 per share, versus $0.59 per share in the prior year
quarter.
Net Interest
Analysis
The
following table presents average balance data and interest income and expense
data for the Company, as well as the related net interest income. The respective
average rates are presented on an annualized basis.
|
Three
Months Ended
|
|
June
30,
|
June
30,
|
|
2009
|
2008
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
Interest
|
|
Yield/
|
Average
|
Interest
|
|
Yield/
|
|
Balance
|
Inc./Exp.
|
|
Cost
|
Balance
|
Inc./Exp.
|
|
Cost
|
|
($
in 000’s)
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
Margin
Balances
|
$
1,138,693
|
$
7,949
|
|
2.79%
|
$1,575,228
|
$ 17,662
|
|
4.48%
|
Assets
Segregated Pursuant
|
|
|
|
|
|
|
|
|
to
Regulations and Other
|
|
|
|
|
|
|
|
|
Segregated
Assets
|
5,194,312
|
3,486
|
|
0.27%
|
4,328,606
|
23,470
|
|
2.17%
|
Bank
Loans, Net of Unearned
|
|
|
|
|
|
|
|
|
Income
|
7,527,007
|
73,186
|
|
3.89%
|
6,503,401
|
83,342
|
|
5.13%
|
Available
for Sale Securities
|
532,033
|
5,681
|
|
4.27%
|
643,300
|
8,043
|
|
5.00%
|
Trading
Instruments
|
|
2,747
|
|
|
|
5,245
|
|
|
Stock
Borrow
|
|
2,300
|
|
|
|
6,833
|
|
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
Variable Interest Entities
|
|
(98)
|
|
|
|
125
|
|
|
Other
|
|
2,786
|
|
|
|
12,215
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
|
$
98,037
|
|
|
|
$
156,935
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
Brokerage
Client Liabilities
|
$
6,137,818
|
$
819
|
|
0.05%
|
$5,211,264
|
20,827
|
|
1.60%
|
Retail
Bank Deposits
|
8,041,547
|
2,926
|
|
0.15%
|
7,719,663
|
32,918
|
|
1.71%
|
Stock
Loan
|
|
786
|
|
|
|
4,390
|
|
|
Interest-Bearing
Liabilities of
|
|
|
|
|
|
|
|
|
Variable
Interest Entities
|
|
898
|
|
|
|
973
|
|
|
Borrowed
Funds and Other
|
|
2,024
|
|
|
|
7,616
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Expense
|
|
7,453
|
|
|
|
66,724
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$
90,584
|
|
|
|
$ 90,211
|
|
|
Net
interest income remained flat compared to the same quarter in the prior year but
declined $11 million, or 11%, over the immediately preceding quarter. RJ Bank’s
net interest income increased $11.7 million, or 18%, over the prior year but
declined $8.4 million, or 10%, from the immediately preceding quarter. Net
interest income in the PCG segment declined $10 million, or 47%, from the prior
year quarter and $2 million, or 13%, from the immediately preceding quarter. RJ
Bank benefitted from better spreads than in the prior year but, as expected,
these spreads have begun to decline, falling 20 basis points in each of the last
two quarters, as they trend toward more sustainable levels.
Average
client margin balances declined $437 million (28%) and average assets segregated
pursuant to regulations increased $820 million over the same quarter of the
prior year. Customer cash balances held in the Client Interest Program increased
$927 million. Net interest income in the PCG segment was negatively impacted by
lower margin balances and by lower spreads than in the prior year. This segment
was negatively impacted by interest rate cuts as the rate is lowered immediately
on the interest earning assets while the interest rate paid to clients could not
be lowered as it is presently only five basis points. In the current rate
environment, interest rate spread on Client Interest Program deposits invested
in the segregated reserve account have been at historically low levels for the
past several quarters. In September 2009, the Company will begin to
participate in a bank sweep program with Raymond James Bank and several
unaffiliated banks. This program will enable clients to have their cash balances
covered by FDIC insurance for up to $2.5 million, will pay clients a higher rate
than the current five basis points, and will modestly improve the Company’s
overall economics. Once client balances have been moved into this program, the
Company’s net interest earnings will decline, but will be more than offset by
fee income from the program’s sponsor. On a segment basis, PCG results will
reflect the improved earnings, while those of Asset Management, due to lower
money market fund balances and Raymond James Bank, by paying higher rates on
deposits, will be adversely impacted.
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 59% of the Company's revenues for the three
months ended June 30, 2009. It generates revenues principally through
commissions charged on securities transactions, fees from wrap fee investment
accounts and the interest revenue generated from client margin loans and cash
balances. 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 PCG Financial Advisors as of the periods
indicated:
|
|
|
June
30,
|
June
30,
|
|
|
Independent
|
2009
|
2008
|
|
Employee
|
Contractors
|
Total
|
Total
|
Private
Client Group - Financial Advisors:
|
|
|
|
|
RJ&A
|
1,288
|
-
|
1,288
|
1,159
|
RJFS
|
-
|
3,220
|
3,220
|
3,114
|
RJ
Ltd.
|
204
|
247
|
451
|
357
|
Raymond
James Investment Services Limited (“RJIS”)
|
-
|
115
|
115
|
86
|
Total
Financial Advisors
|
1,492
|
3,582
|
5,074
|
4,716
|
Private
Client Group revenues were 24% below the prior year quarter, reflecting the
impact of the extremely challenging market conditions. Securities commissions
and fees declined 21% despite an 8% 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. The Company has recruited 358 (net) Financial Advisors
with approximately $200 million in historical annual production in the current
fiscal year. Unfortunately, the financial markets themselves have been in a
steep decline and clients, having lost confidence in the market, are not
investing as actively. As would be expected, revenues from fee-based accounts
have also declined as the fees are based on account valuations which have
declined dramatically during the year. The S&P 500 has declined 27% since
the end of June 2008. Average annual production per Financial Advisor declined
from $336,000 to $283,000
in RJFS and from $520,000 to $426,000
in RJ&A since the same quarter in the prior year.
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 $10 million, or 47%, from the prior year as interest rates fell to
record low levels. In addition, average client margin balances have declined
$437 million since the prior year.
While net
revenues declined 20% from the prior year, pre-tax earnings declined 48%, with
non-interest expenses declining only 18%. These expenses are related to
RJ&A’s growth, including elevated payout levels and front money associated
with recruiting new Financial Advisors, as well as increased occupancy costs for
new branches opened over the past year.
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 73% 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 decreased 26% from the prior year. Trading results
experienced an overall $11.5 million gain, flat with the prior year quarter,
fixed income commissions increased 35% (more than offsetting the 8% decline in
equity commissions) due to market conditions, and investment banking revenues
were 43% below the prior year. Of the segment’s trading profits, $14 million
(greater than 100%) were generated by fixed income, as the bond market continued
to be 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. There were an increased number of
investment banking deals, with 32 domestic and six Canadian underwritings in the
quarter. These deals were considerably smaller than the deals in the prior year
quarter and included fewer lead managed deals than in the prior year.
An improvement in the overall equity markets will be necessary to realize a
significant and sustainable increase in underwritings and the related
commissions and fees. The segment results also included lower mergers and
acquisition fees compared to the prior year’s quarter.
|
Three
Months Ended
|
|
June
30,
|
|
June
30,
|
|
2009
|
|
2008
|
Number
of managed/co-managed public equity offerings:
|
|
|
|
United
States
|
32
|
|
18
|
Canada
|
6
|
|
7
|
|
|
|
|
|
Three
Months Ended
|
|
June
30,
|
June
30,
|
%
Change
|
|
2009
|
2008
|
|
|
(in
000’s)
|
Institutional
Commissions:
|
|
|
|
Equity
|
$ 53,132
|
$
57,656
|
(8%)
|
Fixed
Income
|
47,994
|
35,558
|
35%
|
Total
|
$
101,126
|
$
93,214
|
8%
|
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 portfolio
values either at 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:
|
June
30,
|
March
31,
|
December
31,
|
June
30,
|
|
2009
|
2009
|
2008
|
2008
|
Assets
Under Management (in 000's):
|
|
|
|
|
|
|
|
|
|
Eagle
Asset Management, Inc. (including Eagle Boston)
|
$
12,015,261
|
$
10,513,237
|
$
11,467,978
|
$
15,140,584
|
Eagle
Family of Mutual Funds (formerly Heritage)
|
5,975,256
|
6,551,624
|
6,568,296
|
6,155,156
|
Raymond
James Consulting Services
|
7,018,689
|
6,193,784
|
6,600,908
|
8,746,216
|
Unified
Managed Accounts
|
111,855
|
24,973
|
-
|
-
|
Freedom
Accounts & Russell Model Strategies
|
6,249,803
|
5,337,571
|
6,091,529
|
8,601,293
|
Total Assets
Under Management
|
$
31,370,864
|
$
28,621,189
|
$
30,728,711
|
$
38,643,249
|
|
|
|
|
|
Less:
Assets Managed for Affiliated Entities
|
(2,771,110)
|
(2,488,202)
|
(2,385,412)
|
(2,670,040)
|
|
|
|
|
|
Total
Third Party Assets
|
|
|
|
|
Under
Management
|
$
28,599,754
|
$
26,132,987
|
$
28,343,299
|
$
35,973,209
|
|
|
|
|
|
Non-Managed
Fee Based Assets:
|
|
|
|
|
|
|
|
|
|
Passport
|
$
17,024,582
|
$
14,618,044
|
$
15,180,929
|
$
19,390,165
|
Ambassador
|
5,687,128
|
4,150,720
|
3,931,839
|
4,008,411
|
Other
Non – Managed Fee Based Assets
|
1,221,619
|
1,024,314
|
1,074,730
|
1,425,393
|
Total
|
$
23,933,329
|
$
19,793,078
|
$
20,187,498
|
$
24,823,969
|
The Asset
Management segment’s revenues declined 40% as financial assets under management
declined 20% from the previous year. The asset decline is primarily due to the
decline in market values of the equity portfolios. The percentage decrease in
fees far exceeds that of the decrease in assets under management for three
reasons. First, the profits from managing the $6 billion of money market funds
have been dramatically reduced as Eagle is waiving a significant portion of its
management fee due to the low gross yields on money market instruments.
Secondly, a large portion of the assets are billed at the beginning of the
period, in this case as of the end of March, and those asset balances are 26%
lower than in the prior year. Third, there was a shift by clients to more fixed
income assets, which carry a lower management fee.
Raymond
James Bank
RJ Bank
is a federally chartered savings bank, regulated by the Office of Thrift
Supervision (“OTS”), which 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. RJ Bank also purchases
residential whole loan pools to hold for investment, and participates with other
banks in corporate loan syndications. RJ Bank 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. RJ Bank’s objective is to maintain a substantially duration-matched
portfolio of assets and liabilities.
Gross
revenues declined 16% while net revenues increased 24% over the same quarter in
the prior year. RJ Bank had pre-tax income of $27.4 million for the quarter
ended June 30, 2009 compared to pre-tax income of $38 million in the same
quarter of the prior year. Due to lower overall market interest rates, loan
interest and fee revenues decreased 12%, or $10.2 million, despite average loan
balances increasing 16% to $7.5 billion from $6.5 billion. Average
interest-bearing liabilities increased 4% to $8.1 billion from $7.8 billion,
while interest expense declined $30.2 million due to the average cost of funds
decreasing to 0.2% from 1.7%. The decline in gross interest revenue and expense
was a result of the significant decrease in short-term market interest rates.
Interest spreads remained relatively high at 3.46% for the quarter ended June
30, 2009. As a result, net interest earnings were 18% higher than in the
previous year.
It is
expected that loan balances will remain flat or continue to decline for at least
the next several quarters in order to enable RJ Bank to build its capital level
and related ratios. Interest rate spreads are also expected to gradually
decline, as they did in the June 30, 2009 quarter as compared to the immediately
preceding quarter.
The
percentage of Allowance for Loan Losses (“ALL”) to total loans increased to
1.90% at June 30, 2009 from 1.23% at September 30, 2008. Loan loss provision
expense for the quarter of $29.8 million was 141% higher as compared to $12.4
million for the same quarter in the prior year, but decreased 60% from the $75
million loan loss provision reported in the immediately preceding quarter. That
$75 million provision reflected a charge off of $27 million related to a single
corporate loan to a commercial mortgage REIT and unprecedented decline in
commercial real estate values during the quarter. This current quarter provision
as compared to the prior year included increased loan loss reserves and
charge-offs due to the continued deterioration of the credit markets, declines
in commercial real estate values and an increase in the projected loss
experience on residential mortgage loans. Net charge-offs increased $29.1
million to $34.1 million as compared to the same quarter in the previous year.
This change is due to a charge-off associated with the sale of RJ Bank’s largest
nonperforming loan during the quarter. Nonperforming loans increased $92.2
million to $150.4 million at June 30, 2009 from the previous fiscal year-end,
but this represents only a $7.8 million increase from the immediately preceding
quarter.
Loan loss
provision expense is generally expected to trend in direct proportion to the
health of the general economy, which impacts borrowers’ ability to repay loans.
However, in the event that one or more of RJBank's large borrowers encounter
specific business issues or if the general economy further deteriorates, there
could be a significant negative impact on RJBank’s loan loss provision in one or
more future quarters.
RJ Bank’s
unrealized pre-tax loss on the available for sale securities portfolio decreased
$27.3 million from the March 2009 quarter end to $119.5 million as of the June
quarter end. This
reduction is attributable to improved market conditions during the current
quarter. RJ Bank recorded an additional $1.5 million in other-than-temporary
impairment during the quarter primarily as a result of the deterioration in
credit of one security in the available for sale portfolio that was not
previously considered OTTI in the preceding quarter.
Other
expenses increased by $7.6 million during the current quarter to $16.5 million
from $8.9 million during the same quarter in the prior year. This increase was
primarily driven by the $4.0 million accrual of a special industry-wide FDIC
assessment to be paid in September, increased FDIC premiums resulting from
higher assessment rates issued in April 2009, and $1.4 million due to additional
write-downs on other real estate owned.
The
tables below present certain credit quality trends for corporate loans and
residential/consumer loans:
|
Three
Months Ended
|
|
June
30,
|
June
30,
|
|
2009
|
2008
|
|
(in
000’s)
|
|
|
|
Net
Loan Charge-offs:
|
|
|
Corporate
Loans
|
$ 27,166
|
$ 3,492
|
Residential/Consumer
Loans
|
6,939
|
1,511
|
|
|
|
Total
|
$ 34,105
|
$ 5,003
|
|
|
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
(in
000’s)
|
Allowance
for Loan Loss:
|
|
|
Corporate
Loans
|
$ 109,752
|
$ 79,404
|
Residential/Consumer
Loans
|
27,276
|
8,751
|
|
|
|
Total
|
$ 137,028
|
$ 88,155
|
|
|
|
Nonperforming
Loans:
|
|
|
Corporate
Loans
|
$ 90,473
|
$ 37,462
|
Residential/Consumer
Loans
|
59,923
|
20,702
|
|
|
|
Total
|
$ 150,396
|
$ 58,164
|
|
|
|
Total
Loans (1):
|
|
|
Corporate
and Commercial Real Estate Loans
|
$
4,584,317
|
$
4,563,065
|
Residential/Consumer
Loans
|
2,628,283
|
2,620,317
|
|
|
|
Total
|
$
7,212,600
|
$
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 RJ Bank, 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
|
|
|
|
|
June
30, 2009
|
June
30, 2008
|
|
|
|
Average
|
|
|
Average
|
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued
on next page)
|
Interest-Earning
Banking Assets:
|
|
|
|
|
|
|
Loans,
Net of Unearned Income (1)
|
|
|
|
|
|
|
Commercial
Loans
|
$ 902,247
|
$ 8,321
|
3.69%
|
$ 748,941
|
$ 9,672
|
5.17%
|
Real
Estate Construction Loans
|
386,503
|
2,576
|
2.67%
|
272,209
|
3,287
|
4.83%
|
Commercial
Real Estate Loans
|
3,523,519
|
27,857
|
3.16%
|
3,098,327
|
37,854
|
4.89%
|
Residential
Mortgage Loans
|
2,697,915
|
34,374
|
5.10%
|
2,370,649
|
32,397
|
5.47%
|
Consumer
Loans
|
16,823
|
58
|
1.38%
|
13,275
|
132
|
3.98%
|
|
7,527,007
|
73,186
|
3.89%
|
$
6,503,401
|
83,342
|
5.13%
|
Reverse
Repurchase
|
|
|
|
|
|
|
Agreements
|
511,978
|
229
|
0.18%
|
914,945
|
4,891
|
2.14%
|
Agency
Mortgage backed
|
|
|
|
|
|
|
Securities
|
299,275
|
698
|
0.93%
|
264,947
|
1,994
|
3.01%
|
Non-agency
Collateralized
|
|
|
|
|
|
|
Mortgage
Obligations
|
232,758
|
4,983
|
8.56%
|
378,353
|
6,049
|
6.40%
|
Money
Market Funds, Cash and
|
|
|
|
|
|
|
Cash
Equivalents
|
73,311
|
36
|
0.20%
|
209,122
|
1,206
|
2.31%
|
FHLB
Stock and Other
|
54,523
|
60
|
0.44%
|
15,393
|
210
|
5.46%
|
Total
Interest-Earning
|
|
|
|
|
|
|
Banking
Assets
|
$
8,698,852
|
$ 79,192
|
3.64%
|
$
8,286,161
|
$
97,692
|
4.72%
|
Non-Interest-Earning
Banking Assets
|
|
|
|
|
|
|
and
Allowance for Loan Loss
|
68,120
|
|
|
30,375
|
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
$
8,766,972
|
|
|
$
8,316,536
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
|
|
|
Retail
Deposits:
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 203,477
|
$ 1,951
|
3.84%
|
$ 235,647
|
$ 2,570
|
4.36%
|
Money
Market, Savings,
|
|
|
|
|
|
|
and
NOW Accounts (2)
|
7,838,070
|
975
|
0.05%
|
7,484,016
|
30,348
|
1.62%
|
FHLB
Advances and Other
|
51,561
|
658
|
5.10%
|
76,454
|
852
|
4.46%
|
|
|
|
|
|
|
|
Total
Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
$ 8,093,108
|
$ 3,584
|
0.18%
|
$
7,796,117
|
$ 33,770
|
1.73%
|
|
|
|
|
|
|
|
Non-Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
26,048
|
|
|
13,898
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
|
8,119,156
|
|
|
7,810,015
|
|
|
Total
Banking
|
|
|
|
|
|
|
Shareholder's
|
647,816
|
|
|
506,521
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
and
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
$ 8,766,972
|
|
|
$
8,316,536
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
June
30, 2009
|
June
30, 2008
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Interest
|
Yield/
|
Average
|
|
Interest
|
Yield/
|
|
Balance
|
|
Inc./Exp.
|
Cost
|
Balance
|
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued)
|
Excess
of Interest-
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
Over Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities/Net
|
|
|
|
|
|
|
|
|
Operating
Interest Income
|
$ 605,744
|
|
$ 75,608
|
|
$ 490,044
|
|
$ 63,922
|
|
|
|
|
|
|
|
|
|
|
Bank
Net Interest (3):
|
|
|
|
|
|
|
|
|
Spread
|
|
|
|
3.46%
|
|
|
|
2.99%
|
Margin
(Net Yield on
|
|
|
|
|
|
|
|
|
Interest-
Earning
|
|
|
|
|
|
|
|
|
Bank
Assets)
|
|
|
|
3.48%
|
|
|
|
3.09%
|
Ratio
of Interest
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
to Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
107.48%
|
|
|
|
106.29%
|
Return
On Average:
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
|
|
|
0.80%
|
|
|
|
1.16%
|
Total
Banking
|
|
|
|
|
|
|
|
|
Shareholder's
Equity
|
|
|
|
10.87%
|
|
|
|
18.98%
|
Average
Equity to
|
|
|
|
|
|
|
|
|
Average
Total
|
|
|
|
|
|
|
|
|
Banking
Assets
|
|
|
|
7.39%
|
|
|
|
6.09%
|
(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 June 30, 2009
and 2008 was $5.0 million and $3.5 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 significant decline in RJ Bank’s cost of
funds.
|
Increases
and decreases in interest income and interest expense result from changes in
average balances (volume) of interest-earning banking assets and liabilities, as
well as changes in average interest rates. The following table shows the effect
that these factors had on the interest earned on RJ Bank's interest-earning
assets and the interest incurred on its interest-bearing liabilities. The effect
of changes in volume is determined by multiplying the change in volume by the
previous year's average yield/cost. Similarly, the effect of rate changes is
calculated by multiplying the change in average yield/cost by the previous
year's volume. Changes applicable to both volume and rate have been allocated
proportionately.
|
Three
Months Ended June 30,
|
|
2009
Compared to 2008
|
|
Increase
(Decrease) Due To
|
|
Volume
|
Rate
|
Total
|
|
(in
000’s)
|
Interest
Revenue
|
|
|
|
Interest-Earning
Banking Assets:
|
|
|
|
Loans,
Net of Unearned Income
|
|
|
|
Commercial
Loans
|
$ 1,980
|
$ (3,331)
|
$ (1,351)
|
Real
Estate Construction Loans
|
1,380
|
(2,091)
|
(711)
|
Commercial
Real Estate Loans
|
5,195
|
(15,192)
|
(9,997)
|
Residential
Mortgage Loans
|
4,472
|
(2,495)
|
1,977
|
Consumer
Loans
|
35
|
(109)
|
(74)
|
Reverse
Repurchase Agreements
|
(2,154)
|
(2,508)
|
(4,662)
|
Agency
Mortgage Backed Securities
|
258
|
(1,554)
|
(1,296)
|
Non-agency
Collateralized Mortgage Obligations
|
(2,328)
|
1,262
|
(1,066)
|
Money
Market Funds, Cash and Cash Equivalents
|
(783)
|
(387)
|
(1,170)
|
FHLB
Stock and Other
|
534
|
(684)
|
(150)
|
|
|
|
|
Total
Interest-Earning Banking Assets
|
$ 8,589
|
$ (27,089)
|
$ (18,500)
|
|
|
|
|
Interest
Expense
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
Retail
Deposits:
|
|
|
|
Certificates
Of Deposit
|
$ (351)
|
$ (268)
|
$ (619)
|
Money
Market, Savings and
|
|
|
|
NOW
Accounts
|
1,436
|
(30,809)
|
(29,373)
|
FHLB
Advances and Other
|
(277)
|
83
|
(194)
|
|
|
|
|
Total
Interest-Bearing Banking Liabilities
|
$ 808
|
$ (30,994)
|
$ (30,186)
|
|
|
|
|
Change
in Net Interest Income
|
$ 7,781
|
$ 3,905
|
$ 11,686
|
Emerging
Markets
The
Emerging Markets segment includes the Company’s joint ventures in Latin America
and Turkey. The Company’s joint venture in Turkey has ceased actively conducting
business and has filed for bankruptcy. This accounts for $5 million of the
decline in commissions within this segment. The remaining decline was due to the
global market conditions resulting in declines in commission, investment
advisory and investment banking revenues 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 65%, with net revenues declining 33%. Both gross interest
revenue and expense declined due to lower rates and average balances; matched
book balances are down over 40% from the prior year. The average interest rate
spread declined 43 basis points (56%). The segment’s pre-tax income is down 53%
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”). During the quarter ended March 31, 2009, the Company
relinquished its control over the general partners in the two Ballast Point
Ventures funds. The Company retained ownership interest in these entities. See
Note 1 of the Notes to the Condensed Consolidated Financial Statements for
further information. The Company 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 include a write-up on a Raymond James Capital investment and
write-downs on several private equity partnerships owned by RJF.
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. Expenses are lower then in the prior year due to lower
incentive compensation accruals. As a result, pre-tax earnings were positively
impacted.
Results of Operations – Nine
months ended June 30, 2009 Compared with the Nine months ended June 30,
2008
Except as
discussed below, the underlying reasons for the variances to the prior year
period are substantially the same as the comparative quarterly discussion above
and the statements contained in such foregoing discussion also apply for the
nine month comparison.
Total
Company
Total
Company net revenues decreased 11% to $1.9 billion from $2.1 billion in the
prior year. Revenues declined in every line item except Net Trading Profits. Net
interest earnings increased $68 million, or 29%, but this was not enough to
offset the other revenue declines, resulting in net income declining 41% from
the prior year. The prior year results included stronger commission and asset
management revenues, a much more active investment banking environment,
including record merger and acquisition fees, and lower provisions for loan loss
expense at RJ Bank. Diluted net income was $0.93 per share, down 40% from the
prior year’s $1.56 per share.
The
following table presents the gross revenues and pre-tax income of the Company on
a segment basis for the periods indicated:
|
Nine
Months Ended
|
|
June
30,
|
|
June
30,
|
|
Percentage
|
|
2009
|
|
2008
|
|
Change
|
|
(in
000’s)
|
Total
Company
|
|
|
|
|
|
Revenues
|
$ 1,924,496
|
|
$ 2,445,073
|
|
(21%)
|
Pre-tax
Income
|
186,891
|
|
303,693
|
|
(38%)
|
|
|
|
|
|
|
Private
Client Group
|
|
|
|
|
|
Revenues
|
$ 1,136,305
|
|
$ 1,525,135
|
|
(25%)
|
Pre-tax
Income
|
62,587
|
|
144,227
|
|
(57%)
|
|
|
|
|
|
|
Capital
Markets
|
|
|
|
|
|
Revenues
|
391,243
|
|
386,146
|
|
1%
|
Pre-tax
Income
|
50,495
|
|
36,381
|
|
39%
|
|
|
|
|
|
|
Asset
Management
|
|
|
|
|
|
Revenues
|
132,870
|
|
184,702
|
|
(28%)
|
Pre-tax
Income
|
20,669
|
|
47,552
|
|
(57%)
|
|
|
|
|
|
|
Raymond
James Bank
|
|
|
|
|
|
Revenues
|
273,322
|
|
303,945
|
|
(10%)
|
Pre-tax
Income
|
69,616
|
|
78,622
|
|
(11%)
|
|
|
|
|
|
|
Emerging
Markets
|
|
|
|
|
|
Revenues
|
10,628
|
|
33,270
|
|
(68%)
|
Pre-tax
Loss
|
(4,065)
|
|
(1,720)
|
|
(136%)
|
|
|
|
|
|
|
Stock
Loan/Borrow
|
|
|
|
|
|
Revenues
|
8,258
|
|
29,015
|
|
(72%)
|
Pre-tax
Income
|
2,955
|
|
4,827
|
|
(39%)
|
|
|
|
|
|
|
Proprietary
Capital
|
|
|
|
|
|
Revenues
|
9,780
|
|
18,560
|
|
(47%)
|
Pre-tax
(Loss) Income
|
(1,354)
|
|
4,578
|
|
(130%)
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Revenues
|
4,587
|
|
19,378
|
|
(76%)
|
Pre-tax
Loss
|
(14,012)
|
|
(10,774)
|
|
(30%)
|
|
|
|
|
|
|
Intersegment
Eliminations
|
|
|
|
|
|
Revenues
|
(42,497)
|
|
(55,078)
|
|
23%
|
Pre-tax
Income
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
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.
|
Nine
Months Ended
|
|
|
|
|
June
30, 2009
|
June
30, 2008
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
Interest
|
|
Yield/
|
Average
|
Interest
|
|
Yield/
|
|
Balance
|
Inc./Exp.
|
|
Cost
|
Balance
|
Inc./Exp.
|
|
Cost
|
|
($
in 000’s)
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
Margin
Balances
|
$
1,172,343
|
$ 27,607
|
|
3.14%
|
$1,536,090
|
$ 65,616
|
|
5.70%
|
Assets
Segregated Pursuant
|
|
|
|
|
|
|
|
|
to
Regulations and Other
|
|
|
|
|
|
|
|
|
Segregated
Assets
|
4,805,842
|
13,873
|
|
0.38%
|
4,575,946
|
106,625
|
|
3.11%
|
Bank
Loans, Net of Unearned
|
|
|
|
|
|
|
|
|
Income
|
7,645,288
|
253,854
|
|
4.43%
|
5,864,154
|
256,957
|
|
5.84%
|
Available
for Sale Securities
|
515,817
|
19,259
|
|
4.98%
|
609,591
|
24,093
|
|
5.27%
|
Trading
Instruments
|
|
10,387
|
|
|
|
25,987
|
|
|
Stock
Borrow
|
|
8,250
|
|
|
|
29,015
|
|
|
Interest-Earning
Assets
|
|
|
|
|
|
|
|
|
of
Variable Interest Entities
|
|
78
|
|
|
|
530
|
|
|
Other
|
|
16,414
|
|
|
|
52,376
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
|
$ 349,722
|
|
|
|
$ 561,199
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
Brokerage
Client Liabilities
|
$
5,753,221
|
$ 9,988
|
|
0.23%
|
$5,462,695
|
$ 116,999
|
|
2.86%
|
Retail
Bank Accounts
|
8,538,100
|
21,014
|
|
0.33%
|
6,802,989
|
150,925
|
|
2.96%
|
Stock
Loan
|
|
3,347
|
|
|
|
21,988
|
|
|
Interest-Bearing
Liabilities of
|
|
|
|
|
|
|
|
|
Variable
Interest Entities
|
|
3,608
|
|
|
|
4,187
|
|
|
Borrowed
Funds and Other
|
|
8,131
|
|
|
|
31,436
|
|
|
|
|
|
|
|
|
|
|
|
Total
Interest Expense
|
|
46,088
|
|
|
|
325,535
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
|
|
$ 303,634
|
|
|
|
$ 235,664
|
|
|
Net
interest at RJ Bank increased $106.9 million, or 73% versus the prior year and
represented 84% of the Company’s net interest earnings. Net interest within the
broker-dealer declined due to the compression of interest spreads caused by the
decline in interest rates during the nine months ended June 30,
2009.
Capital
Markets
|
Nine
Months Ended
|
|
June
30,
|
|
June
30,
|
|
2009
|
|
2008
|
Number
of managed/co-managed public equity offerings:
|
|
|
|
United
States
|
45
|
|
47
|
Canada
|
10
|
|
20
|
|
|
|
|
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
%
Change
|
|
2009
|
2008
|
|
|
(in
000’s)
|
Institutional
Commissions:
|
|
|
|
Equity
|
$ 145,172
|
$ 173,097
|
(16%)
|
Fixed
Income
|
136,725
|
85,142
|
61%
|
Total
|
$ 281,897
|
$ 258,239
|
9%
|
Raymond
James Bank
Gross
revenues decreased 10%, net revenues increased 70%, and pre-tax income of $69.6
million decreased 11% in the current nine month period compared to the same
prior year period. Pre-tax income was severely impacted by $130 million in loan
loss provision for the nine months ended June 30, 2009, which included a $75
million loan loss provision in the second quarter of the current year due to
increased levels of nonperforming loans. Net interest income at RJ Bank
increased 73% over the prior year due to the growth in loan balances and
relatively high net interest spreads.
The
tables below present certain credit quality trends for corporate loans and
residential/consumer loans:
|
Nine
Months Ended
|
|
June
30,
|
June
30,
|
|
2009
|
2008
|
|
(in
000’s)
|
|
|
|
Net
Loan Charge-offs:
|
|
|
Corporate
Loans
|
$
64,459
|
$
3,864
|
Residential/Consumer
Loans
|
16,307
|
1,875
|
|
|
|
Total
|
$
80,766
|
$
5,739
|
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.
|
Nine
Months Ended
|
|
|
|
|
June
30, 2009
|
June
30, 2008
|
|
|
|
Average
|
|
|
Average
|
|
Average
|
Interest
|
Yield/
|
Average
|
Interest
|
Yield/
|
|
Balance
|
Inc./Exp.
|
Cost
|
Balance
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued
on next page)
|
Interest-Earning
Banking Assets:
|
|
|
|
|
|
|
Loans,
Net of Unearned Income (1)
|
|
|
|
|
|
|
Commercial
Loans
|
$ 764,427
|
$ 26,115
|
4.56%
|
$ 631,428
|
$ 29,000
|
6.12%
|
Real
Estate Construction Loans
|
373,798
|
9,321
|
3.32%
|
216,078
|
9,375
|
5.78%
|
Commercial
Real Estate Loans
|
3,712,621
|
108,237
|
3.89%
|
2,801,174
|
126,687
|
6.03%
|
Residential
Mortgage Loans
|
2,777,190
|
109,897
|
5.28%
|
2,207,718
|
91,612
|
5.53%
|
Consumer
Loans
|
17,252
|
284
|
2.19%
|
7,756
|
283
|
4.87%
|
|
$
7,645,288
|
$
253,854
|
4.43%
|
$
5,864,154
|
$ 256,957
|
5.84%
|
Reverse
Repurchase
|
|
|
|
|
|
|
Agreements
|
585,220
|
1,134
|
0.26%
|
754,179
|
18,142
|
3.21%
|
Agency
Mortgage backed
|
|
|
|
|
|
|
Securities
|
270,588
|
3,222
|
1.59%
|
216,191
|
6,397
|
3.95%
|
Non-agency
Collateralized
|
|
|
|
|
|
|
Mortgage
Obligations
|
245,229
|
16,037
|
8.72%
|
393,400
|
17,696
|
6.00%
|
Money
Market Funds, Cash and
|
|
|
|
|
|
|
Cash
Equivalents
|
376,099
|
2,639
|
0.94%
|
164,899
|
3,933
|
3.19%
|
FHLB
Stock and Other
|
43,362
|
199
|
0.61%
|
11,170
|
475
|
5.67%
|
Total
Interest-Earning
|
|
|
|
|
|
|
Banking
Assets
|
$
9,165,786
|
$
277,085
|
4.03%
|
$
7,403,993
|
$ 303,600
|
5.47%
|
Non-Interest-Earning
Banking Assets
|
|
|
|
|
|
|
and
Allowance for Loan Loss
|
71,192
|
|
|
23,558
|
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
$
9,236,978
|
|
|
$
7,427,551
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
|
|
|
Retail
Deposits:
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 217,826
|
$ 6,475
|
3.96%
|
$ 242,191
|
$ 8,233
|
4.53%
|
Money
Market, Savings,
|
|
|
|
|
|
|
and
NOW Accounts (2)
|
8,320,274
|
14,539
|
0.23%
|
6,560,798
|
142,692
|
2.90%
|
FHLB
Advances and Other
|
54,265
|
2,013
|
4.95%
|
158,432
|
5,566
|
4.68%
|
|
|
|
|
|
|
|
Total
Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
$
8,592,365
|
$ 23,027
|
0.36%
|
$
6,961,421
|
$ 156,491
|
3.00%
|
|
|
|
|
|
|
|
Non-Interest-Bearing
|
|
|
|
|
|
|
Banking
Liabilities
|
24,461
|
|
|
19,645
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
|
8,616,826
|
|
|
6,981,066
|
|
|
Total
Banking
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
620,152
|
|
|
446,485
|
|
|
|
|
|
|
|
|
|
Total
Banking
|
|
|
|
|
|
|
Liabilities
and
|
|
|
|
|
|
|
Shareholder's
|
|
|
|
|
|
|
Equity
|
$
9,236,978
|
|
|
$
7,427,551
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
June
30, 2009
|
June
30, 2008
|
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
Interest
|
Yield/
|
Average
|
|
Interest
|
Yield/
|
|
Balance
|
|
Inc./Exp.
|
Cost
|
Balance
|
|
Inc./Exp.
|
Cost
|
|
($
in 000’s)
|
|
(continued)
|
Excess
of Interest-
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
Over Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities/Net
|
|
|
|
|
|
|
|
|
Interest
Income
|
$ 573,421
|
|
$ 254,058
|
|
$ 442,572
|
|
$ 147,109
|
|
|
|
|
|
|
|
|
|
|
Bank
Net Interest (3):
|
|
|
|
|
|
|
|
|
Spread
|
|
|
|
3.67%
|
|
|
|
2.47%
|
Margin
(Net Yield on
|
|
|
|
|
|
|
|
|
Interest-
Earning
|
|
|
|
|
|
|
|
|
Bank
Assets)
|
|
|
|
3.70%
|
|
|
|
2.65%
|
Ratio
of Interest
|
|
|
|
|
|
|
|
|
Earning
Banking
|
|
|
|
|
|
|
|
|
Assets
to Interest-
|
|
|
|
|
|
|
|
|
Bearing
Banking
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
106.67%
|
|
|
|
106.36%
|
Return
On Average:
|
|
|
|
|
|
|
|
|
Total
Banking Assets
|
|
|
|
0.64%
|
|
|
|
0.88%
|
Total
Banking
|
|
|
|
|
|
|
|
|
Shareholder's
Equity
|
|
|
|
9.54%
|
|
|
|
14.70%
|
Average
Equity to
|
|
|
|
|
|
|
|
|
Average
Total
|
|
|
|
|
|
|
|
|
Banking
Assets
|
|
|
|
6.71%
|
|
|
|
6.01%
|
(1)
|
Nonaccrual
loans are included in the average loan balances. Payments or income
received on impaired nonaccrual loans are applied to
principal. Income on other nonaccrual loans is recognized on a
cash basis. Fee income on loans included in interest income for the nine
months ended June 30, 2009 and 2008 was $16.2 million and $10.1
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 RJ Bank’s cost of
funds.
|
Increases and decreases in interest
income and interest expense result from changes in average balances (volume) of
interest-earning banking assets and liabilities, as well as changes in average
interest rates. The following table shows the effect that these factors had on
the interest earned on RJ Bank's interest-earning assets and the interest
incurred on its interest-bearing liabilities. The effect of changes in volume is
determined by multiplying the change in volume by the previous year's average
yield/cost. Similarly, the effect of rate changes is calculated by multiplying
the change in average yield/cost by the previous year's volume. Changes
applicable to both volume and rate have been allocated
proportionately.
|
Nine
Months Ended June 30,
|
|
2009
Compared to 2008
|
|
Increase
(Decrease) Due To
|
|
Volume
|
Rate
|
Total
|
|
(in
000’s)
|
Interest
Revenue
|
|
|
|
Interest-Earning
Banking Assets:
|
|
|
|
Loans,
Net of Unearned Income
|
|
|
|
Commercial
Loans
|
$ 6,108
|
$ (8,993)
|
$ (2,885)
|
Real
Estate Construction Loans
|
6,842
|
(6,896)
|
(54)
|
Commercial
Real Estate Loans
|
41,221
|
(59,671)
|
(18,450)
|
Residential
Mortgage Loans
|
23,631
|
(5,346)
|
18,285
|
Consumer
Loans
|
347
|
(346)
|
1
|
Reverse
Repurchase Agreements
|
(4,064)
|
(12,944)
|
(17,008)
|
Agency
Mortgage Backed Securities
|
1,610
|
(4,785)
|
(3,175)
|
Non-agency
Collateralized Mortgage Obligations
|
(6,665)
|
5,006
|
(1,659)
|
Money
Market Funds, Cash and Cash Equivalents
|
5,037
|
(6,331)
|
(1,294)
|
FHLB
Stock and Other Investments
|
1,369
|
(1,645)
|
(276)
|
|
|
|
|
Total
Interest-Earning Banking Assets
|
$ 75,436
|
$ (101,951)
|
$ (26,515)
|
|
|
|
|
Interest
Expense
|
|
|
|
Interest-Bearing
Banking Liabilities:
|
|
|
|
Retail
Deposits:
|
|
|
|
Certificates
Of Deposit
|
$ (828)
|
$ (930)
|
$ (1,758)
|
Money
Market, Savings and
|
|
|
|
NOW
Accounts
|
38,267
|
(166,420)
|
(128,153)
|
FHLB
Advances
|
(3,660)
|
107
|
(3,553)
|
|
|
|
|
Total
Interest-Bearing Banking Liabilities
|
33,779
|
$ (167,243)
|
$ (133,464)
|
|
|
|
|
Change
in Net Interest Income
|
$ 41,657
|
$ 65,292
|
$ 106,949
|
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 consider, 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.
Liquidity
is provided primarily through the Company’s business operations and financing
activities.
Cash
provided by operating activities during the nine months ended June 30, 2009 was
approximately $438.3 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 stock-loaned payables, the decrease in
payables to broker-dealers and clearing organizations, and the decrease in
accrued compensation payables.
Cash
provided by investing activities was $153.7 million, which was primarily
attributable to loan repayments to RJ Bank, maturations and repayments of
available for sale securities at RJ Bank, and the decrease in securities
purchased under agreements to resell at RJ Bank. This was partially offset by
loan originations and purchases of available for sale securities at RJ
Bank.
Financing
activities used $3.2 billion, which was 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 RJ
Bank’s qualifying as a thrift institution at September 30, 2008, and the
decrease in deposits at RJ Bank.
The
Company believes its existing assets, most of which are liquid in nature,
together with funds generated from operations, committed and uncommitted credit
facilities 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 June 30, 2009, both of these
brokerage subsidiaries far exceeded their minimum net capital requirements. At
that date, these subsidiaries had excess net capital of $288.7 million, of which
approximately $150 to $200 million is available for dividend payments (subject
to cash availability, credit agreement restrictions, 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”), RJ Bank may pay dividends to the parent company as long as RJ Bank
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 RJ Bank, is not limited by regulatory
requirements.
Borrowings
and Financing Arrangements
The
following table presents the Company’s domestic financing arrangements as of
June 30, 2009:
|
Committed
|
Committed
|
Uncommitted
|
Uncommitted
|
Total
Financing
|
|
Unsecured
|
Collateralized
|
Collateralized
|
Unsecured
|
Arrangements
|
|
(in
000’s)
|
|
|
|
|
|
|
RJ&A
(with third party lenders)
|
$ -
|
$
175,000
|
$
235,100
|
$
150,000
|
$
560,100
|
RJ&A
(with related parties)
|
-
|
-
|
120,000
|
-
|
120,000
|
RJF
|
100,000
|
-
|
-
|
-
|
100,000
|
|
|
|
|
|
|
Total
Company
|
$
100,000
|
$
175,000
|
$
355,100
|
$
150,000
|
$
780,100
|
At June
30, 2009, the Company maintained three 364-day committed and several uncommitted
financing arrangements denominated in U.S. dollars totaling $780.1 million and
one uncommitted line of credit denominated in Canadian dollars (“CDN”) in the
amount of CDN $20 million. Lenders are under no obligation to lend to the
Company under uncommitted credit facilities. Committed facilities
include a $100 million unsecured revolving credit agreement in the name of RJF,
which closed in February 2009. This credit agreement was amended in June 2009 to
eliminate the requirement of approval to participate in the U.S. Treasury’s TARP
Capital Purchase Program (“CPP”) as a condition to borrowing under the
agreement. The Company withdrew its November 2008 application to participate in
the CPP program in May 2009. Committed credit facilities provided by commercial
banks to RJ&A include a $75 million bilateral repurchase agreement which
closed in April 2009 and a $100 million tri-party repurchase agreement. These
facilities are subject to 0.12% and 0.125% commitment fees, respectively, and
the required market value of the collateral ranges from 102% to
125%.
Additionally,
RJ&A maintains $235.1 million in uncommitted secured facilities provided by
commercial banks. At June 30, 2009, RJ&A also maintained two $60 million
uncommitted tri-party repurchase facilities with RJFS and with RJ Bank.
Unsecured, uncommitted loan facilities available to RJ&A totaled $150
million.
At June
30, 2009, there were collateralized financings outstanding in the amount of
$84.1 million. Consolidated repurchase agreement financings are included in
Securities Sold Under Agreements to Repurchase on the Condensed Consolidated
Statement of Financial Condition. Such financings are collateralized by
non-customer, RJ&A-owned securities.
The
interest rates for all of the Company’s financing facilities are variable and
are based on the Fed Funds rate, LIBOR, credit default swaps rate, 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 June 30, 2009, interest rates on
the financing facilities ranged from (on a 360 days per year basis) 0.64% to
2.69%. For the three months ended June 30, 2008, those interest rates ranged
from 2.00% to 4.38%.
In
addition, the Company’s joint ventures in Turkey and Argentina have multiple
settlement lines of credit. At June 30, 2009, there was an outstanding balance
of $0.5 million on the settlement line in Argentina. There was no outstanding
balance on the settlement line in Turkey. The Company has guaranteed
the settlement line of credit in Argentina for $9 million. The Company did not
renew its guarantee of the settlement line of credit in Turkey. An unsecured
settlement line of credit is available to the Argentina venture in the amount of
$4.4 million, and at June 30, 2009, there was no outstanding balance on this
line. The interest rates for these lines of credit ranged from 4% to 18%. 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.
RJ Bank
had $50 million in FHLB advances outstanding at June 30, 2009, comprised of
several long-term, fixed rate advances. RJ Bank had $1.2 billion in immediate
credit available from the FHLB on June 30, 2009 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 June 30, 2009, all of the FHLB advances outstanding were secured
by a blanket lien on RJ Bank’s residential loan portfolio and FHLB
stock.
At June
30, 2009, the Company had loans payable of $110.3 million. The balance at June
30, 2009 is comprised of a $59.8 million mortgage loan for its home-office
complex, $50 million in FHLB advances (RJ Bank), and $0.5 million outstanding on
an unsecured settlement line of credit in Argentina.
Other
Sources of Liquidity; Availability of Capital for RJ Bank
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, of which $20 million was repaid on July 31, 2009.
There is no specified maturity for this loan.
The
Company’s ability to provide additional capital to RJ Bank is limited by its own
available liquidity. At June 30, 2009, the Company’s available liquidity from
which to provide capital to RJ Bank was $120 million, consisting predominantly
of the excess capital at the Company’s broker-dealer subsidiary, RJ&A, that
was available from time to time for dividends to the parent
company.
On May
29, 2009, the Company filed a “universal” shelf registration statement with the
SEC to to be in a position to access the capital markets if and when
opportune.
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 while maintaining compliance with regulatory requirements
and loan covenants, 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.
See Contractual Obligations, Commitments
and Contingencies section below for information regarding the Company’s
commitments.
Statement of Financial
Condition Analysis
The
Company’s statement of financial condition consists primarily of cash and cash
equivalents (a large portion of which are segregated for the benefit of
customers), receivables and payables. The items represented in the statement of
financial condition are primarily liquid in nature, providing the Company with
flexibility in financing its business. Total assets of $17.8 billion at June 30,
2009 were down approximately 5% from September 30, 2008 (excluding the cash
received in the prior year from the $1.9 billion overnight borrowing at RJ
Bank). Most of this modest decrease is due to the decrease in securities
purchased under agreements to resell and changes in broker-dealers’ gross assets
and liabilities, including receivables from brokerage clients, 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.
As of
June 30, 2009, the Company's liabilities are comprised primarily of brokerage
client payables of $6.5 billion at the broker-dealer subsidiaries and deposits
of $7.6 billion at RJ Bank, as well as deposits held on stock loan transactions
of $578 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 $559 million receivable comprised of the
Company's cash deposits for stock borrowed transactions. To meet its obligations
to clients, the Company has approximately $5.7 billion in cash and segregated
assets. The Company also has client brokerage receivables of $1.4 billion and
$7.1 billion in loans, net at RJ Bank.
Contractual
Obligations, Commitments and Contingencies
The
Company has contractual obligations of approximately $2.7 billion, with $2.2
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, loans and transition assistance commitments to financial advisors
and a stadium naming rights agreement. Included in the obligations
due within the next twelve months are $1.9 billion in commitments related to RJ
Bank’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 June 30, 2009, 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 June 30,
2009, the Company has invested $33.5 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
June 30, 2009, the unused portion of this authorization was $65.5
million.
RJ Bank
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 June 30, 2009 and September 30,
2008, the current exposure under these guarantees was $11.4 million and $2.5
million, respectively, which was underwritten as part of RJ Bank’s larger
corporate credit relationships. The estimated total potential exposure under
these guarantees is $14.6 million at June 30, 2009.
RJ Bank
has outstanding at any time a significant number of commitments to extend
credit, and other credit-related off-balance sheet financial instruments such as
standby letters of credit and loan purchases. 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
June 30, 2009, RJ Bank had entered into two short-term reverse repurchase
agreements totaling $340 million with one counterparty. Although RJ Bank is
exposed to risk that this counterparty may not fulfill its contractual
obligations, the Company believes the risk of loss is minimal due to the U.S.
Treasury or U.S. agency securities received as collateral, the creditworthiness
of this counterparty (which is closely monitored) and the short duration of
these agreements.
The FDIC
announced in February 2009 that it was imposing a special assessment on insured
financial institutions in order to ensure the continued strength of its
insurance fund. The amount to be assessed was finalized in April 2009 to
represent five basis points of a financial institution’s total assets less Tier
1 capital at June 30, 2009, which is capped at 10 basis points of domestic
deposits as of the same accounting period. This special assessment of $4.0
million has been expensed as of June 30, 2009 and is payable to the FDIC on
September 30, 2009.
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 (“Fund 34”) for a capital contribution of
up to $58 million. During the second quarter of fiscal year 2009, the Company
sold five units of Fund 34 to an unrelated third party for approximately $5
million and thus as of June 30, 2009 the Company holds 53 units of Fund 34. At
June 30, 2009, $51.9 million of capital had been contributed by the subsidiary
to Fund 34 in addition to an advance of $5.8 million made by RJTCF to Fund 34 as
of June 30, 2009 (refer to the discussion of short-term advances RJTCF may
provide to project partnerships on behalf of tax credit funds discussed below).
The subsidiary expects to resell its interests in Fund 34 to other investors;
however, the holding period of this interest could be much longer than 90 days.
In addition to the 58 unit interest in Fund 34 initially purchased, RJTCF
provided certain specific performance guarantees to the third-party investors of
Fund 34. The Company had guaranteed a $58 million capital contribution
obligation as well as the specified performance guarantees provided by RJTCF to
Fund 34’s third-party investors. The unfunded capital contribution obligation to
Fund 34 is $300,000 as of June 30, 2009. Additionally, RJTCF may make short-term
loans or advances to project partnerships on behalf of the tax credit funds in
which it serves as managing member or general partner. At June 30, 2009, cash
funded to invest in either loans or investments in project partnerships
(excluding the capital invested in 53 units of Fund 34 mentioned
previously) was $14.9 million. In addition, at June 30, 2009, RJTCF is committed
to additional future fundings (excluding the 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
$12.5 million as of June 30, 2009. Through RJTCF’s wholly owned lending
subsidiary, Raymond James Multi-Family Finance, Inc., certain construction loans
or loans of longer duration (“permanent loans”) may be made directly to certain
project partnerships. As of June 30, 2009, seven such construction loans are
outstanding with an unfunded balance of $2.3 million available for future draws
on such loans. Similarly, five permanent loan commitments are outstanding as of
June 30, 2009. 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 June 30, 2009 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 $8.2 million as of June 30, 2009. 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 June 30, 2009, the Company had client margin securities valued
at $161.4 million pledged with a clearing organization to meet the point in time
requirement of $74 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 offers loans and transition assistance to its Financial Advisors mainly
for recruiting or retention purposes. These commitments are contingent upon
certain events occurring, including but not limited to the Financial Advisor
joining the Company and meeting certain production requirements. In certain
circumstances, the Company may make commitments prior to funding them. As of
June 30, 2009, the Company estimates that it had made commitments of $33.5
million in loans and transition assistance that have not yet been
funded.
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 is a party to two agreements with Raymond James Trust, National
Association (“RJT”). The Office of the Controller of the Currency (“OCC”) is
also a party to one of those agreements. The two agreements were a condition to
OCC’s approval of 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.
On July
6, 2009, the Company entered into a Deposit Services Agreement with Promontory
Interfinancial Network, LLC. (“Promontory”). This agreement obligates the
Company to begin utilizing this FDIC-insured cash sweep program for its clients
no later than October 1, 2009. As part of this arrangement, the Company and
Promontory have also entered into a tri-party agreement with a third party
financial institution, which requires a specified amount of client deposits to
be directed to this institution for a period of up to four years.
See Note
12 of the Notes to the Consolidated Financial Statements for further information
on the Company's commitments and contingencies.
RJ&A
and RJFS have been subject to ongoing investigations in connection with their
sale of auction rate securities. Auction rate securities (“ARS”) are long-term
debt and equity instruments whose interest/dividend rates are reset by periodic
(typically weekly or monthly) auctions. The auctions also provided liquidity to
ARS holders. Those auctions began failing in February 2008, resulting in holders
being unable to liquidate investments they believed to be readily saleable for
cash at par. The Securities and Exchange Commission, whose
investigation is now in its sixteenth month, continues to take testimony of
various individuals and from time to time seeks additional documents and
information. The Office of Financial Regulation of the State of Florida, which
began its investigation of Raymond James a year ago, has also sought extensive
documentation and has been contacting Raymond James clients. In addition,
Florida regulators have recently requested the testimony of approximately twenty
individuals, who are employees or independent financial advisors. Extensive
documentation has also been provided to the Office of the Attorney General of
the State of New York, which is monitoring these investigations. To date, none
of the regulators have reported to the Company on the status of their
investigations or provided it with any indication as to a timeline for
completing their investigations, nor have they made any demand of the Company to
take any remedial action with respect to ARS held by its clients. If the Company
were to consider resolving pending claims, inquiries or investigations by
offering to repurchase all or a significant 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. Because
the Company believes it has meritorious defenses and does not have sufficient
regulatory capital, cash or borrowing capacity to repurchase all or a
significant portion of the remaining ARS held by Raymond James clients, any
action to compel repurchasing ARS would likely be vigorously contested by
it.
As of
July 31, 2009, approximately two-thirds of the remaining $813 million of ARS
currently held by Raymond James clients have been issued by funds of Nuveen
Investments, a large mutual fund sponsor. Nuveen is currently pursuing
alternatives to refinance the ARS issued by its funds. Although there can be no
assurance that Nuveen's refinancing plans will be successful, their refinancing
would significantly reduce the Company’s clients' holdings of ARS.
See Item
1, “Legal Proceedings” in Part II of this report for additional information
concerning ARS.
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. RJ&A, 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 RJ&A, RJFS, Eagle Fund Distributors, 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 4% 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. RJ&A,
RJFS, EFD, and Raymond James (USA) Ltd. all had net capital in excess of minimum
requirements as of June 30, 2009.
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 June 30, 2009 or September 30, 2008.
RJ Bank
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, RJ Bank must meet specific capital guidelines that
involve quantitative measures of RJ Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. RJ
Bank'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 RJ Bank to maintain minimum amounts and ratios of Total and
Tier I Capital (as defined in the regulations) to both risk-weighted assets and
adjusted assets (as defined). Management believes, as of June 30, 2009, that RJ
Bank meets all capital adequacy requirements to which it is
subject.
RJ Bank’s
ability to maintain its “well capitalized” level may be limited by the Company’s
ability to continue to provide capital to RJ Bank. At June 30, 2009, the
Company’s available liquidity from which to provide capital to RJ Bank was $120
million, consisting predominantly of the excess capital at the Company’s
broker-dealer subsidiary, RJ&A, that was available from time to time for
dividends to the parent company. In addition, the Company’s filing of a
universal shelf registration statement as described in Item 2, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources-Other Sources of Liquidity;
Availability of Capital for RJ Bank” above may also provide alternatives
for the Company to raise additional capital.
RJ Bank
applied to the Office of the Comptroller of the Currency (“OCC”) to convert from
a federal savings bank to a national bank on November 29, 2008 and RJF applied
to the Federal Reserve Board to become a bank holding company on December 5,
2008. RJF had a preliminary visit by a Federal Reserve Board examiner
in January 2009 and since then has responded to several follow-up requests for
additional information. RJF has recently been informed by the
Federal Reserve Board that they will conduct a pre-approval inspection of RJF
beginning in August. Accordingly, RJF does not expect action on its
bank holding company application until the Federal Reserve Board has completed
its inspection and received satisfactory responses to all questions that arise
in the course of that inspection. Given that this inspection has yet
to begin, RJF is currently unable to estimate if or when it could be approved as
a bank holding company. Federal Reserve Board staff has also recently
indicated that resolution of the Company’s outstanding ARS issue could impact
the timing of RJF’s conversion application. The OCC has completed its
inspection of RJ Bank and the Company is not aware of any impediments to RJ
Bank's conversion to a national bank, other than approval by the Federal Reserve
Board of RJF as a bank holding company.
The
Company’s business plan for RJ Bank is for it to become a commercial bank,
enabling it to have a majority of its loan portfolio composed of corporate and
commercial real estate loans. If RJ Bank remains a thrift, its
business mix would be required to be oriented to loans related to residential
real estate and other qualifying thrift assets.
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.
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
The use
of fair value to measure financial instruments, with related gains or losses
recognized in the Company’s Condensed Consolidated Statements of Income and
Comprehensive Income, is fundamental to the Company’s financial statements and
its risk management processes.
“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 No. 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 142, real estate owned and nonfinancial
long-lived assets measured at fair value for an impairment assessment under SFAS
144.
In April
2009, the FASB issued FSP SFAS No. 157-4. Although this FSP is effective for the
Company on April 1, 2009, the Company elected to early adopt FSP SFAS No. 157-4
on January 1, 2009. As a result, the Company changed the valuation technique
used for certain available for sale securities and redefined its major security
types used in its trading instruments disclosure by separating mortgage backed
securities (“MBS”) and collateralized mortgage obligations (“CMOs”) from
corporate obligations and agency securities.
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. SFAS 157 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
Notwithstanding
the valuation approach utilized as discussed above, 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 CMOs, asset
backed securities (“ABS”) and certain collateralized debt obligations, to be
inactive as of June 30, 2009. 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. The specific
valuation techniques utilized for the category of financial instrument presented
in the unaudited Condensed Consolidated Statement of Financial Condition are
described below.
Cash
Equivalents
Cash
equivalents consist of investments in U.S. Treasury bills and 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
MBS, 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.
Assumptions utilized by these techniques include estimates of future
delinquencies, loss severities, defaults and prepayments. Securities valued
using these techniques are classified within Level 3 of the fair value
hierarchy. Examples include certain municipal debt securities, certain CMOs,
certain ABS and equity securities in private companies. For certain 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, these 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, RJ Bank 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 residential
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 (“OCI”) unless the loss is considered to
be other-than-temporary, in which case the related credit loss portion is
recognized as a loss in other revenue.
The fair
value of available for sale securities is determined by obtaining third party
pricing service bid quotations and third party broker-dealer quotes. Third party
pricing service bid quotations are based on current market data. The third party
pricing service utilizes evaluated pricing models that vary by asset class and
incorporate available trade, bid and other current market information as well as
cash flow expectations and, when available, loan performance data. The market
inputs the third party pricing service normally seeks for these price
evaluations are based upon observable data including benchmark yields, reported
trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark
securities, bids, offers, and reference data including market research
publications. Securities valued using these valuation techniques are classified
within Level 2 of the fair value hierarchy. For all subordinated non-agency
CMOs, the Company estimates fair value by utilizing discounted cash flow
analyses, using observable market data where available as well as unobservable
inputs provided by management. The unobservable inputs utilized in these
valuation techniques reflect the Company’s own supposition about the assumptions
that market participants would use in pricing a security, including those about
future delinquencies, loss severities, defaults and prepayments. Securities
valued using these valuation techniques are classified within Level 3 of the
fair value hierarchy.
Upon
adopting FSP SFAS No. 157-4 during the quarter ended March 31, 2009, the Company
changed the valuation technique used for senior non-agency CMOs as a result of
the significant decrease in the volume and level of activity for these
securities. The Company utilizes a discounted cash flow analysis to determine
which price quote is most representative of fair value under the current market
conditions. In most cases (16 of 25 senior securities), third party pricing
service bid quotations based upon observable data as described above were
determined to be the most representative indication of fair value for these
securities. For the remaining senior securities, the Company’s discounted cash
flow analysis indicated third party broker-dealer quotes as more representative
and accordingly, the Company gave correspondingly more weight to that indicator
of fair value. In order to validate that the inputs used by the third party
pricing service are observable, management requests, on a quarterly basis, the
inputs for a sample of senior securities and compares these inputs to those used
in the Company’s discounted cash flow analysis. Securities measured using these
valuation techniques are generally classified within Level 2 of the fair value
hierarchy.
If these
sources are not available, or are deemed unreliable, then a security’s fair
value is estimated using the Company’s discounted cash flow analyses as is used
for the subordinated non-agency CMOs. In such instances, the securities measured
are generally classified within Level 3 of the fair value
hierarchy.
The
Company adopted FSP SFAS No. 115-2 and SFAS 124-2 on January 1, 2009. See Note 2
of the Notes to the Condensed Consolidated Financial Statements for additional
information. FSP SFAS No. 115-2 and SFAS 124-2 amends the other-than-temporary
impairment guidance for debt securities classified as available for sale and
held-to-maturity to shift the focus from an entity’s intent to hold until
recovery to its intent or requirement to sell. This guidance is to be applied to
previously other-than-temporarily impaired debt securities existing as of the
effective date by making a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption. The cumulative-effect adjustment
reclassifies the non-credit portion of a previously other-than-temporarily
impaired debt security held as of the date of initial adoption from retained
earnings to accumulated other comprehensive income. The Company did not record a
cumulative-effect adjustment upon adoption of this guidance as the adjustment
was deemed to be immaterial.
For
securities in an unrealized loss position at quarter end, the Company makes an
assessment whether these securities are impaired on an other-than-temporary
basis. In order to evaluate the Company’s risk exposure and any potential
impairment of these securities, characteristics of each security owned such as
collateral type, delinquency and foreclosure levels, credit enhancement,
projected loan losses and collateral coverage are reviewed monthly by
management. The following factors are considered to determine whether an
impairment is other-than-temporary: the Company’s intention to sell the
security, the Company’s assessment of whether it more likely than not will be
required to sell the security before the recovery of its amortized cost basis,
and whether the evidence indicating that the Company will recover the entire
amortized cost basis of a security outweighs evidence to the contrary. Evidence
considered in this assessment includes the reasons for the impairment, the
severity and duration of the impairment, changes in value subsequent to period
end, recent events specific to the issuer or industry, forecasted performance of
the security, and any changes to the rating of the security by a rating
agency.
In
applying FSP SFAS No. 115-2, and SFAS 124-2 and FSP EITF 99-20-1, which amended
EITF 99-20, the Company determines the cash flows expected to be collected 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. Securities on which there is an unrealized
loss that is deemed to be other-than-temporary are written down to fair value
with the credit loss portion of the write-down recorded as a realized loss in
other revenue and the non-credit portion of the write-down recorded in other
comprehensive income. The credit loss portion of the write-down is the
difference between the present value of the cash flows expected to be collected
and the amortized cost basis of the security. The previous amortized cost basis
of the security less the other-than-temporary impairment recognized in earnings
establishes the new cost basis for the security.
The
Company estimates the portion of loss attributable to credit using a discounted
cash flow model. The Company’s discounted cash flow model utilizes relevant
assumptions such as prepayment rate, default rate, and loss severity on a loan
level basis.
See Note
5 of the Notes to the Condensed Consolidated Financial Statements for more
information regarding the Company’s available for sale securities.
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 the 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 typically 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 1 of the fair value hierarchy.
Goodwill
Goodwill
is related to the acquisitions of Roney & Co. (now part of RJ&A) 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 June 30,
2009, goodwill had been allocated to the Private Client Group of RJ&A, and
both the Private Client Group and Capital Markets segments of Raymond James Ltd.
The Company performed its annual impairment testing as of March 31, 2009. This
analysis did not result in impairment, despite the impact of unfavorable market
conditions on the Private Client Group and Capital Market segments. As required,
the Company will continue to perform impairment testing on an annual basis or
when an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying
amount.
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. 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.
RJ Bank
provides an allowance for loan losses in accordance with SFAS 5 and SFAS No.
114, “Accounting by a Creditor for Impairment of a Loan” (“SFAS 114”). The
amount maintained in the allowance reflects management’s continuing evaluation
of the probable losses inherent in the loan portfolio. The allowance for loan
losses is comprised of two components: allowances calculated based on formulas
for homogeneous classes of loans and specific allowances assigned to certain
classified loans individually evaluated for impairment. The calculation of the
allowance based on formulas is subjective as management segregates the loan
portfolio into homogeneous classes. Each class is then assigned an allowance
percentage based on the perceived risk associated with that class of loans,
which is then further segregated by loan grade.
RJ Bank’s
loan grading process provides specific and detailed risk measurement across the
corporate loan portfolio. The factors taken into consideration when assigning
the allowance percentage to each allowance 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 RJ Bank’s unfunded lending commitments using the criteria above,
further adjusted for an estimated probability of funding.
For
individual loans identified as impaired under SFAS 114, RJ Bank 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. After
consideration of the borrower’s ability to restructure the loan, alternative
sources of repayment, and other factors affecting the borrower’s ability to
repay the debt, the portion of the allowance deemed to be a confirmed loss, if
any, is charged off. For collateral dependent corporate loans secured by real
estate, the amount of the reserve considered a confirmed loss and charged off is
generally equal to the difference between the recorded investment in the loan
and the appraised value less costs to sell the collateral. These impaired loans
are then considered to be in a workout status and management continually
evaluates all factors relevant in determining the collectability and fair value
of the loan. Appraisals on these impaired loans are obtained early in the
impairment process as part of determining fair value and are updated as deemed
necessary given the facts and circumstances of each individual situation. All
individual nonperforming commercial real estate loans as of June 30, 2009, are
closely monitored by RJ Bank management. Certain factors such as guarantor
recourse, additional borrower cash contributions or stable operations will
mitigate the need for more frequent than annual appraisals. In its continuous
evaluation of each individual loan, management considers more frequent
appraisals in geographies where commercial property values are known to be
experiencing a greater amount of volatility. For other corporate loans, RJ Bank
evaluates all sources of repayment, including the estimated liquidation value of
collateral pledged, to arrive at the amount considered to be a loss and charged
off. Similar to retail banking, corporate banking and credit risk managers also
hold a monthly meeting to review criticized loans. Additional charge-offs are
taken when the value of the collateral changes or there is a change in the
expected cash flows.
As part
of the ongoing evaluation process, charge-offs are considered on residential
mortgage loans once the loans are delinquent 90 days or more. A charge-off is
taken for the difference between the loan amount and the amount that RJ Bank
estimates will ultimately be collected, based on the value of the underlying
collateral less costs to sell. The property values are adjusted for anticipated
selling costs and the balance is charged off against the allowance. RJ Bank
predominantly uses broker price opinions (“BPO”) for these valuations as access
to the property is restricted during the foreclosure process and there is
insufficient data available for a full appraisal to be performed. BPOs contain
relevant and timely sale comparisons and listings in the marketplace, and
therefore, management has found these BPOs to be good determinants of market
value in lieu of appraisals and are more reliable than an automated valuation
tool or the use of tax assessed values. A full appraisal is obtained
post-foreclosure. RJ Bank takes further charge-offs against the owned asset if
an appraisal has a lower valuation than the original BPO, but does
not reverse previously charged-off amounts if the appraisal is higher than the
original BPO. If a loan remains in pre-foreclosure status for more than six
months, an updated valuation is obtained and further charge-offs are taken if
necessary. In addition, these loans are reviewed in a monthly delinquency
meeting jointly administered by retail banking and credit risk managers. An
initial charge-off is generally taken when the loan is between 90 and 120 days
past due.
In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review RJ Bank’s allowance for loan losses. Such agencies
may require RJ Bank to recognize additions to the allowance based on their
judgments and information available at the time of their
examination.
At June
30, 2009, the amortized cost of all RJ Bank loans was $7.2 billion and an
allowance for loan losses of $137.0 million was recorded against that balance.
The total allowance for loan losses is equal to 1.90% of the amortized cost of
the loan portfolio.
The
following table allocates RJ Bank’s allowance for loan losses by loan
category:
|
June
30,
|
|
September
30,
|
|
2009
|
|
2008
|
|
|
Loan
Category
|
|
|
Loan
Category
|
|
|
as
a % of
|
|
|
as
a % of
|
|
|
Total
Loans
|
|
|
Total
Loans
|
|
Allowance
|
Receivable
|
|
Allowance
|
Receivable
|
|
($
in 000’s)
|
|
|
|
|
|
|
Commercial
Loans
|
$ 14,604
|
12%
|
|
$ 10,147
|
10%
|
|
|
|
|
|
|
Real
Estate Construction Loans
|
10,309
|
6%
|
|
7,061
|
5%
|
|
|
|
|
|
|
Commercial
Real Estate Loans (1)
|
84,839
|
46%
|
|
62,197
|
49%
|
|
|
|
|
|
|
Residential
Mortgage Loans
|
27,135
|
36%
|
|
8,589
|
36%
|
|
|
|
|
|
|
Consumer
Loans
|
141
|
-
|
|
161
|
-
|
|
|
|
|
|
|
Total
|
$
137,028
|
100%
|
|
$
88,155
|
100%
|
(1)
|
Loans
wholly or partially secured by real
estate.
|
The
current condition of the real estate and credit markets has substantially
increased the complexity and uncertainty involved in estimating the losses
inherent in RJ Bank’s loan portfolio. If management’s underlying assumptions and
judgments prove to be inaccurate, the allowance for loan losses could be
insufficient to cover actual losses. These losses would result in a decrease in
the Company’s net income as well as a decrease in the level of regulatory
capital at RJ Bank.
The
Company also makes loans or pays advances to Financial Advisors, primarily for
recruiting and retention purposes. The Company provides for an allowance for
doubtful accounts based on an evaluation of the Company’s ability to collect
such receivables. The Company’s ongoing evaluation includes the review of
specific accounts of Financial Advisors no longer associated with the Company
and the Company’s historical collection experience. At June 30, 2009 the
receivable from Financial Advisors was $250.4 million, which is net of an
allowance of $3.1 million for estimated uncollectibility.
Income
Taxes
SFAS No.
109, “Accounting for Income Taxes”, as interpreted by FIN 48, establishes
financial accounting and reporting standards for the effect of income taxes. The
objectives of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in
the Company’s financial statements or tax returns. Judgment is required in
assessing the future tax consequences of events that have been recognized in the
Company’s financial statements or tax returns. Variations in the actual outcome
of these future tax consequences could materially impact the Company’s financial
position, results of operations, or cash flows. See Note 11 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
complete 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 RJ&A, trade tax-exempt and taxable debt obligations
and act as an active market maker in approximately 700 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. RJ Bank holds investments in mortgage backed
securities and CMOs within its available for sale securities portfolio.
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. See Note 5 of the Notes to the Condensed Consolidated
Financial Statements for information regarding the fair value of available for
sale securities.
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 June 30,
2009, 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 June 30, 2009, were CDN $47.0 million and CDN $62.9 million,
respectively. The Company's trading activities in the aggregate were
significantly below these limits at June 30, 2009. Position limits in trading
inventory accounts are monitored on a daily basis. Consolidated position and
exposure reports are prepared and distributed to senior management. Limit
violations are carefully monitored. Management also monitors inventory levels
and trading results, as well as inventory aging, pricing, concentration and
securities ratings. For derivatives, primarily interest rate swaps, the Company
monitors exposure in its derivatives subsidiary daily based on established
limits with respect to a number of factors, including interest rate, spread,
ratio, basis, and volatility risk. These exposures are monitored both on a total
portfolio basis and separately for selected maturity periods.
In the
normal course of business, the Company enters into underwriting commitments.
RJ&A 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 nine
months ended June 30, 2009, 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 table sets forth the high, low, and daily average VaR for the
Company's overall institutional portfolio during the nine months ended June 30,
2009 and the VaR at June 30, 2009 and September 30, 2008, with the corresponding
dollar value of the Company's portfolio:
|
Nine
Months Ended June 30, 2009
|
|
VaR
at
|
|
|
|
|
|
|
June
30,
|
|
September
30,
|
|
High
|
Low
|
|
Daily Average
|
|
2009
|
|
2008
|
|
($
in 000's)
|
|
|
|
|
|
|
|
|
|
Daily
VaR
|
$ 901
|
$ 296
|
|
$ 540
|
|
$ 764
|
|
$ 586
|
Related
Portfolio Value
|
|
|
|
|
|
|
|
|
(Net) (1)
|
$
98,176
|
$
97,195
|
|
$
98,193
|
|
$
91,059
|
|
$
103,047
|
VaR
as a Percent
|
|
|
|
|
|
|
|
|
of
Portfolio Value
|
0.92%
|
0.30%
|
|
0.56%
|
|
0.84%
|
|
0.57%
|
(1)
|
Portfolio
value achieved on the day of the VaR
calculation.
|
The
following table sets forth the high, low, and daily average VaR for the
Company's overall institutional portfolio during the nine months ended June 30,
2008 and the VaR at June 30, 2008, with the corresponding dollar value of the
Company's portfolio:
|
Nine
Months Ended June 30, 2008
|
|
VaR
at
|
|
|
|
|
|
|
June
30,
|
|
High
|
Low
|
|
Daily Average
|
|
2008
|
|
($
in 000's)
|
|
|
|
|
|
|
|
Daily
VaR
|
$ 690
|
$ 253
|
|
$ 430
|
|
$ 445
|
Related
Portfolio Value
|
|
|
|
|
|
|
(Net) (1)
|
$
196,188
|
$
115,100
|
|
$
165,131
|
|
$
205,470
|
VaR
as a Percent
|
|
|
|
|
|
|
of
Portfolio Value
|
0.35%
|
0.22%
|
|
0.27%
|
|
0.22%
|
(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 June 30, 2009, RJ Ltd.'s sensitivity analysis indicates
that an upward movement would increase RJ Ltd.'s net income by approximately CDN
$1.2 million for the quarter, whereas a downward shift of the same magnitude
would decrease RJ Ltd.'s net income by approximately CDN $284,000 for the
quarter. This sensitivity analysis is based on the assumption that all other
variables remain constant.
RJ Bank
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, short-term U.S. Treasury bills, 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 RJ Bank, market risk for RJ Bank
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. RJ Bank analyzes interest rate risk based on forecasted
net interest income, which is the net amount of interest received and interest
paid, and the net portfolio valuation, both in a range of interest rate
scenarios. The following table represents the carrying value of RJ Bank'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.
RJ Bank
Financial Instruments with Market Risk (as described above):
|
June
30,
|
September
30,
|
|
2009
|
2008
|
|
(in
000's)
|
|
|
|
Mortgage
Backed Securities
|
$ 175,305
|
$ 301,329
|
Loans
Receivable, Net
|
2,128,181
|
2,314,884
|
Total
Assets with Market Risk
|
$
2, 303,486
|
$
2,616,213
|
|
|
|
|
|
|
Certificates
of Deposit
|
$ 101,724
|
$ 118,233
|
Federal
Home Loan Bank Advances
|
50,000
|
50,000
|
Total
Liabilities with Market Risk
|
$ 151,724
|
$ 168,233
|
The
following table shows the distribution of those RJ Bank loans that mature in
more than one year between fixed and adjustable interest rate loans at June 30,
2009:
|
Interest
Rate Type
|
|
Fixed
|
Adjustable
|
Total
|
|
(in
000’s)
|
|
|
|
|
Commercial
Loans
|
$ 1,386
|
$ 849,463
|
$ 850,849
|
Real
Estate Construction Loans
|
-
|
238,562
|
238,562
|
Commercial
Real Estate Loans (1)
|
9,382
|
3,061,945
|
3,071,327
|
Residential
Mortgage Loans
|
25,109
|
2,578,191
|
2,603,300
|
Consumer
Loans
|
-
|
26,057
|
26,057
|
|
|
|
|
Total
Loans
|
$
35,877
|
$
6,754,218
|
$
6,790,095
|
(1)
|
Of
this amount, $1.3 billion is secured by non-owner occupied commercial real
estate properties or their repayment is dependent upon the operation or
sale of commercial real estate properties as of June 30, 2009. The
remainder is wholly or partially secured by real estate, the majority of
which are also secured by other assets of the
borrower.
|
One of
the core objectives of RJ Bank'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 RJ Bank'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, RJ Bank's sensitivity analysis
indicates that an upward movement would decrease RJ Bank's net interest income
by 4.07% in the first year after the rate increase. This sensitivity figure is
based on positions as of June 30, 2009, 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, RJ Bank
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 RJ Bank to
cash flows if interest rates rise above strike rates. RJ Bank 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 RJ&A and RJ Ltd. The U.S.
broker-dealer activities are primarily client-driven, with the objective of
meeting clients' needs while earning a trading profit to compensate for the risk
associated with carrying inventory. 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 30
traders. The average aggregate inventory held for proprietary trading during the
nine months ended June 30, 2009 was CDN $11.0 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 held
in U.S. dollars that may be impacted by fluctuation in foreign exchange rates.
In order to mitigate this risk, RJ Ltd. enters into forward foreign exchange
contracts. The fair value of these contracts is nominal. As of June 30, 2009,
forward contracts outstanding to buy and sell U.S. dollars totaled CDN $9.0
million and CDN $19.2 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.
The
valuation of the mortgage backed securities and CMOs held as available for sale
securities by RJ Bank is impacted by the credit risk associated with the
underlying loans. Underlying loan characteristics associated with this risk are
considered in valuing these securities. See Note 5 of the Notes to the Condensed
Consolidated Financial Statements for more information.
RJ Bank
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 nine
months ended June 30, 2009. For a description of RJ Bank’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 RJ Bank’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 RJ Bank’s residential first mortgage loan portfolio are as
follows:
|
June
30,
|
September
30,
|
|
2009
|
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 RJ Bank’s one-to-four family residential mortgage loans are as
follows:
June
30,
|
September
30,
|
2009
|
2008
(1)
|
($
outstanding as a % of RJ Bank total assets)
|
6.4%
CA
|
5.2%
CA
|
4.5%
NY
|
3.3%
NY
|
3.4%
FL
|
3.0%
FL
|
2.0%
NJ
|
2.1%
NJ
|
1.4%
VA
|
1.3%
VA
|
(1)
|
Concentration
ratios are presented as a percentage of adjusted RJ Bank total assets of
$9.4 billion. Adjusted RJ Bank 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 $60 million return of capital to RJF on
October 2, 2008.
|
The
industry concentrations (top five categories) of RJ Bank’s corporate loans are
as follows:
June
30,
|
September
30,
|
2009
|
2008
(1)
|
($
outstanding as a % of RJ Bank total assets)
|
|
|
3.9% Consumer
Products/Services
|
3.3% Telecom
|
3.7% Healthcare (excluding
hospitals)
|
3.2% Retail Real Estate
|
3.6% Industrial
Manufacturing
|
3.2% Consumer Products/Services
|
3.5% Retail
Real
Estate
|
3.1% Industrial Manufacturing
|
3.4% Hospitality
|
3.0% Healthcare (excluding
hospitals)
|
(1)
|
Concentration
ratios are presented as a percentage of adjusted RJ Bank total assets of
$9.4 billion. Adjusted RJ Bank 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. RJ Bank 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 RJ Bank personnel monthly and documented in a written
report detailing delinquency information, balances, collection status, appraised
value, and other data points. RJ Bank 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 June 30, 2009 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.
In June
2009, a purported class action, Woodard vs. Raymond James Financial,
Inc., et al., was filed in the United States District Court for the
Southern District of New York. The case names as defendants the Company, the
Chief Executive Officer, and Chief Financial Officer. The complaint,
brought on behalf of purchasers of the Company's common stock for the period
between and including April 22, 2008 and April 14, 2009, alleges that various
financial statements and press releases issued by the Company contained material
misstatements and omissions relating to the loan losses at Raymond James Bank,
FSB. The complaint seeks class action status, compensatory damages and costs and
disbursements, including attorneys’ fees.
Raymond
James Yatyrym Menkul Kyymetler A. S., (“RJ MKY”), 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. The Turkish tax authorities, utilizing the 2001
methodology, assessed RJ MKY $5.7 million for 2002. On October 24, 2008, RJ MKY
was notified by the Capital Markets Board of Turkey that the technical capital
inadequacy resulting from RJ MKY’s provision for this case required an
additional capital contribution, and as a result, RJ MKY halted all trading
activities. On December 5, 2008 RJ MKY 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 June 30, 2009, RJ MKY had
total capital of approximately $2.6 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 principal
broker-dealers, RJ&A 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, Defer LP vs. Raymond James
Financial, Inc., et al., filed in April, 2008 in the United States
District Court for the Southern District of
New York, similar to that filed against a number of brokerage firms alleging
various securities law violations relating to the adequacy of disclosure in
connection with the marketing and sale of ARS, which it is vigorously defending.
The complaint seeks class action status, compensatory damages and costs and
disbursements, including attorneys’ fees. The Company announced in April 2008
that customers held approximately $1.9 billion of ARS, which as of June 30,
2009, had declined to approximately $832.5 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 a significant 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 and dividend covenants in the RJF revolving 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 RJ Bank, 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 RJ Bank and the Company's broker-dealer
subsidiaries).
Item
5. OTHER
INFORMATION
Entry into a Material
Definitive Agreement
On August
10, 2009, RJF entered into a senior indenture (the “Senior Indenture”) with the
Bank of New York Mellon Trust Company, N.A., as trustee, for the future issuance
of senior notes pursuant to the Company’s existing shelf registration statement
on Form S-3 (File No. 333-159583). As of the date hereof, no senior notes have
been issued under the Senior Indenture.
Item
6. EXHIBITS
|
|
|
|
4.1
|
|
Description
of Capital Stock, filed herewith.
|
|
|
|
|
|
4.2
|
|
Indenture,
dated as of August 10, 2009 (for senior debt securities) between Raymond
James Financial, Inc. and The Bank of New York Mellon Trust Company, N.A.,
filed herewith
|
|
|
|
|
|
11
|
|
Statement
Re: Computation of per Share Earnings (The calculation of per share
earnings is included in Part I, Item 1 in the Notes to Condensed
Consolidated Financial Statements (Earnings Per Share) and is omitted here
in accordance with Section (b)(11) of Item 601 of Regulation
S-K).
|
|
|
|
|
|
12.1
|
|
Statement
of Computation of Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends, filed herewith.
|
|
|
|
|
|
25.1
|
|
Statement
of Eligibility of The Bank of New York Mellon Trust Company, N.A., filed
herewith.
|
|
|
|
|
|
31.1
|
|
Principal
Executive Officer Certification as required by Rule 13a-14(a)/15d-14(a),
filed herewith.
|
|
|
|
|
|
31.2
|
|
Principal
Financial Officer Certification as required by Rule 13a-14(a)/15d-14(a),
filed herewith.
|
|
|
|
|
|
32.1
|
|
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: August 10, 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
|