UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q (Mark one) | | | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF | | THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2012 or | | | ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF | | THE SECURITIES EXCHANGE ACT OF 1934 |
| | | | | For the transition period from | | to | |
Commission File Number: 1-9109
RAYMOND JAMES FINANCIAL, INC. (Exact name of registrant as specified in its charter) | | | | Florida | | No. 59-1517485 | (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) | | | |
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 ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes x No ¨ 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 ¨ No x Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
138,017,783 shares of common stock as of August 3, 2012
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Form 10-Q for the quarter ended June 30, 2012
INDEX | | | | | | | | PAGE | PART I. | | | | | | | | Item 1. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Item 2. | | | | | | | | Item 3. | | | | | | | | Item 4. | | | | | | | | PART II. | | | | | | | | Item 1. | | | | | | | | Item 1A. | | | | | | | | Item 2. | | | | | | | | Item 3. | | | | | | | | Item 5. | | | | | | | | Item 6. | | | | | | | | | | | |
PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) | | | | | | | | | | June 30, 2012 | | September 30, 2011 | | ($ in thousands) | Assets: | | | | Cash and cash equivalents | $ | 1,729,035 |
| | $ | 2,439,695 |
| Assets segregated pursuant to regulations and other segregated assets | 2,719,026 |
| | 3,548,683 |
| Securities purchased under agreements to resell and other collateralized financings | 706,713 |
| | 398,247 |
| Financial instruments, at fair value: | |
| | |
| Trading instruments | 908,426 |
| | 492,771 |
| Available for sale securities | 751,637 |
| | 520,665 |
| Private equity and other investments | 565,093 |
| | 294,356 |
| Receivables: | |
| | |
| Brokerage clients, net | 2,186,737 |
| | 1,716,828 |
| Stock borrowed | 206,690 |
| | 225,561 |
| Bank loans, net | 7,838,574 |
| | 6,547,914 |
| Brokers-dealers and clearing organizations | 392,443 |
| | 96,096 |
| Other | 1,054,874 |
| | 536,364 |
| Deposits with clearing organizations | 144,230 |
| | 91,482 |
| Prepaid expenses and other assets (includes derivative contracts at fair value of $472.4 million as of June 30, 2012) | 966,271 |
| | 364,264 |
| Investments in real estate partnerships held by consolidated variable interest entities | 302,544 |
| | 320,384 |
| Property and equipment, net | 223,560 |
| | 169,850 |
| Deferred income taxes, net | 188,330 |
| | 171,911 |
| Goodwill | 286,372 |
| | 71,924 |
| Total assets | $ | 21,170,555 |
| | $ | 18,006,995 |
| | | | | Liabilities and equity: | |
| | |
| Trading instruments sold but not yet purchased, at fair value | $ | 186,894 |
| | $ | 76,150 |
| Securities sold under agreements to repurchase | 506,618 |
| | 188,745 |
| Payables: | |
| | |
| Brokerage clients | 4,776,027 |
| | 4,690,414 |
| Stock loaned | 459,860 |
| | 814,589 |
| Bank deposits | 8,277,304 |
| | 7,739,322 |
| Brokers-dealers and clearing organizations | 212,243 |
| | 111,408 |
| Trade and other (includes derivative contracts at fair value of $481.2 million as of June 30, 2012) | 1,164,260 |
| | 309,723 |
| Accrued compensation, commissions and benefits | 591,120 |
| | 452,849 |
| Loans payable of consolidated variable interest entities | 80,549 |
| | 99,982 |
| Corporate debt | 1,333,971 |
| | 611,968 |
| Total liabilities | 17,588,846 |
| | 15,095,150 |
| Commitments and contingencies (see Note 14) |
|
| |
|
| Equity | |
| | |
| Preferred stock; $.10 par value; authorized 10,000,000 shares; issued and outstanding -0- shares | — |
| | — |
| Common stock; $.01 par value; authorized 350,000,000 shares; issued 142,541,708 at June 30, 2012 and 130,670,086 at September 30, 2011 | 1,399 |
| | 1,271 |
| Additional paid-in capital | 998,567 |
| | 565,135 |
| Retained earnings | 2,281,407 |
| | 2,125,818 |
| Treasury stock, at cost; 5,105,380 common shares at June 30, 2012 and 4,263,029 common shares at September 30, 2011 | (118,681 | ) | | (95,000 | ) | Accumulated other comprehensive income | (4,996 | ) | | (9,605 | ) | Total equity attributable to Raymond James Financial, Inc. | 3,157,696 |
| | 2,587,619 |
| Noncontrolling interests | 424,013 |
| | 324,226 |
| Total equity | 3,581,709 |
| | 2,911,845 |
| | | | | Total liabilities and equity | $ | 21,170,555 |
| | $ | 18,006,995 |
|
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) | | | | | | | | | | | | | | | | | | Three months ended June 30, | | Nine months ended June 30, | | 2012 | | 2011 | | 2012 | | 2011 | | (in thousands, except per share amounts) | Revenues: | | | | | | | | Securities commissions and fees | $ | 733,180 |
| | $ | 551,337 |
| | $ | 1,803,041 |
| | $ | 1,649,186 |
| Investment banking | 72,266 |
| | 64,518 |
| | 169,556 |
| | 186,618 |
| Investment advisory fees | 57,887 |
| | 55,016 |
| | 165,661 |
| | 160,069 |
| Interest | 121,186 |
| | 95,832 |
| | 332,134 |
| | 297,029 |
| Account and service fees | 82,082 |
| | 71,739 |
| | 231,947 |
| | 211,928 |
| Net trading profits | 14,544 |
| | 7,529 |
| | 36,866 |
| | 29,097 |
| Other | 34,617 |
| | 22,241 |
| | 65,227 |
| | 31,362 |
| Total revenues | 1,115,762 |
| | 868,212 |
| | 2,804,432 |
| | 2,565,289 |
| Interest expense | 29,554 |
| | 17,825 |
| | 63,510 |
| | 49,016 |
| Net revenues | 1,086,208 |
| | 850,387 |
| | 2,740,922 |
| | 2,516,273 |
| Non-interest expenses: | |
| | |
| | |
| | |
| Compensation, commissions and benefits | 736,050 |
| | 575,726 |
| | 1,874,563 |
| | 1,707,197 |
| Communications and information processing | 55,282 |
| | 36,156 |
| | 136,590 |
| | 103,681 |
| Occupancy and equipment costs | 41,087 |
| | 27,140 |
| | 94,255 |
| | 80,142 |
| Clearance and floor brokerage | 11,025 |
| | 10,277 |
| | 27,549 |
| | 29,641 |
| Business development | 33,098 |
| | 24,800 |
| | 88,319 |
| | 71,565 |
| Investment sub-advisory fees | 7,765 |
| | 7,703 |
| | 21,470 |
| | 22,474 |
| Bank loan loss provision | 9,315 |
| | 8,363 |
| | 21,925 |
| | 28,232 |
| Acquisition related expenses | 20,955 |
| | — |
| | 40,559 |
| | — |
| Loss provision for auction rate securities | — |
| | 45,000 |
| | — |
| | 45,000 |
| Other | 33,640 |
| | 34,143 |
| | 85,151 |
| | 96,278 |
| Total non-interest expenses | 948,217 |
| | 769,308 |
| | 2,390,381 |
| | 2,184,210 |
| Income including noncontrolling interests and before provision for income taxes | 137,991 |
| | 81,079 |
| | 350,541 |
| | 332,063 |
| Provision for income taxes | 48,520 |
| | 31,881 |
| | 134,674 |
| | 125,992 |
| Net income including noncontrolling interests | 89,471 |
| | 49,198 |
| | 215,867 |
| | 206,071 |
| Net income (loss) attributable to noncontrolling interests | 13,121 |
| | 2,412 |
| | 3,323 |
| | (3,355 | ) | Net income attributable to Raymond James Financial, Inc. | $ | 76,350 |
| | $ | 46,786 |
| | $ | 212,544 |
| | $ | 209,426 |
| | | | | | | | | Net income per common share – basic | $ | 0.55 |
| | $ | 0.37 |
| | $ | 1.61 |
| | $ | 1.66 |
| Net income per common share – diluted | $ | 0.55 |
| | $ | 0.37 |
| | $ | 1.60 |
| | $ | 1.65 |
| Weighted-average common shares outstanding – basic | 135,256 |
| | 123,238 |
| | 129,206 |
| | 122,200 |
| Weighted-average common and common equivalent shares outstanding – diluted | 136,657 |
| | 123,958 |
| | 130,187 |
| | 122,689 |
| | | | | | | | | Net income attributable to Raymond James Financial, Inc. | $ | 76,350 |
| | $ | 46,786 |
| | $ | 212,544 |
| | $ | 209,426 |
| Other comprehensive income, net of tax:(1) | |
| | |
| | |
| | |
| Change in unrealized gain (loss) on available for sale securities and non-credit portion of other-than-temporary impairment losses | 622 |
| | (26 | ) | | 6,197 |
| | 6,895 |
| Change in currency translations | (8,933 | ) | | 998 |
| | (1,588 | ) | | 10,205 |
| Total comprehensive income | $ | 68,039 |
| | $ | 47,758 |
| | $ | 217,153 |
| | $ | 226,526 |
| | | | | | | | | Other-than-temporary impairment: | |
| | |
| | |
| | |
| Total other-than-temporary impairment, net | $ | (1,260 | ) | | $ | (2,680 | ) | | $ | 5,406 |
| | $ | (4,064 | ) | Portion of (recoveries) losses recognized in other comprehensive income (before taxes) | (175 | ) | | 425 |
| | (10,274 | ) | | (3,589 | ) | Net impairment losses recognized in other revenue | $ | (1,435 | ) | | $ | (2,255 | ) | | $ | (4,868 | ) | | $ | (7,653 | ) |
| | (1) | The components of other comprehensive income, net of tax, are attributable to Raymond James Financial, Inc. None of the components of other comprehensive income are attributable to noncontrolling interests. |
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) | | | | | | | | | | | Nine months ended June 30, | | | 2012 | | 2011 | | | (in thousands, except per share amounts) | | Common stock, par value $.01 per share: | | | | | Balance, beginning of year | $ | 1,271 |
| | $ | 1,244 |
| | Issuance of shares, registered public offering | 111 |
| (1) | — |
| | Other issuances | 17 |
| | 23 |
| (2) | Balance, end of period | 1,399 |
| | 1,267 |
| | Shares exchangeable into common stock: | |
| | |
| | Balance, beginning of year | — |
| | 3,119 |
| | Exchanged | — |
| | (3,119 | ) | (2) | Balance, end of period | — |
| | — |
| | Additional paid-in capital: | |
| | |
| | Balance, beginning of year | 565,135 |
| | 476,359 |
| | Issuance of shares, registered public offering | 362,712 |
| (1) | — |
| | Employee stock purchases | 12,286 |
| | 7,116 |
| | Exercise of stock options and vesting of restricted stock units, net of forfeitures | 16,142 |
| | 32,281 |
| | Restricted stock, stock option and restricted stock unit expense | 39,287 |
| | 30,412 |
| | Excess tax benefit from share-based payments | 2,407 |
| | 460 |
| | Issuance of stock as consideration for acquisition (3) | — |
| | 4,011 |
| | Other | 598 |
| | 3,281 |
| (2) | Balance, end of period | 998,567 |
| | 553,920 |
| | Retained earnings: | |
| | |
| | Balance, beginning of year | 2,125,818 |
| | 1,909,865 |
| | Net income attributable to Raymond James Financial, Inc. | 212,544 |
| | 209,426 |
| | Cash dividends declared | (52,118 | ) | | (49,346 | ) | | Other | (4,837 | ) | | 4,370 |
| | Balance, end of period | 2,281,407 |
| | 2,074,315 |
| | Treasury stock: | |
| | |
| | Balance, beginning of year | (95,000 | ) | | (81,574 | ) | | Purchases/surrenders | (19,211 | ) | | (6,662 | ) | | Exercise of stock options and vesting of restricted stock units, net of forfeitures | (4,470 | ) | | 1,991 |
| | Issuance of stock as consideration for acquisition | — |
| | 4,504 |
| | Balance, end of period | (118,681 | ) | | (81,741 | ) | | Accumulated other comprehensive income: (4) | |
| | |
| | Balance, beginning of year | (9,605 | ) | | (6,197 | ) | | Net unrealized gain on available for sale securities and non-credit portion of other-than-temporary impairment losses (5) | 6,197 |
| | 6,895 |
| | Net change in currency transactions | (1,588 | ) | | 10,205 |
| | Balance, end of period | (4,996 | ) | | 10,903 |
| | Total equity attributable to Raymond James Financial, Inc. | $ | 3,157,696 |
| | $ | 2,558,664 |
| | Noncontrolling interests: | |
| | |
| | Balance, beginning of year | $ | 324,226 |
| | $ | 294,052 |
| | Net income (loss) attributable to noncontrolling interests | 3,323 |
| | (3,355 | ) | | Capital contributions | 33,228 |
| | 33,576 |
| | Distributions | (6,645 | ) | | (9,541 | ) | | Deconsolidation of previously consolidated low income housing tax credit funds | — |
| | (6,789 | ) | | Consolidation of low income housing tax credit funds not previously consolidated | — |
| | 14,635 |
| | Consolidation of private equity partnerships | 78,394 |
| | — |
| | Other | (8,513 | ) | | (16,003 | ) | | Balance, end of period | 424,013 |
| | 306,575 |
| | Total equity | $ | 3,581,709 |
| | $ | 2,865,239 |
| |
| | (1) | During the quarter ending March 31, 2012, in a registered public offering, 11,075,000 common shares were issued generating approximately $363 million in net proceeds (after consideration of the underwriting discount and direct expenses of the offering). |
| | (2) | During the quarter ending March 31, 2011, approximately 243,000 exchangeable shares were exchanged for common stock on a one-for-one basis. |
| | (3) | In April, 2011, we acquired Howe Barnes, Hoefer & Arnett (“Howe Barnes”) by exchanging RJF shares for all issued and outstanding shares of Howe Barnes. |
| | (4) | The components of other comprehensive income are attributable to Raymond James Financial, Inc. None of the components of other comprehensive income are attributable to noncontrolling interests. |
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | | | | | | | | Nine months ended June 30, | | 2012 | | 2011 | | (in thousands) | Cash flows from operating activities: | | | | Net income attributable to Raymond James Financial, Inc. | $ | 212,544 |
| | $ | 209,426 |
| Net income (loss) attributable to noncontrolling interests | 3,323 |
| | (3,355 | ) | Net income including noncontrolling interests | 215,867 |
| | 206,071 |
| | | | | Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: | |
| | |
| Depreciation and amortization | 38,079 |
| | 30,330 |
| Deferred income taxes | (16,389 | ) | | (43,242 | ) | Premium and discount amortization on available for sale securities and unrealized/realized gain on other investments | (21,222 | ) | | (11,758 | ) | Provisions for loan losses, legal proceedings, bad debts and other accruals | 26,679 |
| | 44,125 |
| Share-based compensation expense | 41,774 |
| | 32,969 |
| Loss provision for auction rate securities | — |
| | 45,000 |
| Other | 11,469 |
| | 20,017 |
| Net change in: | |
| | |
| Assets segregated pursuant to regulations and other segregated assets | 954,857 |
| | 934,240 |
| Securities purchased under agreements to resell and other collateralized financings, net of securities sold under agreements to repurchase | (192,771 | ) | | (294,113 | ) | Stock loaned, net of stock borrowed | (328,145 | ) | | (35,259 | ) | Brokerage client receivables and other accounts receivable, net | (316,477 | ) | | (244,615 | ) | Trading instruments, net | (26,886 | ) | | 99,634 |
| Prepaid expenses and other assets | 5,726 |
| | (17,522 | ) | Brokerage client payables and other accounts payable | (84,289 | ) | | 383,015 |
| Accrued compensation, commissions and benefits | (39,591 | ) | | 17,034 |
| Purchase and origination of loans held for sale, net of proceeds from sale of securitizations and loans held for sale | (49,893 | ) | | (73,999 | ) | Excess tax benefits from stock-based payment arrangements | (3,001 | ) | | (1,772 | ) | | | | | Net cash provided by operating activities | 215,787 |
| | 1,090,155 |
| | | | | Cash flows from investing activities: | |
| | |
| Additions to property and equipment | (53,572 | ) | | (28,170 | ) | Increase in loans, net | (1,256,018 | ) | | (114,152 | ) | Redemptions of Federal Home Loan Bank stock, net | 20,169 |
| | 42,811 |
| (Purchases) sales of private equity and other investments, net | (18,887 | ) | | 10,503 |
| Acquisition of controlling interest in subsidiary | — |
| | (6,354 | ) | Purchases of available for sale securities | (249,381 | ) | | (2,328 | ) | Available for sale securities maturations, repayments and redemptions | 145,860 |
| | 92,049 |
| Proceeds from sales of available for sale securities | — |
| | 13,767 |
| Investments in real estate partnerships held by consolidated variable interest entities, net of other investing activity | (141 | ) | | (12,048 | ) | Business acquisition, net of cash acquired (see Note 2 for the components of net assets acquired) | (1,096,631 | ) | | — |
| | | | | Net cash used in investing activities | $ | (2,508,601 | ) | | $ | (3,922 | ) |
(continued on next page)
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(continued from previous page) | | | | | | | | | | Nine months ended June 30, | | 2012 | | 2011 | | (in thousands) | Cash flows from financing activities: | | | | Proceeds from borrowed funds, net | $ | 1,149,275 |
| | $ | 249,498 |
| Repayments of borrowed funds, net | (425,598 | ) | | (2,560,493 | ) | Proceeds from issuance of shares in registered public offering | 362,823 |
| | — |
| Repayments of borrowings by consolidated variable interest entities which are real estate partnerships | (23,147 | ) | | (23,679 | ) | Proceeds from capital contributed to and borrowings of consolidated variable interest entities which are real estate partnerships | 30,546 |
| | 32,912 |
| Purchase of additional equity interest in subsidiary | (4,017 | ) | | — |
| Exercise of stock options and employee stock purchases | 23,416 |
| | 40,643 |
| Increase (decrease) in bank deposits | 537,982 |
| | (135,260 | ) | Purchase of treasury stock | (20,489 | ) | | (6,998 | ) | Dividends on common stock | (50,655 | ) | | (49,346 | ) | Excess tax benefits from share-based payment arrangements | 3,001 |
| | 1,772 |
| Net cash provided by (used in) financing activities | 1,583,137 |
| | (2,450,951 | ) | | | | | Currency adjustment: | | | | Effect of exchange rate changes on cash | (983 | ) | | 1,801 |
| Net decrease in cash and cash equivalents | (710,660 | ) | | (1,362,917 | ) | Increase in cash resulting from the consolidation of an acquired entity and the acquisition of a controlling interest in a subsidiary | — |
| | 18,366 |
| Cash and cash equivalents at beginning of year | 2,439,695 |
| | 2,943,239 |
| Cash and cash equivalents at end of period | $ | 1,729,035 |
| | $ | 1,598,688 |
| | | | | | | | | Supplemental disclosures of cash flow information: | | | | Cash paid for interest | $ | 51,407 |
| | $ | 36,187 |
| Cash paid for income taxes | $ | 123,715 |
| | $ | 154,275 |
| Non-cash transfers of loans to other real estate owned | $ | 11,121 |
| | $ | 12,157 |
|
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2012
NOTE 1 – BASIS OF PRESENTATION
Raymond James Financial, Inc. (“RJF”) is a holding company headquartered in Florida whose broker-dealer subsidiaries are engaged in various financial service businesses, including the underwriting, distribution, trading and brokerage of equity and debt securities and the sale of mutual funds and other investment products. In addition, other subsidiaries of RJF provide investment management services for retail and institutional clients, corporate and retail banking, and trust services. As used herein, the terms “we,” “our” or “us” refer to RJF and/or one or more of its subsidiaries.
On April 2, 2012 (the “Closing Date”) RJF completed its acquisition of all of the issued and outstanding shares of Morgan Keegan & Company, Inc. (a broker-dealer hereinafter referred to as “MK & Co.”) and MK Holding, Inc. and certain of its related affiliates (altogether referred to hereinafter as “Morgan Keegan”) from Regions Financial Corporation (“Regions”). This acquisition expands both our private client wealth management and our capital markets businesses. See Note 17 for information regarding the capital position of MK & Co. as of June 30, 2012 and Note 2 for further discussion of our acquisition of Morgan Keegan.
The accompanying unaudited condensed consolidated financial statements include the accounts of RJF and its consolidated subsidiaries that are generally controlled through a majority voting interest. We consolidate all of our 100% owned subsidiaries. In addition, we consolidate any variable interest entity (“VIE”) in which we are the primary beneficiary. When we do not have a controlling interest in an entity, but we exert significant influence over the entity, we apply the equity method of accounting. All material intercompany balances and transactions have been eliminated in consolidation.
Certain financial information that is normally included in annual financial statements prepared in accordance with United States of America (“U.S.”) generally accepted accounting principles (“GAAP”) but not required for interim reporting purposes has been condensed or omitted. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods presented.
The nature of our business is such that the results of any interim period are not necessarily indicative of results for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2011, as filed with the U.S. Securities and Exchange Commission (the “2011 Form 10-K”). To prepare condensed consolidated financial statements in conformity with GAAP, we must make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could have a material impact on the condensed consolidated financial statements.
Update of significant accounting policies
A summary of our significant accounting policies is included in Note 1 on pages 81 - 97 of our 2011 Form 10-K. Other than as discussed below, there have been no significant changes in our significant accounting policies since September 30, 2011.
At March 31, 2012, we implemented new Financial Accounting Standards Board guidance regarding fair value measurement. This new guidance primarily provides for certain additional fair value disclosures. See Note 4 for the additional disclosures required under this new accounting guidance.
As more fully described in Note 1, page 87, of our 2011 Form 10-K, we have certain financing receivables that arise from businesses other than our banking business. Specifically, we offer loans to financial advisors and certain key revenue producers, primarily for recruiting and retention purposes, the net balances associated therewith are included within other receivables on our Condensed Consolidated Statements of Financial Condition. The outstanding balance of these loans is $453.5 million and $231.5 million at June 30, 2012 and September 30, 2011, respectively. The June 30, 2012 outstanding balance includes $135.7 million of loans made to MK & Co. financial advisors during April 2012 in conjunction with our acquisition of Morgan Keegan (see Note 2 for further discussion of this acquisition) and $71.4 million of outstanding loans of MK & Co. as of the acquisition date. The related allowance for doubtful accounts balance is $2.2 million and $5.9 million at June 30, 2012 and September 30, 2011, respectively. Of the June 30, 2012 loan balance referred to above, the portion of the balance associated with financial advisors who are no longer affiliated with us, after consideration of the allowance for doubtful accounts, is approximately $2.8 million.
Reclassifications
In the fourth quarter of fiscal year 2011, we changed the title of what had been known as “Financial Service Fees” on our Condensed Consolidated Statements of Income and Comprehensive Income to “Account and Service Fees,” to better reflect the nature of the revenues included within the line item description. Additionally, we reclassified certain components of revenue previously included within other revenues into Account and Service Fees. A reclassification of $32.8 million and $90.3 million million of revenue previously reported as a component of other revenues for the three and nine months ended June 30, 2011 has been included in Account and Service Fees on the Condensed Consolidated Statements of Income and Comprehensive Income as presented, to conform the prior period to the current period presentation.
Certain other prior period amounts, none of which are material, have been reclassified to conform to the current presentation.
NOTE 2 – ACQUISITION OF MORGAN KEEGAN
As of the Closing Date, we applied the acquisition method of accounting to our acquisition of Morgan Keegan (as more fully described in Note 1).
Net assets acquired and consideration paid
The fair value of the assets acquired and liabilities assumed as of the Closing Date are reflected below. | | | | | | (in thousands) | Cash and cash equivalents | $ | 114,466 |
| Assets segregated pursuant to regulations and other segregated assets | 125,200 |
| Securities purchased under agreements to resell and other collateralized financings | 166,604 |
| Financial instruments, at fair value: | | Trading instruments | 504,477 |
| Available for sale securities | 122,309 |
| Private equity and other investments | 245,033 |
| Receivables: | | Brokerage clients, net | 365,567 |
| Stock borrowed | 16,020 |
| Brokers-dealers and clearing organizations | 291,759 |
| Other | 287,417 |
| Deposits with clearing organizations | 51,362 |
| Prepaid expenses and other assets | 443,973 |
| Property and equipment, net | 34,269 |
| Acquired intangible assets (see detail below) | 84,000 |
| Goodwill | 214,448 |
| Trading instruments sold but not yet purchased, at fair value | (216,094 | ) | Securities sold under agreements to repurchase | (368,782 | ) | Payables: | | Brokerage client payables | (372,981 | ) | Stock loaned | (8,307 | ) | Brokers-dealers and clearing organizations | (12,171 | ) | Trade and other | (723,897 | ) | Accrued compensation, commissions and benefits | (176,585 | ) | Net assets acquired at fair value | $ | 1,188,087 |
|
The fair value of the consideration paid and the estimated net purchase price are as follows: | | | | | | (in thousands) | Cash paid to Regions on the Closing Date | $ | 1,211,097 |
| Receivable from Regions as of June 30, 2012 (1) | (23,010 | ) | Estimated net purchase price consideration | $ | 1,188,087 |
|
| | (1) | The estimated outcome of the determination of the final Closing Date tangible book value of Morgan Keegan, as discussed below. |
The total cash flow impact during fiscal year 2012 of a use of cash of $1.1 billion results from the $1.2 billion cash payment on the Closing Date offset by Morgan Keegan's Closing Date cash balance of $114 million.
Preliminary valuation of identified intangible assets
We are in the process of finalizing the valuation of the identifiable intangible assets acquired in the Morgan Keegan acquisition. Based upon our preliminary results, the preliminary values and our estimate of their respective useful lives are as follows: | | | | | | Identified intangible asset description: | Asset amount (in thousands) | Weighted average useful lives (in yrs) | Customer relationships | $ | 51,000 |
| 11.9 | Non-solicitation agreements | 11,000 |
| 5.0 | Developed technology | 11,000 |
| 5.0 | Non-competition agreements | 7,000 |
| 2.0 | Trade names | 4,000 |
| 1.0 | Total identified intangible assets | $ | 84,000 |
| |
Once our final valuation of the identified intangible assets is complete, we will adjust our preliminary estimates accordingly. We utilize the straight-line method of amortization for the acquired intangible assets. Based on our current estimate, amortization expense of $4 million related to the intangible assets acquired in the Morgan Keegan acquisition is included in other expense in our Condensed Consolidated Statements of Income and Comprehensive Income in the three month and nine month periods ended June 30, 2012.
Preliminary estimate of goodwill
The remaining consideration, after adjusting for the preliminary estimate of the identified intangible assets and the net assets and liabilities recorded at fair value, was preliminarily determined to be $214 million, which represents synergies resulting from combining the businesses, and is allocated to goodwill. To the extent that our preliminary value of identified intangible assets changes, there will be an equal and offsetting change to the recorded goodwill.
We elected to write-up to fair value, the tax basis of the acquired assets and liabilities assumed. As a result of this tax election, $68 million of the net deferred tax asset balance of Morgan Keegan as of the Closing Date is included in our allocation to goodwill. The goodwill arising from this transaction is attributable to our private client group and our capital markets business units. Our valuation process to determine the amount of goodwill to allocate to each respective business unit has not been completed. The portion of goodwill that is amortizable for tax purposes is approximately $211 million.
Selected Unaudited Pro forma financial information
The following unaudited pro forma financial information assumes the acquisition had occurred at the beginning of each period presented. Our fiscal year 2012 results of operations include the operations of Morgan Keegan for the period from April 2, 2012 to June 30, 2012. Integration of both equity and fixed income capital markets operations of Morgan Keegan began immediately following the Closing Date which precludes the determination of legacy Morgan Keegan results in those areas. Therefore, the results of the Morgan Keegan business, as acquired, does not exist as a discrete comparable entity within our reporting structure.
Pro forma results have been prepared by adjusting our historical results to include Morgan Keegan's results of operations adjusted for the following: amortization expense related to the estimated intangible assets arising from the acquisition; interest expense to reflect the impact of senior notes issued in March 2012; incremental bonus expense resulting from the bonus agreements made for retention purposes to certain Morgan Keegan financial advisors, incremental compensation expense related to restricted stock units granted to certain executives and key revenue producers for retention purposes; our acquisition expenses; a $545 million goodwill impairment charge included in Morgan Keegan's pre-Closing Date financial statements directly resulting from the transaction; and the applicable tax effect of each adjustment described above. The weighted average common shares used in the computation of both pro forma basic and pro forma diluted earnings per share were adjusted to reflect that the issuance of additional RJF shares that occurred in February 2012 had been outstanding for the entirety of each respective period presented.
The unaudited pro forma results presented do not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable periods presented, nor does it indicate the results of operations in future periods. Additionally, the unaudited pro forma results do not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions on revenues, reduction of expenses, asset dispositions, or other factors. The impact of these items could alter the following unaudited pro forma results.
| | | | | | | | | | | | | | | | Three months ended | | Nine months ended | Pro forma results (Unaudited): | | June 30, 2011 | | June 30, 2012 | | June 30, 2011 | | ($ in thousands except per share amounts) | Total net revenues | | $ | 1,102,328 |
| | $ | 3,253,924 |
| | $ | 3,334,666 |
| Net income | | $ | 65,457 |
| | $ | 255,647 |
| | $ | 242,603 |
| Net income per share: | | | | | | | Basic | | $ | 0.48 |
| | $ | 1.86 |
| | $ | 1.77 |
| Diluted | | $ | 0.47 |
| | $ | 1.85 |
| | $ | 1.76 |
|
Other items of significance
Under the terms of the Stock Purchase Agreement (the “SPA”), on the Closing Date RJF paid Regions approximately $1.2 billion in cash in exchange for the Morgan Keegan shares. This purchase price represented a $230 million premium over a preliminary estimate of tangible book value at closing of $970 million. The SPA contemplated that Morgan Keegan would pay a cash dividend of $250 million to Regions prior to the closing of the transaction. However, the parties subsequently decided to defer payment of the dividend until after the closing, resulting in an increase in the book value of Morgan Keegan and therefore, the purchase price. Following the closing, RJF received a cash dividend in the amount of $250 million from Morgan Keegan. Subsequent to the closing of the transaction, the parties to the SPA were to determine the final closing date tangible book value; we believe we have an agreement in principle with Regions that it owes us approximately $23 million. Although definitive documentation has not yet been completed with respect to this matter, we have included this amount in the estimated net purchase price consideration and in other receivables on our June 30, 2012 Condensed Consolidated Statements of Financial Condition. The SPA provided for a potential downward adjustment of the purchase price if certain revenue retention hurdles were not met during the 90 days following closing; such revenue retention hurdles were met as of July 2, 2012 and as a result there will be no downward adjustment of the purchase price related to any revenue retention hurdles.
During April, 2012, RJF made approximately $136 million of loans to Morgan Keegan financial advisors and issued approximately 1.5 million of restricted stock units to certain key Morgan Keegan revenue producers as part of an employee retention program (see Note 1 for additional information). Concurrent with the execution of the SPA, RJF executed employment agreements with certain key members of the Morgan Keegan management team.
In addition to customary indemnity for breaches of representations and warranties and covenants, the SPA also provides that Regions will indemnify RJF for losses incurred in connection with legal proceedings pending as of the closing date or commenced after the closing date and related to pre-closing matters. With respect to the indemnification pertaining to most breaches of representations and warranties and covenants, there is no indemnification for the first $9 million of aggregate losses, and thereafter indemnification is subject to a maximum amount equal to 15% of the purchase price. With respect to representations regarding certain fundamental matters and with respect to legal proceedings pending as of the Closing Date, such matters are not subject to any annual indemnification deductible or cap. Indemnification for legal proceedings commenced after the closing is subject to an aggregate annual $2 million indemnification deductible for three years, after which RJF is entitled to receive the full amount of all such losses incurred in excess of $2 million.
In our application of the acquisition method of accounting, we recorded an indemnification asset of approximately $198 million pertaining primarily to legal matters, which is included in other assets, and the related liability is reflected in trade and other payables on our Condensed Consolidated Statements of Financial Condition. See Note 14 for discussion of the Morgan Keegan pre-Closing Date litigation matters.
On January 11, 2012, J.P. Morgan Chase (“JPM Chase”) entered into a commitment letter to provide RJF with a $900 million bridge financing facility to provide financing of the purchase price. On February 16, 2012, JPM Chase and a number of other lenders executed a $900 million bridge credit agreement (the “Bridge Financing Agreement”). As a result of the successful completion of certain equity and debt financings during the quarter ended March 31, 2012, RJF terminated the Bridge Financing Agreement on March 10, 2012.
On the Closing Date, certain subsidiaries of RJF (the “Borrowers”) entered into a credit agreement (the “Regions Credit Agreement”) with Regions Bank, an Alabama banking corporation (the “Lender”). See Note 11 for information regarding this borrowing.
One or more of Morgan Keegan’s affiliates are the general partner in private equity funds. As a result of the general partner interest, we are consolidating nine of the funds. Our share (inclusive of any related parties for purposes of this determination) of the ownership interest in the funds we are consolidating ranges from 9% to 100%. As a result of the consolidation, funds with total assets of approximately $116 million as of the Closing Date were consolidated. The portion of the consolidated funds equity that is attributable to others approximated $78 million.
Acquisition related expenses
Acquisition related expenses are recorded in the Condensed Consolidated Statement of Income and Comprehensive Income and include certain incremental expenses arising solely as a result of our acquisition of Morgan Keegan. During the three and nine months ended June 30, 2012, we incurred the following acquisition related expenses: | | | | | | | | | | Three months ended | | Nine months ended | | June 30, 2012 | | June 30, 2012 | | (in thousands) | Severance (1) | $ | 13,845 |
| | $ | 17,028 |
| Financial advisory fees | 20 |
| | 7,040 |
| Integration costs | 6,544 |
| | 7,742 |
| Acquisition bridge financing facility fees | — |
| | 5,684 |
| Legal | — |
| | 2,230 |
| Other | 546 |
| | 835 |
| Total acquisition related expenses | $ | 20,955 |
| | $ | 40,559 |
|
| | (1) | Represents all costs associated with eliminating positions as a result of the Morgan Keegan acquisition, partially offset by the favorable impact arising from the forfeiture of any unvested accrued benefits. |
NOTE 3 – CASH AND CASH EQUIVALENTS, ASSETS SEGREGATED PURSUANT TO REGULATIONS, AND DEPOSITS WITH CLEARING ORGANIZATIONS
Our cash equivalents include money market funds or highly liquid investments with original maturities of 90 days or less, other than those used for trading purposes. For further discussion of our accounting policies regarding assets segregated pursuant to regulations and other segregated assets, see Note 1 on page 83 of our 2011 Form 10-K.
Our cash and cash equivalents, assets segregated pursuant to regulations or other segregated assets, and deposits with clearing organization balances are as follows:
| | | | | | | | | | June 30,
2012 | | September 30,
2011 | | (in thousands) | Cash and cash equivalents: | | | | Cash in banks | $ | 1,724,460 |
| | $ | 2,438,249 |
| Money market investments | 4,575 |
| | 1,446 |
| Total cash and cash equivalents (1) | 1,729,035 |
| | 2,439,695 |
| Cash and securities segregated pursuant to federal regulations and other segregated assets (2) | 2,719,026 |
| | 3,548,683 |
| Deposits with clearing organizations (3) | 144,230 |
| | 91,482 |
| | $ | 4,592,291 |
| | $ | 6,079,860 |
|
| | (1) | The total amounts presented include: 1) Cash and cash equivalents of the parent company of $251 million as of June 30, 2012 that are not subject to any restrictions. 2) Cash and cash equivalents of $365 million and $471 million as of June 30, 2012 and September 30, 2011, respectively, which are either on deposit at our wholly owned bank subsidiary Raymond James Bank, FSB (effective February 1, 2012, Raymond James Bank, N.A.) (“RJ Bank”) or are otherwise invested by one of our subsidiaries on behalf of RJF, and are not subject to any restrictions. |
| | (2) | Consists of cash maintained in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934. Raymond James & Associates, Inc., as a broker-dealer carrying client accounts, is subject to requirements related to maintaining cash or qualified securities in segregated reserve accounts for the exclusive benefit of its clients. Additionally, Raymond James Ltd. (“RJ Ltd.”) is required to hold client Registered Retirement Savings Plan funds in trust. |
| | (3) | Consists of deposits of cash and cash equivalents or other short-term securities held by other clearing organizations or exchanges. |
NOTE 4 – FAIR VALUE
For a further discussion of our valuation methodologies for assets, liabilities measured at fair value, and the fair value hierarchy, see Note 1, pages 83 – 87, in our 2011 Form 10-K.
There have been no material changes to our valuation methodologies since our year ended September 30, 2011.
Assets and liabilities measured at fair value on a recurring and nonrecurring basis are presented below: | | | | | | | | | | | | | | | | | | | | | | June 30, 2012 | | Quoted prices in active markets for identical assets (Level 1) (1) | | Significant other observable inputs (Level 2) (1) | | Significant unobservable inputs (Level 3) | | Netting adjustments (2) | | Balance as of June 30, 2012 | | | (in thousands) | Assets at fair value on a recurring basis: | | | | | | | | | | | Trading instruments: | | | | | | | | | | | Municipal and provincial obligations | | $ | 7 |
| | $ | 336,009 |
| | $ | — |
| | $ | — |
| | $ | 336,016 |
| Corporate obligations | | 15,481 |
| | 50,827 |
| | — |
| | — |
| | 66,308 |
| Government and agency obligations | | 9,163 |
| | 132,811 |
| | — |
| | — |
| | 141,974 |
| Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”) | | 4,232 |
| | 239,871 |
| | — |
| | — |
| | 244,103 |
| Non-agency CMOs and asset-backed securities (“ABS”) | | — |
| | 5,875 |
| | 31 |
| | — |
| | 5,906 |
| Total debt securities | | 28,883 |
| | 765,393 |
| | 31 |
| | — |
| | 794,307 |
| Derivative contracts | | — |
| | 141,388 |
| | — |
| | (94,564 | ) | | 46,824 |
| Equity securities | | 44,064 |
| | 2,027 |
| | — |
| | — |
| | 46,091 |
| Other securities | | 546 |
| | 14,759 |
| | 5,899 |
| | — |
| | 21,204 |
| Total trading instruments | | 73,493 |
| | 923,567 |
| | 5,930 |
| | (94,564 | ) | | 908,426 |
| Available for sale securities: | | |
| | |
| | |
| | |
| | |
| Agency MBS and CMOs | | — |
| | 371,905 |
| | — |
| | — |
| | 371,905 |
| Non-agency CMOs | | — |
| | 138,760 |
| | 526 |
| | — |
| | 139,286 |
| Other securities | | 12 |
| | — |
| | — |
| | — |
| | 12 |
| Auction rate securities (“ARS”): | | |
| | |
| | |
| | |
| | |
| Municipals | | — |
| | — |
| | 123,753 |
| (3) | — |
| | 123,753 |
| Preferred securities | | — |
| | — |
| | 116,681 |
| | — |
| | 116,681 |
| Total available for sale securities | | 12 |
| | 510,665 |
| | 240,960 |
| | — |
| | 751,637 |
| Private equity and other investments: | | |
| | |
| | |
| | |
| | |
| Private equity investments | | — |
| | — |
| | 335,237 |
| (4) | — |
| | 335,237 |
| Other investments | | 222,831 |
| | 2,897 |
| | 4,128 |
| | — |
| | 229,856 |
| Total private equity and other investments | | 222,831 |
| | 2,897 |
| | 339,365 |
| | — |
| | 565,093 |
| Other assets: | | | | | | | | | | | Derivative contracts | | — |
| | 472,382 |
| | — |
| | — |
| | 472,382 |
| Total assets at fair value on a recurring basis | | $ | 296,336 |
| | $ | 1,909,511 |
| | $ | 586,255 |
| | $ | (94,564 | ) | | $ | 2,697,538 |
| | | | | | | | | | | | Assets at fair value on a nonrecurring basis: | | |
| | |
| | |
| | |
| | |
| Bank loans, net: | | |
| | |
| | |
| | |
| | |
| Impaired loans(5) | | $ | — |
| | $ | 54,850 |
| | $ | 34,659 |
| | $ | — |
| | $ | 89,509 |
| Loans held for sale(6) | | — |
| | 49,276 |
| | — |
| | — |
| | 49,276 |
| Total bank loans, net | | — |
| | 104,126 |
| | 34,659 |
| | — |
| | 138,785 |
| Other Real Estate Owned (“OREO”)(7) | | — |
| | 8,132 |
| | — |
| | — |
| | 8,132 |
| Total assets at fair value on a nonrecurring basis(8) | | $ | — |
| | $ | 112,258 |
| | $ | 34,659 |
| | $ | — |
| | $ | 146,917 |
| | (continued on next page) |
| | | | | | | | | | | | | | | | | | | | | | June 30, 2012 | | Quoted prices in active markets for identical assets (Level 1) (1) | | Significant other observable inputs (Level 2) (1) | | Significant unobservable inputs (Level 3) | | Netting adjustments (2) | | Balance as of June 30, 2012 | | | (in thousands) | | | (continued from previous page) | Liabilities at fair value on a recurring basis: | | | | | | | | | | | Trading instruments sold but not yet purchased: | | | | | | | | | | | Municipal and provincial obligations | | $ | — |
| | $ | 234 |
| | $ | — |
| | $ | — |
| | $ | 234 |
| Corporate obligations | | 32 |
| | 5,986 |
| | — |
| | — |
| | 6,018 |
| Government obligations | | 164,393 |
| | 2,980 |
| | — |
| | — |
| | 167,373 |
| Agency MBS and CMOs | | 277 |
| | 103 |
| | — |
| | — |
| | 380 |
| Total debt securities | | 164,702 |
| | 9,303 |
| | — |
| | — |
| | 174,005 |
| Derivative contracts | | — |
| | 127,375 |
| | — |
| | (124,845 | ) | | 2,530 |
| Equity securities | | 10,309 |
| | 50 |
| | — |
| | — |
| | 10,359 |
| Total trading instruments sold but not yet purchased | | 175,011 |
| | 136,728 |
| | — |
| | (124,845 | ) | | 186,894 |
| Trade and other payables: | | | | | | | | | | | Derivative contracts | | — |
| | 481,151 |
| | — |
| | — |
| | 481,151 |
| Other | | — |
| | — |
| | 60 |
| | — |
| | 60 |
| Total trade and other payables | | — |
| | 481,151 |
| | 60 |
| | — |
| | 481,211 |
| Total liabilities at fair value on a recurring basis | | $ | 175,011 |
| | $ | 617,879 |
| | $ | 60 |
| | $ | (124,845 | ) | | $ | 668,105 |
|
| | (1) | We had no transfers of financial instruments from Level 1 to Level 2 during either the three or nine month periods ended June 30, 2012. We had $105 thousand and $541 thousand in transfers of financial instruments from Level 2 to Level 1 during the three and nine month periods ended June 30, 2012, respectively. These transfers were a result of an increase in availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement. Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized. |
| | (2) | We have elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists. |
| | (3) | Includes $48 million of Jefferson County, Alabama Limited Obligation School Warrants ARS and $21 million of Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS. |
| | (4) | Includes $230 million in private equity investments of which the weighted-average portion we own is approximately 30%. Effectively, the economics associated with the portions of these investments we do not own become a component of noncontrolling interests on our Condensed Consolidated Statements of Financial Condition, and amounted to approximately $161 million of that total as of June 30, 2012. |
| | (5) | There was a $55 million transfer of impaired loans from Level 3 to Level 2 during the nine month period ended June 30, 2012 due to the increase in availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement. Our analysis indicates that comparative sales data is a reasonable estimate of fair value, therefore, more consideration was given to this observable input. |
| | (6) | Includes individual loans classified as held for sale, which were recorded at a fair value lower than cost. |
| | (7) | Represents the fair value of foreclosed properties which were measured at a fair value subsequent to their initial classification as OREO. The recorded value in the Condensed Consolidated Statements of Financial Condition is net of the estimated selling costs. |
| | (8) | The adjustment to fair value of the nonrecurring fair value measures for the nine months ended June 30, 2012 resulted in $13.7 million in additional provision for loan losses, as well as $1.5 million in other losses during the nine month period. |
| | | | | | | | | | | | | | | | | | | | | | September 30, 2011 | | Quoted prices in active markets for identical assets (Level 1) (1) | | Significant other observable inputs (Level 2) (1) | | Significant unobservable inputs (Level 3) | | Netting adjustments (2) | | Balance as of September 30, 2011 | | | (in thousands) | Assets at fair value on a recurring basis: | | | | | | | | | | | Trading instruments: | | | | | | | | | | | Municipal and provincial obligations | | $ | 8 |
| | $ | 164,019 |
| | $ | 375 |
| | $ | — |
| | $ | 164,402 |
| Corporate obligations | | 4,137 |
| | 23,470 |
| | — |
| | — |
| | 27,607 |
| Government and agency obligations | | 22,620 |
| | 13,486 |
| | — |
| | — |
| | 36,106 |
| Agency MBS and CMOs | | 31 |
| | 147,726 |
| | — |
| | — |
| | 147,757 |
| Non-agency CMOs and ABS | | — |
| | 49,069 |
| | 50 |
| | — |
| | 49,119 |
| Total debt securities | | 26,796 |
| | 397,770 |
| | 425 |
| | — |
| | 424,991 |
| Derivative contracts | | — |
| | 126,867 |
| | — |
| | (88,563 | ) | | 38,304 |
| Equity securities | | 17,908 |
| | 3,274 |
| | 15 |
| | — |
| | 21,197 |
| Other securities | | 816 |
| | 7,463 |
| | — |
| | — |
| | 8,279 |
| Total trading instruments | | 45,520 |
| | 535,374 |
| | 440 |
| | (88,563 | ) | | 492,771 |
| | | | | | | | | | | | Available for sale securities: | | |
| | |
| | |
| | |
| | |
| Agency MBS and CMOs | | — |
| | 178,732 |
| | — |
| | — |
| | 178,732 |
| Non-agency CMOs | | — |
| | 145,024 |
| | 851 |
| | — |
| | 145,875 |
| Other securities | | 10 |
| | — |
| | — |
| | — |
| | 10 |
| ARS: | | |
| | |
| | |
| | |
| |
|
| Municipals | | — |
| | — |
| | 79,524 |
| (3) | — |
| | 79,524 |
| Preferred securities | | — |
| | — |
| | 116,524 |
| | — |
| | 116,524 |
| Total available for sale securities | | 10 |
| | 323,756 |
| | 196,899 |
| | — |
| | 520,665 |
| | | | | | | | | | | | Private equity and other investments: | | |
| | |
| | |
| | |
| | |
| Private equity investments | | — |
| | — |
| | 168,785 |
| (4) | — |
| | 168,785 |
| Other investments | | 123,421 |
| | 63 |
| | 2,087 |
| | — |
| | 125,571 |
| Total private equity and other investments | | 123,421 |
| | 63 |
| | 170,872 |
| | — |
| | 294,356 |
| | | | | | | | | | | | Other assets | | — |
| | 2,696 |
| | — |
| | — |
| | 2,696 |
| Total assets at fair value on a recurring basis | | $ | 168,951 |
| | $ | 861,889 |
| | $ | 368,211 |
| | $ | (88,563 | ) | | $ | 1,310,488 |
| | | | | | | | | | | | Assets at fair value on a nonrecurring basis: | | |
| | |
| | |
| | |
| | |
| Bank loans, net (5) | | $ | — |
| | $ | 39,621 |
| | 111,941 |
| (7) | $ | — |
| | $ | 151,562 |
| OREO(6) | | — |
| | 11,278 |
| | — |
| | — |
| | 11,278 |
| Total assets at fair value on a nonrecurring basis | | $ | — |
| | $ | 50,899 |
| | $ | 111,941 |
| | $ | — |
| | $ | 162,840 |
| | | | | | | | | | | | (continued on next page) |
| | | | | | | | | | | | | | | | | | | | | | September 30, 2011 | | Quoted prices in active markets for identical assets (Level 1) (1) |
| | Significant other observable inputs (Level 2) (1) | | Significant unobservable inputs (Level 3) |
| | Netting adjustments (2) | | Balance as of September 30, 2011 | (in thousands) | (continued from previous page) | Liabilities at fair value on a recurring basis: | | |
| | |
| | |
| | |
| | |
| Trading instruments sold but not yet purchased: | | |
| | |
| | |
| | |
| | |
| Municipal and provincial obligations | | $ | — |
| | $ | 607 |
| | $ | — |
| | $ | — |
| | $ | 607 |
| Corporate obligations | | — |
| | 5,625 |
| | — |
| | — |
| | 5,625 |
| Government obligations | | 56,472 |
| | — |
| | — |
| | — |
| | 56,472 |
| Agency MBS and CMOs | | 159 |
| | — |
| | — |
| | — |
| | 159 |
| Total debt securities | | 56,631 |
| | 6,232 |
| | — |
| | — |
| | 62,863 |
| Derivative contracts | | — |
| | 112,457 |
| | — |
| | (105,869 | ) | | 6,588 |
| Equity securities | | 6,488 |
| | 211 |
| | — |
| | — |
| | 6,699 |
| Total trading instruments sold but not yet purchased | | 63,119 |
| | 118,900 |
| | — |
| | (105,869 | ) | | 76,150 |
| Trade and other payables: | | | | | | | | | | | Other liabilities | | — |
| | 20 |
| | 40 |
| | — |
| | 60 |
| Total trade and other payables | | $ | — |
| | $ | 20 |
| | $ | 40 |
| | $ | — |
| | $ | 60 |
| Total liabilities at fair value on a recurring basis | | $ | 63,119 |
| | $ | 118,920 |
| | $ | 40 |
| | $ | (105,869 | ) | | $ | 76,210 |
|
| | (1) | We had no significant transfers of financial instruments between Level 1 and Level 2 during the period ended September 30, 2011. Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized. |
| | (2) | We have elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists. |
| | (3) | Includes $53 million of Jefferson County, Alabama Limited Obligation School Warrants ARS and $19 million of Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS. |
| | (4) | Includes $88 million in private equity investments of which the weighted-average portion we own is approximately 20%. Effectively, the economics associated with the portions of these investments we do not own become a component of noncontrolling interests on our Condensed Consolidated Statements of Financial Condition, and amounted to approximately $70 million of that total as of September 30, 2011. |
| | (5) | Includes individual loans classified as held for sale, which were recorded at a fair value lower than cost. |
| | (6) | Represents the fair value of foreclosed properties which were measured at a fair value subsequent to their initial classification as OREO. The recorded value in the Condensed Consolidated Statements of Financial Condition is net of the estimated selling costs. |
| | (7) | At September 30, 2011, Level 3 assets include residential first mortgage nonaccrual loans for which a charge-off had been recorded. See Note 7, pages 110 – 116 of our 2011 Form 10-K. |
Changes in Level 3 recurring fair value measurements
The realized and unrealized gains and losses for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.
Additional information about Level 3 assets and liabilities measured at fair value on a recurring basis is presented below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended June 30, 2012 Level 3 assets at fair value (in thousands) | Financial assets | | Financial liabilities | | Trading instruments | | Available for sale securities | | Private equity and other investments | | Payables- trade and other | | Municipal & provincial obligations | | Non- agency CMOs & ABS | | Equity securities | | Other securities | | Non- agency CMOs | | ARS – municipals | | ARS - preferred securities | | Private equity investments | | Other investments | | Other liabilities | Fair value March 31, 2012 | $ | — |
| | $ | 34 |
| | $ | — |
| | $ | 6,618 |
| | $ | 633 |
| | $ | 71,909 |
| | $ | 102,092 |
| | $ | 181,446 |
| | $ | 2,193 |
| | $ | (39 | ) | Total gains (losses) for the period: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| Included in earnings | — |
| | — |
| | — |
| | (63 | ) | | (157 | ) | | (947 | ) | | — |
| | 20,983 |
| (1) | 9 |
| | (21 | ) | Included in other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | 2,209 |
| | — |
| | |
|