XFRA:RJF Raymond James Financial Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 March 31, 2012

     or

o
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 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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x
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.

137,825,868 shares of common stock as of May 4, 2012

 
 

 



   
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
 
       
   
Form 10-Q for the quarter ended March 31, 2012
 
       
   
INDEX
 
       
     
PAGE
PART I.
 
FINANCIAL INFORMATION
 
       
Item 1.
 
Financial Statements (Unaudited)
 
       
   
Condensed Consolidated Statements of Financial Condition as of March 31, 2012 and September 30, 2011 (Unaudited)
3
       
   
Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended March 31, 2012 and March 31, 2011 (Unaudited)
4
       
   
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended March 31, 2012 and March 31, 2011 (Unaudited)
5
       
   
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and March 31, 2011 (Unaudited)
6
       
   
Notes to Condensed Consolidated Financial Statements (Unaudited)
7
       
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
50
       
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
87
       
Item 4.
 
Controls and Procedures
94
       
PART II.
 
OTHER INFORMATION
 
       
Item 1.
 
Legal Proceedings
95
       
Item 1A.
 
Risk Factors
95
       
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
96
       
Item 3.
 
Defaults upon Senior Securities
96
       
Item 5.
 
Other Information
96
       
Item 6.
 
Exhibits
97
       
   
Signatures
99


 
2

 


PART I   FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

   
March 31, 2012
   
September 30, 2011
 
   
($ in thousands)
 
Assets:
           
Cash and cash equivalents
  $ 2,875,858     $ 2,439,695  
Assets segregated pursuant to regulations and other segregated assets
    3,458,364       3,548,683  
Securities purchased under agreements to resell and other collateralized financings
    340,158       398,247  
Financial instruments, at fair value:
               
Trading instruments
    451,851       492,771  
Available for sale securities
    576,142       520,665  
Private equity and other investments
    299,859       294,356  
Receivables:
               
Brokerage clients, net
    1,671,078       1,716,828  
Stock borrowed
    198,294       225,561  
Bank loans, net
    7,445,828       6,547,914  
Brokers-dealers and clearing organizations
    92,262       96,096  
Other
    623,406       536,364  
Deposits with clearing organizations
    86,417       91,482  
Prepaid expenses and other assets
    416,250       364,264  
Investments in real estate partnerships held by consolidated variable interest entities
    306,040       320,384  
Property and equipment, net
    181,752       169,850  
Deferred income taxes, net
    179,893       171,911  
Goodwill
    71,924       71,924  
                 
Total assets
  $ 19,275,376     $ 18,006,995  
                 
Liabilities and equity:
               
Trading instruments sold but not yet purchased, at fair value
  $ 80,423     $ 76,150  
Securities sold under agreements to repurchase
    137,026       188,745  
Payables:
               
Brokerage clients
    4,751,071       4,690,414  
Stock loaned
    544,373       814,589  
Bank deposits
    7,913,846       7,739,322  
Brokers-dealers and clearing organizations
    67,067       111,408  
Trade and other
    355,076       309,723  
Other borrowings
    349,600       -  
Accrued compensation, commissions and benefits
    364,409       452,849  
Loans payable of consolidated variable interest entities
    90,950       99,982  
Corporate debt
    1,205,664       611,968  
                 
Total liabilities
    15,859,505       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 142,282,732 at
March 31, 2012 and 130,670,086 at September 30, 2011
    1,396       1,271  
Additional paid-in capital
    974,893       565,135  
Retained earnings
    2,222,857       2,125,818  
Treasury stock, at cost; 4,985,142 common shares at March 31, 2012 and 4,263,029 common shares at September 30, 2011
    (114,608 )     (95,000 )
Accumulated other comprehensive income
    3,315       (9,605 )
Total equity attributable to Raymond James Financial, Inc.
    3,087,853       2,587,619  
Noncontrolling interests
    328,018       324,226  
                 
Total equity
    3,415,871       2,911,845  
                 
Total liabilities and equity
  $ 19,275,376     $ 18,006,995  
 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
 
3

 
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
   
Three months ended March 31,
   
Six months ended March 31,
 
   
2012
   
2011
   
2012
   
2011
 
   
(in thousands, except per share amounts)
 
 
Revenues:
                       
Securities commissions and fees
  $ 558,527     $ 563,710     $ 1,069,861     $ 1,097,849  
Investment banking
    57,954       63,131       97,290       122,100  
Investment advisory fees
    54,269       52,643       107,774       105,053  
Interest
    108,852       96,811       210,948       201,197  
Account and service fees
    75,855       70,904       149,865       140,189  
Net trading profits
    12,979       15,246       22,322       21,568  
Other
    21,417       4,299       30,610       9,121  
                                 
Total revenues
    889,853       866,744       1,688,670       1,697,077  
                                 
Interest expense
    17,916       14,687       33,956       31,191  
Net revenues
    871,937       852,057       1,654,714       1,665,886  
                                 
Non-interest expenses:
                               
Compensation, commissions and benefits
    596,891       579,587       1,138,513       1,131,471  
Communications and information processing
    43,741       36,380       81,308       67,525  
Occupancy and equipment costs
    27,231       26,773       53,168       53,002  
Clearance and floor brokerage
    9,070       9,447       16,524       19,364  
Business development
    27,382       22,820       55,221       46,765  
Investment sub-advisory fees
    7,143       7,867       13,705       14,771  
Bank loan loss provision
    5,154       8,637       12,610       19,869  
Acquisition related expenses
    19,604       -       19,604       -  
Other
    27,819       36,308       51,511       62,135  
Total non-interest expenses
    764,035       727,819       1,442,164       1,414,902  
                                 
Income including noncontrolling interests and before provision for income taxes
    107,902       124,238       212,550       250,984  
                                 
Provision for income taxes
    42,628       45,320       86,154       94,111  
                                 
Net income including noncontrolling interests
    65,274       78,918       126,396       156,873  
Net loss attributable to noncontrolling interests
    (3,595 )     (1,999 )     (9,798 )     (5,767 )
Net income attributable to Raymond James Financial, Inc.
  $ 68,869     $ 80,917     $ 136,194     $ 162,640  
                                 
Net income per common share – basic
  $ 0.52     $ 0.64     $ 1.05     $ 1.29  
Net income per common share – diluted
  $ 0.52     $ 0.64     $ 1.05     $ 1.29  
Weighted-average common shares outstanding – basic
    129,353       122,396       126,201       121,752  
Weighted-average common and common equivalent shares outstanding – diluted
    130,644       123,265       126,989       122,238  
                                 
Net income attributable to Raymond James Financial, Inc.
  $ 68,869     $ 80,917     $ 136,194     $ 162,640  
Other comprehensive income, net of tax:(1)
                               
Change in unrealized (loss) gain on available for sale securities and non-credit portion of other-than-temporary impairment losses
    11,236       2,024       5,575       6,921  
Change in currency translations
    2,525       3,703       7,345       9,207  
Total comprehensive income
  $ 82,630     $ 86,644     $ 149,114     $ 178,768  
                                 
Other-than-temporary impairment:
                               
Total other-than-temporary impairment, net
  $ 10,853     $ (2,163 )   $ 6,666     $ (1,384 )
Portion of recoveries recognized in other comprehensive income (before taxes)
    (12,190 )     (1,056 )     (10,099 )     (4,014 )
Net impairment losses recognized in other revenue
  $ (1,337 )   $ (3,219 )   $ (3,433 )   $ (5,398 )
 
(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).

 
4

 
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
   
Six months ended March 31,
 
   
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
    14       20 (2)
Balance, end of period
    1,396       1,264  
                 
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
    362,121 (1)     -  
Employee stock purchases
    5,567       4,486  
Exercise of stock options and vesting of restricted stock units, net of forfeitures
    11,783       30,343  
Restricted stock, stock option and restricted stock unit expense
    28,426       23,960  
Excess tax benefit (deficiency) from share-based payments
    1,640       (236 )
Other
    221       3,107 (2)
Balance, end of period
    974,893       538,019  
                 
Retained earnings:
               
Balance, beginning of year
    2,125,818       1,909,865  
Net income attributable to Raymond James Financial, Inc.
    136,194       162,640  
Cash dividends declared
    (34,318 )     (32,868 )
Other
    (4,837 )     4,370  
Balance, end of period
    2,222,857       2,044,007  
                 
Treasury stock:
               
Balance, beginning of year
    (95,000 )     (81,574 )
Purchases/surrenders
    (18,900 )     (6,659 )
Exercise of stock options and vesting of restricted stock units, net of forfeitures
    (708 )     2,802  
Balance, end of period
    (114,608 )     (85,431 )
                 
Accumulated other comprehensive income: (3)
               
Balance, beginning of year
    (9,605 )     (6,197 )
Net unrealized (loss) gain on available for sale securities and non-credit portion of other-than-temporary impairment losses (4)
    5,575       6,921  
Net change in currency transactions
    7,345       9,207  
Balance, end of period
    3,315       9,931  
Total equity attributable to Raymond James Financial, Inc.
  $ 3,087,853     $ 2,507,790  
                 
Noncontrolling interests:
               
Balance, beginning of year
  $ 324,226     $ 294,052  
Net loss attributable to noncontrolling interests
    (9,798 )     (5,767 )
Capital contributions
    27,383       18,052  
Distributions
    (3,539 )     (3,225 )
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  
Other
    (10,254 )     660  
Balance, end of period
    328,018       311,618  
Total equity
  $ 3,415,871     $ 2,819,408  

(1)  
During the six months ended March 31, 2012, in a registered public offering, 11,075,000 common shares were issued generating approximately $362 million in net proceeds (after consideration of the underwriting discount and direct expenses of the offering).

(2)  
During the six months ended March 31, 2011, approximately 243,000 exchangeable shares were exchanged for common stock on a one-for-one basis.

(3)  
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.

(4)  
Net of tax.
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
 
5

 
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
Six months ended March 31,
 
   
2012
   
2011
 
   
(in thousands)
 
Cash flows from operating activities:
           
Net income attributable to Raymond James Financial, Inc.
  $ 136,194     $ 162,640  
Net loss attributable to noncontrolling interests
    (9,798 )     (5,767 )
Net income including noncontrolling interests
    126,396       156,873  
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
               
Depreciation and amortization
    20,053       19,802  
Deferred income taxes
    (10,033 )     (25,848 )
Premium and discount amortization on available for sale securities and unrealized/realized gain on other investments
    (13,425 )     (1,669 )
Provisions for loan losses, legal proceedings, bad debts and other accruals
    9,638       30,020  
Share-based compensation expense
    30,340       27,041  
Other
    (1,310 )     (1,317 )
Net change in:
               
Assets segregated pursuant to regulations and other segregated assets
    90,319       1,025,583  
Securities purchased under agreements to resell and other collateralized financings, net of securities sold under agreements to repurchase
    6,370       (216,778 )
Stock loaned, net of stock borrowed
    (242,949 )     (136,296 )
Brokerage client receivables and other accounts receivable, net
    (18,653 )     (157,246 )
Trading instruments, net
    44,653       86,277  
Prepaid expenses and other assets
    27,713       11,120  
Brokerage client payables and other accounts payable
    83,022       390,655  
Accrued compensation, commissions and benefits
    (90,531 )     (54,660 )
Purchase and origination of loans held for sale, net of proceeds from sale of securitizations and loans held for sale
    9,677       (19,511 )
Excess tax benefits from stock-based payment arrangements
    (2,210 )     (1,069 )
Net cash provided by operating activities
    69,070       1,132,977  
Cash flows from investing activities:
               
Additions to property and equipment
    (31,182 )     (15,974 )
(Increase) decrease in loans, net
    (961,708 )     24,523  
(Purchases) redemptions of Federal Home Loan Bank stock, net
    (1,168 )     4,777  
(Purchases) sales of private equity and other investments, net
    (8,361 )     14,328  
Purchases of available for sale securities
    (111,884 )     (1,832 )
Available for sale securities maturations, repayments and redemptions
    61,380       66,615  
Proceeds from sales of available for sale securities
    -       11,444  
Investments in real estate partnerships held by consolidated variable interest entities, net of other investing activity
    330       (2,326 )
Net cash (used in) provided by investing activities
    (1,052,593 )     101,555  
Cash flows from financing activities:
               
Proceeds from (repayments of) borrowed funds, net
    932,079       (2,558,602 )
Proceeds from issuance of shares in registered public offering
    362,232       -  
Repayments of borrowings by consolidated variable interest entities which are real estate partnerships
    (11,600 )     (11,859 )
Proceeds from capital contributed to and borrowings of consolidated variable interest entities which are real estate partnerships
    101       17,528  
Purchase of additional equity interest in subsidiary
    (4,017 )     -  
Exercise of stock options and employee stock purchases
    16,144       37,202  
Increase (decrease) in bank deposits
    174,524       (369,135 )
Purchase of treasury stock
    (19,222 )     (6,916 )
Dividends on common stock
    (32,878 )     (32,868 )
Excess tax benefits from share-based payment arrangements
    2,210       1,069  
Net cash provided by (used in) financing activities
    1,419,573       (2,923,581 )
                 
Currency adjustment:
               
Effect of exchange rate changes on cash
    113       978  
Net increase (decrease) in cash and cash equivalents
    436,163       (1,688,071 )
Cash and cash equivalents at beginning of year
    2,439,695       2,943,239  
Cash and cash equivalents at end of period
  $ 2,875,858     $ 1,255,168  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $  36,311     $  32,565  
Cash paid for income taxes
  $ 110,488     $ 118,750  
Non-cash transfers of loans to other real estate owned
  $  10,954     $ 9,936  

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
 
6

 

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 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.

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 $244.3 million and $231.5 million at March 31, 2012 and September 30, 2011, respectively.  The related allowance for doubtful accounts balance is $2.2 million and $5.9 million at March 31, 2012 and September 30, 2011, respectively.  Of the March 31, 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 $1.4 million.


 
7

 


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 $29.8 million and $57.5 million of revenue previously reported as a component of other revenues for the three and six months ended March 31, 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

On January 11, 2012, RJF entered into a definitive stock purchase agreement (the “Stock Purchase Agreement”) to acquire all of the issued and outstanding shares of Morgan Keegan & Company, Inc. and MK Holding, Inc. and certain of its related affiliates (“Morgan Keegan”) from Regions Financial Corporation (“Regions”).  This transaction closed on April 2, 2012.  This acquisition expands both our private client wealth management and our capital markets businesses.

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 six months ended March 31, 2012, we incurred the following acquisition related expenses:

   
For the three and six
month periods ended
 
   
March 31, 2012
 
   
(in thousands)
 
Financial advisory fees
  $ 7,020  
Acquisition bridge financing facility fees
    5,684  
Severance
    3,183  
Legal
    2,495  
Travel
    349  
Other
    873  
Total acquisition related expenses
  $ 19,604  
 
We will apply the acquisition method of accounting to this transaction as of April 2, 2012.  Our fiscal year third quarter 2012 results of operations will include the operations of Morgan Keegan for the period from April 2, 2012 to June 30, 2012. Due to the timing of the acquisition closing, the outcome of the application of the acquisition method and the resultant impact on our condensed consolidated financial statements is incomplete and therefore not included in this quarterly report.

Under the terms of the Stock Purchase Agreement, upon closing Regions received approximately $1.2 billion in cash from RJF in exchange for the Morgan Keegan shares. This purchase price represents a $230 million premium over a preliminary $970 million tangible book value at closing.  The Stock Purchase Agreement 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. The purchase price is subject to final determination of tangible book value as of the closing date and a potential downward adjustment if certain revenue retention hurdles are not met within 90-days post-closing.  RJF anticipates providing approximately $215 million in the form of either cash or restricted stock units to certain key Morgan Keegan revenue producers as part of an employee retention program.  Concurrent with the execution of the Stock Purchase Agreement, RJF executed employment agreements with certain key members of the Morgan Keegan management team.  In addition to customary indemnity for breach of representations and warranties and covenants, the Stock Purchase Agreement also provides that Regions will indemnify RJF for losses incurred in connection with any litigation or similar matter relating to pre-closing actions. Certain indemnifiable losses are subject to an annual $2 million deductible for three years.

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 financing transactions during the quarter ended March 31, 2012, RJF terminated the Bridge Financing Agreement on March 10, 2012.
 
8

 

On April 2, 2012, certain subsidiaries of RJF (the “Borrowers”) entered into a credit agreement (the “Regions Credit Agreement”) with Regions Bank, an Alabama banking corporation (the “Lender”).  The Regions Credit Agreement provided for a $200 million loan made by the Lender to the Borrowers and is subject to a guarantee in favor of the Lender provided by RJF. The proceeds from the loan were disbursed by the Borrowers to RJF for working capital and general corporate purposes. The obligations under the Credit Agreement are secured by, subject to certain exceptions, all of the Borrowers’ personal property, including (i) all present and future auction rate securities owned by any Borrower (the “Pledged Auction Rate Securities”), (ii) all equity interests issued by certain subsidiaries, and (iii) all present and future equity interests and debt securities owned by any Borrower. The loan matures on April 2, 2015 and bears interest at a monthly variable rate equal to LIBOR plus 2.75%.


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:

   
March 31,
2012
   
September 30,
2011
 
   
(in thousands)
 
Cash and cash equivalents:
           
Cash in banks
  $ 2,870,287     $ 2,438,249  
Money market investments
    5,571       1,446  
Total cash and cash equivalents (1)
    2,875,858       2,439,695  
                 
Cash and securities segregated pursuant to federal regulations and other segregated assets (2)
    3,458,364       3,548,683  
Deposits with clearing organizations (3)
    86,417       91,482  
    $ 6,420,639     $ 6,079,860  

(1)  
The total amount presented includes $1.6 billion and $471 million of cash and cash equivalents as of March 31, 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.  The $1.6 billion at March 31, 2012 includes proceeds from the completion of certain equity and debt financing transactions related to the acquisition of Morgan Keegan which closed on April 2, 2012.  See Note 2 for more information.

(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.

 
9

 


Assets and liabilities measured at fair value on a recurring and nonrecurring basis are presented below:


March 31, 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
March 31, 2012
 
   
(in thousands)
 
Assets at fair value on a recurring basis:
                             
Trading instruments:
                             
Municipal and provincial obligations
  $ 7     $ 150,273     $ -     $ -     $ 150,280  
Corporate obligations
    6,457       20,463       -       -       26,920  
Government and agency obligations
    24,316       23,206       -       -       47,522  
Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)
    51       128,513       -       -       128,564  
Non-agency CMOs and asset-backed securities (“ABS”)
    -       30,319       34       -       30,353  
Total debt securities
    30,831       352,774       34       -       383,639  
Derivative contracts
    -       117,362       -       (81,522 )     35,840  
Equity securities
    20,031       3,316       -       -       23,347  
Other securities
    689       1,718       6,618       -       9,025  
Total trading instruments
    51,551       475,170       6,652       (81,522 )     451,851  
Available for sale securities:
                                       
Agency MBS and CMOs
    -       256,670       -       -       256,670  
Non-agency CMOs
    -       144,825       633       -       145,458  
Other securities
    13       -       -       -       13  
Auction rate securities (“ARS”):
                                       
Municipals
    -       -       71,909   (3)     -       71,909  
Preferred securities
    -       -       102,092       -       102,092  
Total available for sale securities
    13       401,495       174,634       -       576,142  
Private equity and other investments:
                                       
Private equity investments
    -       -       181,446   (4)     -       181,446  
Other investments
    116,154       66       2,193       -       118,413  
Total private equity and other investments
    116,154       66       183,639       -       299,859  
Other assets
    -       82       -       -       82  
Total assets at fair value on a recurring basis
  $ 167,718     $ 876,813     $ 364,925     $ (81,522 )   $ 1,327,934  
Assets at fair value on a nonrecurring basis:
                                       
Bank loans, net:
                                       
Impaired loans(5)
  $ -     $ 55,142     $ 34,419     $ -     $ 89,561  
Loans held for sale(6)
    -       57,655       -       -       57,655  
Total bank loans, net
    -       112,797       34,419       -       147,216  
Other Real Estate Owned (“OREO”) (7)
    -       4,649       -       -       4,649  
Total assets at fair value on a nonrecurring basis(8)
  $ -     $ 117,446     $ 34,419       -     $ 151,865  
                                         
(continued on next page)
 

 
10

 


March 31, 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
March 31, 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
  $ -     $ 357     $ -     $ -     $ 357  
Corporate obligations
    -       505       -       -       505  
Government obligations
    66,030       -       -       -       66,030  
Agency MBS and CMOs
    142       -       -       -       142  
Total debt securities
    66,172       862       -       -       67,034  
Derivative contracts
    -       101,096       -       (98,030 )     3,066  
Equity securities
    10,243       80       -       -       10,323  
Total trading instruments sold but not yet purchased
    76,415       102,038       -       (98,030 )     80,423  
Other liabilities
    -       430       39       -       469  
Total liabilities at fair value on a recurring basis
  $ 76,415     $ 102,468     $ 39     $ (98,030 )   $ 80,892  


(1)  
We had no transfers of financial instruments from Level 1 to Level 2 during the three or six month periods ended March 31, 2012.  We had $436 thousand in transfers of financial instruments from Level 2 to Level 1 during the three and six month period ended March 31, 2012.  The 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 $45.8 million of Jefferson County, Alabama Limited Obligation School Warrants ARS and $19.1 million of Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS.

(4)  
Includes $99.8 million in private equity investments of which the weighted-average portion we own is approximately 22%.  Effectively, the economics associated with the portion of this investment we do not own becomes a component of noncontrolling interests on our Condensed Consolidated Statements of Financial Condition, and amounted to approximately $77.9 million of that total as of March 31, 2012.

(5)  
There was a $55 million transfer of impaired loans from Level 3 to Level 2 during the three month period ended March 31, 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 six months ended March 31, 2012 resulted in $10 million in additional provision for loan losses, as well as $790 thousand in other losses during the six month period.

 
11

 


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  
                                         
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  
Other liabilities
    -       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 $53.2 million of Jefferson County, Alabama Limited Obligation School Warrants ARS and $19.2 million of Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS.
(4)  
Includes $87.9 million in private equity investments of which the weighted-average portion we own is approximately 20%.  Effectively, the economics associated with the portion of this investment we do not own becomes 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.

 
12

 

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 March 31, 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
December 31, 2011
  $  135     $  37     $  179     $  5,635     $  741     $   74,707     $  98,537     $   162,074     $  2,040     $ (29 )
Total gains (losses) for the period:
                                                                               
Included in earnings
    9       -       15       (218 )     (138 )     -       -       8,026 (1)     154       (10 )
Included in other comprehensive income
    -       -       -       -       39       (2,798 )     3,555       -       -       -  
Purchases and contributions
    -       -       -       5,189       -       -       -       12,895       -       -  
Sales
    -       -       (16 )     (3,494 )     -       -       -       -       (1 )     -  
Redemptions by issuer
    -       -       -       -       -       -       -       -       -       -  
Distributions
    -       (3 )     -       (494 )     (9 )     -       -       (1,549 )     -       -  
Transfers:
                                                                               
Into Level 3
    -       -       -       -       -       -       -       -       -       -  
Out of Level 3(2)
    (144 )     -       (178 )     -       -       -       -       -       -       -  
Fair value
March 31, 2012
  $  -     $  34     $  -     $  6,618     $  633     $   71,909     $ 102,092     $   181,446     $  2,193     $ (39 )
                                                                                 
Change in unrealized gains
  (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period
  $ -     $ 64     $ -     $ (218 )   $ (138 )   $ (2,798 )   $ 3,555     $ 8,026 (1)   $ 117     $ -  

(1)  
Primarily results from valuation adjustments of certain private equity investments.  Since we only own a portion of these investments, our share of the net valuation adjustments resulted in a gain of $2.8 million which is included in net income attributable to RJF (after noncontrolling interests).  The noncontrolling interests' share of the net valuation adjustments was a gain of approximately $5.2 million.

(2)  
The transfers out of Level 3 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.


 
13

 


Six months ended March 31, 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
September 30, 2011
  $  375     $  50     $  15     $  -     $  851     $   79,524     $  116,524     $   168,785     $  2,087     $ (40 )
Total gains (losses) for the period:
                                                                               
Included in earnings
    89       (4 )     11       (1,160 )     (138 )     (540 )     (75 )     8,030 (1)     107       1  
Included in other comprehensive income
    -       -       -       -       (54 )