RJF-2012.12.31-10Q
Index

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 December 31, 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.

139,456,462 shares of common stock as of February 4, 2013



RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Form 10-Q for the quarter ended December 31, 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.
 
 
 
 
 
 
 
Signatures

2
Index

PART I FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS


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

 
 
 
 
 
December 31, 2012
 
September 30, 2012
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
2,187,707

 
$
1,980,020

Assets segregated pursuant to regulations and other segregated assets
3,421,505

 
2,784,199

Securities purchased under agreements to resell and other collateralized financings
598,579

 
565,016

Financial instruments, at fair value:
 

 
 

Trading instruments
826,194

 
804,272

Available for sale securities
714,911

 
733,874

Private equity investments
329,767

 
336,927

Other investments
295,702

 
310,806

Derivative instruments associated with offsetting matched book positions
431,807

 
458,265

Receivables:
 

 
 

Brokerage clients, net
2,037,742

 
2,067,117

Stock borrowed
173,500

 
200,160

Bank loans, net
8,459,998

 
7,991,512

Brokers-dealers and clearing organizations
89,829

 
225,306

Loans to financial advisors, net
440,365

 
445,497

Other
368,934

 
427,641

Deposits with clearing organizations
166,643

 
163,848

Prepaid expenses and other assets
660,469

 
605,566

Investments in real estate partnerships held by consolidated variable interest entities
297,535

 
299,611

Property and equipment, net
235,733

 
231,195

Deferred income taxes, net
164,541

 
168,187

Goodwill and identifiable intangible assets, net
374,510

 
361,246

Total assets
$
22,275,971

 
$
21,160,265



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

3
Index


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(continued from previous page)
 
 
 
 
 
December 31, 2012
 
September 30, 2012
 
($ in thousands)
Liabilities and equity:
 

 
 

Trading instruments sold but not yet purchased, at fair value
$
202,032

 
$
232,436

Securities sold under agreements to repurchase
373,290

 
348,036

Derivative instruments associated with offsetting matched book positions, at fair value
431,807

 
458,265

Payables:
 

 
 

Brokerage clients
5,553,862

 
4,584,656

Stock loaned
267,034

 
423,519

Bank deposits
8,946,665

 
8,599,713

Brokers-dealers and clearing organizations
124,461

 
103,164

Trade and other
626,706

 
628,734

Other borrowings
132,000

 
—

Accrued compensation, commissions and benefits
537,055

 
690,654

Loans payable of consolidated variable interest entities
71,387

 
81,713

Corporate debt
1,200,090

 
1,329,093

Total liabilities
18,466,389

 
17,479,983

Commitments and contingencies (see Note 16)


 


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 143,635,004 at December 31, 2012 and 142,853,667 at September 30, 2012
1,417

 
1,404

Additional paid-in capital
1,071,580

 
1,030,288

Retained earnings
2,412,561

 
2,346,563

Treasury stock, at cost; 5,098,475 common shares at December 31, 2012 and 5,117,049 common shares at September 30, 2012
(121,656
)
 
(118,762
)
Accumulated other comprehensive income
15,899

 
9,447

Total equity attributable to Raymond James Financial, Inc.
3,379,801

 
3,268,940

Noncontrolling interests
429,781

 
411,342

Total equity
3,809,582

 
3,680,282

Total liabilities and equity
$
22,275,971

 
$
21,160,265






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


4
Index

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

 
Three months ended December 31,
 
2012
 
2011
 
(in thousands, except per share amounts)
Revenues:
 
 
 
Securities commissions and fees
$
738,584

 
$
511,334

Investment banking
84,870

 
39,336

Investment advisory fees
62,070

 
53,505

Interest
123,126

 
102,096

Account and service fees
88,451

 
74,010

Net trading profits
9,339

 
9,343

Other
31,069

 
9,193

Total revenues
1,137,509

 
798,817

Interest expense
28,021

 
16,040

Net revenues
1,109,488

 
782,777

Non-interest expenses:
 

 
 

Compensation, commissions and benefits
762,548

 
541,622

Communications and information processing
60,366

 
37,567

Occupancy and equipment costs
39,478

 
25,937

Clearance and floor brokerage
10,168

 
7,454

Business development
30,629

 
27,839

Investment sub-advisory fees
8,050

 
6,562

Bank loan loss provision
2,923

 
7,456

Acquisition related expenses
17,382

 
—

Other
30,777

 
23,692

Total non-interest expenses
962,321

 
678,129

Income including noncontrolling interests and before provision for income taxes
147,167

 
104,648

Provision for income taxes
53,273

 
43,526

Net income including noncontrolling interests
93,894

 
61,122

Net income (loss) attributable to noncontrolling interests
8,020

 
(6,203
)
Net income attributable to Raymond James Financial, Inc.
$
85,874

 
$
67,325

 
 
 
 
Net income per common share – basic
$
0.62

 
$
0.53

Net income per common share – diluted
$
0.61

 
$
0.53

Weighted-average common shares outstanding – basic
136,524

 
123,225

Weighted-average common and common equivalent shares outstanding – diluted
138,694

 
123,712

 
 
 
 
Net income attributable to Raymond James Financial, Inc.
$
85,874

 
$
67,325

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
10,138

 
(5,661
)
Change in currency translations and net investment hedges
(3,686
)
 
4,820

Total comprehensive income
$
92,326

 
$
66,484

 
 
 
 
Other-than-temporary impairment:
 

 
 

Total other-than-temporary impairment, net
$
3,354

 
$
(4,187
)
Portion of (recoveries) losses recognized in other comprehensive income (before taxes)
(3,739
)
 
2,091

Net impairment losses recognized in other revenue
$
(385
)
 
$
(2,096
)
 
(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).

5
Index


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
Three months ended December 31,
 
2012
 
2011
 
(in thousands, except per share amounts)
Common stock, par value $.01 per share:
 
 
 
Balance, beginning of year
$
1,404

 
$
1,271

Issuances
13

  
9

Balance, end of period
1,417

  
1,280

 
 
 
 
Additional paid-in capital:
 

  
 

Balance, beginning of year
1,030,288

  
565,135

Employee stock purchases
3,273

  
2,215

Exercise of stock options and vesting of restricted stock units, net of forfeitures
18,542

  
1,270

Restricted stock, stock option and restricted stock unit expense
17,154

  
16,907

Excess tax benefit from share-based payments
2,071

  
1,100

Other
252

  
(125
)
Balance, end of period
1,071,580

  
586,502

 
 
 
 
Retained earnings:
 

  
 

Balance, beginning of year
2,346,563

  
2,125,818

Net income attributable to Raymond James Financial, Inc.
85,874

  
67,325

Cash dividends declared
(19,466
)
 
(16,399
)
Other
(410
)
 
(4,837
)
Balance, end of period
2,412,561

 
2,171,907

 
 
 
 
Treasury stock:
 

 
 

Balance, beginning of year
(118,762
)
 
(95,000
)
Purchases/surrenders
(6,899
)
 
(16,784
)
Exercise of stock options and vesting of restricted stock units, net of forfeitures
4,005

 
(790
)
Balance, end of period
(121,656
)
 
(112,574
)
 
 
 
 
Accumulated other comprehensive income:(1)
 

 
 

Balance, beginning of year
9,447

 
(9,605
)
Net unrealized gain (loss) on available for sale securities and non-credit portion of other-than-temporary impairment losses (2)
10,138

 
(5,661
)
Net change in currency transactions and net investment hedges (2)
(3,686
)
 
4,820

Balance, end of period
15,899

 
(10,446
)
Total equity attributable to Raymond James Financial, Inc.
$
3,379,801

 
$
2,636,669

 
 
 
 
Noncontrolling interests:
 

 
 

Balance, beginning of year
$
411,342

 
$
324,226

Net income (loss) attributable to noncontrolling interests
8,020

 
(6,203
)
Capital contributions
13,281

 
21,078

Distributions
(9,972
)
 
(2,493
)
Consolidation of acquired entity (3)
7,592

 
—

Other
(482
)
 
(10,323
)
Balance, end of period
429,781

 
326,285

Total equity
$
3,809,582

 
$
2,962,954


(1)
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.

(2)
Net of tax.

(3)
On December 24, 2012, we acquired a 45% interest in ClariVest Asset Management, LLC, see Notes 1 and 3 for discussion.

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

6
Index

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

 
Three months ended December 31,
 
2012
 
2011
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income attributable to Raymond James Financial, Inc.
$
85,874

 
$
67,325

Net income (loss) attributable to noncontrolling interests
8,020

 
(6,203
)
Net income including noncontrolling interests
93,894

 
61,122

 
 
 
 
Adjustments to reconcile net income including noncontrolling interests to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
16,418

 
9,971

Deferred income taxes
2,104

 
(10,444
)
Premium and discount amortization on available for sale securities and unrealized/realized gain on other investments
(4,501
)
 
(1,392
)
Provisions for loan losses, legal proceedings, bad debts and other accruals
3,954

 
6,556

Share-based compensation expense
17,783

 
17,410

Other
519

 
827

Net change in:
 

 
 

Assets segregated pursuant to regulations and other segregated assets
(637,306
)
 
43,490

Securities purchased under agreements to resell and other collateralized financings, net of securities sold under agreements to repurchase
(8,309
)
 
(6,892
)
Stock loaned, net of stock borrowed
(129,825
)
 
(150,573
)
Repayments of loans (loans provided) to financial advisors
5,132

 
(15,754
)
Brokerage client receivables and other accounts receivable, net
225,982

 
85,076

Trading instruments, net
(27,780
)
 
(6,712
)
Prepaid expenses and other assets
(46,978
)
 
(18,336
)
Brokerage client payables and other accounts payable
958,958

 
141,531

Accrued compensation, commissions and benefits
(154,518
)
 
(161,374
)
Purchase and origination of loans held for sale, net of proceeds from sale of securitizations and loans held for sale
(75,467
)
 
(12,822
)
Excess tax benefits from share-based payment arrangements
(2,071
)
 
(1,675
)
Net cash provided by (used in) operating activities
237,989

 
(19,991
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to property and equipment
(18,935
)
 
(13,647
)
Increase in bank loans, net
(387,071
)
 
(489,970
)
Redemptions of Federal Home Loan Bank/Federal Reserve Bank stock, net
—

 
20,228

Purchases of private equity and other investments, net
(4,422
)
 
(172
)
Purchases of available for sale securities
(26
)
 
(950
)
Available for sale securities maturations, repayments and redemptions
35,144

 
40,029

Investments in real estate partnerships held by consolidated variable interest entities, net of other investing activity
(864
)
 
174

Business acquisition, net of cash acquired
(6,450
)
 
—

Net cash used in investing activities
$
(382,624
)
 
$
(444,308
)

(continued on next page)

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


7
Index

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

(continued from previous page)
 
Three months ended December 31,
 
2012
 
2011
 
(in thousands)
Cash flows from financing activities:
 
 
 
Proceeds from borrowed funds, net
$
132,000

 
$
—

Repayments of borrowed funds, net
(129,150
)
 
(3,848
)
Repayments of borrowings by consolidated variable interest entities which are real estate partnerships
(11,344
)
 
(11,599
)
Proceeds from capital contributed to and borrowings of consolidated variable interest entities which are real estate partnerships
13,224

 
21,078

Exercise of stock options and employee stock purchases
26,849

 
2,642

Increase (decrease) in bank deposits
346,952

 
(34,426
)
Purchase of treasury stock
(8,271
)
 
(17,054
)
Dividends on common stock
(17,968
)
 
(16,399
)
Excess tax benefits from share-based payment arrangements
2,071

 
1,675

Net cash provided by (used in) financing activities
354,363

 
(57,931
)
 
 
 
 
Currency adjustment:
 
 
 
Effect of exchange rate changes on cash
(2,041
)
 
(511
)
Net increase (decrease) in cash and cash equivalents
207,687

 
(522,741
)
Cash and cash equivalents at beginning of year
1,980,020

 
2,439,695

Cash and cash equivalents at end of period
$
2,187,707

 
$
1,916,954

 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
27,093

 
$
11,215

Cash paid for income taxes
$
10,650

 
$
10,137

Non-cash transfers of loans to other real estate owned
$
596

 
$
2,651



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

8
Index

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2012

NOTE 1 – INTRODUCTION AND BASIS OF PRESENTATION

Description of business

Raymond James Financial, Inc. (“RJF”) is a financial 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.

Basis of presentation

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. Additional information on these VIEs is provided in Note 2 on pages 114 - 117 in the section titled, “Evaluation of VIEs to determine whether consolidation is required” as presented in our Annual Report on Form 10-K for the year ended September 30, 2012, as filed with the United States (”U.S.”) Securities and Exchange Commission (the “2012 Form 10-K”) and in Note 9 herein. 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.

Accounting estimates and assumptions

Certain financial information that is normally included in annual financial statements prepared in accordance with 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 2012 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.

Acquisitions

On December 24, 2012, we completed our acquisition of a 45% interest in ClariVest Asset Management, LLC (“ClariVest”), an acquisition that bolsters our platform in the large-cap strategy space. See Note 3 for additional information.

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 affiliates (collectively referred to hereinafter as “Morgan Keegan”) from Regions Financial Corporation (“Regions”).  This acquisition expands both our private client and our capital markets businesses. See Note 3 for further information regarding our acquisition of Morgan Keegan and Note 19 for information regarding the capital position of MK & Co. as of December 31, 2012. The results of operations of Morgan Keegan have been included in our results prospectively from April 2, 2012.

Significant subsidiaries

Our significant subsidiaries, all wholly owned, include: Raymond James & Associates, Inc. (“RJ&A”) and MK & Co., which are domestic broker-dealers carrying client accounts, Raymond James Financial Services, Inc. (“RJFS”) an introducing domestic broker-dealer, Raymond James Ltd. (“RJ Ltd.”) a broker-dealer headquartered in Canada, Eagle Asset Management, Inc., and Raymond James Bank, N.A. (“RJ Bank”), a national bank.

9
Index


NOTE 2 – UPDATE OF SIGNIFICANT ACCOUNTING POLICIES

A summary of our significant accounting policies is included in Note 2 on pages 100 - 117 of our 2012 Form 10-K. Other than as discussed below, there have been no significant changes in our significant accounting policies since September 30, 2012.
Brokerage client receivables, loans to financial advisors and allowance for doubtful accounts
As more fully described in Note 2, page 107, of our 2012 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. We present the outstanding balance of loans to financial advisors on our Condensed Consolidated Statements of Financial Condition, net of their applicable allowances for doubtful accounts. The allowance for doubtful accounts balance associated with all of our loans to financial advisors is $2.7 million and $2.5 million at December 31, 2012 and September 30, 2012, respectively. Of the December 31, 2012 loans to financial advisors, 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 $2.5 million.
Reclassifications
Certain prior period amounts, none of which are material, have been reclassified to conform to the current presentation.


NOTE 3 – ACQUISITIONS

On December 24, 2012, (the “ClariVest Acquisition Date”) we completed our acquisition of a 45% interest in ClariVest, an acquisition that bolsters our platform in the large-cap strategy space. On the ClariVest Acquisition Date, we paid approximately $8.8 million in cash to the sellers for our interest. On the first anniversary of the ClariVest Acquisition Date, a computation based upon the actual earnings of ClariVest during the one year period will be performed and additional consideration may be owed to the sellers within 45 days thereof.

ClariVest, manages more than $3 billion in client assets and currently markets its investment advisory services to corporate and public pension plans, foundations, endowments and Taft-Hartley clients worldwide. As a result of certain protective rights we have under the operating agreement with ClariVest, we are consolidating Clarivest in our financial statements as of the Clarivest Acquisition Date. In addition, a put and call agreement was entered into on the Clarivest Acquisition Date that provides our wholly owned Eagle Asset Management, Inc. subsidiary with various paths to majority ownership in ClariVest, the timing of which would depend upon the financial results of ClariVest’s business and the tenure of existing ClariVest management. The results of operations of ClariVest have been included in our results prospectively from December 24, 2012. For the purposes of certain acquisition related financial reporting requirements, the Clarivest acquisition is not considered to be material to our overall financial condition.

See Note 10 for information regarding the identifiable intangible assets we recorded as a result of the ClariVest acquisition.

Prior year acquisition of Morgan Keegan

On April 2, 2012 RJF completed its acquisition of Morgan Keegan. For a discussion of the significant terms of this acquisition, see Note 3 on pages 118 - 121 in our 2012 Form 10-K.  

Selected Unaudited Pro forma financial information

The following unaudited pro forma financial information assumes the Morgan Keegan acquisition had been completed as of October 1, 2011. 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 identifiable 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.


10
Index

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 period 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.
Pro forma results (Unaudited):
 
Three months ended December 31, 2011
 
($ in thousands except per share amounts)
Total net revenues
 
$
1,048,562

Net income
 
$
93,359

Net income per share:
 
 
Basic
 
$
0.68

Diluted
 
$
0.68


Acquisition related expenses

Acquisition related expenses are recorded in the Condensed Consolidated Statement of Income and Comprehensive Income and include certain incremental expenses arising from our acquisitions.  We incurred the following acquisition related expenses in the three month period ended December 31, 2012:
 
 
Three months ended December 31, 2012
 
 
(in thousands)
 
 
 
Integration costs
 
$
15,536

Financial advisory fees
 
1,176

Severance
 
399

Other
 
271

Total acquisition related expenses
 
$
17,382


We incurred no acquisition related expenses in the three month period ended December 31, 2011.



11
Index

NOTE 4 – 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 discussion of our accounting policies regarding assets segregated pursuant to regulations and other segregated assets, see Note 2 on page 101 of our 2012 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:

 
December 31,
2012
 
September 30,
2012
 
(in thousands)
Cash and cash equivalents:
 
 
 
Cash in banks
$
2,183,388

 
$
1,973,897

Money market fund investments
4,319

 
6,123

Total cash and cash equivalents (1)
2,187,707

 
1,980,020

Cash segregated pursuant to federal regulations and other segregated assets (2)
3,421,505

 
2,784,199

Deposits with clearing organizations (3)
166,643

 
163,848

 
$
5,775,855

 
$
4,928,067


(1)
The total amounts presented include cash and cash equivalents of $581 million and $539 million as of December 31, 2012 and September 30, 2012, respectively, which are either held directly by RJF or are otherwise invested by one of our subsidiaries on behalf of RJF.

(2)
Consists of cash maintained in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934. RJ&A and MK & Co., as broker-dealers carrying client accounts, are subject to requirements related to maintaining cash or qualified securities in segregated reserve accounts for the exclusive benefit of their clients. Additionally, 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.

12
Index


NOTE 5 – FAIR VALUE

For a discussion of our valuation methodologies for assets, liabilities measured at fair value, and the fair value hierarchy, see Note 2, pages 101 - 107, in our 2012 Form 10-K.

There have been no material changes to our valuation methodologies since our year ended September 30, 2012.

Assets and liabilities measured at fair value on a recurring and nonrecurring basis are presented below:
December 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
December 31,
2012
 
 
(in thousands)
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments:
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
7

 
$
222,506

 
$
—

 
$
—

 
$
222,513

Corporate obligations
 
4,349

 
43,242

 
—

 
—

 
47,591

Government and agency obligations
 
7,228

 
139,610

 
—

 
—

 
146,838

Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)
 
1,017

 
266,007

 
—

 
—

 
267,024

Non-agency CMOs and asset-backed securities (“ABS”)
 
—

 
15,536

 
18

 
—

 
15,554

Total debt securities
 
12,601

 
686,901

 
18

 
—

 
699,520

Derivative contracts
 
—

 
135,968

 
—

 
(87,413
)
 
48,555

Equity securities
 
45,326

 
8,422

 
19

 
—

 
53,767

Other securities
 
953

 
16,948

 
6,451

 
—

 
24,352

Total trading instruments
 
58,880

 
848,239

 
6,488

 
(87,413
)
 
826,194

Available for sale securities:
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 
—

 
331,786

 
—

 
—

 
331,786

Non-agency CMOs
 
—

 
144,693

 
125

 
—

 
144,818

Other securities
 
13

 
—

 
—

 
—

 
13

Auction rate securities (“ARS”):
 
 

 
 

 
 

 
 

 
 

Municipals
 
—

 
—

 
133,318

(3) 
—

 
133,318

Preferred securities
 
—

 
—

 
104,976

 
—

 
104,976

Total available for sale securities
 
13

 
476,479

 
238,419

 
—

 
714,911

Private equity investments
 
—

 
—

 
329,767

(4) 
—

 
329,767

Other investments (5)
 
290,549

 
1,030

 
4,123

 
—

 
295,702

Derivative instruments associated with offsetting matched book positions
 
—

 
431,807

 
—

 
—

 
431,807

Other assets:
 
 
 
 
 
 
 
 
 
 
Derivative contracts
 
—

 
2,650

 
—

 
—

 
2,650

Total assets at fair value on a recurring basis
 
$
349,442

 
$
1,760,205

 
$
578,797

 
$
(87,413
)
 
$
2,601,031

 
 
 
 
 
 
 
 
 
 
 
Assets at fair value on a nonrecurring basis:
 
 

 
 

 
 

 
 

 
 

Bank loans, net:
 
 

 
 

 
 

 
 

 
 

Impaired loans
 
$
—

 
$
39,991

 
$
55,848

 
$
—

 
$
95,839

Loans held for sale(6)
 
—

 
108,253

 
—

 
—

 
108,253

Total bank loans, net
 
—

 
148,244

 
55,848

 
—

 
204,092

Other real estate owned (“OREO”)(7)
 
—

 
1,660

 
—

 
—

 
1,660

Total assets at fair value on a nonrecurring basis
 
$
—

 
$
149,904

 
$
55,848

 
$
—

 
$
205,752

 
(continued on next page)

13
Index

December 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
December 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
 
$
—

 
$
6,752

 
$
—

 
$
—

 
$
6,752

Corporate obligations
 
—

 
3,696

 
—

 
—

 
3,696

Government obligations
 
166,911

 
—

 
—

 
—

 
166,911

Agency MBS and CMOs
 
16

 
800

 
—

 
—

 
816

Non-agency MBS and CMOs
 
—

 
—

 
—

 
—

 
—

Total debt securities
 
166,927

 
11,248

 
—

 
—

 
178,175

Derivative contracts
 
—

 
120,803

 
—

 
(118,006
)
 
2,797

Equity securities
 
20,365

 
48

 
—

 
—

 
20,413

Other securities
 
—

 
647

 
—

 
—

 
647

Total trading instruments sold but not yet purchased
 
187,292

 
132,746

 
—

 
(118,006
)
 
202,032

Derivative instruments associated with offsetting matched book positions
 
—

 
431,807

 
—

 
—

 
431,807

Trade and other payables:
 
 
 
 
 
 
 
 
 


Other
 
—

 
—

 
98

 
—

 
98

Total liabilities at fair value on a recurring basis
 
$
187,292

 
$
564,553

 
$
98

 
$
(118,006
)
 
$
633,937



(1)
We had no transfers of financial instruments from Level 1 to Level 2 during the three months ended December 31, 2012.  We had $157 thousand in transfers of financial instruments from Level 2 to Level 1 during the three months ended December 31, 2012.  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)
Where permitted, 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 $54 million of Jefferson County, Alabama Limited Obligation School Warrants ARS and $25 million of Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS.

(4)
Includes $225 million in private equity investments of which the weighted-average portion we own is approximately 29%.  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 $159 million of that total as of December 31, 2012.

(5)
Other investments include $187 million of financial instruments we hold that are related to MK & Co.’s obligations to perform under certain of its deferred compensation plans (see Note 2 page 114, and Note 23 page 170, of our 2012 Form 10-K for further information regarding these plans).

(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.







14
Index

September 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
September 30,
2012
 
 
(in thousands)
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments:
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
7

 
$
346,030

 
$
553

 
$
—

 
$
346,590

Corporate obligations
 
15,916

 
70,815

 
—

 
—

 
86,731

Government and agency obligations
 
10,907

 
156,492

 
—

 
—

 
167,399

Agency MBS and CMOs
 
1,085

 
104,084

 
—

 
—

 
105,169

Non-agency CMOs and ABS
 
—

 
1,986

 
29

 
—

 
2,015

Total debt securities
 
27,915

 
679,407

 
582

 
—

 
707,904

Derivative contracts
 
—

 
144,259

 
—

 
(93,259
)
 
51,000

Equity securities
 
23,626

 
2,891

 
6

 
—

 
26,523

Other securities
 
864

 
12,131

 
5,850

 
—

 
18,845

Total trading instruments
 
52,405

 
838,688

 
6,438

 
(93,259
)
 
804,272

 
 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 
—

 
352,303

 
—

 
—

 
352,303

Non-agency CMOs
 
—

 
147,558

 
249

 
—

 
147,807

Other securities
 
12

 
—

 
—

 
—

 
12

ARS:
 
 

 
 

 
 

 
 

 


Municipals
 
—

 
—

 
123,559

(3) 
—

 
123,559

Preferred securities
 
—

 
—

 
110,193

 
—

 
110,193

Total available for sale securities
 
12

 
499,861

 
234,001

 
—

 
733,874

 
 
 
 
 
 
 
 
 
 
 
Private equity investments
 
—

 
—

 
336,927

(4) 
—

 
336,927

Other investments (5)
 
303,817

 
2,897

 
4,092

 
—

 
310,806

Derivative instruments associated with offsetting matched book positions
 
—

 
458,265

 
—

 
—

 
458,265

Total assets at fair value on a recurring basis
 
$
356,234

 
$
1,799,711

 
$
581,458

 
$
(93,259
)
 
$
2,644,144

 
 
 
 
 
 
 
 
 
 
 
Assets at fair value on a nonrecurring basis:
 
 

 
 

 
 

 
 

 
 

Bank loans, net
 
 
 
 
 
 
 
 
 
 
Impaired loans(6)
 
—

 
47,409

 
46,383

 
—

 
93,792

Loans held for sale(7)
 
—

 
81,093

 
—

 
—

 
81,093

Total bank loans, net
 
—

 
128,502

 
46,383

 
—

 
174,885

OREO(8)
 
—

 
6,216

 
—

 
—

 
6,216

Total assets at fair value on a nonrecurring basis
 
$
—

 
$
134,718

 
$
46,383

 
$
—

 
$
181,101

 
 
 
 
 
 
 
 
 
 
 
(continued on next page)

15
Index

September 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
September 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
 
$
—

 
$
212

 
$
—

 
$
—

 
$
212

Corporate obligations
 
33

 
12,355

 
—

 
—

 
12,388

Government obligations
 
199,501

 
587

 
—

 
—

 
200,088

Agency MBS and CMOs
 
556

 
—

 
—

 
—

 
556

Non-agency MBS and CMOs
 
—

 
121

 
—

 
—

 
121

Total debt securities
 
200,090

 
13,275

 
—

 
—

 
213,365

Derivative contracts
 
—

 
128,081

 
—

 
(124,979
)
 
3,102

Equity securities
 
9,636

 
64

 
—

 
—

 
9,700

Other securities
 
—

 
6,269

 
—

 
—

 
6,269

Total trading instruments sold but not yet purchased
 
209,726

 
147,689

 
—

 
(124,979
)
 
232,436

Derivative instruments associated with offsetting matched book positions
 
—

 
458,265

 
—

 
—

 
458,265

Trade and other payables:
 
 
 
 
 
 
 
 
 
 
Derivative contracts
 
—

 
1,370

 
—

 
—

 
1,370

Other liabilities
 
—

 
—

 
98

 
—

 
98

Total trade and other payables
 
—

 
1,370

 
98

 
—

 
1,468

Total liabilities at fair value on a recurring basis
 
$
209,726

 
$
607,324

 
$
98

 
$
(124,979
)
 
$
692,169



(1)
We had no transfers of financial instruments from Level 1 to Level 2 during the year ended September 30, 2012.  We had $541 thousand in transfers of financial instruments from Level 2 to Level 1 during the year ended September 30, 2012.  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)
Where permitted, 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 $22 million of Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS.

(4)
Includes $224 million in private equity investments of which the weighted-average portion we own is approximately 28%.  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 September 30, 2012.

(5)
Other investments include $185 million of financial instruments we hold that are related to MK & Co.’s obligations to perform under certain of its deferred compensation plans (see Note 2 page 114, and Note 23, page 170, of our 2012 Form 10-K for further information regarding these plans).

(6)
During the year ended September 30, 2012, we initially transferred $55 million of impaired loans from Level 3 to Level 2. The transfer was a result of 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.

(7)
Includes individual loans classified as held for sale, which were recorded at a fair value lower than cost.

(8)
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.


16
Index

The adjustment to fair value of the nonrecurring fair value measures for the three months ended December 31, 2012 resulted in $1.6 million in additional provision for loan losses and $114 thousand in other losses.

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 December 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, 2012
$
553

 
$
29

 
$
6

 
$
5,850

 
$
249

 
$
123,559

 
$
110,193

 
$
336,927

 
$
4,092

 
$
(98
)
Total gains (losses) for the year:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Included in earnings
—

 
(8
)
 
5

 
(31
)
 
(335
)
 
23

 
1,164

 
3,388

(1) 
36

 
—

Included in other comprehensive income
—

 
—

 
—

 
—

 
223

 
9,961

 
1,606

 
—

 
—

 
—

Purchases and contributions
—

 
—

 
44

 
1,273

 
—

 
—

 
25

 
3,593

 
—

 
—

Sales
(553
)
 
—

 
(36
)
 
(3
)
 
—

 
—

 
—

 
—

 
—

 
—

Redemptions by issuer
—

 
—

 
—

 
—

 
—

 
(225
)
 
(8,012
)
 
—

 
—

 
—

Distributions
—

 
(3
)
 
—

 
(638
)
 
(12
)
 
—

 
—

 
(14,141
)
 
(5
)
 
—

Transfers: (2)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Into Level 3
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Out of Level 3
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Fair value
   December 31, 2012
$
—

 
$
18

 
$
19

 
$
6,451

 
$
125

 
$
133,318

 
$
104,976

 
$
329,767

 
$
4,123

 
$
(98
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
—

 
$
18

 
$
3

 
$
(31
)
 
$
(335
)
 
$
9,961

 
$
1,606

 
$
3,388

(1) 
$
76

 
$
—


(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 $1.8 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 $1.6 million.

(2)
Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized.



17
Index


 
Three months ended December 31, 2011
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 year:
 
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

 
 

Included in earnings
80

 
(4
)
 
(4
)
 
(942
)
 
—

 
(540
)
 
(75
)
 
4


(49
)
 
11

Included in other comprehensive income
—

 
—

 
—

 
—

 
(93
)
 
(4,670
)
 
(894
)
 
—

 
—

 
—

Purchases,and contributions
—

 
—

 
16

 
—

 
—

 
475

 
475

 
2,367

 
2

 
—

Sales
(320
)
 
—


—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Redemptions by issuer
—

 
—

 
—

 
—

 
—

 
(125
)
 
(17,450
)
 
—

 
—

 
—

Distributions
—

 
(9
)
 
—

 
—

 
(17
)
 
—

 
—

 
(9,082
)
 
—

 
—

Transfers:
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Into Level 3
—

 
—

 
152

 
6,577

(1) 
—

 
43

 
—

 
—

 
—

 
—

Out of Level 3
—

 
—

 
—

 
—

 
—

 
—

 
(43
)
 
—

 
—

 
—

Fair value
   December 31, 2011
$
135

 
$
37

 
$
179

 
$
5,635

 
$
741

 
$
74,707