RJF-2013.06.30-10Q
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 June 30, 2013
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.

139,846,765 shares of common stock as of August 5, 2013



RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Form 10-Q for the quarter ended June 30, 2013

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)

 
 
 
 
 
June 30, 2013
 
September 30, 2012
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
2,585,545

 
$
1,980,020

Assets segregated pursuant to regulations and other segregated assets
3,451,414

 
2,784,199

Securities purchased under agreements to resell and other collateralized financings
578,147

 
565,016

Financial instruments, at fair value:
 

 
 

Trading instruments
374,858

 
804,272

Available for sale securities
723,340

 
733,874

Private equity investments
217,549

 
336,927

Other investments
239,386

 
310,806

Derivative instruments associated with offsetting matched book positions
265,521

 
458,265

Receivables:
 

 
 

Brokerage clients, net
2,106,283

 
2,067,117

Stock borrowed
155,473

 
200,160

Bank loans, net
8,689,389

 
7,991,512

Brokers-dealers and clearing organizations
170,616

 
225,306

Loans to financial advisors, net
424,245

 
445,497

Other
415,296

 
427,641

Deposits with clearing organizations
134,687

 
163,848

Prepaid expenses and other assets
623,427

 
605,566

Investments in real estate partnerships held by consolidated variable interest entities
275,725

 
299,611

Property and equipment, net
251,835

 
231,195

Deferred income taxes, net
168,778

 
168,187

Goodwill and identifiable intangible assets, net
362,677

 
361,246

Total assets
$
22,214,191

 
$
21,160,265



(continued on next page)












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)
 
 
 
 
 
June 30, 2013
 
September 30, 2012
 
($ in thousands)
Liabilities and equity:
 

 
 

Trading instruments sold but not yet purchased, at fair value
$
103,730

 
$
232,436

Securities sold under agreements to repurchase
248,382

 
348,036

Derivative instruments associated with offsetting matched book positions, at fair value
265,521

 
458,265

Payables:
 

 
 

Brokerage clients
5,238,033

 
4,584,656

Stock loaned
346,558

 
423,519

Bank deposits
9,130,384

 
8,599,713

Brokers-dealers and clearing organizations
191,603

 
103,164

Trade and other
823,207

 
628,734

Other borrowings
93,700

 
—

Accrued compensation, commissions and benefits
640,501

 
690,654

Loans payable of consolidated variable interest entities
62,038

 
81,713

Corporate debt
1,195,392

 
1,329,093

Total liabilities
18,339,049

 
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 144,376,520 at June 30, 2013 and 142,853,667 at September 30, 2012
1,427

 
1,404

Additional paid-in capital
1,122,234

 
1,030,288

Retained earnings
2,537,252

 
2,346,563

Treasury stock, at cost; 5,144,904 common shares at June 30, 2013 and 5,117,049 common shares at September 30, 2012
(123,757
)
 
(118,762
)
Accumulated other comprehensive income
7,039

 
9,447

Total equity attributable to Raymond James Financial, Inc.
3,544,195

 
3,268,940

Noncontrolling interests
330,947

 
411,342

Total equity
3,875,142

 
3,680,282

Total liabilities and equity
$
22,214,191

 
$
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 June 30,
 
Nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Securities commissions and fees
$
763,345

 
$
733,180

 
$
2,266,918

 
$
1,803,041

Investment banking
68,057

 
72,266

 
203,182

 
169,556

Investment advisory fees
74,601

 
57,887

 
202,174

 
165,661

Interest
117,376

 
121,186

 
358,534

 
332,134

Account and service fees
90,757

 
82,082

 
267,608

 
231,947

Net trading (loss) profit
(1,456
)
 
14,544

 
16,011

 
36,866

Other
25,048

 
34,617

 
131,108

 
65,227

Total revenues
1,137,728

 
1,115,762

 
3,445,535

 
2,804,432

Interest expense
28,192

 
29,554

 
83,416

 
63,510

Net revenues
1,109,536

 
1,086,208

 
3,362,119

 
2,740,922

Non-interest expenses:
 

 
 

 
 

 
 

Compensation, commissions and benefits
772,324

 
736,050

 
2,297,919

 
1,874,563

Communications and information processing
67,138

 
55,282

 
192,522

 
136,590

Occupancy and equipment costs
39,323

 
41,087

 
117,495

 
94,255

Clearance and floor brokerage
9,266

 
11,025

 
30,839

 
27,549

Business development
31,737

 
33,098

 
93,854

 
88,319

Investment sub-advisory fees
10,369

 
7,765

 
26,829

 
21,470

Bank loan loss (benefit) provision
(2,142
)
 
9,315

 
4,518

 
21,925

Acquisition related expenses
13,449

 
20,955

 
51,753

 
40,559

Other
39,175

 
33,640

 
111,023

 
85,151

Total non-interest expenses
980,639

 
948,217

 
2,926,752

 
2,390,381

Income including noncontrolling interests and before provision for income taxes
128,897

 
137,991

 
435,367

 
350,541

Provision for income taxes
48,192

 
48,520

 
152,522

 
134,674

Net income including noncontrolling interests
80,705

 
89,471

 
282,845

 
215,867

Net (loss) income attributable to noncontrolling interests
(3,157
)
 
13,121

 
33,149

 
3,323

Net income attributable to Raymond James Financial, Inc.
$
83,862

 
$
76,350

 
$
249,696

 
$
212,544

 
 
 
 
 
 
 
 
Net income per common share – basic
$
0.60

 
$
0.55

 
$
1.79

 
$
1.61

Net income per common share – diluted
$
0.59

 
$
0.55

 
$
1.76

 
$
1.60

Weighted-average common shares outstanding – basic
138,185

 
135,256

 
137,493

 
129,206

Weighted-average common and common equivalent shares outstanding – diluted
141,231

 
136,657

 
140,165

 
130,187

 
 
 
 
 
 
 
 
Net income attributable to Raymond James Financial, Inc.
$
83,862

 
$
76,350

 
$
249,696

 
$
212,544

Other comprehensive income, net of tax:(1)
 

 
 

 
 

 
 

Change in unrealized losses on available for sale securities and non-credit portion of other-than-temporary impairment losses
614

 
622

 
14,358

 
6,197

Change in currency translations and net investment hedges
(8,090
)
 
(8,933
)
 
(16,767
)
 
(1,588
)
Total comprehensive income
$
76,386

 
$
68,039

 
$
247,287

 
$
217,153

 
 
 
 
 
 
 
 
Other-than-temporary impairment:
 

 
 

 
 

 
 

Total other-than-temporary impairment, net
$
(2,852
)
 
$
(1,260
)
 
$
3,866

 
$
5,406

Portion of pre-tax losses (recoveries) recognized in other comprehensive income
2,814

 
(175
)
 
(4,289
)
 
(10,274
)
Net impairment losses recognized in other revenue
$
(38
)
 
$
(1,435
)
 
$
(423
)
 
$
(4,868
)
 
(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)


 
Nine months ended June 30,
 
 
2013
 
2012
 
 
(in thousands, except per share amounts)
 
Common stock, par value $.01 per share:
 
 
 
 
Balance, beginning of year
$
1,404

 
$
1,271

 
Issuances of shares, registered public offering
—

 
111

(1) 
Other issuances
23

  
17

 
Balance, end of period
1,427

  
1,399

 
 
 
 
 
 
Additional paid-in capital:
 

  
 

 
Balance, beginning of year
1,030,288

  
565,135

 
Issuances of shares, registered public offering
—

 
362,712

(1) 
Employee stock purchases
14,317

  
12,286

 
Exercise of stock options and vesting of restricted stock units, net of forfeitures
32,741

  
16,142

 
Restricted stock, stock option and restricted stock unit expense
45,788

  
39,287

 
Excess tax benefit from share-based payments
3,442

  
2,407

 
Purchase of additional equity interest in subsidiary
(4,531
)
 
1,225

 
Other
189

  
(627
)
 
Balance, end of period
1,122,234

  
998,567

 
 
 
 
 
 
Retained earnings:
 

  
 

 
Balance, beginning of year
2,346,563

  
2,125,818

 
Net income attributable to Raymond James Financial, Inc.
249,696

  
212,544

 
Cash dividends declared
(58,597
)
 
(52,118
)
 
Other
(410
)
 
(4,837
)
 
Balance, end of period
2,537,252

 
2,281,407

 
 
 
 
 
 
Treasury stock:
 

 
 

 
Balance, beginning of year
(118,762
)
 
(95,000
)
 
Purchases/surrenders
(7,959
)
 
(19,211
)
 
Exercise of stock options and vesting of restricted stock units, net of forfeitures
2,964

 
(4,470
)
 
Balance, end of period
(123,757
)
 
(118,681
)
 


(continued on next page)
















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



6
Index

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(continued from previous page)

 
Nine months ended June 30,
 
 
2013
 
2012
 
 
(in thousands, except per share amounts)
 
Accumulated other comprehensive income:(2)
 

 
 

 
Balance, beginning of year
$
9,447

 
$
(9,605
)
 
Net change in unrealized losses on available for sale securities and non-credit portion of other-than-temporary impairment losses, net of tax
14,358

 
6,197

 
Net change in currency translations and net investment hedges, net of tax
(16,766
)
 
(1,588
)
 
Balance, end of period
7,039

 
(4,996
)
 
Total equity attributable to Raymond James Financial, Inc.
$
3,544,195

 
$
3,157,696

 
 
 
 
 
 
Noncontrolling interests:
 

 
 

 
Balance, beginning of year
$
411,342

 
$
324,226

 
Net income attributable to noncontrolling interests
33,149

 
3,323

 
Capital contributions
27,727

 
33,228

 
Distributions
(147,075
)
 
(6,645
)
 
Consolidation of acquired entity (3)
7,592

 
—

 
Consolidation of private equity partnerships
—

 
78,394

 
Derecognition resulting from acquisition of additional interests
4,126

 
(665
)
 
Other
(5,914
)
 
(7,848
)
 
Balance, end of period
330,947

 
424,013

 
Total equity
$
3,875,142

 
$
3,581,709

 


(1)
During the nine months ended June 30, 2012, in a registered public offering, 11,075,000 common shares were issued generating approximately $363 million in net proceeds (after consideration of the underwriting discount and direct expenses of the offering).

(2)
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.

(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).

7
Index

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

 
Nine months ended June 30,
 
2013
 
2012
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income attributable to Raymond James Financial, Inc.
$
249,696

 
$
212,544

Net income attributable to noncontrolling interests
33,149

 
3,323

Net income including noncontrolling interests
282,845

 
215,867

 
 
 
 
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
 

 
 

Depreciation and amortization
48,890

 
38,079

Deferred income taxes
(1,537
)
 
(16,389
)
Premium and discount amortization on available for sale securities and unrealized/realized gain on other investments
(80,539
)
 
(21,222
)
Provisions for loan losses, legal proceedings, bad debts and other accruals
15,607

 
26,679

Share-based compensation expense
48,468

 
41,774

Goodwill impairment expense
6,933

 
—

Other
28,153

 
15,946

Net change in:
 

 
 

Assets segregated pursuant to regulations and other segregated assets
(667,215
)
 
954,857

Securities purchased under agreements to resell and other collateralized financings, net of securities sold under agreements to repurchase
(112,785
)
 
(192,771
)
Stock loaned, net of stock borrowed
(32,274
)
 
(328,145
)
Repayments of loans (loans provided) to financial advisors
9,474

 
(155,123
)
Brokerage client receivables and other accounts receivable, net
29,745

 
(165,831
)
Trading instruments, net
338,794

 
(26,886
)
Prepaid expenses and other assets
(75,880
)
 
5,726

Brokerage client payables and other accounts payable
681,963

 
(84,289
)
Accrued compensation, commissions and benefits
(51,389
)
 
(39,591
)
Proceeds from sales of securitizations and loans held for sale, net of purchases and originations of loans held for sale
(52,634
)
 
(49,893
)
Excess tax benefits from share-based payment arrangements
(3,442
)
 
(3,001
)
Net cash provided by operating activities
413,177

 
215,787

 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to property and equipment
(65,757
)
 
(53,572
)
Increase in bank loans, net
(471,409
)
 
(1,256,018
)
Redemptions of Federal Home Loan Bank/Federal Reserve Bank stock, net
1,067

 
20,169

Sales (purchases) of private equity and other investments, net
231,365

 
(18,887
)
Purchases of available for sale securities
(62,102
)
 
(249,381
)
Available for sale securities maturations, repayments and redemptions
90,758

 
145,860

Proceeds from sales of available for sale securities
4,619

 
—

Investments in real estate partnerships held by consolidated variable interest entities, net of other investing activity
1,585

 
(141
)
Business acquisition, net of cash acquired (see Note 3)
(6,450
)
 
(1,096,631
)
Net cash used in investing activities
$
(276,324
)
 
$
(2,508,601
)

(continued on next page)





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


8
Index

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

 
Nine months ended June 30,
 
2013
 
2012
 
(in thousands)
Cash flows from financing activities:
 
 
 
Proceeds from borrowed funds, net
$
211,700

 
$
1,149,275

Repayments of borrowed funds, net
(251,966
)
 
(425,598
)
Proceeds from issuance of shares in registered public offering
—

 
362,823

Repayments of borrowings by consolidated variable interest entities which are real estate partnerships
(22,615
)
 
(23,147
)
Proceeds from capital contributed to and borrowings of consolidated variable interest entities which are real estate partnerships
23,519

 
30,546

Purchase of additional equity interest in subsidiary
(553
)
 
(4,017
)
Exercise of stock options and employee stock purchases
50,555

 
23,416

Increase in bank deposits
530,671

 
537,982

Purchase of treasury stock
(10,581
)
 
(20,489
)
Dividends on common stock
(57,002
)
 
(50,655
)
Excess tax benefits from share-based payment arrangements
3,442

 
3,001

Net cash provided by financing activities
477,170

 
1,583,137

 
 
 
 
Currency adjustment:
 
 
 
Effect of exchange rate changes on cash
(8,498
)
 
(983
)
Net increase (decrease) in cash and cash equivalents
605,525

 
(710,660
)
Cash and cash equivalents at beginning of year
1,980,020

 
2,439,695

Cash and cash equivalents at end of period
$
2,585,545

 
$
1,729,035

 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
80,541

 
$
51,407

Cash paid for income taxes
$
131,952

 
$
123,715

Non-cash transfers of loans to other real estate owned
$
2,188

 
$
11,121






















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

9
Index

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2013

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. The results of operations of Morgan Keegan have been included in our results prospectively from April 2, 2012.


10
Index

Significant subsidiaries

As of June 30, 2013, our significant subsidiaries, all wholly owned, include: Raymond James & Associates, Inc. (“RJ&A”) a domestic broker-dealer 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. In mid-February 2013, the client accounts of MK & Co. were transferred to RJ&A pursuant to our Morgan Keegan acquisition integration strategy (see Note 3 for additional information regarding the Morgan Keegan acquisition).

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. 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 $2.8 million and $2.5 million at June 30, 2013 and September 30, 2012, respectively. Of the June 30, 2013 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 $1.7 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.

As of the ClariVest Acquisition Date, it managed more than $3.1 billion in client assets and marketed 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 since 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.  

In February 2013, we successfully completed the transfer of client accounts from MK & Co. to RJ&A and as a result, are now operating all of the retained historical MK & Co. operations under one (the RJ&A) platform.

11
Index


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.

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):
 
Nine months ended June 30, 2012
 
 
($ in thousands except per share amounts)
Total net revenues
 
$
3,253,924

Net income
 
$
255,647

Net income per share:
 
 
Basic
 
$
1.86

Diluted
 
$
1.85


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:

 
Three months ended June 30,
 
Nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Severance (1)
$
6,742

 
$
13,845

 
$
12,947

 
$
17,028

Integration costs
4,510

 
4,783

 
33,852

 
5,980

Occupancy and equipment costs (2)
2,057

 
1,761

 
3,185

 
1,762

Financial advisory fees
—

 
20

 
1,176

 
7,040

Acquisition bridge financing facility fees
—

 
—

 
—

 
5,684

Legal
—

 
—

 
—

 
2,230

Other
140

 
546

 
593

 
835

Total acquisition related expenses
$
13,449

 
$
20,955

 
$
51,753

 
$
40,559


(1)
Represents all costs associated with eliminating positions as a result of the Morgan Keegan acquisition, partially offset by the favorable impact arising from the forfeiture of any unvested accrued benefits.

(2)
Includes lease costs associated with the abandonment of certain facilities resulting from the Morgan Keegan acquisition.



12
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:

 
June 30,
2013
 
September 30,
2012
 
(in thousands)
Cash and cash equivalents:
 
 
 
Cash in banks
$
2,582,850

 
$
1,973,897

Money market fund investments
2,695

 
6,123

Total cash and cash equivalents (1)
2,585,545

 
1,980,020

Cash segregated pursuant to federal regulations and other segregated assets (2)
3,451,414

 
2,784,199

Deposits with clearing organizations (3)
134,687

 
163,848

 
$
6,171,646

 
$
4,928,067


(1)
The total amounts presented include cash and cash equivalents of $758 million and $539 million as of June 30, 2013 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, and are available without restrictions.

(2)
Consists of cash maintained in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934. RJ&A and MK & Co. (at September 30, 2012), 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.

13
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:
June 30, 2013
 
Quoted prices
in active
markets for
identical
assets
(Level 1) (1)
 
Significant
other
observable
inputs
(Level 2) (1)
 
Significant
unobservable
inputs
(Level 3)
 
Netting
adjustments (2)
 
Balance as of
June 30,
2013
 
 
(in thousands)
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments:
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
32

 
$
106,981

 
$
—

 
$
—

 
$
107,013

Corporate obligations
 
1,074

 
29,165

 
—

 
—

 
30,239

Government and agency obligations
 
9,928

 
35,413

 
—

 
—

 
45,341

Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)
 
6,528

 
78,675

 
—

 
—

 
85,203

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

 
19,078

 
16

 
—

 
19,094

Total debt securities
 
17,562

 
269,312

 
16

 
—

 
286,890

Derivative contracts
 
—

 
99,100

 
—

 
(68,240
)
 
30,860

Equity securities
 
36,021

 
3,928

 
34

 
—

 
39,983

Other securities
 
718

 
10,208

 
6,199

 
—

 
17,125

Total trading instruments
 
54,301

 
382,548

 
6,249

 
(68,240
)
 
374,858

Available for sale securities:
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 
—

 
347,680

 
—

 
—

 
347,680

Non-agency CMOs
 
—

 
133,866

 
262

 
—

 
134,128

Auction rate securities (“ARS”):
 
 

 
 

 
 

 
 

 
 

Municipals
 
—

 
—

 
132,678

(3) 
—

 
132,678

Preferred securities
 
—

 
—

 
108,854

 
—

 
108,854

Total available for sale securities
 
—

 
481,546

 
241,794

 
—

 
723,340

Private equity investments
 
—

 
—

 
217,549

(4) 
—

 
217,549

Other investments (5)
 
233,043

 
2,315

 
4,028

 
—

 
239,386

Derivative instruments associated with offsetting matched book positions
 
—

 
265,521

 
—

 
—

 
265,521

Other assets:
 
 
 
 
 
 
 
 
 
 
Derivative contracts
 
—

 
2,936

 
—

 
—

 
2,936

All other assets
 
—

 
—

 
15

 
—

 
15

Total other assets
 
—

 
2,936

 
15

 
—

 
2,951

Total assets at fair value on a recurring basis
 
$
287,344

 
$
1,134,866

 
$
469,635

 
$
(68,240
)
 
$
1,823,605

 
 
 
 
 
 
 
 
 
 
 
Assets at fair value on a nonrecurring basis: (6)
 
 

 
 

 
 

 
 

 
 

Bank loans, net:
 
 

 
 

 
 

 
 

 
 

Impaired loans
 
$
—

 
$
34,958

 
$
62,749

 
$
—

 
$
97,707

Loans held for sale(7)
 
—

 
138,013

 
—

 
—

 
138,013

Total bank loans, net
 
—

 
172,971

 
62,749

 
—

 
235,720

Other real estate owned (“OREO”)(8)
 
—

 
409

 
—

 
—

 
409

Total assets at fair value on a nonrecurring basis
 
$
—

 
$
173,380

 
$
62,749

 
$
—

 
$
236,129

 
(continued on next page)

14
Index

June 30, 2013
 
Quoted prices
in active
markets for
identical
assets
(Level 1) (1)
 
Significant
other
observable
inputs
(Level 2) (1)
 
Significant
unobservable
inputs
(Level 3)
 
Netting
adjustments (2)
 
Balance as of
June 30,
2013
 
 
(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
 
$
277

 
$
243

 
$
—

 
$
—

 
$
520

Corporate obligations
 
203

 
9,754

 
—

 
—

 
9,957

Government obligations
 
69,684

 
6,629

 
—

 
—

 
76,313

Agency MBS and CMOs
 
151

 
—

 
—

 
—

 
151

Total debt securities
 
70,315

 
16,626

 
—

 
—

 
86,941

Derivative contracts
 
—

 
84,482

 
—

 
(76,576
)
 
7,906

Equity securities
 
8,802

 
81

 
—

 
—

 
8,883

Total trading instruments sold but not yet purchased
 
79,117

 
101,189

 
—

 
(76,576
)
 
103,730

Derivative instruments associated with offsetting matched book positions
 
—

 
265,521

 
—

 
—

 
265,521

Trade and other payables:
 
 
 
 
 
 
 
 
 


Other liabilities
 
—

 
—

 
5,511

(9) 
—

 
5,511

Total trade and other payables
 
—

 
—

 
5,511

 
—

 
5,511

Total liabilities at fair value on a recurring basis
 
$
79,117

 
$
366,710

 
$
5,511

 
$
(76,576
)
 
$
374,762


(1)
We had $755 thousand in transfers of financial instruments from Level 1 to Level 2 during the three months ended June 30, 2013 and $860 thousand in transfers of financial instruments from Level 1 to Level 2 during the nine months ended June 30, 2013.  These transfers were a result of a decrease in availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement. We had $233 thousand in transfers of financial instruments from Level 2 to Level 1 during the three months ended June 30, 2013 and $401 thousand in transfers of financial instruments from Level 2 to Level 1 during the nine months ended June 30, 2013.  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 $55 million of Jefferson County, Alabama Limited Obligation School Warrants ARS and $25 million of Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS.

(4)
Includes $218 million in private equity investments, the weighted-average portion we own is approximately 40%. 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 $62 million of that total as of June 30, 2013.

(5)
Other investments include $171 million of financial instruments that are related to MK & Co.’s obligations to perform under certain of its historic 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)
Goodwill fair value measurements are classified within Level 3 of the fair value hierarchy, which are generally determined using unobservable inputs. See Note 10 for additional information regarding the annual impairment analysis and our methods of estimating the fair value of reporting units that have an allocation of goodwill, including the key assumptions.

(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.

(9)
Primarily comprised of forward commitments to purchase GNMA (as hereinafter defined) MBS arising from our fixed income public finance operations (see Note 16 for additional information regarding these commitments) and to a much lesser extent, other certain commitments.



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)
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)

16
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 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.

The adjustment to fair value of the nonrecurring fair value measures for the nine months ended June 30, 2013 resulted in $5.5 million in additional provision for loan losses and $2.7 million in other losses.


17
Index

Changes in Level 3 recurring fair value measurements

The realized and unrealized gains and losses for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.

Additional information about Level 3 assets and liabilities measured at fair value on a recurring basis is presented below:
Three months ended June 30, 2013 Level 3 assets at fair value
(in thousands)
Financial assets
 
Financial
liabilities
 
Trading instruments
 
Available for sale securities
 
Private equity, other investments and other assets
 
Payables-
trade and
other
 
Non-
agency
CMOs &
ABS
 
Equity
securities
 
Other
securities
 
Non-
agency
CMOs
 
ARS –
municipals
 
ARS -
preferred
securities
 
Private
equity
investments
 
Other
investments
 
Other assets
 
Other
liabilities
Fair value
   March 31, 2013
$
17

 
$
21

 
$
5,723

 
$
420

 
$
134,630

 
$
106,019

 
$
397,715

 
$
3,982

 
$
15

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

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Included in earnings
—

 
(2
)
 
—

 
—

 
356

 
—

 
8,210

(1) 
616

 
—

 
(5,413
)
Included in other comprehensive income
—

 
—

 
—

 
(144
)
 
3,206

 
2,835

 
—

 
—

 
—

 
—

Purchases and contributions
—

 
15

 
1,143

 
—

 
—

 
—

 
5,561

 
120

 
—

 
—

Sales
—

 
—

 
—

 
—

 
(4,884
)
 
—

 
(165,878
)
(2) 
(619
)
 
—

 
—

Redemptions by issuer
—

 
—

 
—

 
—

 
(630
)
 
—

 
—

 
—

 
—

 
—

Distributions
(1
)
 
—

 
(667
)
 
(14
)
 
—

 
—

 
(28,059
)
 
(202
)
 
—

 
—

Transfers: (3)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Into Level 3
—

 
—

 
—

 
—

 
—

 
—

 
—

 
131

 
—

 
—

Out of Level 3
—