RJF-2014.03.31-10Q
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 March 31, 2014
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.

141,075,088 shares of common stock as of May 5, 2014



RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Form 10-Q for the quarter ended March 31, 2014

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)

 
 
 
 
 
March 31, 2014
 
September 30, 2013
 
(in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
2,641,876

 
$
2,596,616

Assets segregated pursuant to regulations and other segregated assets
2,555,155

 
4,064,827

Securities purchased under agreements to resell and other collateralized financings
637,486

 
709,120

Financial instruments, at fair value:
 

 
 

Trading instruments
647,754

 
579,705

Available for sale securities
646,569

 
698,844

Private equity investments
191,401

 
216,391

Other investments
218,192

 
248,512

Derivative instruments associated with offsetting matched book positions
289,271

 
250,341

Receivables:
 

 
 

Brokerage clients, net
1,989,261

 
1,983,340

Stock borrowed
185,868

 
146,749

Bank loans, net
10,028,101

 
8,821,201

Brokers-dealers and clearing organizations
85,086

 
243,101

Loans to financial advisors, net
417,372

 
409,080

Other
492,221

 
407,329

Deposits with clearing organizations
135,554

 
126,405

Prepaid expenses and other assets
629,390

 
611,425

Investments in real estate partnerships held by consolidated variable interest entities
258,633

 
272,096

Property and equipment, net
244,984

 
244,416

Deferred income taxes, net
216,882

 
195,160

Goodwill and identifiable intangible assets, net
357,846

 
361,464

Total assets
$
22,868,902

 
$
23,186,122



(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)
 
 
 
 
 
March 31, 2014
 
September 30, 2013
 
($ in thousands)
Liabilities and equity:
 

 
 

Trading instruments sold but not yet purchased, at fair value
$
200,458

 
$
220,656

Securities sold under agreements to repurchase
377,677

 
300,933

Derivative instruments associated with offsetting matched book positions, at fair value
289,271

 
250,341

Payables:
 

 
 

Brokerage clients
4,112,420

 
5,942,843

Stock loaned
432,223

 
354,377

Bank deposits
10,414,804

 
9,295,371

Brokers-dealers and clearing organizations
157,059

 
109,611

Trade and other
702,013

 
630,344

Other borrowings
78,517

 
84,076

Accrued compensation, commissions and benefits
649,895

 
741,787

Loans payable of consolidated variable interest entities
53,505

 
62,938

Corporate debt
1,192,699

 
1,194,508

Total liabilities
18,660,541

 
19,187,785

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 145,680,145 at March 31, 2014 and 144,559,772 at September 30, 2013
1,439

 
1,429

Additional paid-in capital
1,203,966

 
1,136,298

Retained earnings
2,810,190

 
2,635,026

Treasury stock, at cost; 5,090,046 common shares at March 31, 2014 and 5,002,666 common shares at September 30, 2013
(126,057
)
 
(120,555
)
Accumulated other comprehensive income
(1,234
)
 
10,726

Total equity attributable to Raymond James Financial, Inc.
3,888,304

 
3,662,924

Noncontrolling interests
320,057

 
335,413

Total equity
4,208,361

 
3,998,337

Total liabilities and equity
$
22,868,902

 
$
23,186,122















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 March 31,
 
Six months ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Securities commissions and fees
$
805,719

 
$
764,989

 
$
1,587,899

 
$
1,503,573

Investment banking
67,311

 
50,255

 
147,108

 
135,125

Investment advisory fees
88,096

 
65,503

 
181,510

 
127,573

Interest
118,393

 
118,032

 
235,486

 
241,158

Account and service fees
101,024

 
88,400

 
194,598

 
176,851

Net trading profit
14,842

 
8,128

 
32,993

 
17,467

Other
9,240

 
74,991

 
33,805

 
106,060

Total revenues
1,204,625

 
1,170,298

 
2,413,399

 
2,307,807

Interest expense
25,980

 
27,203

 
51,352

 
55,224

Net revenues
1,178,645

 
1,143,095

 
2,362,047

 
2,252,583

Non-interest expenses:
 

 
 

 
 

 
 

Compensation, commissions and benefits
812,291

 
763,047

 
1,617,236

 
1,525,595

Communications and information processing
69,503

 
65,018

 
131,357

 
125,384

Occupancy and equipment costs
39,897

 
38,694

 
79,582

 
78,172

Clearance and floor brokerage
9,876

 
11,405

 
19,830

 
21,573

Business development
36,667

 
31,488

 
68,911

 
62,117

Investment sub-advisory fees
13,798

 
8,410

 
25,597

 
16,460

Bank loan loss provision
1,979

 
3,737

 
3,615

 
6,660

Acquisition related expenses
—

 
20,922

 
—

 
38,304

Other
41,635

 
41,071

 
84,108

 
71,848

Total non-interest expenses
1,025,646

 
983,792

 
2,030,236

 
1,946,113

Income including noncontrolling interests and before provision for income taxes
152,999

 
159,303

 
331,811

 
306,470

Provision for income taxes
60,904

 
51,057

 
123,195

 
104,330

Net income including noncontrolling interests
92,095

 
108,246

 
208,616

 
202,140

Net (loss) income attributable to noncontrolling interests
(12,465
)
 
28,286

 
(12,577
)
 
36,306

Net income attributable to Raymond James Financial, Inc.
$
104,560

 
$
79,960

 
$
221,193

 
$
165,834

 
 
 
 
 
 
 
 
Net income per common share – basic
$
0.74

 
$
0.57

 
$
1.57

 
$
1.19

Net income per common share – diluted
$
0.72

 
$
0.56

 
$
1.54

 
$
1.17

Weighted-average common shares outstanding – basic
139,888

 
137,817

 
139,498

 
137,156

Weighted-average common and common equivalent shares outstanding – diluted
143,636

 
140,722

 
143,065

 
139,669

 
 
 
 
 
 
 
 
Net income attributable to Raymond James Financial, Inc.
$
104,560

 
$
79,960

 
$
221,193

 
$
165,834

Other comprehensive income (loss), net of tax:(1)
 

 
 

 
 

 
 

Change in unrealized losses on available for sale securities and non-credit portion of other-than-temporary impairment losses
3,482

 
3,606

 
4,576

 
13,744

Change in currency translations and net investment hedges
(10,261
)
 
(4,991
)
 
(16,536
)
 
(8,677
)
Total comprehensive income
$
97,781

 
$
78,575

 
$
209,233

 
$
170,901

 
 
 
 
 
 
 
 
Other-than-temporary impairment:
 

 
 

 
 

 
 

Total other-than-temporary impairment, net
$
2,389

 
$
3,364

 
$
3,973

 
$
6,718

Portion of pre-tax recoveries recognized in other comprehensive income
(2,389
)
 
(3,364
)
 
(4,000
)
 
(7,103
)
Net impairment losses recognized in other revenue
$
—

 
$
—

 
$
(27
)
 
$
(385
)
 
(1)
All components of other comprehensive income, net of tax, are attributable to Raymond James Financial, Inc. 


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)
 
Six months ended March 31,
 
2014
 
2013
 
(in thousands, except per share amounts)
Common stock, par value $.01 per share:
 
 
 
Balance, beginning of year
$
1,429

 
$
1,404

Other issuances
10

 
20

Balance, end of period
1,439

 
1,424

 
 
 
 
Additional paid-in capital:
 

 
 

Balance, beginning of year
1,136,298

 
1,030,288

Employee stock purchases
10,002

 
8,936

Exercise of stock options and vesting of restricted stock units, net of forfeitures
12,747

 
30,989

Restricted stock, stock option and restricted stock unit expense
34,380

 
31,460

Excess tax benefit from share-based payments
9,877

 
2,512

Other
662

 
173

Balance, end of period
1,203,966

 
1,104,358

 
 
 
 
Retained earnings:
 

 
 

Balance, beginning of year
2,635,026

 
2,346,563

Net income attributable to Raymond James Financial, Inc.
221,193

 
165,834

Cash dividends declared
(45,733
)
 
(39,027
)
Other
(296
)
 
(410
)
Balance, end of period
2,810,190

 
2,472,960

 
 
 
 
Treasury stock:
 

 
 

Balance, beginning of year
(120,555
)
 
(118,762
)
Purchases/surrenders
(2,213
)
 
(7,841
)
Exercise of stock options and vesting of restricted stock units, net of forfeitures
(3,289
)
 
4,103

Balance, end of period
(126,057
)
 
(122,500
)
 
 
 
 
Accumulated other comprehensive income:(1)
 

 
 

Balance, beginning of year
$
10,726

 
$
9,447

Net change in unrealized losses on available for sale securities and non-credit portion of other-than-temporary impairment losses, net of tax
4,575

 
13,744

Net change in currency translations and net investment hedges, net of tax
(16,535
)
 
(8,677
)
Balance, end of period
(1,234
)
 
14,514

Total equity attributable to Raymond James Financial, Inc.
$
3,888,304

 
$
3,470,756

 
 
 
 
Noncontrolling interests:
 

 
 

Balance, beginning of year
$
335,413

 
$
411,342

Net (loss) income attributable to noncontrolling interests
(12,577
)
 
36,306

Capital contributions
11,682

 
14,767

Distributions
(14,583
)
 
(34,627
)
Consolidation of acquired entity (2)
—

 
7,592

Other
122

 
5,748

Balance, end of period
320,057

 
441,128

Total equity
$
4,208,361

 
$
3,911,884


(1)
All components of other comprehensive income, net of tax, are attributable to Raymond James Financial, Inc. 

(2)
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)

 
Six months ended March 31,
 
2014
 
2013
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income attributable to Raymond James Financial, Inc.
$
221,193

 
$
165,834

Net (loss) income attributable to noncontrolling interests
(12,577
)
 
36,306

Net income including noncontrolling interests
208,616

 
202,140

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

 
 

Depreciation and amortization
32,444

 
33,011

Deferred income taxes
(23,518
)
 
(196
)
Premium and discount amortization on available for sale securities and unrealized/realized gain on other investments
(17,911
)
 
(70,542
)
Provisions for loan losses, legal proceedings, bad debts and other accruals
9,339

 
10,965

Share-based compensation expense
37,416

 
33,688

Goodwill impairment expense
—

 
6,933

Other
7,571

 
10,180

Net change in:
 

 
 

Assets segregated pursuant to regulations and other segregated assets
1,509,672

 
(851,231
)
Securities purchased under agreements to resell and other collateralized financings, net of securities sold under agreements to repurchase
148,378

 
(9,274
)
Stock loaned, net of stock borrowed
38,727

 
(68,452
)
(Loans provided to) repayments of loans, to financial advisors, net
(14,100
)
 
16,224

Brokerage client receivables and other accounts receivable, net
80,143

 
(113,581
)
Trading instruments, net
(59,341
)
 
84,875

Prepaid expenses and other assets
82,714

 
39,111

Brokerage client payables and other accounts payable
(1,802,701
)
 
867,203

Accrued compensation, commissions and benefits
(92,635
)
 
(70,863
)
Proceeds from sales of securitizations and loans held for sale, net of purchases and originations of loans held for sale
(1,844
)
 
58,329

Excess tax benefits from share-based payment arrangements
(9,877
)
 
(2,512
)
Net cash provided by operating activities
133,093

 
176,008

 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to property and equipment
(31,320
)
 
(46,933
)
Increase in bank loans, net
(1,314,264
)
 
(538,715
)
Redemptions of Federal Home Loan Bank/Federal Reserve Bank stock, net
1,389

 
1,067

Proceeds from sales of loans held for investment
82,991

 
95,988

Sales of private equity and other investments, net
36,469

 
2,006

Purchases of available for sale securities
(1,305
)
 
(62,102
)
Available for sale securities maturations, repayments and redemptions
69,665

 
62,272

Proceeds from sales of available for sale securities
370

 
13

Investments in real estate partnerships held by consolidated variable interest entities, net of other investing activity
(4,457
)
 
1,575

Business acquisition, net of cash acquired
(2,007
)
 
(6,450
)
Net cash used in investing activities
$
(1,162,469
)
 
$
(491,279
)
 
 
 
 
 
 
 
 
 
 
 
 
(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)
 
Six months ended March 31,
 
2014
 
2013
 
(in thousands)
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from borrowed funds, net
$
367

 
$
180,000

Repayments of borrowed funds, net
(7,829
)
 
(130,054
)
Repayments of borrowings by consolidated variable interest entities which are real estate partnerships
(10,955
)
 
(11,344
)
Proceeds from capital contributed to and borrowings of consolidated variable interest entities which are real estate partnerships
3,335

 
908

Exercise of stock options and employee stock purchases
21,684

 
44,219

Increase in bank deposits
1,119,433

 
474,638

Purchase of treasury stock
(6,212
)
 
(9,311
)
Dividends on common stock
(42,760
)
 
(37,457
)
Excess tax benefits from share-based payment arrangements
9,877

 
2,512

Net cash provided by financing activities
1,086,940

 
514,111

 
 
 
 
Currency adjustment:
 

 
 

Effect of exchange rate changes on cash
(12,304
)
 
(4,711
)
Net increase in cash and cash equivalents
45,260

 
194,129

Cash and cash equivalents at beginning of year
2,596,616

 
1,980,020

Cash and cash equivalents at end of period
$
2,641,876

 
$
2,174,149

 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Cash paid for interest
$
49,750

 
$
53,442

Cash paid for income taxes
$
179,488

 
$
83,111

Non-cash transfers of loans to other real estate owned
$
2,448

 
$
1,902




























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

8
Index

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2014

NOTE 1 – INTRODUCTION AND BASIS OF PRESENTATION

Description of business

Raymond James Financial, Inc. (“RJF” or the “Company”) 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 120 - 122 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, 2013, as filed with the United States (“U.S.”) Securities and Exchange Commission (the “2013 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 2013 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.

Fiscal year 2013 acquisition

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 investment objective. During the second quarter, we made an earn-out payment to the sellers of ClariVest. See Note 3 for additional information.

Adoption of new accounting guidance

In December 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance requiring additional disclosures regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments.  This guidance was further amended in January 2013. Specifically, this new guidance requires additional information about derivatives, repurchase agreements, reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. This guidance was first effective for our quarter ended December 31, 2013.  See Note 14 for these additional disclosures.

In February 2013, the FASB issued new guidance intended to improve the reporting of reclassifications out of accumulated other comprehensive income (“AOCI”). The new guidance requires us to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its

9
Index

entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, we are required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This new guidance was first effective for our quarter ended December 31, 2013.  See Note 17 for these additional disclosures.

Significant subsidiaries

As of March 31, 2014, 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 Financial Services Advisors, Inc. (“RJFSA”), a registered investment advisor, Raymond James Ltd. (“RJ Ltd.”), a broker-dealer headquartered in Canada, Eagle Asset Management, Inc. (“Eagle”) and Raymond James Bank, N.A. (“RJ Bank”), a national bank.

In mid-February 2013, the client accounts of Morgan Keegan & Company, Inc. (a broker-dealer hereinafter referred to as “MK & Co.”), a subsidiary which we had considered in certain prior periods to be a significant subsidiary, were transferred to RJ&A pursuant to our strategy to integrate the operations of MK & Co. and MK Holding, Inc. and certain of its affiliates (collectively referred to hereinafter as “Morgan Keegan”) into our own. RJF acquired Morgan Keegan from Regions Financial Corporation (“Regions”) on April 2, 2012 (the “Closing Date”).

NOTE 2 – UPDATE OF SIGNIFICANT ACCOUNTING POLICIES

A summary of our significant accounting policies is included in Note 2 on pages 104 - 122 of our 2013 Form 10-K. There have been no significant changes in our significant accounting policies since September 30, 2013.
Brokerage client receivables, loans to financial advisors and allowance for doubtful accounts
As more fully described in Note 2 on page 112 of our 2013 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 $2.5 million and $2.8 million at March 31, 2014 and September 30, 2013, respectively. Of the March 31, 2014 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 $3.5 million.
Reclassifications
As more fully described in Note 1 on page 104, and Note 28 on page 187 of our 2013 Form 10-K, effective September 30, 2013 we implemented changes in our reportable segments. These segment changes had no effect on the historical financial results of operations. Prior period segment balances impacted by this change have been reclassified to conform to the current presentation. See Note 23 for presentation of segment information.
Certain other prior period amounts, none of which are material, have been reclassified to conform to the current presentation.

NOTE 3 – ACQUISITIONS

Acquisitions during fiscal year 2013

On December 24, 2012 (the “ClariVest Acquisition Date”), we completed our acquisition of a 45% interest in ClariVest. On the ClariVest Acquisition Date, we paid approximately $8.8 million in cash to the sellers for our interest. A computation based upon the actual earnings of ClariVest during the one year period since the ClariVest Acquisition Date was performed and additional cash consideration owed to the sellers of approximately $2 million was paid during the three month period ended March 31, 2014.

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 Eagle 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 purposes of certain acquisition related financial reporting requirements, the ClariVest acquisition is not considered to be material to our overall financial condition.


10
Index

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

Acquisition related expense

Acquisition related expenses are recorded in the Condensed Consolidated Statement of Income and Comprehensive Income and include certain incremental expenses arising from our acquisitions.  Acquisition related expenses in the current fiscal year are no longer material for separate disclosure since our integration of Morgan Keegan was substantially complete as of September 30, 2013. In the prior year periods, we incurred the following acquisition related expense:
 
Three months ended March 31, 2013
 
Six months ended March 31, 2013
 
(in thousands)
Information systems integration and conversion costs (1)
$
10,381

 
$
22,545

Severance (2)
5,806

 
6,205

Temporary services
1,389

 
1,603

Occupancy and equipment costs (3)
708

 
1,274

Financial advisory fees
—

 
1,176

Legal
435

 
459

Other integration costs
2,203

 
5,042

Total acquisition related expense
$
20,922

 
$
38,304


(1)
Includes equipment costs related to the disposition of information systems equipment, and temporary services incurred specifically related to the information systems conversion.

(2)
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.

(3)
Includes lease costs associated with the abandonment of certain facilities resulting from the Morgan Keegan acquisition.


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 106 of our 2013 Form 10-K.

Our cash and cash equivalents, assets segregated pursuant to regulations or other segregated assets, and deposits with clearing organization balances are as follows:
 
March 31,
2014
 
September 30,
2013
 
(in thousands)
Cash and cash equivalents:
 
 
 
Cash in banks
$
2,630,650

 
$
2,593,890

Money market fund investments
11,226

 
2,726

Total cash and cash equivalents (1)
2,641,876

 
2,596,616

Cash segregated pursuant to federal regulations and other segregated assets (2)
2,555,155

 
4,064,827

Deposits with clearing organizations (3)
135,554

 
126,405

 
$
5,332,585

 
$
6,787,848


(1)
The total amounts presented include cash and cash equivalents of $1.07 billion and $1.02 billion as of March 31, 2014 and September 30, 2013, 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 under the Securities Exchange Act of 1934. RJ&A, as a broker-dealer carrying client accounts, is subject to requirements related to maintaining cash or qualified securities in segregated reserve accounts for the exclusive benefit of its’ clients. Additionally, 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.

11
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 on pages 107 - 111 of our 2013 Form 10-K. There have been no material changes to our valuation methodologies since our year ended September 30, 2013.

Assets and liabilities measured at fair value on a recurring and nonrecurring basis are presented below:
March 31, 2014
 
Quoted prices
in active
markets for
identical
assets
(Level 1) (1)
 
Significant
other
observable
inputs
(Level 2) (1)
 
Significant
unobservable
inputs
(Level 3)
 
Netting
adjustments (2)
 
Balance as of
March 31,
2014
 
 
(in thousands)
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments:
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
4,470

 
$
166,759

 
$
—

 
$
—

 
$
171,229

Corporate obligations
 
2,582

 
64,716

 
—

 
—

 
67,298

Government and agency obligations
 
6,390

 
54,442

 
—

 
—

 
60,832

Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)
 
693

 
149,871

 
—

 
—

 
150,564

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

 
37,692

 
13

 
—

 
37,705

Total debt securities
 
14,135

 
473,480

 
13

 
—

 
487,628

Derivative contracts
 
—

 
84,607

 
—

 
(59,938
)
 
24,669

Equity securities
 
57,355

 
3,846

 
37

 
—

 
61,238

Corporate loans
 
—

 
33,074

 
—

 
—

 
33,074

Other
 
462

 
37,980

 
2,703

 
—

 
41,145

Total trading instruments
 
71,952

 
632,987

 
2,753

 
(59,938
)
 
647,754

Available for sale securities:
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 
—

 
296,709

 
—

 
—

 
296,709

Non-agency CMOs
 
—

 
125,563

 
38

 
—

 
125,601

Other securities
 
2,084

 
—

 
—

 
—

 
2,084

Auction rate securities (“ARS”):
 
 

 
 

 
 

 
 

 
 

Municipals
 
—

 
—

 
109,960

(3) 
—

 
109,960

Preferred securities
 
—

 
—

 
112,215

 
—

 
112,215

Total available for sale securities
 
2,084

 
422,272

 
222,213

 
—

 
646,569

Private equity investments
 
—

 
—

 
191,401

(4) 
—

 
191,401

Other investments (5)
 
215,141

 
1,263

 
1,788

 
—

 
218,192

Derivative instruments associated with offsetting matched book positions
 
—

 
289,271

 
—

 
—

 
289,271

Other assets:
 
 
 
 
 
 
 
 
 
 
Derivative contracts
 
—

 
146

 
—

 
—

 
146

Other assets
 
—

 
—

 
15

 
—

 
15

Total other assets
 
—

 
146

 
15

 
—

 
161

Total assets at fair value on a recurring basis
 
$
289,177

 
$
1,345,939

 
$
418,170

 
$
(59,938
)
 
$
1,993,348

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

 
 

 
 

 
 

 
 

Bank loans, net:
 
 

 
 

 
 

 
 

 
 

Impaired loans
 
$
—

 
$
39,555

 
$
50,489

 
$
—

 
$
90,044

Loans held for sale(7)
 
—

 
1,515

 
—

 
—

 
1,515

Total bank loans, net
 
—

 
41,070

 
50,489

 
—

 
91,559

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

 
422

 
—

 
—

 
422

Total assets at fair value on a nonrecurring basis
 
$
—

 
$
41,492

 
$
50,489

 
$
—

 
$
91,981

 
(continued on next page)

12
Index

March 31, 2014
 
Quoted prices
in active
markets for
identical
assets
(Level 1) (1)
 
Significant
other
observable
inputs
(Level 2) (1)
 
Significant
unobservable
inputs
(Level 3)
 
Netting
adjustments (2)
 
Balance as of
March 31,
2014
 
 
(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
 
$
5,680

 
$
2,008

 
$
—

 
$
—

 
$
7,688

Corporate obligations
 
911

 
22,062

 
—

 
—

 
22,973

Government obligations
 
147,663

 
—

 
—

 
—

 
147,663

Agency MBS and CMOs
 
209

 
1,977

 
—

 
—

 
2,186

Total debt securities
 
154,463

 
26,047

 
—

 
—

 
180,510

Derivative contracts
 
—

 
69,999

 
—

 
(64,171
)
 
5,828

Equity securities
 
14,050

 
70

 
—

 
—

 
14,120

Total trading instruments sold but not yet purchased
 
168,513

 
96,116

 
—

 
(64,171
)
 
200,458

Derivative instruments associated with offsetting matched book positions
 
—

 
289,271

 
—

 
—

 
289,271

Trade and other payables:
 
 
 
 
 
 
 
 
 


Derivative contracts
 
—

 
662

 
—

 
—

 
662

Other liabilities
 
—

 
—

 
82

(9) 
—

 
82

Total trade and other payables
 
—

 
662

 
82

 
—

 
744

Total liabilities at fair value on a recurring basis
 
$
168,513

 
$
386,049

 
$
82

 
$
(64,171
)
 
$
490,473


(1)
We had no transfers of financial instruments from Level 1 to Level 2 during the three and six months ended March 31, 2014.  We had no transfers of financial instruments from Level 2 to Level 1 during the three and six months ended March 31, 2014.  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 (see Note 14 for additional information regarding offsetting financial instruments).

(3)
Includes $58 million of Jefferson County, Alabama Limited Obligation School Warrants ARS.

(4)
The portion of these investments we do not own is approximately $55 million as of March 31, 2014 and are included as a component of noncontrolling interest in our Condensed Consolidated Statements of Financial Condition. The weighted average portion we own is approximately $136 million or 71% of the total private equity investments of $191 million included in our Condensed Consolidated Statements of Financial Condition.

(5)
Other investments include $145 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 on page 119, and Note 23 on page 176, of our 2013 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.

(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)
Includes 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.


13
Index


September 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
September 30,
2013
 
 
(in thousands)
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments:
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
10

 
$
202,816

 
$
—

 
$
—

 
$
202,826

Corporate obligations
 
833

 
59,573

 
—

 
—

 
60,406

Government and agency obligations
 
6,408

 
106,988

 
—

 
—

 
113,396

Agency MBS and CMOs
 
155

 
92,994

 
—

 
—

 
93,149

Non-agency CMOs and ABS
 
—

 
16,957

 
14

 
—

 
16,971

Total debt securities
 
7,406

 
479,328

 
14

 
—

 
486,748

Derivative contracts
 
—

 
89,633

 
—

 
(61,524
)
 
28,109

Equity securities
 
48,749

 
4,231

 
35

 
—

 
53,015

Other
 
1,413

 
6,464

 
3,956

 
—

 
11,833

Total trading instruments
 
57,568

 
579,656

 
4,005

 
(61,524
)
 
579,705

 
 
 
 
 
 
 
 
 
 
 
Available for sale securities:
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 
—

 
326,029

 
—

 
—

 
326,029

Non-agency CMOs
 
—

 
128,943

 
78

 
—

 
129,021

Other securities
 
2,076

 
—

 
—

 
—

 
2,076

ARS:
 
 

 
 

 
 

 
 

 


Municipals
 
—

 
—

 
130,934

(3) 
—

 
130,934

Preferred securities
 
—

 
—

 
110,784

 
—

 
110,784

Total available for sale securities
 
2,076

 
454,972

 
241,796

 
—

 
698,844

 
 
 
 
 
 
 
 
 
 
 
Private equity investments
 
—

 
—

 
216,391

(4) 
—

 
216,391

Other investments (5)
 
241,627

 
2,278

 
4,607

 
—

 
248,512

Derivative instruments associated with offsetting matched book positions
 
—

 
250,341

 
—

 
—

 
250,341

Other receivables
 
—

 
—

 
2,778

(6) 
—

 
2,778

Other assets
 
—

 
—

 
15

 
—

 
15

Total assets at fair value on a recurring basis
 
$
301,271

 
$
1,287,247

 
$
469,592

 
$
(61,524
)
 
$
1,996,586

 
 
 
 
 
 
 
 
 
 
 
Assets at fair value on a nonrecurring basis: (7)
 
 

 
 

 
 

 
 

 
 

Bank loans, net
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
—

 
33,187

 
59,868

 
—

 
93,055

Loans held for sale(8)
 
—

 
28,119

 
—

 
—

 
28,119

Total bank loans, net
 
—

 
61,306

 
59,868

 
—

 
121,174

OREO(9)
 
—

 
209

 
—

 
—

 
209

Total assets at fair value on a nonrecurring basis
 
$
—

 
$
61,515

 
$
59,868

 
$
—

 
$
121,383

 
 
 
 
 
 
 
 
 
 
 
(continued on next page)

14
Index

September 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
September 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
 
$
165

 
$
1,612

 
$
—

 
$
—

 
$
1,777

Corporate obligations
 
30

 
9,081

 
—

 
—

 
9,111

Government obligations
 
169,816

 
—

 
—

 
—

 
169,816

Agency MBS and CMOs
 
3,068

 
—

 
—

 
—

 
3,068

Total debt securities
 
173,079

 
10,693

 
—

 
—

 
183,772

Derivative contracts
 
—

 
74,920

 
—

 
(69,279
)
 
5,641

Equity securities
 
31,151

 
92

 
—

 
—

 
31,243

Total trading instruments sold but not yet purchased
 
204,230

 
85,705

 
—

 
(69,279
)
 
220,656

Derivative instruments associated with offsetting matched book positions
 
—

 
250,341

 
—

 
—

 
250,341

Trade and other payables:
 
 
 
 
 
 
 
 
 
 
Derivative contracts
 
—

 
714

 
—

 
—

 
714

Other liabilities
 
—

 
—

 
60

 
—

 
60

Total trade and other payables
 
—

 
714

 
60

 
—

 
774

Total liabilities at fair value on a recurring basis
 
$
204,230

 
$
336,760

 
$
60

 
$
(69,279
)
 
$
471,771


(1)
We had $860 thousand transfers of financial instruments from Level 1 to Level 2 during the year ended September 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 $401 thousand in transfers of financial instruments from Level 2 to Level 1 during the year ended September 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 (see Note 14 for additional information regarding offsetting financial instruments).

(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)
Of the total private equity investments, the weighted-average portion we own is approximately 41%.  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 $63 million of the total as of September 30, 2013.

(5)
Other investments include $176 million of financial instruments that are related to obligations to perform under certain of MK & Co.’s historic deferred compensation plans (see Note 2 on page 119, and Note 23 on page 176, of our 2013 Form 10-K for further information regarding these plans).

(6)
Primarily comprised of forward commitments to purchase GNMA (as hereinafter defined) MBS arising from our fixed income public finance operations (see Note 20 on page 171 of our 2013 Form 10-K for additional information).

(7)
Goodwill fair value measurements are classified within Level 3 of the fair value hierarchy, which are generally determined using unobservable inputs. See Note 13 on pages 155 - 157 of our 2013 Form 10-K 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.

(8)
Includes individual loans classified as held for sale, which were recorded at a fair value lower than cost.

(9)
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.


15
Index

The adjustment to fair value of the nonrecurring fair value measures for the six months ended March 31, 2014 resulted in a $176 thousand reversal of the provision for loan losses and $1.5 million in other losses. The adjustment to fair value of the nonrecurring fair value measures for the six months ended March 31, 2013 resulted in $5.7 million in additional provision for loan losses and $49 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 March 31, 2014 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
 
Non-
agency
CMOs
 
ARS –
municipals
 
ARS -
preferred
securities
 
Private
equity
investments
 
Other
investments
 
Other assets
 
Other
liabilities
Fair value
   December 31, 2013
$
13

 
$
35

 
$
4,199

 
$
46

 
$
108,458

 
$
112,122

 
$
209,977

 
$
1,949

 
$
15

 
$
(1,417
)
Total gains (losses) for the period:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Included in earnings
—

 
5

 
(32
)
 
—

 
63

 
44

 
13


48

 
—

 
1,335

Included in other comprehensive income
—

 
—

 
—

 
6

 
1,849

 
374

 
—

 
—

 
—

 
—

Purchases and contributions
—

 
23

 
3,185

 
—

 
—

 
—

 
5,317

 
—

 
—

 
—

Sales
—

 
(26
)
 
(4,649
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Redemptions by issuer
—

 
—

 
—

 
—

 
(410
)
 
(325
)
 
—

 
(28
)
 
—

 
—

Distributions
—

 
—

 
—

 
(14
)
 
—

 
—

 
(5,329
)
 
(181
)
 
—

 
—

Transfers: (1)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

Into Level 3
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Out of Level 3
—

 
—

 
—

 
—

 
—

 
—

 
(18,577
)
(2) 
—

 
—

 
—

Fair value
   March 31, 2014
$
13

 
$
37

 
$
2,703

 
$
38

 
$
109,960

 
$
112,215

 
$
191,401

 
$
1,788

 
$
15

 
$
(82
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
$
—

 
$
5

 
$
(32
)
 
$
—

 
$
63

 
$
44

 
$
13

 
$
60

 
$
—

 
$
—


(1)
Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized.

(2)
The transfers out of Level 3 were primarily comprised of the portion of private equity investments which do not represent equity investments, whose balances were transferred to cash and cash equivalents or other receivables on our Consolidated Statements of Financial Condition, and whose carrying values approximate fair value.


16
Index

Six months ended March 31, 2014 Level 3 assets at fair value
(in thousands)
 
Financial assets