q10063008.htm


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, 2008

or

o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
   
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from
 
to
 

Commission File Number: 1-9109

RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

Florida
 
No. 59-1517485
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     

880 Carillon Parkway, St. Petersburg, Florida 33716
(Address of principal executive offices)    (Zip Code)

(727) 567-1000
(Registrant's telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

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

Large accelerated filer x
Accelerated filer o
   
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o                                 No x

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

119,719,189 shares of Common Stock as of August 5, 2008




   
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
 
       
   
Form 10-Q for the Quarter Ended June 30, 2008
 
       
   
INDEX
 
       
       
PART I.
 
FINANCIAL INFORMATION
PAGE
       
Item 1.
 
Financial Statements (unaudited)
 
       
   
Condensed Consolidated Statements of Financial Condition as of June 30, 2008 and September 30, 2007 (unaudited)
3
       
   
Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended June 30, 2008 and June 30, 2007 (unaudited)
4
       
   
Condensed Consolidated Statements of Income and Comprehensive Income for the nine months ended June 30, 2008 and June 30, 2007 (unaudited)
4
       
   
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2008 and June 30, 2007 (unaudited)
5
       
   
Notes to Condensed Consolidated Financial Statements (unaudited)
7
       
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
30
       
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
53
       
Item 4.
 
Controls and Procedures
56
       
PART II.
 
OTHER INFORMATION
56
       
Item 1.
 
Legal Proceedings
56
       
Item 1A.
 
Risk Factors
57
       
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
57
       
Item 6.
 
Exhibits
57
       
   
Signatures
58
       
       

2


PART I   FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS


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

 
June 30,
September 30,
 
2008
2007
 
(in 000’s)
Assets:
   
Cash and Cash Equivalents
$     669,541 
$      644,943 
Assets Segregated Pursuant to Regulations and Other Segregated Assets
4,121,260 
4,127,667 
Securities Purchased under Agreements to Resell and Other Collateralized Financings
972,996 
1,295,004 
Financial Instruments:
   
Trading Instruments, at Fair Value
491,599 
467,761 
Available for Sale Securities, at Fair Value
619,166 
569,952 
Other Investments, at Fair Value
88,694 
90,637 
Receivables:
   
Brokerage Clients, Net
1,965,787 
1,704,300 
Stock Borrowed
1,166,913 
1,292,265 
Bank Loans, Net
6,680,362 
4,664,209 
Brokers-Dealers and Clearing Organizations
141,609 
228,865 
Other
339,150 
315,227 
Investments in Real Estate Partnerships - Held by Variable Interest Entities
222,692 
221,147 
Property and Equipment, Net
184,665 
166,963 
Deferred Income Taxes, Net
112,733 
107,922 
Deposits With Clearing Organizations
75,746 
36,416 
Goodwill
62,575 
62,575 
Prepaid Expenses and Other Assets
363,700 
258,315 
     
 
$ 18,279,188 
$ 16,254,168 
     
Liabilities And Shareholders' Equity:
   
Loans Payable
$      312,904 
$      122,640 
Loans Payable Related to Investments by Variable Interest Entities in Real Estate Partnerships
101,197 
116,479 
Payables:
   
Brokerage Clients
5,825,439 
5,675,860 
Stock Loaned
1,177,188 
1,280,747 
Bank Deposits
7,746,139 
5,585,259 
Brokers-Dealers and Clearing Organizations
197,299 
128,298 
Trade and Other
186,450 
450,008 
Trading Instruments Sold but Not Yet Purchased, at Fair Value
241,974 
149,729 
Securities Sold Under Agreements to Repurchase
88,707 
393,282 
Accrued Compensation, Commissions and Benefits
311,515 
356,627 
Income Taxes Payable
3,504 
7,755 
     
 
16,192,316 
14,266,684 
     
Minority Interests
239,494 
229,670 
     
Shareholders' 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
   
with 123,611,432 Issued at June 30, 2008 and Authorized
   
180,000,000 Shares with 120,903,331 Issued at September 30, 2007
1,197 
1,176 
Shares Exchangeable into Common Stock; 273,042
   
at June 30, 2008 and September 30, 2007
3,504 
3,504 
Additional Paid-In Capital
334,091 
277,095 
Retained Earnings
1,603,478 
1,461,898 
Accumulated Other Comprehensive Income
(8,695) 
30,191 
 
1,933,575 
1,773,864 
Less: 3,978,879 and 1,005,668  Common Shares in Treasury, at Cost
(86,197)
(16,050)
 
1,847,378 
1,757,814 
     
 
$ 18,279,188 
$ 16,254,168 
     
See accompanying Notes to Condensed Consolidated Financial Statements.


3


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(in 000’s, except per share amounts)

 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
June 30,
June 30,
 
2008
2007
2008
2007
Revenues:
       
Securities Commissions and Fees
$ 483,225 
$ 462,047 
$1,437,327 
$1,281,204 
Investment Banking
36,236 
51,818 
87,323 
131,682 
Investment Advisory Fees
51,492 
51,754 
161,416 
152,487 
Interest
156,935 
191,691 
561,199 
514,727 
Net Trading Profits
11,100 
7,050 
5,256 
16,434 
Financial Service Fees
31,774 
30,285 
97,512 
91,683 
Other
37,986 
28,108 
95,040 
82,436 
         
Total Revenues
808,748 
822,753 
2,445,073 
2,270,653 
         
Interest Expense
66,724 
134,093 
325,535 
352,374 
Net Revenues
742,024 
688,660 
2,119,538 
1,918,279 
 
 
 
Non-Interest Expenses:
       
Compensation, Commissions and Benefits
490,479 
462,459 
1,434,389 
1,299,862 
Communications and Information Processing
30,899 
28,828 
93,140 
83,080 
Occupancy and Equipment Costs
26,102 
19,983 
71,600 
59,849 
Clearance and Floor Brokerage
7,969 
8,180 
23,648 
22,662 
Business Development
24,527 
22,416 
70,130 
66,252 
Investment Advisory Fees
12,997 
12,111 
38,490 
34,615 
Other
34,358 
29,156 
87,552 
60,686 
Total Non-Interest Expenses
627,331 
583,133 
1,818,949 
1,627,006 
         
Minority Interest in Subsidiaries
(425)
(4,371)
(3,104)
(5,346)
     
Income Before Provision for Income Taxes
115,118 
109,898 
303,693 
296,619 
         
Provision for Income Taxes
45,180 
41,545 
117,723 
109,156 
         
Net Income
$  69,938 
$  68,353 
$  185,970 
$   187,463 
         
Net Income per Share-Basic
$      0.60 
$      0.59 
$         1.59 
$         1.63 
Net Income per Share-Diluted
$      0.59 
$      0.57 
$         1.56 
$         1.58 
Weighted Average Common Shares
       
Outstanding-Basic
115,633 
116,135 
116,573 
115,353 
Weighted Average Common and Common
       
Equivalent Shares Outstanding-Diluted
118,272 
119,140 
119,212 
118,425 
         
Cash Dividend per Common Share
$      0.11 
$       0.10 
$         0.33 
$        0.30 
         
Net Income
$  69,938 
$   68,353 
$ 185,970 
$   187,463 
Other Comprehensive Income:
       
Net Unrealized Gain (Loss) on Available
       
  for SaleSecurities, Net of Tax
1,834 
(954)
(35,383)
(834)
Net Change in Currency Translations, Net of Tax
874 
9,190 
(3,503)
7,842 
Total Comprehensive Income
$  72,646 
$  76,589 
$   147,084 
$ 194,471 

See accompanying Notes to Condensed Consolidated Financial Statements.

4


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in 000’s)
(continued on next page)

 
Nine Months Ended
 
June 30,
June 30,
 
2008
2007
Cash Flows From Operating Activities:
   
Net Income
$ 185,970 
$     187,463 
Adjustments to Reconcile Net Income to Net
   
Cash Provided by (Used in) Operating Activities:
   
Depreciation and Amortization
20,240 
16,310 
Excess Tax Benefits from Share-Based Payment Arrangements
(392)
(1,781)
Deferred Income Taxes
17,351 
(2,673)
Premium and Discount Amortization on Available for Sale Securities
   
and Unrealized Gain on Other Investments
(379)
673 
Other-than-temporary Impairment on Available for Sale Securities
2,823 
Loss on Sale of Property and Equipment
40 
13 
Gain on Sale of Loans Available for Sale
(304)
(397)
Gain on Sale of Joint Venture Interest
(2,559)
Provision for Loan Loss, Legal Proceedings, Bad Debts and Other Accruals
43,465 
17,169 
Share-Based Compensation Expense
27,102 
27,089 
     
(Increase) Decrease in Operating Assets:
   
Assets Segregated Pursuant to Regulations and Other Segregated Assets
6,407 
(583,594)
Receivables:
   
Brokerage Clients, Net
(264,674)
(205,536)
Stock Borrowed
125,352 
(308,900)
Brokers-Dealers and Clearing Organizations
87,256 
(243,963)
Other
(35,921)
(87,014)
Securities Purchased Under Agreements to Resell and Other Collateralized
   
Financings, Net of Securities Sold Under Agreements to Repurchase
(162,567)
(183,317)
Trading Instruments, Net
68,407 
(4,854)
Proceeds from Sale of Loans Available for Sale
26,907 
29,396 
Origination of Loans Available for Sale
(26,111)
(30,906)
Prepaid Expenses and Other Assets
(145,135)
(17,781)
     
Increase (Decrease) in Operating Liabilities:
   
Payables:
   
Brokerage Clients
149,579 
779,159 
Stock Loaned
(103,559)
267,231 
Brokers-Dealers and Clearing Organizations
69,001 
148,455 
Trade and Other
19,395 
27,507 
Accrued Compensation, Commissions and Benefits
(44,241)
(15,941)
Income Taxes Payable
(9,967)
(23,073)
Minority Interest
(3,104)
(5,346)
     
Net Cash Provided by (Used in)Operating Activities
52,941 
(217,170)


See accompanying Notes to Condensed Consolidated Financial Statements.

5


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in 000’s)
(continued from previous page)

 
Nine Months Ended
 
June 30,
June 30,
 
2008
2007
     
Cash Flows from Investing Activities:
   
Additions to Property and Equipment, Net
(35,348)
(30,062)
Proceeds from Sale of Joint Venture Interest, Net of Cash Disposed
3,514 
Bank loan Originations and Purchases
(4,342,767)
(2,563,294)
Bank loan Repayments
2,006,563 
1,388,809 
Purchases of Other Investments, Net
2,482 
(18,434)
Investments in Real Estate Partnerships-Held by Variable
   
Interest Entities
(1,545)
(16,818)
Repayments of Loans by Investor Members of Variable Interest Entities Related
   
to Investments in Real Estate Partnerships
6,112 
12,780 
Securities Purchased Under Agreements to Resell, Net
180,000 
(895,000)
Sales of Available for Sale Securities
81 
Purchases of Available for Sale Securities
(189,565)
(325,096)
Available for Sale Securities Maturations and Repayments
81,376 
75,995 
     
Net Cash Used in Investing Activities
(2,292,692)
(2,367,525)
     
Cash Flows from Financing Activities:
   
Proceeds from Borrowed Funds, Net
200,000 
426,900 
Repayments of Mortgage and Borrowings, Net
(9,736)
(15,233)
Proceeds from Borrowed Funds Related to Investments by Variable Interest
   
Entities in Real Estate Partnerships
4,237 
5,202 
Repayments of Borrowed Funds Related to Investments by Variable Interest
   
Entities in Real Estate Partnerships
(19,519)
(36,339)
Proceeds from Capital Contributed to Variable Interest Entities Related to
   
Investments in Real Estate Partnerships
28,264 
58,816 
Minority Interest
(15,336)
(29,479)
Exercise of Stock Options and Employee Stock Purchases
26,140 
32,811 
Increase in Bank Deposits
2,160,880 
2,217,666 
Purchase of Treasury Stock
(67,243)
(1,350)
Dividends on Common Stock
(40,227)
(36,411)
Excess Tax Benefits from Share-Based Payment Arrangements
392 
1,781 
     
Net Cash Provided by Financing Activities
2,267,852 
2,624,364 
     
Currency Adjustment:
   
Effect of Exchange Rate Changes on Cash
(3,503)
7,842 
Net Increase in Cash and Cash Equivalents
24,598 
47,511 
     
Cash Resulting from Consolidation of Variable Interest Entities Related to
   
Investments in Real Estate Partnerships
(291)
Cash Resulting from Consolidation of Limited Partnerships
3,945 
Cash and Cash Equivalents at Beginning of Year
644,943 
392,418 
     
Cash and Cash Equivalents at End of Period
$  669,541 
$   443,583 
     
Supplemental Disclosures of Cash Flow Information:
   
Cash Paid for Interest
$  330,370 
$   349,101 
Cash Paid for Income Taxes
$   109,942 
$   128,364 


See accompanying Notes to Condensed Consolidated Financial Statements.

6


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008

NOTE 1 - BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements include the accounts of Raymond James Financial, Inc. (“RJF”) and its consolidated subsidiaries that are generally controlled through a majority voting interest.  RJF is a holding company headquartered in Florida whose subsidiaries are engaged in various financial service businesses; as used herein, the term “the Company” refers to RJF and/or one or more of its subsidiaries.  In accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), the Company also consolidates any variable interest entities (“VIEs”) for which it is the primary beneficiary. Additional information is provided in Note 6. When the Company does not have a controlling interest in an entity, but exerts significant influence over the entity, the Company applies the equity method of accounting. All material intercompany balances and transactions have been eliminated in consolidation.

Certain financial information that is normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America ("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 the Company's 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 the Company's Annual Report on Form 10-K for the year ended September 30, 2007.  To prepare consolidated financial statements in conformity with GAAP, management must estimate certain amounts that affect the reported assets and liabilities, disclosure of contingent assets and liabilities, and reported revenues and expenses. Actual results could differ from those estimates. Certain revisions and reclassifications have been made to the unaudited condensed consolidated financial statements of the prior period to conform to the current period presentation. For the nine months ended June 30, 2007, the Company reclassified certain segregated assets and reverse repurchase agreements from cash and cash equivalents. The Condensed Consolidated Statements of Cash Flows for the respective period were adjusted for this reclassification, which resulted in an increase in cash flows used in operating activities of $52.1 million. In addition, a reclassification of $1.5 million related to loans available for sale further increased cash flows used in operating activities and decreased cash flows used in investing activities. In the quarter ended September 30, 2007, a new segment was established: Proprietary Capital. The components of this segment were previously included in the Asset Management and Other segments. Reclassifications have been made in the segment disclosure for the three and nine months ended June 30, 2007 to conform to this presentation. Additional information is provided in Note 17 below.

The Company’s quarters end on the last day of each calendar quarter.

NOTE 2 – EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS:

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”. FIN 48 establishes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN 48, evaluation of income tax benefits is a two-step process. First, income tax benefits can be recognized in financial statements for a tax position if it is considered “more likely than not” (as defined in SFAS 5, “Accounting for Contingencies”) of being sustained on audit based solely on the technical merits of the income tax position. Second, if the recognition criteria are met, the amount of income tax benefits to be recognized is measured based on the largest income tax benefit that is more than 50 percent likely to be realized on ultimate resolution of the tax position. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN 48 on October 1, 2007. See Note 10 below for information regarding the impact the adoption of FIN 48 had on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (October 1, 2008 for the Company), and interim periods within those fiscal years. Although the Company will have to comply with the additional disclosure requirements of this pronouncement, it does not expect SFAS 157 to have a material impact on the financial position or operating results of the Company.

7


In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows companies to elect to follow fair value accounting for certain financial assets and liabilities on an instrument by instrument basis. SFAS 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007 (October 1, 2008 for the Company). The Company does not expect SFAS 159 to have a material impact on the consolidated financial statements of the Company.

In April 2007, the FASB issued Staff Position (“FSP”) FIN No. 39-1, "Amendment of FASB Interpretation No. 39” (“FSP FIN No. 39-1”). FSP FIN No. 39-1 defines "right of setoff" and specifies what conditions must be met for a derivative contract to qualify for this right of setoff. FSP FIN No. 39-1 also addresses the applicability of a right of setoff to derivative instruments and clarifies the circumstances in which it is appropriate to offset amounts recognized for those instruments in the statement of financial position. In addition, this FSP permits offsetting of fair value amounts recognized for multiple derivative instruments executed with the same counterparty under a master netting arrangement and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the same master netting arrangement as the derivative instruments. This interpretation is effective for fiscal years beginning after November 15, 2007 (October 1, 2008 for the Company), with early application permitted. The Company is currently evaluating the impact the adoption of FSP FIN No. 39-1 will have on its consolidated financial statements.

In May 2007, the FASB issued FSP FIN No. 46R-7, "Application of FASB Interpretation No. 46(R) to Investment Companies". FSP FIN No. 46R-7 amends the scope of the exception to FIN 46R to state that investments accounted for at fair value in accordance with the specialized accounting guidance in the American Institute of Certified Public Accountants ("AICPA") Audit and Accounting Guide, Investment Companies, (the “Guide”) are not subject to consolidation under FIN 46R. This FSP remains effective only upon initial adoption of Statement of Position (“SOP”) 07-1, "Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies" (“SOP 07-1”).

In June 2007, the Accounting Standards Executive Committee of the AICPA issued SOP 07-1. This SOP provides guidance for determining whether an entity is within the scope of the Guide. Additionally, it provides guidance as to whether a parent company or an equity method investor can apply the specialized industry accounting principles of the Guide (referred to as investment company accounting). In February 2008, the FASB issued FSP SOP 07-1-1, “Effective Date of AICPA Statement of Position 07-1”, which delays indefinitely the effective date of SOP 07-1.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires noncontrolling interests to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. This statement is applicable to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements and is effective for fiscal years beginning on or after December 15, 2008 (October 1, 2009 for the Company). The Company is currently evaluating the impact the adoption of SFAS 160 will have on its consolidated financial statements.

In February 2008, the FASB issued FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP SFAS No. 157-2”). FSP SFAS No. 157-2 delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities that are not remeasured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008 (October 1, 2009 for the Company), and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of FSP SFAS No. 157-2 will have on its consolidated financial statements.

In February 2008, the FASB issued FSP SFAS No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP SFAS No. 140-3”). FSP SFAS No. 140-3 addresses the issue of whether these transactions should be viewed as two separate transactions or as one "linked" transaction. The FSP includes a "rebuttable presumption" that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. The FSP will be effective for fiscal years beginning after November 15, 2008 (October 1, 2009 for the Company) and will apply only to original transfers made after that date; early adoption will not be allowed. The Company is currently evaluating the impact the adoption of FSP SFAS No. 140-3 will have on its consolidated financial statements.

 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires companies to expand its disclosures regarding derivative instruments and hedging activities to include how and why an entity is using a derivative instrument or hedging activity, an explanation of its accounting under SFAS 133, and how this instrument affects the entity’s financial position and performance as well as cash flows. SFAS 161 also clarifies that derivative instruments are subject to concentration-of-credit-risk disclosures which amends SFAS 107, “Disclosures about Fair Value of Financial Instruments”. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (March 31, 2009 for the Company) with early adoption permitted. The Company is currently evaluating the impact the adoption of SFAS 161 will have on its consolidated financial statements.
 

8


 

 
In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents to be treated as participating securities as defined in EITF Issue No. 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128," and, therefore, included in the earnings allocation in computing earnings per share under the two-class method described in FASB Statement No. 128, “Earnings per Share”. This FSP is effective for fiscal years beginning after December 15, 2008 (October 1, 2009 for the Company), and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of FSP EITF 03-6-1 will have on its consolidated financial statements.

NOTE 3 – TRADING INSTRUMENTS AND TRADING INSTRUMENTS SOLD BUT NOT YET PURCHASED:

 
June 30, 2008
September 30, 2007
   
Instruments
 
Instruments
   
Sold but
 
Sold but
 
Trading
Not Yet
Trading
Not Yet
 
Instruments
Purchased
Instruments
Purchased
 
(in 000's)
         
Municipal Obligations
$   199,145
$    60,258
$   200,024
$            54
Corporate Obligations
66,601
312
56,069
952
Government Obligations
74,140
80,460
83,322
45,275
Agencies
66,214
54,289
47,123
60,829
Total Debt Securities
406,100
195,319
386,538
107,110
         
Derivative Contracts
40,522
20,650
30,603
8,445
Equity Securities
42,074
26,005
46,913
34,174
Other Securities
2,903
-
3,707
-
Total
$   491,599
$   241,974
$   467,761
$   149,729

Trading securities are valued at fair market value, and securities which are not readily marketable are carried at estimated fair value as determined by management. When available, the Company uses prices from independent sources, which include pricing services. Depending upon the type of security, the pricing service may provide a listed price or a matrix price. If listed market prices are unavailable to the pricing service, then its matrix pricing may utilize pricing services or broker or dealer price quotations, or spread-based models periodically re-calibrated to market trades in similar securities in order to derive the fair value of the instruments. For positions in illiquid securities that do not have readily determinable fair values, the Company uses estimated fair values. Estimated fair values are determined by management based upon consideration of available information, including trading levels of similar securities in liquid markets, standard spread-based pricing models re-calibrated from time to time to trade activity in the identical asset or similar assets, the coupon level and possible early redemption features of the security, and current financial information regarding the issuer, including information which may be of a confidential nature to the Company from time to time. Fair values for derivative contracts are obtained from pricing models that consider current market trading levels and the contractual prices for the underlying financial instruments, as well as time value and yield curve or other volatility factors underlying the positions.

Mortgage backed securities of $89.6 million and $48.9 million at June 30, 2008 and September 30, 2007, respectively, are included in Corporate Obligations and Agencies in the table above. Mortgage backed securities sold but not yet purchased of $54.3 million and $60.8 million at June 30, 2008 and September 30, 2007, respectively, are included in Agencies in the table above. As of June 30, 2008, auction rate securities totaling $44.1 million are included in Municipal Obligations in the table above. Auction rate securities sold but not yet purchased of $0.4 million are also included in Municipal Obligations. As of June 30, 2008 these securities were carried at par, which is management’s estimate of fair value. Subsequent to June 30, 2008, approximately $29.7 million of these securities were redeemed at par. The Company believes most of the remainder of these securities will be redeemed at par, within a reasonable time period, by virtue of call provisions, as issuers refinance their bonds to reduce the higher levels of debt service resulting from recent failed auctions.

9



NOTE 4 - AVAILABLE FOR SALE SECURITIES:

Available for sale securities are comprised primarily of collateralized mortgage obligations (“CMOs”) and mortgage-related debt securities, owned by Raymond James Bank (“RJBank”), and certain equity securities owned by the Company's non-broker-dealer subsidiaries. About 40 percent of the RJBank portfolio is invested in relatively short average-life floating rate securities issued by Ginnie Mae, Fannie Mae or Freddie Mac. Other than approximately $6.4 million of fair value in securities rated less than “AAA,” the remaining fair value of the mortgage-backed securities portfolio is comprised of “AAA” rated non-agency residential mortgage securities. These securities were purchased based on the underlying loan characteristics such as loan to value (“LTV”) ratio, credit scores, property type, location and the current level of credit enhancement. Current characteristics of each security owned such as delinquency and foreclosure levels, credit enhancement, projected losses and coverage are reviewed monthly by management. There were no material proceeds from the sale of available for sale securities for the three and nine months ended June 30, 2008 and 2007.

The fair value of available for sale securities is based on bid quotations received from a pricing service or securities dealers. If these sources are not available, then the fair value is estimated using quoted market prices for similar securities, pricing models, or discounted cash flow analyses, using observable market data where available. The amortized cost and estimated market values of securities available for sale at June 30, 2008 and September 30, 2007 are as follows:

 
June 30, 2008
   
Gross
Gross
 
   
Unrealized
Unrealized
 
 
Cost Basis
Gains
Losses
Fair Value
 
(in 000's)
Available for Sale Securities:
       
Agency Mortgage Backed Securities
$ 257,562
$ 262
$   (1,460)
$ 256,364
Non-Agency Collateralized Mortgage Obligations
420,440
(57,651)
362,789
         
Total RJBank Available for Sale Securities
678,002
262
(59,111)
619,153
         
Other Securities
3
10
13
         
Total Available for Sale Securities
$ 678,005
$ 272
$ (59,111)
$ 619,166

 
September 30, 2007
   
Gross
Gross
 
   
Unrealized
Unrealized
 
 
Cost Basis
Gains
Losses
Fair Value
 
(in 000's)
Available for Sale Securities:
       
Agency Mortgage Backed Securities
$ 189,816
$ 283
$      (404)
$ 189,695
Non-Agency Collateralized Mortgage Obligations
382,980
239
(3,003)
380,216
         
Total RJBank Available for Sale Securities
572,796
522
(3,407)
569,911
         
Other Securities
3
38
41
         
Total Available for Sale Securities
$ 572,799
$ 560
$   (3,407)
$ 569,952

Most securities declined in market value due to ongoing market disruptions that resulted in an aggregate pretax unrealized loss of $58.8 million.  The Company determined that one security in the portfolio was other-than-temporarily impaired and recognized a loss of $2.8 million in income for the three months ended June 30, 2008. Based on the Company’s evaluation of the performance and underlying characteristics of the other securities including the low levels of current and estimated credit losses relative to the level of credit enhancement, and the Company’s consideration of its intent and ability to hold the securities for a period of time sufficient to allow for the anticipated recovery in the market value of the securities none of the other securities were considered to be other-than-temporarily impaired.

10



NOTE 5 – BANK LOANS, NET:

Bank client receivables are primarily comprised of loans originated or purchased by RJBank and include commercial and residential real estate loans, as well as commercial and consumer loans. These receivables are collateralized by first or second mortgages on residential or other real property, by other assets of the borrower, or are unsecured. The following table presents the balance and associated percentage of each major loan category in RJBank's portfolio, including loans receivable and loans available for sale:

     
 
June 30,
September 30,
 
2008
2007
 
Balance
%
Balance
%
 
($ in 000’s)
         
Commercial Loans (1)
$    757,660 
11%
$    343,783 
7%
Real Estate Construction Loans
304,877 
5%
123,664 
3%
Commercial Real Estate Loans (2)
3,175,649 
47%
2,317,840 
49%
Residential Mortgage Loans
2,542,853 
37%
1,934,645 
41%
Consumer Loans
16,326 
4,541 
         
Total Loans
6,797,365 
100%
4,724,473 
100%
         
Net Unearned Income and Deferred Expenses (3)
(39,421)
 
(13,242)
 
Allowance for Loan Losses
(77,582)
 
(47,022)
 
         
 
(117,003)
 
(60,264)
 
         
Loans, Net
$ 6,680,362 
 
$ 4,664,209 
 

(1) Loans not secured by real estate.
(2) Loans wholly or partially secured by real estate.
(3) Includes purchase premiums, purchase discounts, and net deferred origination fees and costs.

At June 30, 2008 and September 30, 2007, RJBank had $50 million and $55 million, respectively, in Federal Home Loan Bank (“FHLB”) advances secured by a blanket lien on RJBank's residential mortgage loan portfolio.

At June 30, 2008 and September 30, 2007, RJBank had $1.1 million and $5.1 million in loans available for sale, respectively. RJBank's gain from the sale of originated loans available for sale was $72,000 and $208,000 for the three months ended June 30, 2008 and 2007, respectively. RJBank's gain from the sale of originated loans available for sale was $304,000 and $397,000 for the nine months ended June 30, 2008 and 2007, respectively.

Certain officers, directors, and affiliates, and their related entities were indebted to RJBank for $1,465,000 and $999,000 at June 30, 2008 and September 30, 2007, respectively. All such loans were made in the ordinary course of business.

Loan interest and fee income for the three months ended June 30, 2008 and 2007 was $83.3 million and $51.7 million, respectively. Loan interest and fee income for the nine months ended June 30, 2008 and 2007 was $257.0 million and $137.9 million, respectively.

The following table shows the contractual maturities of RJBank’s loan portfolio at June 30, 2008, including contractual principal repayments. This table does not, however, include any estimates of prepayments. These prepayments could significantly shorten the average loan lives and cause the actual timing of the loan repayments to differ from those shown in the following table:

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Due in
 
 
1 Year or Less
1 Year – 5 Years
>5 Years
Total
 
(in 000’s)
         
Commercial Loans (1)
$        977
$    384,261
$    372,422
$    757,660
Real Estate Construction Loans
65,879
214,976
24,022
304,877
Commercial Real Estate Loans (2)
152,334
2,296,024
727,291
3,175,649
Residential Mortgage Loans
1,513
4,171
2,537,169
2,542,853
Consumer Loans
12,867
3,459
-
16,326
         
Total Loans
$ 233,570
$ 2,902,891
$ 3,660,904
$ 6,797,365

(1) Loans not secured by real estate.
(2) Loans wholly or partially secured by real estate.

RJBank classifies loans as nonperforming when full and timely collection of interest or principal becomes uncertain or when they are 90 days past due. The following table shows the comparative data for nonperforming loans and assets:

 
June 30,
September 30,
 
2008
2007
 
($ in 000’s)
     
Nonaccrual Loans
$ 29,619
$ 1,391
Accruing Loans Which are 90 Days or More
   
Past Due
6,336
2,674
     
Total Nonperforming Loans
35,955
4,065
     
Real Estate Owned and Other
   
Repossessed Assets, Net
1,913
1,653
     
Total Nonperforming Assets, Net
$ 37,868
$ 5,718
     
Total Nonperforming Assets as a % of
   
Total Loans, Net and Other Real Estate Owned, Net
0.57%
0.12%

The gross interest income related to non-performing loans, which would have been recorded had these loans been current in accordance with their original terms totaled $458,000 for the quarter ending June 30, 2008 or $643,000 since origination. The interest income recognized on nonaccrual loans for the three months and nine months ended June 30, 2008 was $45,000 and $131,000 respectively. As of June 30, 2008, there were four loans which RJBank considers to be impaired in the corporate loan portfolio totaling $20.3 million included in nonaccrual loans, with reserves totaling $3.4 million established against these four loans. RJBank considers a loan to be impaired when it is probable that it will be unable to collect the scheduled payments of principal or interest when due according to the terms of the loan agreement. Of the $3.5 million in charge-offs related to corporate loans, $3.1 million in charge-offs related to these impaired loans and $409,000 related to a loan that was sold during the quarter. As of June 30, 2008, one of these impaired loans totaling $7.3 million was classified as a troubled debt restructuring. At the time of this restructuring, RJBank increased its commitment to the borrower by $894,000.

12



Changes in the allowance for loan losses at RJBank were as follows:

 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
June 30,
June 30,
 
2008
2007
2008
2007
 
($ in 000’s)
         
Allowance for Loan Losses,
       
Beginning of Period
$ 70,219 
$ 25,341 
$ 47,022 
$ 18,694 
Provision For Loan Losses
12,366 
5,343 
36,299 
12,035 
Charge-Offs:
       
Commercial Loans (1)
Real Estate Construction Loans
Commercial Real Estate Loans (2)
(3,492)
(3,864)
Residential Mortgage Loans
(1,509)
(131)
(1,939)
(176)
Consumer Loans
         
Total Charge-Offs
(5,001)
(131)
(5,803)
(176)
         
Recoveries
(2)
64 
         
Net Charge-Offs
(5,003)
(131)
(5,739)
(176)
         
Allowance for Loan Losses,
       
End of Period
$ 77,582 
$ 30,553 
$ 77,582 
$ 30,553 
         
Annualized Net Charge-Offs to Average
       
Bank Loans, Net Outstanding
0.31%
0.02%
0.13%
0.01%

(1) Loans not secured by real estate.
(2) Loans wholly or partially secured by real estate.

The calculation of the allowance is subjective as management segregates the loan portfolio into different homogeneous classes and assigns each class an allowance percentage based on the perceived risk associated with that class of loans. The factors taken into consideration when assigning the reserve percentage to each reserve category include estimates of borrower default probabilities and collateral values; trends in delinquencies; volume and terms; changes in geographic distribution, lending policies, local, regional, and national economic conditions; concentrations of credit risk and past loss history. In addition, the Company provides for potential losses inherent in RJBank’s unfunded lending commitments using the criteria above, further adjusted for an estimated probability of funding. The provision for loan loss is included in other expenses in the Condensed Consolidated Statements of Income and Comprehensive Income.

In addition to the allowance for loan losses, RJBank had reserves for unfunded lending commitments included in Trade and Other Payables of $7.8 million and $6.8 million at June 30, 2008 and September 30, 2007, respectively.

RJBank’s net interest income after provision for loan losses for the quarter ended June 30, 2008 and 2007 was $51.6 million and $17.2 million, respectively.  RJBank’s net interest income after provision for loan losses for the nine months ended June 30, 2008 and 2007 was $110.8 million and $43.7 million, respectively.

RJBank originates and purchases portfolios of loans that may or may not include interest only loans that subject the borrower to payment increases over the life of the loan. RJBank does not originate or purchase residential loans that have terms that permit negative amortization features or are option adjustable rate mortgages. Loans with deeply discounted teaser rates are not originated or purchased.

13



Loans where borrowers may be subject to payment increases include adjustable rate mortgage loans with terms that initially require payment of interest only; payments may increase significantly when the interest-only period ends and the loan principal begins to amortize. At June 30, 2008 and September 30, 2007, these loans totaled $2.0 billion and $1.6 billion, respectively. These loans are underwritten based on a variety of factors including the borrower’s credit history, debt to income ratio, employment, the LTV ratio, and the borrower’s disposable income and cash reserves. In instances where the borrower is of lower credit standing, the loans are typically underwritten to have a lower LTV ratio and/or other mitigating factors.

Management does not believe these loans represent any unusual concentrations of risk, as evidenced by low net charge-offs and past due loans. All of these loans are secured by mortgages on one-to-four family residential real estate and are diversified geographically. Interest-only loans are underwritten at the time of application or purchase based on the amortizing payment amount, and borrowers are required to meet stringent parameters regarding debt ratios, LTV levels, and credit score.

High LTV loans include all mortgage loans where the LTV is greater than or equal to 90% and the borrower has not provided other credit support or purchased private mortgage insurance (“PMI”). At June 30, 2008 and September 30, 2007, RJBank held $1.5 million and $0.7 million, respectively, in total commitments for these loans.

NOTE 6 - VARIABLE INTEREST ENTITIES (“VIEs”):

Under the provisions of FIN 46R the Company has determined that Raymond James Employee Investment Funds I and II (the “EIF Funds”), certain entities in which Raymond James Tax Credit Funds, Inc. (“RJTCF”) owns variable interests, various partnerships involving real estate, and a trust fund established for employee retention purposes are VIEs.  Of these, the Company has determined that the EIF Funds, certain tax credit fund partnerships/LLCs, and the trust fund should be consolidated in the financial statements as the Company is the primary beneficiary.

The EIF Funds are limited partnerships, for which the Company is the general partner, that invest in the merchant banking and private equity activities of the Company and other unaffiliated venture capital limited partnerships. The EIF Funds were established as compensation and retention measures for certain qualified key employees of the Company. The Company makes non-recourse loans to these employees for two-thirds of the purchase price per unit. The loans and applicable interest are to be repaid based on the earnings of the EIF Funds. The Company is deemed to be the primary beneficiary, and accordingly, consolidates the EIF Funds, which had combined assets of approximately $22.0 million at June 30, 2008. None of those assets act as collateral for any obligations of the EIF Funds. The Company's exposure to loss is limited to its contributions and the non-recourse loans funded to the employee investors, for which their partnership interests serve as collateral. At June 30, 2008 that exposure is approximately $5.2 million.

RJTCF is a wholly owned subsidiary of RJF and is the managing member or general partner in approximately 53 separate tax credit housing funds having one or more investor members or limited partners. These tax credit housing funds are organized as limited liability companies or limited partnerships for the purpose of investing in limited partnerships which purchase and develop low income housing properties qualifying for tax credits. As of June 30, 2008, 50 of these tax credit housing funds are VIEs as defined by FIN 46R, and RJTCF’s interest in these tax credit housing funds which are VIEs range from .01% to 1.0%.

RJTCF has concluded that it is the primary beneficiary in approximately one fifth of these tax credit housing funds, and accordingly, consolidates these funds, which have combined assets of approximately $241.5 million at June 30, 2008. None of those assets act as collateral for any obligations of these funds. The Company's exposure to loss is limited to its investments in, advances to, and receivables due from these funds and at June 30, 2008, that exposure is approximately $3.7 million.

14



RJTCF is not the primary beneficiary of the remaining tax credit housing funds it determined to be VIEs and accordingly the Company does not consolidate these funds. The Company's exposure to loss is limited to its investments in, advances to, and receivables due from these funds and at June 30, 2008, that exposure is approximately $10.7 million.

The three remaining tax credit housing funds that have been determined not to be VIEs are wholly owned by RJTCF and are included in the Company’s consolidated financial statements. During June 30, 2008, only two of these funds had any material activity. These funds typically hold interests in certain tax credit limited partnerships for less than 90 days. These funds had assets of approximately $10.8 million at June 30, 2008.

As of June 30, 2008, the Company has a variable interest in several limited partnerships involved in various real estate activities, in which a subsidiary is the general partner. The Company is not the primary beneficiary of these partnerships and accordingly the Company does not consolidate these partnerships. These partnerships have assets of approximately $11.8 million at June 30, 2008. The Company's exposure to loss is limited to its capital contributions. The carrying value of the Company's investment in these partnerships is not material at June 30, 2008.

One of the Company’s restricted stock plans is associated with a trust fund which was established through the Company’s wholly owned Canadian subsidiary. This trust fund was established and funded to enable the trust fund to acquire Company common stock in the open market to be used to settle restricted stock units granted as a retention vehicle for certain employees of the Canadian subsidiary. For financial statement purposes, the Company is deemed to be the primary beneficiary in accordance with FIN 46R, and accordingly, consolidates this trust fund, which has assets of approximately $14.2 million at June 30, 2008. None of those assets are specifically pledged as collateral for any obligations of the trust fund. The Company's exposure to loss is limited to its contributions to the trust fund and at June 30, 2008, that exposure is approximately $14.2 million.

NOTE 7 - BANK DEPOSITS:

Bank deposits include Negotiable Order of Withdrawal (“NOW”) accounts, demand deposits, savings and money market accounts and certificates of deposit. The following table presents a summary of bank deposits at June 30, 2008 and September 30, 2007:

 
June 30, 2008
September 30, 2007
   
Weighted
 
Weighted
   
Average
 
Average
 
Balance
Rate (1)
Balance
Rate (1)
 
($ in 000's)
         
Bank Deposits:
       
NOW Accounts
$       3,575
0.34%
$       4,493
1.57%
Demand Deposits (Non-Interest Bearing)
2,592
3,645
Savings and Money Market Accounts
7,506,516
1.53%
5,337,587
4.59%
Certificates of Deposit
233,456
4.31%
239,534
4.75%
Total Bank Deposits
$7,746,139
1.61%
$5,585,259
4.59%

(1) Weighted average rate calculation is based on the actual deposit balances at June 30, 2008 and September 30, 2007.

RJBank had deposits from RJF executive officers and directors of $89,000 and $234,000 at June 30, 2008 and September 30, 2007, respectively.

15



Scheduled maturities of certificates of deposit and brokered certificates of deposit at June 30, 2008 and September 30, 2007 were as follows:

 
June 30, 2008
September 30, 2007
 
Denominations
 
Denominations
 
 
Greater than
Denominations
Greater than
Denominations
 
or Equal
Less than
or Equal
Less than
 
to $100,000
$100,000
to $100,000
$100,000
 
(in 000's)
         
Three Months or Less
$ 11,437
$   28,865
$ 14,386
$   23,922
Over Three Through Six Months
9,032
19,896
10,949
28,980
Over Six Through Twelve Months
15,301
38,052
11,790
38,005
Over One Through Two Years
14,718
39,765
14,706
36,997
Over Two Through Three Years
6,631
18,632
7,978
22,345
Over Three Through Four Years
7,123
12,789
7,857
14,103
Over Four Years
3,097
8,118
1,802
5,714
Total
$ 67,339
$ 166,117
$ 69,468
$ 170,066

Interest expense on deposits is summarized as follows:

 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
June 30,
June 30,
 
2008
2007
2008
2007
 
(in 000's)
         
Certificates of Deposit
$   2,570
$   2,749
$     8,233
$     8,204
Money Market, Savings and
       
NOW Accounts
30,348
52,908
142,692
119,311
Total
$ 32,918
$ 55,657
$ 150,925
$ 127,515

NOTE 8 – LOANS PAYABLE:

Loans payable at June 30, 2008 and September 30, 2007 are presented below:

 
June 30,
September 30,
 
2008
2007
 
(in 000's)
Short-Term Borrowings:
   
Borrowings on Lines of Credit (1)
$   200,000
$     2,685
Current Portion of Mortgage Notes Payable
2,833
2,731
Federal Home Loan Bank Advances (2)
-
5,000
Total Short-Term Borrowings
202,833
10,416
     
Long-Term Borrowings:
   
Mortgage Notes Payable (3)
60,071
62,224
Federal Home Loan Bank Advances (2)
50,000
50,000
Total Long-Term Borrowings
110,071
112,224
     
Total Loans Payable
 $   312,904
$ 122,640


16



(1)  
At June 30, 2008, the Company maintained two 364-day committed and several uncommitted lines of credit denominated in U.S. dollars and one uncommitted line of credit denominated in Canadian dollars (“CDN”). At June 30, 2008, the aggregate domestic lines were $1.3 billion and CDN $40 million, respectively. The interest rates for these lines of credit are variable and are based on the Fed Funds rate, LIBOR, and Canadian prime rate. For the three months ended June 30, 2008, interest rates on the lines of credit ranged from 2.36% to 4.38%. For the three months ended June 30, 2007, interest rates on the lines of credit ranged from 5.00% to 6.28%. Loans on the secured uncommitted lines of credit are collateralized by Company owned securities. The Company maintains a $600 million uncommitted tri-party repurchase agreement line of credit. Under this agreement, the Company pledges certain of its trading inventory as collateral against borrowings on this line. The required market value of the collateral ranges from 102% to 105% of the cash borrowed. The interest rate is set daily based on market conditions for Fed funds. The lender is under no obligation to lend to the Company under this tri-party line at any given time. Under this agreement, there were no secured short-term borrowings outstanding at June 30, 2008. The Company’s $200 million and $50 million committed lines of credit are subject to 0.125% and 0.15% per annum facility fees, respectively. At June 30, 2008, the Company’s entire $200 million committed line of credit was outstanding. Subsequent to June 30, 2008 the Company repaid $80 million of this debt and entered into a new 364-day $100 million committed tri-party repurchase agreement line of credit.

In addition, the Company’s joint ventures in Turkey and Argentina have multiple settlement lines of credit. The Company has guaranteed certain of these settlement lines of credit as follows: two in Turkey totaling $10.5 million and one in Argentina for $9.0 million. At June 30, 2008, there were no outstanding balances on the settlement lines in Argentina and Turkey. At June 30, 2008 the aggregate unsecured settlement lines of credit available were $95.1 million, and there were no outstanding balances on these lines. The interest rates for these lines of credit ranged from 9% to 17%.

(2)  
RJBank had $50 million in FHLB advances outstanding at June 30, 2008, which was comprised of several long-term, fixed rate advances. The weighted average interest rate on these fixed rate advances at June 30, 2008 was 5.19%. The outstanding FHLB advances mature between September 2010 and February 2011. The maximum amount of FHLB advances outstanding at any month-end during the three months ended June 30, 2008 and 2007 was $55 million and $60 million, respectively. The average amounts of FHLB advances outstanding and the weighted average interest rate thereon for the three months ended June 30, 2008 and 2007 were $53.6 million at a rate of 5.25% and $59.6 million at a rate of 5.26%, respectively. These advances are secured by a blanket lien on RJBank's residential loan portfolio granted to FHLB. The FHLB has the right to convert advances totaling $35 million at June 30, 2008 to a floating rate at one or more future dates. RJBank has the right to prepay these advances without penalty if the FHLB exercises its right.

(3)  
Mortgage notes payable evidences a mortgage loan for the financing of the Company's home office complex. The mortgage loan bears interest at 5.7% and is secured by land, buildings, and improvements with a net book value of $68.5 million at June 30, 2008.

NOTE 9 – DERIVATIVE FINANCIAL INSTRUMENTS:

The Company enters into interest rate swaps and futures contracts as part of its fixed income business to facilitate customer transactions and to hedge a portion of the Company’s trading inventory. These positions are marked to market with the gain or loss and the related interest recorded in Net Trading Profits within the statement of income for the period. Any collateral exchanged as part of the swap agreement is recorded in Broker Receivables and Payables in the statement of financial condition for the period. The Company had outstanding interest rate derivative contracts with notional amounts of $3.5 billion at June 30, 2008 and September 30, 2007. The notional amount of a derivative contract does not change hands; it is simply used as a reference to calculate payments. Accordingly, the notional amount of the Company’s derivative contracts outstanding at June 30, 2008 greatly exceeds the possible losses that could arise from such transactions. The net market value of all open derivative positions at June 30, 2008 and September 30, 2007 was $19.9 million and $22.2 million, respectively.

To mitigate interest rate risk in a significantly rising rate environment, RJBank purchased three year term interest rate caps with high strike rates (more than 300 basis points higher than current rates) during the quarter ended June 30, 2008 that will increase in value if interest rates rise and entitle RJBank to cash flows if interest rates rise above strike rates. These positions are recorded at fair value with any changes in fair value recorded in Other Revenue within the statement of income for the period. At June 30, 2008, the notional amount of the interest rate caps held by RJBank was $1 billion and the fair value was $1.3 million.

17



The Company is exposed to credit losses in the event of nonperformance by the counterparties to its interest rate swap agreements. The Company performs a credit evaluation of counterparties prior to entering into swap transactions and monitors their credit standings. Currently, the Company anticipates that all counterparties will be able to fully satisfy their obligations under those agreements. The Company may require collateral from counterparties to support these obligations as established by the credit threshold specified by the agreement and/or as a result of monitoring the credit standing of the counterparties. The Company is also exposed to interest rate risk related to its interest rate swap agreements. The Company monitors exposure in its derivatives subsidiary daily based on established limits with respect to a number of factors, including interest rate, spread, ratio and basis, and volatility risks. These exposures are monitored both on a total portfolio basis and separately for selected maturity periods.

NOTE 10 – INCOME TAXES:

The Company adopted the provisions of FIN 48 on October 1, 2007. The impact of the adoption of FIN 48 resulted in a decrease to beginning retained earnings and an increase to the liability due to unrecognized tax benefits of approximately $4.2 million.

The total amount of gross unrecognized tax benefits as of the date of adoption was approximately $8.6 million. Of this total, approximately $6.9 million (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future periods. At June 30, 2008 the Company’s liability for unrecognized tax benefits decreased to $5.7 million and the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate for income from continuing operations decreased to $4.0 million. Approximately $2.8 million of the decrease in unrecognized tax benefits was the result of the conclusion of various state tax audits.

The Company recognizes the accrual of interest and penalties related to income tax matters in interest expense and other expense, respectively. Interest and penalties accrued as of the beginning of the year was $1.6 million. During the nine months ended June 30, 2008, accrued interest expense related to unrecognized tax benefits increased by approximately $150,000. During the nine months ended June 30, 2008, penalty expense related to unrecognized tax benefits increased by $50,000. Interest and penalties accrued as of June 30, 2008 were $1.8 million.

The Company’s tax liability does not include any accrual for potential taxes, interest or penalties related to tax assessments of the Company’s Turkish joint venture. The Company has fully reserved for its equity interest in this joint venture (see Note 11 below for additional information).

The Company files income tax returns in the U. S. federal jurisdiction and various states, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examination by tax authorities for years prior to 2007 for federal tax returns, 2004 for state and local tax returns and 2000 for foreign tax returns. During the second quarter, the Company settled the Limited Issue Focused Examinations by the Internal Revenue Service for fiscal years 2005 and 2006. As a result, the Company paid $163,000 that was previously provided for under FIN 48 as an unrecognized tax benefit. The fiscal year 2007 and 2008 federal income tax returns are being examined under the IRS Compliance Assurance Program. This program accelerates the examination of key issues in an attempt to resolve them before the tax return is filed. Certain state and local returns are also currently under various stages of audit. The 2007 IRS audit and state audits in process are expected to be completed in 2008. It is anticipated that the unrecognized tax benefits may be reduced by an estimated $0.5 million over the next 12 months.

NOTE 11 – COMMITMENTS AND CONTINGENCIES:

The Company is the lessor in a leveraged commercial aircraft transaction with Continental Airlines, Inc. (“Continental").  The Company's ability to realize its expected return is dependent upon this airline’s ability to fulfill its lease obligation.  In the event that this airline defaults on its lease commitment and the Trustee for the debt holders is unable to re-lease or sell the plane with adequate terms, the Company would suffer a loss of some or all of its investment.  The value of this leveraged lease with Continental was approximately $9.1 million as of June 30, 2008.  The Company's equity investment represented 20% of the aggregate purchase price; the remaining 80% was funded by public debt issued in the form of equipment trust certificates. The residual value of the aircraft at the end of the lease term of approximately 17 years was originally projected to be 15% of the original cost and has not been adjusted since inception. This lease expires in May 2014.

18



Although Continental remains current on its lease payments to the Company, the inability of Continental to make its lease payments, or the termination or modification of the lease through a bankruptcy proceeding, could result in the write-down of the Company's investment and the acceleration of certain income tax payments.  The Company continues to monitor this lessee for specific events or circumstances that would increase the likelihood of a default on Continental’s obligations under this lease.

RJBank had $50 million in FHLB advances outstanding at June 30, 2008, which was comprised of several long-term, fixed rate advances. RJBank had $1.6 billion in immediate credit available from the FHLB at June 30, 2008 and total available credit of $3.3 billion with the pledge of additional collateral to the FHLB. See Note 8 of the Notes to Condensed Consolidated Financial Statements for more information.

At June 30, 2008 and September 30, 2007, no securities other than FHLB stock were pledged by RJBank as collateral with the FHLB for advances. In addition to the FHLB stock pledged as collateral for advances, RJBank provided the FHLB with a blanket lien against RJBank's entire portfolio of residential mortgage loans.

As of June 30, 2008, RJBank has entered into overnight reverse repurchase agreements totaling $725 million with three counterparties, with individual exposures of $385 million, $280 million and $60 million. Although RJBank is exposed to risk that these counterparties may not fulfill their contractual obligations, the Company believes the risk of default is minimal due to the creditworthiness of these counterparties, collateral received and the short duration of these agreements.

As of September 30, 2007, RJBank had not settled purchases of $300.6 million in syndicated loans (included in Bank Loans, Net) due to the sellers’ delays in finalizing settlement, all of which had settled prior to March 31, 2008. As of June 30, 2008, RJBank had not settled the purchases of $19.6 million in syndicated loans. These loans are expected to be settled during the three months ended September 30, 2008.

See Note 15 of the Notes to Condensed Consolidated Financial Statements with respect to RJBank’s commitments to extend credit and other credit-related off-balance sheet financial instruments such as standby letters of credit and loan purchases.

As part of an effort to increase brand awareness, the Company entered into a stadium naming rights contract in July 1998. The contract expires in 2016 and has a 4% annual escalation clause. Expenses of $796,000 and $765,000 were recognized in the three months ended June 30, 2008 and 2007, respectively. Expenses of $2,356,000 and $2,266,000 were recognized in the nine months ended June 30, 2008 and 2007, respectively.

In the normal course of business, the Company enters into underwriting commitments. Transactions relating to such commitments of Raymond James & Associates (“RJA”) that were open at June 30, 2008 and were subsequently settled had no material effect on the consolidated financial statements as of that date. Transactions relating to such commitments of Raymond James Ltd. (“RJ Ltd.”) that were recorded and open at June 30, 2008 were approximately CDN $1.5 million.

The Company utilizes client marginable securities to satisfy deposits with clearing organizations. At June 30, 2008, the Company had client margin securities valued at $134.6 million pledged with a clearing organization to meet the point in time requirement of $76.4 million. At September 30, 2007, the Company had client margin securities valued at $135.7 million pledged with a clearing organization to meet the point in time requirement of $67.5 million.

In January 2008, Sirchie Acquisition Company, LLC (“SAC”), an 80% owned indirect subsidiary of the Company, acquired substantially all of the business, assets, and properties of Sirchie Finger Print Laboratories, Inc. (“Sirchie”), the assets or stock of several other companies and certain real estate. The Company’s equity investment in SAC was approximately $20 million. SAC also acquired 51% of the common stock of Law Enforcement Associates Corporation as part of the transaction. This acquisition is one of the Company’s recent merchant banking initiatives.

SAC has been advised by the Commerce and Justice Departments that they intend to seek civil and criminal sanctions against it, as the purported successor in interest to Sirchie, based upon alleged breaches of Department of Commerce export control suspension orders by Sirchie and its former majority shareholder that occurred prior to the acquisition. Discussions are ongoing and the impact, if any, on the value of this investment is indeterminate at this time.

19



The Company has committed a total of $56.5 million, in amounts ranging from $200,000 to $5.0 million, to 43 different independent venture capital or private equity partnerships. As of June 30, 2008, the Company has invested $37.1 million of that amount and has received $29.9 million in distributions. Additionally, the Company controls the general partner in two internally sponsored private equity limited partnerships to which it has committed $14.0 million. Of that amount, the Company has invested $13.0 million and has received $9.2 million in distributions as of June 30, 2008. The Company is not the controlling general partner in another internally sponsored private equity limited partnership to which it has committed $30.0 million. As of June 30, 2008, the Company has invested $2.3 million of that amount and has not received any distributions.

The Company is the general partner in the EIF Funds. These limited partnerships invest in the merchant banking and private equity activities of the Company and other unaffiliated venture capital limited partnerships. The EIF Funds were established as compensation and retention measures for certain qualified key employees of the Company. At June 30, 2008, the funds have unfunded commitments of $2.5 million.

In the normal course of business, certain subsidiaries of the Company act as general partner and may be contingently liable for activities of various limited partnerships. These partnerships engaged primarily in real estate activities. In the opinion of the Company, such liabilities, if any, for the obligations of the partnerships will not in the aggregate have a material adverse effect on the Company's consolidated financial position.

At June 30, 2008, the approximate market values of collateral received that can be repledged by the Company, were:

Sources of Collateral (In 000's):
 
Securities Purchased Under Agreements to Resell and Other
 
Collateralized Financings
$   986,727
Securities Received in Securities Borrowed Vs. Cash Transactions
868,734
Collateral Received for Margin Loans
1,619,573
Total
$3,475,034

During the quarter certain collateral was repledged. At June 30, 2008, the approximate market values of this portion of collateral and financial instruments owned that were repledged by the Company, were:

Uses of Collateral and Trading Securities (In 000's):
 
Securities Purchased Under Agreements to Resell and Other
 
Collateralized Financings
$     68,792
Securities Received in Securities Borrowed Vs. Cash Transactions
815,533
Collateral Received for Margin Loans
134,575
Total
$1,018,900

At June 30, 2008, the Company maintained two 364-day committed and several uncommitted lines of credit denominated in U.S. dollars and one uncommitted line of credit denominated in Canadian dollars. At June 30, 2008, the aggregate domestic lines were $1.3 billion and CDN $40 million. The interest rates for these lines of credit are variable and are based on the Fed Funds rate, LIBOR, and Canadian prime rate. At June 30, 2008, the Company’s entire $200 million committed line of credit was outstanding. Subsequent to June 30, 2008 the Company repaid $80 million of this debt and entered into a new 364-day $100 million committed tri-party repurchase agreement line of credit. See Note 8 of the Notes to Condensed Consolidated Financial Statements for more information.

The Company’s joint ventures in Turkey and Argentina have multiple settlement lines of credit. The Company has guaranteed certain of these settlement lines of credit as follows: two in Turkey totaling $10.5 million and one in Argentina for $9.0 million. See Note 8 of the Notes to Condensed Consolidated Financial Statements for more information. The Company has also from time to time authorized performance guarantees for the completion of trades with counterparties in Argentina and Turkey. At June 30, 2008, there were no outstanding performance guarantees in Argentina or Turkey.

20



The Company guarantees the existing mortgage debt of RJA of approximately $62.9 million. The Company guarantees interest rate swap obligations of RJ Capital Services, Inc. The Company has also committed to lend to RJTCF, or guarantee obligations in connection with RJTCF’s low income housing development/rehabilitation and syndication activities, aggregating up to $125 million upon request, subject to certain limitations as well as annual review and renewal. RJTCF borrows in order to invest in partnerships which purchase and develop properties qualifying for tax credits. These investments in project partnerships are then sold to various tax credit funds, which have third party investors, and for which RJTCF serves as the managing member or general partner. RJTCF typically sells these investments within 90 days of their acquisition, and the proceeds from the sales are used to repay RJTCF’s borrowings. Subsequent to quarter end, the Company made a commitment to purchase and potentially hold up to $75 million of unsold interests in one of RJTCF’s current fund offerings. In such an event, the Company would expect to resell these interests to other investors, however the holding period of these interests could be much longer than 90 days. Additionally, RJTCF may make short-term loans or advances to project partnerships on behalf of the tax credit funds in which it serves as managing member or general partner. At June 30, 2008, cash funded to invest in either loans or investments in project partnerships was $29.7 million. At June 30, 2008, RJTCF is also committed to additional future fundings of $53.2 million related to project partnerships that have not yet been sold to various tax credit funds (including the fund offering mentioned previously that the Company made a commitment to purchase and potentially hold up to $75 million of unsold interests). The Company and RJTCF also issue certain guarantees to various third parties related to project partnerships, interests in which have been or are expected to be sold to one or more tax credit funds under RJTCF’s management. In some instances, RJTCF is not the primary guarantor of these obligations which aggregate to a cumulative maximum obligation of approximately $16.1 million as of June 30, 2008.

The Company was required to enter into two agreements, both with Raymond James Trust, National Association and one with the Office of the Controller of the Currency (“OCC”), as a condition to the conversion of Raymond James Trust Company, now known as Raymond James Trust, National Association, (‘RJT”) from a state to a federally chartered institution. The conversion was effective January 1, 2008. Effective July 1, 2008, the Company merged its second state-chartered trust company, Raymond James Trust Company West, into RJT. Under those agreements, the Company is obligated to provide RJT with sufficient capital in a form acceptable to the OCC to meet and maintain the capital and liquidity requirements commensurate with RJT’s risk profile for its conversion and any subsequent requirements of the OCC. The conversion expands RJT’s market nationwide, while substituting federal for multiple state regulatory oversight. RJT’s federal charter limits it to fiduciary activities. Thus, capital requirements are not expected to be significant. Based on current projections, RJT’s existing capital is expected to be sufficient for the foreseeable future.

Raymond James Yatyrym Menkul Kyymetler A. S., (“RJY”), the Company’s Turkish affiliate, was assessed for the year 2001 approximately $6.8 million by the Turkish tax authorities. The authorities applied a significantly different methodology than in the prior year’s audit which the Turkish tax court and Council of State affirmed. RJY is vigorously contesting most aspects of this assessment and has sought reconsideration of the Turkish Council of State. The Turkish tax authorities, utilizing the 2001 methodology, assessed RJY $5.7 million for 2002, which is also being challenged. Audits of 2003 and 2004 are anticipated and their outcome is unknown in light of the change in methodology and the pending litigation. The Company has recorded a provision for loss in its consolidated financial statements for its net equity interest in this joint venture. As of June 30, 2008, RJY had total capital of approximately $9.3 million, of which the Company owns approximately 50%.

In connection with auction rate securities (“ARS”), the Company's primary broker dealers, RJA and RJFS, have been subject to ongoing examinations by the Securities and Exchange Commission (“SEC”) and the New York Attorney General's Office. The Company is also named in a class action similar to that filed against a number of brokerage firms alleging various securities law violations. The Company has no other litigation pending involving auction rate securities. The Company announced in April 2008 that customers held approximately $1.9 billion of ARS which as of June 30, 2008 had declined to approximately $1.3 billion due to the redemption and refinancing of ARS.

The Company is a defendant or co-defendant in various lawsuits and arbitrations incidental to its securities business. The Company is contesting the allegations in these cases and believes that there are meritorious defenses in each of these lawsuits and arbitrations. In view of the number and diversity of claims against the Company, the number of jurisdictions in which litigation is pending and the inherent difficulty of predicting the outcome of litigation and other claims, the Company cannot state with certainty what the eventual outcome of pending litigation or other claims will be. In the opinion of the Company's management, based on current available information, review with outside legal counsel, and consideration of amounts provided for in the accompanying consolidated financial statements with respect to these matters, ultimate resolution of these matters will not have a material adverse impact on the Company's financial position or results of operations. However, resolution of one or more of these matters may have a material effect on the results of operations in any future period, depending upon the ultimate resolution of those matters and upon the level of income for such period.

21



NOTE 12 - CAPITAL TRANSACTIONS:

The following table presents information on a monthly basis for purchases of the Company’s stock for the quarter ended June 30, 2008:

 
Number of
 
Average
Period
Shares Purchased (1)
 
Price Per Share
       
April 1, 2008 – April 30, 2008
-
 
-
May 1, 2008 – May 31, 2008
-
 
-
June 1, 2008 – June 30, 2008
397
 
$28.55
Total
397
 
$28.55


(1)  
The Company does not have a formal stock repurchase plan. On May 20, 2004, the Board of Directors authorized $75 million for repurchases pursuant to prior authorization from the Board of Directors. During March 2008, the Company exhausted this authorization. On March 11, 2008, the Board of Directors authorized an additional $75 million for repurchases at the discretion of the Board’s Share Repurchase Committee. Since May 2004, 3,355,961 shares have been repurchased for a total of $77.4 million, leaving $72.6 million available to repurchase shares. Historically the Company has considered such purchases when the price of its stock approaches 1.5 times book value or when employees surrender shares as payment for option exercises. The decision to repurchase shares is subject to cash availability and other factors. Accordingly, the Company purchased 2,634,833 shares in open market transactions for the nine months ended June 30, 2008. During the nine months ended June 30, 2008, 241,614 shares were purchased for the trust fund that was established and funded to acquire Company common stock in the open market to be used to settle restricted stock units granted as a retention vehicle for certain employees of the Company’s wholly owned Canadian subsidiary (see Note 17 of the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2007 for more information on this trust fund). The Company also purchased 397 shares that were surrendered by employees as payment for option exercises during the three months ended June 30, 2008.

NOTE 13 – SHARE-BASED COMPENSATION:

The Company applies the provisions of SFAS No. 123R, “Share-Based Payment”, to account for share-based awards made to employees and directors. This pronouncement requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors to be based on estimated fair values.  The Company’s share-based employee and outside director compensation plans are described more fully in Note 17 of the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2007. The Company’s net income for the three and nine months ended June 30, 2008 includes $8.2 million and $26.7 million, respectively, of compensation costs and $2.7 million and $8.4 million, respectively of income tax benefits related to the Company’s share-based awards to employees and members of its Board of Directors. The Company’s net income for the three and nine months ended June 30, 2007 includes $7.1 million and $20.7 million, respectively, of compensation costs and $2.3 million and $6.2 million, respectively of income tax benefits related to the Company’s share-based awards to employees and members of its Board of Directors.

During the three months ended June 30, 2008, the Company granted 2,400 stock options and 187,767 shares of restricted stock to employees under its share-based employee compensation plans. During the nine months ended June 30, 2008, the Company granted 1,490,450 stock options, 1,108,791 shares of restricted stock and 240,483 restricted stock units to employees under its share-based employee compensation plans. During the nine months ended June 30, 2008, 17,500 stock options were granted to outside directors. Restricted stock grants under the 2007 Stock Bonus Plan and the 2005 Restricted Stock Plan are limited to 750,000 and 1,350,000 shares, respectively, per fiscal year.

The weighted-average grant-date fair value of stock options granted to employees and directors during the three and nine months ended June 30, 2008 was $7.59 and $8.24 per share, respectively. Pre-tax unrecognized compensation expense for stock options granted to employees and outside directors, net of estimated forfeitures, was $15.3 million as of June 30, 2008, and will be recognized as expense over a weighted-average period of approximately 2.9 years.

22



The weighted-average grant-date fair value of restricted stock granted to employees during the three and nine months ended June 30, 2008 was $24.71 and $30.15 per share, respectively. Pre-tax unrecognized compensation expense for unvested restricted stock granted to employees, net of estimated forfeitures, was $61.9 million as of June 30, 2008, and will be recognized as expense over a weighted-average period of approximately 2.9 years.

The weighted-average grant-date fair value of restricted stock units granted to employees during the nine months ended June 30, 2008 was $30.29 per share.  Pre-tax unrecognized compensation expense for unvested restricted stock units granted to employees, net of estimated forfeitures, was $6.4 million as of June 30, 2008, and will be recognized as expense over a weighted-average period of approximately 1.5 years.

Under one of its non-qualified fixed stock option plans, the Company may grant stock options to its independent contractor Financial Advisors.  In addition, the Company may grant restricted stock units or restricted shares of common stock to its independent contractor Financial Advisors under one of its restricted stock plans.  The Company accounts for share-based awards to its independent contractor Financial Advisors in accordance with EITF No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (see Note 18 of the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2007 for more information). Due to the increase in the value of the Company’s common stock during the quarter ended June 30, 2008, the Company’s net income for the three months ended June 30, 2008 includes $2.6 million and $1.0 million, respectively, of compensation costs and income tax benefits related to the Company’s share-based awards to its independent contractor Financial Advisors. Due to the decline in the value of the Company’s common stock during the nine months ended June 30, 2008, the Company’s net income for the nine months ended June 30, 2008 includes $2.1 million and $0.8 million, respectively, of reductions in compensation expense and income tax benefits related to the Company’s share-based awards to its independent contractor Financial Advisors. The Company’s net income for the three and nine months ended June 30, 2007 includes $1.9 million and $4.8 million, respectively, of compensation costs and $0.7 million and $1.8 million, respectively, of income tax benefits related to the Company’s share-based plans available for awards to its independent contractor Financial Advisors.

During the three months ended June 30, 2008, the Company granted 27,332 shares of restricted stock to its independent contractor Financial Advisors. During the nine months ended June 30, 2008, the Company granted 48,000 stock options and 72,651 shares of restricted stock to its independent contractor Financial Advisors.

As of June 30, 2008, there was $3.0 million of total unrecognized pre-tax compensation cost related to unvested stock options granted to its independent contractor Financial Advisors based on an estimated weighted-average fair value of $7.79 per share at that date.  These costs are expected to be recognized over a weighted average period of approximately 2.9 years.

As of June 30, 2008, there was $2.6 million of total unrecognized pre-tax compensation cost related to unvested restricted stock granted to its independent contractor Financial Advisors based on an estimated fair value of $26.39 per share at that date. These costs are expected to be recognized over a weighted average period of approximately 4 years.

NOTE 14 - REGULATIONS AND CAPITAL REQUIREMENTS:

Certain broker-dealer subsidiaries of the Company are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934. RJA, a member firm of the Financial Industry Regulatory Authority (“FINRA”), is also subject to the rules of FINRA, whose requirements are substantially the same. Rule 15c3-1 requires that aggregate indebtedness, as defined, not exceed 15 times net capital, as defined. Rule 15c3-1 also provides for an “alternative net capital requirement”, which RJA, Raymond James Financial Services, Inc. (“RJFS”), Heritage Fund Distributors, Inc. (“HFD”), and Raymond James (USA) Ltd. (“RJ(USA)”) have elected. It requires that minimum net capital, as defined, be equal to the greater of $250,000 or two percent of Aggregate Debit Items arising from client transactions. FINRA may require a member firm to reduce its business if its net capital is less than four percent of Aggregate Debit Items and may prohibit a member firm from expanding its business and declaring cash dividends if its net capital is less than five percent of Aggregate Debit Items. The net capital position of RJA at June 30, 2008 and September 30, 2007 was as follows:

23



 
June 30,
September 30,
 
2008
2007
 
($ in 000's)
Raymond James & Associates, Inc.:
 
(Alternative Method Elected)
   
Net Capital as a Percent of Aggregate
   
Debit Items
19.27% 
21.94% 
Net Capital
$ 320,567 
$ 332,873 
Less: Required Net Capital
(33,268)
(30,344)
Excess Net Capital
$ 287,299 
$ 302,529 

At June 30, 2008 and September 30, 2007, RJFS had no Aggregate Debit Items and therefore the minimum net capital of $250,000 was applicable. The net capital position of RJFS at June 30, 2008 and September 30, 2007 was as follows:

 
June 30,
September 30,
 
2008
2007
 
(in 000's)
Raymond James Financial Services, Inc.:
 
(Alternative Method Elected)
   
Net Capital
$ 59,702 
$ 70,583 
Less: Required Net Capital
(250)
(250)
Excess Net Capital
$ 59,452 
$ 70,333 

At June 30, 2008 and September 30, 2007, HFD had no Aggregate Debit Items and therefore the minimum net capital of $250,000 was applicable. The net capital position of HFD at June 30, 2008 and September 30, 2007 was as follows:

 
June 30,
September 30,
 
2008
2007
 
(in 000’s)
Heritage Fund Distributors, Inc.:
 
(Alternative Method Elected)
   
Net Capital
$ 2,359 
$ 6,039 
Less: Required Net Capital
(250)
(250)
Excess Net Capital
$ 2,109 
$ 5,789 

The net capital position of RJ(USA) at June 30, 2008 and September 30, 2007 was as follows:

 
June 30,
September 30,
 
2008
2007
 
($ in 000's)
Raymond James (USA) Ltd.:
 
(Alternative Method Elected)
   
Net Capital as a Percent of Aggregate
   
Debit Items
96.44% 
23.00% 
Net Capital
$ 3,762 
$ 3,418 
Less: Required Net Capital
(250)
(299)
Excess Net Capital
$ 3,512 
$ 3,119 

At June 30, 2008 and September 30, 2007, RJ(USA) had Aggregate Debit Items of $3,901,000 and $14,967,000. The minimum capital required was the greater of $250,000 or 2% of Aggregate Debit Items. The capital required for June 30, 2008 and September 30, 2007 was $250,000 and $299,000, respectively.

RJ Ltd. is subject to the Minimum Capital Rule (Dealer Member Rule No. 17 of the Investment Industry Regulatory Organization of Canada ("IIROC")) and the Early Warning System (Dealer Member Rule No. 30 of the IIROC). The Minimum Capital Rule requires that every member shall have and maintain at all times Risk Adjusted Capital greater than zero calculated in accordance with Form 1 (Joint Regulatory Financial Questionnaire and Report) and with such requirements as the Board of Directors of the IIROC may from time to time prescribe. Insufficient Risk Adjusted Capital may result in suspension from membership in the stock exchanges or the IIROC.

24


The Early Warning System is designed to provide advance warning that a member firm is encountering financial difficulties. This system imposes certain sanctions on members who are designated in Early Warning Level 1 or Level 2 according to their capital, profitability, liquidity position, frequency of designation or at the discretion of the IIROC. Restrictions on business activities and capital transactions, early filing requirements, and mandated corrective measures are sanctions that may be imposed as part of the Early Warning System. The Company was not in Early Warning Level 1 or Level 2 at June 30, 2008 or September 30, 2007. The Risk Adjusted Capital of RJ Ltd. at June 30, 2008 and September 30, 2007 was as follows (in Canadian dollars):

 
June 30,
September 30,
 
2008
2007
 
(in 000’s)
Raymond James Ltd.:
   
Risk Adjusted Capital before minimum
$ 51,517 
$ 47,974 
Less: Required Minimum Capital
(250)
(250)
Risk Adjusted Capital
$ 51,267 
$ 47,724 

The Company’s other domestic and international broker-dealers are in compliance with and meet all net capital requirements.

RJBank is subject to various regulatory and capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, RJBank must meet specific capital guidelines that involve quantitative measures of RJBank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. RJBank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require RJBank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes that, as of June 30, 2008, RJBank meets all capital adequacy requirements to which it is subject.

As of June 30, 2008, the most recent notification from the Office of Thrift Supervision categorized RJBank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized”, RJBank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed RJBank's category.

     
To be well capitalized
   
Requirement for capital
under prompt
   
adequacy
corrective action
 
Actual
purposes
provisions
 
Amount
Ratio
Amount
Ratio
Amount
Ratio
 
($ in 000's)
As of June 30, 2008:
           
Total Capital (to
           
Risk-Weighted Assets)
$ 624,732
10.2%
$ 491,984
8.0%
$ 614,980
10.0%
Tier I Capital (to
           
Risk-Weighted Assets)
547,909
8.9%
245,992
4.0%
368,988
6.0%
Tier I Capital (to
           
Adjusted Assets)
547,909
6.5%
335,124
4.0%
418,905
5.0%
             
As of September 30, 2007:
           
Total Capital (to
           
Risk-Weighted Assets)
$ 420,704
10.1%
$ 332,832
8.0%
$ 416,040
10.0%
Tier I Capital (to
           
Risk-Weighted Assets)
368,699
8.9%
166,416
4.0%
249,624
6.0%
Tier I Capital (to
           
Adjusted Assets)
368,699
5.8%
253,048
4.0%
316,309
5.0%


25



NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:

RJBank has outstanding at any time a significant number of commitments to extend credit and other credit-related off-balance sheet financial instruments such as standby letters of credit and loan purchases. These arrangements are subject to strict credit control assessments and each customer’s credit worthiness is evaluated on a case-by-case basis. A summary of commitments to extend credit and other credit-related off-balance sheet financial instruments outstanding at June 30, 2008 and September 30, 2007, is as follows:

 
June 30,
September 30,
 
2008
2007
 
(in 000's)
     
Standby Letters of Credit
$   229,810
$   100,397
Open End Consumer Lines of Credit
41,988
27,871
Commercial Lines of Credit
1,345,688
1,218,690
Unfunded Loan Commitments - Variable Rate (1)
570,643
397,752
Unfunded Loan Commitments - Fixed Rate
6,956
12,831

(1)  
Includes commitments to purchase pools of adjustable rate whole first mortgage loans.

Because many loan commitments expire without being funded in whole or part, the contract amounts are not estimates of future cash flows.

Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that the collateral or other security is of no value. RJBank uses the same credit approval and monitoring process in extending loan commitments and other credit-related off-balance sheet instruments as it does in making loans.

RJBank’s policy is generally to require customers to provide collateral at the time of closing. The amount of collateral obtained, if it is deemed necessary by RJBank upon extension of credit, is based on RJBank’s credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, real estate, and income producing commercial properties.

In the normal course of business, RJBank issues, or participates in the issuance of, financial standby letters of credit whereby it provides an irrevocable guarantee of payment in the event the letter of credit is drawn down by the beneficiary. As of June 30, 2008, $229.8 million of such letters of credit were outstanding. Of the letters of credit outstanding, $227.5 million are underwritten as part of a larger corporate credit relationship. In the event that a letter of credit is drawn down, RJBank would pursue repayment from the debtor under the existing borrowing relationship, or would liquidate collateral, or both. The proceeds from repayment or liquidation of collateral are expected to satisfy the maximum potential future amount of any payments of amounts drawn down under the existing letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved with extending loan commitments to clients, and accordingly, RJBank uses a credit evaluation process and collateral requirements similar to those for loan commitments.

See Note 20 of the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2007 for more information regarding the Company’s financial instruments with off-balance sheet risk.

26



NOTE 16 – EARNINGS PER SHARE:

The following table presents the computation of basic and diluted earnings per share:

 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
June 30,
June 30,
 
2008
2007
2008
2007
 
(in 000’s, except per share amounts)
         
Net Income
$  69,938
$  68,353
$ 185,970
$ 187,463
         
Weighted Average Common Shares
       
Outstanding During the Period
115,633
116,135
116,573
115,353
         
Dilutive Effect of Stock Options and Awards (1)
2,639
3,005
2,639
3,072
         
Weighted Average Diluted Common
       
Shares (1)
118,272
119,140
119,212
118,425
         
Net Income per Share – Basic
$      0.60
$      0.59
$       1.59
$       1.63
         
Net Income per Share - Diluted (1)
$      0.59
$      0.57
$       1.56
$       1.58
         
Securities Excluded from Weighted Average
       
Diluted Common Shares Because Their Effect
       
Would Be Antidilutive
3,623
694
3,045
1,247

(1)  
Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include stock options, units and awards.

NOTE 17 – SEGMENT ANALYSIS:

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

The Company currently operates through the following eight business segments: Private Client Group; Capital Markets; Asset Management; RJBank; Emerging Markets; Stock Loan/Borrow; Proprietary Capital and various corporate activities combined in the "Other" segment. In the quarter ended September 30, 2007, a new segment was established: Proprietary Capital. The components of this segment were previously included in Asset Management and Other. Reclassifications have been made in the segment disclosure for previous periods to conform to this presentation. The business segments are based upon factors such as the services provided and the distribution channels served and are consistent with how the Company assesses performance and determines how to allocate resources throughout the Company and its subsidiaries. The financial results of the Company's segments are presented using the same policies as those described in Note 1 of the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2007.  Segment data includes charges allocating corporate overhead and benefits to each segment. Intersegment revenues, charges, receivables and payables are eliminated between segments upon consolidation.

The Private Client Group segment includes the retail branches of the Company's broker-dealer subsidiaries located throughout the U.S., Canada and the United Kingdom. These branches provide securities brokerage services including the sale of equities, mutual funds, fixed income products and insurance products to their individual clients. The segment includes net interest earnings on client margin loans and cash balances. Additionally, this segment includes the correspondent clearing services that the Company provides to other broker-dealer firms.

27



The Capital Markets segment includes institutional sales and trading in the U.S., Canada and Europe. It provides securities brokerage, trading, and research services to institutions with an emphasis on the sale of U.S. and Canadian equities and fixed income products. This segment also includes the Company's management of and participation in underwritings, merger and acquisition services, public finance activities, and the operations of Raymond James Tax Credit Funds, Inc.

The Asset Management segment includes investment portfolio management services of Eagle Asset Management, Inc., Eagle Boston Investment Management, Inc., and Raymond James Consulting Services (RJA’s asset management services division), mutual fund management by Heritage Asset Management, Inc., and trust services of Raymond James Trust, National Association. and Raymond James Trust Company West. In addition to the asset management services noted above, this segment also offers fee-based programs to clients who have contracted for portfolio management services from outside money managers.

RJBank is a separate segment, which provides consumer, residential, and commercial loans, as well as FDIC-insured deposit accounts to clients of the Company's broker-dealer subsidiaries and to the general public.

The Emerging Markets segment includes various joint ventures in Turkey and Latin America. These joint ventures operate in securities brokerage, investment banking and asset management.

The Stock Loan/Borrow segment involves the borrowing and lending of securities from and to other broker-dealers, financial institutions and other counterparties, generally as an intermediary.

The Proprietary Capital segment consists of the Company’s principal capital and private equity activities including: various direct and third party private equity and merchant banking investments (including Raymond James Capital, Inc., a captive merchant banking business), short-term special situation mezzanine and bridge investments, the EIF Funds, and three private equity funds sponsored by the Company: Raymond James Capital Partners, L.P., Ballast Point Ventures, L.P., and Ballast Point Ventures II, L.P.

The Other segment includes certain corporate activities of the Company.

Information concerning operations in these segments of business is as follows:

 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
June 30,
June 30,
 
2008
2007
2008
2007
 
(in 000’s)
Revenues:
       
Private Client Group
$  472,843 
$  499,475 
$ 1,488,871 
$ 1,421,824 
Capital Markets
147,047 
146,383 
386,009 
373,508 
Asset Management
57,629 
58,094 
179,826 
173,652 
RJBank
96,222 
79,221 
303,945 
186,000 
Emerging Markets
10,339 
14,676 
32,985 
43,126 
Stock Loan/Borrow
6,728 
19,573 
29,015 
49,284 
Proprietary Capital
16,134 
6,715 
18,475 
11,917 
Other
1,806 
(1,384)
5,947 
11,342 
Total Revenues
$  808,748 
$  822,753 
$ 2,445,073 
$ 2,270,653 
         
Income Before Provision for Income Taxes:
 
Private Client Group
$   36,654 
$   56,158 
$    143,478 
$    161,527 
Capital Markets
27,882 
25,571 
41,722 
53,022 
Asset Management
13,365 
16,480 
45,050 
46,520 
RJBank
37,957 
8,729 
78,622 
24,962 
Emerging Markets
(348)
(2,931)
(1,618)
1,674 
Stock Loan/Borrow
1,893 
1,421 
4,827 
2,995 
Proprietary Capital
5,794 
4,400 
4,563 
4,617 
Other
(8,079)
70 
(12,951)
1,302 
Pre-Tax Income
$ 115,118 
$ 109,898 
$    303,693 
$   296,619 


28



 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
June 30,
June 30,
 
2008
2007
2008
2007
 
(in 000’s)
Net Interest Income (Expense):
Private Client Group
$   22,205 
$   31,710 
$     70,896 
$     92,729 
Capital Markets
638 
(2,265)
1,048 
(6,309)
Asset Management
145 
359 
928 
1,021 
RJBank
63,922 
22,498 
147,109 
55,712 
Emerging Markets
240 
808 
1,950 
2,219 
Stock Loan/Borrow
2,338 
2,344 
7,027 
6,496 
Proprietary Capital
152 
289 
1,160 
915 
Other
571 
1,855 
5,546 
9,570 
Net Interest Income
$   90,211 
$   57,598 
$   235,664 
$   162,353 

The following table presents the Company's total assets on a segment basis:

     
 
June 30,
September 30,
 
2008
2007
 
(in 000’s)
Total Assets:
   
Private Client Group *
$   6,874,482 
$   6,608,059
Capital Markets **
1,399,285 
1,533,273
Asset Management
78,029 
95,894
RJBank
8,339,757 
6,312,966
Emerging Markets
82,271 
104,238
Stock Loan/Borrow
1,186,139 
1,302,937
Proprietary Capital
167,082 
115,062
Other
152,143 
181,739
Total
$ 18,279,188 
$ 16,254,168

*       Includes $46 million of goodwill allocated pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets".
**       Includes $17 million of goodwill allocated pursuant to SFAS No. 142.

The Company has operations in the U.S., Canada, Europe and joint ventures in Turkey and Latin America. Substantially all long-lived assets are located in the U.S. Revenues, classified by the major geographic areas in which they are earned, were as follows:

 
Three Months Ended
Nine Months Ended
 
June 30,
June 30,
June 30,
June 30,
 
2008
2007
2008
2007
 
(in 000’s)
Revenues:
       
United States
$ 717,014
$  732,547
$  2,164,936
$ 2,013,485
Canada
69,804
63,551
203,832
177,651
Europe
13,159
12,682
45,764
38,957
Other
8,771
13,973
30,541
40,560
Total
$ 808,748
$  822,753
$  2,445,073
$ 2,270,653

The Company has $10.3 million invested, net of a $4.6 million reserve for its Turkish joint venture interest, in emerging market joint ventures, which carry greater risk than amounts invested in developed markets.


29


 
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business and Total Company Overview

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and the financial condition of the Company. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, the Company’s financial statements, and accompanying notes to the financial statements.

Historically, the Company’s overall results have been highly correlated to the activity levels in the U.S. equity markets. Active securities markets, a steep, positively sloping yield curve and upward movements in equity indices have a positive impact, while volatile interest rates and disruption in credit markets have a negative impact on brokerage results. As Raymond James Bank (“RJBank”) continues to grow and a greater percentage of the firm’s revenues come from interest earnings and recurring asset based fees, results have become somewhat more insulated from these market influences. The Company is currently operating in a challenging environment: indications of a possible recession and financial services industry issues related to credit quality, auction rate securities and liquidity are negatively impacting activity levels, and the current equity market conditions continue to dampen investment banking activity. However, positive Financial Advisor recruiting results (especially in the employee subsidiary), increased institutional commissions, and continued loan growth coupled with improved interest rate spreads at RJBank had a positive impact on results and should position the Company well for future periods. The Company also had strong trading profits and capital gains on proprietary investments in the current quarter.

30



Segments

The Company currently operates through the following eight business segments: Private Client Group; Capital Markets; Asset Management; Raymond James Bank; Emerging Markets; Stock Loan/Borrow, Proprietary Capital and certain corporate activities in the Other segment.

The following table presents the gross revenues and pre-tax earnings of the Company on a segment basis for the periods indicated:

 
Three Months Ended
 
June 30,
 
June 30,
 
Percentage
 
2008
 
2007
 
Change
 
(in 000’s)
Total Company
         
Revenues
$ 808,748 
 
$ 822,753 
 
(2%)
Pre-tax Earnings
$ 115,118 
 
$ 109,898 
 
5% 
           
Private Client Group
         
Revenues
472,843 
 
499,475 
 
(5%)
Pre-tax Earnings
36,654 
 
56,158 
 
(35%)
           
Capital Markets
         
Revenues
147,047 
 
146,383 
 
0% 
Pre-tax Earnings
27,882 
 
25,571 
 
9% 
           
Asset Management
         
Revenues
57,629 
 
58,094 
 
(1%)
Pre-tax Earnings
13,365 
 
16,480 
 
(19%)
           
Raymond James Bank
         
Revenues
96,222 
 
79,221 
 
21% 
Pre-tax Earnings
37,957 
 
8,729 
 
335% 
           
Emerging Markets
         
Revenues
10,339 
 
14,676 
 
(30%)
Pre-tax Loss
(348)
 
(2,931)
 
88% 
           
Stock Loan/Borrow
         
Revenues
6,728 
 
19,573 
 
(66%)
Pre-tax Earnings
1,893 
 
1,421 
 
33% 
           
Proprietary Capital
         
Revenues
16,134 
 
6,715 
 
140% 
Pre-tax Earnings
5,794 
 
4,400 
 
32% 
           
Other
         
Revenues
1,806 
 
(1,384)
 
230% 
Pre-tax (Loss)Earnings
(8,079)
 
70 
 
(11,641%)







31


Results of Operations – Three Months Ended June 30, 2008 Compared with the Three Months Ended June 30, 2007

Total Company

Total Company net revenues increased 8% to $742.0 million from $688.7 million in the prior year. Net interest earnings increased 57% or $32.6 million with net income up 2% from the prior year quarter. The current year results include increased net interest income, positive trading results, a write-up on proprietary capital investments, and increased institutional commissions, net of increased non-interest expenses. The Company’s effective tax rate for the quarter continues to be higher than it has been for the previous quarters primarily as a result of the current year nondeductible unrealized loss on the Company’s corporate owned life insurance investment, in contrast to the gain in the prior year. It is currently anticipated that the annual tax rate will be 2% higher than the prior year. Diluted net income was $0.59 per share, versus $0.57 per share in the prior year quarter.

Net Interest Analysis

The following table presents average balance data and interest income and expense data for the Company, as well as the related net interest income. The respective average rates are presented on an annualized basis.

 
Three Months Ended
 
June 30,
June 30,
 
2008
2007
       
Average
     
Average
 
Average
Interest
 
Yield/
Average
Interest
 
Yield/
 
Balance
Inc./Exp.
 
Cost
Balance
Inc./Exp.
 
Cost
 
($ in 000’s)
Interest-Earning Assets:
               
Margin Balances
$1,575,228
$ 17,662
 
4.48%
$1,423,603
$  27,116
 
7.62%
Assets Segregated Pursuant
               
to Regulations and Other
               
Segregated Assets
4,072,571
21,381
 
2.10%
3,732,500
49,269
 
5.28%
Interest-Earning Assets
               
of RJBank (1)
8,286,161
97,692
 
4.72%
5,243,979
78,939
 
6.02%
Stock Borrow
 
6,728
     
19,573
   
Interest-Earning Assets
               
of Variable Interest Entities
 
125
     
174
   
Other
 
13,347
     
16,620
   
                 
Total Interest Income
 
156,935
     
191,691
   
                 
Interest-Bearing Liabilities:
               
Client Interest Program
$5,211,264
20,827
 
1.60%
$4,616,939
50,795
 
4.40%
Interest-Bearing Liabilities
               
of RJBank (1)
7,796,117
33,770
 
1.73%
4,897,454
56,441
 
4.61%
Stock Loan
 
4,390
     
17,229
   
Interest-Bearing Liabilities of
               
Variable Interest Entities
 
973
     
1,842
   
Other
 
6,764
     
7,786
   
                 
Total Interest Expense
 
66,724
     
134,093
   
                 
Net Interest Income
 
$ 90,211
     
$ 57,598
   

(1)  
See Raymond James Bank section in Item 2 of Part I for details.

32



Net interest increased $32.6 million, or 57%, over the same quarter in the prior year. RJBank’s net interest increased $41.4 million, or 184%, while net interest in the Private Client Group declined $9.5 million, or 30%. RJBank benefited not only from the continued growth of its loan portfolio but also from increased spreads. There were two specific factors which enhanced the interest rate spreads at RJBank as follows: (1) as rates were declining over the quarter, a larger spread was realized on a large portion of the 5/1 adjustable rate mortgage portfolio that is still in its fixed rate period; and (2) RJBank benefited from a historically high LIBOR rate (used for pricing the entire corporate loan portfolio) relative to RJBank’s cost of funds, which are Fed funds based. As a result, RJBank had an interest rate spread of close to 3% which is not sustainable and is approximately 30 to 50 basis points above what might be expected on an ongoing basis.

Average client margin balances increased $152 million (11%) and assets segregated pursuant to regulations increased $340 million over the same quarter of the prior year. Customer cash balances held in the Client Interest Program increased $594 million despite the sweep of $550 million to RJBank in late March 2008. Net interest in the Private Client Group was negatively impacted by the sweep of customer deposits to RJBank in late March and by lower spreads. This segment is negatively impacted by interest rate cuts as the rate is lowered immediately on the interest earning assets while the lowering of the interest rate paid to clients occurs over a period of weeks to remain competitive with money market fund yields.

Private Client Group

The Private Client Group (“PCG”) segment includes the retail branches of the Company's broker-dealer subsidiaries located throughout the United States, Canada, and the United Kingdom.  The Private Client Group Financial Advisors provide securities brokerage services including the sale of equity securities, mutual funds, fixed income instruments, annuities and insurance products. This segment accounted for 58% of the Company's revenues for the three months ended June 30, 2008. It generates revenues principally through commissions charged on securities transactions, fees from wrap fee investment accounts and the interest revenue generated from client margin loans and cash balances.  The Company primarily charges for the services provided to its Private Client Group clients based on commission schedules or through asset based advisory fees.

The success of the Private Client Group is dependent upon the quality and integrity of its Financial Advisors and support personnel and the Company's ability to attract, retain, and motivate a sufficient number of these associates.  The Company faces competition for qualified associates from major financial services companies, including other brokerage firms, insurance companies, banking institutions, and discount brokerage firms. The Company currently offers several affiliation alternatives for Financial Advisors ranging from the traditional branch setting, under which the Financial Advisors are employees of the Company and the costs associated with running the branch are incurred by the Company, to the independent contractor model, under which the Financial Advisors are responsible for all of their own direct costs.  Accordingly, the independent contractor Financial Advisors are paid a larger percentage of commissions and fees.  By offering alternative models to potential and existing Financial Advisors, the Company is able to effectively compete with a wide variety of other brokerage firms for qualified Financial Advisors, as Financial Advisors can choose the model that best suits their practice and profile. For the past several years, the Company has focused on increasing its minimum production standards and recruiting Financial Advisors with high average production. The following table presents a summary of Private Client Group Financial Advisors as of the periods indicated:

     
June 30,
June 30,
   
Independent
2008
2007
 
Employee
Contractors
Total
Total
Private Client Group - Financial Advisors:
       
RJA
1,159
-
1,159
1,054
RJFS
-
3,114
3,114
3,074
RJ Ltd.
193
164
357
325
RJIS
-
86
86
76
Total Financial Advisors
1,352
3,364
4,716
4,529

The Private Client Group Segment continues to be positively impacted by the successful recruiting of employee Financial Advisors and increased Financial Advisor productivity. RJA added a net 105 Financial Advisors versus June of the prior year, as the Company continued to benefit from brokerage industry unrest. Average annual production per RJA Financial Advisor increased 12% from $465,000 to $520,000 and average annual production per RJFS Financial Advisor also increased 12% from $300,000 to $336,000 over the same quarter prior year. RJ Ltd. added 32 Financial Advisors versus the prior June. These factors are being offset by the poor equity market environment. As a result, PCG commissions were essentially flat with the prior year quarter.

33



The pre-tax segment results declined 35% versus the prior year on flat net revenues. The segment results were impacted by a $9.5 million decline in net interest income from the prior year primarily due to declining interest rates which compressed net interest earnings despite higher client balances. In addition, the business margins continue to be negatively impacted by the expenses associated with successful recruiting, including commission concessions, the expense associated with the amortization of advances, account transfer fees, new branch expenses and additional support staff.

Capital Markets

The Capital Markets segment includes institutional sales and trading in the United States, Canada, and Europe; management of and participation in underwritings; financial advisory services including private placements and merger and acquisition services; public finance activities; and the syndication and related management of investment partnerships designed to yield returns in the form of low-income housing tax credits to institutions. The Company provides securities brokerage services to institutions with an emphasis on the sale of U.S. and Canadian equities and fixed income products. Institutional sales commissions accounted for 63% of the segment’s revenues and are driven primarily through trade volume, resulting from a combination of general market activity and by the Capital Markets group’s ability to find attractive investment opportunities and promote those opportunities to potential and existing clients. Revenues from investment banking activities are driven principally by the number and the dollar value of the transactions with which the Company is involved. This segment also includes trading of taxable and tax-exempt fixed income products, as well as equity securities in the OTC and Canadian markets. This trading involves the purchase of securities from, and the sale of securities to, clients of the Company or other dealers who may be purchasing or selling securities for their own account or acting as agent for their clients. Profits and losses related to this trading activity are primarily derived from the spreads between bid and ask prices in the relevant market.

Capital Market’s quarterly results increased approximately $2.3 million, or 9%, from the comparable prior year quarter. Market conditions led to a $17.5 million, or 23%, increase in commissions, with fixed income commissions up $17 million, or 93%, over the prior year quarter. Total firm investment banking revenues were down $15.6 million, or 30%. Trading profits were higher than normal at $11 million, a combination of $12.9 million in fixed income trading profits and the continued domestic equity trading and RJ Ltd. losses related to facilitating customer trades. In the prior year quarter, the Company had trading profits of $6 million. Given the retraction in the market for low-income housing tax credit investments, RJTCF anticipates a decrease in its profitability for fiscal year 2008 as compared to the prior fiscal year.

 
Three Months Ended
 
June 30,
 
June