q02082011.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    December 31, 2010

or

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

For the transition period from
 
to
 

Commission File Number: 1-9109

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

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

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes x No o

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

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

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

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

125,996,802 shares of Common Stock as of February 4, 2011

 
 

 


   
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
 
       
   
Form 10-Q for the Quarter Ended December 31, 2010
 
       
   
INDEX
 
       
     
PAGE
PART I.
 
FINANCIAL INFORMATION
 
       
Item 1.
 
Financial Statements (unaudited)
 
       
   
Condensed Consolidated Statements of Financial Condition as of December 31, 2010 and September 30, 2010 (unaudited)
3
       
   
Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended December 31, 2010 and December 31, 2009 (unaudited)
4
       
   
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended December 31, 2010 and December 31, 2009 (unaudited)
5
       
   
Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2010 and December 31, 2009 (unaudited)
6
       
   
Notes to Condensed Consolidated Financial Statements (unaudited)
7
       
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
43
       
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
68
       
Item 4.
 
Controls and Procedures
75
       
PART II.
 
OTHER INFORMATION
 
       
Item 1.
 
Legal Proceedings
76
       
Item 1A.
 
Risk Factors
76
       
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
77
 
Item 3.
 
 
Defaults Upon Senior Securities
77
 
Item 5.
 
 
Other Information
77
       
Item 6.
 
Exhibits
78
       
   
Signatures
99
       
       

 
2

 

PART I   FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

             
   
December 31,
2010
   
September 30,
2010
 
   
($ in 000’s)
 
Assets
           
Cash and Cash Equivalents
  $ 1,204,883     $ 2,943,239  
Assets Segregated Pursuant to Regulations and Other Segregated Assets
    2,069,075       3,430,715  
Securities Purchased under Agreements to Resell and Other Collateralized Financings
    456,239       344,652  
Financial Instruments, at Fair Value:
               
Trading Instruments
    612,360       591,447  
Available for Sale Securities
    385,163       424,461  
Private Equity and Other Investments
    325,453       321,079  
Receivables:
               
Brokerage Clients, Net
    1,628,394       1,675,535  
Stock Borrowed
    184,964       262,888  
Bank Loans, Net
    6,104,133       6,094,929  
Brokers-Dealers and Clearing Organizations
    115,839       143,994  
Other
    477,734       442,856  
Deposits with Clearing Organizations
    81,162       76,488  
Prepaid Expenses and Other Assets
    460,264       451,357  
Investments in Real Estate Partnerships - Held by Variable Interest Entities
    328,927       280,890  
Property and Equipment, Net
    171,569       170,768  
Deferred Income Taxes, Net
    181,104       165,208  
Goodwill
    62,575       62,575  
                 
Total Assets
  $ 14,849,838     $ 17,883,081  
                 
Liabilities and Equity
               
Trading Instruments Sold but Not Yet Purchased, at Fair Value
  $ 203,989     $ 131,038  
Securities Sold Under Agreements to Repurchase
    166,815       233,346  
Payables:
               
Brokerage Clients
    3,382,225       3,308,115  
Stock Loaned
    498,040       698,668  
Bank Deposits
    6,682,396       7,079,718  
Brokers-Dealers and Clearing Organizations
    98,554       137,041  
Trade and Other
    308,459       290,268  
Other Borrowings
    30,000       2,557,000  
Accrued Compensation, Commissions and Benefits
    298,821       418,591  
Loans Payable Related to Investments by Variable Interest Entities in Real Estate Partnerships
    107,437       76,464  
Corporate Debt
    355,169       355,964  
                 
Total Liabilities
    12,131,905       15,286,213  
                 
Commitments and Contingencies (See Note 12)
               
                 
Equity
               
Preferred Stock; $.10 Par Value; Authorized 10,000,000 Shares; Issued and Outstanding -0- Shares
    -       -  
Common Stock; $.01 Par Value; Authorized 350,000,000 Shares; Issued 129,305,302 at December 31, 2010 and 128,620,429 at September 30, 2010
    1,254       1,244  
Shares Exchangeable into Common Stock; 243,048 at December 31, 2010 and September 30, 2010
    3,119       3,119  
Additional Paid-In Capital
    503,649       476,359  
Retained Earnings
    1,979,572       1,909,865  
Treasury Stock, at  cost, 4,019,411 Common Shares at December 31, 2010 and 3,918,492 Common Shares at September 30, 2010
    (85,056 )     (81,574 )
Accumulated Other Comprehensive Income
    4,204       (6,197 )
Total Equity Attributable to Raymond James Financial, Inc.
    2,406,742       2,302,816  
Noncontrolling Interests
    311,191       294,052  
                 
Total Equity
    2,717,933       2,596,868  
                 
Total Liabilities and Equity
  $ 14,849,838     $ 17,883,081  
                 
                 
                 
                 
                 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
 

 
3

 

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

   
Three Months Ended December 31,
 
   
2010
   
2009
 
Revenues:
           
Securities Commissions and Fees
  $ 534,139     $ 469,151  
Investment Banking
    58,969       25,718  
Investment Advisory Fees
    52,216       43,975  
Interest
    104,386       91,372  
Net Trading Profits
    6,322       11,637  
Financial Service Fees
    41,788       36,782  
Other
    32,513       24,034  
                 
Total Revenues
    830,333       702,669  
                 
Interest Expense
    16,504       15,702  
Net Revenues
    813,829       686,967  
                 
Non-Interest Expenses:
               
Compensation, Commissions and Benefits
    551,884       471,079  
Communications and Information Processing
    31,145       28,074  
Occupancy and Equipment Costs
    26,229       26,715  
Clearance and Floor Brokerage
    9,917       8,502  
Business Development
    23,945       19,881  
Investment Sub-Advisory Fees
    6,904       6,558  
Bank Loan Loss Provision
    11,232       22,835  
Other
    25,827       36,210  
Total Non-Interest Expenses
    687,083       619,854  
                 
Income Including Noncontrolling Interests and Before Provision for Income Taxes
    126,746       67,113  
                 
Provision for Income Taxes
    48,791       26,485  
                 
Net Income Including Noncontrolling Interests
    77,955       40,628  
Net Loss Attributable to Noncontrolling Interests
    (3,768 )     (2,275 )
Net Income Attributable to Raymond James Financial, Inc.
  $ 81,723     $ 42,903  
                 
Net Income per Common Share-Basic
  $ 0.65     $ 0.35  
Net Income per Common Share-Diluted
  $ 0.65     $ 0.35  
Weighted-Average Common Shares Outstanding-Basic
    121,155       118,763  
Weighted-Average Common and Common Equivalent Shares Outstanding-Diluted
    121,534       118,983  
                 
                 
Net Income Attributable to Raymond James Financial, Inc.
  $ 81,723     $ 42,903  
Other Comprehensive Income, Net of Tax(1):
               
Change in Unrealized Gain on Available for Sale Securities and Non-Credit Portion of Other-Than-Temporary Impairment Losses
    4,897       13,223  
Change in Currency Translations
    5,504       2,973  
Total Comprehensive Income
  $ 92,124     $ 59,099  
                 
Other-Than-Temporary Impairment:
               
Total Other-Than-Temporary Impairment, net
  $ 779     $ (15,520 )
Portion of Losses Recognized in Other Comprehensive Income (Before Taxes)
    (2,958 )     12,521  
Net Impairment Losses Recognized in Other Revenue
  $ (2,179 )   $ (2,999 )

(1)  
The components of Other Comprehensive Income, Net of Tax are attributable to Raymond James Financial, Inc.  None of the components of other comprehensive income are attributable to noncontrolling interests.

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

 
4

 

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(in 000’s, except per share amounts)

   
Three Months Ended December 31,
 
   
2010
   
2009
 
Common Stock, par value $.01 per share
           
Balance, beginning of year
  $ 1,244     $ 1,227  
Issued
    10       2  
Balance, end of period
    1,254       1,229  
                 
Shares Exchangeable into Common Stock
               
Balance, beginning of year
    3,119       3,198  
Exchanged
    -       (2 )
Balance, end of period
    3,119       3,196  
                 
Additional Paid-In Capital
               
Balance, beginning of year
    476,359       416,662  
Employee stock purchases
    1,690       1,633  
Exercise of stock options and vesting of restricted stock units, net of forfeitures
    13,798       4,421  
Restricted stock, stock option and restricted stock unit expense
    14,355       12,455  
Excess tax benefit from share-based payments
    (1,000 )     (457 )
Other
    (1,553 )     1,074  
Balance, end of period
    503,649       435,788  
                 
Retained Earnings
               
Balance, beginning of year
    1,909,865       1,737,591  
Net Income attributable to Raymond James Financial, Inc.
    81,723       42,903  
Cash Dividends
    (16,387 )     (13,686 )
Other
    4,371       -  
Balance, end of period
    1,979,572       1,766,808  
                 
Treasury Stock
               
Balance, beginning of year
    (81,574 )     (84,412 )
Purchases/Surrenders
    (5,265 )     (3,322 )
Exercise of stock options and vesting of restricted stock units, net of forfeitures
    1,783       (501 )
Balance, end of period
    (85,056 )     (88,235 )
                 
Accumulated Other Comprehensive Income(1)
               
Balance, beginning of year
    (6,197 )     (41,803 )
Net unrealized gain on available for sale securities and non-credit portion of other-than-temporary impairment losses(2)
    4,897       13,223  
Net change in currency transactions
    5,504       2,973  
Balance, end of period
    4,204       (25,607 )
                 
Total Equity Attributable to Raymond James Financial, Inc.
  $ 2,406,742     $ 2,093,179  
                 
Noncontrolling Interests
               
Balance, beginning of year
  $ 294,052     $ 200,676  
Net Loss Attributable to Noncontrolling Interests
    (3,768 )     (2,275 )
Capital Contributions
    14,512       24,869  
Distributions
    -       (340 )
Other
    6,395       (20
Balance, end of period
    311,191       222,910  
                 
Total Equity
  $ 2,717,933     $ 2,316,089  
                 

(1)  
The components of Other Comprehensive Income are attributable to Raymond James Financial, Inc.  None of the components of other comprehensive income are attributable to noncontrolling interests.

(2)  
Net of tax.

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

 
 
5

 

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

   
Three Months Ended December 31,
 
   
2010
   
2009
 
Cash Flows From Operating Activities:
           
Net Income Attributable to Raymond James Financial, Inc.
  $ 81,723     $ 42,903  
Net Loss Attributable to Noncontrolling Interests
    (3,768 )     (2,275 )
Net Income Including Noncontrolling Interests
    77,955       40,628  
Adjustments to Reconcile Net Income Including Noncontrolling Interests to Net Cash Provided by (Used in) Operating Activities:
               
Depreciation and Amortization
    9,574       11,758  
Deferred Income Taxes
    (18,737 )     (23,070
Premium and Discount Amortization on Available for Sale Securities and Unrealized/Realized Gain on Other Investments
    (484 )     360  
Provisions for Loan Losses, Legal Proceedings, Bad Debts and Other Accruals
    14,793       37,635  
Stock-Based Compensation Expense
    15,832       12,901  
Other
    (2,234 )     (302 )
Net Change In:
               
Assets Segregated Pursuant to Regulations and Other Segregated Assets
    1,363,377       332,266  
Securities Purchased Under Agreements to Resell and Other Collateralized Financings, net of Securities Sold Under Agreements to Repurchase
    (178,118 )     (126,107 )
Stock Loaned, net of Stock Borrowed
    (122,704 )     300,332  
Brokerage Client Receivables and Other Accounts Receivable, net
    46,147       29,697  
Trading Instruments, net
    66,114       29,808  
Prepaid Expenses and Other Assets
    (129 )     (45,038 )
Brokerage Client Payables and Other Accounts Payable
    66,780       (619,498 )
Accrued Compensation, Commissions and Benefits
    (122,556 )     (107,096 )
Purchase and Origination of Loans Held for Sale, net of Proceeds from Sale of Securitizations and Loans Held for Sale
    (2,868 )     (12,632 )
Excess Tax Benefits from Stock-Based Payment Arrangements
    (293 )     (157 )
Net Cash Provided by (Used in) Operating Activities
    1,212,449       (138,515 )
Cash Flows from Investing Activities:
               
Additions to Property and Equipment
    (9,500 )     (5,827 )
(Increase) Decrease in Loans, net
    (48,760 )     177,759  
Redemption of  Federal Home Loan Bank stock, net
    4,777       -  
Purchases of  Private Equity and Other Investments, net
    (8,648 )     (13,888 )
Decrease  in Securities Purchased Under Agreements to Resell
    -       2,000,000  
Purchases of Available for Sale Securities
    (1,201 )     -  
Available for Sale Securities Maturations and Repayments
    34,538       37,975  
Sales of Available for Sale Securities
    11,161       -  
Investments in Real Estate Partnerships Held by Variable Interest Entities, net of Other Investing Activity
    (4,369 )     (5,945 )
Net Cash (Used In) Provided by Investing Activities
    (22,002 )     2,190,074  
Cash Flows from Financing Activities:
               
Proceeds from Borrowed Funds, net
    -       1,027  
Repayments of Borrowings, net
    (2,527,795 )     (930,752 )
Repayments of Borrowings by Variable Interest Entities which are Real Estate Partnerships
    (11,859 )     (8,513 )
Proceeds from Capital Contributed to Variable Interest Entities which are Real Estate Partnerships
    14,196       25,917  
Exercise of Stock Options and Employee Stock Purchases
    17,025       5,309  
Decrease in Bank Deposits
    (397,322 )     (2,416,318
Purchase of Treasury Stock
    (5,261 )     (3,322 )
Dividends on Common Stock
    (16,387 )     (13,686 )
Excess Tax Benefits from Stock-Based Payment Arrangements
    293       157  
Net Cash Used in Financing Activities
    (2,927,110 )     (3,340,181 )
Currency Adjustment:
               
Effect of Exchange Rate Changes on Cash
    (1,693 )     1,122  
Net Decrease in Cash and Cash Equivalents
    (1,738,356 )     (1,287,500 )
                 
Cash and Cash Equivalents at Beginning of Year
    2,943,239       2,306,085  
Cash and Cash Equivalents at End of Period
  $ 1,204,883     $ 1,018,585  
Supplemental Disclosures of Cash Flow Information:
               
Cash Paid for Interest
  $ 8,787     $ 5,382  
Cash Paid for Income Taxes
  $ 6,688     $ 8,972  
Non-Cash Transfers of Loans to Other Real Estate Owned
  $ 6,917     $ 4,971  

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

 
6

 

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2010

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 terms “our”, “we” or “us” refer to RJF and/or one or more of its subsidiaries. In addition, we consolidate any variable interest entities (“VIEs”) in which we are the primary beneficiary. Additional information on these VIEs is provided in Note 7 of these Notes to Condensed Consolidated Financial Statements. When we do not have a controlling interest in an entity, but we exert significant influence over the entity, we apply the equity method of accounting. All material intercompany balances and transactions have been eliminated in consolidation.

Certain financial information that is normally included in annual financial statements prepared in accordance with 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 our business is such that the results of any interim period are not necessarily indicative of results for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2010, as filed with the United States of America (“U.S.”) Securities and Exchange Commission (the “2010 Form 10-K”). To prepare condensed consolidated financial statements in conformity with GAAP, we must make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could have a material impact on the condensed consolidated financial statements.

Update of Significant Accounting Policies

A summary of our significant accounting policies is included in Note 1 on pages 79 – 90 of our 2010 Form 10-K.  Other than as discussed below, there have been no significant changes in our significant accounting policies since the year-end September 30, 2010.

As of October 1, 2010, we implemented new Financial Accounting Standards Board (“FASB”) guidance regarding the consolidation of VIEs.  This new guidance changes the approach to determine a VIEs’ primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest.  This new guidance also increases the frequency of required assessments to determine whether we are the primary beneficiary of any VIEs to which we are a party.  Upon adoption of this new guidance, we deconsolidated two low-income housing tax credit (“LIHTC”) funds which we determined we are no longer the primary beneficiary, and consolidated two other LIHTC funds which we determined we are the primary beneficiary under the new guidance.  See Note 7 for further discussion.

At December 31, 2010, we implemented new FASB guidance which requires enhanced disclosures about our allowances for loan losses and credit quality of our financing receivables. See Note 6 which contains the additional disclosures required under this new guidance specifically pertaining to the financing receivables arising from our bank subsidiary, Raymond James Bank, FSB (“RJ Bank”), including certain additional accounting policy information regarding such balances not previously included in Note 1 – Summary of Significant Accounting Policies on pages 79-90 of our 2010 Form 10-K.

 
7

 


We also have certain financing receivables that arise from businesses other than our banking business, which are within the scope of the new accounting guidance.  Specifically, we make loans to financial advisors and certain revenue producers, primarily for recruiting and retention purposes.  Our accounting policies governing this activity, including our policies for determining the allowance for doubtful accounts, are described in Note 1 page 85 of our 2010 Form 10-K.  As of December 31, 2010, the outstanding balance of these loans is $227.8 million, with a related allowance for doubtful accounts of $10.1 million, and are included in Other Receivables on our Condensed Consolidated Statements of Financial Condition.  Based upon the nature of these financing receivables, we do not analyze this asset on a portfolio segment or class basis.  Further, the aging of this receivable balance is not a determinative factor in computing our allowance for doubtful accounts as concerns regarding the recoverability of these loans primarily arises in the event that the financial advisor becomes no longer affiliated with us.  Of the loan balance referred to above, the portion of the balance associated with financial advisors who are no longer affiliated with us, after consideration of the allowance for doubtful accounts, is approximately $2 million.

Reclassifications

Certain other prior period amounts, none of which are material, have been reclassified to conform to the current presentation.

NOTE 2 - CASH AND CASH EQUIVALENTS, ASSETS SEGREGATED PURSUANT TO REGULATIONS, AND DEPOSITS WITH CLEARING ORGANIZATIONS:

Our cash equivalents include money market funds or highly liquid investments not held for resale with original maturities of 90 days or less. For further discussion of our accounting policies regarding assets segregated pursuant to regulations and other segregated assets, see Note 1 on page 80 of our 2010 Form 10-K.

The following are financial instruments that are cash and cash equivalents or other investment balances which are readily convertible into cash as of December 31, 2010 and September 30, 2010:

             
   
December 31,
   
September 30,
 
   
2010
   
2010
 
   
(in 000's)
 
Cash and Cash Equivalents:
           
Cash in banks
  $ 1,199,162     $ 2,939,963 (1)
Money market investments
    5,721       3,276  
Total cash and cash equivalents (2)
    1,204,883       2,943,239  
                 
Cash and securities segregated pursuant to federal regulations and other segregated assets (3)
    2,069,075       3,430,715 (1)
Deposits with clearing organizations(4)
    81,162       76,488  
    $ 3,355,120     $ 6,450,442  

(1)  
At September 30, 2010, cash and other segregated assets included additional amounts in order for RJ Bank to meet point-in-time regulatory balance sheet composition requirements related to its qualifying as a thrift institution. The cash in banks and other segregated assets balances at September 30, 2010 included an additional $1.8 billion and $1.3 billion, respectively, resulting from the September 30, 2010 point-in-time requirement.  See Note 22 on page 130 of our 2010 Form 10-K for discussion of the September 30, 2010 point-in-time requirement.

(2)  
Of the total, includes $423 million of RJF Parent Company cash and cash equivalents (invested on behalf of the RJF Parent Company by one of its subsidiaries) as of December 31, 2010.  At September 30, 2010, the RJF Parent Company had $287 million in cash and cash equivalents (see Note 26 on page 135 of the 2010 Form 10-K for further information).

(3)  
Consists of cash and cash equivalents maintained in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934. Raymond James & Associates, Inc. (“RJ&A”), as a broker-dealer carrying client accounts, is subject to requirements related to maintaining cash or qualified securities in a segregated reserve account for the exclusive benefit of its clients. Additionally, Raymond James Ltd. (“RJ Ltd”). is required to hold client Registered Retirement Savings Plan funds in trust.  The $1.3 billion in other segregated assets at September 30, 2010 related to the point-in-time regulatory balance sheet composition requirements mentioned above was held as collateral by the Federal Home Loan Bank of Atlanta (“FHLB”) securing an overnight advance.  On October 1, 2010, the advance was repaid.

(4)  
Consists of deposits of cash and cash equivalents or other short-term securities held by other clearing organizations or exchanges.


NOTE 3 - FAIR VALUE:

For a further discussion of our valuation methodologies for assets, liabilities measured at fair value, and the fair value hierarchy, see Note 1 pages 81 - 84 in our 2010 Form 10-K.

There have been no material changes to our valuation methodologies since our year ended September 30, 2010.

 
8

 


Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and September 30, 2010 are presented below:

                               
December 31, 2010
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)(1)
   
Significant
Other
Observable
Inputs
(Level 2)(1)
   
Significant
Unobservable
Inputs
(Level 3)
   
Netting
Adjustments(2)
   
Balance as of
December 31,
2010
 
   
(in 000’s)
 
Assets:
                             
Trading Instruments:
                             
Municipal and Provincial Obligations
  $ 252     $ 220,140     $ 6,076     $ -     $ 226,468  
Corporate Obligations
    20,724       29,532       -       -       50,256  
Government and Agency Obligations
    18,650       25,794       -       -       44,444  
Agency Mortgage-Backed Securities(“MBS”) and Collateralized Mortgage Obligations (“CMOs”)
    561       234,242       -       -       234,803  
Non-Agency CMOs and Asset-Backed Securities (“ABS”)
    -       3,771       3,643       -       7,414  
Total Debt Securities
    40,187       513,479       9,719       -       563,385  
Derivative Contracts
    -       86,275       -       (64,169     22,106  
Equity Securities
    17,750       447       3,225       -       21,422  
Other Securities
    691       4,756       -       -       5,447  
Total Trading Instruments
    58,628       604,957       12,944       (64,169     612,360  
                                         
Available for Sale Securities:
                                       
Agency MBS and CMOs
    -       197,333       -       -       197,333  
Non-Agency CMOs
    -       181,721       1,098       -       182,819  
Other Securities
    10       5,001       -       -       5,011  
Total Available for Sale Securities
    10       384,055       1,098       -       385,163  
                                         
Private Equity and Other Investments:
                                       
Private Equity Investments
    -       -       159,586 (3)     -       159,586  
Other Investments
    165,156       666       45       -       165,867  
Total Private Equity and Other Investments
    165,156       666       159,631       -       325,453  
                                         
Other Assets
    -       -       25       -       25  
Total
  $ 223,794     $ 989,678     $ 173,698     $ (64,169 )   $ 1,323,001  
                                         
Liabilities:
                                       
Trading Instruments Sold but Not Yet Purchased:
                                       
Municipal and Provincial Obligations
  $ -     $ 149     $ -     $ -     $ 149  
Corporate Obligations
    -       2,576       -       -       2,576  
Government Obligations
    179,354       -       -       -       179,354  
Agency MBS and CMOs
    785       -       -       -       785  
Total Debt Securities
    180,139       2,725       -       -       182,864  
Derivative Contracts
    -       64,157       -       (57,175 )     6,982  
Equity Securities
    13,745       398       -       -       14,143  
Total Trading Instruments Sold but Not Yet Purchased
    193,884       67,280       -       (57,175 )     203,989  
                                         
Other Liabilities
    -       3       46       -       49  
Total
  $ 193,884     $ 67,283     $ 46     $ (57,175 )   $ 204,038  

(1)  
We had no significant transfers of financial instruments between Level 1 and Level 2 during the period ended December 31, 2010.  Our policy is to use the end of each respective quarterly reporting period to determine when transfers of financial instruments between levels are recognized.

(2)  
We have elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists.

(3)  
Includes $85.2 million in private equity investments of which the weighted-average portion we own is approximately 20%.  The portion of this investment we do not own becomes a component of Noncontrolling Interests on our Condensed Consolidated Statements of Financial Condition, and amounted to $68.1 million of that total as of December 31, 2010.

 
9

 


                               
September 30, 2010
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)(1)
   
Significant
Other
Observable
Inputs
(Level 2)(1)
   
Significant Unobservable
Inputs
(Level 3)
   
Netting
Adjustments(2)
   
Balance as of
September 30,
2010
 
   
(in 000’s)
 
Assets:
                             
Trading Instruments:
                             
Municipal and Provincial Obligations
  $ 7     $ 162,071     $ 6,275     $ -     $ 168,353  
Corporate Obligations
    21,485       16,986       -       -       38,471  
Government and Agency Obligations
    27,374       9,520       -       -       36,894  
Agency MBS and CMOs
    303       278,275       -       -       278,578  
Non-Agency CMOs and ABS
    -       4,367       3,930       -       8,297  
Total Debt Securities
    49,169       471,219       10,205       -       530,593  
Derivative Contracts
    -       102,490       -       (76,123 )     26,367  
Equity Securities
    28,506       113       3,025       -       31,644  
Other Securities
    1,250       1,593       -       -       2,843  
Total Trading Instruments
    78,925       575,415       13,230       (76,123 )     591,447  
                                         
Available for Sale Securities:
                                       
Agency MBS and CMOs
    -       217,879       -       -       217,879  
Non-Agency CMOs
    -       200,559       1,011       -       201,570  
Other Securities
    9       5,003       -       -       5,012  
Total Available for Sale Securities
    9       423,441       1,011       -       424,461  
                                         
Private Equity and Other Investments:
                                       
Private Equity Investments
    -       -       161,230 (3)     -       161,230  
Other Investments
    158,653       1,151       45       -       159,849  
Total Private Equity and Other Investments
    158,653       1,151       161,275       -       321,079  
                                         
Other Assets
    -       25       -       -       25  
Total
  $ 237,587     $ 1,000,032     $ 175,516     $ (76,123 )   $ 1,337,012  
                                         
Liabilities:
                                       
Trading Instruments Sold but Not Yet Purchased:
                                       
Municipal and Provincial Obligations
  $ -     $ 296     $ -     $ -     $ 296  
Corporate Obligations
    17       676       -       -       693  
Government Obligations
    99,631       -       -       -       99,631  
Agency MBS and CMOs
    105       -       -       -       105  
Total Debt Securities
    99,753       972       -       -       100,725  
Derivative Contracts
    -       86,039       -       (84,390 )     1,649  
Equity Securities
    15,890       12,774       -       -       28,664  
Total Trading Instruments Sold but Not Yet Purchased
    115,643       99,785       -       (84,390 )     131,038  
                                         
Other Liabilities
    -       105       46       -       151  
Total
  $ 115,643     $ 99,890     $ 46     $ (84,390 )   $ 131,189  

(1)  
We had no significant transfers of financial instruments between Level 1 and Level 2 during the year ended September 30, 2010.  Our policy is to use the end of each respective quarterly reporting period to determine when transfers of financial instruments between levels are recognized.

(2)  
We have elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists.

(3)  
Includes $86.3 million in private equity investments of which the weighted-average portion we own is approximately 20%.  The portion of this investment we do not own becomes a component of Noncontrolling Interests on our Condensed Consolidated Statements of Financial Condition, and amounted to $69.1 million of that total as of September 30, 2010.

 
10

 


Changes in Level 3 Recurring Fair Value Measurements

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

Additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended December 31, 2010 and 2009 are presented below:

   
Level 3 Financial Assets at Fair Value
       
Period Ended
December 31, 2010
 
Fair Value, September 30,
2010
   
Total Realized
/Unrealized
Gains/(Losses)
Included in
Earnings
   
Total Unrealized Gains/(Losses) Included in
Other Comprehensive Income
   
Purchases, Issuances, and Settlements,
Net
   
Transfers
Into
Level 3
   
Transfers
Out of
Level 3
   
Fair Value, December 31,
2010
   
Change in Unrealized Gains/ (Losses) Related to Financial Instruments
Held at
December 31, 2010
 
   
(in 000’s)
       
Assets:
                                               
Trading Instruments:
                                               
Municipal and Provincial Obligations
  $ 6,275     $ (194 )   $ -     $ (5 )   $ -     $ -     $ 6,076     $ (389 )
Non-Agency CMOs and ABS
    3,930       (137 )     -       (149 )     -       -       3,643       52  
Equity Securities
    3,025       -       -       200       -       -       3,225       -  
                                                                 
Available for Sale Securities:
                                                               
Non-Agency CMOs
    1,011       -       167       (80 )     -       -       1,098       -  
                                                                 
Private Equity and Other Investments:
                                                               
Private Equity Investments
    161,230       75       -       (1,719 )     -       -       159,586       (5 )
Other Investments
    45       -       -       -       -       -       45       -  
Other Assets
    -       -       -       -       25       -       25       -  
                                                                 
Liabilities:
                                                               
Other Liabilities
  $ (46 )   $ -     $ -     $ -     $ -     $ -     $ (46   $ -  


 
11

 


   
Level 3 Financial Assets at Fair Value
       
Period Ended
December 31, 2009
 
Fair Value, September 30,
2009
   
Total Realized
/Unrealized
Gains/(Losses)
Included in
Earnings
   
Total Unrealized Gains/(Losses) Included in
Other Comprehensive Income
   
Purchases, Issuances, and Settlements,
Net
   
Transfers
Into
Level 3
   
Transfers
Out of
Level 3
   
Fair Value, December 31,
2009
   
Change in Unrealized Gains/ (Losses) Related to Financial Instruments
Held at
December 31, 2009
 
   
(in 000’s)
       
Assets:
                                               
Trading Instruments:
                                               
Municipal and Provincial Obligations
  $ 5,316     $ 7     $ -     $ -     $ -     $ -     $ 5,323     $ 7  
Non-Agency CMOs and ABS
    10,915       (340 )     -       (1,399 )     -       -       9,176       (426 )
Derivative Contracts
    222       (222 )     -       -       -       -       -       -  
Other Securities
    919       524       -       17       -       -       1,460       523  
                                                                 
Available for Sale Securities:
                                                               
Non-Agency CMOs
    2,596       (552 )     711       (134 )     -       -       2,621       (552 )
                                                                 
Private Equity and Other Investments:
                                                               
Private Equity Investments
    142,671       (302 )     -       2,598       -       -       144,967       (302 )
Other Investments
    227       (4 )     -       -       -       -       223       (4 )
                                                                 
Liabilities:
                                                               
Derivative Contracts
  $ -     $ (117   $ -     $ -     $ -     $ -     $ (117 )   $ (205 )
Other Liabilities
    (59 )     13       -       -       -       -       (46 )     (7 )


As of December 31, 2010, 8.9% of our assets and 1.7% of our liabilities are instruments measured at fair value on a recurring basis. Instruments measured at fair value on a recurring basis categorized as Level 3 as of December 31, 2010 represent 13.1% of our assets measured at fair value.  As of December 31, 2009, 7.8% and 0.7% of our assets and liabilities, respectively, represented instruments measured at fair value on a recurring basis. Instruments measured at fair value on a recurring basis categorized as Level 3 as of December 31, 2009 represented 14.3% of our assets measured at fair value.

Gains and losses (realized and unrealized) included in revenues for the three months ended December 31, 2010 and 2009 are reported in net trading profits and other revenues in our Condensed Consolidated Statements of Income as follows:

For the Three Months Ended December 31, 2010
 
Net Trading
Profits
   
Other
Revenues
 
   
(in 000’s)
 
             
Total gains included in revenues
  $ (331 )   $ 75  
Change in unrealized gains/(losses) relating to assets still held at reporting date
  $ (337 )   $ (5 )


For the Three Months Ended December 31, 2009
 
Net Trading
Profits (Losses)
   
Other
Revenues
 
   
(in 000’s)
 
             
Total gains/(losses) included in revenues
  $ 187     $ (1,180 )
Change in unrealized gains/(losses) relating to assets still held at reporting date
  $ 100     $ (1,066 )

 
12

 


Nonrecurring Fair Value Measurements

Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value measurement only in certain circumstances, for example, when there is evidence of impairment or in other situations where the lower of cost or fair value method of accounting is applied. Our financial instruments which are measured at fair value on a nonrecurring basis include certain RJ Bank loans that have been deemed impaired and certain loans classified as held for sale.  Our nonfinancial assets which are measured at fair value on a nonrecurring basis include goodwill and other real estate owned (“OREO”).  The table below provides information, by level within the fair value hierarchy, for both financial and nonfinancial assets measured at fair value on a nonrecurring basis and held at December 31, 2010 and September 30, 2010.

   
Fair Value Measurements
 
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable
Inputs (Level 3)
   
Balance as of
December 31,
2010
 
December 31, 2010:
 
(in 000’s)
 
Assets at fair value on a nonrecurring basis:
                       
Bank Loans, Net(1)
  $ -     $ 4,121     $ 46,573     $ 50,694  
OREO (2)
    -       2,578       -       2,578  
       
September 30, 2010:
     
Assets at fair value on a nonrecurring basis:
                               
Bank Loans, Net(1)
  $ -     $ 1,901     $ 71,920     $ 73,821  
OREO (2)
    -       19,431       -       19,431  

(1)  
Includes individual loans classified as held for sale, which were recorded at a fair value lower than cost.

(2)  
Represents the fair value of foreclosed properties which were measured at a fair value subsequent to their initial classification as OREO. The recorded value in the Condensed Consolidated Statements of Financial Condition is net of the estimated selling costs.

The adjustment to fair value of the nonrecurring fair value measures for the three months ended December 31, 2010 resulted in $12.6 million in additional provision for loan losses as well as $502,000 in other losses during the quarter.

For a discussion of our accounting policies for impairment of loans held for investment, loans held for sale, and OREO, see Note 1 on pages 85-87 of our 2010 Form 10-K.

Fair Value Option

The fair value option is an accounting election that allows the reporting entity to apply fair value accounting for certain financial assets and liabilities on an instrument by instrument basis.  As of December 31, 2010, we have elected not to choose the fair value option for any of our financial assets or liabilities not already recorded at fair value.

OTHER FAIR VALUE DISCLOSURES

Many, but not all of the financial instruments we hold are recorded at fair value in the Condensed Consolidated Statements of Financial Condition.  Refer to Note 3 pages 95-96 of our 2010 Form 10-K for discussion of the methods and assumptions we apply to the determination of fair value of our financial instruments that are not otherwise recorded at fair value.

The carrying amounts and estimated fair values of our financial instruments that are not carried at fair value at December 31, 2010 and September 30, 2010, respectively, are as follows:

       
   
December 31, 2010
   
September 30, 2010
 
   
Carrying
   
Estimated
   
Carrying
   
Estimated
 
   
Amount
   
Fair Value
   
Amount
   
Fair Value
 
   
(in 000’s)
 
Financial Assets:
                       
Bank Loans, Net
  $ 6,104,133     $ 6,135,587     $ 6,094,929     $ 6,099,106  
Financial Liabilities:
                               
Bank Deposits
    6,682,396       6,689,481       7,079,718       7,088,297  
Other Borrowings
    30,000       30,241       2,557,000       2,557,613  
Corporate Debt
    355,169       411,005       355,964       421,132  


 
13

 

NOTE 4 – TRADING INSTRUMENTS AND TRADING INSTRUMENTS SOLD BUT NOT YET PURCHASED:

   
December 31, 2010
   
September 30, 2010
 
   
Trading
Instruments
   
Instruments Sold but
Not Yet
Purchased
   
Trading
Instruments
   
Instruments
Sold but
Not Yet
Purchased
 
   
(in 000's)
 
                         
Municipal and Provincial Obligations
  $ 226,468     $ 149     $ 168,353     $ 296  
Corporate Obligations
    50,256       2,576       38,471       693  
Government and Agency Obligations
    44,444       179,354       36,894       99,631  
Agency MBS and CMOs
    234,803       785       278,578       105  
Non-Agency CMOs and ABS
    7,414       -       8,297       -  
Total Debt Securities
    563,385       182,864       530,593       100,725  
                                 
Derivative Contracts
    22,106       6,982       26,367       1,649  
Equity Securities
    21,422       14,143       31,644       28,664  
Other Securities
    5,447       -       2,843       -  
Total
  $ 612,360     $ 203,989     $ 591,447     $ 131,038  

Auction rate securities totaling $9.6 million and $9.1 million at December 31, 2010 and September 30, 2010, respectively, are included predominately within the Municipal and Provincial Obligations presented in the table above. There were no auction rate securities in Trading Instruments Sold but Not Yet Purchased as of either December 31, 2010 or September 30, 2010.

See Note 3 for additional information regarding the fair value of Trading Instruments and Trading Instruments Sold but Not Yet Purchased.

 
14

 


NOTE 5 - AVAILABLE FOR SALE SECURITIES:

Available for sale securities are comprised primarily of CMOs and other mortgage-related debt securities, owned by RJ Bank, and certain equity securities owned by our non-broker-dealer subsidiaries. There were proceeds of $11.2 million from the sale of available for sale securities during the three month period ended December 31, 2010, which resulted in total losses of $411,000.  There were no proceeds from the sale of available for sale securities for the three month period ended December 31, 2009.

The amortized cost and estimated fair values of available for sale securities as of December 31, 2010 and September 30, 2010 are as follows:

   
December 31, 2010
 
         
Gross
   
Gross
       
         
Unrealized
   
Unrealized
       
   
Cost Basis
   
Gains
   
Losses
   
Fair Value
 
   
(in 000's)
 
Available for Sale Securities:
                       
Agency MBS and CMOs
  $ 196,581     $ 854     $ (102 )   $ 197,333  
Non-Agency CMOs (1)
    226,420       36       (43,637 )    <