q101211.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, 2011

   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.

125,996,881 shares of common stock as of February 3, 2012

 
 

 


   
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
 
       
   
Form 10-Q for the quarter ended December 31, 2011
 
       
   
INDEX
 
       
     
PAGE
PART I.
 
FINANCIAL INFORMATION
 
       
Item 1.
 
Financial Statements (Unaudited)
 
       
   
Condensed Consolidated Statements of Financial Condition as of December 31, 2011 and September 30, 2011 (Unaudited)
3
       
   
Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended December 31, 2011 and December 31, 2010 (Unaudited)
4
       
   
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended December 31, 2011 and December 31, 2010 (Unaudited)
5
       
   
Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2011 and December 31, 2010 (Unaudited)
6
       
   
Notes to Condensed Consolidated Financial Statements (Unaudited)
7
       
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
42
       
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
69
       
Item 4.
 
Controls and Procedures
76
       
PART II.
 
OTHER INFORMATION
 
       
Item 1.
 
Legal Proceedings
77
       
Item 1A.
 
Risk Factors
77
       
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
78
       
Item 3.
 
Defaults upon Senior Securities
78
       
Item 5.
 
Other Information
78
       
Item 6.
 
Exhibits
79
       
   
Signatures
80

 
2

 

PART I   FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

   
December 31, 2011
   
September 30, 2011
 
   
($ in thousands)
 
Assets:
           
Cash and cash equivalents
  $ 1,916,954     $ 2,439,695  
Assets segregated pursuant to regulations and other segregated assets
    3,505,193       3,548,683  
Securities purchased under agreements to resell and other collateralized financings
    400,455       398,247  
Financial instruments, at fair value:
               
Trading instruments
    564,441       492,771  
Available for sale securities
    470,093       520,665  
Private equity and other investments
    277,769       294,356  
Receivables:
               
Brokerage clients, net
    1,676,589       1,716,828  
Stock borrowed
    244,368       225,561  
Bank loans, net
    7,015,204       6,547,914  
Brokers-dealers and clearing organizations
    64,514       96,096  
Other
    536,674       536,364  
Deposits with clearing organizations
    86,498       91,482  
Prepaid expenses and other assets
    384,572       364,264  
Investments in real estate partnerships held by consolidated variable interest entities
    316,498       320,384  
Property and equipment, net
    173,901       169,850  
Deferred income taxes, net
    185,919       171,911  
Goodwill
    71,924       71,924  
                 
Total assets
  $ 17,891,566     $ 18,006,995  
                 
Liabilities and equity:
               
Trading instruments sold but not yet purchased, at fair value
  $ 128,512     $ 76,150  
Securities sold under agreements to repurchase
    184,061       188,745  
Payables:
               
Brokerage clients
    4,804,234       4,690,414  
Stock loaned
    682,823       814,589  
Bank deposits
    7,704,896       7,739,322  
Brokers-dealers and clearing organizations
    74,084       111,408  
Trade and other
    359,899       309,723  
Accrued compensation, commissions and benefits
    293,002       452,849  
Loans payable of consolidated variable interest entities
    89,657       99,982  
Corporate debt
    607,444       611,968  
                 
Total liabilities
    14,928,612       15,095,150  
                 
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 130,778,293 at
December 31, 2011 and 130,670,086 at September 30, 2011
    1,280       1,271  
Additional paid-in capital
    586,502       565,135  
Retained earnings
    2,171,907       2,125,818  
Treasury stock, at cost; 4,944,618 common shares at December 31, 2011 and 4,263,029 common shares at September 30, 2011
    (112,574 )     (95,000 )
Accumulated other comprehensive income
    (10,446 )     (9,605 )
Total equity attributable to Raymond James Financial, Inc.
    2,636,669       2,587,619  
Noncontrolling interests
    326,285       324,226  
                 
Total equity
    2,962,954       2,911,845  
                 
Total liabilities and equity
  $ 17,891,566     $ 18,006,995  



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)


   
Three months ended December 31,
 
   
2011
   
2010
 
   
(in thousands, except per share amounts)
 
 
Revenues:
           
Securities commissions and fees
  $ 511,334     $ 534,139  
Investment banking
    39,336       58,969  
Investment advisory fees
    53,505       52,411  
Interest
    102,096       104,386  
Account and service fees
    74,010       69,285  
Net trading profits
    9,343       6,322  
Other
    9,193       4,821  
                 
Total revenues
    798,817       830,333  
                 
Interest expense
    16,040       16,504  
Net revenues
    782,777       813,829  
                 
Non-interest expenses:
               
Compensation, commissions and benefits
    541,622       551,884  
Communications and information processing
    37,567       31,145  
Occupancy and equipment costs
    25,937       26,229  
Clearance and floor brokerage
    7,454       9,917  
Business development
    27,839       23,945  
Investment sub-advisory fees
    6,562       6,904  
Bank loan loss provision
    7,456       11,232  
Other
    23,692       25,827  
Total non-interest expenses
    678,129       687,083  
                 
Income including noncontrolling interests and before provision for income taxes
    104,648       126,746  
                 
Provision for income taxes
    43,526       48,791  
                 
Net income including noncontrolling interests
    61,122       77,955  
Net loss attributable to noncontrolling interests
    (6,203 )     (3,768 )
Net income attributable to Raymond James Financial, Inc.
  $ 67,325     $ 81,723  
                 
Net income per common share – basic
  $ 0.53     $ 0.65  
Net income per common share – diluted
  $ 0.53     $ 0.65  
Weighted-average common shares outstanding – basic
    123,225       121,155  
Weighted-average common and common equivalent shares outstanding – diluted
    123,712       121,534  
                 
Net income attributable to Raymond James Financial, Inc.
  $ 67,325     $ 81,723  
Other comprehensive income, net of tax:(1)
               
Change in unrealized (loss) gain on available for sale securities and non-credit portion of other-than-temporary impairment losses
    (5,661 )     4,897  
Change in currency translations
    4,820       5,504  
Total comprehensive income
  $ 66,484     $ 92,124  
                 
Other-than-temporary impairment:
               
Total other-than-temporary impairment, net
  $ (4,187 )   $ 779  
Portion of losses (recoveries) recognized in other comprehensive income (before taxes)
    2,091       (2,958 )
Net impairment losses recognized in other revenue
  $ (2,096 )   $ (2,179 )


(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)

   
Three months ended December 31,
 
   
2011
   
2010
 
   
(in thousands, except per share amounts)
 
Common stock, par value $.01 per share:
           
Balance, beginning of year
  $ 1,271     $ 1,244  
Issued
    9       10  
Balance, end of period
    1,280       1,254  
                 
Shares exchangeable into common stock:
               
Balance, beginning of year
    -       3,119  
Exchanged
    -       -  
Balance, end of period
    -       3,119  
                 
Additional paid-in capital:
               
Balance, beginning of year
    565,135       476,359  
Employee stock purchases
    2,215       1,690  
Exercise of stock options and vesting of restricted stock units, net of forfeitures
    1,270       13,798  
Restricted stock, stock option and restricted stock unit expense
    16,907       14,355  
Excess tax benefit (deficiency) from share-based payments
    1,100       (1,000 )
Other
    (125 )     (1,553 )
Balance, end of period
    586,502       503,649  
                 
Retained earnings:
               
Balance, beginning of year
    2,125,818       1,909,865  
Net income attributable to Raymond James Financial, Inc.
    67,325       81,723  
Cash dividends declared
    (16,399 )     (16,387 )
Other
    (4,837 )     4,371  
Balance, end of period
    2,171,907       1,979,572  
                 
Treasury stock:
               
Balance, beginning of year
    (95,000 )     (81,574 )
Purchases/Surrenders
    (16,784 )     (5,265 )
Exercise of stock options and vesting of restricted stock units, net of forfeitures
    (790 )     1,783  
Balance, end of period
    (112,574 )     (85,056 )
                 
Accumulated other comprehensive income: (1)
               
Balance, beginning of year
    (9,605 )     (6,197 )
Net unrealized (loss) gain on available for sale securities and non-credit portion of other-than-temporary impairment losses (2)
    (5,661 )     4,897  
Net change in currency transactions
    4,820       5,504  
Balance, end of period
    (10,446 )     4,204  
                 
Total equity attributable to Raymond James Financial, Inc.
  $ 2,636,669     $ 2,406,742  
                 
Noncontrolling interests:
               
Balance, beginning of year
  $ 324,226     $ 294,052  
Net loss attributable to noncontrolling interests
    (6,203 )     (3,768 )
Capital contributions
    21,078       14,512  
Distributions
    (2,493 )     -  
Deconsolidation of previously consolidated low income housing tax credit funds
    -       (6,789 )
Consolidation of low income housing tax credit funds not previously consolidated
    -       14,635  
Other
    (10,323 )     (1,451 )
Balance, end of period
    326,285       311,191  
                 
Total equity
  $ 2,962,954     $ 2,717,933  

(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)

   
Three months ended December 31,
 
   
2011
   
2010
 
   
(in thousands)
 
Cash flows from operating activities:
           
Net income attributable to Raymond James Financial, Inc.
  $ 67,325     $ 81,723  
Net loss attributable to noncontrolling interests
    (6,203 )     (3,768 )
Net income including noncontrolling interests
    61,122       77,955  
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
               
Depreciation and amortization
    9,971       9,574  
Deferred income taxes
    (10,444 )     (18,737 )
Premium and discount amortization on available for sale securities and unrealized/realized gain on other investments
    (1,392 )     (484 )
Provisions for loan losses, legal proceedings, bad debts and other accruals
    6,556       14,793  
Share-based compensation expense
    17,410       15,832  
Other
    827       (2,234 )
Net change in:
               
Assets segregated pursuant to regulations and other segregated assets
    43,490       1,363,377  
Securities purchased under agreements to resell and other collateralized financings, net of securities sold under agreements to repurchase
    (6,892 )     (178,118 )
Stock loaned, net of stock borrowed
    (150,573 )     (122,704 )
Brokerage client receivables and other accounts receivable, net
    69,322       46,147  
Trading instruments, net
    (6,712 )     66,114  
Prepaid expenses and other assets
    (18,336 )     (129 )
Brokerage client payables and other accounts payable
    141,531       66,780  
Accrued compensation, commissions and benefits
    (161,374 )     (122,556 )
    Purchase and origination of loans held for sale, net of proceeds from sale of securitizations
        and loans held for sale
    (12,822 )     (2,868 )
Excess tax benefits from stock-based payment arrangements
    (1,675 )     (293 )
Net cash (used in) provided by operating activities
    (19,991 )     1,212,449  
Cash flows from investing activities:
               
Additions to property and equipment
    (13,647 )     (9,500 )
Increase in loans, net
    (489,970 )     (48,760 )
Redemptions of Federal Home Loan Bank stock, net
    20,228       4,777  
Sales (purchases) of private equity and other investments, net
    3,845       (8,648 )
Purchase of additional equity interest in subsidiary
    (4,017 )     -  
Purchases of available for sale securities
    (950 )     (1,201 )
Available for sale securities maturations, repayments and redemptions
    40,029       34,538  
Proceeds from sales of available for sale securities
    -       11,161  
Investments in real estate partnerships held by consolidated variable interest entities, net of other investing activity
    174       (4,369 )
Net cash used in investing activities
    (444,308 )     (22,002 )
Cash flows from financing activities:
               
Repayments of borrowings, net
    (3,848 )     (2,527,795 )
Repayments of borrowings by consolidated variable interest entities which are real estate partnerships
    (11,599 )     (11,859 )
Proceeds from capital contributed to and borrowings of consolidated variable interest entities which are real estate partnerships
    21,078       14,196  
Exercise of stock options and employee stock purchases
    2,642       17,025  
Decrease in bank deposits
    (34,426 )     (397,322 )
Purchase of treasury stock
    (17,054 )     (5,261 )
Dividends on common stock
    (16,399 )     (16,387 )
Excess tax benefits from share-based payment arrangements
    1,675       293  
Net cash used in financing activities
    (57,931 )     (2,927,110 )
                 
Currency adjustment:
               
Effect of exchange rate changes on cash
    (511 )     (1,693 )
Net decrease in cash and cash equivalents
    (522,741 )     (1,738,356 )
Cash and cash equivalents at beginning of year
    2,439,695       2,943,239  
Cash and cash equivalents at end of period
  $ 1,916,954     $ 1,204,883  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $  11,215     $  8,787  
Cash paid for income taxes
  $ 10,137     $ 6,688  
Non-cash transfers of loans to other real estate owned
  $  2,651     $ 6,917  
 
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, 2011


NOTE 1 – BASIS OF PRESENTATION

Raymond James Financial, Inc. (“RJF”) is a holding company headquartered in Florida whose broker-dealer subsidiaries are engaged in various financial service businesses, including the underwriting, distribution, trading and brokerage of equity and debt securities and the sale of mutual funds and other investment products.  In addition, other subsidiaries of RJF provide investment management services for retail and institutional clients, corporate and retail banking, and trust services.  As used herein, the terms “we,” “our” or “us” refer to RJF and/or one or more of its subsidiaries.

The accompanying unaudited condensed consolidated financial statements include the accounts of RJF and its consolidated subsidiaries that are generally controlled through a majority voting interest.  We consolidate all of our 100% owned subsidiaries.  In addition, we consolidate any variable interest entity (“VIE”) in which we are the primary beneficiary.  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 United States of America (“U.S.”) generally accepted accounting principles (“GAAP”) but not required for interim reporting purposes has been condensed or omitted. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods presented.

The nature of our business is such that the results of any interim period are not necessarily indicative of results for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2011, as filed with the U.S. Securities and Exchange Commission (the “2011 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 81 - 97 of our 2011 Form 10-K.  Other than as discussed below, there have been no significant changes in our significant accounting policies since September 30, 2011.

As more fully described in Note 1, page 87, of our 2011 Form 10-K, we have certain financing receivables that arise from businesses other than our banking business.  Specifically, we offer loans to financial advisors and certain key revenue producers, primarily for recruiting and retention purposes, the net balances associated therewith are included within other receivables on our Condensed Consolidated Statements of Financial Condition.  The outstanding balance of these loans is $241.4 million and $231.5 million at December 31, 2011 and September 30, 2011, respectively.  The related allowance for doubtful accounts balance is $5.4 million and $5.9 million at December 31, 2011 and September 30, 2011, respectively.  Of the December 31, 2011 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 $2.4 million.


 
7

 


Reclassifications

In the fourth quarter of fiscal year 2011, we changed the title of what had been known as “Financial Service Fees” on our Condensed Consolidated Statements of Income and Comprehensive Income to “Account and Service Fees”, to better reflect the nature of the revenues included within the line item description.  Additionally, we reclassified certain components of revenue previously included within other revenues into Account and Service Fees.  A reclassification of $27.5 million of revenue previously reported as a component of other revenues for the three months ended December 31, 2010 has been included in Account and Service Fees on the Condensed Consolidated Statements of Income and Comprehensive Income as presented, to conform the prior period to the current period presentation.

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 with original maturities of 90 days or less, other than those used for trading purposes.  For further discussion of our accounting policies regarding assets segregated pursuant to regulations and other segregated assets, see Note 1 on page 83 of our 2011 Form 10-K.

Our cash and cash equivalents, assets segregated pursuant to regulations or other segregated assets, and deposits with clearing organization balances are as follows:

   
December 31, 2011
   
September 30, 2011
 
   
(in thousands)
 
Cash and cash equivalents:
           
Cash in banks
  $ 1,912,945     $ 2,438,249  
Money market investments
    4,009       1,446  
Total cash and cash equivalents (1)
    1,916,954       2,439,695  
                 
Cash and securities segregated pursuant to federal regulations and other segregated assets (2)
    3,505,193       3,548,683  
Deposits with clearing organizations (3)
    86,498       91,482  
    $ 5,508,645     $ 6,079,860  

(1)  
The total amount presented includes $470 million and $471 million of cash and cash equivalents as of December 31, 2011 and September 30, 2011, respectively, which are either on deposit at our wholly owned bank subsidiary Raymond James Bank, FSB  (effective February 1, 2012, Raymond James Bank, N.A.) (“RJ Bank”) or are otherwise invested by one of our subsidiaries on behalf of RJF.

(2)  
Consists primarily of cash or qualified securities maintained in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934. Raymond James & Associates, Inc., 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.

(3)  
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 83 – 87, in our 2011 Form 10-K.

There have been no material changes to our valuation methodologies since our year ended September 30, 2011.

 
8

 


Recurring fair value measurements

Assets and liabilities measured at fair value on a recurring basis are presented below:

December 31, 2011
 
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, 2011
 
   
(in thousands)
 
Assets:
                             
Trading instruments:
                             
Municipal and provincial obligations
  $ 31     $ 185,841     $ 135     $ -     $ 186,007  
Corporate obligations
    3,346       14,311       -       -       17,657  
Government and agency obligations
    7,238       47,390       -       -       54,628  
Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)
    5       180,915       -       -       180,920  
Non-agency CMOs and asset-backed securities (“ABS”)
    -       55,778       37       -       55,815  
Total debt securities
    10,620       484,235       172       -       495,027  
Derivative contracts
    -       129,394       -       (90,032 )     39,362  
Equity securities
    16,823       3,681       179       -       20,683  
Other securities
    1,068       2,666       5,635       -       9,369  
Total trading instruments
    28,511       619,976       5,986       (90,032 )     564,441  
Available for sale securities:
                                       
Agency MBS and CMOs
    -       162,282       -       -       162,282  
Non-agency CMOs
    -       133,817       741       -       134,558  
Other securities
    9       -       -       -       9  
Auction rate securities (“ARS”):
                                       
Municipals
    -       -       74,707   (3)     -       74,707  
Preferred securities
    -       -       98,537       -       98,537  
Total available for sale securities
    9       296,099       173,985       -       470,093  
Private equity and other investments:
                                       
Private equity investments
    -       -       162,074 (4)     -       162,074  
Other investments
    113,591       64       2,040       -       115,695  
Total private equity and other investments
    113,591       64       164,114       -       277,769  
Other assets
    -       6,513       -       -       6,513  
Total
  $ 142,111     $ 922,652     $ 344,085     $ (90,032 )   $ 1,318,816  
                                         
Liabilities:
                                       
Trading instruments sold but not yet purchased:
                                       
Municipal and provincial obligations
  $ -     $ 1,103     $ -     $ -     $ 1,103  
Corporate obligations
    -       2,229       -       -       2,229  
Government obligations
    92,532       12,405       -       -       104,937  
Agency MBS and CMOs
    279       -       -       -       279  
Total debt securities
    92,811       15,737       -       -       108,548  
Derivative contracts
    -       114,982       -       (105,311 )     9,671  
Equity securities
    10,015       278       -       -       10,293  
Total trading instruments sold but not yet purchased
    102,826       130,997       -       (105,311 )     128,512  
Other liabilities
    -       -       29       -       29  
Total
  $ 102,826     $ 130,997     $ 29     $ (105,311 )   $ 128,541  

(1)  
We had no significant transfers of financial instruments between Level 1 and Level 2 during the quarter ended December 31, 2011.  Our policy is that the end of each respective quarterly reporting period determines 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 $49.3 million of Jefferson County, Alabama Limited Obligation School Warrants ARS and $18.1 million of Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS.

(4)  
Includes $84.9 million in private equity investments of which the weighted-average portion we own is approximately 21%.  Effectively, the economics associated with 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 approximately $67.1 million of that total as of December 31, 2011.


 
9

 


September 30, 2011
 
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, 2011
 
   
(in thousands)
 
Assets:
                             
Trading instruments:
                             
Municipal and provincial obligations
  $ 8     $ 164,019     $ 375     $ -     $ 164,402  
Corporate obligations
    4,137       23,470       -       -       27,607  
Government and agency obligations
    22,620       13,486       -       -       36,106  
Agency MBS and CMOs
    31       147,726       -       -       147,757  
Non-agency CMOs and ABS
    -       49,069       50       -       49,119  
Total debt securities
    26,796       397,770       425       -       424,991  
Derivative contracts
    -       126,867       -       (88,563 )     38,304  
Equity securities
    17,908       3,274       15       -       21,197  
Other securities
    816       7,463       -       -       8,279  
Total trading instruments
    45,520       535,374       440       (88,563 )     492,771  
Available for sale securities:
                                       
Agency MBS and CMOs
    -       178,732       -       -       178,732  
Non-agency CMOs
    -       145,024       851       -       145,875  
Other securities
    10       -       -       -       10  
ARS:
                                       
Municipals
    -       -       79,524   (3)     -       79,524  
Preferred securities
    -       -       116,524       -       116,524  
Total available for sale securities
    10       323,756       196,899       -       520,665  
Private equity and other investments:
                                       
Private equity investments
    -       -       168,785 (4)     -       168,785  
Other investments
    123,421       63       2,087       -       125,571  
Total private equity and other investments
    123,421       63       170,872       -       294,356  
Other assets
    -       2,696       -       -       2,696  
Total
  $ 168,951     $ 861,889     $ 368,211     $ (88,563 )   $ 1,310,488  
                                         
Liabilities:
                                       
Trading instruments sold but not yet purchased:
                                       
Municipal and provincial obligations
  $ -     $ 607     $ -     $ -     $ 607  
Corporate obligations
    -       5,625       -       -       5,625  
Government obligations
    56,472       -       -       -       56,472  
Agency MBS and CMOs
    159       -       -       -       159  
Total debt securities
    56,631       6,232       -       -       62,863  
Derivative contracts
    -       112,457       -       (105,869 )     6,588  
Equity securities
    6,488       211       -       -       6,699  
Total trading instruments sold but not yet purchased
    63,119       118,900       -       (105,869 )     76,150  
Other liabilities
    -       20       40       -       60  
Total
  $ 63,119     $ 118,920     $ 40     $ (105,869 )   $ 76,210  

(1)  
We had no significant transfers of financial instruments between Level 1 and Level 2 during the period ended December 31, 2011.  Our policy is that the end of each respective quarterly reporting period determines 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 $53.2 million of Jefferson County, Alabama Limited Obligation School Warrants ARS and $19.2 million of Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS.

(4)  
Includes $87.9 million in private equity investments of which the weighted-average portion we own is approximately 20%.  Effectively, the economics associated with 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 approximately $70 million of that total as of September 30, 2011.

 
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 is presented below:

Three months ended December 31, 2011
Level 3 assets at fair value
(in thousands)
 
Financial assets
   
Financial
liabilities
 
   
Trading instruments
   
Available for sale securities
   
Private equity and
other investments
   
Payables-
trade and
other
 
   
Municipal &
provincial
obligations
   
Non-
agency
CMOs &
ABS
   
Other
securities
   
 
Equity
securities
   
Non-
agency
CMOs
   
 
ARS –
municipals
   
ARS -
Preferred
 securities
   
Private
equity
investments
   
 
Other
investments
   
 
Other
liabilities
 
Fair value
September 30, 2011
  $  375     $  50     $  -     $  15     $  851     $   79,524     $   116,524     $   168,785     $  2,087     $ (40 )
Realized/unrealized gains (losses):
                                                                               
Included in earnings
    80       (4 )     (942 )     (4 )     -       (540 )     (75 )     4       (49 )     11  
Included in other comprehensive income
    -       -       -       -       (93 )     (4,670 )     (894 )     -       -       -  
Purchases and contributions
    -       -       -       16       -       475       475       2,367       2       -  
Sales
    (320 )     -       -       -       -       -       -       -       -       -  
Redemptions by issuer
    -       -       -       -       -       (125 )     (17,450 )     -       -       -  
Distributions
    -       (9 )     -       -       (17 )     -       -       (9,082 )     -       -  
Transfers:
                                                                               
Into Level 3
    -       -       6,577 (1)     152       -       43       -       -       -       -  
Out of Level 3
    -       -       -       -       -       -       (43 )     -       -       -  
Fair value
December 31, 2011
  $  135     $  37     $  5,635     $  179     $  741     $   74,707     $ 98,537     $   162,074     $  2,040     $ (29 )
                                                                                 
Change in unrealized gains (losses) related to financial instruments held at December 31, 2011
  $ (125 )   $ 214     $ (942 )   $ -     $ -     $ (5,131 )   $ (894 )   $ 4     $ (52 )   $ -  

(1)  
During the three month period ended December 31, 2011, we transferred certain securities which were previously included in Level 2, non-agency CMOs and ABS.



 
11

 



Three months ended December 31, 2010
Level 3 assets at fair value
(in thousands)
 
Financial assets
   
Financial
liabilities
 
   
Trading instruments
   
Available
for sale
securities
   
Private equity and other
investments
   
Prepaid
expenses
and other
assets
   
Payables-trade
and other
 
   
Municipal
&
provincial
obligations
   
Non-
agency
CMOs
& ABS
   
 
Equity
securities
   
Non-
agency
CMOs
   
Private
equity
investments
   
 
Other
investments
   
 
Other
assets
   
 
Other
liabilities
 
 
Fair value
September 30, 2010
  $  6,275     $   3,930     $  3,025     $  1,011     $  161,230     $  45     $  -     $ (46 )
Realized/unrealized gains (losses):
                                                               
Included in earnings
    (194 )     (137 )     -       -       75       -       -       -  
Included in other comprehensive income
    -       -       -       167       -       -       -       -  
Purchases, issuances & settlements, net
    (5 )     (150 )     200       (80 )     (1,719 )     -       -       -  
Transfers:
                                                               
Into Level 3
    -       -       -       -       -       -       25       -  
Out of Level 3
    -       -       -       -       -       -       -       -  
Fair value
December 31, 2010
  $  6,076     $  3,643     $  3,225     $  1,098     $  159,586     $  45     $  25     $ (46 )
                                                                 
Change in unrealized gains (losses) related to financial instruments held at December 31, 2010
  $ (389 )   $ 52     $ -     $ -     $ (5 )   $ -     $ -     $ -  


As of December 31, 2011, 7.4% of our assets and 0.9% 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, 2011 represent 26.1% of our assets measured at fair value, a substantial increase as compared to December 31, 2010 as a result of the repurchase of ARS that primarily occurred during the fourth quarter of fiscal year 2011 (see the ARS repurchase discussion in Note 17 on pages 130 – 131 of our 2011 Form 10-K).  As of December 31, 2010, 8.9% and 1.7% 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, 2010 represented 13.1% of our assets measured at fair value.

Gains and losses (realized and unrealized) included in revenues are reported in net trading profits and other revenues in our Condensed Consolidated Statements of Income and Comprehensive Income as follows:

For the three months ended December 31, 2011
 
Net trading
profits
   
Other
revenues
 
   
(in thousands)
 
             
Total losses included in revenues
  $ (870 )   $ (649 )
Change in unrealized losses relating to assets still held at reporting date
    (853 )     (6,073 )

For the three months ended December 31, 2010
 
Net trading
profits
   
Other
revenues
 
   
(in thousands)
 
             
Total (losses) gains included in revenues
  $ (331 )   $ 75  
Change in unrealized losses relating to assets still held at reporting date
    (337 )     (5 )


 
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.  Assets that are not financial instruments but are subject to measurement 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 assets with nonrecurring fair value measurements during the period and still held as of the reporting date.

   
Fair value measurements
 
   
Quoted prices
in active
markets for
identical
assets
(Level 1)
   
Significant
other
observable
inputs
(Level 2)
   
Significant
unobservable
inputs
(Level 3)
   
Total
 
December 31, 2011:
 
(in thousands)
 
Assets at fair value on a nonrecurring basis:
                       
Bank loans, net (1)
  $ -     $ 48,888     $ 96,342     $ 145,230  
OREO (2)
    -       7,456       -       7,456  
       
September 30, 2011:
     
Assets at fair value on a nonrecurring basis:
                               
Bank loans, net (1)
  $ -     $ 39,621     $ 111,941     $ 151,562  
OREO (2)
    -       11,278       -       11,278  

(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, 2011 resulted in $4.6 million in additional provision for loan losses, as well as $635,000 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, pages 88 – 92 of our 2011 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, 2011, 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 103 – 104, of our 2011 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 are as follows:

   
December 31, 2011
   
September 30, 2011
 
   
Carrying
   
Estimated
   
Carrying
   
Estimated
 
   
amount
   
fair value
   
amount
   
fair value
 
   
(in thousands)
 
Financial assets:
                       
Bank loans, net
  $ 7,015,204     $ 7,062,726     $ 6,547,914     $ 6,596,439  
Financial liabilities:
                               
Bank deposits
    7,704,896       7,710,091       7,739,322       7,745,607  
Corporate debt
    607,444       662,686       611,968       675,509  

 
13

 


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

   
December 31, 2011
   
September 30, 2011
 
   
Trading
instruments
   
Instruments
sold but not
yet purchased
   
Trading
instruments
   
Instruments
sold but not
yet purchased
 
   
(in thousands)
 
                         
Municipal and provincial obligations
  $ 186,007     $ 1,103     $ 164,402     $ 607  
Corporate obligations
    17,657       2,229       27,607       5,625  
Government and agency obligations
    54,628       104,937       36,106       56,472  
Agency MBS and CMOs
    180,920       279       147,757       159  
Non-agency CMOs and ABS
    55,815       -       49,119       -  
Total debt securities
    495,027       108,548       424,991       62,863  
                                 
Derivative contracts
    39,362       9,671       38,304       6,588  
Equity securities
    20,683       10,293       21,197       6,699  
Other securities
    9,369       -       8,279       -  
Total
  $ 564,441     $ 128,512     $ 492,771     $ 76,150  

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 of MBS and CMOs owned by RJ Bank, ARS and certain equity securities owned by our non-broker-dealer subsidiaries.  Refer to the discussion of our available for sale securities accounting policies, including the fair value determination process, on Note 1 pages 85 – 86 in our 2011 Form 10-K.

There were no proceeds from the sale of available for sale securities during the three month period ended December 31, 2011.  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.

During the three month period ended December 31, 2011, ARS with an aggregate par value of $17.6 million were redeemed by their issuer at par; an insignificant gain was recorded in our Condensed Consolidated Statements of Income and Comprehensive Income on the ARS securities which were subject to these redemptions.

The amortized cost and fair values of available for sale securities are as follows:

   
Cost basis
   
Gross
unrealized gains
   
Gross
unrealized losses
   
Fair value
 
   
(in thousands)
 
December 31, 2011:
                       
Available for sale securities:
                       
Agency MBS and CMOs
  $ 161,858     $ 486     $ (62 )   $ 162,282  
Non-agency CMOs (1)
    185,112       -       (50,554 )     134,558  
Total RJ Bank available for sale securities
    346,970       486       (50,616 )     296,840  
                                 
Auction rate securities:
                               
Municipal obligations(2)
    79,377       162       (4,832 )     74,707  
Preferred securities(3)
    99,431       15       (909 )     98,537  
Total auction rate securities
    178,808       177       (5,741 )     173,244  
                                 
Other securities
    3       6      <