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 DecemberMarch 31, 20112012

     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.

125,996,881137,825,868 shares of common stock as of February 3,May 4, 2012

 
 
 



  RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES 
    
  Form 10-Q for the quarter ended DecemberMarch 31, 20112012 
    
  INDEX 
    
   PAGE
PART I. FINANCIAL INFORMATION 
    
Item 1. Financial Statements (Unaudited) 
    
  Condensed Consolidated Statements of Financial Condition as of DecemberMarch 31, 20112012 and September 30, 2011 (Unaudited)3
    
  Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended DecemberMarch 31, 20112012 and DecemberMarch 31, 20102011 (Unaudited)4
    
  Condensed Consolidated Statements of Changes in Shareholders’ Equity for the threesix months ended DecemberMarch 31, 20112012 and DecemberMarch 31, 20102011 (Unaudited)5
    
  Condensed Consolidated Statements of Cash Flows for the threesix months ended DecemberMarch 31, 20112012 and DecemberMarch 31, 20102011 (Unaudited)6
    
  Notes to Condensed Consolidated Financial Statements (Unaudited)7
    
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations4250
    
Item 3. Quantitative and Qualitative Disclosures about Market Risk6987
    
Item 4. Controls and Procedures7694
    
PART II. OTHER INFORMATION 
    
Item 1. Legal Proceedings7795
    
Item 1A. Risk Factors7795
    
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds7896
    
Item 3. Defaults upon Senior Securities7896
    
Item 5. Other Information7896
    
Item 6. Exhibits7997
    
  Signatures8099


 
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  March 31, 2012  September 30, 2011 
 ($ in thousands)  ($ in thousands) 
Assets:            
Cash and cash equivalents $1,916,954  $2,439,695  $2,875,858  $2,439,695 
Assets segregated pursuant to regulations and other segregated assets  3,505,193   3,548,683   3,458,364   3,548,683 
Securities purchased under agreements to resell and other collateralized financings  400,455   398,247   340,158   398,247 
Financial instruments, at fair value:                
Trading instruments
  564,441   492,771   451,851   492,771 
Available for sale securities
  470,093   520,665   576,142   520,665 
Private equity and other investments
  277,769   294,356   299,859   294,356 
Receivables:
                
Brokerage clients, net
  1,676,589   1,716,828   1,671,078   1,716,828 
Stock borrowed
  244,368   225,561   198,294   225,561 
Bank loans, net
  7,015,204   6,547,914   7,445,828   6,547,914 
Brokers-dealers and clearing organizations
  64,514   96,096   92,262   96,096 
Other
  536,674   536,364   623,406   536,364 
Deposits with clearing organizations
  86,498   91,482   86,417   91,482 
Prepaid expenses and other assets
  384,572   364,264   416,250   364,264 
Investments in real estate partnerships held by consolidated variable interest entities
  316,498   320,384   306,040   320,384 
Property and equipment, net
  173,901   169,850   181,752   169,850 
Deferred income taxes, net
  185,919   171,911   179,893   171,911 
Goodwill
  71,924   71,924   71,924   71,924 
                
Total assets
 $17,891,566  $18,006,995  $19,275,376  $18,006,995 
                
Liabilities and equity:                
Trading instruments sold but not yet purchased, at fair value
 $128,512  $76,150  $80,423  $76,150 
Securities sold under agreements to repurchase
  184,061   188,745   137,026   188,745 
Payables:
                
Brokerage clients
  4,804,234   4,690,414   4,751,071   4,690,414 
Stock loaned
  682,823   814,589   544,373   814,589 
Bank deposits
  7,704,896   7,739,322   7,913,846   7,739,322 
Brokers-dealers and clearing organizations
  74,084   111,408   67,067   111,408 
Trade and other
  359,899   309,723   355,076   309,723 
Other borrowings
  349,600   - 
Accrued compensation, commissions and benefits
  293,002   452,849   364,409   452,849 
Loans payable of consolidated variable interest entities  89,657   99,982   90,950   99,982 
Corporate debt
  607,444   611,968   1,205,664   611,968 
                
Total liabilities
  14,928,612   15,095,150   15,859,505   15,095,150 
                
Commitments and contingencies (See Note 12)
        
Commitments and contingencies (see Note 14)
        
                
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 
Common stock; $.01 par value; authorized 350,000,000 shares; issued 142,282,732 at
March 31, 2012 and 130,670,086 at September 30, 2011
  1,396   1,271 
Additional paid-in capital  586,502   565,135   974,893   565,135 
Retained earnings  2,171,907   2,125,818   2,222,857   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)
Treasury stock, at cost; 4,985,142 common shares at March 31, 2012 and 4,263,029 common shares at September 30, 2011  (114,608)  (95,000)
Accumulated other comprehensive income  (10,446)  (9,605)  3,315   (9,605)
Total equity attributable to Raymond James Financial, Inc.
  2,636,669   2,587,619   3,087,853   2,587,619 
Noncontrolling interests  326,285   324,226   328,018   324,226 
                
Total equity
  2,962,954   2,911,845   3,415,871   2,911,845 
                
Total liabilities and equity
 $17,891,566  $18,006,995  $19,275,376  $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 March 31,  Six months ended March 31, 
  2012  2011  2012  2011 
  (in thousands, except per share amounts) 
 
Revenues:
            
Securities commissions and fees $558,527  $563,710  $1,069,861  $1,097,849 
Investment banking  57,954   63,131   97,290   122,100 
Investment advisory fees  54,269   52,643   107,774   105,053 
Interest  108,852   96,811   210,948   201,197 
Account and service fees  75,855   70,904   149,865   140,189 
Net trading profits  12,979   15,246   22,322   21,568 
Other  21,417   4,299   30,610   9,121 
                 
Total revenues  889,853   866,744   1,688,670   1,697,077 
                 
Interest expense  17,916   14,687   33,956   31,191 
Net revenues  871,937   852,057   1,654,714   1,665,886 
                 
Non-interest expenses:                
Compensation, commissions and benefits  596,891   579,587   1,138,513   1,131,471 
Communications and information processing  43,741   36,380   81,308   67,525 
Occupancy and equipment costs  27,231   26,773   53,168   53,002 
Clearance and floor brokerage  9,070   9,447   16,524   19,364 
Business development  27,382   22,820   55,221   46,765 
Investment sub-advisory fees  7,143   7,867   13,705   14,771 
Bank loan loss provision  5,154   8,637   12,610   19,869 
Acquisition related expenses  19,604   -   19,604   - 
Other  27,819   36,308   51,511   62,135 
Total non-interest expenses  764,035   727,819   1,442,164   1,414,902 
                 
Income including noncontrolling interests and before provision for income taxes  107,902   124,238   212,550   250,984 
                 
Provision for income taxes  42,628   45,320   86,154   94,111 
                 
Net income including noncontrolling interests  65,274   78,918   126,396   156,873 
Net loss attributable to noncontrolling interests  (3,595)  (1,999)  (9,798)  (5,767)
Net income attributable to Raymond James Financial, Inc. $68,869  $80,917  $136,194  $162,640 
                 
Net income per common share – basic $0.52  $0.64  $1.05  $1.29 
Net income per common share – diluted $0.52  $0.64  $1.05  $1.29 
Weighted-average common shares outstanding – basic  129,353   122,396   126,201   121,752 
Weighted-average common and common equivalent shares outstanding – diluted  130,644   123,265   126,989   122,238 
                 
Net income attributable to Raymond James Financial, Inc. $68,869  $80,917  $136,194  $162,640 
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  11,236   2,024   5,575   6,921 
Change in currency translations  2,525   3,703   7,345   9,207 
Total comprehensive income $82,630  $86,644  $149,114  $178,768 
                 
Other-than-temporary impairment:                
Total other-than-temporary impairment, net $10,853  $(2,163) $6,666  $(1,384)
Portion of recoveries recognized in other comprehensive income (before taxes)  (12,190)  (1,056)  (10,099)  (4,014)
Net impairment losses recognized in other revenue $(1,337) $(3,219) $(3,433) $(5,398)
  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,  Six months ended March 31, 
 2011  2010  2012  2011 
 (in thousands, except per share amounts)  (in thousands, except per share amounts) 
Common stock, par value $.01 per share:            
Balance, beginning of year $1,271  $1,244  $1,271  $1,244 
Issued  9   10 
Issuance of shares, registered public offering  111(1)  - 
Other issuances  14   20(2)
Balance, end of period  1,280   1,254   1,396   1,264 
                
Shares exchangeable into common stock:                
Balance, beginning of year  -   3,119   -   3,119 
Exchanged  -   -   -   (3,119)(2)
Balance, end of period  -   3,119   -   - 
                
Additional paid-in capital:                
Balance, beginning of year  565,135   476,359   565,135   476,359 
Issuance of shares, registered public offering  362,121(1)  - 
Employee stock purchases  2,215   1,690   5,567   4,486 
Exercise of stock options and vesting of restricted stock units, net of forfeitures  1,270   13,798   11,783   30,343 
Restricted stock, stock option and restricted stock unit expense  16,907   14,355   28,426   23,960 
Excess tax benefit (deficiency) from share-based payments  1,100   (1,000)  1,640   (236)
Other  (125)  (1,553)  221   3,107(2)
Balance, end of period  586,502   503,649   974,893   538,019 
                
Retained earnings:                
Balance, beginning of year  2,125,818   1,909,865   2,125,818   1,909,865 
Net income attributable to Raymond James Financial, Inc.  67,325   81,723   136,194   162,640 
Cash dividends declared  (16,399)  (16,387)  (34,318)  (32,868)
Other  (4,837)  4,371   (4,837)  4,370 
Balance, end of period  2,171,907   1,979,572   2,222,857   2,044,007 
                
Treasury stock:                
Balance, beginning of year  (95,000)  (81,574)  (95,000)  (81,574)
Purchases/Surrenders  (16,784)  (5,265)
Purchases/surrenders  (18,900)  (6,659)
Exercise of stock options and vesting of restricted stock units, net of forfeitures  (790)  1,783   (708)  2,802 
Balance, end of period  (112,574)  (85,056)  (114,608)  (85,431)
                
Accumulated other comprehensive income: (1)
        
Accumulated other comprehensive income: (3)
        
Balance, beginning of year  (9,605)  (6,197)  (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 unrealized (loss) gain on available for sale securities and non-credit portion of other-than-temporary impairment losses (4)
  5,575   6,921 
Net change in currency transactions  4,820   5,504   7,345   9,207 
Balance, end of period  (10,446)  4,204   3,315   9,931 
        
Total equity attributable to Raymond James Financial, Inc. $2,636,669  $2,406,742  $3,087,853  $2,507,790 
                
Noncontrolling interests:                
Balance, beginning of year $324,226  $294,052  $324,226  $294,052 
Net loss attributable to noncontrolling interests  (6,203)  (3,768)  (9,798)  (5,767)
Capital contributions  21,078   14,512   27,383   18,052 
Distributions  (2,493)  -   (3,539)  (3,225)
Deconsolidation of previously consolidated low income housing tax credit funds  -   (6,789)  -   (6,789)
Consolidation of low income housing tax credit funds not previously consolidated  -   14,635   -   14,635 
Other  (10,323)  (1,451)  (10,254)  660 
Balance, end of period  326,285   311,191   328,018   311,618 
        
Total equity $2,962,954  $2,717,933  $3,415,871  $2,819,408 

(1)During the six months ended March 31, 2012, in a registered public offering, 11,075,000 common shares were issued generating approximately $362 million in net proceeds (after consideration of the underwriting discount and direct expenses of the offering).

(2)  During the six months ended March 31, 2011, approximately 243,000 exchangeable shares were exchanged for common stock on a one-for-one basis.

(3)  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)(4)  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)

  Six months ended March 31, 
  2012  2011 
  (in thousands) 
Cash flows from operating activities:      
Net income attributable to Raymond James Financial, Inc. $136,194  $162,640 
Net loss attributable to noncontrolling interests  (9,798)  (5,767)
Net income including noncontrolling interests  126,396   156,873 
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:        
Depreciation and amortization  20,053   19,802 
Deferred income taxes  (10,033)  (25,848)
Premium and discount amortization on available for sale securities and unrealized/realized gain on other investments  (13,425)  (1,669)
Provisions for loan losses, legal proceedings, bad debts and other accruals  9,638   30,020 
Share-based compensation expense  30,340   27,041 
Other  (1,310)  (1,317)
Net change in:        
Assets segregated pursuant to regulations and other segregated assets  90,319   1,025,583 
Securities purchased under agreements to resell and other collateralized financings, net of securities sold under agreements to repurchase  6,370   (216,778)
Stock loaned, net of stock borrowed  (242,949)  (136,296)
Brokerage client receivables and other accounts receivable, net  (18,653)  (157,246)
Trading instruments, net  44,653   86,277 
Prepaid expenses and other assets  27,713   11,120 
Brokerage client payables and other accounts payable  83,022   390,655 
Accrued compensation, commissions and benefits  (90,531)  (54,660)
Purchase and origination of loans held for sale, net of proceeds from sale of securitizations and loans held for sale  9,677   (19,511)
Excess tax benefits from stock-based payment arrangements  (2,210)  (1,069)
Net cash provided by operating activities  69,070   1,132,977 
Cash flows from investing activities:        
Additions to property and equipment  (31,182)  (15,974)
(Increase) decrease in loans, net  (961,708)  24,523 
(Purchases) redemptions of Federal Home Loan Bank stock, net  (1,168)  4,777 
(Purchases) sales of private equity and other investments, net  (8,361)  14,328 
Purchases of available for sale securities  (111,884)  (1,832)
Available for sale securities maturations, repayments and redemptions  61,380  ��66,615 
Proceeds from sales of available for sale securities  -   11,444 
Investments in real estate partnerships held by consolidated variable interest entities, net of other investing activity  330   (2,326)
Net cash (used in) provided by investing activities  (1,052,593)  101,555 
Cash flows from financing activities:        
Proceeds from (repayments of) borrowed funds, net  932,079   (2,558,602)
Proceeds from issuance of shares in registered public offering  362,232   - 
Repayments of borrowings by consolidated variable interest entities which are real estate partnerships  (11,600)  (11,859)
Proceeds from capital contributed to and borrowings of consolidated variable interest entities which are real estate partnerships  101   17,528 
Purchase of additional equity interest in subsidiary  (4,017)  - 
Exercise of stock options and employee stock purchases  16,144   37,202 
Increase (decrease) in bank deposits  174,524   (369,135)
Purchase of treasury stock  (19,222)  (6,916)
Dividends on common stock  (32,878)  (32,868)
Excess tax benefits from share-based payment arrangements  2,210   1,069 
Net cash provided by (used in) financing activities  1,419,573   (2,923,581)
         
Currency adjustment:        
Effect of exchange rate changes on cash  113   978 
Net increase (decrease) in cash and cash equivalents  436,163   (1,688,071)
Cash and cash equivalents at beginning of year  2,439,695   2,943,239 
Cash and cash equivalents at end of period $2,875,858  $1,255,168 
         
Supplemental disclosures of cash flow information:        
Cash paid for interest $ 36,311  $ 32,565 
Cash paid for income taxes $110,488  $118,750 
Non-cash transfers of loans to other real estate owned $ 10,954  $9,936 
  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)
DecemberMarch 31, 20112012


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 Policiessignificant 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.

At March 31, 2012, we implemented new Financial Accounting Standards Board guidance regarding fair value measurement.  This new guidance primarily provides for certain additional fair value disclosures.  See Note 4 for the additional disclosures required under this new accounting guidance.

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$244.3 million and $231.5 million at DecemberMarch 31, 20112012 and September 30, 2011, respectively.  The related allowance for doubtful accounts balance is $5.4$2.2 million and $5.9 million at DecemberMarch 31, 20112012 and September 30, 2011, respectively.  Of the DecemberMarch 31, 20112012 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$1.4 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”,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$29.8 million and $57.5 million of revenue previously reported as a component of other revenues for the three and six months ended DecemberMarch 31, 20102011 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 – ACQUISITION OF MORGAN KEEGAN

On January 11, 2012, RJF entered into a definitive stock purchase agreement (the “Stock Purchase Agreement”) to acquire all of the issued and outstanding shares of Morgan Keegan & Company, Inc. and MK Holding, Inc. and certain of its related affiliates (“Morgan Keegan”) from Regions Financial Corporation (“Regions”).  This transaction closed on April 2, 2012.  This acquisition expands both our private client wealth management and our capital markets businesses.

Acquisition related expenses are recorded in the Condensed Consolidated Statement of Income and Comprehensive Income and include certain incremental expenses arising solely as a result of our acquisition of Morgan Keegan.  During the three and six months ended March 31, 2012, we incurred the following acquisition related expenses:

  
For the three and six
month periods ended
 
  March 31, 2012 
  (in thousands) 
Financial advisory fees $7,020 
Acquisition bridge financing facility fees  5,684 
Severance  3,183 
Legal  2,495 
Travel  349 
Other  873 
Total acquisition related expenses $19,604 
We will apply the acquisition method of accounting to this transaction as of April 2, 2012.  Our fiscal year third quarter 2012 results of operations will include the operations of Morgan Keegan for the period from April 2, 2012 to June 30, 2012. Due to the timing of the acquisition closing, the outcome of the application of the acquisition method and the resultant impact on our condensed consolidated financial statements is incomplete and therefore not included in this quarterly report.

Under the terms of the Stock Purchase Agreement, upon closing Regions received approximately $1.2 billion in cash from RJF in exchange for the Morgan Keegan shares. This purchase price represents a $230 million premium over a preliminary $970 million tangible book value at closing.  The Stock Purchase Agreement contemplated that Morgan Keegan would pay a cash dividend of $250 million to Regions prior to the closing of the transaction. However, the parties subsequently decided to defer payment of the dividend until after the closing, resulting in an increase in the book value of Morgan Keegan and therefore, the purchase price.  Following the closing, RJF received a cash dividend in the amount of $250 million from Morgan Keegan. The purchase price is subject to final determination of tangible book value as of the closing date and a potential downward adjustment if certain revenue retention hurdles are not met within 90-days post-closing.  RJF anticipates providing approximately $215 million in the form of either cash or restricted stock units to certain key Morgan Keegan revenue producers as part of an employee retention program.  Concurrent with the execution of the Stock Purchase Agreement, RJF executed employment agreements with certain key members of the Morgan Keegan management team.  In addition to customary indemnity for breach of representations and warranties and covenants, the Stock Purchase Agreement also provides that Regions will indemnify RJF for losses incurred in connection with any litigation or similar matter relating to pre-closing actions. Certain indemnifiable losses are subject to an annual $2 million deductible for three years.

On January 11, 2012, J.P. Morgan Chase (“JPM Chase”) entered into a commitment letter to provide RJF with a $900 million bridge financing facility to provide financing of the purchase price.  On February 16, 2012, JPM Chase and a number of other lenders executed a $900 million bridge credit agreement (the “Bridge Financing Agreement”).  As a result of the successful completion of certain equity and debt financing transactions during the quarter ended March 31, 2012, RJF terminated the Bridge Financing Agreement on March 10, 2012.
8

On April 2, 2012, certain subsidiaries of RJF (the “Borrowers”) entered into a credit agreement (the “Regions Credit Agreement”) with Regions Bank, an Alabama banking corporation (the “Lender”).  The Regions Credit Agreement provided for a $200 million loan made by the Lender to the Borrowers and is subject to a guarantee in favor of the Lender provided by RJF. The proceeds from the loan were disbursed by the Borrowers to RJF for working capital and general corporate purposes. The obligations under the Credit Agreement are secured by, subject to certain exceptions, all of the Borrowers’ personal property, including (i) all present and future auction rate securities owned by any Borrower (the “Pledged Auction Rate Securities”), (ii) all equity interests issued by certain subsidiaries, and (iii) all present and future equity interests and debt securities owned by any Borrower. The loan matures on April 2, 2015 and bears interest at a monthly variable rate equal to LIBOR plus 2.75%.


NOTE 23 – 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  
March 31,
2012
  
September 30,
2011
 
 (in thousands)  (in thousands) 
Cash and cash equivalents:            
Cash in banks $1,912,945  $2,438,249  $2,870,287  $2,438,249 
Money market investments  4,009   1,446   5,571   1,446 
Total cash and cash equivalents (1)
  1,916,954   2,439,695   2,875,858   2,439,695 
                
Cash and securities segregated pursuant to federal regulations and other segregated assets (2)
  3,505,193   3,548,683   3,458,364   3,548,683 
Deposits with clearing organizations (3)
  86,498   91,482   86,417   91,482 
 $5,508,645  $6,079,860  $6,420,639  $6,079,860 

(1)  The total amount presented includes $470 million$1.6 billion and $471 million of cash and cash equivalents as of DecemberMarch 31, 20112012 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.  The $1.6 billion at March 31, 2012 includes proceeds from the completion of certain equity and debt financing transactions related to the acquisition of Morgan Keegan which closed on April 2, 2012.  See Note 2 for more information.

(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 accountaccounts for the exclusive benefit of its clients. Additionally, Raymond James Ltd. (“RJ Ltd”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 34 – 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.

 
89
 


Recurring fair value measurements

Assets and liabilities measured at fair value on a recurring and nonrecurring 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
 
March 31, 2012 
Quoted prices
in active
markets for
identical
assets
(Level 1) (1)
  
Significant
other
observable
inputs
(Level 2) (1)
  
Significant
unobservable
inputs
(Level 3)
  
Netting
adjustments (2)
  
Balance as of
March 31, 2012
 
 (in thousands)  (in thousands) 
Assets:               
Assets at fair value on a recurring basis:
               
Trading instruments:                              
Municipal and provincial obligations $31  $185,841  $135  $-  $186,007  $7  $150,273  $-  $-  $150,280 
Corporate obligations  3,346   14,311   -   -   17,657   6,457   20,463   -   -   26,920 
Government and agency obligations  7,238   47,390   -   -   54,628   24,316   23,206   -   -   47,522 
Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)  5   180,915   -   -   180,920   51   128,513   -   -   128,564 
Non-agency CMOs and asset-backed securities (“ABS”)  -   55,778   37   -   55,815   -   30,319   34   -   30,353 
Total debt securities  10,620   484,235   172   -   495,027   30,831   352,774   34   -   383,639 
Derivative contracts  -   129,394   -   (90,032)  39,362   -   117,362   -   (81,522)  35,840 
Equity securities  16,823   3,681   179   -   20,683   20,031   3,316   -   -   23,347 
Other securities  1,068   2,666   5,635   -   9,369   689   1,718   6,618   -   9,025 
Total trading instruments  28,511   619,976   5,986   (90,032)  564,441   51,551   475,170   6,652   (81,522)  451,851 
Available for sale securities:                                        
Agency MBS and CMOs  -   162,282   -   -   162,282   -   256,670   -   -   256,670 
Non-agency CMOs  -   133,817   741   -   134,558   -   144,825   633   -   145,458 
Other securities  9   -   -   -   9   13   -   -   -   13 
Auction rate securities (“ARS”):                                        
Municipals  -   -   74,707  (3)  -   74,707   -   -   71,909  (3)  -   71,909 
Preferred securities  -   -   98,537   -   98,537   -   -   102,092   -   102,092 
Total available for sale securities  9   296,099   173,985   -   470,093   13   401,495   174,634   -   576,142 
Private equity and other investments:                                        
Private equity investments  -   -   162,074(4)  -   162,074   -   -   181,446  (4)  -   181,446 
Other investments  113,591   64   2,040   -   115,695   116,154   66   2,193   -   118,413 
Total private equity and other investments  113,591   64   164,114   -   277,769   116,154   66   183,639   -   299,859 
Other assets  -   6,513   -   -   6,513   -   82   -   -   82 
Total
 $142,111  $922,652  $344,085  $(90,032) $1,318,816 
Total assets at fair value on a recurring basis
 $167,718  $876,813  $364,925  $(81,522) $1,327,934 
Assets at fair value on a nonrecurring basis:                    
Bank loans, net:                    
Impaired loans(5)
 $-  $55,142  $34,419  $-  $89,561 
Loans held for sale(6)
  -   57,655   -   -   57,655 
Total bank loans, net  -   112,797   34,419   -   147,216 
Other Real Estate Owned (“OREO”) (7)
  -   4,649   -   -   4,649 
Total assets at fair value on a nonrecurring basis(8)
 $-  $117,446  $34,419   -  $151,865 
                                        
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 
(continued on next page)(continued on next page) 

10


March 31, 2012 
Quoted prices
in active
markets for
identical
assets
(Level 1) (1)
  
Significant
other
observable
inputs
(Level 2) (1)
  
Significant
unobservable
inputs
(Level 3)
  
Netting
adjustments (2)
  
Balance as of
March 31, 2012
 
  (in thousands) 
  (continued from previous page) 
                
Liabilities at fair value on a recurring basis:
 
               
Trading instruments sold but not yet purchased:               
Municipal and provincial obligations $-  $357  $-  $-  $357 
Corporate obligations  -   505   -   -   505 
Government obligations  66,030   -   -   -   66,030 
Agency MBS and CMOs  142   -   -   -   142 
Total debt securities  66,172   862   -   -   67,034 
Derivative contracts  -   101,096   -   (98,030)  3,066 
Equity securities  10,243   80   -   -   10,323 
Total trading instruments sold but not yet purchased  76,415   102,038   -   (98,030)  80,423 
Other liabilities  -   430   39   -   469 
Total liabilities at fair value on a recurring basis $76,415  $102,468  $39  $(98,030) $80,892 


(1)  We had no significant transfers of financial instruments betweenfrom Level 1 andto Level 2 during the quarterthree or six month periods ended DecemberMarch 31, 2011.2012.  We had $436 thousand in transfers of financial instruments from Level 2 to Level 1 during the three and six month period ended March 31, 2012.  The transfers were a result of an increase in availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement.  Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized.

(2)  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$45.8 million of Jefferson County, Alabama Limited Obligation School Warrants ARS and $18.1$19.1 million of Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS.

(4)  Includes $84.9$99.8 million in private equity investments of which the weighted-average portion we own is approximately 21%22%.  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$77.9 million of that total as of DecemberMarch 31, 2011.2012.

(5)  There was a $55 million transfer of impaired loans from Level 3 to Level 2 during the three month period ended March 31, 2012 due to the increase in availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement.  Our analysis indicates that comparative sales data is a reasonable estimate of fair value, therefore, more consideration was given to this observable input.

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

(7)  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.

(8)  The adjustment to fair value of the nonrecurring fair value measures for the six months ended March 31, 2012 resulted in $10 million in additional provision for loan losses, as well as $790 thousand in other losses during the six month period.

 
911
 


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
  
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)  (in thousands) 
Assets:               
Assets at fair value on a recurring basis:
               
Trading instruments:                              
Municipal and provincial obligations $8  $164,019  $375  $-  $164,402  $8  $164,019  $375  $-  $164,402 
Corporate obligations  4,137   23,470   -   -   27,607   4,137   23,470   -   -   27,607 
Government and agency obligations  22,620   13,486   -   -   36,106   22,620   13,486   -   -   36,106 
Agency MBS and CMOs  31   147,726   -   -   147,757   31   147,726   -   -   147,757 
Non-agency CMOs and ABS  -   49,069   50   -   49,119   -   49,069   50   -   49,119 
Total debt securities  26,796   397,770   425   -   424,991   26,796   397,770   425   -   424,991 
Derivative contracts  -   126,867   -   (88,563)  38,304   -   126,867   -   (88,563)  38,304 
Equity securities  17,908   3,274   15   -   21,197   17,908   3,274   15   -   21,197 
Other securities  816   7,463   -   -   8,279   816   7,463   -   -   8,279 
Total trading instruments  45,520   535,374   440   (88,563)  492,771   45,520   535,374   440   (88,563)  492,771 
Available for sale securities:                                        
Agency MBS and CMOs  -   178,732   -   -   178,732   -   178,732   -   -   178,732 
Non-agency CMOs  -   145,024   851   -   145,875   -   145,024   851   -   145,875 
Other securities  10   -   -   -   10   10   -   -   -   10 
ARS:                                        
Municipals  -   -   79,524  (3)  -   79,524   -   -   79,524  (3)  -   79,524 
Preferred securities  -   -   116,524   -   116,524   -   -   116,524   -   116,524 
Total available for sale securities  10   323,756   196,899   -   520,665   10   323,756   196,899   -   520,665 
Private equity and other investments:                                        
Private equity investments  -   -   168,785(4)  -   168,785   -   -   168,785(4)  -   168,785 
Other investments  123,421   63   2,087   -   125,571   123,421   63   2,087   -   125,571 
Total private equity and other investments  123,421   63   170,872   -   294,356   123,421   63   170,872   -   294,356 
Other assets  -   2,696   -   -   2,696   -   2,696   -   -   2,696 
Total
 $168,951  $861,889  $368,211  $(88,563) $1,310,488 
Total assets at fair value on a recurring basis
 $168,951  $861,889  $368,211  $(88,563) $1,310,488 
                                        
Liabilities:                    
Assets at fair value on a nonrecurring basis:                    
Bank loans, net (5)
 $-  $39,621   111,941(7) $-  $151,562 
OREO(6)
  -   11,278   -   -   11,278 
Total assets at fair value on a nonrecurring basis
 $-  $50,899  $111,941  $-  $162,840 
                    
Liabilities at fair value on a recurring basis:
                    
Trading instruments sold but not yet purchased:                                        
Municipal and provincial obligations $-  $607  $-  $-  $607  $-  $607  $-  $-  $607 
Corporate obligations  -   5,625   -   -   5,625   -   5,625   -   -   5,625 
Government obligations  56,472   -   -   -   56,472   56,472   -   -   -   56,472 
Agency MBS and CMOs  159   -   -   -   159   159   -   -   -   159 
Total debt securities  56,631   6,232   -   -   62,863   56,631   6,232   -   -   62,863 
Derivative contracts  -   112,457   -   (105,869)  6,588   -   112,457   -   (105,869)  6,588 
Equity securities  6,488   211   -   -   6,699   6,488   211   -   -   6,699 
Total trading instruments sold but not yet purchased  63,119   118,900   -   (105,869)  76,150   63,119   118,900   -   (105,869)  76,150 
Other liabilities  -   20   40   -   60   -   20   40   -   60 
Total $63,119  $118,920  $40  $(105,869) $76,210 
Total liabilities at fair value on a recurring basis $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,September 30, 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.
(5)  Includes individual loans classified as held for sale, which were recorded at a fair value lower than cost.
(6)  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.
(7)  At September 30, 2011, Level 3 assets include residential first mortgage nonaccrual loans for which a charge-off had been recorded.  See Note 7, pages 110 – 116 of our 2011 Form 10-K.

 
1012
 


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)
 
Three months ended March 31, 2012
Level 3 assets at fair value
(in thousands)
Three months ended March 31, 2012
Level 3 assets at fair value
(in thousands)
 
Financial assetsFinancial assets  
Financial
liabilities
 Financial assets  
Financial
liabilities
 
 Trading instruments  Available for sale securities  
Private equity and
other investments
  
Payables-
trade and
other
  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
  
Municipal &
provincial
obligations
  
Non-
agency
CMOs &
ABS
  
Equity
securities
  
Other
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):                                        
Fair value
December 31, 2011
 $ 135  $ 37  $ 179  $ 5,635  $ 741  $ 74,707  $ 98,537  $ 162,074  $ 2,040  $(29)
Total gains (losses) for the period:                                        
Included in earnings  80   (4)  (942)  (4)  -   (540)  (75)  4   (49)  11   9   -   15   (218)  (138)  -   -   8,026(1)  154   (10)
Included in other comprehensive income  -   -   -   -   (93)  (4,670)  (894)  -   -   -   -   -   -   -   39   (2,798)  3,555   -   -   - 
Purchases and contributions  -   -   -   16   -   475   475   2,367   2   -   -   -   -   5,189   -   -   -   12,895   -   - 
Sales  (320)  -   -   -   -   -   -   -   -   -   -   -   (16)  (3,494)  -   -   -   -   (1)  - 
Redemptions by issuer  -   -   -   -   -   (125)  (17,450)  -   -   -   -   -   -   -   -   -   -   -   -   - 
Distributions  -   (9)  -   -   (17)  -   -   (9,082)  -   -   -   (3)  -   (494)  (9)  -   -   (1,549)  -   - 
Transfers:                                                                                
Into Level 3  -   -   6,577(1)  152   -   43   -   -   -   -   -   -   -   -   -   -   -   -   -   - 
Out of Level 3(2)  -   -   -   -   -   -   (43)  -   -   -   (144)  -   (178)  -   -   -   -   -   -   - 
Fair value
December 31, 2011
 $ 135  $ 37  $ 5,635  $ 179  $ 741  $ 74,707  $98,537  $ 162,074  $ 2,040  $(29)
Fair value
March 31, 2012
 $ -  $ 34  $ -  $ 6,618  $ 633  $ 71,909  $102,092  $ 181,446  $ 2,193  $(39)
                                                                                
Change in unrealized gains (losses) related to financial instruments held at December 31, 2011 $(125) $214  $(942) $-  $-  $(5,131) $(894) $4  $(52) $- 
Change in unrealized gains
(losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period
 $-  $64  $-  $(218) $(138) $(2,798) $3,555  $8,026(1) $117  $- 

(1)  Primarily results from valuation adjustments of certain private equity investments.  Since we only own a portion of these investments, our share of the net valuation adjustments resulted in a gain of $2.8 million which is included in net income attributable to RJF (after noncontrolling interests).  The noncontrolling interests' share of the net valuation adjustments was a gain of approximately $5.2 million.

(2)  The transfers out of Level 3 were a result of an increase in availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement.  Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized.


13


Six months ended March 31, 2012
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
  
Equity
securities
  
Other
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)
Total gains (losses) for the period:                                        
Included in earnings  89   (4)  11   (1,160)  (138)  (540)  (75)  8,030(1)  107   1 
Included in other comprehensive income  -   -   -   -   (54)  (7,468)  2,661   -   -   - 
Purchases and contributions  -   -   16   5,189   -   475   475   15,262   -   - 
Sales  (320)  -   (16)  (3,494)  -   -   -   -   (1)  - 
Redemptions by issuer  -   -   -   -   -   (125)  (17,450)  -   -   - 
Distributions  -   (12)  -   (494)  (26)  -   -   (10,631)  -   - 
Transfers:                                        
Into Level 3  -   -   152   6,577(2)  -   43   -   -   -   - 
Out of Level 3(3)
  (144)  -   (178)  -   -   -   (43)  -   -   - 
Fair value
March 31, 2012
 $ -  $ 34  $ -  $ 6,618  $ 633  $ 71,909  $102,092  $ 181,446  $ 2,193  $(39)
                                         
Change in unrealized gains
  (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period
 
 $-  $64  $-  $(218) $(138) $(7,930) $2,661  $8,030(1) $52  $- 

(1)  Primarily results from valuation adjustments of certain private equity investments.  Since we only own a portion of these investments, our share of the net valuation adjustments resulted in a gain of $2.8 million which is included in net income attributable to RJF (after noncontrolling interests).  The noncontrolling interests' share of the net valuation adjustments was a gain of approximately $5.2 million.

(2)  During the threesix month period ended DecemberMarch 31, 2011,2012, we transferred certain securities which were previously included in Level 2, non-agency CMOs and ABS.

(3)  The transfers out of Level 3 were a result of an increase in availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement.  Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized.


 
1114
Three months ended March 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
  
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
December 31, 2010
 $ 6,076  $ 3,643  $ 3,225  $ 1,098  $ 159,586  $ 45  $ 25  $(46)
Total gains (losses) for the period:                                
Included in earnings  (388)  877   -   121   (478)  -   -   - 
Included in other comprehensive income  -   -   -   (101)  -   -   -   - 
Purchases, issues & settlements, net  -   (599)  (1,300)  (318)  (2,062)  -   -   - 
Transfers:                                
Into Level 3  -   -   -   -   -   -   -   (3)
Out of Level 3  -   -   -   -   -   -   -   7 
Fair value
March 31, 2011
 $ 5,688  $ 3,921  $ 1,925  $ 800  $ 157,046  $ 45  $ 25  $(42)
                                 
Change in unrealized gains
  (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period
 $(388) $1,092  $-  $(81) $(3,293) $-  $-  $- 
Six months ended March 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
  
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)
Total gains (losses) for the period:                                
Included in earnings  (582)  740   -   121   (403)  -   -   - 
Included in other comprehensive income  -   -   -   66   -   -   -   - 
Purchases, issues & settlements, net  (5)  (749)  (1,100)  (398)  (3,781)  -   -   - 
Transfers:                                
Into Level 3  -   -   -   -   -   -   25   (3)
Out of Level 3  -   -   -   -   -   -   -   7 
Fair value
March 31, 2011
 $ 5,688  $ 3,921  $ 1,925  $ 800  $ 157,046  $ 45  $ 25  $(42)
                                 
Change in unrealized gains
  (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period
 $(777) $1,144  $-  $(81) $(3,298) $-  $-  $- 
 


15

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 DecemberMarch 31, 2011, 7.4%2012, 6.9% of our assets and 0.9%0.5% 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 DecemberMarch 31, 20112012 represent 26.1%27.5% of our assets measured at fair value, a substantial increase as compared to DecemberMarch 31, 20102011 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 1718 on pages 130 – 131 of our 2011 Form 10-K).  As of DecemberMarch 31, 2010, 8.9%2011, 7.8% and 1.7%0.9% 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 DecemberMarch 31, 20102011 represented 13.1%14.2% of our assets measured at fair value.

Gains and losses (realized and unrealized) included in revenuesearnings for the period are reportedpresented 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 March 31, 2012 
Net trading
profits
  
Other
revenues
 
  (in thousands) 
       
Total (losses) gains for the period included in revenues $(194) $8,032 
Change in unrealized (losses) gains for the period for assets held at the end of the reporting period  (154)  8,762 

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)
For the six months ended March 31, 2012 
Net trading
profits
  
Other
revenues
 
  (in thousands) 
       
Total (losses) gains for the period included in revenues $(1,064) $7,385 
Change in unrealized (losses) gains for the period for assets held at the end of the reporting period  (154)  2,675 


For the three months ended March 31, 2011 
Net trading
profits
  
Other
revenues
 
  (in thousands) 
       
Total gains (losses) for the period included in revenues $489  $(357)
Change in unrealized gains (losses) for the period for assets held at the end of the reporting period  705   (3,374)


For the six months ended March 31, 2011 
Net trading
profits
  
Other
revenues
 
  (in thousands) 
       
Total gains (losses) for the period included in revenues $158  $(282)
Change in unrealized gains (losses) for the period for assets held at the end of the reporting period  367   (3,379)



 
1216
Quantitative information about level 3 fair value measurements

The significant assumptions used in the valuation of level 3 financial instruments are as follows (the table below includes the significant majority of the financial instruments we hold that are classified as level 3 measures):
Level 3 financial instrument 
Fair value at
March 31, 2012
(in thousands)
 Valuation technique(s)Unobservable input Range (weighted-average) 
Recurring measurements:        
         
Available for sale securities:        
ARS:        
Municipals $45,822 
Probability weighted
internal scenario model:
    
     Scenario 1 - Recent trades
Observed trades (in inactive markets)
 of in-portfolio securities as well as
observed trades (in active markets) of
other comparable securities
 
57% of par - 104% of par
(59% of par)
 
          
     Scenario 2 – scenario of potential outcomes
Par value of  scenario based
possible outcomes(a)
 
70% of par- 93% of par
 (83% of par)
 
          
      
Weighting assigned to weighted
average of scenario 1
  50%-60% (55%) 
      
Weighting assigned to weighted
average of scenario 2
  40%-50% (45%) 
  $19,064 Recent trades
Observed trades (in inactive markets)
of in-portfolio securities as well as
observed trades of
 other comparable securities
(in inactive markets)
 
51% of par - 107% of par
(64% of par)
 
      
Comparability adjustments(b)
 +/-5% of par (+/-5% of par) 
  $7,023 Discounted cash flow
Average discount rate(c)
  3.17% - 7.15% (4.68%) 
      
Average interest rates applicable to future interest income on the securities(d)
  0.67% - 6.14% (4.30%) 
      
Prepayment year(e)
  2014 - 2030 (2019) 
Preferred securities $102,092 Discounted cash flow
Average discount rate(c)
  4.32% - 5.59% (5.09%) 
      
Average interest rates applicable to future interest income on the securities(d)
  2.34% - 3.52% (3.17%) 
      
Prepayment year(e)
  2012 - 2021 (2018) 
Private equity investments: $84,927 
Market comparable
companies
EBITDA multiple(f)
Projected EBITDA growth(g)
  
5.75 – 6 (5.88)
7.9% - 14.5% (11.2%)
 
  $37,348 Discounted cash flowDiscount rate  15% - 15% (15%) 
      Terminal growth rate of cash flows  3% - 3% (3%) 
      Terminal year  2015 - 2015 (2015) 
  $59,171 
Transaction price or other
investment-specific events(h)
Not meaningful(h)
 
Not meaningful(h)
 
Nonrecurring measurements:          
           
Impaired loans :  residential $22,149 Discounted cash flowPrepayment rate 0 yrs. – 12 yrs. (2.03 yrs.) 
Impaired loans :  corporate $12,270 
Appraisal or discounted
cash flow(i)
Not meaningful(i)
 
Not meaningful(i)
 
(a)  Management utilizes an internal model which projects the outcome of various scenarios which management believes market participants are evaluating as likely possible outcomes impacting the value of the security.  Values presented represent the range of fair values associated with the various potential scenarios.
(b)  Management estimates that market participants apply this range of either discount or premium, as applicable, to the limited observable trade data in order to assess the value of the securities within this portfolio segment.
(c)  Represents amounts used when we have determined that market participants would take these discounts into account when pricing the investments.
(d)  Future interest rates are projected based upon a forward interest rate curve, plus a spread over such projected base rate that is applicable to each future period for each security within this portfolio segment.  The interest rates presented represent the average interest rate over all projected periods for securities within the portfolio segment.
(e)  Assumed year of at least a partial redemption of the outstanding security by the issuer.
(f)  Represents amounts used when we have determined that market participants would use such multiples when pricing the investments.
(g)  Represents the projected growth in earnings before interest, taxes, depreciation and amortization (“EBITDA”) utilized in the valuation as compared to the prior periods reported EBITDA.
(h)  Certain direct private equity investments are valued initially at the transaction price until significant transactions or developments indicate that a change in the carrying values of these investments is appropriate.
(i)  The valuation techniques used for the impaired corporate loan portfolio as of March 31, 2012 were appraisals less selling costs for the collateral dependent loans, and discounted cash flows for the one remaining impaired loan that is not collateral dependent.
17
 


NonrecurringQualitative disclosure about unobservable inputs

For our recurring 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 categorized within Level 3 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 nonrecurringthe sensitivity of the fair value measurements duringmeasurement to changes in significant unobservable inputs and interrelationships between those unobservable inputs are described below:

Auction rate securities:

One of the period and still heldsignificant unobservable inputs used in the fair value measurement of auction rate securities presented within our available for sale securities portfolio relate to judgments regarding whether the level of observable trading activity is sufficient to conclude markets are active.  Where insufficient levels of trading activity are determined to exist 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.
date, then management’s assessment of how much weight to apply to trading prices in inactive markets versus management’s own valuation models could significantly impact the valuation conclusion.  The valuation of the securities impacted by changes in management’s assessment of market activity levels could be either higher or lower, depending upon the relationship of the inactive trading prices compared to the outcome of management’s internal valuation models.

The adjustmentfuture interest rate and maturity assumptions impacting the valuation of the auction rate securities are directly related.  As short-term interest rates rise, due to the variable nature of the penalty interest rate provisions imbedded in most of these securities in the event auctions fail to set the security’s interest rate, then a penalty rate that is specified in the security increases.  These penalty rates are based upon a stated interest rate spread over what is typically a short-term base interest rate index.  Management estimates that at some level of increase in short-term interest rates, issuers of the securities will have the economic incentive to refinance (and thus prepay) the securities.  Therefore, the short-term interest rate assumption directly impacts the input related to the timing of any projected prepayment.  The faster and steeper short-term interest rates rise, the earlier prepayments will likely occur and the higher the fair value of the nonrecurringsecurity.

Private equity investments:

The significant unobservable inputs used in the fair value measures formeasurement of private equity investments included within our other assets relate to the three months ended December 31, 2011 resultedfinancial performance of the investment entity, and the markets required return on investments from entities in $4.6 millionindustries in additional provision for loan losses, as well as $635,000which we hold investments.  Significant increases (or decreases) in other losses duringeither our investment entities future economic performance will have a directly proportional impact on the quarter.

For a discussionvaluation results.  The value of our accounting policies for impairmentinvestment moves inversely with the market’s expectation of loansreturns from such investments.  Should the market require higher returns from industries in which we are invested, all other factors held for investment, loansconstant, our investments will decrease in value.  Should the market accept lower returns from industries in which we are invested, all other factors held for sale, and OREO, see Note 1, pages 88 – 92 ofconstant, our 2011 Form 10-K.investments will increase in value.

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 DecemberMarch 31, 2011,2012, we have elected not to choose the fair value option for any of our financial assets or liabilities not already recorded at fair value.


18


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 by level within the fair value hierarchy and the carrying amounts of our financial instruments that are not carried at fair value as of March 31, 2012 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 

March 31, 2012 
Quoted prices
in active
markets for
identical
assets
(Level 1)
  
Significant
other
observable
inputs
(Level 2)
  
Significant
unobservable
inputs
(Level 3)
  Total estimated fair value  Carrying amount 
  (in thousands) 
Financial assets:
               
Bank loans, net(1)
 $-  $-  $7,343,148  $7,343,148  $7,298,612 
                     
Financial liabilities:
                    
Bank deposits $-  $7,605,995  $318,021  $7,924,016  $7,913,846 
Other borrowings  -   349,600   -   349,600   349,600 
Corporate debt  363,720   926,855   -   1,290,575   1,205,664 
                     
13
(1)  Excludes all impaired loans and loans held for sale which have been recorded at fair value in the Condensed Consolidated Statement of Financial Condition at March 31, 2012.

The estimated fair values and the carrying amounts of our financial instruments that are not carried at fair value as of September 30, 2011 are as follows:

  Estimated  Carrying 
  fair value  amount 
  (in thousands) 
Financial assets:      
Bank loans, net $6,596,439  $6,547,914 
Financial liabilities:        
Bank deposits  7,745,607   7,739,322 
Corporate debt  675,509   611,968 


NOTE 45 – TRADING INSTRUMENTS AND TRADING INSTRUMENTS SOLD BUT NOT YET PURCHASED

 December 31, 2011  September 30, 2011  March 31, 2012  September 30, 2011 
 
Trading
instruments
  
Instruments
sold but not
yet purchased
  
Trading
instruments
  
Instruments
sold but not
yet purchased
  
Trading
instruments
  
Instruments
sold but not
yet purchased
  
Trading
instruments
  
Instruments
sold but not
yet purchased
 
 (in thousands)  (in thousands) 
                        
Municipal and provincial obligations $186,007  $1,103  $164,402  $607  $150,280  $357  $164,402  $607 
Corporate obligations  17,657   2,229   27,607   5,625   26,920   505   27,607   5,625 
Government and agency obligations  54,628   104,937   36,106   56,472   47,522   66,030   36,106   56,472 
Agency MBS and CMOs  180,920   279   147,757   159   128,564   142   147,757   159 
Non-agency CMOs and ABS  55,815   -   49,119   -   30,353   -   49,119   - 
Total debt securities  495,027   108,548   424,991   62,863   383,639   67,034   424,991   62,863 
                                
Derivative contracts  39,362   9,671   38,304   6,588   35,840   3,066   38,304   6,588 
Equity securities  20,683   10,293   21,197   6,699   23,347   10,323   21,197   6,699 
Other securities  9,369   -   8,279   -   9,025   -   8,279   - 
Total $564,441  $128,512  $492,771  $76,150  $451,851  $80,423  $492,771  $76,150 

See Note 34 for additional information regarding the fair value of trading instruments and trading instruments sold but not yet purchased.


 
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NOTE 56 – 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 threesix month period ended DecemberMarch 31, 2011.2012.  There were proceeds of $11.2$11.4 million from the sale of available for sale securities during the threesix month period ended DecemberMarch 31, 2010,2011, which resulted in total losses of $411,000.$209 thousand.

During the threesix month period ended DecemberMarch 31, 2011,2012, 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  Cost basis  
Gross
unrealized gains
  
Gross
unrealized losses
  Fair value 
 (in thousands)  (in thousands) 
December 31, 2011:            
March 31, 2012:            
Available for sale securities:                        
Agency MBS and CMOs $161,858  $486  $(62) $162,282  $255,832  $1,284  $(446) $256,670 
Non-agency CMOs (1)
  185,112   -   (50,554)  134,558   179,282   -   (33,824)  145,458 
Total RJ Bank available for sale securities  346,970   486   (50,616)  296,840   435,114   1,284   (34,270)  402,128 
                                
Auction rate securities:                                
Municipal obligations(2)
  79,377   162   (4,832)  74,707   79,377   221   (7,689)  71,909 
Preferred securities(3)
  99,431   15   (909)  98,537 
Preferred securities  99,431   2,661   -   102,092 
Total auction rate securities  178,808   177   (5,741)  173,244   178,808   2,882   (7,689)  174,001 
                                
Other securities  3   6   -   9   3   10   -   13 
Total available for sale securities $525,781  $669  $(56,357) $470,093  $613,925  $4,176  $(41,959) $576,142 
                                
September 30, 2011:                                
Available for sale securities:                                
Agency MBS and CMOs $178,120  $639  $(27) $178,732  $178,120  $639  $(27) $178,732 
Non-agency CMOs (4)(3)
  192,956   -   (47,081)  145,875   192,956   -   (47,081)  145,875 
Total RJ Bank available for sale securities  371,076   639   (47,108)  324,607   371,076   639   (47,108)  324,607 
                                
Auction rate securities:                                
Municipal obligations  79,524   -   -   79,524   79,524   -   -   79,524 
Preferred securities  116,524   -   -   116,524   116,524   -   -   116,524 
Total auction rate securities  196,048   -   -   196,048   196,048   -   -   196,048 
                                
Other securities  3   7   -   10   3   7   -   10 
Total available for sale securities $567,127  $646  $(47,108) $520,665  $567,127  $646  $(47,108) $520,665 


(1)  As of DecemberMarch 31, 2011,2012, the non-credit portion of other-than-temporary impairment (“OTTI”) recorded in accumulated other comprehensive income (“AOCI”) was $40$27.8 million (before taxes).

(2)  As of DecemberMarch 31, 2011,2012, the non-credit portion of OTTI recorded in AOCI was $4.7$7.5 million (before taxes).

(3)As of December 31, 2011, the non-credit portion of OTTI recorded in AOCI was $894,000 (before taxes).

(4)  As of September 30, 2011, the non-credit portion of OTTI recorded in AOCI was $37.9 million (before taxes).
 
 
See Note 34 for additional information regarding the fair value of available for sale securities.


 
1520
 


The contractual maturities, amortized cost, carrying values and current yields for our available for sale securities are as presented below.  Since RJ Bank’s available for sale securities are backed by mortgages, actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.  Expected maturities of ARS and other securities may differ significantly from contractual maturities, as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 December 31, 2011  March 31, 2012 
 Within one year  
After one but
within five
years
  
After five but
within ten
years
  After ten years  Total  Within one year  
After one but
within five
years
  
After five but
within ten
years
  After ten years  Total 
 (in thousands)  (in thousands) 
Agency MBS & CMOs:                              
Amortized cost $-  $-  $46,094  $115,764  $161,858  $-  $84  $93,133  $162,615  $255,832 
Carrying value  -   -   46,201   116,081   162,282   -   83   93,076   163,511   256,670 
Weighted-average yield  -   -   0.44%  0.79%  0.69%  -   0.36%  0.56%  0.80%  0.71%
                                        
Non-agency CMOs:                                        
Amortized cost $-  $-  $-  $185,112  $185,112  $-  $-  $-  $179,282  $179,282 
Carrying value  -   -   -   134,558   134,558   -   -   -   145,458   145,458 
Weighted-average yield  -   -   -   3.19%  3.19%  -   -   -   3.15%  3.15%
                                        
Sub-total agency MBS & CMOs and non-agency CMOs:                                        
Amortized cost $-  $-  $46,094  $300,876  $346,970  $-  $84  $93,133  $341,897  $435,114 
Carrying value  -   -   46,201   250,639   296,840   -   83   93,076   308,969   402,128 
Weighted-average yield  -   -   0.44%  2.08%  1.82%  -   0.36%  0.56%  1.91%  1.59%
                                        
Auction rate securities:                                        
Municipal obligations                                        
Amortized cost $-  $-  $553  $78,824  $79,377  $-  $-  $553  $78,824  $79,377 
Carrying value  -   -   565   74,142   74,707   -   -   543   71,366   71,909 
Weighted-average yield  -   -   0.48%  0.76%  0.76%  -   -   0.48%  0.76%  0.76%
                                        
Preferred securities:                                        
Amortized cost $-  $-  $-  $99,431  $99,431  $-  $-  $-  $99,431  $99,431 
Carrying value  -   -   -   98,537   98,537   -   -   -   102,092   102,092 
Weighted-average yield  -   -   -   0.26%  0.26%  -   -   -   0.26%  0.26%
                                        
Sub-total auction rate securities:                                        
Amortized cost $-  $-  $553  $178,255  $178,808  $-  $-  $553  $178,255  $178,808 
Carrying value  -   -   565   172,679   173,244   -   -   543   173,458   174,001 
Weighted-average yield  -   -   0.48%  0.48%  0.48%  -   -   0.48%  0.48%  0.48%
                                        
Other securities:                                        
Amortized cost $-  $-  $-  $3  $3  $-  $-  $-  $3  $3 
Carrying value  -   -   -   9   9   -   -   -   13   13 
                                        
Total available for sale securities:                                        
Amortized cost $-  $-  $46,647  $479,134  $525,781  $-  $84  $93,686  $520,155  $613,925 
Carrying value  -   -   46,766   423,327   470,093   -   83   93,619   482,440   576,142 
Weighted-average yield  -   -   0.44%  1.57%  1.47%  -   0.36%  0.56%  1.42%  1.29%



 
1621
 


The gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:

 December 31, 2011  March 31, 2012 
 Less than 12 months  12 months or more  Total  Less than 12 months  12 months or more  Total 
 Estimated  Unrealized  Estimated  Unrealized  Estimated  Unrealized  Estimated  Unrealized  Estimated  Unrealized  Estimated  Unrealized 
 fair value  losses  fair value  losses  fair value  losses  fair value  losses  fair value  losses  fair value  losses 
 (in thousands)  (in thousands) 
                                    
Agency MBS and CMOs $24,748  $(25) $15,228  $(37) $39,976  $(62) $74,057  $(410) $13,888  $(36) $87,945  $(446)
Non-agency CMOs  1,270   (88)  133,288   (50,466)  134,558   (50,554)  1,308   (10)  144,150   (33,814)  145,458   (33,824)
ARS municipal obligations  67,929   (4,832)  -   -   67,929   (4,832)  52,802   (7,689)  -   -   52,802   (7,689)
ARS preferred securities  89,041   (909)  -   -   89,041   (909)
Total impaired securities $182,988  $(5,854) $148,516  $(50,503) $331,504  $(56,357) $128,167  $(8,109) $158,038  $(33,850) $286,205  $(41,959)

  September 30, 2011 
  Less than 12 months  12 months or more  Total 
  Estimated  Unrealized  Estimated  Unrealized  Estimated  Unrealized 
  fair value  losses  fair value  losses  fair value  losses 
  (in thousands) 
                   
Agency MBS and CMOs $23,366  $(6) $17,702  $(21) $41,068  $(27)
Non-agency CMOs  1,345   (93)  144,530   (46,988)  145,875   (47,081)
Total impaired securities $24,711  $(99) $162,232  $(47,009) $186,943  $(47,108)

The reference point for determining when securities are in a loss position is the reporting period end. As such, it is possible that a security had a fair value that exceeded its amortized cost on other days during the period.

Agency MBS and CMOs

The Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), as well as the Government National Mortgage Association (“GNMA”), guarantee the contractual cash flows of the agency MBS and CMOs. At DecemberMarch 31, 2011,2012, of the 1917 U.S. government-sponsored enterprise MBS and CMOs in an unrealized loss position, 11nine were in a continuous unrealized loss position for less than 12 months and 8eight for 12 months or more.  We do not consider these securities other-than-temporarily impaired due to the guarantee provided by FNMA, FHLMC, and GNMA as to the full payment of principal and interest, and the fact that we have the ability and intent to hold these securities to maturity.

Non-agency CMOs

AsAll individual non-agency securities are evaluated for OTTI on a quarterly basis.  Only those non-agency CMOs whose amortized cost basis we do not expect to recover in full are considered to be other than temporarily impaired as we have the ability and intent to hold these securities to maturity.  To assess whether the amortized cost basis of December 31, 2011non-agency CMOs will be recovered, RJ Bank performs a cash flow analysis for each security.  This comprehensive process considers borrower characteristics and including subsequent ratings changes, $32.3 millionthe particular attributes of the loans underlying each security.  Loan level analysis includes a review of historical default rates, loss severities, liquidations, prepayment speeds and delinquency trends.  The historical details, home prices and economic outlook are considered to derive assumptions of default rates, loss severities, delinquencies and prepayment speeds utilized in the discounted cash flow model to project security specific cash flows, which factors in the amount of credit enhancement specific to the security.  The difference between the present value of the cash flows expected and the amortized cost basis is the credit loss and is recorded as OTTI.


22


The significant assumptions used in the cash flow analysis of non-agency CMOs were rated investment grade by at least one rating agency, and $102.3 million were rated less than investment grade. are as follows:

March 31, 2012
Range
Weighted-
average (1)
Default rate0% - 36.8%13.7%
Loss severity14.9% - 71.7%46.5%
Prepayment rate0.07% - 17.4%7.1%

             (1)Represents the expected activity for the next twelve months.

At DecemberMarch 31, 2011,2012, 24 of the 25 non-agency CMOs were in a continuous unrealized loss position for 12 months or more and one was in that position for less than 12 months.  The non-agency securities carry various amountsAs of credit enhancement,March 31, 2012 and none are collateralized with subprime loans.  Current characteristicsincluding subsequent ratings changes, $34 million of each security owned, such as delinquency and foreclosure levels, credit enhancement, projected losses and coverage, are reviewed monthly by management.  Only thosethe non-agency CMOs whose amortized cost basis we dowere rated investment grade by at least one rating agency, and $111 million were rated less than investment grade, which ranged from BB to D.  Given the comprehensive analysis process utilized, these ratings are not expect to recovera significant factor in full are considered to be other-than-temporarily impaired as we have the ability and intent to hold these securities to maturity.overall OTTI evaluation process.  The unrealized losses at DecemberMarch 31, 20112012 were primarily due to the continued interest rate volatility and uncertainty in the markets.

Based on the expected cash flows derived from the model utilized in our analysis, we expect to recover all unrealized losses not already recorded in earnings on our non-agency CMOs. However, it is possible that the underlying loan collateral of these securities will perform worse than current expectations, which may lead to adverse changes in the cash flows expected to be collected on these securities and potential future OTTI losses.


17


The significant assumptions used in the cash flow analysis of non-agency CMOs are as follows:

December 31, 2011
Range
Weighted-
average (1)
Default rate0.3% - 38.5%14.1%
Loss severity14.9% - 79%45%
Prepayment rate0.3% - 31.8%9.3%

(1)  Represents the expected activity for the next twelve months.

ARS

Our cost basis in the ARS we hold is the fair value of the securities in the period in which we acquired them (see the ARS repurchase discussion in Note 1718 on pages 130 – 131 of our 2011 Form 10-K).  Only those ARS whose amortized cost basis we do not expect to recover in full are considered to be other-than-temporarily impaired as we have the ability and intent to hold these securities to maturity.

As of December 31, 2011, all of the ARS preferred securities were rated investment grade by at least one rating agency.  Since we have the ability and intent to hold these securities to maturity and we expect to recover our cost basis in full, we have concluded that none of these ARS preferred securities are other-than-temporarily impaired.  The unrealized losses at December 31, 2011 were primarily due to a slight change in the forward interest rate assumptions we utilize to develop our cash flow forecasts for these securities.

During the three month period ended December 31, 2011, Jefferson County, Alabama filed a voluntary petition for relief under Chapter 9 of the U.S. Bankruptcy Code in the U.S. District Court for the Northern District of Alabama.  Within our municipal ARS holdings, we hold Jefferson County, Alabama Limited Obligation School Warrants ARS (“Jeff Co. Schools ARS”) and Jefferson County, Alabama Sewer Revenue Refunding Warrants ARS (“Jeff Co. Sewers ARS”).  AsDuring the first quarter of Decemberour fiscal year 2012, Jefferson County, Alabama filed a voluntary petition for relief under Chapter 9 of the U.S. Bankruptcy Code in the U.S. District Court for the Northern District of Alabama.  During the six month period ended March 31, 2011,2012, unrealized losses arose for both the Jeff Co. Schools ARS and the Jeff Co. Sewers ARS based upon a decrease in the trading prices forfair values of these securities over the three month period then ended.securities.  Based upon the available information as of DecemberMarch 31, 2011,2012, we prepared a cash flow forecastforecasts for each of these two ARS for the purpose of determining the amount of any OTTI related to credit losses. We concluded there was no OTTI related to credit losses associated with the Jeff Co. Schools ARS based on theas our expected cash flows derived from the model utilized in our analysis which indicatedflow forecast indicates that we expect to recover all unrealized losses on our holdings of the Jeff Co. Schools ARS.cost basis in these securities.  Refer to the discussion below for the amount of OTTI related to credit losses which we determined regarding the Jeff Co. Sewers ARS.

Other-than-temporarily impaired securities

Although there is no intent to sell either our ARS or our non-agency CMOs and it is not more likely than not that we will be required to sell these securities, we do not expect to recover the entire amortized cost basis of certain securities within these portfolios.

Changes in the amount of OTTI related to credit losses recognized in other revenues on available for sale securities are as follows:

 
Three months ended
December 31,
  
Three months ended
March 31,
  
Six months ended
March 31,
 
 2011  2010  2012  2011  2012  2011 
 (in thousands)  (in thousands) 
                  
Amount related to credit losses on securities we held at the beginning of the period $22,306  $18,816  $24,402  $20,995  $22,306  $18,816 
Additions to the amount related to credit loss for which an OTTI was not previously recognized  462   -   -   213   462   213 
Decreases to the amount related to credit loss for securities sold during the period  -   -   -   (6,744)  -   (6,744)
Additional increases to the amount related to credit loss for which an OTTI was previously recognized  1,634   2,179   1,337   3,006   2,971   5,185 
Amount related to credit losses on securities we held at the end of the period $24,402  $20,995  $25,739  $17,470  $25,739  $17,470 

23


The current period credit losses representing increases toFor the amounts related tothree and six months ended March 31, 2012 credit losses for which an OTTI was previously recognized were primarily due to high loss severities on individual loan collateral of certain non-agency CMOs and the expected continuation of high default levels and collateral losses into calendar year 2012.  The current periodFor the six months ended March 31, 2012 credit losses related to securities for which an OTTI was not previously recognized arise from Jeff Co. Sewers ARS, and reflect the portion of our amortized cost basis that we do not expect to receive based upon the present value of our most recent projected cash flows for that security.

18


NOTE 67 – BANK LOANS, NET

Bank client receivables are comprised of loans originated or purchased by RJ Bank and include commercial and industrial (“C&I”) loans, commercial and residential real estate loans, as well as consumer loans. These receivables are collateralized by first or second mortgages on residential or other real property, other assets of the borrower, or are unsecured.

For a discussion of our accounting policies regarding bank loans and allowances for losses, including the policies regarding loans held for investment, loans held for sale, off-balance sheet loan commitments, nonperforming assets, troubled debt restructurings (“TDRs”), impaired loans, the allowance for loan losses and reserve for unfunded lending commitments, and loan charge-off policies, see Note 1, pages 88 – 92, in our 2011 Form 10-K.

We segregate our loan portfolio into five loan portfolio segments: C&I, commercial real estate (“CRE”), CRE construction, residential mortgage and consumer. These portfolio segments also serve as the portfolio loan classes for purposes of credit analysis, except for residential mortgage loans which are further disaggregated into residential first mortgage and residential home equity classes.

The following table presents the balances for both the held for sale and held for investment loan portfolios as well as the associated percentage of each portfolio segment in RJ Bank's total loan portfolio:

 December 31, 2011  September 30, 2011  March 31, 2012  September 30, 2011 
 Balance  %  Balance  %  Balance  %  Balance  % 
 ($ in thousands)  ($ in thousands) 
                        
Loans held for sale, net(1)
 $104,152   2% $102,236   2% $99,255   1% $102,236   2%
Loans held for investment:                                
C&I loans  4,517,838   63%  4,100,939   61%  4,820,364   63%  4,100,939   61%
CRE construction loans  6,240   -   29,087   -   50,010   1%  29,087   - 
CRE loans  825,468   11%  742,889   11%  937,570   12%  742,889   11%
Residential mortgage loans  1,748,057   24%  1,756,486   26%  1,726,132   23%  1,756,486   26%
Consumer loans  9,087   -   7,438   -   40,553   -   7,438   - 
Total loans held for investment  7,106,690       6,636,839       7,574,629       6,636,839     
Net unearned income and deferred expenses  (48,135)      (45,417)      (83,378)      (45,417)    
Total loans held for investment, net(1)
  7,058,555       6,591,422       7,491,251       6,591,422     
                                
Total loans held for sale and investment  7,162,707   100%  6,693,658   100%  7,590,506   100%  6,693,658   100%
Allowance for loan losses  (147,503)      (145,744)      (144,678)      (145,744)    
Bank loans, net $7,015,204      $6,547,914      $7,445,828      $6,547,914     

(1)  Net of unearned income and deferred expenses, which includes purchase premiums, purchase discounts, and net deferred origination fees and costs.

RJ Bank purchased or originated $109.1$168.8 million and $29.2$277.9 million of loans held for sale during the three and six months ended DecemberMarch 31, 20112012, respectively and 2010, respectively.  During the three months ended December 31, 2011 and 2010, there were proceeds of $20.1$52.6 million and $26.3$81.8 million for the three and six months ended March 31, 2011, respectively.  There were proceeds from the sale of held for sale loans of $45.6 million and $65.7 million for the three and six months ended March 31, 2012, respectively, resulting in net gains of $217,000$307 thousand and $259,000,$524 thousand, respectively.  There were proceeds from the sale of held for sale loans of $25 million and $51.3 million for the three and six months ended March 31, 2011, respectively, whichresulting in net gains of $315 thousand and $574 thousand, respectively.  These gains were recorded in other revenues on our Condensed Consolidated Statements of Income and Comprehensive Income.

24


The following table presents purchases and sales of any loans held for investment by portfolio segment:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011 2010  2012  2011  2012  2011 
 Purchases  Sales Purchases  Sales  Purchases  Sales  Purchases  Sales  Purchases  Sales  Purchases  Sales 
 (in thousands)  (in thousands) 
                                    
C&I loans(1) $49,752  $5,880  $-  $2,966  $239,108  $26,358  $6,930  $12,912  $288,860  $32,238  $6,930  $15,879 
CRE construction(1)
  31,074   -   -   -   31,074   -   -   - 
CRE loans(1)
  121,402   -   -   -   121,402   -   -   - 
Residential mortgage loans  28,384   -   39,963   -   4,720   -   460   -   33,104   -   40,423   - 
Total $78,136  $5,880  $39,963  $2,966  $396,304  $26,358  $7,390  $12,912  $474,440  $32,238  $47,353  $15,879 


(1)  Includes a total of $367 million for a Canadian loan portfolio purchased during the three months ended March 31, 2012, which was comprised of $219 million C&I, $31 million of CRE construction and $117 million of CRE loans.
19


The following table presents the comparative data for nonperforming loans held for investment and total nonperforming assets:

 
December 31,
2011
  
September 30,
2011
  
March 31,
2012
  
September 30,
2011
 
 ($ in thousands)  ($ in thousands) 
Nonaccrual loans:            
C&I loans $8,539  $25,685  $6,230  $25,685 
CRE loans  15,825   15,842   9,441   15,842 
Residential mortgage loans:                
First mortgage loans  87,025   90,992   86,970   90,992 
Home equity loans/lines  62   67   171   67 
Total nonaccrual loans  111,451   132,586   102,812   132,586 
                
Accruing loans which are 90 days past due:                
Residential mortgage loans:                
First mortgage loans  -   690   -   690 
Home equity loans/lines  72   47   -   47 
Total accruing loans which are 90 days past due  72   737   -   737 
Total nonperforming loans  111,523   133,323   102,812   133,323 
                
Real estate owned and other repossessed assets, net:                
CRE  4,942   7,707   6,178   7,707 
Residential:                
First mortgage
  7,334   6,852   7,792   6,852 
Home equity
  13   13   13   13 
Total  12,289   14,572   13,983   14,572 
Total nonperforming assets, net $123,812  $147,895  $116,795  $147,895 
Total nonperforming assets, net as a % of RJ Bank total assets  1.41%  1.64%  1.30%  1.64%

The table of nonperforming assets above excludes $12.4$11.8 million and $10.3 million as of DecemberMarch 31, 20112012 and September 30, 2011, respectively, of residential TDRs which were returned to accrual status in accordance with our policy.

As of DecemberMarch 31, 20112012 and September 30, 2011, RJ Bank had no outstanding commitments on nonperforming loans.

The gross interest income related to the nonperforming loans reflected in the previous table, which would have been recorded had these loans been current in accordance with their original terms, totaled $1.3$1.4 million and $1.8$2.5 million for the three and six months ended DecemberMarch 31, 20112012, respectively and 2010, respectively.$2.1 million and $3.7 million for the three and six months ended March 31, 2011.  The interest income recognized on nonperforming loans was $649,000$324 thousand and $324,000$970 thousand for the three and six months ended DecemberMarch 31, 20112012, respectively and 2010, respectively.$116 thousand and $417 thousand for the three and six months ended March 31, 2011.


 
2025
 


The following table presents an analysis of the payment status of loans held for investment:

 
30-59
days
  
60-89
days
  
90 days
or more
  
Total
past due
  Current  
Total loans held for
investment (1)
  
30-59
days
  
60-89
days
  
90 days
or more
  
Total
past due
  Current  
Total loans held for
investment (1)
 
 (in thousands)  (in thousands) 
As of December 31, 2011:                  
As of March 31, 2012:                  
                                    
C&I loans $392  $-  $-  $392  $4,517,446  $4,517,838  $231  $-  $-  $231  $4,820,133  $4,820,364 
CRE construction loans  -   -   -   -   6,240   6,240   -   -   -   -   50,010   50,010 
CRE loans  -   -   11,156   11,156   814,312   825,468   -   -   4,997   4,997   932,573   937,570 
Residential mortgage loans:                                                
First mortgage loans  8,655   7,375   59,607   75,637   1,643,413   1,719,050   10,429   6,520   60,349   77,298   1,621,118   1,698,416 
Home equity loans/lines  168   -   111   279   28,728   29,007   338   -   65   403   27,313   27,716 
Consumer loans  -   -   -   -   9,087   9,087   -   -   -   -   40,553   40,553 
Total loans held for investment, net $9,215  $7,375  $70,874  $87,464  $7,019,226  $7,106,690  $10,998  $6,520  $65,411  $82,929  $7,491,700  $7,574,629 

As of September 30, 2011:                  
                   
C&I loans $-  $-  $-  $-  $4,100,939  $4,100,939 
CRE construction loans  -   -   -   -   29,087   29,087 
CRE loans  -   -   5,053   5,053   737,836   742,889 
Residential mortgage loans:                        
First mortgage loans  6,400   6,318   61,870   74,588   1,651,181   1,725,769 
Home equity loans/lines  88   -   114   202   30,515   30,717 
Consumer loans  -   -   -   -   7,438   7,438 
Total loans held for investment, net $6,488  $6,318  $67,037  $79,843  $6,556,996  $6,636,839 

(1)  Excludes any net unearned income and deferred expenses.

The following table provides a summary of RJ Bank’s impaired loans:

 December 31, 2011  September 30, 2011  March 31, 2012  September 30, 2011 
 
Gross
recorded
investment
  
Unpaid
principal
balance
  
Allowance
for losses
  
Gross
recorded
investment
  
Unpaid
principal
balance
  
Allowance
for losses
  
Gross
recorded
investment
  
Unpaid
principal
balance
  
Allowance
for losses
  
Gross
recorded
investment
  
Unpaid
principal
balance
  
Allowance
for losses
 
 (in thousands)  (in thousands) 
Impaired loans with allowance for loan losses:(1)
                                    
C&I loans $8,539  $12,576  $4,436  $25,685  $26,535  $8,478  $6,230  $12,558  $3,400  $25,685  $26,535  $8,478 
CRE loans  6,122   6,130   1,545   6,122   6,131   1,014   18   27   1   6,122   6,131   1,014 
Residential mortgage loans:                                                
First mortgage loans  81,234   119,767   10,582   83,471   123,202   10,226   79,489   119,732   10,300   83,471   123,202   10,226 
Home equity loans/lines  128   128   19   128   128   20   128   128   18   128   128   20 
Total  96,023   138,601   16,582   115,406   155,996   19,738   85,865   132,445   13,719   115,406   155,996   19,738 
                                                
Impaired loans without allowance for loan losses:(2)
                                                
CRE loans  9,704   20,648   -   9,720   20,648   -   9,423   18,477   -   9,720   20,648   - 
Residential - first mortgage loans  7,197   11,119   -   6,553   10,158   -   7,992   12,405   -   6,553   10,158   - 
Total  16,901   31,767   -   16,273   30,806   -   17,415   30,882   -   16,273   30,806   - 
Total impaired loans $112,924  $170,368  $16,582  $131,679  $186,802  $19,738  $103,280  $163,327  $13,719  $131,679  $186,802  $19,738 

(1)  Impaired loan balances have had reserves established based upon management’s analysis.

(2)  When the discounted cash flow, collateral value or market value equals or exceeds the carrying value of the loan, then the loan does not require an allowance.  These are generally loans in process of foreclosure that have already been adjusted to fair value.

The table above includes $8.5$6.2 million C&I, $4.7$4.4 million CRE, $25.2 million residential first mortgage and $128,000$128 thousand residential home equity TDRs at DecemberMarch 31, 2011.2012.  In addition, the table above includes $12 million C&I, $4.7 million CRE, $23.3 million residential first mortgage and $128,000$128 thousand residential home equity TDRs at September 30, 2011.

 
2126
 


The average balance of the total impaired loans and the related interest income recognized in the Condensed Consolidated Statements of Income and Comprehensive Income are as follows:

 Three months ended  Three months ended March 31,  Six months ended March 31, 
 December 31, 2011  December 31, 2010  2012  2011  2012  2011 
 (in thousands)  (in thousands) 
Average impaired loan balance:                  
C&I loans $19,857  $-  $7,094  $-  $13,476  $- 
CRE loans  15,825   47,075   13,309   46,923   14,567   46,998 
Residential mortgage loans:                        
First mortgage loans  88,611   84,403(1)  88,062   85,442(1)  88,336   84,923(1)
Home equity loans/lines  128   144   141   143   135   144 
Total $124,421  $131,622  $108,606  $132,508  $116,514  $132,065 
                        
Interest income recognized:                        
Residential mortgage loans:                        
First mortgage loans $421  $291(1) $251  $131(1) $643  $413(1)
Home equity loans/lines  1   1   1   1   2   2 
Total $422  $292  $252  $132  $645  $415 

(1)  In order to enhance the comparability of amounts presented, the DecemberMarch 31, 20102011 amount includes nonaccrual loans, or related interest income, as applicable, for which a charge-off had been recorded. The amount originally reported for this period did not include such loans.

During the three and six months ended DecemberMarch 31, 20112012 and 2010,2011, RJ Bank granted concessions to borrowers having financial difficulties, for which the resulting modification was deemed a TDR.  The concessions granted for first mortgage residential loans were generally interest rate reductions and interest capitalization.  The table below presents the impact TDRs which occurred during the respective periods presented had on our condensed consolidated financial statements:

 
 
Number of
contracts
  
Pre-modification
outstanding
recorded
investment
  
Post-modification
outstanding
recorded
investment
  
 
Number of
contracts
  
Pre-modification
outstanding
recorded
investment
  
Post-modification
outstanding
recorded
investment
 
 ($ in thousands)  ($ in thousands) 
Three months ended December 31, 2011:         
Three months ended March 31, 2012:         
Residential – first mortgage loans  5  $2,215  $2,323   4  $1,197  $1,343 
                        
Three months ended December 31, 2010:            
Three months ended March 31, 2011:            
Residential – first mortgage loans  6  $3,178  $3,263   9  $3,930  $4,159 
            
Six months ended March 31, 2012:            
Residential – first mortgage loans  9  $3,411  $3,666 
            
Six months ended March 31, 2011:            
Residential – first mortgage loans  15  $6,696  $7,024 

During the three and six months ended DecemberMarch 31, 2011,2012, there was onewere five and seven residential first mortgage TDRTDRs with a recorded investment of $85,000$2.3 million and $3.2 million, respectively, for which there was a payment default and for which the respective loan was modified as a TDR within the 12 months prior to the default.  During the threesix months ended DecemberMarch 31, 2010,2011, there were two residential first mortgage TDRs with a recorded investment of $844,000$736 thousand for which there was a payment default and for which the respective loan was modified as a TDR within the 12 months prior to the default.  There were no TDRs for the three months ended March 31, 2011 for which there was a payment default and for which the respective loans were modified as TDRs within the 12 months prior to the default.

The credit quality of RJ Bank’s loan portfolio is summarized monthly by management using the standard asset classification system utilized by bank regulators for the residential and consumer loan portfolios and internal risk ratings, which correspond to the same standard asset classifications for the corporate loan portfolio.  These classifications are divided into three groups:  Not Classified (Pass), Special Mention, and Classified or Adverse Rating (Substandard, Doubtful and Loss) and are defined as follows:

Pass – Loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less costs to acquire and sell, of any underlying collateral in a timely manner.

Special Mention – Loans which have potential weaknesses that deserve management’s close attention. These loans are not adversely classified and do not expose RJ Bank to sufficient risk to warrant an adverse classification.

27


Substandard – Loans which are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans with this classification are characterized by the distinct possibility that RJ Bank will sustain some loss if the deficiencies are not corrected.

22


Doubtful – Loans which have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions and values.

Loss – Loans which are considered by management to be uncollectible and of such little value that their continuance on RJ Bank’s books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted.  RJ Bank does not have any loan balances within this classification as in accordance with its accounting policy, loans, or a portion thereof considered to be uncollectible, are charged-off prior to the assignment of this classification.

RJ Bank’s credit quality of its held for investment loan portfolio is as follows:

          Residential mortgage                 Residential mortgage       
 C&I  
CRE
construction
  CRE  
First
mortgage
  
Home
equity
  Consumer  Total  C&I  
CRE
construction
  CRE  
First
mortgage
  
Home
equity
  Consumer  Total 
 (in thousands)  (in thousands) 
As of December 31, 2011:                     
As of March 31, 2012:                     
Pass $4,310,903  $6,240  $658,992  $1,604,002  $28,615  $9,087  $6,617,839  $4,656,534  $50,010  $788,680  $1,580,664  $27,417  $40,553  $7,143,858 
Special mention (1)
  123,454   -   91,518   25,755   170   -   240,897   125,604   -   107,654   29,561   128   -   262,947 
Substandard (1)
  74,942   -   70,289   89,293   222   -   234,746   31,996   -   36,792   88,191   171   -   157,150 
Doubtful (1)
  8,539   -   4,669   -   -   -   13,208   6,230   -   4,444   -   -   -   10,674 
Total $4,517,838  $6,240  $825,468  $1,719,050  $29,007  $9,087  $7,106,690  $4,820,364  $50,010  $937,570  $1,698,416  $27,716  $40,553  $7,574,629 
                                                        
As of September 30, 2011:                                                        
Pass $3,906,358  $29,087  $572,124  $1,607,327  $30,319  $7,438  $6,152,653  $3,906,358  $29,087  $572,124  $1,607,327  $30,319  $7,438  $6,152,653 
Special mention (1)
  88,889   -   76,021   23,684   170   -   188,764   88,889   -   76,021   23,684   170   -   188,764 
Substandard (1)
  93,658   -   90,058   94,758   228   -   278,702   93,658   -   90,058   94,758   228   -   278,702 
Doubtful (1)
  12,034   -   4,686   -   -   -   16,720   12,034   -   4,686   -   -   -   16,720 
Total $4,100,939  $29,087  $742,889  $1,725,769  $30,717  $7,438  $6,636,839  $4,100,939  $29,087  $742,889  $1,725,769  $30,717  $7,438  $6,636,839 

(1)  Loans classified as special mention, substandard or doubtful are all considered to be “criticized” loans.

The credit quality of RJ Bank’s residential first mortgage loan portfolio is additionally assessed utilizing updated loan-to-value (“LTV”) ratios.  RJ Bank further segregates all of its performing residential first mortgage loan portfolio with higher reserve percentages allocated to the higher LTV loans.  Current LTVs are updated using the most recently available information (generally on a quarter lag) and are estimated based on the initial appraisal obtained at the time of origination, adjusted using relevant market indices for housing price changes that have occurred since origination.  The value of the homes could vary from actual market values due to change in the condition of the underlying property, variations in housing price changes within metropolitan statistical areas and other factors.

The table below presents the most recently available update of the performing residential first mortgage loan portfolio summarized by current LTV:

  
Balance(1)
 
  (in thousands) 
LTV range:   
LTV less than 50% $292,339 
LTV greater than 50% but less than 80%  413,981 
LTV greater than 80% but less than 100%  259,248 
LTV greater than 100%, but less than 120%  272,106 
LTV greater than 120% but less than 140%  106,302 
LTV greater than 140%  63,674 
       Total $1,407,650 

(1)   Excludes loans that have full repurchase recourse for any delinquent loans.


28


Changes in the allowance for loan losses of RJ Bank by portfolio segment are as follows:

    Loans held for investment        Loans held for investment    
 
Loans held
for sale
  C&I  
CRE
construction
  CRE  
Residential
mortgage
  Consumer  Total  
Loans held
for sale
  C&I  
CRE
construction
  CRE  
Residential
mortgage
  Consumer  Total 
 (in thousands)  (in thousands) 
Three months ended
December 31, 2011:
                     
Three months ended
March 31, 2012:
                     
Balance at beginning of period: $5  $81,267  $490  $30,752  $33,210  $20  $145,744  $-  $84,086  $105  $30,427  $32,864  $21  $147,503 
Provision for loan losses  (5)  5,968   (385)  (755)  2,599   34   7,456   -   2,235(1)  636(1)  (2,728)(1)  4,985   26   5,154 
Net charge-offs:                                                        
Charge-offs  -   (3,149)  -   -   (3,257)  (38)  (6,444)  -   (2,068)  -   (1,000)  (5,329)  -   (8,397)
Recoveries  -   -   -   430   312   5   747   -   -   -   118   222   5   345 
Net charge-offs  -   (3,149)  -   430   (2,945)  (33)  (5,697)  -   (2,068)  -   (882)  (5,107)  5   (8,052)
Balance at
December 31, 2011
 $-  $84,086  $105  $30,427  $32,864  $21  $147,503 
Foreign exchange translation adjustment  -   47   8   18   -   -   73 
Balance at March 31, 2012 $-  $84,300  $749  $26,835  $32,742  $52  $144,678 
                                                        
Three months ended
December 31, 2010:
                            
                            
Six months ended
March 31, 2012:
                            
Balance at beginning of period: $23  $60,464  $4,473  $47,771  $34,297  $56  $147,084  $5  $81,267  $490  $30,752  $33,210  $20  $145,744 
Provision for loan losses  25   (486)  (1,801)  7,184   6,344   (34)  11,232   (5)  8,203(1)  251(1)  (3,483)(1)  7,584   60   12,610 
Net charge-offs:                                                        
Charge-offs  -   -   -   (6,449)  (6,315)  -   (12,764)  -   (5,217)  -   (1,000)  (8,586)  (38)  (14,841)
Recoveries  -   -   -   100   372   -   472   -   -   -   548   534   10   1,092 
Net charge-offs  -   -   -   (6,349)  (5,943)  -   (12,292)  -   (5,217)  -   (452)  (8,052)  (28)  (13,749)
Balance at
December 31, 2010
 $48  $59,978  $2,672  $48,606  $34,698  $22  $146,024 
Foreign exchange translation adjustment  -   47   8   18   -   -   73 
Balance at March 31, 2012 $-  $84,300  $749  $26,835  $32,742  $52  $144,678 

(1)  There were additional provisions for loan losses recorded during the three months ended March 31, 2012 of $3.3 million, $558 thousand, and $1.3 million for C&I, CRE construction, and CRE loans, respectively, related to a Canadian loan portfolio RJ Bank purchased during the period.


     Loans held for investment    
  
Loans held
for sale
  C&I  
CRE
construction
  CRE  
Residential
mortgage
  Consumer  Total 
 
  (in thousands) 
Three months ended
   March 31, 2011:
                     
Balance at beginning of period: $48  $59,978  $2,672  $48,606  $34,698  $22  $146,024 
Provision for loan losses  (44)  4,800   73   (1,122)  4,894   36   8,637 
Net charge-offs:                            
Charge-offs  -   (82)  -   (3,481)  (5,790)  (40)  (9,393)
Recoveries  -   -   -   179   667   1   847 
Net charge-offs  -   (82)  -   (3,302)  (5,123)  (39)  (8,546)
Balance at March 31, 2011 $4  $64,696  $2,745  $44,182  $34,469  $19  $146,115 
                             
Six months ended
   March 31, 2011:
                            
Balance at beginning of period: $23  $60,464  $4,473  $47,771  $34,297  $56  $147,084 
Provision for loan losses  (19)  4,314   (1,728)  6,062   11,238   2   19,869 
Net charge-offs:                            
Charge-offs  -   (82)  -   (9,930)  (12,105)  (40)  (22,157)
Recoveries  -   -   -   279   1,039   1   1,319 
Net charge-offs  -   (82)  -   (9,651)  (11,066)  (39)  (20,838)
Balance at March 31, 2011 $4  $64,696  $2,745  $44,182  $34,469  $19  $146,115 


 
2329
 



The following table presents, by loan portfolio segment, RJ Bank’s recorded investment and related allowance for loan losses:

    Loans held for investment        Loans held for investment    
 
Loans held
for sale
  C&I  
CRE
construction
  CRE  
Residential
mortgage
  Consumer  Total  
Loans held
for sale
  C&I  
CRE
construction
  CRE  
Residential
mortgage
  Consumer  Total 
 (in thousands)  (in thousands) 
December 31, 2011:                     
March 31, 2012:                     
Allowance for loan losses:                                          
Individually evaluated for impairment $-  $4,436  $-  $1,545  $3,396  $-  $9,377  $-  $3,400  $-  $1  $3,223  $-  $6,624 
Collectively evaluated for impairment  -   79,650   105   28,882   29,468   21   138,126   -   80,900   749   26,834   29,519   52   138,054 
Total allowance for loan losses $-  $84,086  $105  $30,427  $32,864  $21  $147,503  $-  $84,300  $749  $26,835  $32,742  $52  $144,678 
Loan category as a % of total recorded investment  2%  63%  -   11%  24%  -   100%  1%  63%  1%  12%  23%  -   100%
                                                        
Recorded
investment:(1)
                                                        
Individually evaluated for impairment $-  $8,539  $-  $15,826  $25,357  $-  $49,722  $-  $6,230  $-  $9,441  $25,371  $-  $41,042 
Collectively evaluated for impairment  95,486   4,509,299   6,240   809,642   1,722,700   9,087   7,152,454   90,731   4,814,134   50,010   928,129   1,700,761   40,553   7,624,318 
Total recorded investment $95,486  $4,517,838  $6,240  $825,468  $1,748,057  $9,087  $7,202,176  $90,731  $4,820,364  $50,010  $937,570  $1,726,132  $40,553  $7,665,360 
      
      
      
September 30, 2011:                                                        
Allowance for loan losses:                                                        
Individually evaluated for impairment $-  $8,478  $-  $1,014  $2,642  $-  $12,134  $-  $8,478  $-  $1,014  $2,642  $-  $12,134 
Collectively evaluated for impairment  5   72,789   490   29,738   30,568   20   133,610   5   72,789   490   29,738   30,568   20   133,610 
Total allowance for loan losses $5  $81,267  $490  $30,752  $33,210  $20  $145,744  $5  $81,267  $490  $30,752  $33,210  $20  $145,744 
Loan category as a % of total recorded investment  2%  61%  -   11%  26%  -   100%  2%  61%  -   11%  26%  -   100%
                                                        
Recorded
investment:(1)
                                                        
Individually evaluated for impairment $-  $25,685  $-  $15,842  $23,453  $-  $64,980  $-  $25,685  $-  $15,842  $23,453  $-  $64,980 
Collectively evaluated for impairment  92,748   4,075,254   29,087   727,047   1,733,033   7,438   6,664,607   92,748   4,075,254   29,087   727,047   1,733,033   7,438   6,664,607 
Total recorded investment $92,748  $4,100,939  $29,087  $742,889  $1,756,486  $7,438  $6,729,587  $92,748  $4,100,939  $29,087  $742,889  $1,756,486  $7,438  $6,729,587 

(1)  Excludes any net unearned income and deferred expenses.

RJ Bank had no recorded investment in loans acquired with deteriorated credit quality as of either DecemberMarch 31, 20112012 or September 30, 2011.

The reserve for unfunded lending commitments, included in trade and other payables on our Condensed Consolidated Statements of Financial Condition, was $9.7$10.9 million and $10.4 million at DecemberMarch 31, 20112012 and September 30, 2011, respectively.


 
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NOTE 78 – VARIABLE INTEREST ENTITIES

A VIE requires consolidation by the entity’s primary beneficiary.  We evaluate all of the entities in which we are involved to determine if the entity is a VIE and if so, whether we hold a variable interest and are the primary beneficiary.

We hold variable interests in the following VIE’s: Raymond James Employee Investment Funds I and II (the “EIF Funds”), a trust fund established for employee retention purposes (“Restricted Stock Trust Fund”), certain low-income housing tax credit (“LIHTC”) funds (“LIHTC Funds”), various other partnerships and limited liability corporationscompanies (“LLCs”)  involving real estate (“Other Real Estate Limited Partnerships and LLCs”) and certain funds formed for the purpose of making and managing investments in securities of other entities (“Managed Funds”).

Refer to Note 1, pages 94 – 97 in our 2011 Form 10-K for a description of our principal involvement with VIEs and the accounting policies regarding the determinations of whether we are deemed to be the primary beneficiary of any VIEs which we hold a variable interest.  As of DecemberMarch 31, 2011,2012, there have been no significant changes in either the nature of our involvement with, or the accounting policies associated with the analysis of, VIEs as described in the 2011 Form 10-K referenced above.

Raymond James Tax Credit Funds, Inc., a wholly owned subsidiary of RJF (“RJTCF”), is the managing member or general partner in LIHTC Funds having one or more investor members or limited partners.  These LIHTC Funds are organized as limited partnerships or LLCs for the purpose of investing in a number of project partnerships, which are limited partnerships or LLCs that in turn purchase and develop low-income housing properties qualifying for tax credits.

VIEs where we are the primary beneficiary

Of the VIEs in which we hold an interest, we have determined that the EIF Funds, the Restricted Stock Trust Fund and certain LIHTC Funds require consolidation in our financial statements as we are deemed the primary beneficiary of those VIEs.  The aggregate assets and liabilities of the entities we consolidate are provided in the table below.

 
Aggregate
assets (1)
  
Aggregate
liabilities (1)
  
Aggregate
assets (1)
  
Aggregate
liabilities (1)
 
 (in thousands)  (in thousands) 
December 31, 2011:      
March 31, 2012:      
LIHTC Funds $253,006  $110,818  $241,381  $105,659 
Guaranteed LIHTC fund(2)
  87,022   985 
Guaranteed LIHTC Fund(2)
  85,322   1,094 
Restricted Stock Trust Fund  15,214   10,826   15,219   9,852 
EIF Funds  13,664   -   13,904   - 
Total $368,906  $122,629  $355,826  $116,605 
                
September 30, 2011:                
LIHTC Funds $257,631  $121,908  $257,631  $121,908 
Guaranteed LIHTC Fund(2)
  87,811   10,424   87,811   10,424 
Restricted Stock Trust Fund  8,099   4,630   8,099   4,630 
EIF Funds  16,223   -   16,223   - 
Total $369,764  $136,962  $369,764  $136,962 

(1)  Aggregate assets and aggregate liabilities differ from the consolidated carrying value of assets and liabilities due to the elimination of intercompany assets and liabilities held by the consolidated VIE.

(2)  In connection with one of the multi-investor tax credit funds in which RJTCF is the managing member, RJTCF has provided the investor members with a guaranteed return on their investment in the fund (the “Guaranteed LIHTC Fund”).


 
2531
 


The following table presents information about the carrying value of the assets, liabilities and equity of the VIEs which we consolidate and are included within our Condensed Consolidated Statements of Financial Condition. The noncontrolling interests presented in this table represent the portion of these net assets which are not ours.
 
December 31,
2011
  
September 30,
2011
  
March 31,
2012
  
September 30,
2011
 
 (in thousands)  (in thousands) 
Assets:            
Assets segregated pursuant to regulations and other segregated assets $16,550  $18,317  $13,801  $18,317 
Receivables, other  5,410   11,288   6,514   11,288 
Investments in real estate partnerships held by consolidated variable interest entities  316,498   320,384   306,040   320,384 
Trust fund investment in RJF common stock (1)
  15,214   8,099   15,219   8,099 
Prepaid expenses and other assets  14,750   17,197   14,851   17,197 
Total assets $368,422  $375,285  $356,425  $375,285 
Liabilities and equity:                
Loans payable of consolidated variable interest entities (2)
 $89,657  $99,982  $90,950  $99,982 
Trade and other payables  4,589   5,353   2,739   5,353 
Intercompany payables  8,425   6,904   8,931   6,904 
Total liabilities  102,671   112,239   102,620   112,239 
RJF Equity  6,063   5,537   6,028   5,537 
Noncontrolling interests  259,688   257,509   247,777   257,509 
Total equity  265,751   263,046   253,805   263,046 
Total liabilities and equity $368,422  $375,285  $356,425  $375,285 


(1)  Included in treasury stock in our Condensed Consolidated Statements of Financial Condition.

(2)  Comprised of several non-recourse loans.  We are not contingently liable under any of these loans.

The following table presents information about the net loss of the VIEs which we consolidate and are included within our Condensed Consolidated Statements of Income and Comprehensive Income. The noncontrolling interests presented in this table represent the portion of the net loss from these VIEs which are not ours.

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  2010  2012  2011  2012  2011 
 (in thousands)  (in thousands) 
Revenues:                  
Interest $1  $-  $1  $1  $2  $1 
Other  333   (69)  220   2,656   553   2,591 
Total revenues  334   (69)  221   2,657   555   2,592 
Interest expense  1,305   1,555   1,356   1,578   2,661   3,133 
Net (expense) revenues  (971)  (1,624)  (1,135)  1,079   (2,106)  (541)
                        
Non-interest expenses  4,931   3,671   11,257   5,990   16,188   9,661 
Net loss including noncontrolling interests  (5,902)  (5,295)  (12,392)  (4,911)  (18,294)  (10,202)
Net loss attributable to noncontrolling interests  (6,428)  (5,003)  (12,357)  (4,629)  (18,785)  (9,628)
Net income (loss) attributable to RJF $526  $(292) $(35) $(282) $491  $(574)

Low-income housing tax credit funds

RJTCF is the managing member or general partner in approximately 7677 separate low-income housing tax credit funds having one or more investor members or limited partners.   RJTCF has concluded that it is the primary beneficiary of 11 of the 7576 non-guaranteed LIHTC Funds it has sponsored and, accordingly, consolidates these funds.  In addition, RJTCF consolidates the one Guaranteed LIHTC Fund it sponsors.  See Note 1214 for further discussion of the guarantee obligation as well as other RJTCF commitments.


 
2632
 


VIEs where we hold a variable interest but we are not the primary beneficiary

The aggregate assets, liabilities, and our exposure to loss from those VIEs in which we hold a variable interest, but concluded we are not the primary beneficiary, are provided in the table below.

 December 31, 2011  September 30, 2011  March 31, 2012  September 30, 2011 
 
Aggregate
assets
  
Aggregate
liabilities
  
Our risk
of loss
  
Aggregate
assets
  
Aggregate
liabilities
  
Our risk
of loss
  
Aggregate
assets
  
Aggregate
liabilities
  
Our risk
of loss
  
Aggregate
assets
  
Aggregate
liabilities
  
Our risk
of loss
 
 (in thousands)  (in thousands) 
                                    
LIHTC Funds $1,732,015  $633,206  $54,762  $1,582,764  $533,311  $37,733  $1,871,920  $716,776  $36,115  $1,582,764  $533,311  $37,733 
Other Real Estate Limited Partnerships and LLCs  36,429   35,470   5,320   39,344   35,467   8,068   32,097   35,688   1,454   39,344   35,467   8,068 
Total $1,768,444  $668,676  $60,082  $1,622,108  $568,778  $45,801  $1,904,017  $752,464  $37,569  $1,622,108  $568,778  $45,801 

VIEs where we hold a variable interest but we are not required to consolidate

The aggregate assets, liabilities, and our exposure to loss from Managed Funds in which we hold a variable interest are provided in the table below:

  December 31, 2011 September 30, 2011 
  
Aggregate
assets
  
Aggregate
liabilities
  
Our risk
of loss
 
Aggregate
assets
  
Aggregate
liabilities
  
Our risk
of loss
 
  (in thousands) 
Managed Funds $12,532  $-  $782  $12,813  $-  $834 
  March 31, 2012 September 30, 2011 
  
Aggregate
assets
  
Aggregate
liabilities
  
Our risk
of loss
 
Aggregate
assets
  
Aggregate
liabilities
  
Our risk
of loss
 
  (in thousands) 
Managed Funds $13,322  $-  $830  $12,813  $-  $834 


NOTE 89 – BANK DEPOSITS

Bank deposits include Negotiable Order of Withdrawal (“NOW”) accounts, demand deposits, savings and money market accounts and certificates of deposit. The following table presents a summary of bank deposits including the weighted-average rate:

 December 31, 2011  September 30, 2011  March 31, 2012  September 30, 2011 
 Balance  
Weighted-
average
rate (1)
  Balance  
Weighted-
average
rate (1)
  Balance  
Weighted-
average
rate (1)
  Balance  
Weighted-
average
rate (1)
 
 ($ in thousands)  ($ in thousands) 
Bank deposits:                        
NOW accounts $4,986   0.01% $4,183   0.01% $5,060   0.01% $4,183   0.01%
Demand deposits (non-interest-bearing)  25,990   -   21,663   -   19,237   -   21,663   - 
Savings and money market accounts  7,397,364   0.04%  7,468,136   0.08%  7,581,697   0.04%  7,468,136   0.08%
Certificates of deposit  276,556   2.27%  245,340   2.37%  307,852   2.19%  245,340   2.37%
Total bank deposits(2)
 $7,704,896   0.12% $7,739,322   0.15% $7,913,846   0.12% $7,739,322   0.15%

(1)  Weighted-average rate calculation is based on the actual deposit balances at DecemberMarch 31, 20112012 and September 30, 2011, respectively.

(2)  Bank deposits exclude affiliate deposits of approximately $3 million and $250 million at DecemberMarch 31, 20112012 and September 30, 2011, respectively.

RJ Bank’s savings and money market accounts in the table above consist primarily of deposits that are cash balances swept from the investment accounts maintained at our wholly owned broker-dealer subsidiary Raymond James & Associates (“RJ&A”). These balances are held in Federal Deposit Insurance Corporation (“FDIC”) insured bank accounts through the Raymond James Bank Deposit Program (“RJBDP”) administered by RJ&A.

 
2733
 



Scheduled maturities of certificates of deposit are as follows:

 December 31, 2011  September 30, 2011  March 31, 2012  September 30, 2011 
 
Denominations
greater than or
equal to $100,000
  
Denominations
less than $100,000
  
Denominations
greater than or
equal to $100,000
  
Denominations
less than $100,000
  
Denominations
greater than or
equal to $100,000
  
Denominations
less than $100,000
  
Denominations
greater than or
equal to $100,000
  
Denominations
less than $100,000
 
 (in thousands)  (in thousands) 
                        
Three months or less $7,555  $6,878  $7,403  $7,977  $10,024  $8,316  $7,403  $7,977 
Over three through six months  7,745   7,528   6,408   6,153   3,899   10,362   6,408   6,153 
Over six through twelve months  9,705   13,946   6,711   15,103   10,295   11,209   6,711   15,103 
Over one through two years  18,336   22,485   19,567   19,862   21,045   24,323   19,567   19,862 
Over two through three years  17,490   22,912   10,045   17,286   23,637   28,929   10,045   17,286 
Over three through four years  24,878   35,903   29,136   36,271   30,374   34,309   29,136   36,271 
Over four through five years  46,308   34,887   34,349   29,069   51,576   39,554   34,349   29,069 
Total $132,017  $144,539  $113,619  $131,721  $150,850  $157,002  $113,619  $131,721 

Interest expense on deposits is summarized as follows:

 
Three months ended
December 31,
  
Three months ended
March 31,
  
Six months ended
March 31,
 
 2011  2010  2012  2011  2012  2011 
 (in thousands)  (in thousands) 
                  
Certificates of deposit $1,488  $1,587  $1,633  $1,541  $3,121  $3,129 
Money market, savings and NOW accounts(1)
  755   1,830   704   1,799   1,459   3,628 
Total interest expense on deposits $2,243  $3,417  $2,337  $3,340  $4,580  $6,757 

(1)  ExcludesInterest expense on affiliate deposits for the three month period ended March 31, 2012 was insignificant.  For the six month period ended March 31, 2012, excludes interest expense on affiliate deposits of $76 thousand for the three month period ended December 31, 2011.$75 thousand.


NOTE 910 – OTHER BORROWINGS
The following table details the components of other borrowings:

  
March 31,
2012
  
September 30,
2011
 
  (in thousands) 
Other borrowings:      
Borrowings on secured lines of credit (1)
 $99,000  $- 
Borrowings on unsecured lines of credit (2)
  250,600   - 
Total other borrowings $349,600  $- 
         

(1)  Any borrowings on secured lines of credit are day-to-day and are generally utilized to finance certain fixed income securities.

(2)  Any borrowings on unsecured lines of credit are day-to-day and are generally utilized for cash management purposes.

As of DecemberMarch 31, 20112012 and September 30, 2011, we had no borrowings outstanding on either secured or unsecured lines of credit, and RJ Bank had no advances outstanding from the Federal Home Loan Bank.

As of DecemberMarch 31, 2011,2012, there were other collateralized financings outstanding in the amount of $184.1$137 million.  As of September 30, 2011, there were other collateralized financings outstanding in the amount of $188.8 million. These other collateralized financings are included in securities sold under agreements to repurchase on the Condensed Consolidated Statements of Financial Condition. These financings are collateralized by non-customer, RJ&A-owned securities.


34
NOTE 11 – CORPORATE DEBT

The following summarizes our corporate debt:

    
  
March 31,
2012
  
September 30,
2011
 
  (in thousands) 
       
Mortgage notes payable (1)
 $51,056  $52,754 
4.25% senior notes, due 2016, net of unamortized discount of $405 thousand and $455 thousand at March 31, 2012 and September 30, 2011, respectively (2)
  249,595   249,545 
8.60% senior notes, due 2019, net of unamortized discount of $37 thousand and $40 thousand at March 31, 2012 and September 30, 2011 , respectively  (3)
  299,963   299,960 
5.625% senior notes, due 2024, net of unamortized discount of $994 thousand at March 31, 2012 (4)
  249,006   - 
6.90% senior notes, due 2042(5)
  350,000   - 
Other financings (6)
  6,044   9,709 
Total corporate debt $1,205,664  $611,968 

(1)  Mortgage notes payable pertain to mortgage loans on our headquarters office complex. These mortgage loans are secured by land, buildings, and improvements with a net book value of $57.9 million at March 31, 2012.  These mortgage loans bear interest at 5.7% with repayment terms of monthly interest and principal debt service and a January 2023 maturity.

(2)  In April 2011, we sold in a registered underwritten public offering, $250 million in aggregate principal amount of 4.25% senior notes due April 2016.  Interest on these senior notes is payable semi-annually.  We may redeem some or all of these senior notes at any time prior to their maturity at a redemption price equal to the greater of (i) 100% of the principal amount of the notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the redemption date at a discount rate equal to a designated U.S. Treasury rate, plus 30 basis points, plus accrued and unpaid interest thereon to the redemption date.

(3)  In August 2009, we sold in a registered underwritten public offering, $300 million in aggregate principal amount of 8.60% senior notes due August 2019. Interest on these senior notes is payable semi-annually. We may redeem some or all of these senior notes at any time prior to their maturity, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the redemption date at a discount rate equal to a designated U.S. Treasury rate, plus 50 basis points, plus accrued and unpaid interest thereon to the redemption date.

(4)  In March 2012, we sold in a registered underwritten public offering, $250 million in aggregate principal amount of 5.625% senior notes due April 2024. Interest on these senior notes is payable semi-annually. We may redeem some or all of these senior notes at any time prior to their maturity, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the redemption date at a discount rate equal to a designated U.S. Treasury rate, plus 50 basis points, plus accrued and unpaid interest thereon to the redemption date.

(5)  In March 2012, we sold in a registered underwritten public offering, $350 million in aggregate principal amount of 6.90% senior notes due March 2042. Interest on these senior notes is payable quarterly in arrears on March 15, June 15, September 15 and December 15, commencing on June 15, 2012. On or after March 15, 2017, we may redeem some or all of the senior notes at any time at the redemption price equal to 100% of the principal amount of the notes being redeemed plus accrued interest thereon to the redemption date.

(6)  This financing balance pertains to term loan financing of Raymond James European Securities, S.A.S. (“RJES”).  The term loan bears interest at a variable rate indexed to the Euro Interbank Offered Rate and is secured by certain assets of RJES.  The repayment terms include annual principal repayments and a September 2013 maturity.

Our corporate debt as of March 31, 2012, based upon its contractual terms, matures as follows:

  March 31, 2012 
  (in thousands) 
    
During the six months ending September 30, 2012 $4,720 
Fiscal 2013  6,718 
Fiscal 2014  3,860 
Fiscal 2015  4,086 
Fiscal 2016  253,920 
Fiscal 2017 and thereafter  932,360 
Total $1,205,664 


35


NOTE 1012 – DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives arising from our fixed income business operations

We enter into interest rate swaps and futures contracts either as part of our fixed income business to facilitate customer transactions, to hedge a portion of our trading inventory, or for our own account.   The majority of our derivative positions are executed in the over-the-counter market with financial institutions. These positions are recorded at fair value with the related gain or loss and interest recorded in earnings within the Condensed Consolidated Statements of Income and Comprehensive Income.  The revenue related to the interest rate contracts includes realized and unrealized gains and losses on derivative instruments.  Cash flows related to these fixed income interest rate contracts are included as operating activities (the “trading instruments, net” line) on the Condensed Consolidated Statements of Cash Flows for the period.

None of the derivatives described above are designated as fair value or cash flow hedges.

Derivatives arising from RJ Bank’s business operations
 
On February 29, 2012, a Canadian subsidiary of RJ Bank commenced operations as a result of a purchase of substantially all of a foreign bank’s Canadian corporate loan portfolio. U.S. subsidiaries of RJ Bank utilize forward foreign exchange contracts to hedge RJ Bank’s foreign currency exposure due to its non-U.S. dollar net investment.  RJ Bank has entered into three-month forward contracts which are recorded at fair value on the Condensed Consolidated Statements of Financial Condition.  The effective portion of the related gain or loss is recorded, net of tax, in shareholders’ equity as part of the cumulative translation adjustment component of AOCI with such balance impacting earnings in the event the net investment is sold or substantially liquidated.  Gains and losses on the undesignated portions of these derivative instruments as well as amounts representing hedge ineffectiveness are recorded in earnings in the Condensed Consolidated Statements of Income and Comprehensive Income.  Hedge effectiveness is assessed using a method that is based on changes in forward rates at each reporting period.  The measurement of hedge ineffectiveness is based on the beginning balance of the foreign net investment at the inception of the hedging relationship and performed using the hypothetical derivative method.  However, as the terms of the hedging instrument and hypothetical derivative match at inception, there is no expected ineffectiveness to be recorded in earnings.  Cash flows related to these derivative contracts are classified within operating activities in the Condensed Consolidated Statements of Cash Flows.
28
 

Description of the collateral we hold related to our derivative contracts


We elect to net-by-counterparty the fair value of interest rate swapderivative contracts entered into by our fixed income trading group.group and RJ Bank’s U.S. subsidiaries.  Certain of these contracts contain a legally enforceable master netting arrangement that allows for netting of all individual swap receivables and payablesderivative transactions with each counterparty and, therefore, the fair value of those swapderivative contracts are netted by counterparty in the Condensed Consolidated Statements of Financial Condition.  The credit support annex allowsrelated to the interest rate swaps allow parties to the master agreement to mitigate their credit risk by requiring the party which is out of the money to post collateral.  We accept collateral in the form of cash, U.S. Treasury securities, or other marketable securities.  As we elect to net-by-counterparty the fair value of interest rate swap contracts, we also net-by-counterparty any cash collateral exchanged as part of the swap agreement.

This cash collateral is recorded net-by-counterparty at the related fair value.  The cash collateral included in the net fair value of all open derivative asset positions aggregates to a net liability of $30.2 million and $19 million at Decembereach of March 31, 20112012 and September 30, 2011, respectively.2011.  The cash collateral included in the net fair value of all open derivative liability positions aggregates to a net asset of $46.1$36.1 million and $37 million at DecemberMarch 31, 20112012 and September 30, 2011, respectively.  Our maximum loss exposure under these interest rate swap contracts at DecemberMarch 31, 20112012 is $39.5$36.5 million.

NoneRJ Bank provides to its U.S. subsidiaries a guarantee of payment in the event of the subsidiaries’ default for exposure under the forward foreign exchange contracts.  Due to this RJ Bank guarantee and the short-term nature of these derivatives, RJ Bank’s U.S. subsidiaries are not required to post collateral and do not receive collateral on derivative contracts with the respective counterparties.  Our maximum loss exposure under these forward foreign exchange contracts at March 31, 2012 is $430 thousand.



36

Derivative balances included in our derivatives are designated as fair value or cash flow hedges.financial statements

See the table below for the notional and fair value amounts of both the asset and liability derivatives.

Asset derivativesAsset derivatives 
December 31, 2011 September 30, 2011March 31, 2012 September 30, 2011 
Balance sheet
location
Notional
amount
Fair
  value(1)
 
Balance sheet
location
Notional
amount
Fair
  value(1)
Balance sheet
location
 
Notional
amount
  
Fair
 value(1)
 
Balance sheet
location
 
Notional
amount
  
Fair
 value(1)
 
(in thousands)(in thousands) 
Derivatives designated as hedging instruments:            
Forward foreign exchange contractsOther assets $218,546  $69 Other assets $-  $- 
                  
Derivatives not designated as hedging instruments:                         
Interest rate contractsTrading instruments$ 2,197,923$ 129,394 Trading instruments$ 2,248,150$ 126,867Trading instruments $2,208,582  $117,362 Trading instruments $2,248,150  $126,867 
Forward foreign exchange contractsOther assets $42,105  $13 Other assets $-  $- 
(1)  The fair value in this table is presented on a gross basis before netting of cash collateral and by counterparty according to our legally enforceable master netting arrangements. The fair value in the Condensed Consolidated Statements of Financial Condition is presented net.

 Liability derivatives 
 March 31, 2012 September 30, 2011 
 
Balance sheet
location
 
Notional
amount
  
Fair
 value(1)
 
Balance sheet
location
 
Notional
amount
  
Fair
 value(1)
 
 (in thousands) 
Derivatives designated as hedging instruments:              
Forward foreign exchange contractsTrade and other payables $137,343  $421 Trade and other payables $-  $- 
                   
Derivatives not designated as hedging instruments:                  
Interest rate contractsTrading instruments sold $2,127,614  $101,096 Trading instruments sold $1,722,820  $112,457 
Forward foreign exchange contractsTrade and other payables $3,008  $9 Trade and other payables $-  $- 

(1)  The fair value in this table is presented on a gross basis before netting of cash collateral and by counterparty according to our legally enforceable master netting arrangements. The fair value in the Condensed Consolidated Statements of Financial Condition is presented net.

 Liability derivatives
 December 31, 2011 September 30, 2011
 
Balance sheet
location
Notional
amount
Fair
  value(1)
 
Balance sheet
location
Notional
amount
Fair
  value(1)
 (in thousands)
Derivatives not designated as hedging instruments:       
Interest rate contractsTrading instruments sold$ 2,190,344$ 114,982 Trading instruments sold$ 1,722,820$ 112,457
Gains recognized on forward foreign exchange derivatives in AOCI totaled $248 thousand, net of income taxes, for the three and six month periods ended March 31, 2012.  There was no hedge ineffectiveness and no components of derivative gains or losses were excluded from the assessment of hedge effectiveness for the three and six month periods ended March 31, 2012.  We did not enter into any forward foreign exchange derivative contracts during the year ended September 30, 2011.

(1)  The fair value in this table is presented on a gross basis before netting of cash collateral and by counterparty according to our legally enforceable master netting arrangements. The fair value in the Condensed Consolidated Statements of Financial Condition is presented net.


29


See the table below for the impact of the derivatives not designated as hedging instruments on the Condensed Consolidated Statements of Income and Comprehensive Income:

 
Amount of gain (loss) on derivatives
recognized in income
  
Amount of gain (loss) on derivatives
recognized in income
 
 Three months ended December 31,  
Three months ended
March 31,
  
Six months ended
March 31,
 
Location of gain (loss)
recognized on derivatives in the
Condensed Consolidated Statements of Income
and Comprehensive Income
2011 2010
Location of gain (loss)
recognized on derivatives in the
Condensed Consolidated Statements of
Income and Comprehensive Income
 2012  2011  2012  2011 
 (in thousands)  (in thousands) 
Derivatives not designated as hedging instruments:           
Interest rate contractsNet trading (loss) profit$     (177) $     2,514Net trading profits $1,372  $1,993  $1,195  $4,507 
Forward foreign exchange contractsOther revenues $87  $-  $87  $- 
37

Risks associated with, and our risk mitigation related to, our derivative contracts

We are exposed to credit losses in the event of nonperformance by the counterparties to our interest rate and forward foreign exchange derivative agreements.  We perform a credit evaluation of counterparties prior to entering into derivative transactions and we monitor their credit standings.  Currently, we anticipate that all of the counterparties will be able to fully satisfy their obligations under those agreements.  We may require collateral in the form of cash deposits from counterparties to support certain of these obligations as established by the credit threshold specified by the agreement and/or as a result of monitoring the credit standing of the counterparties.  We are also exposed to interest rate risk related to our interest rate derivative agreements.  For the derivatives included in trading instruments and trading instruments sold onWe are also exposed to foreign exchange risk related to our Condensed Consolidated Statements of Financial Condition, weforward foreign exchange derivative agreements.  We monitor exposure in our derivative agreements daily based on established limits with respect to a number of factors, including interest rate, foreign exchange spot and forward rates, spread, ratio, basis and volatility risks.  These exposures are monitored both on a total portfolio basis and separately for each agreement for selected maturity periods.


NOTE 1113 – INCOME TAXES

For further discussion of income tax matters, see Note 1, page 94, and Note 16,17, pages 126 – 128, in our 2011 Form 10-K.

As of DecemberMarch 31, 20112012 and September 30, 2011, our liability for unrecognized tax benefits was $5$6.3 million and $4.7 million, respectively.  The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $4$3.2 million and $3.8 million at DecemberMarch 31, 20112012 and September 30, 2011, respectively.  We anticipate that the unrecognized tax benefits will not change significantly over the next twelve months.

We recognize the accrual of interest and penalties related to income tax matters in interest expense and other expense, respectively. As of DecemberMarch 31, 20112012 and September 30, 2011, accrued interest and penalties included in the unrecognized tax benefits liability were approximately $1.4$1.7 million and $1.3 million, respectively.

Our effective tax rate of approximately 39.3%38.2% for the three month period ended DecemberMarch 31, 20112012 is greater than the approximately 37.4%35.9% effective tax rate applicable to the prior year quarter.  The primary factors for this increase in our effective tax rate for the quarter ended DecemberMarch 31, 20112012 were an increase in the average state tax rate component of this blended rate, and the effect of relatively consistent non-deductible expenses coupled with lower pre-tax earnings.  For the fiscal year-to-date period ended March 31, 2012, our effective rate of 38.75% approximates the prior year-to-date effective rate.

We file U. S. federal income tax returns as well as returns with various state, local and foreign jurisdictions. With few exceptions, we are generally no longer subject to U.S. federal, state and local, or foreign income tax examination by tax authorities for years prior to fiscal year 2011 for federal tax returns, fiscal year 2007 for state and local tax returns and fiscal year 2006 for foreign tax returns.  Our fiscal year 2011 and 2012 transactions are currently being examined under the Internal Revenue Service (“IRS”) Compliance Assurance Program.  This program accelerates the examination of key issues in an attempt to resolve them before the tax return is filed. Certain state and local returns are also currently under various stages of audit. The fiscal year 2011 IRS audit and state audits in process are expected to be completed in fiscal year 2012.


 
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NOTE 1214 – COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments and contingencies

On June 30, 2011, RJ Bank announced that it entered intoSee Note 2 for a definitive agreementdiscussion of our outstanding commitments as of March 31, 2012 related to acquire substantially allthe acquisition of a foreign bank’s Canadian corporate loan portfolio.  As a result of thisMorgan Keegan.  The acquisition transaction RJ Bank organized a finance entity in Canada which will commence operations at the closing of this loan purchase.  This entity will allow RJ Bank to expand its corporate and commercial real estate lending activity.  This loan portfolio currently consists of approximately $505 million in loan commitments, of which approximately $440 million is outstanding.  The loan portfolio is highly diverse with loans across various industry sectors throughout Canada.  RJ Bank expects this transaction to close during February,closed on April 2, 2012.

As of DecemberMarch 31, 2011,2012, RJ Bank had not settled purchases of $61.1$32.8 million in syndicated loans.  These loan purchases are expected to be settled within 90 days.

RJ Bank has committed $2 million to a small business investment company which provides capital and long-term loans to small businesses.  As of DecemberMarch 31, 2011,2012, we have invested $1.3 million of the committed amount and the distributions received have been insignificant.

See Note 1618 for additional information regarding RJ Bank’s commitments to extend credit and other credit-related off-balance sheet financial instruments such as standby letters of credit and loan purchases.

In the normal course of business we enter into underwriting commitments. As of DecemberMarch 31, 2011,2012, RJ&A had no open transactions involving such commitments.  Transactions involving such commitments of RJ Ltd. that were recorded and open at DecemberMarch 31, 20112012 were approximately $2.4$7 million in Canadian dollars (“CDN”).

We utilize client marginable securities to satisfy deposits with clearing organizations. At DecemberMarch 31, 2011,2012, we had client margin securities valued at $95.5$109.5 million pledged with a clearing organization to meet our requirement of $78$97.1 million.

As part of our recruiting efforts, we offer loans to prospective financial advisors and certain key revenue producers primarily for recruiting and/or retention purposes. These commitments are contingent upon certain events occurring, including, but not limited to, the individual joining us and, in most circumstances, require them to meet certain production requirements.  As of DecemberMarch 31, 20112012 we had made commitments, to either prospects that have accepted our offer, or recently recruited producers, of approximately $20$26.8 million that have not yet been funded.

We have committed a total of $66.3$64.3 million, in amounts ranging from $200,000$200 thousand to $5 million, to 4846 different independent venture capital or private equity partnerships.  In addition, we have a commitment totaling $38.2 million to two additional private equity limited partnerships.  As of DecemberMarch 31, 2011,2012, we have invested $72.4$74.6 million of the committed amounts and have received $54.4$50.7 million in distributions.  We also control the general partner in onetwo internally sponsored private equity limited partnershippartnerships to which we have committed and$11.6 million.  As of March 31, 2012, we have invested $6.5$9.2 million, and have received $5.2 million in distributions as of December 31, 2011.distributions.

RJF has committed to lend to RJTCF, or guarantee obligations in connection with RJTCF’s low-income housing development/rehabilitation and syndication activities, aggregating up to $150 million upon request, subject to certain limitations as well as annual review and renewal. RJTCF borrows in order to invest in partnerships which purchase and develop properties qualifying for tax credits (“project partnerships”). These investments in project partnerships are then sold to various tax credit funds, which have third-party investors and for which RJTCF serves as the managing member or general partner. RJTCF typically sells these investments within 90 days of their acquisition, and the proceeds from the sales are used to repay RJTCF’s borrowings.

RJTCF may make short-term loans or advances to project partnerships on behalf of the tax credit funds in which it serves as managing member or general partner. At DecemberMarch 31, 2011,2012, cash funded to invest in either loans or investments in project partnerships was $64.4$42.8 million.


31


At DecemberMarch 31, 2011,2012, the approximate market values of collateral received that we can repledge were:

 Sources of collateral  Sources of collateral 
 (in thousands)  (in thousands) 
      
Securities purchased under agreements to resell and other collateralized financings $400,145  $338,664 
Securities received in securities borrowed vs. cash transactions  236,026   193,108 
Collateral received for margin loans  1,229,173   1,272,197 
Other  6,513 
Securities received as collateral related to derivative contracts  7,877 
Total $1,871,857  $1,811,846 


39

Certain collateral was repledged. At DecemberMarch 31, 2011,2012, the approximate market values of this portion of collateral and financial instruments that we own and pledged were:

 
Uses of collateral
and trading securities
  
Uses of collateral
and trading securities
 
 (in thousands)  (in thousands) 
      
Securities sold under agreements to repurchase $197,679  $144,461 
Securities delivered in securities loaned vs. cash transactions  660,946   527,744 
Collateral used for secured loans  113,313 
Collateral used for cash loans  16,603   16,775 
Collateral used for deposits at clearing organizations  127,329   127,234 
Total $1,002,557  $929,527 

As a result of the extensive regulation of the financial services industry, our broker-dealer and investment advisory subsidiaries are subject to regular reviews and inspections by regulatory authorities and self-regulatory organizations, which can result in the imposition of sanctions for regulatory violations, ranging from non-monetary censure to fines and, in serious cases, temporary or permanent suspension from conducting business. In addition, from time to time regulatory agencies and self-regulatory organizations institute investigations into industry practices, which can also result in the imposition of such sanctions.

See Note 19 for a discussion of a significant commitment made subsequent to December 31, 2011.

Guarantees

RJ Bank provides to its affiliate, Raymond James Capital Services, Inc. (“RJ Cap Services”), on behalf of certain corporate borrowers, a guarantee of payment in the event of the borrower’s default for exposure under interest rate swaps entered into with RJ Cap Services. At DecemberMarch 31, 2011,2012, the current exposure under these guarantees was $14.9$15.5 million, which were underwritten as part of the larger corporate credit relationship.relationships.  The outstanding interest rate swaps at DecemberMarch 31, 20112012 have maturities ranging from July 2012March 2013 through October 2016.  RJ Bank records an estimated reserve for its credit risk associated with the guarantee of these client swaps, which was insignificant as of DecemberMarch 31, 2011.2012.  The estimated total potential exposure under these guarantees is $17.9$17.2 million at DecemberMarch 31, 2011.2012.

RJ Bank guarantees the forward foreign exchange contract obligations of its U.S. subsidiaries.  See Note 12 for additional information regarding these derivatives.

RJF guarantees interest rate swap obligations of RJ Cap Services. See Note 1012 for additional information regarding our interest rate swaps.

We have from time to time authorized performance guarantees for the completion of trades with counterparties in Argentina. At DecemberMarch 31, 2011,2012, there were no outstanding performance guarantees in Argentina.

In March 2008, RJF guaranteed an $8 million letter of credit issued for settlement purposes that was requested by the Capital Markets Board (“CMB”) for our Turkish joint venture.  While our Turkish joint venture ceased operations in December 2008, the CMB has not released this letter of credit.  The issuing bank has instituted an action seeking payment of its fees on the underlying letter of credit and to confirm that the guarantee remains in effect.

RJF has guaranteed the Borrowers performance under the Regions Credit Agreement.  See further discussion in Note 2.

RJF guarantees the existing mortgage debt of RJ&A of approximately $51.9$51.1 million.

RJTCF issues certain guarantees to various third parties related to project partnerships whose interests have been sold to one or more of the funds in which RJTCF is the managing member or general partner. In some instances, RJTCF is not the primary guarantor of these obligations which aggregate to a cumulative maximum obligation of approximately $1.3$1.8 million as of DecemberMarch 31, 2011.2012.

 
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RJF has guaranteed RJTCF’s performance to various third parties on certain obligations arising from RJTCF’s sale and/or transfer of units in one of its fund offerings (“Fund 34”).  Under such arrangements, RJTCF has provided either: (1) certain specific performance guarantees including a provision whereby in certain circumstances, RJTCF will refund a portion of the investors’ capital contribution, or (2) a guaranteed return on their investment.  Under the performance guarantees, the circumstances resultingconditions which would result in a payment to third parties depend uponby RJTCF under the quantity and timing of the qualification of tax credits by the underlying projects within Fund 34.  Basedguarantees have been satisfied, neither RJF nor RJTCF funded any obligations under such guarantees nor do either have any further obligations under such guarantees.  Further, based upon its most recent projections and performance of Fund 34, RJTCF does not anticipate that any refundspayments will be paidmade to any of these third parties under these performance guarantees.the guarantee of the return on investment.  The maximum exposure to loss represents the undiscounted future payments due to investors for the return on and of their investment, and approximates $44 million as of DecemberMarch 31, 2011.2012.  Under the guarantee of returns, should the underlying LIHTC project partnerships held by Fund 34 fail to deliver a certain amount of tax credits and other tax benefits over the next ten years, RJTCF is obligated to provide the investor with a specified return.  A $41.6 million financing asset is included in prepaid expenses and other assets, and a related $41.8$42.1 million liability is included in trade and other payables on our Condensed Consolidated Statements of Financial Condition as of DecemberMarch 31, 2011.2012. The maximum exposure to loss under this guarantee represents the undiscounted future payments due to investors for the return on and of their investment, and approximates $49.9 million at DecemberMarch 31, 2011.2012.

Legal matter contingencies

We are a defendant or co-defendant in various lawsuits and arbitrations incidental to our securities business as well as other corporate litigation. We are contesting the allegations in these cases and believe that there are meritorious defenses in each of these lawsuits and arbitrations. In view of the number and diversity of claims against us, the number of jurisdictions in which litigation is pending and the inherent difficulty of predicting the outcome of litigation and other claims, we cannot state with certainty what the eventual outcome of pending litigation or other claims will be. Refer to Note 1, page 93, of our 2011 Form 10-K for a discussion of our criteria for establishing a range of possible loss related to such matters.  As of DecemberMarch 31, 2011,2012, management currently estimates the aggregate range of possible loss is from $0 to an amount of up to $10 million in excess of the accrued liability (if any) related to these matters.  In the opinion of management, based on current available information, review with outside legal counsel, and consideration of the accrued liability amounts provided for in the accompanying condensed consolidated financial statements with respect to these matters, ultimate resolution of these matters will not have a material adverse impact on our financial position or cumulative results of operations. However, resolution of one or more of these matters may have a material effect on the results of operations in any future period, depending upon the ultimate resolution of those matters and upon the level of income for such period.


 
3341
 


NOTE 1315 – INTEREST INCOME AND INTEREST EXPENSE

The components of interest income and interest expense are as follows:

 
Three months ended
December 31,
  
Three months ended
March 31,
  
Six months ended
March 31,
 
 2011  2010  2012  2011  2012  2011 
 (in thousands)  (in thousands) 
Interest income:                  
Margin balances $13,702  $12,759  $13,252  $12,648  $26,954  $25,407 
Assets segregated pursuant to regulations and other segregated assets  2,198   1,986   2,185   2,089   4,384   4,075 
Bank loans, net of unearned income  72,022   74,204   77,587   66,381   149,609   140,585 
Available for sale securities  2,087   3,556   2,093   2,890   4,183   6,446 
Trading instruments  4,079   5,328   4,062   5,985   8,141   11,313 
Stock borrow  2,388   1,596 
Interest income of consolidated VIEs  1   - 
Stock loan  2,633   1,369   5,021   2,965 
Other  5,619   4,957   7,040   5,449   12,656   10,406 
Total interest income  102,096   104,386   108,852   96,811   210,948   201,197 
Interest expense:                        
Brokerage client liabilities  609   895   574   840   1,183   1,734 
Retail bank deposits  2,243   3,417   2,337   3,340   4,580   6,757 
Stock loan  460   509 
Trading instrument sold but not yet purchased  476   1,074   999   1,901 
Stock borrow  491   400   951   909 
Borrowed funds  970   1,370   822   924   1,792   2,294 
Senior notes  9,307   6,523   11,046   6,523   20,353   13,046 
Interest expense of consolidated VIEs  1,305   1,555   1,356   1,578   2,661   3,133 
Other  1,146   2,235   814   8   1,437   1,417 
Total interest expense  16,040   16,504   17,916   14,687   33,956   31,191 
Net interest income  86,056   87,882   90,936   82,124   176,992   170,006 
Less: provision for loan losses  (7,456)  (11,232)  (5,154)  (8,637)  (12,610)  (19,869)
Net interest income after provision for loan losses $78,600  $76,650  $85,782  $73,487  $164,382  $150,137 


NOTE 1416 – SHARE-BASED COMPENSATION

At December 31, 2011On February 23, 2012, the 2012 Stock Incentive Plan (the “2012 Plan”) was approved by our shareholders.  The 2012 Plan serves as the successor to our 1996 Stock Option Plan for Key Management Personnel, 2007 Stock Option Plan for Independent Contractors, 2002 Incentive Stock Option Plan, Stock Option Plan for Outside Directors, 2005 Restricted Stock Plan and 2007 Stock Bonus Plan (the “Predecessor Plans”). Upon approval of the 2012 Plan by our shareholders, the Predecessor Plans terminated (except with respect to awards previously granted under the Predecessor Plans that remain outstanding). Under the 2012 Plan, we had multiplemay grant 15,400,000 new shares in addition to the shares available for grant under the Predecessor Plans as of February 23, 2012.  The 1992 Incentive Stock Option Plan is not a Predecessor Plan and terminated on the date our shareholders approved the 2012 Plan (except with respect to awards previously granted under the 1992 Incentive Stock Option Plan that remain outstanding).  The 2012 Plan permits us to grant share-based and cash-based awards designed to be exempt from the limitation on deductible compensation plans for our employees, Boardunder Section 162(m) of Directors and non-employees.the Internal Revenue Code.  In our 2011 Form 10-K, our share-based compensation accounting policies are described in Note 1, page 94.  Other information relating to theour employee and Board of Director share-based compensation plansawards are outlined in our 2011 Form 10-K in Note 20, pages 132 – 136, while Note 21, pages 136 – 139, discusses our non-employee share-based plans.awards.  For purposes of this report, we have combined our presentation of both our employee and Board of Director share-based compensation plansawards with our non-employee share-based compensation plans,awards, both of which are described below.

Fixed stockStock option plansawards

Expense and income tax benefits related to our stock option compensation plans available for grantsawards granted to employees, members of our Board of Directors and independent contractor financial advisors are presented below:

 
Three months ended
December 31,
  
Three months ended
March 31,
  
Six months ended
March 31,
 
 2011  2010  2012  2011  2012  2011 
 (in thousands)  (in thousands) 
                  
Total share-based expense $3,555  $5,125  $4,244  $3,852  $7,799  $8,977 
Income tax benefits related to share-based expense  489   982   984   988   1,473   1,970 


42
For the threesix months ended DecemberMarch 31, 2011,2012, we realized $62,000$5 thousand of excess tax benefit deficiencybenefits related to our stock option awards.  During the three months ended DecemberMarch 31, 2011,2012, we granted 1,263,600266,567 stock options to employees and no stock options were granted to our independent contractor financial advisors.  During the six months ended March 31, 2012, we granted 1,531,417 stock options to employees and 46,900 stock options to our independent contractor financial advisors.  During the three and six months ended DecemberMarch 31, 2011,2012, no stock options were granted to outside directors.


34


Unrecognized pre-tax expense for stock option awards granted to employees, directors and independent contractor financial advisors, net of estimated forfeitures, and the remaining period over which the expense will be recognized as of DecemberMarch 31, 20112012 are presented below:

 
Unrecognized
pre-tax expense
  
Remaining
weighted-
average period
  
Unrecognized
pre-tax expense
  
Remaining
weighted-
average period
 
 (in thousands)  (in years)  (in thousands)  (in years) 
            
Employees and directors $20,428   3.5  $19,083   3.3 
Independent contractor financial advisors  809   3.5   1,013   3.3 

The weighted-average grant-date fair value of stock option awards granted to employees for the three and six months ended DecemberMarch 31, 20112012 is $8.85.$13.48 and $9.66, respectively.

The fair value of each option grant awarded to our independent contractor financial advisors is estimated on the date of grant and periodically revalued using the Black-Scholes option pricing model.  The weighted-average fair value for unvested options granted to independent contractor financial advisors as of DecemberMarch 31, 20112012 is $10.83.$14.83.

Restricted stock planawards

During the three months ended DecemberMarch 31, 2011,2012, we granted 1,038,636143,035 restricted stock units to employees.employees and 12,000 restricted stock units to outside directors.  During the six months ended March 31, 2012, we granted 1,181,671 restricted stock units to employees and 12,000 restricted stock units to outside directors.  No restricted stock units were granted to outside directors.independent contractor financial advisors during the three months ended March 31, 2012.  There were 2,586 shares of restricted stock units granted to independent contractor financial advisors during the threesix months ended DecemberMarch 31, 2011.  Restricted stock grants under the 2005 Restricted Stock Plan are limited to 2,000,000 shares per fiscal year.2012.

Expense and income tax benefits related to our restricted stock plans available for grantsawards granted to employees, members of our Board of Directors and independent contractor financial advisors are presented below:

 
Three months ended
December 31,
  Three months ended March 31,  Six months ended March 31, 
 2011  2010  2012  2011  2012  2011 
 (in thousands)  (in thousands) 
                  
Total share-based expense $6,573  $5,111  $5,994  $5,063  $12,567  $10,174 
Income tax benefits related to share-based expense  2,498   1,919   2,278   1,901   4,776   3,820 

For the threesix months ended DecemberMarch 31, 2011,2012, we realized $192,000$320 thousand of excess tax benefits related to our restricted stock awards.

Unrecognized pre-tax expense for restricted stock shares and restricted stock units granted to employees, directors and independent contractor financial advisors, net of estimated forfeitures, and the remaining period over which the expense will be recognized as of DecemberMarch 31, 20112012 are presented below:

 
Unrecognized
pre-tax expense
  
Remaining
weighted-
average period
  
Unrecognized
pre-tax expense
  
Remaining
weighted-
average period
 
 (in thousands)  (in years)  (in thousands)  (in years) 
            
Employees and directors $63,517   3.7  $62,505   3.6 
Independent contractor financial advisors  1,185   2.0   1,137   1.9 

The weighted-average grant-date fair value of restricted stock share and unit awards granted to employees and outside directors for the three and six months ended DecemberMarch 31, 20112012 is $27.49.$35.38 and $28.52, respectively.


43
The fair value of each restricted stock share awarded to our independent contractor financial advisors is valued on the date of grant and periodically revalued at the current stock price.  The weighted-average fair value for unvested restricted stock awards granted to independent contractor financial advisors as of DecemberMarch 31, 20112012 is $30.96.$36.53.

35


Stock bonus planawards

During the three months ended DecemberMarch 31, 2011,2012, we granted 578,74615,610 restricted stock units to employees as part of our stock bonus plan.  Restrictedemployees.  During the six months ended March 31, 2012, we granted 594,356 restricted stock units granted under the 2007 stock bonus plan are limited to 750,000 shares per fiscal year.employees.

Expense and income tax benefits related to our stock plan available for grantsbonus awards granted to employees are presented below:

 
Three months ended
December 31,
  Three months ended March 31,  Six months ended March 31, 
 2011  2010  2012  2011  2012  2011 
 (in thousands)  (in thousands) 
                  
Total share-based expense $6,949  $5,342  $2,190  $1,874  $9,139  $7,216 
Income tax benefits related to share-based expense  2,641   2,006   832   704   3,473   2,710 

For the threesix months ended DecemberMarch 31, 2011,2012, we realized $970,000$1.3 million of excess tax benefits related to our stock bonus awards.

Unrecognized pre-tax expense for share-based awards granted to employees, net of estimated forfeitures, and the remaining period over which the expense will be recognized as of DecemberMarch 31, 20112012 is $18.8$16.9 million and 2.42.2 years, respectively.  The weighted-average grant-date fair value of restricted stock share and unit awards granted to employees for the three and six months ended DecemberMarch 31, 20112012 is $29.42.$35.74 and $29.59, respectively.


NOTE 1517 – REGULATIONS AND CAPITAL REQUIREMENTS

For a discussion of the various regulations and capital requirements applicable to certain of our businesses and subsidiaries, see Note 22, pages 139 – 141, of our 2011 Form 10-K.

The netRJF, as a bank holding company, and RJ Bank, are subject to various regulatory capital positionrequirements administered by the federal and state banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our and RJ Bank’s financial results. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, RJF and RJ Bank must meet specific capital guidelines that involve quantitative measures of our wholly owned broker-dealer subsidiaryassets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. RJF’s and RJ&A is Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require RJF, as follows:a bank holding company, and RJ Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital to average assets (as defined). To be categorized as “well capitalized,” RJF must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below.

  
December 31,
2011
  
September 30,
2011
 
  ($ in thousands) 
Raymond James & Associates, Inc.:      
(Alternative Method elected)      
Net capital as a percent of aggregate debit items  23.79%  27.02%
Net capital $362,446  $409,869 
Less: required net capital  (30,477)  (30,340)
Excess net capital $331,969  $379,529 
  Actual  
Requirement for capital
adequacy purposes
  
To be well capitalized under prompt
corrective action
provisions
 
  Amount  Ratio  Amount  Ratio  Amount  Ratio 
  ($ in thousands) 
RJF as of March 31, 2012:                  
Total capital (to risk-weighted assets) $3,190,346   18.8% $1,357,594   8.0% $1,696,993   10.0%
Tier I capital (to risk-weighted assets)  3,028,181   17.9%  676,688   4.0%  1,015,033   6.0%
Tier I capital (to adjusted assets)  3,028,181   16.2%  747,699   4.0%  934,624   5.0%
                         

The net capital position of our wholly owned broker-dealer subsidiary Raymond James Financial Services, Inc. is as follows:

  
December 31,
2011
  
September 30,
2011
 
  (in thousands) 
Raymond James Financial Services, Inc.:      
(Alternative Method elected)      
Net capital $16,418  $17,829 
Less: required net capital  (250)  (250)
Excess net capital $16,168  $17,579 

The risk adjusted capital of our wholly owned broker-dealer subsidiary RJ Ltd., which is headquartered in Canada, is as follows (in Canadian dollars):

  
December 31,
2011
  
September 30,
2011
 
  (in thousands) 
Raymond James Ltd.:      
Risk adjusted capital before minimum $69,550  $70,855 
Less: required minimum capital  (250)  (250)
Risk adjusted capital $69,300  $70,605 

 
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At December 31, 2011, our other active domestic and international broker-dealers are in compliance with and met all netcurrent capital requirements.

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

 Actual  
Requirement for capital
adequacy purposes
  
To be well capitalized under prompt
corrective action
provisions
  Actual  
Requirement for capital
adequacy purposes
  
To be well capitalized under prompt
corrective action
provisions
 
 Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
 ($ in thousands)  ($ in thousands) 
As of December 31, 2011:                  
RJ Bank as of March 31, 2012:                  
Total capital (to risk-weighted assets) $1,106,116   14.3% $619,988   8.0% $774,986   10.0% $1,098,232   13.3% $661,467   8.0% $826,833   10.0%
Tier I capital (to risk-weighted assets)  1,008,618   13.0%  309,994   4.0%  464,991   6.0%  994,368   12.0%  330,733   4.0%  496,100   6.0%
Tier I capital (to adjusted assets)  1,008,618   11.4%  353,041   4.0%  441,301   5.0%  994,368   11.3%  352,329   4.0%  440,411   5.0%
                                                
As of September 30, 2011:                        
RJ Bank as of September 30, 2011:                        
Total capital (to risk-weighted assets) $1,018,858   13.7% $595,165   8.0% $743,956   10.0% $1,018,858   13.7% $595,165   8.0% $743,956   10.0%
Tier I capital (to risk-weighted assets)  925,212   12.4%  297,582   4.0%  446,374   6.0%  925,212   12.4%  297,582   4.0%  446,374   6.0%
Tier I capital (to adjusted assets)  925,212   10.3%  360,961   4.0%  451,202   5.0%  925,212   10.3%  360,961   4.0%  451,202   5.0%

RJ Bank calculates the Total Capital and Tier I Capital ratios in order to assess its compliance with both regulatory requirements and its internal capital policy in addition to providing a measure of underutilized capital should these ratios become excessive.  Capital levels are continually monitored to assess RJ Bank’s capital position.

The increasedecrease in the Total Capital (to risk-weighted assets) ratio andat March 31, 2012 compared to September 30, 2011 was primarily due to an increase in risk-weighted assets during the six month period ended March 31, 2012, resulting from our  utilization of low risk-weighted excess cash balances available at September 30, 2011 to fund significant corporate loan growth.  The increase in Tier I Capital (to adjusted assets) ratiosratio at DecemberMarch 31, 20112012 compared to September 30, 2011 werewas primarily due to earnings and $50 milliona change from using period-end total assets to average total assets in the calculation as a result of capital contributions received from RJFRJ Bank’s conversion to reporting under the Consolidated Reports of Condition and Income (“Call Report”) during the threesix month period ended DecemberMarch 31, 2011.2012.

Certain of our broker-dealer subsidiaries are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934.

The net capital position of our wholly owned broker-dealer subsidiary RJ&A is as follows:

  
March 31,
2012
  
September 30,
2011
 
  ($ in thousands) 
Raymond James & Associates, Inc.:      
(Alternative Method elected)      
Net capital as a percent of aggregate debit items  22.84%  27.02%
Net capital $341,395  $409,869 
Less: required net capital  (29,894)  (30,340)
Excess net capital $311,501  $379,529 

The net capital position of our wholly owned broker-dealer subsidiary Raymond James Financial Services, Inc. is as follows:

  
March 31,
2012
  
September 30,
2011
 
  (in thousands) 
Raymond James Financial Services, Inc.:      
(Alternative Method elected)      
Net capital $16,824  $17,829 
Less: required net capital  (250)  (250)
Excess net capital $16,574  $17,579 



45


The risk adjusted capital of our wholly owned broker-dealer subsidiary RJ Ltd., which is headquartered in Canada, is as follows (in Canadian dollars):

  
March 31,
2012
  
September 30,
2011
 
  (in thousands) 
Raymond James Ltd.:      
Risk adjusted capital before minimum $72,217  $70,855 
Less: required minimum capital  (250)  (250)
Risk adjusted capital $71,967  $70,605 

At March 31, 2012, our other active domestic and international broker-dealers are in compliance with and met all net capital requirements.


NOTE 1618 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

For a discussion of our financial instruments with off-balance sheet risk, see Note 23, pages 141 – 143, of our 2011 Form 10-K.

RJ Bank has outstanding at any time a significant number of commitments to extend credit and other credit-related off-balance sheet financial instruments such as standby letters of credit and loan purchases, which then extend over varying periods of time. These arrangements are subject to strict credit control assessments and each customer’s credit worthiness is evaluated on a case-by-case basis. Fixed-rate commitments are also subject to market risk resulting from fluctuations in interest rates and RJ Bank’s exposure is limited to the replacement value of those commitments. A summary of commitments to extend credit and other credit-related off-balance sheet financial instruments outstanding follows:

 December 31, 2011  March 31, 2012 
 (in thousands)  (in thousands) 
Standby letters of credit $200,034  $184,232 
Open end consumer lines of credit  35,986   81,752 
Commercial lines of credit  1,789,445   1,854,760 
Unfunded loan commitments - variable rate $ 68,496 
Unfunded loan commitments  138,088 

Because many lending commitments expire without being funded in whole or part, the contract amounts are not estimates of our actual future credit exposure or future liquidity requirements. We maintain a reserve to provide for potential losses related to the unfunded lending commitments. See Note 67 for further discussion of this reserve for unfunded lending commitments.

37



RJ Ltd. is subject to foreign exchange risk primarily due to financial instruments held in U.S. dollars that may be impacted by fluctuation in foreign exchange rates. In order to mitigate this risk, RJ Ltd. enters into forward foreign exchange contracts. The fair value of these contracts is not significant. As of DecemberMarch 31, 2011,2012, forward contracts outstanding to buy and sell U.S. dollars totaled CDN $3.1$4.7 million and CDN $1.9$7.5 million, respectively.

46


NOTE 1719 – EARNINGS PER SHARE

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

 Three months ended December 31,  
Three months ended
March 31,
  
Six months ended
March 31,
 
 2011  2010  2012  2011  2012  2011 
 (in thousands, except per share amounts)  (in thousands, except per share amounts) 
Income for basic earnings per common share:                  
Net income attributable to RJF $67,325  $81,723  $68,869  $80,917  $136,194  $162,640 
Less allocation of earnings and dividends to participating securities (1)
  (1,722)  (2,885)  (1,431)  (2,624)  (3,151)  (5,512)
Net income attributable to RJF common shareholders $65,603  $78,838  $67,438  $78,293  $133,043  $157,128 
                        
Income for diluted earnings per common share:                        
Net income attributable to RJF $67,325  $81,723  $68,869  $80,917  $136,194  $162,640 
Less allocation of earnings and dividends to participating securities (1)
  (1,717)  (2,878)  (1,421)  (2,609)  (3,137)  (5,495)
Net income attributable to RJF common shareholders $65,608  $78,845  $67,448  $78,308  $133,057  $157,145 
                        
Common shares:                        
Average common shares in basic computation  123,225   121,155   129,353   122,396   126,201   121,752 
Dilutive effect of outstanding stock options and certain restricted stock units  487   379   1,291   869   788   486 
Average common shares used in diluted computation  123,712   121,534   130,644   123,265   126,989   122,238 
                        
Earnings per common share:                        
Basic $0.53  $0.65  $0.52  $0.64  $1.05  $1.29 
Diluted $0.53  $0.65  $0.52  $0.64  $1.05  $1.29 
Stock options and certain restricted stock units excluded from weighted-average diluted common shares because their effect would be antidilutive  3,645   3,652   68   339   199   2,569 

(1)  Represents dividends paid during the period to participating securities plus an allocation of undistributed earnings to participating securities. Participating securities represent unvested restricted stock and certain restricted stock units and amounted to weighted-average shares of 3.22.7 million and 4.54.1 million for the three months ended DecemberMarch 31, 2012 and 2011, respectively.  Participating securities represent unvested restricted stock and 2010,certain restricted stock units and amounted to weighted-average shares of 3 million and 4.3 million for the six months ended March 31, 2012 and 2011, respectively.  Dividends paid to participating securities amounted to $420,000$341 thousand and $469,000$533 thousand for the three months ended DecemberMarch 31, 2012 and 2011, respectively.  Dividends paid to participating securities amounted to $758 thousand and 2010,$1 million for the six months ended March 31, 2012 and 2011, respectively.  Undistributed earnings are allocated to participating securities based upon their right to share in earnings if all earnings for the period had been distributed.

Dividends per common share declared and paid are as follows:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  2010  2012  2011  2012  2011 
                  
Dividends per common share - declared $0.13  $0.13  $0.13  $0.13  $0.26  $0.26 
Dividends per common share - paid $0.13  $0.11  $0.13  $0.13  $0.26  $0.24 


NOTE 1820 – SEGMENT ANALYSIS

We currently operate through the following eight business segments: “Private Client Group;” “Capital Markets;” “Asset Management;” RJ Bank; “Emerging Markets;” “Securities Lending;” “Proprietary Capital” and various corporate activities combined in the “Other” segment.  The business segments are based upon factors such as the services provided and the distribution channels served and are consistent with how we assess performance and determine how to allocate our resources throughout our subsidiaries. For a further discussion of our business segments, see Note 25, pages 144 – 146, of our 2011 Form 10-K.


 
3847
 


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

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  2010  2012  2011  2012  2011 
 (in thousands)  (in thousands) 
Revenues:                  
Private Client Group $528,618  $519,431  $567,766  $556,632  $1,096,384  $1,076,063 
Capital Markets  136,165   173,026   165,126   177,409   301,291   350,435 
Asset Management  56,795   55,587   58,217   55,341   115,012   110,928 
RJ Bank  77,416   77,441   83,136   69,099   160,552   146,540 
Emerging Markets  4,652   8,589   8,527   11,962   13,179   20,551 
Securities Lending  2,442   1,750   2,733   1,479   5,175   3,229 
Proprietary Capital  473   670   13,390   (275)  13,863   395 
Other  2,661   3,403   3,270   3,574   5,931   6,977 
Intersegment eliminations  (10,405)  (9,564)  (12,312)  (8,477)  (22,717)  (18,041)
Total revenues $798,817  $830,333  $889,853  $866,744  $1,688,670  $1,697,077 
                        
Income (loss) excluding noncontrolling interests and before provision for income taxes:                        
Private Client Group $49,408  $55,740  $46,249  $45,990  $95,657  $101,730 
Capital Markets  10,001   24,646   22,012   33,689   32,013   58,335 
Asset Management  15,813   15,594   16,621   15,227   32,434   30,821 
RJ Bank  53,003   46,464   57,313   42,256   110,316   88,720 
Emerging Markets  (2,549)  321   (999)  1,192   (3,548)  1,513 
Securities Lending  1,206   524   1,430   330   2,636   854 
Proprietary Capital  (65)  (142)  3,741   (4,032)  3,676   (4,174)
Other  (15,966)  (12,633)  (34,870)  (8,415)  (50,836)  (21,048)
Pre-tax income excluding noncontrolling interests  110,851   130,514   111,497   126,237   222,348   256,751 
Add: net income (loss) attributable to noncontrolling interests  (6,203)  (3,768)
Add: net loss attributable to noncontrolling interests  (3,595)  (1,999)  (9,798)  (5,767)
Income including noncontrolling interests and before provision for income taxes $104,648  $126,746  $107,902  $124,238  $212,550  $250,984 

Net interest income (expense):                  
Private Client Group $17,519  $15,589  $18,384  $16,576  $35,903  $32,165 
Capital Markets  1,197   1,517   977   1,911   2,174   3,428 
Asset Management  16   28   10   24   26   52 
RJ Bank  72,729   74,353   78,238   66,786   150,967   141,139 
Emerging Markets  108   134   248   494   356   628 
Securities Lending  1,928   1,087   2,142   968   4,070   2,055 
Proprietary Capital  151   200   221   (20)  372   180 
Other  (7,592)  (5,026)  (9,284)  (4,615)  (16,876)  (9,641)
Net interest income $86,056  $87,882  $90,936  $82,124  $176,992  $170,006 

The following table presents our total assets on a segment basis:

 
December 31,
2011
  
September 30,
2011
  
March 31,
2012
  
September 30,
2011
 
 (in thousands)  (in thousands) 
Total assets:            
Private Client Group (1)
 $5,681,340  $5,581,214  $5,624,784  $5,581,214 
Capital Markets (2)
  1,531,064   1,478,974   1,686,682   1,478,974 
Asset Management  61,965   61,793   66,240   61,793 
RJ Bank  8,791,526   8,741,975   8,950,761   8,741,975 
Emerging Markets  76,500   74,362   66,207   74,362 
Securities Lending  686,073   817,770   550,197   817,770 
Proprietary Capital  170,512   176,919   195,223   176,919 
Other  892,586   1,073,988   2,135,282   1,073,988 
Total $17,891,566  $18,006,995  $19,275,376  $18,006,995 

(1)  Includes $48 million of goodwill.

(2)  Includes $24 million of goodwill.

 
3948
 


We have operations in the United States, Canada, Europe and joint ventures in Latin America. Substantially all long-lived assets are located in the United States.  Revenues and income before provision for income taxes and excluding noncontrolling interests, classified by major geographic areas in which they are earned, are as follows:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  2010  2012  2011  2012  2011 
 (in thousands)  (in thousands) 
Revenues:                  
United States $711,921  $711,822  $781,467  $743,773  $1,492,465  $1,455,596 
Canada  62,810   91,276   80,166   95,738   143,899   187,014 
Europe  18,542   18,149   20,315   14,992   40,236   33,141 
Other  5,544   9,086   7,905   12,241   12,070   21,326 
Total $798,817  $830,333  $889,853  $866,744  $1,688,670  $1,697,077 
                        
Pre-tax income excluding noncontrolling interests:                        
United States $110,372  $116,774  $102,928  $112,149  $212,375  $228,921 
Canada  3,039   12,546   9,550   15,252   13,511   27,798 
Europe  47   566   (16)  (2,284)  (90)  (1,716)
Other  (2,607)  628   (965)  1,120   (3,448)  1,748 
Total $110,851  $130,514  $111,497  $126,237  $222,348  $256,751 

Our total assets, classified by major geographic area in which they are held, are presented below:

 
December 31,
2011
  
September 30,
2011
  
March 31,
2012
  
September 30,
2011
 
 (in thousands)  (in thousands) 
Total assets:            
United States (1)
 $16,451,085  $16,456,892  $17,460,307  $16,456,892 
Canada(2)
  1,330,200   1,436,505   1,716,299   1,436,505 
Europe(3)
  45,224   50,666   47,465   50,666 
Other  65,057   62,932   51,305   62,932 
Total $17,891,566  $18,006,995  $19,275,376  $18,006,995 

(1)  Includes $32 million of goodwill.

(2)  Includes $33 million of goodwill.

(3)  Includes $7 million of goodwill.


 
40


NOTE 19 – SUBSEQUENT EVENTS

On January 11, 2012, RJF entered into a definitive stock purchase agreement (the “Stock Purchase Agreement”) to acquire all of the issued and outstanding shares of Morgan Keegan & Company, Inc. and MK Holding, Inc. and certain of its related affiliates (“Morgan Keegan”) from Regions Financial Corporation (“Regions”).  This acquisition will expand both our private client wealth management and our capital markets businesses.

Under the terms of the Stock Purchase Agreement, Regions will receive $930 million in cash from RJF on the closing date, in exchange for the Morgan Keegan shares. This purchase price represents a $230 million premium over the anticipated $700 million tangible book value at closing.  The purchase price will be adjusted on a dollar-for-dollar basis, to the extent that the tangible book value of Morgan Keegan at closing is not $700 million.  Further, the purchase price is subject to downward adjustment if certain revenue retention hurdles are not met within 90-days post-closing.  RJF anticipates providing approximately $160-215 million in the form of either cash or restricted stock units to certain key Morgan Keegan revenue producers as part of an employee retention program.  Concurrent with the execution of the Stock Purchase Agreement, RJF executed employment agreements with certain key members of the Morgan Keegan management team.  In addition to customary indemnity for breach of representations and warranties and covenants, the Stock Purchase Agreement also provides that Regions will indemnify RJF for losses incurred in connection with any litigation or similar matter relating to pre-closing actions. Certain indemnifiable losses are subject to an annual $2 million deductible for three years.

On January 11, 2012, J.P. Morgan Chase entered into a commitment letter to provide RJF with a $900 million bridge financing facility to provide financing of the purchase price.  Subject to market conditions, RJF anticipates the facility will be replaced or refinanced by the issuance of $300 million of equity followed by $600 million of long-term notes.

This acquisition transaction is subject to certain regulatory approvals and is expected to close on or around April 1, 2012.

4149
 


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

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand our results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying unaudited notes to the condensed consolidated financial statements.  Where “NM” is used in various percentage change computations, the computed percentage change has been determined not to be meaningful.

Factors Affecting “Forward-Looking Statements”

From time to time, Raymond James Financial, Inc. (“RJF”), together with its subsidiaries hereinafter collectively referred to as “our,” “we” or “us,” may publish “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, allowance for loan loss levels at our wholly owned bank subsidiary Raymond James Bank, FSB (effective February 1, 2012, Raymond James Bank, N.A.) (“RJ Bank”), projected ventures, new products, anticipated market performance, recruiting efforts, regulatory approvals, and other matters.  The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, we caution readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These risks and uncertainties, many of which are beyond our control, are discussed in the section entitled “Risk Factors” of Item 1A of Part I included in our Annual Report on Form 10-K for the year ended September 30, 2011, as filed with the United States of America (“U.S.”) Securities and Exchange Commission (the “2011 Form 10-K”) and in Item 1A of Part II of this report on Form 10-Q. We do not undertake any obligation to publicly update or revise any forward-looking statements.

Executive Overview

Results in the investment businesses in which we operate are highly correlated to the general overall strength of economic conditions and, more specifically, to the direction of the U.S. equity markets.  Overall market conditions, interest rates, economic, political and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control.  These factors affect the financial decisions made by investors, including their level of participation in the financial markets.  They also impact the level of underwriting activity, trading profits and asset valuations.  In turn, these decisions affect our business results.

Quarter ended DecemberMarch 31, 20112012 compared with the quarter ended DecemberMarch 31, 20102011

In what were unsettled and challengingsomewhat improved market conditions during the quarter, most of our businesses performed relatively well.  Our record net revenues of $783$872 million represented a 4% decrease compared to bothan 11% increase over the preceding quarter and a 2% increase over the prior year quarter.  Two percent revenueRevenue increases in both our Private Client Group and Asset Management segments over the prior year were more thanpartially offset by decreases in our Capital Markets and Emerging Markets segments.  We realized net valuation increases on certain of our proprietary equity holdings which, although have a lesser impact on net income after consideration of the share of these investments we do not own, still had a favorable net impact on our results for the quarter.  Non-interest expenses decreased $9increased $36 million, or 1%5%, from the prior year quarter primarily due to a $10$20 million of acquisition related costs we incurred associated with the Morgan Keegan (hereafter defined) acquisition, which closed on April 2, 2012.  The portion of non-interest expenses attributable to our operations increased $17 million, or 2%, decreaseand primarily resulted from an increase in compensation related costs resulting from lower commissions expenses and other revenue and profit-driven compensation, net of increased salary expense.which is correlated with our increase in revenues.  In addition, there was a $4$3 million, or 34%40%, decrease in the bank loan loss provision, which was more than offset by increases in certain communications and information processing and business development expenses.

Our pre-tax income decreased $20$15 million, or 15%12%, as compared to the prior year quarter.  We generatedOur net income of over $67was $69 million, in the current quarter, a $14$12 million, or 18%15%, decrease as compared to the prior year quarter.  However, after consideration of the acquisition related expenses we incurred during the quarter and $1.7 million of incremental interest expense we incurred as part of the pre-closing date execution of our Morgan Keegan purchase financing strategies, we generated an adjusted pre-tax income of a record $133 million (a non-GAAP measure) for the quarter which is $7 million, or 5%, greater than the prior year quarter.  Adjusted net income was $82 million (a non-GAAP measure) for the quarter which is $1 million, or 1%, greater than the prior year quarter.

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As compared to the prior year quarter, our financial results were most significantly impacted by:

·  A $15Our Private Client Group segment generated record net revenues of $566 million, or 59%, decreasea 2% increase over the prior year.  Pre-tax income of $46 million approximated the prior year level.  The increase in net revenues, including an increase in the pre-tax income of our Capital Markets segment.  Investment banking revenuesportion which we consider being recurring, was more than offset by increases in the current quarter decreased significantly over the strong prior year quarter.  Results were also significantly impacted by decreases in both equity and fixed income institutional sales commissions resulting from this quarter’s less favorable financial markets.non-interest expenses.

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·  A $7Our Asset Management segment generated $17 million of pre-tax income, a $1 million, or 14%a 9% increase over the prior year level.  Assets under management increased to record high levels as of March 31, 2012.  Net inflows of client assets drove the increase as market values increased only marginally as compared to the prior year quarter end.

·  RJ Bank generated a $15 million, or 36%, increase in the pre-tax income generated by RJ Bank.  Thisto a record $57 million.  The increase primarily resulted from an increase in net interest revenues from higher average loan balances and an increase in net interest spread and to a lesser extent, a lower loan loss provision resulting from improved credit quality as compared to the prior year, as well as an increase in net revenues.year.

·  A $6We incurred acquisition related costs associated with our acquisition of Morgan Keegan of $19.6 million, plus an incremental $1.7 million of interest expense we incurred as we executed senior debt offerings during the quarter to fund the April 2, 2012 closing.

·  The $12 million, or 11%35%, decrease in the pre-tax income of our Private Client Group segment.  NetCapital Markets segment resulted from lower investment banking revenues increased by 2%, including an increase in the portioncurrent quarter than in the strong prior year quarter.  Results were also significantly impacted by decreases in equity institutional sales commissions resulting from this quarter’s less active new issue markets, which we consider being recurring, but this increase was more thanwere only partially offset by a decrease in net interest earnings and increases in non-interest expenses.institutional fixed income commissions.

·  A $3The $8 million, decreaseor 193%, increase in the pre-tax income (after consideration of the attribution to noncontrolling interests) generated by our Proprietary Capital segment was primarily driven by an increase in the valuation of one of our Emerging Markets segment.  Net revenues in this segment decreased by 46%, in part due to the volatility in the global markets as well as a decrease in investment banking revenues.

·  Our Asset Management segment generated $16 million of pre-tax income, approximating the prior year level.  Assets under management increased in comparison to levels at both the prior year end and the preceding quarter end.  Net inflows of client assets more than exceeded the decrease in market values as compared to the prior year quarter end.investments.

·  Our effective tax rate applicable to the quarter increased to 39.3%38.2% from the rate applicable in the prior year quarter of 37.4%35.9%, primarily resulting from an increase in the average state tax rate component of this blended rate, and the effect of relatively consistent non-deductible expenses coupled with lower pre-tax earnings.

On January 11, 2012, we entered into a definitive stock purchase agreement to acquire all of the issued and outstanding shares of Morgan Keegan & Company, Inc. and MK Holding, Inc. and its related affiliates (“Morgan Keegan”) from Regions Financial Corporation (“Regions”).  We completed this purchase transaction on April 2, 2012.  This acquisition will expandexpands both our private client wealth management and our capital markets businesses.  Morgan Keegan offersbrings to us a strong private client business, one of the industry’s top fixed income groups, and a significant equity capital markets division. Headquartered in Memphis with 57 full-service offices in 20 states, the company hasMorgan Keegan had approximately 3,100 employees and more than 1,200 totalapproximately 1,000 financial advisors.advisors as of the date of our purchase. While an addition of this size is a departure from our focus on organic growth supplemented by individual hires and small acquisitions, it is not a departure from our overall strategy. We have used strategic mergers to grow throughout our history when the timing and pricing are right and, most importantly, when there is a strong cultural fit and clear path for integration.  With the addition of Morgan Keegan, we will beare one of the country’s largest wealth management and investment banking firms not headquartered on Wall Street, affording us even greater ability to support our financial advisors and retail and institutional clients.  The acquisition is subject to certain regulatory approvals and is expected to close on or about April 1, 2012.

BasedWith regard to regulatory changes that could impact our businesses, based on our review of the Dodd-Frank Act, and because of the nature of our businesses and our business practices, we presently do not expect the legislation to have a significant impact on our operations. However, because many of the regulations will result from further studies and are yet to be adopted by various regulatory agencies, the impact on our businesses remains uncertain.  

During January 2012, RJF’s application to become a bank holding company and a financial holding company was approved by the Board of Governors of the Federal Reserve System (the “FRB”) and RJ Bank’s conversion to a national bank was approved by the Office of the Comptroller of the Currency (“OCC”).  These changes became effective February 1, 2012.  This status better represents the way RJ Bank has been conducting its business.

 
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Six months ended March 31, 2012 compared with the six months ended March 31, 2011

Our net revenues of $1.7 billion represent a 1% decrease compared to the prior year period.  Revenue increases in both our Private Client Group and Asset Management segments over the prior year period are more than offset by decreases in our Capital Markets and Emerging Markets segments.  Non-interest expenses increased $27 million, or 2%, from the prior year primarily due to $20 million of acquisition related costs we incurred specifically associated with the Morgan Keegan acquisition, which closed on April 2, 2012.  The portion of non-interest expenses attributable to our operations increased $8 million, or less than 1%, primarily resulting from increases in certain communications and information processing and business development expenses.  Offsetting those increases is a $7 million, or 37%, decrease in the bank loan loss provision.

Our pre-tax income decreased $34 million, or 13%, while our net income of $136 million represented a $26 million, or 16%, decrease as compared to the prior year period.  However, after consideration of the acquisition related expenses we incurred during the March, 2012 quarter and the $1.7 million of incremental interest expense we incurred during that quarter as part of the pre-closing date execution of our Morgan Keegan purchase financing strategies, we generated an adjusted pre-tax income of $244 million (a non-GAAP measure) for the six month period which is $13 million, or 5%, less than the prior year period.

Our financial results during the six month period were most significantly impacted by the factors described above for the most recent quarter unless otherwise noted:


·  A $22 million, or 24%, increase in the pre-tax income generated by RJ Bank.

·   A $26 million, or 45%, decrease in the pre-tax income of our Capital Markets segment.

·  A $6 million, or 6%, decrease in the pre-tax income of our Private Client Group segment resulting from increased non-interest expenses.

·  A $5 million decrease in the pre-tax income of our Emerging Markets segment.  Net revenues in this segment decreased by $7 million, or 36%, due to a decrease in investment banking revenues caused in part by the volatility in the global markets.

·  A $2 million, or 5%, increase in the pre-tax income generated by our Asset Management segment.

·  An $8 million, or 188%, increase in the pre-tax income (after consideration of the attribution to noncontrolling interests) generated by our Proprietary Capital segment

·  Our effective tax rate increased to 38.7% from the rate applicable in the prior period of 36.7%, primarily resulting from an increase in the average state tax rate component of this blended rate, and the effect of relatively consistent non-deductible expenses coupled with lower pre-tax earnings.


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Segments

We currently operate through the following eight business segments: Private Client Group (“PCG”); “Capital Markets;” “Asset Management;” RJ Bank; “Emerging Markets;” “Securities Lending;” “Proprietary Capital” and certain corporate activities combined in the “Other” segment.

The following table presents our consolidated and segment gross revenues and pre-tax income excluding noncontrolling interests for the periods indicated:
  Three months ended March 31,  Six months ended March 31, 
  2012  2011  % change  2012  2011  % change 
  ($ in thousands) 
Total company                  
Revenues $889,853  $866,744   3% $1,688,670  $1,697,077   - 
Pre-tax income excluding noncontrolling interests  111,497   126,237   (12)%  222,348   256,751   (13)%
                         
PCG                        
Revenues  567,766   556,632   2%  1,096,384   1,076,063   2%
Pre-tax income  46,249   45,990   1%  95,657   101,730   (6)%
                         
Capital Markets                        
Revenues  165,126   177,409   (7)%  301,291   350,435   (14)%
Pre-tax income  22,012   33,689   (35)%  32,013   58,335   (45)%
                         
Asset Management                        
Revenues  58,217   55,341   5%  115,012   110,928   4%
Pre-tax income  16,621   15,227   9%  32,434   30,821   5%
                         
RJ Bank                        
Revenues  83,136   69,099   20%  160,552   146,540   10%
Pre-tax income  57,313   42,256   36%  110,316   88,720   24%
                         
Emerging Markets                        
Revenues  8,527   11,962   (29)%  13,179   20,551   (36)%
Pre-tax (loss) income  (999)  1,192   (184)%  (3,548)  1,513   (335)%
                         
Securities Lending                        
Revenues  2,733   1,479   85%  5,175   3,229   60%
Pre-tax income  1,430   330   333%  2,636   854   209%
                         
Proprietary Capital                        
Revenues  13,390   (275) NM   13,863   395  NM 
Pre-tax income (loss)  3,741   (4,032)  193%  3,676   (4,174)  188%
                         
Other                        
Revenues  3,270   3,574   (9)%  5,931   6,977   (15)%
Pre-tax loss  (34,870)  (8,415)  (314)%  (50,836)  (21,048)  (142)%
                         
Intersegment eliminations                        
Revenues  (12,312)  (8,477)  (45)%  (22,717)  (18,041)  (26)%
                         

  Three months ended December 31, 
  2011  2010  % change 
  ($ in thousands) 
Total company         
Revenues $798,817  $830,333   (4)%
Pre-tax income excluding noncontrolling interests  110,851   130,514   (15)%
             
PCG            
Revenues  528,618   519,431   2%
Pre-tax income  49,408   55,740   (11)%
             
Capital Markets            
Revenues  136,165   173,026   (21)%
Pre-tax income  10,001   24,646   (59)%
             
Asset Management            
Revenues  56,795   55,587   2%
Pre-tax income  15,813   15,594   1%
             
RJ Bank            
Revenues  77,416   77,441   - 
Pre-tax income  53,003   46,464   14%
             
Emerging Markets            
Revenues  4,652   8,589   (46)%
Pre-tax (loss) income  (2,549)  321   (894)%
             
Securities Lending            
Revenues  2,442   1,750   40%
Pre-tax income  1,206   524   130%
             
Proprietary Capital ��          
Revenues  473   670   (29)%
Pre-tax loss  (65)  (142)  54%
             
Other            
Revenues  2,661   3,403   (22)%
Pre-tax loss  (15,966)  (12,633)  (26)%
             
Intersegment eliminations            
Revenues  (10,405)  (9,564)  (9)%


 
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Net interest analysis

We have certain assets and liabilities, not only held in our RJ Bank segment but also held in our PCG and Capital Markets segments, which are subject to changes in interest rates; these changes in interest rates have an impact on our overall financial performance. Given the relationship of our interest sensitive assets to liabilities held in each of these segments, an increase in short-term interest rates would result in an overall increase in our net earnings (we currently have more assets than liabilities with a yield that would be affected by a change in short-term interest rates).  A gradual increase in short-term interest rates would have the most significant favorable impact on our PCG and RJ Bank segments. The actual amount of any benefit would be dependent upon a variety of factors including, but not limited to, the change in balances, the rapidity and magnitude of the increase in rates, and the interest rates paid on client cash balances.

Quarter ended DecemberMarch 31, 20112012 compared with the quarter ended DecemberMarch 31, 20102011 – Net Interest Analysis

The following table presents average balance data and interest income and expense data, as well as the related net interest income:

 Three months ended December 31,  Three months ended March 31, 
 2011  2010  2012  2011 
 
Average
balance
  
Interest
inc./exp.
  
Average
yield/cost
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/cost
  
Average
Balance(1)
  
Interest
inc./exp.
  
Average
yield/cost
  
Average
Balance(1)
  
Interest
inc./exp.
  
Average
yield/cost
 
 ($ in thousands)  ($ in thousands) 
Interest-earning assets:                                    
Margin balances $1,525,989  $13,702   3.56% $1,467,233  $12,759   3.45% $1,506,662  $13,252   3.53% $1,475,124  $12,648   3.48%
Assets segregated pursuant to regulations and other segregated assets  3,264,651   2,198   0.27%  1,778,326   1,986   0.44%  3,266,842   2,185   0.27%  1,987,364   2,089   0.43%
Bank loans, net of unearned income (1)(2)
  6,930,795   72,022   4.09%  6,174,819   74,204   4.43%  7,243,186   77,587   4.25%  6,227,876   66,381   4.26%
Available for sale securities  538,299   2,087   1.54%  454,091   3,556   3.13%  560,688   2,093   1.50%  410,061   2,890   2.86%
Trading instruments(3)      4,079           5,328       551,357   4,062   2.96%  630,514   5,985   3.81%
Stock borrow      2,388           1,596     
Interest-earning assets of consolidated variable interest entities      1           -     
Other      5,619           4,957     
Stock loan  658,594   2,633   1.60%  541,643   1,369   1.01%
Other(3)
  2,489,709   7,040   1.14%  1,825,050   5,449   1.20%
Total interest income     $102,096          $104,386      $16,277,038   108,852   2.69% $13,097,632  $96,811   2.97%
                                                
Interest-bearing liabilities:                                                
Brokerage client liabilities $4,485,098  $609   0.05% $2,994,490  $895   0.12% $4,523,280   574   0.05% $3,352,592  $840   0.10%
Bank deposits (1)
  7,897,328   2,243   0.11%  6,544,998   3,417   0.20%
Stock loan      460           509     
Bank deposits (2)
  7,710,066   2,337   0.12%  6,727,510   3,340   0.20%
Trading instruments sold but not yet purchased(3)
  106,966   476   1.79%  154,336   1,074   2.79%
Stock borrow  186,681   491   1.05%  214,949   400   0.74%
Borrowed funds      970           1,370       177,519   822   1.86%  118,322   924   3.13%
Senior notes  550,227   9,307   6.62%  299,956   6,523   8.60%  662,120   11,046   6.71%  299,957   6,523   8.60%
Loans payable of consolidated variable interest entities(3)      1,305           1,555       90,088   1,356   6.05%  107,952   1,578   5.86%
Other      1,146           2,235     
Other(3)
  141,994   814   2.31%  49,675   8   0.06%
Total interest expense      16,040           16,504      $13,598,714   17,916   0.53% $11,025,293   14,687   0.54%
Net interest income     $86,056          $87,882          $90,936          $82,124     

(1)Represents average daily balance, unless otherwise noted.

(2)  See Results of Operations – RJ Bank in this MD&A for further information.

(3)  Average balance is calculated based on the average of the end of month balances for each month within the period.
Net interest income decreased $1.8increased $9 million, or 2%11%, as compared to the prior year. Net interest income is earned primarily by our PCG and RJ Bank segments, which are discussed separately below.

Net interest income in the PCG segment increased $1.9$2 million, or 12%11%, resulting primarily from increased client margin balances coupled with higher netand a slight increase in the interest spreadsrate earned as compared toon client margin balances despite the prior year.impact of more client assets entering our multi-bank sweep program which pays a fee in lieu of interest.

Partially offsetting the increase in net interest income in the PCG segment, RJ Bank’s net interest income decreased $1.6increased $11 million, or 2%17%.  RJ Bank’s net interest income in the prior year period included a $6 million correction of an accumulated interest income understatement of prior periods related to purchased residential loan pools. Excluding the impact of this correction recorded in the prior year period, RJ Bank’s net interest income increased $5 million over the comparable prior year period primarily as a result of an increase in average loans outstanding being partially offset by a decrease inwhile the average loan portfolio yield.yield remained nearly unchanged.  The increase in average loans included $400 million in loans acquired from Allied Irish Bank in Canada.  Refer to the discussion of the specific components of RJ Bank’s net interest income in the RJ Bank section of this MD&A.

 
4554
 


Interest income earned on our available for sale securities portfolio decreased as compared to the prior year as a result of the Auction Rate Securities (“ARS”) we repurchased primarily during the quarter ended September 30, 2011 (refer to Item 3 on page 27 of our 2011 Form 10-K for a discussion of this ARS repurchase) which have a substantially lower weighted-average yield than the rest of the securities in this portfolio (see Note 56 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information on our available for sale securities).

Interest expense on senior notes increased approximately $4.5 million over the prior year.  The increase is primarily comprised of $2.7 million resulting from our April, 2011 4.25% senior notes offering, and $1.7 million arising from our March, 2012 issuance of $350 million 6.9% senior notes and our March, 2012 issuance of $250 million 5.625% senior notes.  Both of the March, 2012 debt offerings were part of our financing activities associated with funding the Morgan Keegan acquisition which closed on April 2, 2012.   

Six months ended March 31, 2012 compared with the six months ended March 31, 2011 – Net Interest Analysis

The following table presents average balance data and interest income and expense data, as well as the related net interest income:

  Six months ended March 31, 
  2012  2011 
  
Average
Balance(1)
  
Interest
inc./exp.
  
Average
yield/cost
  
Average
Balance(1)
  
Interest
inc./exp.
  
Average
yield/cost
 
  ($ in thousands) 
Interest-earning assets:                  
Margin balances $1,516,408  $26,954   3.55% $1,471,132  $25,407   3.46%
Assets segregated pursuant to regulations and other segregated assets  3,265,741   4,384   0.27%  1,881,697   4,075   0.43%
Bank loans, net of unearned income (2)
  7,085,444   149,609   4.17%  6,201,056   140,585   4.40%
Available for sale securities  549,421   4,183   1.52%  432,318   6,446   2.99%
Trading instruments(3)
  579,852   8,141   2.80%  628,899   11,313   3.59%
Stock loan  697,832   5,021   1.44%  572,388   2,965   1.04%
Other(3)
  2,562,989   12,656   0.98%  1,721,108   10,406   1.21%
Total interest income $16,257,687   210,948   2.60% $12,908,598   201,197   3.28%
                         
Interest-bearing liabilities:                        
Brokerage client liabilities  4,504,363   1,183   0.05%  3,171,554   1,734   0.11%
Bank deposits (2)
  7,804,209   4,580   0.12%  6,635,251   6,757   0.20%
Trading instruments sold but not yet purchased(3)
  117,928   999   1.69%  174,739   1,901   2.17%
Stock borrow  189,690   951   1.00%  220,797   909   0.82%
Borrowed funds  202,464   1,792   1.77%  121,542   2,294   3.76%
Senior notes  605,513   20,353   6.72%  299,957   13,046   8.60%
Loans payable of consolidated variable interest entities(3)
  93,314   2,661   5.70%  97,370   3,133   6.42%
Other(3)
  170,179   1,437   1.69%  73,726   1,417   3.83%
Total interest expense $13,687,660   33,956   0.50% $10,794,936   31,191   0.58%
Net interest income     $176,992          $170,006     

(1)  Represents average daily balance, unless otherwise noted.

(2)  See Results of Operations – RJ Bank in this MD&A for further information.

(3)  Average balance is calculated based on the average of the end of month balances for each month within the period.

Net interest income increased $7 million, or 4%, as compared to the prior year. Net interest income is earned primarily by our PCG and RJ Bank segments, which are discussed separately below.

Net interest income in the PCG segment increased $4 million, or 12%, resulting primarily from increased client margin balances and a slight increase in the interest rate earned on client margin balances despite the impact of more client assets entering our multi-bank sweep program which pays a fee in lieu of interest.

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RJ Bank’s net interest income increased $10 million, or 7%.  RJ Bank’s net interest income in the prior year period included a $6 million correction of an accumulated interest income understatement of prior periods related to purchased residential loan pools. Excluding the impact of this correction recorded in the prior year period, RJ Bank’s net interest income increased $16 million over the comparable prior year period primarily as a result of an increase in average loans outstanding being partially offset by a decrease in the average loan portfolio yield.  Refer to the discussion of the specific components of RJ Bank’s net interest income in the RJ Bank section of this MD&A.

Interest income earned on our available for sale securities portfolio decreased as compared to the prior year as a result of the ARS we repurchased primarily during the quarter ended September 30, 2011 (refer to Item 3 on page 27 of our 2011 Form 10-K for a discussion of this ARS repurchase) which have a substantially lower weighted-average yield than the rest of the securities in this portfolio (see Note 6 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information on our available for sale securities).

Interest expense on senior notes increased approximately $7.3 million over the prior year.  The increase is primarily comprised of $5.4 million resulting from our April, 2011 sale4.25% senior notes offering, and $1.7 million arising from our March, 2012 issuance of $350 million 6.9% senior notes and our March, 2012 issuance of $250 million 5.625% senior notes.  Both of 4.25% senior notes, due April 2016.  This issuance reducedthe March, 2012 debt offerings were part of our average costfinancing activities associated with senior notes fromfunding the prior year level.Morgan Keegan acquisition which closed on April 2, 2012.   


Results of Operations – Private Client Group

The following table presents consolidated financial information for our PCG segment for the periods indicated:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  % change  2010  2012  % change  2011  2012  % change  2011 
 ($ in thousands)  ($ in thousands) 
Revenues:                           
Securities commissions and fees $432,703   -  $430,931  $468,663   1% $465,670  $901,366   1% $896,601 
Interest  19,444   7%  18,231   20,213   10%  18,413   39,657   8%  36,644 
Account and service fees:                                    
Client account and service fees  31,411   (2)%  31,948   33,192   12%  29,579   64,603   5%  61,528 
Mutual fund and annuity service fees  31,993   31%  24,510   31,897   20%  26,654   63,890   25%  51,164 
Client transaction fees  6,855   (26)%  9,312   7,131   (24)%  9,382   13,986   (25)%  18,694 
Correspondent clearing fees  707   (24)%  935   784   (9)%  859   1,491   (17)%  1,794 
Account and service fees – all other  45   7%  42   67   29%  52   112   19%  94 
Sub-total account and service fees  71,011   6%  66,747   73,071   10%  66,526   144,082   8%  133,274 
Other  5,460   55%  3,522   5,819   (3)%  6,023   11,279   18%  9,544 
Total revenues  528,618   2%  519,431   567,766   2%  556,632   1,096,384   2%  1,076,063 
                                    
Interest expense  1,925   (27)%  2,642   1,829   -   1,837   3,754   (16)%  4,479 
Net revenues  526,693   2%  516,789   565,937   2%  554,795   1,092,630   2%  1,071,584 
                                    
Non-interest expenses:                                    
Sales commissions  319,037   1%  314,939   349,969   1%  345,271   669,006   1%  660,210 
Admin & incentive compensation and benefit costs  88,632   8%  81,870   95,280   8%  87,996   183,912   8%  169,866 
Communications and information processing  19,798   27%  15,546   24,947   30%  19,216   44,745   29%  34,762 
Occupancy and equipment  17,698   (6)%  18,783   18,999   (2)%  19,467   36,697   (4)%  38,250 
Business development  13,789   -   13,806   14,841   12%  13,259   28,630   6%  27,065 
Clearance and other  18,331   13%  16,177   15,652   (34)%  23,746   33,983   (15)%  39,923 
Total non-interest expenses  477,285   4%  461,121   519,688   2%  508,955   996,973   3%  970,076 
Income before taxes and including noncontrolling interests  49,408   (11)%  55,668   46,249   1%  45,840   95,657   (6)%  101,508 
Noncontrolling interests  -       (72)  -       (150)  -       (222)
Pre-tax income excluding noncontrolling interests $49,408   (11)% $55,740  $46,249   1% $45,990  $95,657   (6)% $101,730 
Margin on net revenues  9.4%      10.8%  8.2%      8.3%  8.8%      9.5%


56


Through our PCG segment, we provide securities transaction and financial planning services to client accounts through the branch office systems of our broker-dealer subsidiaries located throughout the United States, Canada and the United Kingdom.  Our financial advisors offer a broad range of investments and services, including both third-party and proprietary products, and a variety of financial planning services.  We charge sales commissions or asset-based fees for investment services we provide to our PCG clients based on established schedules. Our financial advisors offer a number of professionally managed load mutual funds, as well as a selection of no-load funds.  Net interest revenue in the PCG segment is generated by customer balances, predominately the earnings on margin loans and assets segregated pursuant to regulations, less interest paid on customer cash balances (“Client Interest Program”).  The PCG segment earns a fee (in lieu of interest revenue) from the Raymond James Bank Deposit Program (“RJBDP”), a program where clients’ cash deposits in their brokerage accounts are re-deposited through a third-party service into interest-bearing deposit accounts at a number of banks. The RJBDP program enables clients to obtain up to $2.5 million in individual Federal Deposit Insurance Corporation (“FDIC”) deposit insurance coverage ($5 million for joint accounts) in addition to earning competitive rates for their cash balances.  This fee is eliminated in the intersegment eliminations.

46


The success of the PCG segment is dependent upon the quality of our products, services, financial advisors and support personnel including our ability to attract, retain and motivate a sufficient number of these associates. We face competition for qualified associates from major financial services companies, including other brokerage firms, insurance companies, banking institutions and discount brokerage firms. We currently offer several affiliation alternatives for financial advisors ranging from the traditional branch setting, under which the financial advisors are our employees and we incur the costs associated with operating the branch, to the independent contractor model, under which the independent contractor financial advisor is responsible for all of their own direct costs. Accordingly, the independent contractor financial advisors are paid a larger percentage of commissions. By offering alternative models to potential and existing financial advisors, we are able to effectively compete with a wide variety of other brokerage firms for qualified financial advisors, as financial advisors can choose the model that best suits their practice and profile.

Revenues of the PCG segment are correlated with total client assets under administration as well as the overall U.S. equities markets.  As of DecemberMarch 31, 2011,2012, total client assets under administration amounted to $270$292 billion, an increase of 5.5%8.1% over the preceding quarter endended December 31, 2011 level and up 3%6.2% over the Decembercomparable prior year quarter ended March 31, 2010 total.2011 level.

The following table presents the number of PCG financial advisors and investment advisor representatives as of the dates indicated:

Employee
Independent
contractors
Investment
advisor
representatives(1)
December 31,
2011
Total
 
December 31,
2010
Total
Employee
Independent
contractors
Investment
advisor
representatives(1)
March 31,
2012
Total
 
March 31,
2011
Total
Private Client Group:           
Raymond James & Associates (“RJ&A”)1,313--1,313 1,2731,327--1,327 1,276
Raymond James Financial Services, Inc. (“RJFS”)    -3,1822463,428 3,489-3,2052433,448 3,470
Raymond James Limited (“RJ Ltd.”)   201253-454 442199259-458 443
Raymond James Investment Services Limited (“RJIS”)-61100161 149-64101165 151
Total financial advisors and investment advisor representatives1,5143,4963465,356 5,3531,5263,5283445,398 5,340


Employee
Independent
contractors
Investment
advisor
representatives(1)
September 30,
2011
Total
Employee
Independent
contractors
Investment
advisor representatives(1)
September 30,
2011
Total
Private Client Group:       
RJ&A1,311-1,3111,311--1,311
RJFS    -3,1932373,430    -3,1932373,430
RJ Ltd.   198254-452   198254-452
RJIS-6196157-6196157
Total financial advisors and investment advisor representatives1,5093,5083335,3501,5093,5083335,350

(1)  Investment advisor representatives with custody only relationships.

57

Quarter ended DecemberMarch 31, 20112012 compared with the quarter ended DecemberMarch 31, 20102011 – Private Client Group

PCG pre-tax results decreased $6approximated the prior year’s quarter, generating approximately $46 million in each respective period.

The quarter’s record net revenues were $11 million, or 11%, as compared to2% higher than the prior year.

Net revenues increased $10 million, or 2%.year quarter.  PCG’s pre-tax margin decreased slightly to 9.4%8.2% of net revenues compared to the prior year’s 10.8%8.3%. 

Securities commissions and fees approximatedincreased $3 million, or 1%.  Commissions arising from our U.S. operations increased over 3% as compared to the prior year level, reflecting only a modest $2 million improvement.  Equityperiod as equity market conditions in the U.S. markets were notsomewhat improved as strongcompared to March, 2011 levels.  However, securities commissions and fees arising from our Canadian operations decreased 14% as those incompared to the prior year quarter.  This was offset by higher client asset balancesperiod and a slightthat, coupled with declines in the other foreign markets in which we operate, resulted in the modest overall increase in the total number of financial advisors.our securities commissions and fees.  Commissions generated from equity, fixed income, insurance and mutual fund products eachannuities all declined as compared to the prior year quarter;period; however, a significant increase in asset-based fees as well as commissions on insurance and annuity products offset those decreases.


47


Mutual fund and annuity service fees increased $7$5 million, or 31%20%, primarily as a result of an increase in mutual fund networking and omnibus and education and marketing fees all of which are earned frompaid by the mutual fund and insurance companies whose products we distribute.  During the past year, we have been implementing a change in the data sharing arrangements with many mutual fund companies from a networking to an omnibus arrangement.  The fees earned from omnibus arrangements are greater than those under networking arrangements in order to compensate us for the additional reporting requirements performed by the broker-dealer under omnibus arrangements.  The largest portion of this conversion occurred midway through the prior fiscal year.

Client account and service fee revenues increased $4 million, or 12%, over the prior year primarily resulting from an increase in the fees we receive in lieu of interest earnings, from our multi-bank sweep program.  Fees increased as a result of higher balances in the program.

Partially offsetting the increases in net revenues described above, client transaction fees decreased $2 million, or 26%24%, primarily as a result of certain mutual fund relationships converting over the past year to a no-transaction fee program.  Under this program, we receive increased fees from mutual fund companies which are included within mutual fund and annuity service fee revenue described above, but our clients no longer pay us transaction fees on mutual fund trades within certain of our managed programs.

While total segment revenues increased 2%, the portion that we consider to be recurring increased to 64%approximately 63% as of March 31, 2012 as compared to the 61% average for the prior fiscal year.60% as of March 31, 2011.  Assets in fee-based accounts at DecemberMarch 31, 2011 increased 10% to $752012 are $86 billion, an increase of 21% as compared to $68the $71 billion of assets in fee-based accounts at DecemberMarch 31, 2010, and $68 billion at September 30, 2011.  Recurring commission and fee revenues include asset based fees, trailing commissions from mutual funds, variable annuities and insurance products, mutual fund service fees and interest.

PCG interest revenues increased by $1$2 million, or 7%10%, resulting from an increase in client margin balances and a slight increase in the interest rate earned on client margin balances.  Interest earned on customer reserve (segregated assets) balances despite the impact of more assets being swept into our multi-bank sweep program.

Non-interest expenses increased due to an increase in balances, which more than offset a decrease in interest rates earned on such balances as compared to$11 million, or 2%, over the prior year.

Sales commission expense increased by $4$5 million, or 1%, generally consistent with the slight increase in commission and fee revenues.  Administrative and incentive compensation expenses increased $7 million, or 8%. The increase primarily results from increases in salaries and benefits due to increased headcount and annual salary increases.  Communications and information processing expense increased $4$6 million, or 27%30%, due to increases in certain computer software development costs and increases in other costs resulting from the additional reporting requirements we have under omnibus arrangements (refer to the increase in mutual fund and annuity service fee revenue arising from these arrangements discussed above).  Partially offsetting the increases described above, clearance and other expense decreased $8 million, or 34%, resulting primarily from favorable resolutions in a number of legal and other matters that have resulted in relatively low other expense levels in the current year.

Six months ended March 31, 2012 compared with the six months ended March 31, 2011 – Private Client Group

PCG pre-tax results decreased $6 million, or 6%, as compared to prior year.

Net revenues increased $21 million, or 2%.  PCG’s pre-tax margin decreased to 8.8% of net revenues compared to the prior year’s 9.5%. 

 
4858


Securities commissions and fees increased $5 million, or 1%.  Commissions arising from our U.S. operations increased approximately 3% as compared to the prior year period as equity market conditions in the U.S. markets, while choppy at best over the six month period, were somewhat improved as compared to March , 2011 levels.  However, securities commissions and fees arising from our Canadian operations decreased 15% as compared to the prior year period and that, coupled with declines in other foreign markets in which we operate, resulted in a modest overall increase in our securities commissions and fees.  Commissions generated from equity, fixed income, and mutual fund products each declined as compared to the prior year period; however, a significant increase in asset-based fees as well as increases in commissions on insurance and annuity products offset those decreases.

Mutual fund and annuity service fees increased $13 million, or 25%, primarily as a result of an increase in mutual fund networking and omnibus fees which are paid by the mutual fund companies whose products we distribute.  During the past year, we have been implementing a change in the data sharing arrangements with many mutual fund companies from networking to an omnibus arrangement.  The fees earned from omnibus arrangements are greater than those under networking arrangements in order to compensate us for the additional reporting requirements performed by the broker-dealer under omnibus arrangements.  The largest portion of this conversion occurred midway through the prior fiscal year.

Client account and service fee revenues increased $3 million, or 5%, over the prior year primarily resulting from an increase in the fees we receive in lieu of interest earnings, from our multi-bank sweep program.  Fees increased as a result of higher balances in the program.

Partially offsetting the increases in net revenues described above, client transaction fees decreased $5 million, or 25%, primarily as a result of certain mutual fund relationships converting over the past year to a no-transaction fee program.  Under this program, we receive increased fees from mutual fund companies which are included within mutual fund and annuity service fee revenue described above, but our clients no longer pay us transaction fees on mutual fund trades within certain of our managed programs.

While total segment revenues increased 2%, the portion that we consider to be recurring continues to increase and is approximately 63% as of March 31, 2012 as compared to 61% as of September 30, 2011.  Assets in fee-based accounts at March 31, 2012 are $86 billion, an increase of 26% as compared to the $68 billion of assets in fee-based accounts at September 30, 2011.  Recurring commission and fee revenues include asset based fees, trailing commissions from mutual funds, variable annuities and insurance products, mutual fund service fees and interest.

PCG interest revenues increased $3 million, or 8%, resulting from an increase in client margin balances and a slight increase in the interest rate earned on client margin balances despite more assets being swept into our multi-bank sweep program.

Non-interest expenses increased $27 million, or 3%, over the prior year.  Sales commission expense increased $9 million, or 1%, generally consistent with the increase in commission and fee revenues.  Administrative and incentive compensation expenses increased $14 million, or 8%. The increase primarily results from increases in salaries and benefits due to increased headcount and annual salary increases.  Communications and information processing expense increased $10 million, or 29%, due to increases in certain computer software development costs and increases in other costs resulting from the additional reporting requirements we have under omnibus arrangements (refer to the increase in mutual fund and annuity service fee revenue arising from these arrangements discussed above).  Partially offsetting the increases described above, clearance and other expense decreased $6 million, or 15%, resulting primarily from favorable resolutions in a number of legal and other matters that have resulted in relatively low other expense levels in the current year.

59
 


Results of Operations – Capital Markets

The following table presents consolidated financial information for our Capital Markets segment for the periods indicated:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  % change  2010  2012  % change  2011  2012  % change  2011 
 ($ in thousands)  ($ in thousands) 
Revenues:                           
Institutional sales commissions:                           
Equity $49,357   (28)% $68,089  $55,879   (19)% $69,124  $105,236   (23)% $137,213 
Fixed income  31,512   (12)%  35,652   35,984   20%  30,056   67,496   3%  65,708 
Underwriting fees  14,475   (60)%  35,870   23,014   (21)%  29,097   37,489   (42)%  64,969 
Tax credit funds syndication fees  4,475   7%  4,195   11,202   87%  6,003   15,677   54%  10,196 
Mergers & acquisitions fees  18,431   9%  16,895   17,438   (21)%  22,013   35,869   (8)%  38,908 
Private placement fees  1,918   1270%  140   1,903  NM   75   3,821  NM   215 
Trading profits  7,133   71%  4,169   10,248   (22)%  13,063   17,381   1%  17,232 
Interest  4,347   (21)%  5,497   4,319   (30)%  6,162   8,666   (26)%  11,659 
Other  4,517   79%  2,519   5,139   183%  1,816   9,656   123%  4,335 
Total revenues  136,165   (21)%  173,026   165,126   (7)%  177,409   301,291   (14)%  350,435 
                                    
Interest expense  3,150   (21)%  3,980   3,342   (21)%  4,250   6,492   (21)%  8,230 
Net revenues  133,015   (21)%  169,046   161,784   (7)%  173,159   294,799   (14)%  342,205 
                                    
Non-interest expenses:                                    
Sales commissions  27,988   (26)%  37,670   30,711   (6)%  32,824   58,699   (17)%  70,494 
Admin & incentive compensation and benefit costs  67,868   (15)%  79,754   81,116   5%  76,910   148,984   (5)%  156,664 
Communications and information processing  12,031   16%  10,362   12,151   12%  10,879   24,182   14%  21,241 
Occupancy and equipment  6,082   16%  5,242   6,332   18%  5,368   12,414   17%  10,610 
Business development  8,240   6%  7,740   7,846   3%  7,627   16,086   5%  15,367 
Clearance and other  7,613   (13)%  8,725   14,534   31%  11,136   22,147   12%  19,861 
Total non-interest expenses  129,822   (13)%  149,493   152,690   5%  144,744   282,512   (4)%  294,237 
Income before taxes and including noncontrolling interests  3,193   (84)%  19,553   9,094   (68)%  28,415   12,287   (74)%  47,968 
Noncontrolling interests  (6,808)      (5,093)  (12,918)      (5,274)  (19,726)      (10,367)
Pre-tax income excluding noncontrolling interests $10,001   (59)% $24,646  $22,012   (35)% $33,689  $32,013   (45)% $58,335 

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


60


Quarter ended DecemberMarch 31, 20112012 compared with the quarter ended DecemberMarch 31, 20102011 – Capital Markets

Pre-tax income in the Capital Markets segment decreased nearly $15$12 million, or 59%35%, as compared to the prior year driven by weaker equity capital markets not entirely offset by improved fixed income results.

Net revenues decreased by $11 million, or 7%, primarily resulting from a $13 million, or 19%, decrease in institutional equity sales commissions, a $6 million, or 21%, reduction in underwriting fees, a $5 million, or 21%, decrease in merger and acquisition fees, and a $3 million, or 22%, decrease in trading profits, which were partially offset by a $6 million, or 20%, increase in institutional fixed income sales commissions, a $5 million, or 87%, increase in tax credit fund syndication fees and an increase in private placement fees of $2 million.  Lingering concerns over the European debt crisis and the U.S. economy, as well as the continued low interest rate environment, continued to have negative impacts on the markets for the better part of the current quarter.  Although equity markets finished the quarter at levels higher than the prior year period, the equity markets remained sluggish for the better part of the quarter resulting in a less than robust market for public offerings.  Fixed income sales commissions increased over the prior year as the market conditions were more favorable for fixed income products.  The number of lead managed underwritings during the current quarter increased in our U.S. operations and decreased in our Canadian operations.  Similarly, the number of co-managed underwritings increased in our U.S. operations and decreased in our Canadian operations.  The prior year quarter was a particularly strong quarter for our Canadian operations but market conditions have slowed significantly in their markets over the past year.  Our tax credit fund syndication subsidiary sold approximately $197 million in tax credit fund equity investments to investors during the quarter, an increase of 86% over the volume sold in the prior year’s comparable period.

The current quarter trading profits increased $3 million, or 44%, as compared to the December 2011 quarter, but trailed the prior year quarter by $3 million, or 22%.  The trading profits generated during the quarter were led by municipal fixed income products which while strong, represent a decline from the comparable prior year period.

Non-interest expenses increased $8 million, or 5%, over the prior year.  Salary and benefits expense increased $8 million, or 29%, due to factors including: the addition of personnel, the annual increase in salary and benefits costs, and the inclusion of Raymond James European Securities, Inc. (“RJES”) in our consolidation effective as of April, 2011 when we acquired a controlling interest in that subsidiary.  Incentive compensation expenses decreased $4 million, or 9%, primarily due to lower profitability levels.  Sales commission expense decreased $2 million, or 6%, which is correlated with the decrease in overall institutional sales commission revenues of 7%.  The increase in other expense primarily resulted from an increase of approximately $5 million in losses of certain tax credit funds that we consolidate.  These losses are included in other expense but are attributable to the noncontrolling interests (see next paragraph) and, therefore, have almost no net impact on the segment’s pre-tax income.

Noncontrolling interests represent the impact of consolidating certain low-income housing tax credit funds, which also impacts other revenue, interest expense, and other expenses within this segment (see Note 8 of the Notes to Condensed Consolidated Financial Statements for further details) as well as the impact of our consolidation of RJES, and reflects the portion of these consolidated entities which we do not own.  Total segment expenses attributable to noncontrolling interest increased by approximately $8 million as compared to the prior year.

Six months ended March 31, 2012 compared with the six months ended March 31, 2011 – Capital Markets

Pre-tax income in the Capital Markets segment decreased over $26 million, or 45%, as compared to the prior year.


49


Net revenues decreased by $36$47 million, or 21%14%, primarily resulting from a $21$32 million, or 60%, reduction in underwriting fees, a $19 million, or 28%23%, decrease in institutional equity sales commissions, and a $4$27 million, or 12%42%, reduction in underwriting fees, a $3 million, or 8%, decrease in institutional fixed income sales commissions,merger and acquisition fees, which were partially offset by increases in trading profits of $3$5 million, or 71%54%, mergerin tax credit fund syndication fees and acquisition fees of $2$4 million or 9%, andin private placement fees of $2 million.fees.  Lingering concerns over the European debt crisis and the U.S. economy, as well as the continued low interest rate environment, negatively impacted the markets for the better part of the current quarter,year, resulting in significantly lower equity and fixed income institutional sales commissions and fewer public offerings.  The numbernumbers of lead managed underwritings during the current quarter decreasedyear has increased 25% in our U.S. operations, and 57%but have decreased 63% in our Canadian operations.  Similarly, the numbers of co-managed underwritings have increased 3% in our U.S. operations but decreased 29% in our Canadian operations. The number of co-managed underwritings decreased 39% in both our U.S. andprior year was a very strong period for our Canadian operations.investment banking operations but market conditions have slowed significantly in their markets so far this year.

61


TheTrading profits for the current quarteryear yielded substantially similar results as compared to the prior year.   Current year trading profits are improved over both the September, 2011 quarter and the prior year quarter,arose primarily from fixed income products, led primarily by municipal fixed income products.  Increased demand and a decrease in supply of municipal bonds in the market during the year have resulted in strong trading gains in the current period.gains.

Non-interest expenses were $20$12 million, or 13%4%, lower than the prior year.  Incentive compensation expense decreased $20$24 million, or 39%24%, the result of variable compensation decreases due to lower revenues and profitability and a $5 million greater reversal of prior year bonus accruals than were made last year and variable compensation decreases due to lower revenues and profitability in the segment in the current quarter.year.  Sales commission expense decreased $10$12 million, or 26%17%, which is correlated with the 22%15% decrease in total institutional sales commission revenues.  Salary and benefits expense increased $7.5$16 million, or 25%27%, due to our investment in additional personnel.personnel, annual increases in salary and benefits, and our consolidation of RJES which was effective when we acquired a controlling interest in that subsidiary in April, 2011.  The increase in other expense results from an increase of $5 million in losses of certain tax credit funds that we consolidate.  These losses are included in other expense but are attributable to the noncontrolling interests (see next paragraph) and, therefore, have almost no net impact on the segment’s pre-tax income.

Noncontrolling interests represent the impact of consolidating certain low-income housing tax credit funds, which also impacts other revenue, interest expense, and other expenses within this segment (see Note 78 of the Notes to Condensed Consolidated Financial Statements for further details) as well as the impact of our consolidation of Raymond James European Securities, Inc. (“RJES”),RJES, and reflects the portion of these consolidated entities which we do not own.  Total segment expenses attributable to noncontrolling interest increased by approximately $9 million as compared to the prior year.

 
50



Results of Operations – Asset Management

The following table presents consolidated financial information for our Asset Management segment for the periods indicated:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  % change  2010  2012  % change  2011  2012  % change  2011 
 ($ in thousands)  ($ in thousands) 
Revenues:                           
Investment advisory fees $47,517   3% $45,922  $48,538   8% $45,088  $96,055   6% $91,010 
Other  9,278   (4)%  9,665   9,679   (6)%  10,253   18,957   (5)%  19,918 
Total revenues  56,795   2%  55,587   58,217   5%  55,341   115,012   4%  110,928 
                                    
Expenses:                                    
Administrative and incentive compensation and benefit costs  19,985   3%  19,492   20,317   6%  19,164   40,302   4%  38,656 
Communications and information processing  3,802   2%  3,710   4,165   4%  4,007   7,967   3%  7,717 
Occupancy and equipment  921   (9)%  1,009   817   (14)%  951   1,738   (11)%  1,960 
Business development  1,880   1%  1,857   1,660   (8)%  1,797   3,540   (3)%  3,654 
Investment sub-advisory fees  6,172   (3)%  6,383   6,509   (4)%  6,782   12,681   (4)%  13,165 
Other  7,766   20%  6,466   7,980   10%  7,263   15,746   15%  13,729 
Total expenses  40,526   4%  38,917   41,448   4%  39,964   81,974   4%  78,881 
Income before taxes and including noncontrolling interests  16,269   (2)%  16,670   16,769   9%  15,377   33,038   3%  32,047 
Noncontrolling interests  456       1,076   148       150   604       1,226 
Pre-tax income excluding noncontrolling interests $15,813   1% $15,594  $16,621   9% $15,227  $32,434   5% $30,821 

The following table presents assets under management and the non-managed fee-based assets that significantly impact segment results at the dates indicated:

  
December 31,
2011
  
September 30,
2011
  
December 31,
2010
  
September 30,
2010
 
  (in millions) 
Assets under management:            
Eagle Asset Management, Inc. $17,828  $16,092  $17,546  $15,567 
Raymond James Consulting Services  8,634   8,356   8,791   8,458 
Unified Managed Accounts  2,054   1,677   978   735 
Freedom Accounts & other managed programs  10,115   9,523   9,628   8,791 
Total assets under management  38,631   35,648   36,943   33,551 
                 
Less:  Assets managed for affiliated entities  (3,703)  (3,579)  (3,580)  (3,544)
Net assets under management $34,928  $32,069  $33,363  $30,007 
                 
Non-managed fee-based assets:                
Passport $25,371  $24,008  $24,006  $22,708 
Ambassador  14,573   13,555   11,655   10,479 
Other non-managed fee-based assets  2,369   2,196   2,177   2,023 
Total $42,313  $39,759  $37,838  $35,210 

The Asset Management segment includes the operations of Eagle Asset Management, Inc. (“Eagle”), the Eagle Family of Funds, the asset management operations of RJ&A, Raymond James Trust, and other fee-based programs.  The majority of the revenue for this segment is generated by the investment advisory fees related to asset management services for individual investment portfolios, mutual funds and managed programs.  As of December 31, 2011, approximately 83% of investment advisory fees are earned from assets held in managed programs.  Generally, about 70% of our investment advisory fees recorded in a quarter are determined based on balances at the beginning of a quarter, approximately 15% are based on balances at the end of the quarter and the remaining 15% are computed based on average assets throughout the quarter. Asset balances are impacted by both the performance of the market and the new sales and redemptions of client accounts/funds. Rising markets positively impact revenues from investment advisory fees as existing accounts increase in value, and individuals and institutions typically commit incremental funds in rising markets.


 
5162
 


The following table reflects assets under management in managed programs that significantly impact segment results at the dates indicated:

  
March 31,
2012
  
December 31,
2011
  
September 30,
2011
  
March 31,
2011
  
December 31,
2010
  
September 30,
2010
 
  (in millions) 
Assets under management:                  
Eagle Asset Management, Inc. $20,400  $17,828  $16,092  $18,514  $17,546  $15,567 
Raymond James Consulting Services  9,121   8,634   8,356   9,088   8,791   8,458 
Unified Managed Accounts  2,486   2,054   1,677   1,372   978   735 
Freedom Accounts & other managed programs  11,168   10,115   9,523   10,348   9,628   8,791 
Total assets under management  43,175   38,631   35,648   39,322   36,943   33,551 
                         
Less: Assets managed for affiliated entities  (3,864)  (3,703)  (3,579)  (3,685)  (3,580)  (3,544)
Net assets under management $39,311  $34,928  $32,069  $35,637  $33,363  $30,007 

As of March 31, 2012, approximately 83% of investment advisory fees recorded in this segment are earned from assets held in managed programs.  Generally, about 55% of our investment advisory fees recorded in a quarter are determined based on balances at the beginning of a quarter, approximately 25% are based on balances at the end of the quarter and the remaining 20% are computed based on average assets throughout the quarter.

The following table reflects assets under management in non-managed programs that significantly impact segment results at the dates indicated:
  
March 31,
2012
  
December 31,
2011
  
September 30,
2011
  
March 31,
2011
  
December 31,
2010
  
September 30,
2010
 
  (in millions) 
Passport $27,760  $25,371  $24,008  $25,384  $24,006  $22,708 
Ambassador  16,310   14,573   13,555   13,013   11,655   10,479 
Other non-managed fee-based assets  2,627   2,369   2,196   2,439   2,177   2,023 
Total $46,697  $42,313  $39,759  $40,836  $37,838  $35,210 

As of March 31, 2012, approximately 17% of investment advisory fees recorded in this segment are earned from assets held in non-managed programs and all such investment advisory fees are determined based on balances at the beginning of the quarter.

Quarter ended DecemberMarch 31, 20112012 compared to the quarter ended DecemberMarch 31, 20102011 – Asset Management

Pre-tax income in the Asset Management segment increased $200,000,over $1 million, or 1%9%, as compared to the prior year.

Investment advisory fee revenue increased by $2over $3 million, or 3%8%, from the prior year, generated by an increase in assets under management.  AssetsTotal assets under management are $1.6$3.9 billion more at March 31, 2012 than at the endthey were as of the comparable prior year period,March 31, 2011, an increase of 4.7%9.8%.  Of this increase, approximately $3.1$3.7 billion results from net inflows of client assets, partially offset by a net decreaseand the remaining portion of the increase results from an increase in market values of approximately $1.5 billion.values.

Expenses increased by approximately $2$1.5 million, or 4%, primarily resulting from a net $500,000,$1 million, or 3%6%, increase in administrative and performance based incentive compensation, and an $1 million,a $700 thousand, or 20%10%, increase in other expenses.  A significant portion of the increase in other expense is due to increases in the costs incurred to make certain funds sponsored by Eagle available as investment choices on the platforms of other broker-dealers andbroker-dealers.

63


Six months ended March 31, 2012 compared to the six months ended March 31, 2011 – Asset Management

Pre-tax income in the Asset Management segment increased nearly $2 million, or 5%, as compared to prior year.

Investment advisory fee revenue increased by $5 million, or 6%, generated by an increase in assets under management.  Total assets under management are $3.9 billion more at March 31, 2012 than they were as of March 31, 2011, an increase of 9.8%. Of this increase, approximately $3.7 billion results from net inflows of client assets, and the remaining portion of the increase results from an increase in market values.

Expenses increased by approximately $3 million, or 4%, primarily resulting from a $1.6 million, or 4%, increase in administrative and performance based incentive compensation, and a $2 million, or 15%, increase in other expenses.  A significant portion of the increase in other expense is due to increases in the costs incurred to make certain funds sponsored by Eagle available as investment choices on the platforms of other broker-dealers.  In addition the increase includes greater third-party expenses of Raymond James Trust incurred in the performance of certain of its obligations to clients.


Results of Operations – RJ Bank

The following table presents consolidated financial information for RJ Bank for the periods indicated:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  % change  2010  2012  % change  2011  2012  % change  2011 
 ($ in thousands)  ($ in thousands) 
Revenues:                           
Interest income $75,093   (4)% $78,312  $80,581   15% $70,249  $155,674   5% $148,561 
Interest expense  2,364   (40)%  3,959   2,343   (32)%  3,463   4,707   (37)%  7,422 
Net interest income  72,729   (2)%  74,353   78,238   17%  66,786   150,967   7%  141,139 
Other (loss) income  2,323   367%  (871)  2,555   322%  (1,150)  4,878   341%  (2,021)
Net revenues  75,052   2%  73,482   80,793   23%  65,636   155,845   12%  139,118 
Non-interest expenses:                                    
Employee compensation and benefits  4,180   12%  3,734   4,419   22%  3,636   8,599   17%  7,370 
Communications and information processing  754   70%  444   677   18%  572   1,431   41%  1,016 
Occupancy and equipment  171   (6)%  182   211   -   210   382   (3)%  392 
Provision for loan losses  7,456   (34)%  11,232   5,154   (40)%  8,637   12,610   (37)%  19,869 
FDIC insurance premiums  1,186   (58)%  2,831   1,297   (51)%  2,623   2,483   (54)%  5,454 
Affiliate deposit account servicing fees  5,768   1%  5,707   6,551   52%  4,307   12,319   23%  10,014 
Other  2,534   (12)%  2,888   5,171   52%  3,395   7,705   23%  6,283 
Total non-interest expenses  22,049   (18)%  27,018   23,480   -   23,380   45,529   (10)%  50,398 
Pre-tax income $53,003   14% $46,464  $57,313   36% $42,256  $110,316   24% $88,720 


ForDuring the period ended DecemberMarch 31, 2011,2012, RJ Bank wasbecame a federally chartered savingsnational bank, regulated by the OCC, which provides corporate, residential and consumer loans, as well as Federal Deposit Insurance Corporation (“FDIC”) insured deposit accounts, to clients of our broker-dealer subsidiaries and to the general public.  On February 1, 2012, RJ Bank converted to a national bank charter under which it will continue to be regulated by the OCC.  RJ Bank is active in corporate loan syndications and participations, and also purchases commercial loans in the secondary market.  When available, residential whole loan packages meeting our underwriting standards are purchased to hold for investment.  RJ Bank generates revenue principally through the interest income earned on loans and investments, which is offset by the interest expense it pays on client deposits and on its borrowings.

52


The tables below present certain credit quality trends for corporate loans and residential/consumer loans:

  Three months ended December 31, 
  2011  2010 
  (in thousands) 
Net loan charge-offs:      
C&I loans $(3,149) $- 
CRE loans  430   (6,349)
Residential/mortgage loans  (2,945)  (5,943)
Consumer loans  (33)  - 
Total $(5,697) $(12,292)
         
         
  
December 31,
2011
  
September 30,
2011
 
  (in thousands) 
Allowance for loan losses:        
Loans held for sale $-  $5 
Loans held for investment:        
C&I loans  84,086   81,267 
CRE construction loans  105   490 
CRE loans  30,427   30,752 
Residential/mortgage loans  32,864   33,210 
Consumer loans  21   20 
Total $147,503  $145,744 
         
Nonperforming assets:        
Nonperforming loans:        
C& I loans $8,539  $25,685 
CRE loans  15,825   15,842 
Residential mortgage loans:        
Residential mortgage loans  87,025   91,682 
Home equity loans/lines  134   114 
Total nonperforming loans  111,523   133,323 
Other real estate owned:        
CRE  4,942   7,707 
Residential:        
First mortgage  7,334   6,852 
Home equity  13   13 
Total other real estate owned  12,289   14,572 
Total nonperforming assets $123,812  $147,895 

  Three months ended March 31,  Six months ended March 31, 
  2012  2011  2012  2011 
  (in thousands) 
Net loan (charge-offs)/recoveries:            
C&I loans $(2,068) $( 82) $(5,217) $(82)
CRE loans  (882)  (3,302)  (452)  (9,651)
Residential/mortgage loans  (5,107)  (5,123)  (8,052)  (11,066)
Consumer loans  5   (39)  (28)  (39)
Total $(8,052) $(8,546) $(13,749) $(20,838)


Total loans:      
Loans held for sale, net(1)
 $104,152  $102,236 
Loans held for investment:        
C&I loans  4,517,838   4,100,939 
CRE construction loans  6,240   29,087 
CRE loans  825,468   742,889 
Residential/mortgage loans  1,748,057   1,756,486 
Consumer loans  9,087   7,438 
Net unearned income and deferred expenses  (48,135)  (45,417)
Total loans held for investment  7,058,555   6,591,422 
Total loans $7,162,707  $6,693,658 
64


  
March 31,
2012
  
September 30,
2011
 
  (in thousands) 
Allowance for loan losses:      
Loans held for sale $-  $5 
Loans held for investment:        
C&I loans  84,300   81,267 
CRE construction loans  749   490 
CRE loans  26,835   30,752 
Residential/mortgage loans  32,742   33,210 
Consumer loans  52   20 
Total $144,678  $145,744 
         
Nonperforming assets:        
Nonperforming loans:        
C&I loans $6,230  $25,685 
CRE loans  9,441   15,842 
Residential mortgage loans:        
Residential mortgage loans  86,970   91,682 
Home equity loans/lines  171   114 
Total nonperforming loans  102,812   133,323 
Other real estate owned:        
CRE  6,178   7,707 
Residential:        
First mortgage  7,792   6,852 
Home equity  13   13 
Total other real estate owned  13,983   14,572 
Total nonperforming assets $116,795  $147,895 

  
March 31,
2012
  
September 30,
2011
 
  (in thousands) 
Total loans:      
Loans held for sale, net(1)
 $99,255  $102,236 
Loans held for investment:        
C&I loans  4,820,364   4,100,939 
CRE construction loans  50,010   29,087 
CRE loans  937,570   742,889 
Residential/mortgage loans  1,726,132   1,756,486 
Consumer loans  40,553   7,438 
Net unearned income and deferred expenses  (83,378)  (45,417)
Total loans held for investment  7,491,251   6,591,422 
Total loans $7,590,506  $6,693,658 

(1)  Net of unearned income and deferred expenses.



 
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Quarter ended DecemberMarch 31, 20112012 compared to the quarter ended DecemberMarch 31, 20102011 – RJ Bank

Pre-tax income generated by the RJ Bank segment increased $7$15 million, or 14%36%, as compared to the prior year.  The improvement in pre-tax income was attributable to a $4an increase of $15 million, or 34%23%, in net revenue, and a $3 million, or 40%, decrease in the provision for loan losses, and an increase of $2offset by a $3 million, or 2%23%, increase in net revenue.non-interest expenses.
 
Net revenue was positively impacted by an increase of $11 million in net interest income, a decrease of $1 million  in other-than-temporarily impaired (“OTTI”) losses on our available for sale securities portfolio and a $2$1 million foreign currency transaction gain, offset by a $2 million decrease in net interest income.gain.
 
 
Net interest income in the prior year period included a $6 million correction of an accumulated interest income understatement of prior periods related to purchased residential loan pools. Excluding the impact of this correction recorded in the prior year period, net interest income increased $5 million over the comparable prior year period primarily as a result of a $756 million$1 billion, or 16%, increase in average loans outstanding which was driven by a $1.1 billion, or 26%, increase in average corporate loans outstanding, offset by a $154 million, or 8%, decrease in the average residential portfolio outstanding.  Average corporate loans outstanding include the impact of the $400 million Canadian loan portfolio purchased on February 29, 2012.  The average loan portfolio yield was virtually unchanged totaling 4.25%, compared to 4.26% in the prior year period as an increase in the corporate portfolio yield was offset by a decrease in the average loan portfolio yield from 4.43% (4.33% excluding the impact of the correction recorded in the prior year period) to 4.09%. The loan portfolio yield decreased due to a decline in the yield on the residential portfolio resulting from adjustable rate loans resetting at lower rates.portfolio. Average interest-earning banking assets increased $1.5$1.2 billion as a result of the $756 million$1 billion increase in average loans, an $857increase of $204 million increase in average cash balances and a decrease of $129$61 million in average investments. The net interest margin decreased 0.49%increased 0.02% from the prior year quarter to 3.21%3.55% due to a 0.59%0.05% decrease in the yield on earning assets offset by a 0.12% decrease in the average cost of funds. The decrease in the loan portfolio yield combined with the increase in low-yielding short term cash balances and a lower yield on the investment portfolio all contributed to the decrease in the net interest margin.
 
 
Corresponding to the increase in interest-earning banking assets, average interest-bearing banking liabilities increased $1.4$1 billion, or 21%15%, to $8$7.7 billion. This increase in average liabilities above the amount required to fund the growth in loans was the result of higher cash balances in firm client accounts, which exceeded the RJBDP capacity at outside financial institutions. These deposits were invested in short term liquid investments producing very little interest rate spread.
 
 
The provision for loan losses as compared to the prior year quarter was impacted by a significant reduction in CRE nonperforming loans, improved credit characteristics of certain problem loans, and the reduction of the balance of residential nonperforming loans. In addition, somewhat improved economic conditions relative to the prior year quarter has limited the number of new problem loans. The current quarter provision for loan losses reflects an additional $5 million resulting from the Canadian loans purchased during the period.  Net loan charge-offs decreased $7$1 million or 54%, to $6$8 million forcompared to the prior year quarter.
 
 
Nonperforming loans decreased $22$9 million, or 16%8%, compared to September 30, 2011. CorporateDecember 31, 2011, which was almost entirely due to the change in corporate nonperforming loans decreased $17 million, or 41%, and residential nonperforming loans decreased $5 million, or 5%.loans.
 
 
The unrealized loss on our available for sale securities portfolio was $50$33 million, compared to $46$50 million as of September 30,December 31, 2011.  TheDespite the market value improvement during the quarter, the unrealized loss was duecontinued to continuedreflect wide interest rate spreads across market sectors related to the continued uncertainty in the residential non-agency collateralized mortgage obligation (“CMOs”) market.
 
The $3 million improvement in other income as compared to the prior year quarter was primarily due to a $2 million foreign currency transaction gain related to RJ Bank’s $64 million Canadian currency denominated loan portfolio and a reduction of $1 million in OTTI charges on the non-agency securities portfolio.
On June 30, 2011, RJ Bank announced that it entered into a definitive agreement to acquire substantially all of a foreign bank’s Canadian corporate loan portfolio.  This loan portfolio currently consists of approximately $505 million in loan commitments, of which approximately $440 million is outstanding.  The loans we are purchasing are comprised of CRE and C&I loans as well as project finance loans in the power and infrastructure sector.  RJ Bank expects this transaction to close during February, 2012.


 
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The following table presents average balance data and interest income and expense data for our banking operations, as well as the related interest yields and rates and interest spread for the years indicated:

 Three months ended December 31,  Three months ended March 31, 
 2011  2010  2012  2011 
 
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
 
 ($ in thousands)  ($ in thousands) 
Interest-earning banking assets:                                    
Loans, net of unearned income(1)
                                    
Loans held for sale $92,904  $390   1.67% $6,004  $90   6.02% $94,485  $503   2.14% $31,063  $223   2.90%
Loans held for investment                                                
C&I loans  4,299,124   48,982   4.49%  3,210,932   37,945   4.62%  4,566,963   53,848   4.68%  3,432,915   38,673   4.51%
CRE construction loans  17,818   101   2.21%  63,078   381   2.37%  35,038   949   10.71%  60,979   583   3.82%
CRE loans  755,456   7,306   3.78%  909,538   8,240   3.55%  785,005   8,083   4.07%  801,865   7,957   3.97%
Residential mortgage loans  1,757,902   15,202   3.38%  1,976,581   27,509   4.60%  1,738,903   14,053   3.20%  1,894,877   18,919   3.99%
Consumer loans  7,591   41   2.16%  8,686   39   1.78%  22,792   151   2.65%  6,177   26   1.73%
Total loans, net  6,930,795   72,022   4.09%  6,174,819   74,204   4.43%  7,243,186   77,587   4.25%  6,227,876   66,381   4.26%
                                                
Agency mortgage-backed securities (“MBS”)  170,618   330   0.77%  208,118   387   0.74%  203,938   419   0.82%  187,211   358   0.77%
Non-agency CMOs  190,267   1,515   3.19%  245,973   3,169   5.15%  183,253   1,425   3.11%  222,851   2,523   4.53%
Money market funds, cash and cash equivalents  1,447,623   885   0.24%  641,393   457   0.28%  964,383   568   0.24%  783,715   567   0.29%
Federal Home Loan Bank (“FHLB”) stock and other  164,104   341   0.83%  148,716   95   0.25%  131,673   582   1.77%  146,816   420   1.16%
Total interest-earning banking assets  8,903,407  $75,093   3.32%  7,419,019  $78,312   3.91%  8,726,433  $80,581   3.66%  7,568,469  $70,249   3.71%
                                                
Non-interest-earning banking assets:                                                
Allowance for loan losses  (148,317)          (144,110)          (144,774)          (144,872)        
Unrealized loss on available for sale securities  (48,857)          (47,475)          (44,354)          (40,318)        
Other assets  260,936           250,164           243,039           241,318         
Total non-interest-earning banking assets  63,762           58,579           53,911           56,128         
                        
Total banking assets $8,967,169          $7,477,598          $8,780,344          $7,624,597         
                                                
Interest-bearing banking liabilities:                                                
Deposits:                                                
Certificates of deposit $259,769  $1,488   2.27% $217,406  $1,587   2.90% $298,447  $1,633   2.19% $220,037  $1,541   2.84%
Money market, savings, and NOW accounts(2)
  7,637,560   831   0.04%  6,327,592   1,830   0.11%  7,411,619   704   0.04%  6,507,473   1,799   0.11%
FHLB advances and other  72,645   45   0.25%  51,036   542   4.16%  31,9051   6   0.07%  13,692   123   3.61%
                        
Total interest-bearing banking liabilities  7,969,974  $2,364   0.12%  6,596,034  $3,959   0.24%  7,741,971  $2,343   0.12%  6,741,202  $3,463   0.21%
                                                
Non-interest-bearing banking liabilities  66,865           60,242           62,511           58,276         
                                                
Total banking liabilities  8,036,839           6,656,276           7,804,482           6,799,478         
Total banking shareholder’s equity  930,330           821,322           975,862           825,119         
Total banking liabilities and shareholders’ equity $8,967,169          $7,477,598          $8,780,344          $7,624,597         
(continued on next page)(continued on next page) (continued on next page) 


 
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 Three months ended December 31,  Three months ended March 31, 
 2011  2010  2012  2011 
 
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
 
 ($ in thousands)  ($ in thousands) 
 (continued from previous page)  (continued from previous page) 
Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income $933,433  $72,729     $822,985  $74,353     $984,462  $78,238     $827,267  $66,786    
                                            
Bank net interest::
                                            
Spread          3.20%(3)          3.67%          3.54%(3)          3.48%
Margin (net yield on interest-earning banking assets)          3.21%(3)          3.70%          3.55%(3)          3.50%
Ratio of interest-earning banking assets to interest-bearing banking liabilities          111.71%          112.48%          112.72%          111.65%
Return on average:                                                
Total banking assets          1.48%          1.55%          1.65%          1.04%
Total banking shareholder's equity          14.25%          14.09%          14.83%          9.93%
Average equity to average total banking assets          10.37%          10.98%          11.11%          10.45%


(1)  Nonaccrual loans are included in the average loan balances. Payment or income received on impaired nonaccrual loans are applied to principal. Income on other nonaccrual loans is recognized on a cash basis. Fee income on loans included in interest income for the three months ended DecemberMarch 31, 2012 and 2011 and 2010 was $10$12 million and $12$10 million, respectively.

(2)  Negotiable Order of Withdrawal (“NOW”) account.

(3)  Excluding the impact of excess RJBDP deposits held during the three month period ended DecemberMarch 31, 2011,2012, the net interest spread and margin was 3.59%3.75% and 3.60%3.76% at DecemberMarch 31, 2011,2012, respectively.  These deposits arose from higher cash balances in firm client accounts due to the market volatility, thus exceeding the RJBDP capacity at outside financial institutions in the program.  These deposits were invested in short term liquid investments producing very little net interest spread.


 
5668
 


Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning banking assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on RJ Bank's interest-earning assets and the interest incurred on its interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year's volume. Changes applicable to both volume and rate have been allocated proportionately.

 Three months ended December 31,  Three months ended March 31, 
 2011 compared to 2010  2012 compared to 2011 
 Increase (decrease) due to  Increase (decrease) due to 
 Volume  Rate  Total  Volume  Rate  Total 
 (in thousands)  (in thousands) 
Interest revenue:                  
Interest-earning banking assets:                  
Loans, net of unearned income:                  
Loans held for sale $1,303  $(1,003) $300  $456  $(176) $280 
Loans held for investment                        
C&I loans  12,860   (1,823)  11,037   12,775   2,400   15,175 
CRE construction loans  (273)  (7)  (280)  (248)  614   366 
CRE loans  (1,396)  462   (934)  (167)  293   126 
Residential mortgage loans(1)
  (2,338)  (3,592)  (5,930)  (1,557)  (3,309)  (4,866)
Consumer loans  (5)  7   2   70   55   125 
Agency MBS  (70)  13   (57)  32   29   61 
Non-agency CMOs  (718)  (936)  (1,654)  (449)  (649)  (1,098)
Money market funds, cash and cash equivalents  574   (146)  428   130   (129)  1 
FHLB stock and other  10   236   246 
FHLB/Fed stock and other  (43)  205   162 
Total interest-earning banking assets  9,947   (6,789)  3,158   10,999   (667)  10,332 
                        
Interest expense:                        
Interest-bearing banking liabilities:                        
Deposits:                        
Certificates of deposit  309   (408)  (99)  549   (457)  92 
Money market, savings and NOW accounts  379   (1,378)  (999)  250   (1,345)  (1,095)
FHLB advances and other  229   (726)  (497)  164   (281)  (117)
Total interest-bearing banking liabilities  917   (2,512)  (1,595)  963   (2,083)  (1,120)
Change in net interest income $9,030  $(4,277) $4,753  $10,036  $1,416  $11,452 


Six months ended March 31, 2012 compared to the six months ended March 31, 2011 – RJ Bank

Pre-tax income generated by the RJ Bank segment increased $22 million, or 24%, as compared to the prior year.  The improvement in pre-tax income was primarily attributable to an increase of $17 million, or 12%, in net revenue and a $7 million, or 37%, decrease in the provision for loan losses.
Net revenue was positively impacted by a $10 million increase in net interest income, a decrease of $2 million in OTTI losses on our available for sale securities portfolio and a $3 million foreign currency transaction gain.
Net interest income in the prior year period included a $6 million correction of an accumulated interest income understatement of prior periods related to purchased residential mortgage loan pools. Excluding the impact of this correction recorded in the prior year period, net interest income increased $16 million over the comparable prior year period primarily as a result of an $884 million increase in average loans outstanding offset by a decrease in the average loan portfolio yield from 4.40% (4.30% excluding the impact of the correction recorded in the prior year period) to 4.17%. Average corporate loans outstanding include the impact of the $400 million Canadian loan portfolio purchased on February 29. The loan portfolio yield decreased due to a decline in the yield on the residential mortgage loan portfolio resulting from adjustable rate loans resetting at lower rates. Average interest-earning banking assets increased $1.3 billion as a result of the $884 million increase in average loans, a $533 million increase in average cash balances, offset by a decrease of $95 million in average investments. The net interest margin decreased 0.27% (0.19% excluding the impact of the correction recorded in the prior period) from the prior year quarter to 3.38% due to a decrease in the yield on earning assets partially offset by a decrease in the average cost of funds. The decrease in the loan portfolio yield combined with the increase in low-yielding short term cash balances and a lower yield on the investment portfolio all contributed to the decrease in the net interest margin.

69
Corresponding to the increase in interest-earning banking assets, average interest-bearing banking liabilities increased $1.2 billion to $7.9 billion. This increase in average liabilities above the amount required to fund the growth in loans was the result of higher cash balances in firm client accounts, which exceeded the RJBDP capacity at outside financial institutions. These deposits were invested in short term liquid investments producing very little interest rate spread. The RJBDP capacity issue was resolved during the March quarter.
The provision for loan losses as compared to the prior year was impacted by a reduction in CRE nonperforming loans, improved credit characteristics of certain problem loans, and the reduction of the balance of residential nonperforming loans. In addition, somewhat improved economic conditions relative to the prior year has limited the number of new problem loans. Net loan charge-offs decreased $7 million, or 34%, to $14 million for the period.
Nonperforming loans decreased $31 million, or 23%, compared to September 30, 2011. Corporate nonperforming loans decreased $26 million, or 62%, and residential nonperforming loans decreased $5 million, or 5%.

70



The following table presents average balance data and interest income and expense data for our banking operations, as well as the related interest yields and rates and interest spread for the years indicated:

  Six months ended March 31, 
  2012  2011 
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
 
  ($ in thousands) 
Interest-earning banking assets:                  
Loans, net of unearned income(1)
                  
Loans held for sale $93,690  $893   1.90% $18,396  $313   3.41%
Loans held for investment                        
C&I loans  4,431,728   104,284   4.66%  3,354,755   76,618   4.54%
CRE construction loans  26,420   1,419   10.56%  62,594   964   3.05%
CRE loans  770,002   13,566   3.47%  821,688   16,197   3.90%
Residential mortgage loans  1,748,454   29,255   3.29%  1,936,178   46,428   4.42%
Consumer loans  15,150   192   2.53%  7,445   65   1.76%
Total loans, net  7,085,444   149,609   4.17%  6,201,056   140,585   4.40%
                         
Agency MBS  187,187   749   0.80%  197,779   745   0.75%
Non-agency CMOs  186,779   2,940   3.15%  234,539   5,692   4.85%
Money market funds, cash and cash equivalents  1,207,288   1,453   0.24%  711,772   1,024   0.29%
FHLB stock and other  147,978   923   1.24%  147,777   515   0.70%
Total interest-earning banking assets  8,814,676  $155,674   3.49%  7,492,923  $148,561   3.85%
                         
Non-interest-earning banking assets:                        
Allowance for loan losses  (146,546)          (144,487)        
Unrealized loss on available for sale securities  (46,618)          (43,936)        
Other assets  252,021           245,789         
Total non-interest-earning banking assets  58,857           57,366         
Total banking assets $8,873,533          $7,550,289         
                         
Interest-bearing banking liabilities:                        
Deposits:                        
Certificates of deposit $279,002  $3,121   2.23% $218,707  $3,129   2.87%
Money market, savings, and NOW accounts  7,525,207   1,535   0.04%  6,416,544   3,628   0.11%
FHLB advances and other  52,386   51   0.20%  32,569   665   4.05%
Total interest-bearing banking liabilities  7,856,595  $4,707   0.12%  6,667,820  $7,422   0.22%
                         
Non-interest-bearing banking liabilities  64,540           59,270         
                         
Total banking liabilities  7,921,135           6,727,090         
Total banking shareholder’s equity  952,398           823,199         
Total banking liabilities and shareholders’ equity $8,873,533          $7,550,289         
(continued on next page) 


71



  Six months ended March 31, 
  2012  2011 
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
  
Average
balance
  
Interest
inc./exp.
  
Average
yield/
cost
 
  ($ in thousands) 
  (continued from previous page) 
Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income $958,081  $150,967     $825,103  $141,139    
                       
Bank net interest::
                      
Spread          3.37%(2)          3.63%
Margin (net yield on interest-earning banking assets)          3.38%(2)          3.65%
Ratio of interest-earning banking assets to interest-bearing banking liabilities          112.19%          112.37%
Return on average:                        
Total banking assets          1.56%          1.48%
Total banking shareholder's equity          14.55%          13.59%
Average equity to average total banking assets          10.73%          10.90%


(1)  AdjustedNonaccrual loans are included in the average loan balances. Payment or income received on impaired nonaccrual loans are applied to excludeprincipal. Income on other nonaccrual loans is recognized on a $6 million December 2010 quarter end correction of an accumulatedcash basis. Fee income on loans included in interest income understatementfor the six months ended March 31, 2012 and 2011 was $22 million in prior periods related to purchased residential mortgage loan pools.each respective period.

(2)  Excluding the impact of excess RJBDP deposits held during the six month period ended March 31, 2012, the net interest spread and margin was 3.67% and 3.68%, respectively.  These deposits arose from higher cash balances in firm client accounts due to the market volatility, thus exceeding the RJBDP capacity at outside financial institutions in the program.  These deposits were invested in short term liquid investments producing very little net interest spread.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning banking assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on RJ Bank's interest-earning assets and the interest incurred on its interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year's volume. Changes applicable to both volume and rate have been allocated proportionately.

 
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  Six months ended March 31, 
  2012 compared to 2011 
  Increase (decrease) due to 
  Volume  Rate  Total 
  (in thousands) 
Interest revenue:         
Interest-earning banking assets:         
Loans, net of unearned income:         
Loans held for sale $1,281  $(701) $580 
Loans held for investment            
C&I loans  24,597   3,069   27,666 
CRE construction loans  (557)  1,012   455 
CRE loans  (1,019)  (1,612)  (2,631)
Residential mortgage loans  (4,501)  (12,672)  (17,173)
Consumer loans  68   59   127 
Agency MBS  (40)  44   4 
Non-agency CMOs  (1,159)  (1,593)  (2,752)
Money market funds, cash and cash equivalents  713   (284)  429 
FHLB stock and other  1   407   408 
Total interest-earning banking assets  19,384   (12,271)  7,113 
             
Interest expense:            
Interest-bearing banking liabilities:            
Deposits:            
Certificates of deposit  863   (871)  (8)
Money market, savings and NOW accounts  627   (2,720)  (2,093)
FHLB advances and other  405   (1,019)  (614)
Total interest-bearing banking liabilities  1,895   (4,610)  (2,715)
Change in net interest income $17,489  $(7,661) $9,828 

73
 


Results of Operations – Emerging Markets

The following table presents consolidated financial information of our Emerging Markets segment for the periods indicated:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  % change  2010  2012  % change  2011  2012  % change  2011 
��($ in thousands)  ($ in thousands) 
Revenues:                           
Securities commissions and fees $2,307   (37)% $3,669  $2,407   (20)% $3,005  $4,714   (29)% $6,674 
Investment banking  44   (98)%  1,906   3,954   (33)%  5,943   3,998   (49)%  7,849 
Investment advisory fees  953   (5)%  998   965   (3)%  993   1,918   (4)%  1,991 
Interest income  146   (24)%  193   256   (53)%  543   402   (45)%  736 
Trading profits  959   (43)%  1,677   978   (34)%  1,486   1,937   (39)%  3,163 
Other income  243   66%  146   (33)  (313)%  (8)  210   52%  138 
Total revenues  4,652   (46)%  8,589   8,527   (29)%  11,962   13,179   (36)%  20,551 
Interest expense  38   (36)%  59   8   (84)%  49   46   (57)%  108 
Net revenues  4,614   (46)%  8,530   8,519   (28)%  11,913   13,133   (36)%  20,443 
Non-interest expenses:                                    
Compensation expense  4,887   (2)%  4,963   7,046   (3)%  7,297   11,933   (3)%  12,260 
Other expense  2,117   (29)%  3,002   2,418   (26)%  3,273   4,535   (28)%  6,275 
Total non-interest expenses  7,004   (12)%  7,965   9,464   (10)%  10,570   16,468   (11)%  18,535 
(Loss) income before taxes and including noncontrolling interests:  (2,390)  (523)%  565   (945)  (170)%  1,343   (3,335)  (275)%  1,908 
Noncontrolling interests  159       244   54       151   213       395 
Pre-tax (loss) income excluding noncontrolling interests $(2,549)  (894)% $321  $(999)  (184)% $1,192  $(3,548)  (335)% $1,513 

The Emerging Markets segment includes the results from our joint ventures in Latin America including Argentina, Uruguay and Brazil.

Quarter ended DecemberMarch 31, 20112012 compared to the quarter ended DecemberMarch 31, 20102011 – Emerging Markets

Pre-tax income in the Emerging Markets segment decreased $3$2 million, or 184%, as compared to the prior year.

Total revenues decreased by over $3 million as compared to the prior year.  The majority of the decrease is due to investment banking revenues, which decreased $2 million as compared to the prior year.  The majority of the investmentInvestment banking revenues in the prior year aroseincluded $5 million from our Argentine joint venture whichwho acted as an advisor to one of our institutional clients; this revenue did not recurclients on a significant transaction.  In the current period, we recognized an additional $3 million of investment banking revenues associated with those advisory services representing an amount which had been deferred in the currentprior year pending the satisfaction of certain conditions.  Securities commissions and fees decreased $600 thousand.

Non-interest expenses decreased approximately $1 million, primarily resulting from a decrease in clearing expenses that resulted from reduced trading activity, and a decrease in compensation related expenses resulting from lower levels of profitability.

Six months ended March 31, 2012 compared to the six months ended March 31, 2011 – Emerging Markets

Pre-tax income in the Emerging Markets segment decreased $5 million, or 335%, as compared to the prior year.

Total revenues decreased approximately $7 million as compared to the prior year.  Our revenues in this segment during the current period were furtherhave been negatively impacted by market volatility which has impacted certain of our securities commissions, investment advisory fee revenues and trading profits as compared to the prior year, a quarter which experiencedperiod that was experiencing generally improved global market conditions.  Investment banking revenues have decreased nearly $4 million, securities commissions and fees have decreased nearly $2 million and trading profits have decreased $1 million.  The prior year investment banking revenues included fees of $7 million arising from our Argentine joint venture who acted as an advisor to institutional clients in several significant transactions.  In the current year, we recognized a partially offsetting $3 million of investment banking revenues associated with certain of those advisory services representing an amount which had been deferred in the prior year pending the satisfaction of certain conditions.

Non-interest expenses decreased $1approximately $2 million, primarily resulting from a decrease in clearing expenses that resulted from the reduced volumetrading activity, and a decrease in compensation related expenses resulting from lower levels of trading activity.profitability.


 
5874
 


Results of Operations – Securities Lending

The following table presents consolidated financial information of our Securities Lending segment for the periods indicated:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  % change  2010  2012  % change  2011  2012  % change  2011 
 ($ in thousands)  ($ in thousands) 
Interest income and expense:                    ��      
Interest income $2,388   50% $1,596  $2,633   92% $1,369  $5,021   69% $2,965 
Interest expense  460   (10)%  509   491   22%  401   951   5%  910 
Net interest income  1,928   77%  1,087   2,142   121%  968   4,070   98%  2,055 
Other income  54   (65)%  154   100   (9)%  110   154   (42)%  264 
Net revenues  1,982   60%  1,241   2,242   108%  1,078   4,224   82%  2,319 
Non-interest expenses:  776   8%  717   812   9%  748   1,588   8%  1,465 
Pre-tax income $1,206   130% $524  $1,430   333% $330  $2,636   209% $854 

This segment conducts its business through the borrowing and lending of securities from and to other broker-dealers, financial institutions and other counterparties.  Generally, we conduct these activities as an intermediary (referred to as “Matched Book”).  However, Securities Lending will also loan customer marginable securities held in a margin account containing a debit (referred to as lending from the “Box”) to counterparties. The borrower of the securities puts up a cash deposit on which interest is earned.  The lender in turn receives cash and pays interest. These cash deposits are adjusted daily to reflect changes in the current market value of the underlying securities. Additionally, securities are borrowed from other broker-dealers (referred to as borrowing for the “Box”) to facilitate RJ&A’s clearance and settlement obligations.  The net revenues of this operation are the interest spreads generated.

Quarter ended DecemberMarch 31, 20112012 compared to the quarter ended DecemberMarch 31, 20102011 – Securities Lending

Pre-tax income generated by this segment increased by approximately $700,000,$1.1 million, or 130%333%, as compared to the prior year.

The increase is due to higher net interest income in both our Box lending activities as well as, but to a lesser extent, our MatchMatched Book lending activities.  In the Box lending activities, we realized a net $1 million increase in net interest as both average balances outstanding and net interest spreads increased.increased significantly as compared to the prior year quarter. The increase in net interest spread in box lending activities resulted from our receiving a premium market rate on certain hard to locate securities.  In the MatchMatched Book lending activities our net interest spread increased by approximately $100 thousand as a result of higher net interest spreads, partially offset by a decrease in our average balances outstanding as compared to the prior year quarter.

Six months ended March 31, 2012 compared to the six months ended March 31, 2011 – Securities Lending

Pre-tax income generated by this segment increased by approximately $1.8 million, or 209%, as compared to the prior year.

The increase is due to higher net interest income in both our Box lending activities as well as, but to a lesser extent, our Matched Book lending activities.  In the Box lending activities, we realized a net $1.8 million increase in net interest as both average balances outstanding and net interest spreads increased significantly as compared to the prior year. The increase in net interest spread in box lending activities resulted from our receiving a premium market rate on certain hard to locate securities.  In the Matched Book lending activities our net interest increased by approximately $200 thousand as a result of higher net interest spreads, partially offset by a decrease in our average balances outstanding as compared to the prior year.


 
5975
 


Results of Operations – Proprietary Capital

The following table presents consolidated financial information for the ProprietyProprietary Capital segment for the periods indicated:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  % change  2010  2012  % change  2011  2012  % change  2011 
 ($ in thousands)  ($ in thousands) 
Revenues:                           
Interest $151   (25)% $200  $221  NM  $(20) $372   107% $180 
Investment advisory fees  325   37%  238   194   (18)%  237   519   9%  475 
Other  (3)  (101)%  232   12,975  NM   (492)  12,972  NM   (260)
Total revenues  473   (29)%  670   13,390  NM   (275)  13,863  NM   395 
Expenses:                                    
Compensation expense  439   (31)%  639   522   12%  465   961   (13)%  1,104 
Other expenses  109   14%  96   6   (96)%  168   115   (56)%  264 
Total expenses  548   (25)%  735   528   (17)%  633   1,076   (21)%  1,368 
Loss before taxes and including noncontrolling interests:  (75)  (15)%  (65)
Income (loss) before taxes and including noncontrolling interests:  12,862  NM   (908)  12,787  NM   (973)
Noncontrolling interests  (10)      77   9,121       3,124   9,111       3,201 
Pre-tax loss excluding noncontrolling interests $(65)  54% $(142)
Pre-tax income (loss) excluding noncontrolling interests $3,741   193% $(4,032) $3,676   188% $(4,174)

The Proprietary Capital segment consists of our principal capital and private equity activities and the segment results are substantially determined by the valuations within Raymond James Capital Partners, L.P. (“Capital Partners”), Raymond James Employee Investment Funds I and II (the “EIF Funds”), and the valuations of our direct merchant banking investments and our investments in third-party private equity funds (the “Third-Party“Third Party Private Funds”).  As of DecemberMarch 31, 2011,2012, our merchant banking investments, at fair value, include a $16$21 million investment in an event photography business, a manufacturer of crime investigation and forensic supplies, an $18$19 million indirect investment (through Capital Partners) in an allergy immunotherapy testing and treatment supply company and(the “Allergy Company”), a $21$16 million investment in a manufacturer of crime investigation and forensic supplies (the “Forensic Company”), and during the quarter ended March 31, 2012, our share of an event photography business.indirect investment in a beauty salon and spa company was $3 million.

Quarter ended DecemberMarch 31, 20112012 compared to the quarter ended DecemberMarch 31, 20102011 – Proprietary Capital

Pre-tax lossincome generated by this segment decreasedincreased by approximately $80,000,$8 million, or 54%193%, as compared to the prior year.  There were no significant changes inThe increase is due to both the valuationspositive performance of ourthe investments during the current year.  Inperiod, and write-downs in the investments which negatively impacted the prior year there wasresults and which did not recur.

In the current year, total revenues resulted primarily from dividend income and a relatively smallnet valuation increase from the Allergy Company totaling approximately $11 million, a $1 million increase in the net valuation of certain Third Party Private Funds, and dividends from other investments.

The portion of this quarter’s revenue attributable to noncontrolling interests was significant as approximately $9 million of the Allergy Company dividend and net valuation increase is attributable to others.

The prior year results included a $3 million write-down in the value of our Third-Party Private fundsinvestment in the Forensic Supply Company, and EIF Funds.  Offsettingapproximately $400 thousand in write-downs in the decreasevalue of certain other holdings, partially offset by a $3 million valuation increase in revenue, compensation expensethe Allergy Company.  After attribution of all of this activity to the noncontrolling interests, the net results in the prior year were a $4 million pre-tax loss.

Six months ended March 31, 2012 compared to the six months ended March 31, 2011 – Proprietary Capital

Pre-tax income generated by this segment increased by approximately $8 million, or 188%, as compared to the prior year.  The increase is due to both the positive performance of the investments during the current year, decreased as comparedand write-downs in the investments which negatively impacted the prior year.year results which have not recurred.

In the current year, total revenues resulted primarily from dividend income and a net valuation increase from the Allergy Company totaling approximately $11 million, a $1 million increase in the net valuation of certain Third Party Private Funds, and dividends from other investments.

The portion of this year’s revenue attributable to noncontrolling interests is significant as approximately $9 million of the Allergy Company dividend and net valuation increase is attributable to others.

 
6076
 


The prior year results include a $3 million write-down in the value of our investment in the Forensic Supply Company, and approximately $400 thousand in write-downs in the value of certain other holdings, partially offset by a $3 million valuation increase in the Allergy Company.  After attribution of all of this activity to the noncontrolling interests, the net results in the prior year were a $4 million pre-tax loss.

Results of Operations – Other

The following table presents consolidated financial information for the Other segment for the periods indicated:

 Three months ended December 31,  Three months ended March 31,  Six months ended March 31, 
 2011  % change  2010  2012  % change  2011  2012  % change  2011 
 ($ in thousands)  ($ in thousands) 
Revenues:                           
Interest income $1,921   (1)% $1,940  $2,102   19% $1,761  $4,023   9% $3,701 
Other  740   (49)%  1,463   1,168   (36)%  1,813   1,908   (42)%  3,276 
Total revenues  2,661   (22)%  3,403   3,270   (9)%  3,574   5,931   (15)%  6,977 
Interest expense  9,513   37%  6,966   11,386   79%  6,376   20,899   57%  13,342 
Net revenues  (6,852)  (92)%  (3,563)  (8,116)  (190)%  (2,802)  (14,968)  (135)%  (6,365)
Acquisition related expenses  19,604  NM   -   19,604  NM   - 
Other expense  9,114   -   9,070   7,150   27%  5,613   16,264   11%  14,683 
Non-interest expenses  26,754   377%  5,613   35,868   144%  14,683 
Pre-tax loss $(15,966)  (26)% $(12,633) $(34,870)  (314)% $(8,415) $(50,836)  (142)% $(21,048)

This segment includes various corporate overhead costs, includingour acquisition related expenses associated with our acquisition of Morgan Keegan which closed on April 2, 2012, and interest expense on our senior debt.

Quarter ended DecemberMarch 31, 20112012 compared to the quarter ended DecemberMarch 31, 20102011 – Other

Pre-tax loss generated by this segment increased by over $3$26 million, or 26%314%, as compared to the same quarter in the prior year.

This increaseOther revenues are approximately $700 thousand less than the prior year due to a sale in the lossprior year of certain investments which did not recur in the current period.

Interest expense increased $5 million over the prior year.  The increase is primarily the resultcomprised of a $2.7 million increase inof interest expense resulting from ourthe April 2011 issuance of $250 million 4.25% senior notes offering,and $1.7 million of interest expense arising from our March 2012 issuance of $350 million 6.9% senior notes and our March 2012 issuance of $250 million 5.625% senior notes.  Both of the March 2012 debt offerings were part of our financing activities associated with funding the Morgan Keegan acquisition that closed on April 2, 2012.

Acquisition related expenses are all associated with our acquisition of Morgan Keegan and include approximately $500,000$7 million of OTTI expensefinancial advisory fee expenses, $6 million in financing fees primarily associated with a bridge financing facility which was terminated in March 2012 when it became evident the facility would not be needed as part of the acquisition financing, $3 million in legal expenses, and $3 million in severance expense.  We anticipate incurring additional acquisition related expenses in the third and fourth quarters as we implement our integration plans.

Other expenses increased $1.5 million in the current period primarily related to certain corporate overhead expenses.

Six months ended March 31, 2012 compared to the six months ended March 31, 2011 – Other

Pre-tax loss generated by this segment increased by approximately $30 million, or 142%, as compared to the same six months in the prior year.

Other revenues are approximately $1.4 million less than the prior year due to a sale in the prior year of certain investments which did not recur in the current period and approximately $500 thousand of OTTI losses associated with our ARS portfolio, and an approximately $500,000 decrease in gains on various investments as compared toportfolio.

Interest expense increased $7.6 million over the prior year.  The increase is primarily comprised of $5.3 million of interest expense resulting from the April 2011 issuance of $250 million 4.25% senior notes, and $1.7 million of interest expense arising from our March 2012 issuance of $350 million 6.9% senior notes and our March 2012 issuance of $250 million 5.625% senior notes.  Both of the March 2012 debt offerings were part of our financing activities associated with funding the Morgan Keegan acquisition which closed on April 2, 2012.

 
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Acquisition related expenses are all associated with our acquisition of Morgan Keegan and include approximately $7 million of financial advisory fee expenses, $6 million in financing fees primarily associated with a bridge financing facility which was terminated in March 2012 when it became evident the facility would not be needed as part of the acquisition financing, $3 million in legal expenses, and $3 million in severance expense.

Other expenses increased $1.6 million in the current period primarily related to certain corporate overhead expenses.


Liquidity and Capital Resources

Liquidity is essential to our business.  The primary goal of our liquidity management activities is to ensure adequate funding to conduct our business over a range of market environments.

Senior management establishes our liquidity and capital policies. These policies include senior management’s review of short- and long-term cash flow forecasts, review of monthly capital expenditures, the monitoring of the availability of alternative sources of financing, and the daily monitoring of liquidity in our significant subsidiaries. Our decisions on the allocation of capital to our business units consider, among other factors, projected profitability and cash flow, risk and impact on future liquidity needs. Our treasury department assists in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure as well as maintains our relationships with various lenders. The objectives of these policies are to support the successful execution of our business strategies while ensuring ongoing and sufficient liquidity.

Liquidity is provided primarily through our business operations and financing activities.  Financing activities could include bank borrowings, repurchase agreement transactions or additional capital raising activities under our “universal” shelf registration.registration statement.

Cash used inprovided by operating activities during the threesix months ended DecemberMarch 31, 20112012 was $20$69 million.   Increases in operatingOperating cash were generatedresulting from successful operating results over the period an increaseresulted in brokerage client payables and other accounts payable, a decrease in brokerage client receivables and other accounts receivable, and$161 million increase.  Operating cash increased $90 million as a decrease inresult of a decreased amount of assets segregated pursuant to regulations and other segregated assets.  These increases in operating cash were more than offset by operating cash usedassets; the lower required amount is primarily due to fund thelower reserve requirements associated with a decrease in accrued compensation, commissionsthe stock loan balance outstanding net of the impact of the increase in brokerage client payables.  Brokerage client payables and benefitsother accounts payable increased by $83 million, primarily resulting from the payment of annual incentive compensation awards during the period, anddue to an increase in client cash deposits.  Operating cash increased by $45 million due to a decrease in our net trading instrument balances. A decrease in the stock loaned, net of stock borrowed.borrowed balances resulted in a $243 million use of operating cash, as cash balances were returned to counterparties.  Operating cash was utilized to make incentive compensation payments during the first quarter of fiscal year 2012, and resulted in a usage of $91 million of operating cash, net of current year accruals.

Investing activities resulted in a use of cash of $1.1 billion in the six month period ended March 31, 2012.  Cash was used $444to fund a $962 million increase in bank loans which included the acquisition of the $400 million Allied Irish Bank Canadian loan portfolio.  Cash in the net amount of $51 million was also invested in available for sale securities, primarily held by RJ Bank, net of maturations, redemptions and repayments.  We also invested $31 million in additions to fixed assets during the period.

Financing activities provided $1.4 billion of cash in the threesix month period ended DecemberMarch 31, 2011.2012.  The usecash provided was largely the result of cashan equity offering which generated $362 million of proceeds and two debt financing transactions which generated approximately $587 million of net proceeds.  We completed these transactions as part of our financing for the acquisition of Morgan Keegan, which closed on April 2, 2012 (see the discussion of the projected impact of the Morgan Keegan acquisition on our liquidity below).  In addition, in anticipation of the April 2, 2012 closing, we borrowed approximately $350 million against our short-term lines of credit to insure sufficient liquidity on the closing date.  A significant portion of the liquidity on hand at March 31, 2012 was utilized to fund an increase in net loans was partially offset by cash received from the maturations, repayments and salespurchase price of available for sale securities and from redemptions of FHLB stock.

Financing activities used $58Morgan Keegan on April 2, 2012.  In addition to these transactions associated with the Morgan Keegan acquisition, $175 million of cash was generated from increases in the three month period ended December 31, 2011.  This use of cash resulted predominantly from a decrease in bank deposits, the purchase of RJF shares in the open market, and dividend payments to our shareholders.RJ Bank customer deposits.

We believe our existing assets, most of which are liquid in nature, together with funds generated from operations and committed and uncommitted financing facilities, should provide adequate funds for continuing operations at current levels of activity.activity and to operate in the future at levels which include the businesses of Morgan Keegan.

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Effective with the February, 2012 approval of RJF to become a bank holding company, we are required to provide certain disclosures including certain Statistical Disclosures by Bank Holding Companies.  One of those disclosures is to provide RJF’s dividend payout ratio, which is as follows for the periods indicated:

 
For the six month
period ended
March 31, 2012
For the
year ended
September 30, 2011
RJF dividend payout ratio(1)
25%24%
(1)  Computed as dividends declared per common share during the period as a percentage of diluted earnings per common share.

Refer to the RJ Bank section of this MD&A and the Notes to Condensed Consolidated Financial Statements for the other required disclosures.

Sources of Liquidity

We havehad approximately $472 million$1.6 billion of available cash and cash equivalents as of DecemberMarch 31, 20112012 (nearly all of which is invested on behalf of the parent company by RJ&A) that was not subject to any restrictions.  Cash and cash equivalents held were as follow:
  March 31, 2012 
  (in thousands) 
RJF $7,864 
RJ&A, invested on behalf of RJF  1,567,066 
RJ&A, excluding  investment on behalf of RJF  313,001 
RJ Bank  761,101 
Other  226,826 
Total $2,875,858 
A significant portion of the liquidity was raised in anticipation of the April 2, 2012 closing of our acquisition of Morgan Keegan (see the discussion of the projected impact of the Morgan Keegan acquisition on our liquidity below).  Additionally,In addition to the liquidity on hand and described above, we have other various potential sources of liquidity as set forthwhich are described below.

Liquidity Available from Subsidiaries

Liquidity is principally available to the parent company from RJ&A, which is required to maintain net capital equal to the greater of $1 million or 2% of aggregate debit balances arising from customer transactions. Covenants in RJ&A’s committed secured financing facilities require its net capital to be a minimum of 10% of aggregate debit balances.  At DecemberMarch 31, 2011,2012, RJ&A exceeded both the minimum regulatory and its financing covenants net capital requirements. At that date, RJ&A had excess net capital of approximately $332$312 million, of which approximately $134$117 million is available for dividend (after taking into account regulatory and covenant restrictions) while still maintaining its net capital at 15% of aggregate debit items, its current internal and informal policy.  There are also limitations on the amount of dividends that may be declared by a broker-dealer without Financial Industry Regulatory Authority (“FINRA”) approval.

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Effective February 1, 2012, upon its conversion to a national bank, RJ Bank may pay dividends to the parent company without prior approval by its regulator as long as the dividend does not exceed the sum of RJ Bank’s current calendar year net income and the previous two calendar years’ retained net income, and RJ Bank maintains its “well capitalized” status.targeted capital to risk-weighted assets ratios.  During the threesix month period ended DecemberMarch 31, 2011,2012, RJ Bank made noa $50 million dividend paymentspayment to RJF.  RJF has made capital contributions of $50 million to RJ Bank during the same period.  RJ Bank had approximately $176.1$106 million of capital in excess of the amount it would need as of DecemberMarch 31, 20112012 to maintain a total capital to risk-weighted assets ratio of 12%, its current policy.

One of our non-broker-dealer subsidiaries, RJ Securities, Inc., currently holds the ARS portion of the available for sale securities portfolio, which approximates $173$174 million at fair value as of DecemberMarch 31, 2011.  Any redemptions2012.  On April 2, 2012, this ARS portfolio was pledged as collateral under a credit agreement (the “Regions Credit Agreement”) with Regions Bank, an Alabama banking corporation (the “Lender”) for a $200 million loan made by issuersthe Lender to certain subsidiaries of RJF (see discussion of this Regions Credit Agreement in Note 2 of the ARS will createNotes to Condensed Consolidated Financial Statements in this Form 10-Q, and see the discussion of the projected impact of Morgan Keegan acquisition on liquidity during the period such redemptions occur.below).
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Liquidity available to us from our subsidiaries, other than RJ&A, RJ Bank and RJ Securities, Inc., is relatively insignificant and in certain instances may be subject to regulatory requirements.

Borrowings and Financing Arrangements

The following table presents our domestic financing arrangements with third-party lenders and the outstanding balances related thereto, as of DecemberMarch 31, 2011:2012:
  
Committed
secured(1)
  
Uncommitted
secured (1)(2)
  
Uncommitted
unsecured (1)(2)
  Total 
  
Financing
Amount
  
Outstanding
balance
  
Financing
Amount
  
Outstanding
balance
  
Financing
Amount
  
Outstanding
balance
  
Financing
Amount
  
Outstanding
balance
 
  (in thousands) 
RJ&A $400,000  $4,482  $1,800,000  $231,544  $375,000  $150,600  $2,575,000  $386,626 
RJF  -   -   -   -   100,000   100,000   100,000   100,000 
Total $400,000  $4,482  $1,800,000  $231,544  $475,000  $250,600  $2,675,000  $486,626 
                                 
Total number of agreements  4       6       7       17     
(1)  
Our ability to borrow is dependent upon compliance with the conditions in the various committed loan agreements and collateral eligibility requirements.
(2)  Lenders are under no contractual obligation to lend to us under uncommitted credit facilities.

  
Committed
secured
  
Uncommitted
secured (1)
  
Uncommitted
unsecured (1)
  Total 
  ($ in thousands) 
             
RJ&A $425,000  $1,035,100  $375,000  $1,835,100 
RJF  -   -   100,000   100,000 
Total $425,000  $1,035,100  $475,000  $1,935,100 
                 
Total number of agreements  4   6   7     


(1)       Lenders are under no contractual obligation to lend to us under uncommitted credit facilities.

The committed domestic financing arrangements are in the form of either tri-party repurchase agreements, bilateral repurchase agreements or a secured line of credit.  The uncommitted domestic financing arrangements are in the form of secured lines of credit, secured bilateral or tri-party repurchase agreements, or unsecured lines of credit.

We maintain three unsecured settlement lines of credit available to our Argentine joint venture in the aggregate amount of $13.4$13.3 million. Of the aggregate amount, one settlement line for $9 million is guaranteed by RJF. There were no borrowings outstanding on any of these lines of credit as of DecemberMarch 31, 2011.2012.

RJ Bank has $1 billion$932 million in immediate credit available from the FHLB on DecemberMarch 31, 20112012 and total available credit of 40% of total assets, with the pledge of additional collateral to the FHLB.

RJ Bank is eligible to participate in the FRB’s discount-window program; however, RJ Bank does not view borrowings from the FRB as a primary means of funding.  The credit available in this program is subject to periodic review and may be terminated or reduced at the discretion of the FRB.

From time to time we purchase short-term securities under agreements to resell (“Reverse Repurchase Agreements”) and sell securities under agreements to repurchase (“Repurchase Agreements”).  We account for each of these types of transactions as collateralized financings with the outstanding balances on the Repurchase Agreements included in securities sold under agreements to repurchase.  At DecemberMarch 31, 2011,2012, collateralized financings outstanding in the amount of $184.1$137 million are included in securities sold under agreements to repurchase on the Condensed Consolidated Statements of Financial Condition. Of this total, outstanding borrowingsbalances on the committed and uncommitted Repurchase Agreements (which are reflected in the table of domestic financing arrangements above) were $79.7$4 million and $104.4$133 million, respectively, as of DecemberMarch 31, 2011.2012.  Such financings are generally collateralized by non-customer, RJ&A-owned securities.  The required market value of the collateral associated with the committed secured facilities ranges from 102% to 133% of the amount financed.

 
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The average daily balance outstanding during the five most recent successive quarters, the maximum month-end balance outstanding during the quarter and the period ended balances at each respective period end for Repurchase Agreements and Reverse Repurchase Agreements of RJF are as follows:

 Repurchase transactions  Reverse repurchase transactions  Repurchase transactions  Reverse repurchase transactions 
For the period ended:
 
Average daily
balance
outstanding
  
End of period
balance
outstanding
  
Average daily
balance
outstanding
  
End of period
balance
outstanding
 
For the period ended: 
Average daily
balance
outstanding
  
Maximum month-end
balance outstanding
during the quarter
  
End of period
balance
outstanding
  
Average daily
balance
outstanding
  
Maximum month-end
balance outstanding
during the quarter
  
End of
period
balance
outstanding
 
 (in thousands)  (in thousands) 
                              
March 31, 2012 $180,875  $176,335  $137,026  $410,578  $413,527  $340,158 
December 31, 2011 $184,925  $184,061  $433,170  $400,455   184,925   244,961   184,061   433,170   468,848   400,455 
September 30, 2011  145,574   188,745   425,248   398,247   145,574   290,686   188,745   425,248   446,314   398,247 
June 30, 2011  62,527   84,861   64,988   473,739   488,312   470,407 
March 31, 2011  66,848   62,292   62,292   444,640   431,260   390,376 


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At DecemberMarch 31, 2011 and September 30, 2011,2012, in addition to the financing arrangements described above, we had othercorporate debt of $607 million and $612 million, respectively.$1.2 billion. The balance at December 31, 2011 is comprised of a $51$350 million balance outstanding on our mortgage loan for our home-office complex, $66.90% senior notes due 2042, $250 million outstanding on term loan financing provided to RJES,our 5.625% senior notes due 2024, $300 million outstanding on our 8.60% senior notes due August 2019, and $250 million outstanding on our 4.25% senior notes due April 2016.2016, $51 million outstanding on a mortgage loan for our home-office complex, and $6 million outstanding on term loan financing provided to RJES.

Our current senior long-term debt ratings are:

Rating AgencyRatingOutlook
Standard and Poor’s (“S&P”)BBBStableNegative
Moody’s Investor Service (“Moody’s”)Baa2Stable

The S&P rating and outlook as presented in their November, 2011 report reflects no change in the rating and an improved outlook as compared to their previous report. The Moody’s rating and outlook are from their October, 2010 report, which reflected no change in the rating and an improved outlook as compared to their previous report. In January 2012, in response to our announcement regarding RJF entering into a definitive stock purchase agreement to acquire Morgan Keegan (see further discussion in Note 192 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q), both S&P and Moody’s placed RJF on review for possible downgrade.

The S&P rating and outlook reflected above are as presented in their March, 2012 report which concluded no change in the rating, removed us from “credit watch with negative implications”, but assigned a less favorable outlook of “negative”, a change from “stable”, which had been reflected in their previous report. S & P’s less favorable outlook is based upon their concern about certain risks associated with our integration of Morgan Keegan.

The Moody’s rating and outlook reflected above are from their April, 2012 report, which concluded no change in the rating and an improved outlook to “stable” from “ratings under review for possible downgrade.”

We believe our current long-term debt ratings depend upon a number of factors including industry dynamics, operating and economic environment, operating results, operating margins, earnings trends and volatility, balance sheet composition, liquidity and liquidity management, our capital structure, our overall risk management, business diversification and our market share, the success of our integration of Morgan Keegan, and competitive position in the markets in which we operate. Deteriorations in any of these factors could impact our credit ratings.  Any rating downgrades could increase our costs in the event we were to pursue obtaining additional financing.

Should our credit rating be downgraded prior to a public debt offering it is probable that we would have to offer a higher rate of interest to bond holders.  A downgrade to below investment grade may make a public debt offering difficult to execute on terms we would consider to be favorable.  The April 2, 2012 Regions Credit Agreement between Regions Bank and certain subsidiaries of RJF (see the discussion of this borrowing described within Note 2 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q) includes as an event of default, the failure of RJF as a guarantor of the repayment of the loan to maintain an investment grade rating on its unsecured senior debt.  Otherwise, none of our credit agreements contain a condition or event of default related to our credit ratings.  A credit downgrade could create a reputational issue and could also result in certain counterparties limiting their business with us, result in negative comments by analysts and potentially impact investor perception of us, and resultantly impact our stock price and/or our clients’ perception of us.

Other sources of liquidity

We own life insurance policies which are utilized to fund certain non-qualified deferred compensation plans and other employee benefit plans. We are able to borrow up to 90% of the cash surrender value of certain of these policies.  The policies which we could readily borrow against have a cash surrender value of approximately $130$142 million as of DecemberMarch 31, 2011.2012.  There are no borrowings outstanding against any of these policies as of DecemberMarch 31, 2011.2012.

On May 29, 2009 we filed a “universal” shelf registration statement with the SEC to be in a position to access the capital markets if and when necessary or perceived by us to be opportune. In August 2009, we sold $300 million in aggregate principal amount of 8.60% senior notes due in August 2019, through a registered underwritten public offering.  In April 2011, we sold $250 million in aggregate principal amount of 4.25% senior notes due April 2016, through a registered underwritten public offering.  The registration statement is effectiveIn February 2012, we sold 11,075,000 shares of our common stock generating net proceeds of $362 million.  In March 2012, we sold $350 million in aggregate principal amount of 6.90% senior notes due in March 2042 and $250 million in aggregate principal amount of 5.625% senior notes due April 2024, through May, 2012 to facilitate future capital raising activities.registered underwritten public offerings.

See the “contractual obligations, commitments and contingencies” section below for information regarding our commitments.

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Projected impact of the Morgan Keegan acquisition transactions on our liquidity

OnAs more fully described in Note 2 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, on January 11, 2012, RJF entered into a definitive stock purchase agreement (the “Stock Purchase Agreement”) to acquire all of the issued and outstanding shares of Morgan Keegan from Regions.  See Note 19We completed this purchase transaction on April 2, 2012 and the completion of this transaction had a significant impact on the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information regarding this acquisition.$1.6 billion of available cash and cash equivalents as of March 31, 2012 described above.

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Under the terms of the Stock Purchase Agreement, Regions will receive $930 millionreceived $1.211 billion in cash from RJF on April 2, 2012 in exchange for 100% of the closing date (subjectMorgan Keegan shares, an amount which is subject to adjustment in future periods as provided under the Stock Purchase Agreement), in exchange forAgreement. Subsequent to the completion of this purchase transaction on April 2, 2012, Morgan Keegan shares.paid a $250 million dividend to RJF.  Additionally on April 2, 2012, RJF received the proceeds from a $200 million credit agreement that certain subsidiaries of RJF entered into with Regions Bank.  The net impact on our available cash and cash equivalents from the April 2, 2012 transactions related to the purchase of Morgan Keegan amounted to a decrease of $761 million.  In addition to these April 2, 2012 transactions, during the purchase price paid to Regions,month of April, 2012 we anticipate makingmade cash retention payments approximating $140of approximately $136 million to certain key Morgan Keegan employees concurrentfinancial advisors.  We will incur transaction and integration charges associated with this purchase, a portion of which was incurred and paid during the period ended March 31, 2012 with the closing of the transaction and incurring transaction integration charges of up to $50 million.

In anticipation of funding the purchase price, on January 11, 2012 J.P. Morgan Chase (“JPMC”) entered into a commitment letter to provide RJF with a $900 million bridge financing facility to provide financing of the purchase price.  Subject to market conditions, RJF anticipates the facility will be replaced or refinanced by the issuance of $300 million of equity followed by $600 million of long-term notes. The remaining portion ofto be incurred and paid during the cash considerations paid at closing, or approximately $220 million, will be funded from the available cash and cash equivalents on-hand.upcoming quarters.

Statement of financial condition analysis

The assets on our statement of financial condition consist primarily of cash and cash equivalents (a large portion of which areis segregated for the benefit of customers), receivables including bank loans, financial instruments held for either trading purposes or as investments, and other assets.  A significant portion of our assets are liquid in nature, providing us with flexibility in financing our business.  Total assets of $17.9$19.3 billion at DecemberMarch 31, 2011 were2012 are approximately 1% lower7% greater than total assets as of September 30, 2011.  DecreasesThe increase in total assets results primarily from cash generated from an equity offering and cash equivalentstwo debt financing transactions during the quarter ended March 31, 2012 in anticipation of the closing date of the Morgan Keegan acquisition, and assets segregated pursuant to regulations and other segregated assets are partially offset by thea significant increase in net bank loans as we grew our bankreceivable due to the growth of RJ Bank’s loan portfolio overduring the current period.six month period that included a purchase of loans from Allied Irish Bank (see the RJ Bank section of this MD&A for additional information).

As of DecemberMarch 31, 2011,2012, our liabilities of $14.9$15.9 billion were 1% less5% greater than our liabilities as of September 30, 2011, primarily due to decreasesthe two debt financing transactions described above, as well as an increase in accrued compensation, commissions and benefits that were largely a result of the annual payment of incentive compensation awards during the period.short-term borrowings.


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Contractual obligations, commitments and contingencies

As of December 31, 2011, thereWe have been no material changes in our contractual obligations other thanto make future payments in the ordinary course of business since September 30, 2011.  See Note 17, pages 128 – 131, of the Notesconnection with short- and long-term debt, non-cancelable lease agreements, partnership and limited liability company investments, commitments to the Consolidated Financial Statements in our 2011 Form 10-K, Contractual obligations,extend credit, underwriting commitments and contingencies on pages 55 - 56 in our 2011 Form 10-K and Note 12 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.a naming rights agreement.  The following table sets forth these contractual obligations by fiscal year:

On January 11, 2012, RJF entered into a Stock Purchase Agreement to acquire all of the issued and outstanding shares of Morgan Keegan from Regions.  
  Total  
Remainder
of fiscal
year 2012
  
Fiscal year
2013
  
Fiscal year
2014
  
Fiscal year
2015
  
Fiscal year
2016
  Thereafter 
  (in thousands) 
                      
Corporate debt(1)
 $1,205,664  $4,720  $6,718  $3,860  $4,086  $253,920  $932,360 
Interest on debt(1)
  1,152,886   32,503   77,549   77,141   76,915   76,675   812,103 
Other borrowings(1)
  349,600   349,600   -   -   -   -   - 
Loans payable of consolidated variable interest entities(2)
  90,950   18,530   18,915   18,529   15,645   10,812   8,519 
Operating leases  229,671   45,996   41,811   33,475   27,291   23,732   57,366 
Investments - private equity partnerships  29,954   29,954   -   -   -   -   - 
Certificates of deposit (3)
  307,852   32,601   47,767   37,249   70,342   63,730   56,163 
Commitments to extend credit - RJ Bank (4)
  1,854,760   1,854,760   -   -   -   -   - 
RJ Bank loans purchased, not yet settled  32,800   32,800   -   -   -   -   - 
Commitments to real estate entities  2,459   2,459   -   -   -   -   - 
Commitment to purchase real estate in Pasco County, Florida(5)
  3,500   3,500   -   -   -   -   - 
Underwriting commitments  7,049   7,049   -   -   -   -   - 
Naming rights for Raymond James stadium  14,879   1,861   3,835   3,988   4,148   1,047   - 
Loans and commitments to financial advisors(6)
  26,784   17,138   7,406   1,700   69   471   - 
Total $5,308,808  $2,433,471  $204,001  $175,942  $198,496  $430,387  $1,866,511 

(1)  See Notes 10 and 11 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information.

(2)  Loans which are non-recourse to us. See further discussion in Note 13 of the Notes to Consolidated Financial Statements included on page 122 of our 2011 Form 10-K.

(3)  See Note 9 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information.

(4)  See Note 18 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information.

(5)  See discussion of this commitment in Item 2, “Properties” on page 26 of our 2011 Form 10-K.

(6)  Amounts presented do not include the $136 million of cash retention payments made in April, 2012 to certain key Morgan Keegan employees which are described above.

See Note 1914 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additionalfurther information regarding this acquisition.  In anticipation of funding the purchase price, on January 11, 2012, JPMC entered into a commitment letter to provide RJF with a $900 million bridge financing facility to provide financing for a portion of the purchase price.   Under the terms of this financing commitment, any amounts borrowed against the facility would mature 364 days from the closing date of the acquisition transaction.  The interest rates specified in the commitment are variable based generally on the London Interbank Offered Rate (LIBOR) plus an interest spread which is determined based upon a number of factors.our commitments and contingencies.

Regulatory

The following discussion should be read in conjunction with the Regulatory section on pages 56 - 57 of our 2011 Form 10-K.

RJ&A, RJFS, Eagle Fund Distributors, Inc. and Raymond James (USA) Ltd. all had net capital in excess of minimum requirements as of DecemberMarch 31, 2011.2012.

RJ Ltd. was not in Early Warning Level 1 or Level 2 as of or during the three-monthsix-month period ended DecemberMarch 31, 2011.2012.

Under the regulatory framework for prompt corrective action, RJ Bank met the requirements to be categorized as “well capitalized” as of December 31, 2011.
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During January 2012, RJF’s application to become a bank holding company and a financial holding company was approved by the FRB, and RJ Bank’s conversion to a national bank was approved by the OCC.  These changes became effective February 1, 2012.

  We converted to a bank holding company in order to provide RJ Bank the ability to maintain a portfolio with a greater percentage of its assets invested in corporate loans than were otherwise permissible under the thrift regulations RJ Bank was previously subject to.  As a thrift, RJ Bank was required to make qualifying investments annually in order to meet the point in time qualified thrift lender (“QTL”) test.  As a national bank, RJ Bank will not have to make such qualifying investments in order to maintain regulatory compliance.
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We currently invest in selected private equity and merchant banking investments (see the Proprietary Capital section of our MD&A).  As a bank holding company, the magnitude of such investments will be subject to certain limitations.  At our current investment levels, we do not anticipate having to make any otherwise unplanned divestitures of these investments in order to comply with regulatory limits, however, the amount of future investments may be limited in order to maintain compliance within regulatory specified levels.

As a result of our conversion, we are now subject to additional regulatory reporting requirements which add to our administrative burden and costs.  The maintenance of certain risk-based regulatory capital levels could impact various capital allocation decisions impacting one or more of our businesses.  However, currently, due to our strong capital position, we do not anticipate these capital requirements will have any negative impact on our business activities.

Under the regulatory framework for prompt corrective action, RJ Bank met the requirements to be categorized as “well capitalized” as of March 31, 2012.


The Dodd-Frank Act has the potential to impact certain of our current business operations, including, but not limited to, its impact on RJ Bank which is discussed in Item 1, Business-“Regulation” on pages 10 - 12 in our 2011 Form 10-K.  Because of the nature of our business and our business practices, we do not expect the Dodd-Frank Act to have a significant impact on our operations as a whole. However, because many of the implementing regulations will result from further studies by various regulatory agencies, the specific impact on each of our businesses is uncertain.

See Note 1517 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for further information on regulatory and capital requirements.

Off-balance sheet arrangements

For information regarding our off-balance sheet arrangements, see Note 1618 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.

Effects of inflation

For information regarding the effects of inflation on our business, see the Effects of Inflation section on page 64 of our 2011 Form 10-K.

Factors affecting “forward-looking statements”

From time to time, we may publish “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, allowance for loan loss levels at RJ Bank, projected ventures, new products, anticipated market performance, recruiting efforts, regulatory approvals, and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, we caution readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These risks and uncertainties, many of which are beyond our control, are discussed in the section entitled “Risk Factors” in Item 1A of Part I on pages 14 - 25 included in the 2011 Form 10-K and in Item 1A of Part II of this report on Form 10-Q.  We do not undertake any obligation to publicly update or revise any forward-looking statements.

Critical accounting policiesestimates

The condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).  For a full description of these and other accounting policies, see Note 1 of the Notes to Consolidated Financial Statements included on pages 81 - 97 in our 2011 Form 10-K and updated in Note 1 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.  We believe that of our significant accounting policies, those described below involve a high degree of judgment and complexity. These critical accounting policies require estimates and assumptions that affect the amounts of assets, liabilities, revenues and expenses reported in the condensed consolidated financial statements. Due to their nature, estimates involve judgment based upon available information. Actual results or amounts could differ from estimates and the difference could have a material impact on the condensed consolidated financial statements. Therefore, understanding these policies is important in understanding the reported results of our operations and our financial position.


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Valuation of financial instruments, investments and other assets

The use of fair value to measure financial instruments, with related gains or losses recognized in our Condensed Consolidated Statements of Income and Comprehensive Income is fundamental to our financial statements and our risk management processes.  See Note 1, pages 83 – 87, of our 2011 Form 10-K for a discussion of our fair value accounting policies regarding financial instruments owned and financial instruments sold but not yet purchased.  Except for the expansion of the application of our policies for assessing available for sale securities for potential impairment on an other-than-temporary basis to ARS, which are more fully described in Note 5 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, we have not implemented any material changes in the accounting policies described therein during the period covered by this report.

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“Trading instruments” and “available for sale securities” are reflected in the Condensed Consolidated Statements of Financial Condition at fair value or amounts that approximate fair value. Unrealized gains and losses related to these financial instruments are reflected in our net income or our other comprehensive income, depending on the underlying purpose of the instrument.

As of DecemberMarch 31, 2011, 7.4%2012, 6.9% of our total assets and 0.9%0.5% of our total liabilities are instruments measured at fair value on a recurring basis.

Financial instruments measured at fair value on a recurring basis categorized as Level 3 amount to $344.1$365 million as of DecemberMarch 31, 20112012 and represent 26.1%27.5% of our assets measured at fair value. Our private equity investments comprise $162.1$181 million, or 47.1%49.7%, and our ARS positions comprise $173.2$174 million, or 50.3%47.7%, of the Level 3 assets as of DecemberMarch 31, 2011.2012.  Level 3 assets represent 13.1%10.7% of total equity as of DecemberMarch 31, 2011.2012.

Financial instruments which are liabilities categorized as Level 3 amount to $29,000$39 thousand as of DecemberMarch 31, 20112012 and represent less than 1% of liabilities measured at fair value.

See Notes 3, 4, 5 and 56 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information on our financial instruments.

Goodwill

Goodwill involves the application of significant management judgment.  For a discussion of the judgments involved in testing goodwill for impairment, see the Goodwill section on page 61 of our 2011 Form 10-K.

We perform goodwill testing on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  During the quarter ended March 31, 2012, we performed a qualitative assessment for each reporting unit that includes an allocation of goodwill to determine whether it is more likely than not that the carrying value of such reporting unit including the recorded goodwill is in excess of the fair value of the reporting unit.  In any instance in which we are unable to qualitatively conclude that it is more likely than not that the fair value of the reporting unit exceeds the reporting units’ carrying value including goodwill, a quantitative analysis of the fair value of the reporting unit is performed.  Based upon the outcome of our qualitative assessment, we determined that no quantitative analysis of the fair value of any reporting unit as of December 31, 2011 was required, with the exception of our RJES reporting unit.  For the RJES reporting unit, an income approach valuation model was updated as of December 31, 2011 to assess the fair value of the reporting unit to compare to the carrying value of the reporting unit including the recorded goodwill.  Based upon the outcome of all the qualitative assessments and quantitative analyses performed, we concluded that none of the goodwill allocated to any of our reporting units was impaired as of December 31, 2011.  No events have occurred during the three month period endedsince December 31, 2011 that would cause us to update the annual impairment testing we last performed as of December 31, 2010.that date.

Loss provisions

Refer to the discussion of loss provisions on pages 61 - 62 of our 2011 Form 10-K.

RJ Bank provides an allowance for loan losses which reflects our continuing evaluation of the probable losses inherent in the loan portfolio.  See Note 67 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information.

At DecemberMarch 31, 2011,2012, the amortized cost of all RJ Bank loans was $7.2$7.6 billion and an allowance for loan losses of $147.5$145 million was recorded against that balance. The total allowance for loan losses is equal to 2.06%1.91% of the amortized cost of the loan portfolio.

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The current condition of the real estate and credit markets has substantially increased the complexity and uncertainty involved in estimating the losses inherent in RJ Bank’s loan portfolio. If our underlying assumptions and judgments prove to be inaccurate, the allowance for loan losses could be insufficient to cover actual losses. In such an event, any losses would result in a decrease in our net income as well as a decrease in the level of regulatory capital at RJ Bank.

Income taxes

For a description of the significant assumptions, judgments and interpretations associated with the accounting for income taxes, see Income taxes on page 62 of the 2011 Form 10-K.


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Effects of recently issued accounting standards, and accounting standards not yet adopted

In April 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance regarding the evaluation of certain terms in repurchase agreements which impact the determination of whether a repurchase arrangement should be accounted for as a secured borrowing or a sale.  The new guidance removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially agreed terms, even in the event of default by the transferee.  This newWe adopted this guidance is effective prospectively for anyas of our applicable transactions, or modifications of existing transactions, that occur on or after January 1,2, 2012.  We do not anticipate that this new guidance will have anyThere was no significant impact on our consolidated financial statements.

In May 2011, the FASB issued new guidance amending the existing pronouncement related to fair value measurement.  This new guidance primarily expands the existing disclosure requirements for fair value.  Specifically, the new guidance mandates the following additional disclosures:  1) the amount of any transfers between Level 1 and Level 2 of the fair value hierarchy,  2) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement of Level 3 instruments,  3) a qualitative discussion of the sensitivity of the fair value to changes in unobservable inputs and any inter-relationships between those inputs that magnify or mitigate the effect on the measurement of Level 3 instruments and 4) the level within the fair value hierarchy, of items that are not measured at fair value in the statement of financial condition but whose fair value must be disclosed.  This new guidance is effective for us prospectively beginning January 1,in our period ending March 31, 2012.  We expect theOur adoption of this new guidance will resultresulted in an increase of certain of our financial statement disclosures,additional disclosure but the adoption willdid not have anya significant impact on our consolidated financial position or results of operations.  See these disclosures included in Note 4 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.

In June 2011, the FASB issued new guidance amending the existing pronouncement regarding the presentation of comprehensive income.  This new guidance reduces the alternatives for the presentation of the components of other comprehensive income.  Specifically, it eliminates the alternative of presenting them as part of the Statement of Changes in Shareholders’ Equity.  This new guidance is effective for fiscal years and interim periods within those years, beginning December 15, 2011; however, early adoption is permitted.  In December 2011, the FASB indefinitely deferred the effective date for certain provisions within this new guidance, specifically, those provisions which require the presentation of reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented.  We currently present the components of other comprehensive income within our Condensed Consolidated Statements of Income and Comprehensive Income and, therefore, the adoption of this new guidance does not impact us.

In September 2011, the FASB issued new guidance amending the existing pronouncement regarding the annual evaluation of goodwill for potential impairment.  This new guidance adds a new optional step to the prior guidance.  This new step is an optional qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before applying the two-step goodwill impairment test.  If one concludes, based on qualitative factors, that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required.  This new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011; early adoption is permitted.  We chose not to adoptadopted this new guidance in fiscal year 2011 since we had already completedfor our annual impairmentgoodwill testing under the prior guidance when this new guidance was issued.  We do not expect ouras of December 31, 2011.  The adoption of this new guidance in fiscal year 2012 tostandard did not have any impact on our financial position or results of operations.

In December 2011, the FASB issued new guidance amending the existing pronouncement by requiring additional disclosures regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments.  Specifically, this new guidance will require additional information about financial instruments and derivative instruments that are either; 1) offset or 2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are currently offset.  The additional disclosure is intended to provide greater transparency on the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments within the scope of this amendment.  This new guidance is first effective for our financial report covering the quarter ended December 31, 2013.  We are currently evaluating the impact the adoption of this new guidance will have on our presentation of assets and liabilities within our consolidated statements of financial condition.
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Off-Balance Sheet arrangements

For information concerning our off-balance sheet arrangements, see Note 1618 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

For a description of our risk management policies, including a discussion of our primary market risk exposures, which include interest rate risk and equity price risk, as well as a discussion of our foreign exchange risk, credit risk including a discussion of our loan underwriting policies and risk monitoring processes applicable to RJ Bank, liquidity risk, operational risk, and regulatory and legal risk and a discussion of how these exposures are managed, refer to pages 65 - 75 of our 2011 Form 10-K.

Market risk

Market risk is our risk of loss resulting from changes in interest rates and securities prices.  We have exposure to market risk primarily through our broker-dealer and banking operations.  See page 65 of our 2011 Form 10-K for discussion of how we manage our market risk.

See Notes 34 and 45 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding the fair value of trading inventories associated with our broker-dealer client facilitation, market-making and proprietary trading activities in addition to RJ Bank’s securitizations.  See Note 56 of the Notes to the Condensed Consolidated Financial Statements for information regarding the fair value of available for sale securities.

Interest rate risk

We are exposed to interest rate risk as a result of our RJ Bank operations, as well as our trading inventories of fixed income instruments held in our Capital Markets segment.  See pages 65 – 68 of our 2011 Form 10-K for discussion of how we manage our interest rate risk.

During the threesix months ended DecemberMarch 31, 2011,2012, the reported daily loss in the institutional fixed income trading portfolio did not exceed the predicted Value-at-Risk (“VaR”) on any trading day.

The following tables set forth the high, low, and daily average VaR for our overall institutional fixed income portfolio with the corresponding dollar value of our portfolio as of the periods and dates indicated:
  Six months ended March 31, 2012  VaR at 
  High  Low  Daily Average  March 31, 2012  September 30, 2011 
  ($ in thousands) 
                
Daily VaR $1,352  $218  $628  $218  $ 441 
Related portfolio value (net) (1)
  315,473   225,005   261,970   225,005   220,436 
VaR as a percent of portfolio value  0.43%  0.10%  0.24%  0.10%  0.20%

 Three months ended December 31, 2011  VaR at 
 High  Low  Daily Average  December 31, 2011  September 30, 2011  Six months ended March 31, 2011  VaR at 
 High  Low  Daily Average  March 31, 2011 
 ($ in thousands)  ($ in thousands) 
                           
Daily VaR $1,352  $403  $803  $403  $ 441  $1,015  $211  $619  $553 
Related portfolio value (net) (1)
  315,473   200,299   267,833   200,299   220,436   225,783   299,698   223,435   193,088 
VaR as a percent of portfolio value  0.43%  0.20%  0.30%  0.20%  0.20%  0.45%  0.07%  0.28%  0.29%

(1)       Portfolio value achieved on the day of the VaR calculation.


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The modeling of the risk characteristics of trading positions involves a number of assumptions and approximations. While management believes that its assumptions and approximations are reasonable, there is no uniform industry methodology for estimating VaR, and different assumptions or approximations could produce materially different VaR estimates. As a result, VaR statistics are more reliable when used as indicators of risk levels and trends within a firm than as a basis for inferring differences in risk-taking across firms.

We have chosen the historical period of twelve months to be representative of the current interest rate markets.  We utilize stress testing to complement our VaR analysis so as to measure risk under historical and hypothetical adverse scenarios.  VaR results are indicative of relatively recent changes in general interest rate markets and are not designed to capture historical stress periods beyond the twelve months historical period.  Should the market suddenly become more volatile, actual trading losses may exceed the VaR results presented.  During volatile markets we may choose to pare our trading inventories to reduce risk.  Back testing procedures performed include comparing projected VaR results to our daily trading losses in our institutional trading portfolios.  We then verify that the number of times that daily trading losses exceed VaR is consistent with our expectations at a 99% confidence level.

In addition, see Note 1012 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information regarding our derivative financial instruments.

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RJ Bank maintains an earning asset portfolio that is comprised of C&I, commercial and residential real estate, and consumer loans, as well as MBS, collateralized mortgage obligations, Small Business Administration loan securitizations, deposits at other banks and other investments.  Those earning assets are funded by RJ Bank’s obligations to customers.customers (i.e. customer deposits).  Based on theits current earning asset portfolio, of RJ Bank, market risk for RJ Bank is subject to interest rate risk.  The current economic environment has led to an extended period of low market interest rates.  As a result, the majority of RJ Bank’s adjustable rate assets and liabilities have experienced a reduction in interest rate yields and costs that reflect these very low market interest rates.  During the quarter, RJ Bank has focused its interest rate risk analysis on the risk of market interest rates rising should the economic environment begin to improve.rising.  RJ Bank analyzes interest rate risk based on forecasted net interest income, which is the net amount of interest received and interest paid, and the net portfolio valuation, both in a range of interest rate scenarios.

One of the objectives of RJ Bank’s Asset Liability Management Committee is to manage the sensitivity of net interest income to changes in market interest rates. The methods used to measure this sensitivity are described on pages 66 - 6768 of our 2011 Form 10-K. There were no material changes to these methods during the threesix months ended DecemberMarch 31, 2011.2012.

The following table is an analysis of RJ Bank’s estimated net interest income over a 12 month period based on instantaneous shifts in interest rates (expressed in basis points) using RJ Bank’s own internal asset/liability model:

Instantaneous
changes in rate
  
Net interest
income
  
Projected change in
net interest income
 
   ($ in thousands)    
        
 +300  $304,650   (3.67)%
 +200   315,941   (0.10)%
 +100   323,144   2.17%
       -   316,271   - 
 -100   299,987   (5.15)%
Instantaneous
changes in rate
  
Net interest
income
  
Projected change in
net interest income
 
   ($ in thousands)    
        
 +300  $331,910   1.13%
 +200   340,840   3.85%
 +100   344,731   5.03%
 -   328,216   - 
 -100   309,827   (5.60)%



The following table presents the amount of RJ Bank’s interest-earning assets and interest-bearing liabilities expected to reprice, prepay or mature in each of the indicated periods at DecemberMarch 31, 2011:2012:

 Repricing opportunities  Repricing opportunities 
 0 - 6 months  7 - 12 months  1 - 5 years  5 or more years  0 - 6 months  7 - 12 months  1 - 5 years  5 or more years 
 (in thousands)  (in thousands) 
Interest-earning assets:                        
Loans $6,200,082  $623,184  $306,862  $80,880  $6,781,681  $420,939  $339,193  $132,126 
Available for sale securities  160,763   26,791   100,756   58,660   199,016   27,649   131,817   76,632 
Other investments  1,270,875   -   -   -   899,514   -   -   - 
Total interest-earning assets  7,631,720   649,975   407,618   139,540   7,880,211   448,588   471,010   208,758 
Interest-bearing liabilities:                                
Transaction and savings accounts  7,402,350   -   -   -   7,586,757   -   -   - 
Certificates of deposit  29,706   23,651   223,199   -   32,601   21,504   253,747   - 
Total interest-bearing liabilities  7,432,056   23,651   223,199   -   7,619,358   21,504   253,747   - 
Gap  199,664   626,324   184,419   139,540   260,853   427,084   217,263   208,758 
Cumulative gap $199,664  $825,988  $1,010,407  $1,149,947  $260,853  $687,937  $905,200  $1,113,958 



 
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The following table shows the contractual maturities of RJ Bank’s loan portfolio at DecemberMarch 31, 2011,2012, including contractual principal repayments.  This table does not, however, include any estimates of prepayments.  These prepayments could shorten the average loan lives and cause the actual timing of the loan repayments to differ significantly from those shown in the following table:

 Due in  Due in 
 One year or less  
>One year – five
years
  > 5 years  Total  One year or less  
>One year – five
years
  > 5 years  Total 
 (in thousands)  (in thousands) 
                        
Loans held for sale $-  $-  $95,486  $95,486  $-  $-  $90,731  $90,731 
Loans held for investment:                                
C&I loans  90,313   3,287,288   1,140,237   4,517,838   106,734   3,455,766   1,257,864   4,820,364 
CRE construction loans  -   6,240   -   6,240   20,612   11,442   17,956   50,010 
CRE loans  332,134   444,959   48,375   825,468   364,992   519,058   53,520   937,570 
Residential mortgage loans  559   12,930   1,734,568   1,748,057   526   13,165   1,712,441   1,726,132 
Consumer loans  8,713   374   -   9,087   40,179   374   -   40,553 
Total loans held for investment  431,719   3,751,791   2,923,180   7,106,690   533,043   3,999,805   3,041,781   7,574,629 
Total loans $431,719  $3,751,791  $3,018,666  $7,202,176  $533,043  $3,999,805  $3,132,512  $7,665,360 

The following table shows the distribution of the recorded investment of those RJ Bank loans that mature in more than one year between fixed and adjustable interest rate loans at DecemberMarch 31, 2011:2012:

 Interest rate type  Interest rate type 
 Fixed  Adjustable  
Total(1)
  Fixed  Adjustable  
Total(1)
 
 (in thousands)  (in thousands) 
                  
Loans held for sale $11,622  $83,864  $95,486  $9,860  $80,871  $90,731 
Loans held for investment:                        
C&I loans  29,998   4,397,527   4,427,525   3,674   4,709,956   4,713,630 
CRE construction loans  -   6,240   6,240   -   29,398   29,398 
CRE loans  1,713   491,621   493,334   65,003   507,575   572,578 
Residential mortgage loans  133,664   1,613,834(2)  1,747,498   154,402   1,571,204(2)  1,725,606 
Consumer loans  -   374   374   -   374   374 
Total loans held for investment  165,375   6,509,596   6,674,971   223,079   6,818,507   7,041,586 
Total loans $176,997  $6,593,460  $6,770,457  $232,939  $6,899,378  $7,132,317 

(1)  Excludes any net unearned income and deferred expenses.

(2)  See the “Credit risk” discussion within Item 3 of this Form 10-Q for additional information regarding RJ Bank’s interest-only loan portfolio and related repricing schedule.

Equity price risk

We are exposed to equity price risk as a consequence of making markets in equity securities and the investment activities of RJ&A and RJ Ltd. The U.S. broker-dealer activities are primarily client-driven, with the objective of meeting clients' needs while earning a trading profit to compensate for the risk associated with carrying inventory.  RJ Ltd. has a proprietary trading business; the average aggregate inventory held for proprietary trading by RJ Ltd. during the threesix months ended DecemberMarch 31, 20112012 was $12.4$12.9 million in Canadian dollars (“CDN”).  We attempt to reduce the risk of loss inherent in our inventory of equity securities by monitoring those security positions constantly throughout each day and establishing position limits.

Foreign exchange risk

We are subject to foreign exchange risk due to: financial instruments denominated in U.S. dollars predominantly held by RJ Ltd., whose functional currency is the Canadian dollar, which may be impacted by fluctuation in foreign exchange rates; certain loans held by RJ Bank denominated in Canadian currency; and our investments in foreign subsidiaries.

In order to mitigate its portion of this risk, RJ Ltd. enters into forward foreign exchange contracts. The fair value of these contracts is nominal. As of DecemberMarch 31, 2011,2012, RJ Ltd. held forward contracts to buy and sell U.S. dollars totaling CDN $3.1$4.7 million and CDN $1.9$7.5 million, respectively.  In addition, RJ Bank’s U.S. subsidiaries hedge the foreign exchange risk related to their net investment in a foreign subsidiary utilizing short-term, forward foreign exchange contracts.  These derivative agreements are accounted for as net investment hedges in the Condensed Consolidated Financial Statements.  See Note 12 of the Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding these derivative contracts.

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To date, we have elected not to hedge the foreign exchange risk associated with either RJ Bank’s loans denominated in Canadian currency or the carrying value of our investments in certain other foreign subsidiaries.subsidiaries, or certain loans held by RJ Bank that are denominated in Canadian currency.

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Credit risk

Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. The nature and amount of credit risk depends on the type of transaction, the structure and duration of that transaction and the parties involved. Credit risk is an integral component of the profit assessment of lending and other financing activities. Refer to the discussion of our credit risk on pages 68 - 74 of our 2011 Form 10-K.

RJ Bank has significant corporate and residential mortgage loan portfolios.  A significant downturn in the overall economy, deterioration in real estate values or a significant issue within any sector where RJ Bank has a significant exposure could result in large provisions for loan losses and/or charge-offs.

Changes in the allowance for loan losses of RJ Bank are as follows:

 Three months ended December 31,  Six months ended March 31, 
 2011  2010  2012  2011 
 ($ in thousands)  ($ in thousands) 
            
Allowance for loan losses, beginning of period $145,744  $147,084  $145,744  $147,084 
Provision for loan losses  7,456   11,232   12,610   19,869 
Charge-offs:                
C&I loans  (3,149)  -   (5,217)  (82)
CRE loans  -   (6,449)  (1,000)  (9,930)
Residential mortgage loans  (3,257)  (6,315)  (8,586)  (12,105)
Consumer  (38)  -   (38)  (40)
Total charge-offs  (6,444)  (12,764)  (14,841)  (22,157)
Recoveries:                
CRE loans  430   100   548   279 
Residential mortgage loans  312   372   534   1,039 
Consumer  5   -   10   1 
Total recoveries  747   472   1,092   1,319 
Net charge-offs  (5,697)  (12,292)  (13,749)  (20,838)
Foreign exchange translation adjustment  73   - 
Allowance for loan losses, end of period $147,503  $146,024  $144,678  $146,115 
                
Allowance for loan losses to total bank loans outstanding  2.06%  2.34%  1.91%  2.37%

The primary factors impacting the provision for loan losses during the period were an improvementa significant reduction in the credit quality within thenonperforming CRE portfolio,loans, an improvement in the credit characteristics of certain problem corporate loans, and the reduction of the balance of residential mortgage nonperforming loans.  In addition, although the amount of nonperforming loans remains elevated by historical standards, somewhat improved economic conditions relative to the prior year have limited the amount of new problem loans.

The following table presents net loan charge-offs and the percentage of net loan charge-offs to the average outstanding loan balances by loan portfolio segment (annualized):
  Three months ended March 31,  Six months ended March 31, 
  2012  2011  2012  2011 
  
Net loan
charge-off
amount
  
% of avg.
outstanding
loans
  
Net loan
charge-off
amount
  
% of avg.
outstanding
loans
  
Net loan
charge-off
amount
  
% of avg.
outstanding
loans
  
Net loan
charge-off
amount
  
% of avg.
outstanding
loans
 
 
 
  ($ in thousands) 
                         
C&I loans $(2,068)  0.18% $(82)  0.01% $(5,217)  0.24% $(82)  - 
CRE loans  (882)  0.45%  (3,302)  1.65%  (452)  0.12%  (9,651)  2.35%
Residential mortgage loans  (5,107)  1.17%  (5,123)  1.08%  (8,052)  0.92%  (11,066)  1.14%
Consumer loans  5   0.09%  (39)  2.53%  (28)  0.37%  (39)  1.05%
Total $(8,052)  0.44% $(8,546)  0.55% $(13,749)  0.39% $(20,838)  0.67%

  Three months ended December 31, 
  2011  2010 
  
Net loan
charge-off
amount
  
% of avg.
outstanding
loans
  
Net loan
charge-off
amount
  
% of avg.
outstanding
loans
 
 
 
  ($ in thousands) 
             
C&I loans $(3,149)  0.29% $-   - 
CRE loans  430   (0.23)%  (6,349)  2.79%
Residential mortgage loans  (2,945)  0.67%  (5,943)  1.23%
Consumer loans  (33)  1.74%  -   - 
Total $(5,697)  0.33% $(12,292)  0.80%
90

The level of charge-off activity is a factor that is considered in evaluating the potential for and severity of future credit losses. The 54%34% decline in net charge-offs compared to the prior year quarter was primarily attributable to improved credit quality in the C&I loan portfolio in addition to a stabilization of the balance in nonperforming residential mortgage loans.

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The table below presents nonperforming loans and total allowance for loan losses:

 December 31, 2011  September 30, 2011  March 31, 2012  September 30, 2011 
 
Nonperforming
loan balance
  
Allowance for
loan losses
balance
  
Nonperforming
loan balance
  
Allowance for
loan losses
balance
  
Nonperforming
loan balance
  
Allowance for
loan losses
balance
  
Nonperforming
loan balance
  
Allowance for
loan losses
balance
 
 (in thousands)  (in thousands) 
                        
Loans held for sale $-  $-  $-  $(5) $-  $-  $-  $(5)
Loans held for investment:                                
C&I loans  8,539   (84,086)  25,685   (81,267)  6,230   (84,300)  25,685   (81,267)
CRE construction loans  -   (105)  -   (490)  -   (749)  -   (490)
CRE loans  15,825   (30,427)  15,842   (30,752)  9,441   (26,835)  15,842   (30,752)
Residential mortgage loans  87,159   (32,864)  91,796   (33,210)  87,141   (32,742)  91,796   (33,210)
Consumer loans  -   (21)  -   (20)  -   (52)  -   (20)
Total $111,523  $(147,503) $133,323  $(145,744) $102,812  $(144,678) $133,323  $(145,744)

The level of nonperforming loans is another indicator of potential future credit losses. The amount of nonperforming loans decreased 16%23% during the threesix months ended DecemberMarch 31, 2011.2012.  This decrease was primarily due to a $17$19 million reduction in nonperforming C&I loans, a $6 million reduction in nonperforming CRE loans and a $5 million reduction in nonperforming residential mortgage loans.  Included in nonperforming residential mortgage loans are $75$74 million in loans for which $42$45 million in charge-offs were previously recorded.

Loan underwriting policies

RJ Bank’s underwriting policies for the major types of loans are described on pages 71 - 72 of our 2011 Form 10-K. There was no material change in RJ Bank’s underwriting policies during the three months ended DecemberMarch 31, 2011.2012.

Risk monitoring process

Another component of the credit risk strategy at RJ Bank is the ongoing risk monitoring and review processes for all residential, consumer and corporate credit exposures and is discussed on pages 72 - 74 of our 2011 Form 10-K.  There are various other factors included in these processes, depending on the loan portfolio.  There were no material changes to those processes and policies during the threesix month period ended DecemberMarch 31, 2011.2012.

Residential mortgage and consumer loans

We track and review many factors to monitor credit risk in RJ Bank’s residential mortgage loan portfolio. These factors include, but are not limited to: loan performance trends, loan product parameters and qualification requirements, geographic concentrations, estimated home price declines, borrower credit scores, updated loan-to-value (“LTV”) ratios, occupancy (i.e., owner occupied, second home or investment property), level of documentation, loan purpose, average loan size, and policy exceptions.  Except for updated LTV ratios and estimated home price declines, all of these factors are utilized in our qualitative assessment of the allowance for loan losses in order to identify trends related to the credit quality of the respective loan portfolio.

Residential mortgageEstimated home price declines and updated LTV ratios are utilized in our quantitative assessment of the allowance for loan delinquency levels are elevated by historical standards atlosses.  RJ Bank due toadjusts its loss given default (severity) factor directly by an estimated home price decline which is consistent with the economic downturn and the high level of unemployment. Our consumer loan portfolio, however, has not experienced high levels of delinquencies to date.  At December 31, 2011 and September 30, 2011, there were no delinquent consumer loans.published Case-Shiller index as well as projections from other leading institutions forecasting home price declines.

At December 31, 2011, loans over 30 days delinquent (including nonperforming loans) increased to 4.32% of residential and consumer loans outstanding, compared to 4.24% over 30 days delinquent at September 30, 2011.  Despite this increase, our December 31, 2011 percentage compares favorably to the national average for over 30 day delinquencies of 10.08% as most recently reported by the FRB.  RJ Bank’s significantly lower delinquency rate as compared to its peers is the result of both our conservative underwriting policies and the lack of exotic loan products and subprime loans.



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The following table presents a summary of delinquent residential and consumer loans:

  
Delinquent residential and consumer loans
(amount)
  
Delinquent residential and consumer loans as a
percentage of outstanding loan balances
 
                   
  30-89 days  90 days or more  Total  30-89 days  90 days or more  Total 
  ($ in thousands) 
                   
December 31, 2011:                  
Residential mortgage loans:                  
First mortgage loans $16,030  $59,607  $75,637   0.93%  3.47%  4.40%
Home equity loans/lines  168   111   279   0.57%  0.38%  0.95%
Total residential mortgage and consumer loans $16,198  $59,718  $75,916   0.92%  3.40%  4.32%
September 30, 2011:                        
Residential mortgage loans:                        
First mortgage loans $12,718  $61,870  $74,588   0.74%  3.58%  4.32%
Home equity loans/lines  88   114   202   0.28%  0.37%  0.65%
Total residential mortgage and consumer loans $12,806  $61,984  $74,790   0.73%  3.51%  4.24%

To manage and limit credit losses, we maintain a rigorous process to manage our loan delinquencies. See page 73 of our 2011 Form 10-K for further discussion of this process. There have been no material changes to this process during the three months ended December 31, 2011.

Credit risk is also managed by diversifying the residential mortgage portfolio. The geographic concentrations (top five states) of RJ Bank’s one-to-four family residential mortgage loans are as follows:

December 31, 2011 September 30, 2011
($ outstanding as a % of RJ Bank total assets)
       
 3.2%
CA (1)
  3.3%
CA (1)
 2.7%FL  2.6%FL
 1.9%NY  1.9%NY
 1.1%NJ  1.1%NJ
 0.9%VA  0.9%VA

(1)  This concentration ratio for the state of California excludes 2.2% and 1.9% at December 31, 2011 and September 30, 2011, respectively, for loans purchased from a large investment grade institution that have full repurchase recourse for any delinquent loans.

Loans where borrowers may be subject to payment increases include adjustable rate mortgage loans with terms that initially require payment of interest only.  Payments may increase significantly when the interest-only period ends and the loan principal begins to amortize. At December 31, 2011 and September 30, 2011, these loans totaled $570.8 million and $639.9 million, respectively, or approximately 35% and 40% of the residential mortgage portfolio, respectively.  In the current interest rate environment, a large percentage of these loans were projected to adjust to a payment lower than the current payment. The outstanding balance of interest-only loans, based on their contractual terms, are scheduled to reprice as follows:

  December 31, 2011 
  (in thousands) 
    
One year or less $378,024 
Over one year through two years  56,712 
Over two years through three years  81,512 
Over three years through four years  25,372 
Over four years through five years  8,572 
Over five years  20,612 
Total outstanding residential interest-only loan balance $570,804 


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A component of credit risk management for the residential portfolio is the LTV and borrower credit score at origination or purchase. The most recent LTV/FICO scores at origination of RJ Bank’s residential first mortgage loan portfolio are as follows:

December 31, 2011September 30, 2011
Residential first mortgage loan weighted-average LTV/FICO (1)
66%/75266%/751

        (1) At origination. Small group of local loans representing less than 0.5% of residential portfolio excluded.

In addition, RJ Bank obtains the most recently available information (generally on a quarter lag) to estimate current LTV ratios on the individual loans in the residential mortgage loan portfolio.  Current LTVsLTV ratios are estimated based on the initial appraisal obtained at the time of origination, adjusted using relevant market indices for housing price changes that have occurred since origination.  The value of the homes could vary from actual market values due to change in the condition of the underlying property, variations in housing price changes within metropolitan statistical areas and other factors.


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RJ Bank estimates that residential mortgage loans with updated LTVs between 100% and 120% represent 17%18% of the residential mortgage loan portfolio and residential mortgage loans with updated LTVs in excess of 120% represent 9%11% of the residential mortgage loan portfolio.  The current average estimated LTV is approximately 80% for the total residential mortgage loan portfolio.  Credit risk management utilizes this data in conjunction with delinquency statistics, loss experience and economic circumstances to establish appropriate allowance for loan losses for the residential mortgage loan portfolio, which is based upon an estimate for the probability of default and loss given default for each homogeneous class of loans.

Residential mortgage loan delinquency levels are elevated by historical standards at RJ Bank due to the economic downturn and the high level of unemployment. Our consumer loan portfolio, however, has not experienced high levels of delinquencies to date.  At March 31, 2012 and September 30, 2011, there were no delinquent consumer loans.

At March 31, 2012, loans over 30 days delinquent (including nonperforming loans) increased to 4.40% of residential and consumer loans outstanding, compared to 4.24% over 30 days delinquent at September 30, 2011.  Despite this increase, our March 31, 2012 percentage compares favorably to the national average for over 30 day delinquencies of 10.2% as most recently reported by the FRB.  RJ Bank’s significantly lower delinquency rate as compared to its peers is the result of both our conservative underwriting policies and the lack of exotic loan products and subprime loans.

The following table presents a summary of delinquent residential and consumer loans:

  
Delinquent residential and consumer loans
(amount)
  
Delinquent residential and consumer loans as a
percentage of outstanding loan balances
 
                   
  30-89 days  90 days or more  Total  30-89 days  90 days or more  Total 
  ($ in thousands) 
                   
March 31, 2012:                  
Residential mortgage loans:                  
First mortgage loans $16,949  $60,349  $77,298   1.00%  3.55%  4.55%
Home equity loans/lines  338   65   403   1.21%  0.23%  1.44%
Total residential mortgage and consumer loans $17,287  $60,414  $77,701   0.98%  3.42%  4.40%
September 30, 2011:                        
Residential mortgage loans:                        
First mortgage loans $12,718  $61,870  $74,588   0.74%  3.58%  4.32%
Home equity loans/lines  88   114   202   0.28%  0.37%  0.65%
Total residential mortgage and consumer loans $12,806  $61,984  $74,790   0.73%  3.51%  4.24%

To manage and limit credit losses, we maintain a rigorous process to manage our loan delinquencies. See page 73 of our 2011 Form 10-K for further discussion of this process. There have been no material changes to this process during the six months ended March 31, 2012.

Credit risk is also managed by diversifying the residential mortgage portfolio. The geographic concentrations (top five states) of RJ Bank’s one-to-four family residential mortgage loans are as follows:

March 31, 2012 September 30, 2011
($ outstanding as a % of RJ Bank total assets)
       
 3.1%
CA (1)
  3.3%
CA (1)
 2.8%FL  2.6%FL
 1.8%NY  1.9%NY
 1.0%NJ  1.1%NJ
 0.8%VA  0.9%VA

(1)  This concentration ratio for the state of California excludes 2.1% and 1.9% at March 31, 2012 and September 30, 2011, respectively, for loans purchased from a large investment grade institution that have full repurchase recourse for any delinquent loans.


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Loans where borrowers may be subject to payment increases include adjustable rate mortgage loans with terms that initially require payment of interest only.  Payments may increase significantly when the interest-only period ends and the loan principal begins to amortize. At March 31, 2012 and September 30, 2011, these loans totaled $524.1 million and $639.9 million, respectively, or approximately 30% and 40% of the residential mortgage portfolio, respectively.  At March 31, 2012, the balance of amortizing, former interest-only, loans totaled $44.9 million.  The weighted average number of years before the remainder of the loans, which were still in their interest-only period at March 31, 2012, begins amortizing is 3.07 years.  In the current interest rate environment, a large percentage of these loans were projected to adjust to a payment lower than the current payment. The outstanding balance of loans that were interest-only at origination and based on their contractual terms are scheduled to reprice are as follows:

  March 31, 2012 
  (in thousands) 
    
One year or less $348,272 
Over one year through two years  51,152 
Over two years through three years  73,449 
Over three years through four years  17,770 
Over four years through five years  10,046 
Over five years  23,379 
Total outstanding residential interest-only loan balance $524,068 

A component of credit risk management for the residential portfolio is the LTV and borrower credit score at origination or purchase. The most recent LTV/FICO scores at origination of RJ Bank’s residential first mortgage loan portfolio are as follows:

March 31, 2012September 30, 2011
Residential first mortgage loan weighted-average LTV/FICO (1)
66%/75266%/751

(1) At origination. Small group of local loans representing less than 0.5% of residential portfolio excluded.

For more information regarding updated LTVs for our performing residential first mortgage loan portfolio, see Note 7 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.

Corporate loans

Credit risk in RJ Bank’s corporate loan portfolio is monitored on an individual loan basis for trends in borrower operational performance, payment history, credit ratings, collateral performance, loan covenant compliance and other factors including industry performance and concentrations. As part of the credit review process the loan grade is reviewed at least quarterly to confirm the appropriate risk rating for each credit. See Note 1, page 88, of our 2011 Form 10-K, specifically the bank loans and allowances for losses section, for additional information on RJ Bank’s corporate loan portfolio and allowance for loan loss policies.

At DecemberMarch 31, 2011,2012, other than loans classified as nonperforming, there were twowas one government-guaranteed loansloan totaling $392,000$231 thousand that werewas delinquent greater than 30 days.

Credit risk is also managed by diversifying the corporate loan portfolio. RJ Bank’s corporate portfolio does not contain a significant concentration in any single industry. The industry concentrations (top five categories) of RJ Bank’s corporate loans are as follows:

December 31, 2011 September 30, 2011
March 31, 2012March 31, 2012 September 30, 2011
($ outstanding as a % of RJ Bank total assets)
             
4.3%Telecommunications  4.2%Telecommunications4.9%Consumer products and services  4.2%Telecommunications
4.1%Consumer products and services  3.4%Consumer products and services3.8%Media communications  3.4%Consumer products and services
3.5%Pharmaceuticals  2.9%Media communications3.4%Pharmaceuticals  2.9%Media communications
3.2%Hospitals  2.9%Pharmaceuticals3.2%Technology  2.9%Pharmaceuticals
3.1%Technology  2.6%Healthcare providers (non-hospital)3.1%Hospitals  2.6%Healthcare providers (non-hospital)

Liquidity risk

See the section entitled “Liquidity and Capital Resources” in Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q for more information regarding our liquidity and how we manage liquidity risk.


 
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Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls are procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, are recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended DecemberMarch 31, 20112012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II   OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The following information supplements and amends the disclosure set forth under Part I, Item 3 “Legal Proceedings” on page 27 of our 2011 Form 10-K.

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

See Note 1214 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q for additional information regarding legal matter contingencies.

Item 1A. RISK FACTORS

See Item 1A: Risk Factors, on pages 14 - 25 of our 2011 Form 10-K for a discussion of risk factors that impact our operations and financial results.  With the exception of the below, there have been no material changes in the risk factors as discussed therein.

The acquisition of Morgan Keegan involves risks that could strategically affect our business.

On January 11, 2012 we announced that RJF entered into a definitive stock purchase agreement to acquire all of the issued and outstanding shares of Morgan Keegan (refer to the discussion of this subsequent eventacquisition in Note 192 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q).  This acquisition transaction was completed and closed on April 2, 2012.

Acquisitions of this magnitude pose numerous risks, including: difficulty in integrating our and Morgan Keegan’s businesses, services and products; failure to achieve anticipated synergies or realize the projected benefits of the transaction; diversion of management’s attention from other business concerns due to transaction relatedtransaction-related issues; potential loss of clients or key employees; the need to combine accounting and data processing systems and management controls and to integrate relationships with clients, trading counterparties and business partners; regulatory and other approvals and conditions to the transaction are not received or satisfied on a timely basis or at all; the possibility that modifications to the terms of the transaction may be required to obtain or satisfy regulatory approvals or conditions to closing; changes in the anticipated timing for closing the transaction; the inability to sustain revenue and earnings growth; and changes in the capital markets.  There is no assurance that this acquisition will yield all of the positive benefits anticipated.  If we are not able to integrate successfully, there is a risk that our results of operations, financial condition and cash flows may be materially and adversely affected.

 
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Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table presents information on our purchases of our own stock, on a monthly basis, for the threesix month period ended DecemberMarch 31, 2011:2012:

 
Number of shares
purchased (1)
  
Average price
per share
  
Number of shares
purchased (1)
  
Average price
per share
 
            
October 1, 2011 – October 31, 2011  394,080  $24.53   394,080  $24.53 
November 1, 2011 – November 30, 2011  256,359   27.75   245,521   29.00 
December 1, 2011 – December 31, 2011  -   -   -   - 
First quarter  650,439  $25.80   639,601  $26.25 
        
January 1, 2012 – January 31, 2012  61,025  $34.58 
February 1, 2012 – February 29, 2012  -   - 
March 1, 2012 – March 31, 2012  -   - 
Second quarter  61,025  $34.58 
Year-to-date  700,626  $26.97 

(1)  We purchase our own stock in conjunction with a number of activities, each of which are described below.  We do not have a formal stock repurchase plan. As of DecemberMarch 31, 2011,2012, there is $43.4$41.3 million remaining on the current authorization of our Board of Directors for open market share repurchases.

From time to time, our Board of Directors has authorized specific dollar amounts for repurchases at the discretion of our Board’s Securities Repurchase Committee. The decision to repurchase securities is subject to cash availability and other factors. Historically we have considered such purchases when the price of our stock approaches 1.5 times book value.  During the threesix months ended DecemberMarch 31, 2011,2012, we purchased 394,080 of our shares in open market transactions for a total of $9.7 million, or an average price of approximately $24.53 per share.

Share purchases for the trust fund that was established and funded to acquire our common stock in the open market and used to settle restricted stock units granted as a retention vehicle for certain employees of our wholly owned Canadian subsidiary (see Note 1416 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for more information on this trust fund) amounted to 256,359245,521 shares for a total of $7.1 million, for the threesix month period ended DecemberMarch 31, 2011.2012.

We also repurchase shares when employees surrender shares as payment for option exercises.  During the threesix months ended DecemberMarch 31, 2011,2012, there were no61,025 shares surrendered to us by employees as payment for option exercises.

We expect to continue paying cash dividends. However, the payment and rate of dividends on our common stock is subject to several factors including operating results, our financial requirements, regulatory capital restrictions applicable to RJF as a bank holding company, and the availability of funds from our subsidiaries, including the broker-dealer subsidiaries, which may be subject to restrictions under the net capital rules of the SEC, FINRA and the Investment Industry Regulatory Organization of Canada (“IIROC”) as well as net capital covenants in their credit agreements, and RJ Bank, which may be subject to restrictions by federal banking agencies. Such restrictions have not previously limited our dividend payments. (See Note 1517 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for more information on the capital restrictions placed on RJF, RJ Bank and our broker-dealer subsidiaries.)

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 5. OTHER INFORMATION

None.


 
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Item 6. EXHIBITS

3.2Amended and Restated By-Laws of Raymond James Financial, Inc. reflecting amendments adopted by the Board of Directors on April 20, 2012, incorporated by reference to Exhibit 3(ii) as filed with Form 8-K on April 25, 2012.
4.5Third Supplemental Indenture, dated as of March 7, 2012 (for senior debt securities), between Raymond James Financial, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 as filed with Form 8-K on March 7, 2012.
4.6Fourth Supplemental Indenture, dated as of March 26, 2012 (for senior debt securities), between Raymond James Financial, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 as filed with Form 8-K on March 26, 2012.
10.19Stock Purchase Agreement, dated January 11, 2012, between Raymond James Financial, Inc. and Regions Financial Corporation (excluding certain exhibits and schedules), incorporated by reference to Exhibit 10.19 as filed with Form 8-K on January 12, 2012.
10.20*Employment Separation Agreement, Waiver and Release dated as of January 20, 2012 between Raymond James Financial, Inc. and Richard K. Riess, filed herewith.
10.21*Raymond James Financial, Inc. 2012 Stock Incentive Plan, incorporated by reference to Appendix A to Definitive Proxy Statement for the Annual Meeting of Shareholders held February 23, 2012, filed January 25, 2012.
10.22*Form of Contingent Stock Option Agreement under 2012 Stock Incentive Plan, filed herewith.
10.23*Form of Stock Option Agreement under 2012 Stock Incentive Plan, filed herewith.
10.24*Form of Restricted Stock Unit Agreement for Non-Bonus Award (Employee/Independent Contractor) under 2012 Stock Incentive Plan, filed herewith.
10.25*Form of Restricted Stock Unit Agreement for Non-Employee Director under 2012 Stock Incentive Plan, filed herewith.
10.26*Form of Restricted Stock Unit Agreement for Stock Bonus Award under 2012 Stock Incentive Plan, filed herewith.
10.27*Form of Restricted Stock Unit Agreement for John C. Carson, Jr. (Performance-based Retention Award) under 2012 Stock Incentive Plan, filed herewith.
10.28*Letter Agreement dated January 31, 2012 between Raymond James Financial, Inc. and Richard G. Averitt, III regarding transition of services and employment matters, filed herewith.
10.29Credit Agreement, dated as of April 2, 2012, among Raymond James Investments, LLC, RJ Securities, Inc., RJC Forensics, LLC, RJC Event Photos, LLC, Morgan Properties, LLC and Regions Bank (excluding certain exhibits and schedules), incorporated by reference to Exhibit 10.22 as filed with Form 8-K on April 3, 2012.
10.30*Employment Agreement, dated January 11, 2012, as amended and restated as of April 20, 2012, by and between Raymond James Financial, Inc. and John C. Carson, Jr., incorporated by reference to Exhibit 10.1 as filed with Form 8-K on April 25, 2012.
11 Statement Re: Computation of per Share Earnings (the calculation of per share earnings is included in Part I, Item 1 in the Notes to Condensed Consolidated Financial Statements (Earnings Per Share) and is omitted here in accordance with Section (b)(11) of Item 601 of Regulation S-K). 

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12.1 Statement of Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends, filed herewith. 
    
31.1 Principal Executive Officer Certification as required by Rule 13a-14(a)/15d-14(a), filed herewith. 
    
31.2 Principal Financial Officer Certification as required by Rule 13a-14(a)/15d-14(a), filed herewith. 
    
32 Certification by Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. 
    
99.(i).1 Charter of the Audit Committee of the Board of Directors as revised on November 21, 2011, incorporated by reference to Exhibit 99.(i).1 as filed herewith.
with Form 10-Q on February 8, 2012. 


*Indicates a management contract or compensatory plan or arrangement in which a director or named executive officer participates.


 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


  RAYMOND JAMES FINANCIAL, INC.
  (Registrant)
   
   
   
   
Date:  February 8,May 9, 2012
 /s/ Paul C. Reilly
  Paul C. Reilly
  Chief Executive Officer
   
   
   
   
   
Date:  February 8,May 9, 2012
 /s/ Jeffrey P. Julien
  Jeffrey P. Julien
  Executive Vice President - Finance
  Chief Financial Officer and Treasurer
 

 
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