RAYMOND JAMES FINANCIAL INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the results of our operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and accompanying notes to 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, N.A. ("RJ Bank"), projected ventures, new products, anticipated market performance, recruiting efforts, regulatory approvals, the integration of Morgan Keegan (as hereinafter defined), and other matters. (On April 2, 2012, RJF completed its acquisition of all of the issued and outstanding shares of Morgan Keegan & Company, Inc. (a broker-dealer hereinafter referred to as "MK & Co.") and MK Holding, Inc. and certain of its affiliates (collectively referred to hereinafter as "Morgan Keegan") from Regions Financial Corporation ("Regions")). 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, 2012, as filed with the United States of America ("U.S.") Securities and Exchange Commission (the "2012 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 We operate as a financial services and bank holding company. Results in the 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 and fixed income markets, and the corporate and mortgage lending and credit (both commercial and residential) trends. 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 market participants which include investors, borrowers, and competitors, impacting their level of participation in the financial markets.

These factors also impact the level of public offerings, trading profits, interest rate volatility and asset valuations, or a combination thereof. In turn, these decisions affect our business results.

Quarter ended December 31, 2012 compared with the quarter ended December 31, 2011 Despite the event-driven market environment during the quarter, we achieved record net revenues of $1.1 billion, a 4% increase over the preceding quarter and a 42% increase compared to the prior year quarter. All of our segments realized increased revenues over the prior year with the exception of our securities lending segment. Total client assets under administration increased to a record $392 billion, a 45% increase as compared to the prior year.

Approximately $85 billion of the client assets under administration total are associated with legacy Morgan Keegan branches. Non-interest expenses increased $284 million, or 42%, from the prior year primarily due to the addition of Morgan Keegan. Non-interest expenses were consistent with the preceding quarter, increasing $14 million, or 1%. The current year quarter non-interest expenses include $17 million of acquisition and integration related costs which we incurred primarily associated with the Morgan Keegan acquisition. The bank loan loss provision decreased $5 million from the prior year reflecting the overall improvement in the credit markets from that period.

Inclusive of the impact of the acquisition of Morgan Keegan, our pre-tax income increased $28 million, or 26%, compared to the prior year. After the exclusion of the acquisition related expenses we incurred primarily resulting from the Morgan Keegan acquisition, we generated adjusted pre-tax income of $157 million (a non-GAAP measure)(1) for the current quarter, a $13 million, or 9%, increase over the preceding quarter and a $46 million, or 41%, increase over the comparable prior year pre-tax income of $111 million.

(1) Refer to the discussion and reconciliation of the GAAP results to the non-GAAP results in the "Non-GAAP Reconciliation" section of this MD&A.

60-------------------------------------------------------------------------------- Index A summary of the most significant matters impacting our financial results as compared to the prior year quarter, are as follows: • Our Private Client Group segment generated net revenues of $709 million, a 35% increase over the prior year. Pre-tax income of $53 million represents a 7% increase compared to the prior year. The increase in revenues is in large part due to our acquisition of Morgan Keegan and the high levels of retention of the Morgan Keegan financial advisors. Client assets under administration of the Private Client Group increased 39%, to $370 billion at December 31, 2012, as compared to the prior year. The increase is a result of both the $66 billion in assets brought on by Morgan Keegan branches and growth in legacy RJF private client assets.

• The Capital Markets segment realized a $22 million, or 216%, increase to $32 million in pre-tax income, reflecting improved equity capital market revenues net of the impact of weaker fixed income capital markets results.

Significant increases in both underwriting and merger and acquisition fee revenues occurred as issuers sought to complete transactions in advance of any anticipated tax law changes associated with the then pending fiscal cliff crisis. The expansion of our fixed income institutional sales business as a result of the Morgan Keegan acquisition drove the increase in our institutional commissions as compared to the prior year. While still a positive overall result and flat as compared to the prior year, our fixed income trading profits declined from the preceding quarter being adversely effected by volatile market conditions which arose late in the current quarter.

• Our Asset Management segment generated $21 million of pre-tax income, a $5 million, or 32%, increase compared to the prior year. Assets under management increased to a record $46.5 billion as of December 31, 2012. Net inflows of client assets, including assets of Morgan Keegan clients, appreciation in the market values of assets, and our December 24, 2012 acquisition of a 45% interest in ClariVest Asset Management, LLC ("ClariVest") with its $3.1 billion of assets under management, drove the increase. The ClariVest acquisition bolsters our platform in the large-cap strategy space. ClariVest markets its investment services to corporate and public pension plans, foundations, endowments and Taft-Hartley clients worldwide.

• RJ Bank generated $68 million in pre-tax income, a $15 million, or 28%, increase over the prior year. The increase resulted from an increase in net interest revenues resulting from higher average loan balances, an increase in the net interest spread, and a lower loan loss provision resulting from an improved credit environment.

• Our Emerging Markets segment generated a $2 million pre-tax loss, which is flat as compared to the prior year. Pre-tax results for the period include expenses associated with closure of our operations in Brazil.

• A $6 million increase in the pre-tax income (net of noncontrolling interests) generated by our Proprietary Capital segment was primarily the result of dividends and distributions received on certain of our investments during the current period.

• We incurred acquisition and integration related costs of $17 million in the current year, primarily associated with the Morgan Keegan acquisition.

With regard to regulatory changes that could impact our businesses in the future, our view of the potential impact to us of future regulations is substantially unchanged by the regulatory activities that occurred during the most recent period. 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.

61-------------------------------------------------------------------------------- Index 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 various corporate activities combined in the "Other" segment. The following table presents our consolidated and segment gross revenues and pre-tax income, the latter excluding noncontrolling interests, for the periods indicated: Three months ended December 31, 2012 2011 % change ($ in thousands) Total company Revenues $ 1,137,509 $ 798,817 42 % Pre-tax income excluding noncontrolling interests 139,147 110,851 26 % Private Client Group Revenues 712,814 528,618 35 % Pre-tax income 52,911 49,408 7 % Capital Markets Revenues 247,554 136,165 82 % Pre-tax income 31,607 10,001 216 % Asset Management Revenues 65,629 56,795 16 % Pre-tax income 20,943 15,813 32 % RJ Bank Revenues 92,050 77,416 19 % Pre-tax income 67,943 53,003 28 % Emerging Markets Revenues 5,589 4,652 20 % Pre-tax loss (2,354 ) (2,549 ) (8 )% Securities Lending Revenues 1,488 2,442 (39 )% Pre-tax income 539 1,206 (55 )% Proprietary Capital Revenues 20,616 473 NM Pre-tax income (loss) 5,720 (65 ) NM Other Revenues 5,304 2,661 99 % Pre-tax loss (38,162 ) (15,966 ) 139 % Intersegment eliminations Revenues (13,535 ) (10,405 ) 30 % 62-------------------------------------------------------------------------------- Index Reconciliation of the GAAP results to the non-GAAP measures We believe that the non-GAAP measures provide useful information by excluding those items that may not be indicative of our core operating results and that the GAAP and the non-GAAP measures should be considered together.

The non-GAAP adjustments for the periods indicated are comprised of the one-time acquisition and integration costs incurred which are non-recurring expenses (primarily associated with the Morgan Keegan acquisition), net of applicable taxes.

The following table provides a reconciliation of the GAAP basis to the non-GAAP measures: Three months ended December 31, December 31, Change vs. prior September 30, Change vs. prior 2012 2011 year 2012 quarter (in thousands, except per share amounts) Net income attributable to RJF, Inc. - GAAP basis $ 85,874 $ 67,325 28 % $ 83,325 3 % Non-GAAP adjustments : Acquisition related expenses (1) 17,382 - NM 18,725 (7 )% Tax effect of non-GAAP adjustments (2) (6,656 ) - NM (6,328 ) 5 % Net income attributable to RJF, Inc. - Non-GAAP basis $ 96,600 $ 67,325 43 % $ 95,722 1 % Non-GAAP earnings per common share: Non-GAAP basic $ 0.70 $ 0.53 32 % $ 0.69 1 % Non-GAAP diluted $ 0.69 $ 0.53 30 % $ 0.69 - % Average equity - GAAP basis (3) $ 3,324,370 $ 2,612,144 27 % $ 3,213,318 3 % Average equity - non-GAAP basis (4) $ 3,322,744 $ 2,612,144 27 % $ 3,192,258 4 % Return on equity for the quarter (annualized) 10.3 % 10.3 % - % 10.4 % (1 )% Return on equity for the quarter - non-GAAP basis (annualized) (5) 11.6 % 10.3 % 13 % 12.0 % (3 )% (1) The non-GAAP adjustment adds back to pre-tax income one-time acquisition and integration expenses associated with acquisitions that were incurred during each respective period.

(2) The non-GAAP adjustment reduces net income for the income tax effect of all the pre-tax non-GAAP adjustments, utilizing the effective tax rate applicable to each respective period.

(3) Computed as total equity attributable to Raymond James Financial, Inc. as of the date indicated plus the prior quarter-end total, divided by two.

(4) The calculation of non-GAAP average equity includes the impact on equity of the non-GAAP adjustments described in the table above, as applicable for each respective period.

(5) Computed by utilizing the net income attributable to RJF, Inc.-non-GAAP basis and the return on equity-non-GAAP basis, for each respective period.

63-------------------------------------------------------------------------------- Index Net interest analysis We have a significant amount of assets and liabilities held in our PCG, Capital Markets and RJ Bank 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.

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, 2012 2011 Average Interest Average Average Interest Average balance(1) inc./exp. yield/cost balance(1) inc./exp. yield/cost ($ in thousands) Interest-earning assets: Margin balances $ 1,835,454 $ 16,164 3.52 % $ 1,525,989 $ 13,702 3.56 % Assets segregated pursuant to regulations and other segregated assets 2,670,050 1,960 0.29 % 3,264,651 2,198 0.27 % Bank loans, net of unearned income (2) 8,303,983 87,310 4.21 % 6,930,795 72,022 4.09 % Available for sale securities 739,689 2,217 1.20 % 538,299 2,087 1.54 % Trading instruments(3) 890,971 6,012 2.70 % 608,346 4,079 2.68 % Stock loan 355,819 1,391 1.56 % 737,071 2,388 1.30 % Loans to financial advisors(3) 437,730 2,125 1.94 % 234,847 1,977 3.37 % Other(3) 1,946,925 5,947 1.22 % 2,466,775 3,643 0.59 % Total $ 17,180,621 $ 123,126 2.87 % $ 16,306,773 $ 102,096 2.50 % Interest-bearing liabilities: Brokerage client liabilities $ 4,372,834 548 0.05 % $ 4,485,098 $ 609 0.05 % Bank deposits (2) 8,738,284 2,476 0.11 % 7,897,328 2,243 0.11 % Trading instruments sold but not yet purchased(3) 249,551 798 1.28 % 128,890 523 1.62 % Stock borrow 139,200 504 1.45 % 192,699 460 0.95 % Borrowed funds 346,187 1,314 1.52 % 225,015 970 1.72 % Senior notes 1,148,689 19,066 6.64 % 550,227 9,307 6.62 % Loans payable of consolidated variable interest entities(3) 78,271 1,049 5.36 % 96,540 1,305 5.41 % Other(3) 367,934 2,266 2.46 % 198,365 623 1.26 % Total $ 15,440,950 $ 28,021 0.73 % $ 13,774,162 $ 16,040 0.47 % Net interest income $ 95,105 $ 86,056 (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.

64-------------------------------------------------------------------------------- Index Quarter ended December 31, 2012 compared with the quarter ended December 31, 2011 - Net Interest Analysis Net interest income increased $9 million, or 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 $3 million, or 18%, primarily resulting from increased client margin and client cash balances arising from the Morgan Keegan acquisition. Net interest associated with legacy Raymond James PCG operations was relatively flat as compared to the prior year.

RJ Bank's net interest income increased $15 million, or 21%, primarily as a result of an increase in average loans outstanding. 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 increased slightly despite significantly lower yields on the portfolio as compared to the prior year. The average balance of the portfolio increased primarily as a result of the auction rate securities ("ARS") we acquired in the Morgan Keegan acquisition. Given that the yield on ARS is significantly lower than the yield on other types of available for sale securities, as the proportion of ARS in our available for sale securities portfolio increases, the weighted-average yield on total available for sale securities portfolio decreases.

Interest expense on our senior notes increased approximately $10 million over the prior year. The increase results from the interest expense associated with our March 2012 issuance of $350 million 6.9% senior notes and $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.

65-------------------------------------------------------------------------------- Index 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, 2012 % change 2011 ($ in thousands) Revenues: Securities commissions and fees: Equities $ 73,181 27 % $ 57,695 Fixed income products 24,353 65 % 14,793 Mutual funds 144,662 38 % 105,193 Fee-based accounts 242,568 43 % 169,555 Insurance and annuity products 83,318 30 % 64,148 New issue sales credits 27,455 29 % 21,319 Sub-total securities commissions and fees 595,537 38 % 432,703 Interest 24,143 24 % 19,444 Account and service fees: Client account and service fees 42,597 36 % 31,411 Mutual fund and annuity service fees 38,383 20 % 31,993 Client transaction fees 3,851 (44 )% 6,855 Correspondent clearing fees 703 (1 )% 707 Account and service fees - all other 65 44 % 45 Sub-total account and service fees 85,599 21 % 71,011 Other 7,535 38 % 5,460 Total revenues 712,814 35 % 528,618 Interest expense 3,468 80 % 1,925 Net revenues 709,346 35 % 526,693 Non-interest expenses: Sales commissions 431,749 35 % 319,037 Admin & incentive compensation and benefit costs 120,121 36 % 88,632 Communications and information processing 38,343 94 % 19,798 Occupancy and equipment 28,802 63 % 17,698 Business development 17,625 28 % 13,789 Clearance and other 19,795 8 % 18,331 Total non-interest expenses 656,435 38 % 477,285 Pre-tax income $ 52,911 7 % $ 49,408 Margin on net revenues 7.5 % 9.4 % 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. The portion of this fee paid by RJ Bank is eliminated in the intersegment eliminations.

66-------------------------------------------------------------------------------- Index 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.

The PCG business of the Morgan Keegan broker-dealer operated on its historic Morgan Keegan platform throughout this reporting period. Our plan is to migrate all the financial advisors and client accounts off of the Morgan Keegan platform and fully integrate the operations onto the Raymond James & Associates, Inc.

("RJ&A") platform during the second quarter of fiscal year 2013.

Revenues of the PCG segment are correlated with total client assets under administration as well as the overall U.S. equities markets. As of December 31, 2012, total PCG client assets under administration amounted to $370 billion, an increase of approximately 1% over the preceding quarter ended September 30, 2012 and up 39% over the $267 billion as of December 31, 2011, $66 billion of which resulted from our acquisition of Morgan Keegan.

The following table presents a summary of Private Client Group financial advisors and investment advisor representatives as of the dates indicated: Investment advisor December September December Independent representatives 31, 2012 30, 2012 31, 2011 Employees contractors (1) total total total RJ&A 1,346 - - 1,346 1,335 1,313 MK & Co. (2) 869 - - 869 892 - Raymond James Financial Services, Inc.

("RJFS") - 3,212 246 3,458 3,467 3,428 Raymond James Ltd. ("RJ Ltd.") 185 278 - 463 473 454 Raymond James Investment Services Limited ("RJIS") - 65 88 153 163 161 Total financial advisors and investment advisor representatives 2,400 3,555 334 6,289 6,330 5,356 (1) Investment advisor representatives with custody only relationships.

(2) We acquired MK & Co. on April 2, 2012.

Quarter ended December 31, 2012 compared with the quarter ended December 31, 2011 - Private Client Group Net revenues increased $183 million, or 35%, while pre-tax income increased $4 million, or 7%. PCG's pre-tax margin on net revenues decreased to 7.5% as compared to the prior year's 9.4%.

Securities commissions and fees increased $163 million, or 38%. A significant portion of this increase results from our acquisition of Morgan Keegan on April 2, 2012, which brought over 900 financial advisors into PCG, 89% of whom have been retained as of December 31, 2012. The retention rate for Morgan Keegan financial advisors who were offered a retention incentive approximates 95%.

Overall, we have realized a 17% increase in the number of PCG financial advisors as of December 31, 2012 as compared to December 31, 2011. Client assets under administration increased $103 billion, or 39%, compared to the December 31, 2012 level, to $370 billion, in large part ($66 billion) as a result of the Morgan Keegan acquisition. Equity market conditions in the U.S., while volatile during the current three month period, were improved as compared to the prior year.

Client account and service fee revenues increased $11 million, or 36%, over the prior year. The portion of these revenues generated from Morgan Keegan clients was $7 million. Of the remaining increase, the primary component is the fees we receive, in lieu of interest earnings, from our multi-bank sweep program which have increased as a result of higher balances in the program.

67-------------------------------------------------------------------------------- Index Mutual fund and annuity service fees increased $6 million, or 20%, primarily as a result of an increase in mutual fund omnibus fees, education and marketing support fees, and no-transaction-fee ("NTF") program revenues, all of which are paid to us by the mutual fund companies whose products we distribute. We continue to implement changes in the data sharing arrangements with many mutual fund companies, converting 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 impact of the revenues generated from Morgan Keegan clients on mutual fund and annuity service fee revenues was $2 million. The Morgan Keegan client mutual fund positions will be eligible for our omnibus program following conversion to the RJ&A platform.

Partially offsetting the increases in revenues described above, client transaction fees decreased $3 million, or 44%, primarily as a result of certain mutual fund relationships converting over the past year to a NTF program and an April 2012 reduction in transaction fees associated with certain non-managed fee-based accounts. Under the mutual fund NTF 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.

Total segment revenues increased 35%. The portion of total segment revenues that we consider to be recurring is approximately 65% at December 31, 2012, slightly higher than the prior year level. Recurring commission and fee revenues include asset based fees, trailing commissions from mutual funds, variable annuities and insurance products, mutual fund service fees, fees earned on funds in our multi-bank sweep program, and interest. Assets in all fee-based accounts in aggregate at December 31, 2012 are $110 billion, an increase of 1% over the balances as of September 30, 2012, and 31% as compared to the $84 billion of assets in fee-based accounts at December 31, 2011. Approximately $9 billion of the increase in asset balances in fee-based accounts over the December 31, 2011 levels resulted from the addition of assets in the fee-based accounts of Morgan Keegan.

PCG net interest revenues increased $3 million, or 18%, primarily resulting from increased client margin and client cash balances arising from the Morgan Keegan acquisition. Net interest associated with legacy Raymond James PCG operations was relatively flat as compared to the prior year.

Non-interest expenses increased $179 million, or 38%, over the prior year. Sales commission expense increased $113 million, or 35%, generally consistent with the increase in commission and fee revenues. Administrative and incentive compensation expenses increased $31 million, or 36%. The increase primarily results from increases in salaries and benefits expense due to the increased support staff and information technology and operations headcount arising from the addition of the Morgan Keegan associates.

Communications and information processing expense increased $19 million, or 94%.

Computer software development costs and other information technology related costs, which include consulting expenses, increased over $14 million as compared to the prior year as a result of various information technology enhancements to existing platforms and additional reporting requirements, including regulatory requirements and those under omnibus arrangements (refer to the increase in mutual fund and annuity service fee revenue arising from these arrangements discussed above). Expenses primarily associated with the increase in our number of offices and personnel arising from the Morgan Keegan acquisition resulted in an increase in office related expenses of $4 million.

Occupancy and equipment expense increased $11 million, or 63%, primarily due to rent, and other facility related expenses, associated with the increase of approximately 140 branch office locations resulting from the Morgan Keegan acquisition.

Business development expense increased $4 million, or 28%, primarily due to increases in travel and related costs arising from the increased number of financial advisors and other associates resulting from the Morgan Keegan acquisition.

68-------------------------------------------------------------------------------- Index 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, 2012 % change 2011 ($ in thousands) Revenues: Institutional sales commissions: Equity $ 54,207 10 % $ 49,357 Fixed income 90,954 189 % 31,512 Sub-total institutional sales commissions 145,161 80 % 80,869 Securities underwriting fees 27,014 87 % 14,475 Tax credit funds syndication fees 4,269 (5 )% 4,475 Mergers & acquisitions fees 48,065 161 % 18,431 Private placement fees 5,094 166 % 1,918 Trading profits 7,296 2 % 7,133 Interest 6,071 40 % 4,347 Other 4,584 1 % 4,517 Total revenues 247,554 82 % 136,165 Interest expense 4,276 36 % 3,150 Net revenues 243,278 83 % 133,015 Non-interest expenses: Sales commissions 59,413 112 % 27,988 Admin & incentive compensation and benefit costs 110,215 62 % 67,868 Communications and information processing 15,874 32 % 12,031 Occupancy and equipment 8,481 39 % 6,082 Business development 9,781 19 % 8,240 Clearance and other 13,652 79 % 7,613 Total non-interest expenses 217,416 67 % 129,822 Income before taxes and including noncontrolling interests 25,862 710 % 3,193 Noncontrolling interests (5,745 ) (6,808 ) Pre-tax income excluding noncontrolling interests $ 31,607 216 % $ 10,001 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 public offerings; 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 participation in public offerings, 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 our role in the offering, 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.

Certain of the Capital Markets businesses of Morgan Keegan were immediately integrated into RJ&A's operations on the date of acquisition. Other Morgan Keegan Capital Markets businesses are being integrated into RJ&A over time.

Morgan Keegan equity capital markets and fixed income operations are included in the current year results, therefore, comparisons of our legacy capital markets operations, especially fixed income operations, to our current operations, are not meaningful. Our plan is to have fully integrated all of the Morgan Keegan Capital Markets businesses into RJ&A by the end of the second quarter of this fiscal year.

69-------------------------------------------------------------------------------- Index Quarter ended December 31, 2012 compared with the quarter ended December 31, 2011 - Capital Markets Pre-tax income in the Capital Markets segment increased $22 million, or 216%, as compared to the prior year.

Our fixed income results were significantly higher for the current period as compared to the prior year primarily driven by the acquisition of Morgan Keegan.

The combination of our former fixed income operations with Morgan Keegan's fixed income operations results in a combined department that is approximately three times the size of our legacy fixed income business.

Net revenues increased by $110 million, or 83%, primarily resulting from a $59 million, or 189%, increase in institutional fixed income sales commissions, a $30 million, or 161%, increase in merger and acquisition fees, a $13 million, or 87% increase in securities underwriting fees, a $5 million, or 10%, increase in institutional equity sales commissions, and a $3 million, or 166%, increase in private placement fees. Capital markets were sluggish leading up to the national elections, seemingly awaiting the outcome. But in the latter part of the quarter, concerns related to the pending fiscal cliff crisis had, at least in part, a favorable impact on our equity capital markets business as underwriting and merger and acquisition activity improved significantly as issuers sought to complete certain equity transactions in advance of any anticipated tax law changes. However, those same fiscal cliff concerns had an adverse impact on our fixed income capital markets business as the municipal fixed income markets were negatively impacted during December by discussions and rumors regarding potential changes in the tax laws pertaining to limits, or caps, on the tax-exempt advantages of the instruments. In response to these uncertainties, interest rates on municipal securities increased during December which negatively impacted our trading results during the month.

The increase in fixed income institutional sales commissions over the prior year are primarily due to the increased size of our fixed income operations after the Morgan Keegan acquisition. Our significantly larger public finance fixed income operations as a result of the Morgan Keegan acquisition produced a $13 million increase in our revenues, which favorably impacted both our investment banking revenues and our securities commissions and fees.

The number of lead and co-managed underwritings as well as merger & acquisition transactions during the current period increased significantly in our U.S.

operations as compared to the prior year. The most significant increases in merger and acquisition fees were in the industrial growth, energy, technology & communications, and the government services sectors. Capital markets activities in our Canadian operations remained sluggish in the current period, continuing to reflect the adverse market conditions which existed throughout the prior fiscal year.

Trading profits for the current quarter were essentially flat as compared to the prior year. Despite our significantly enhanced fixed income trading capacity after the Morgan Keegan acquisition, our trading profit results for the current period, while positive overall, were unfavorably impacted in December 2012 by the adverse conditions in the municipal fixed income market in the face of the anticipated fiscal cliff crisis described above.

Non-interest expenses increased $88 million, or 67%, over the prior year primarily driven by the addition of the Morgan Keegan fixed income operations. Sales commission expense increased $31 million, or 112%, which is directly correlated to the increase in overall institutional sales commission revenues of 80%, and includes the shift to a higher percentage of fixed income sales. Administrative and incentive compensation and benefit expense increased $42 million, or 62%, primarily driven by the significant increase in personnel resulting from the Morgan Keegan acquisition. The increase in clearance and other expense of $6 million results from the allocation of certain general and administrative and back office clearing expenses associated with the increased fixed income volume between the PCG segment and this capital markets segment, as well as amortization expense in the current period arising from certain intangible assets acquired in the Morgan Keegan acquisition.

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 9 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for further details) as well as the impact of our consolidation of Raymond James European Securities, Inc. ("RJES"), and reflects the portion of these consolidated entities which we do not own. Total segment expenses attributable to noncontrolling interest decreased by approximately $1 million as compared to the prior year.

70-------------------------------------------------------------------------------- Index 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, 2012 % change 2011 ($ in thousands) Revenues: Investment advisory fees $ 54,951 16 % $ 47,517 Other 10,678 15 % 9,278 Total revenues 65,629 16 % 56,795 Expenses: Admin & incentive compensation and benefit costs 21,703 9 % 19,985 Communications and information processing 3,771 (1 )% 3,802 Occupancy and equipment 951 3 % 921 Business development 1,984 6 % 1,880 Investment sub-advisory fees 7,176 16 % 6,172 Other 8,500 9 % 7,766 Total expenses 44,085 9 % 40,526 Income before taxes and including noncontrolling interests 21,544 32 % 16,269 Noncontrolling interests 601 456 Pre-tax income excluding noncontrolling interests $ 20,943 32 % $ 15,813 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. Asset balances are impacted by both the performance of the market and the net 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. As of December 31, 2012, approximately 81% of investment advisory fees recorded in this segment are earned from assets held in managed programs. Of these revenues, approximately 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 financial assets under management in managed programs that significantly impact segment results at the dates indicated: December 31, September 30, December 31, September 30, 2012 2012 2011 2011 (in millions) Assets under management: Eagle Asset Management, Inc. $ 20,575 $ 19,986 $ 17,828 $ 16,092 Raymond James Consulting Services 9,407 9,443 8,634 8,356 Unified Managed Accounts ("UMA") 3,067 2,855 2,054 1,677 Freedom Accounts & other managed programs 12,268 11,884 10,115 9,523 ClariVest Asset Management, LLC 3,112 (1) - - - Sub-total assets under management 48,429 44,168 38,631 35,648 Less: Assets managed for affiliated entities (4,235 ) (4,185 ) (3,703 ) (3,579 ) Sub-total net assets under management 44,194 39,983 34,928 32,069 Morgan Keegan managed fee-based assets (2) 2,333 2,801 - - Total assets under management $ 46,527 $ 42,784 $ 34,928 $ 32,069 (1) Eagle acquired a 45% interest in ClariVest on December 24, 2012.

(2) All revenues generated since April 2, 2012 (the "Closing Date") of the Morgan Keegan acquisition arising from assets in Morgan Keegan managed fee-based programs are included in the PCG segment. These assets are managed by unaffiliated portfolio managers.

71-------------------------------------------------------------------------------- Index As of December 31, 2012, approximately 19% 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.

The following table reflects assets under management in non-managed programs that significantly impact segment results at the dates indicated: December 31, September 30, December 31, September 30, 2012 2012 2011 2011 (in millions) Passport $ 30,446 $ 30,054 $ 25,371 $ 24,008 Ambassador 18,549 17,826 14,573 13,555 Other non-managed fee-based assets 3,076 3,153 2,369 2,196 Sub-total assets under management 52,071 51,033 42,313 39,759 Morgan Keegan non-managed fee-based assets (1) 6,810 6,772 - - Total assets under management $ 58,881 $ 57,805 $ 42,313 $ 39,759 (1) All revenues generated since the Closing Date of the Morgan Keegan acquisition arising from assets in Morgan Keegan non-managed fee-based programs are included in the PCG segment.

On December 24, 2012 (the "ClariVest Acquisition Date"), we completed our acquisition of a 45% interest in ClariVest, an acquisition that bolsters our platform in the large-cap strategy space. ClariVest, manages more than $3 billion in client assets and currently markets its investment services to corporate and public pension plans, foundations, endowments and Taft-Hartley clients worldwide. As a result of certain protective rights we have under the operating agreement with ClariVest, we are consolidating ClariVest in our financial statements as of the ClariVest Acquisition Date. In addition, a put and call agreement was entered into on the ClariVest Acquisition Date that provides our wholly owned Eagle Asset Management, Inc. subsidiary with various paths to majority ownership in ClariVest, the timing of which would depend upon the financial results of ClariVest's business and the tenure of existing ClariVest management. The results of operations of ClariVest have been included in our results prospectively from December 24, 2012. Given the timing of the effective date of this acquisition (near the end of the three month reporting period ended December 31, 2012), this acquisition did not have a significant impact on our results of operations for the quarter.

Quarter ended December 31, 2012 compared to the quarter ended December 31, 2011 - Asset Management Pre-tax income in the Asset Management segment increased $5 million, or 32%, as compared to the prior year.

Investment advisory fee revenue increased by $7 million, or 16%, generated by an increase in assets under management. Total legacy Raymond James assets under management in managed programs of $45.3 billion at December 31, 2012, are $6.7 billion more than they were as of December 31, 2011, an increase of 17% (fee revenue excludes fees arising from fee-based assets in programs managed by Morgan Keegan as the revenues associated with these activities are reflected entirely in our PCG segment until the PCG integration occurs in the second quarter of this fiscal year). Since the prior year and excluding the impact of the ClariVest acquisition, net inflows of client assets into managed programs approximated $3.8 billion while asset values have increased by $2.9 billion.

Total legacy Raymond James assets under management in non-managed programs as of December 31, 2012 have increased $10 billion, or 23%, as compared to the prior year, and investment advisory fee revenue associated with such assets increased by $1 million, or 18%. Other revenue increased by over $1 million, or 15%, primarily resulting from an increase in fee income generated by our Raymond James Trust ("RJT") subsidiary reflecting a 22% increase in RJT client assets as compared to the prior year.

Expenses increased by approximately $4 million, or 9%, resulting from a $2 million, or 9%, increase in administrative and performance based incentive compensation, a $1 million, or 16%, increase in investment sub-advisory fees, and a $1 million, or 9%, increase in other expenses. The increase in administrative and performance based incentive compensation is a result of the combination of increases in salary expenses resulting from annual increases and additions to staff, as well as an increase in performance compensation which is directly related to the increase in investment advisory fee revenues. The increase in investment sub-advisory fee expense is directly related to the increase in advisory fees paid to the external managers associated with certain assets included within the UMA program. The $1 million increase in other expense is primarily due to increases in the costs incurred so that certain funds sponsored by Eagle are available as investment choices on the platforms of other broker-dealers.

72-------------------------------------------------------------------------------- Index Results of Operations - RJ Bank The following table presents consolidated financial information for RJ Bank for the periods indicated: Three months ended December 31, 2012 % change 2011 ($ in thousands) Revenues: Interest income $ 90,374 20 % $ 75,093 Interest expense (2,628 ) 11 % (2,364 ) Net interest income 87,746 21 % 72,729 Other income 1,676 (28 )% 2,323 Net revenues 89,422 19 % 75,052 Non-interest expenses: Employee compensation and benefits 4,828 16 % 4,180 Communications and information processing 670 (11 )% 754 Occupancy and equipment 268 57 % 171 Provision for loan losses 2,923 (61 )% 7,456 FDIC insurance premiums 1,456 23 % 1,186 Affiliate deposit account servicing fees 6,971 21 % 5,768 Other 4,363 72 % 2,534 Total non-interest expenses 21,479 (3 )% 22,049 Pre-tax income $ 67,943 28 % $ 53,003 RJ Bank is a national bank, regulated by the Office of the Comptroller of the Currency ("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. RJ Bank is active in corporate loan syndications and participations, and also purchases commercial loans in the secondary market. Residential mortgage loans are originated and held for investment or sold in the secondary market. 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.

73-------------------------------------------------------------------------------- Index The tables below present certain credit quality trends for corporate loans and residential/consumer loans: Three months ended December 31, 2012 2011 (in thousands) Net loan (charge-offs)/recoveries: Commercial and Industrial ("C&I") loans $ (90 ) $ (3,149 ) Commercial real estate ("CRE") loans 544 430 Residential/mortgage loans (2,839 ) (2,945 ) Consumer loans 5 (33 ) Total $ (2,380 ) $ (5,697 ) December 31, 2012 September 30, 2012 (in thousands) Allowance for loan losses: Loans held for investment: C&I loans $ 96,010 $ 92,409 CRE construction loans 874 739 CRE loans 27,232 27,546 Residential/mortgage loans 23,073 26,138 Consumer loans 832 709 Total $ 148,021 $ 147,541 Nonperforming assets: Nonperforming loans: C&I loans $ 18,995 $ 19,517 CRE loans 8,168 8,404 Residential mortgage loans: Residential mortgage loans 83,025 78,372 Home equity loans/lines 439 367 Total nonperforming loans 110,627 106,660 Other real estate owned: CRE 226 4,902 Residential: First mortgage 3,440 3,316 Home equity - - Total other real estate owned 3,666 8,218 Total nonperforming assets $ 114,293 $ 114,878 Total loans: Loans held for sale, net(1) $ 231,890 $ 160,515 Loans held for investment: C&I loans 5,227,142 5,018,831 CRE construction loans 57,572 49,474 CRE loans 1,049,861 936,450 Residential mortgage loans 1,693,517 1,691,986 Consumer loans 414,069 352,495 Net unearned income and deferred expenses (66,032 ) (70,698 ) Total loans held for investment 8,376,129 7,978,538 Total loans $ 8,608,019 $ 8,139,053 (1) Net of unearned income and deferred expenses.

74-------------------------------------------------------------------------------- Index Quarter ended December 31, 2012 compared to the quarter ended December 31, 2011 - RJ Bank Pre-tax income generated by the RJ Bank segment increased $15 million, or 28%, as compared to the prior year. The improvement in pre-tax income was primarily attributable to an increase of $14 million, or 19%, in net revenues and a $5 million, or 61%, decrease in the provision for loan losses, offset by a $4 million, or 27%, increase in non-interest expenses (excluding provision for loan losses).

Net revenue was positively impacted by a $15 million increase in net interest income, $1 million less in other-than-temporarily impaired ("OTTI") losses on our available for sale securities portfolio, and a $1 million increase in income from the sale of held for sale loans, partially offset by $3 million in foreign currency transaction losses on Canadian dollar denominated loans in the corporate loan portfolio.

Net interest income increased $15 million over the prior year, primarily as a result of an $898 million increase in average interest-earning banking assets.

This increase in average interest-earning banking assets was driven by a $1.4 billion increase in average loans, which was partially offset by a decrease of $566 million in average cash. The yield on interest-earning banking assets increased to 3.62% from 3.32% in the prior year due to this significant increase in loans. The loan portfolio yield increased slightly to 4.13% from 4.09% in the prior year due to an improvement in the corporate loan portfolio yield, offset by a decline in the yield of the residential mortgage loan portfolio resulting from adjustable rate loans resetting at lower rates. As a result of the increase in the yield of the average interest-earning assets, the net interest margin increased to 3.52% from 3.21%.

Corresponding to the increase in interest-earning banking assets, average interest-bearing banking liabilities increased $820 million to $9 billion.

The provision for loan losses was positively impacted by improved economic conditions, which led to stronger credit characteristics of certain corporate criticized loans, higher loan-to-value ("LTV") ratios in the residential mortgage loan portfolio, and a significant reduction in delinquent loans. Net loan charge-offs decreased $3 million, or 58%, to $2 million. As compared to September 30, 2012, nonperforming loans increased $4 million, or 4%, which is comprised of a $5 million, or 6% increase in residential nonperforming loans partially offset by a $1 million, or 3%, decrease in corporate nonperforming loans.

The $4 million increase in non-interest expenses (excluding provision for loan losses) as compared to the prior year was primarily attributable to a $1 million increase in affiliate deposit account servicing fees resulting from increased deposit balances, a $1 million increase in unfunded lending commitment reserve expense, and a $1 million, or 16%, increase in compensation and benefits related to staff additions.

The unrealized loss on our available for sale securities portfolio at December 31, 2012 was $12 million compared to $17 million as of September 30, 2012. This improvement was the result of higher market prices, despite the continued uncertainty in the residential non-agency collateralized mortgage obligation ("CMOs") market.

During the last week of October, 2012, the mid-Atlantic and Northeast regions of the U.S. suffered severe damage from Hurricane Sandy and related storms. As a result of our review of our loans in the affected area, there is currently no indication that this weather related event will have a significant impact on our portfolio. However, we continue to assess information as it becomes available.

We are unable to estimate a range of loss associated with the financial impact of this event at this time, however, we don't expect it to have a materially adverse impact on our results of operations in fiscal year 2013.

75-------------------------------------------------------------------------------- Index 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 periods indicated: Three months ended December 31, 2012 2011 Average Average Average Interest yield/ Average Interest yield/ balance inc./exp. cost balance inc./exp. cost ($ in thousands) Interest-earning banking assets: Loans, net of unearned income(1) Loans held for sale $ 168,642 $ 970 2.28 % $ 92,904 $ 390 1.67 % Loans held for investment: C&I loans 5,057,904 58,587 4.56 % 4,299,124 48,982 4.49 % CRE construction loans 48,374 757 6.12 % 17,818 101 2.21 % CRE loans 962,060 10,677 4.34 % 755,456 7,306 3.78 % Residential mortgage loans 1,694,776 13,400 3.09 % 1,757,902 15,202 3.38 % Consumer loans 372,227 2,919 3.01 % 7,591 41 2.16 % Total loans, net 8,303,983 87,310 4.13 % 6,930,795 72,022 4.09 % Agency mortgage-backed securities ("MBS") 341,165 735 0.86 % 170,618 330 0.77 % Non-agency CMOs 163,379 1,155 2.83 % 190,267 1,515 3.19 % Money market funds, cash and cash equivalents 909,950 594 0.26 % 1,447,623 885 0.24 % Federal Home Loan Bank ("FHLB") stock, Federal Reserve Bank of Atlanta ("FRB") stock, and other 82,473 580 2.79 % 164,104 341 0.83 % Total interest-earning banking assets 9,800,950 $ 90,374 3.62 % 8,903,407 $ 75,093 3.32 % Non-interest-earning banking assets: Allowance for loan losses (148,081 ) (148,317 ) Unrealized loss on available for sale securities (15,303 ) (48,857 ) Other assets 286,830 260,936 Total non-interest-earning banking assets 123,446 63,762 Total banking assets $ 9,924,396 $ 8,967,169 (continued on next page) 76-------------------------------------------------------------------------------- Index Three months ended December 31, 2012 2011 Average Average Average Interest yield/ Average Interest yield/ balance inc./exp. cost balance inc./exp. cost (continued from previous page) ($ in thousands) Interest-bearing banking liabilities: Deposits: Certificates of deposit $ 317,468 $ 1,663 2.08 % $ 259,769 $ 1,488 2.27 % Money market, savings, and NOW accounts (2) 8,420,816 813 0.04 % 7,637,560 831 0.04 % FHLB advances and other 51,704 152 1.17 % 72,645 45 0.25 % Total interest-bearing banking liabilities 8,789,988 $ 2,628 0.12 % 7,969,974 $ 2,364 0.12 % Non-interest-bearing banking liabilities 82,769 66,865 Total banking liabilities 8,872,757 8,036,839 Total banking shareholder's equity 1,051,639 930,330 Total banking liabilities and shareholders' equity $ 9,924,396 $ 8,967,169 Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income $ 1,010,962 $ 87,746 $ 933,433 $ 72,729 Bank net interest: Spread 3.50 % 3.20 % (3) Margin (net yield on interest-earning banking assets) 3.52 % 3.21 % (3) Ratio of interest-earning banking assets to interest-bearing banking liabilities 111.50 % 111.71 % Annualized return on average: Total banking assets 1.72 % 1.48 % Total banking shareholder's equity 16.27 % 14.25 % Average equity to average total banking assets 10.60 % 10.37 % (1) Nonaccrual loans are included in the average loan balances. Payment or income received on corporate nonaccrual loans are applied to principal.

Income on all other nonaccrual loans is recognized on a cash basis. Fee income on loans included in interest income for the three months ended December 31, 2012 and 2011 was $14 million and $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 December 31, 2011, the net interest spread and margin was 3.59% and 3.60% at December 31, 2011, respectively. These deposits arose from higher cash balances in firm client accounts due to the market volatility, thus exceeding RJBDP capacity at outside financial institutions in the program. These deposits were invested in short term liquid investments producing very little net interest spread.

77-------------------------------------------------------------------------------- Index 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 period'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, 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 $ 318 $ 262 $ 580 Loans held for investment: C&I loans 8,645 960 9,605 CRE construction loans 173 483 656 CRE loans 1,998 1,373 3,371 Residential mortgage loans (546 ) (1,256 ) (1,802 ) Consumer loans 1,969 909 2,878 Agency MBS 330 75 405 Non-agency CMOs (214 ) (146 ) (360 ) Money market funds, cash and cash equivalents (329 ) 38 (291 ) FHLB stock, FRB stock, and other (170 ) 409 239 Total interest-earning banking assets 12,174 3,107 15,281 Interest expense: Interest-bearing banking liabilities: Deposits: Certificates of deposit 330 (155 ) 175 Money market, savings and NOW accounts 85 (103 ) (18 ) FHLB advances and other (13 ) 120 107 Total interest-bearing banking liabilities 402 (138 ) 264 Change in net interest income $ 11,772 $ 3,245 $ 15,017 78-------------------------------------------------------------------------------- Index 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, 2012 % change 2011 ($ in thousands) Revenues: Securities commissions and fees $ 2,652 15 % $ 2,307 Investment banking 247 461 % 44 Investment advisory fees 1,474 55 % 953 Interest income 318 118 % 146 Trading profits 700 (27 )% 959 Other income 198 (19 )% 243 Total revenues 5,589 20 % 4,652 Interest expense 15 (61 )% 38 Net revenues 5,574 21 % 4,614 Non-interest expenses: Compensation expense 4,752 (3 )% 4,887 Other expense 2,811 33 % 2,117 Total non-interest expenses 7,563 8 % 7,004 Loss before taxes and including noncontrolling interests: (1,989 ) 17 % (2,390 ) Noncontrolling interests 365 159 Pre-tax loss excluding noncontrolling interests $ (2,354 ) 8 % $ (2,549 ) The Emerging Markets segment includes the results from our joint ventures in Latin America including Argentina and Uruguay. During the three months ended December 31, 2012, we commenced the process to cease our operations in Brazil.

Quarter ended December 31, 2012 compared to the quarter ended December 31, 2011 - Emerging Markets The pre-tax loss generated by the Emerging Markets segment decreased $200 thousand, or 8%, as compared to the prior year.

Total revenues increased approximately $1 million as compared to the prior year.

The increase is primarily attributable to a $500 thousand increase in investment advisory fee revenues attributable to our Argentine joint venture, as compared to the prior year.

Non-interest expenses increased by $600 thousand, primarily resulting from expenses incurred in connection with the closing of our operations in Brazil.

79-------------------------------------------------------------------------------- Index 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, 2012 % change 2011 ($ in thousands) Interest income and expense: Interest income $ 1,391 (42 )% $ 2,388 Interest expense 504 10 % 460 Net interest income 887 (54 )% 1,928 Other income 97 80 % 54 Net revenues 984 (50 )% 1,982 Non-interest expenses 445 (43 )% 776 Pre-tax income $ 539 (55 )% $ 1,206 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 December 31, 2012 compared to the quarter ended December 31, 2011 - Securities Lending Pre-tax income generated by this segment decreased by approximately $700 thousand, or 55%, as compared to the prior year.

The decrease results from the 54% decrease of net interest income arising from both our Box lending and, to a lesser extent, our Matched Book lending activities. In the Box lending activities, we realized a $700 thousand decrease in net interest as average balances outstanding decreased significantly, partially offset by a slight increase in net interest spreads. In the Matched Book lending activities our net interest decreased by approximately $300 thousand resulting from a decrease in both our average balances outstanding as well as net interest spreads.

80-------------------------------------------------------------------------------- Index Results of Operations - Proprietary Capital The following table presents consolidated financial information for the Proprietary Capital segment for the periods indicated: Three months ended December 31, 2012 % change 2011 ($ in thousands) Revenues: Interest $ 811 437 % $ 151 Investment advisory fees 361 11 % 325 Other 19,444 NM (3 ) Total revenues 20,616 NM 473 Interest expense 461 NM - Net revenues 20,155 NM 473 Non-interest expenses: Compensation expense 1,036 136 % 439 Other expenses 600 450 % 109 Total non-interest expenses 1,636 199 % 548 Income (loss) before taxes and including noncontrolling interests: 18,519 NM (75 ) Noncontrolling interests 12,799 (10 ) Pre-tax income (loss) excluding noncontrolling interests $ 5,720 NM $ (65 ) The Proprietary Capital 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 private equity funds (the "Third Party Private Funds"). As a part of the Morgan Keegan acquisition, we acquired various direct and third party private equity and merchant banking investments, employee investment funds and private equity funds of Morgan Keegan (the "Morgan Keegan Private Equity Portfolio") which have a fair value of $131 million, the portion of which is attributable to our ownership share is $65 million, as of December 31, 2012. Altogether, our holdings include various direct and third party private equity and merchant banking investments, as well as merchant banking investments, at fair value, which include a $27 million investment in an event photography business (the "Event Photography Company"), a $23 million indirect investment (through Capital Partners) in an allergy immunotherapy testing and treatment supply company (the "Allergy Company"), a $12 million investment in a manufacturer of crime investigation and forensic supplies (the "Forensic Company"), and a $3 million indirect investment in a company pursuing a new concept in the salon services market.

Quarter ended December 31, 2012 compared to the quarter ended December 31, 2011 - Proprietary Capital Pre-tax income generated by this segment increased by approximately $6 million as compared to the prior year. The increase is due to the positive performance of the investments during the current year.

In the current period, total revenues resulted primarily from $10 million of either distributions received, or valuation adjustments related to, a number of the Morgan Keegan Private Equity Portfolio investments, a $9 million dividend received from the Allergy Company, and interest, dividends or distributions received totaling approximately $1 million from other investments in the portfolio.

The increase in non-interest expenses of approximately $1 million results from increased incentive compensation expenses associated with the favorable performance of the investments both in the current period and the prior fiscal year, as well as certain sub-advisory expenses associated with the Morgan Keegan Private Equity Portfolio.

The portion of revenue attributable to noncontrolling interests is significant as approximately $7 million of the Allergy Company dividend, $5 million of the Morgan Keegan Private Equity Portfolio distributions received and valuation increases, and $1 million of the revenues associated with other investments, relate to the portion of those investments that we do not own.

In the comparable prior year period, there was no significant activity associated with the investments in our portfolio.

81-------------------------------------------------------------------------------- Index Results of Operations - Other The following table presents consolidated financial information for the Other segment for the periods indicated: Three months ended December 31, 2012 % change 2011 ($ in thousands) Revenues: Interest income $ 2,939 53 % $ 1,921 Other 2,365 220 % 740 Total revenues 5,304 99 % 2,661 Interest expense 19,614 106 % 9,513 Net revenues (14,310 ) (109 )% (6,852 ) Non-interest expenses: Acquisition related expenses 17,382 NM - Other expense 6,470 (29 )% 9,114 Total non-interest expenses 23,852 162 % 9,114 Pre-tax loss $ (38,162 ) (139 )% $ (15,966 ) This segment includes various corporate overhead costs, our acquisition and integration related expenses primarily associated with our April 2, 2012 acquisition of Morgan Keegan, and interest expense on our senior debt.

Quarter ended December 31, 2012 compared to the quarter ended December 31, 2011 - Other Pre-tax loss generated by this segment increased by approximately $22 million, or 139%, as compared to the prior year.

Total revenues increased by nearly $3 million compared to the prior year primarily resulting from realized and unrealized gains in certain investments, an increase in distributions received from certain partnership investments, and a decrease in OTTI losses associated with our ARS portfolio as compared to the prior year. There were no OTTI losses arising from the ARS portfolio in the current period, the prior period included a $500 thousand OTTI loss.

Interest expense increased $10 million over the prior year. The increase is primarily comprised of interest expense resulting from our March 2012 issuances of $350 million 6.9% senior notes and $250 million 5.625% senior notes, as well as interest expense associated with borrowings under certain credit agreements with Regions Bank (as more fully described in Note 12 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q). Both of the March 2012 debt offerings and the borrowings from Regions Bank were part of our acquisition financing activities and other transactions associated with the Morgan Keegan acquisition.

Acquisition related expenses, primarily associated with our acquisition of Morgan Keegan but also including certain expenses incurred in our acquisition of ClariVest, include expenses associated with our integration of Morgan Keegan's operations into our own. These expenses include financial advisory fee expenses, severance related expenses, integration costs and other acquisition related expenses (see Note 3 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information).

Other expenses decreased $3 million in the current period primarily as a result of certain nonrecurring advertising expenses incurred in the prior year.

82-------------------------------------------------------------------------------- Index Certain statistical disclosures by bank holding companies As a financial holding company, we are required to provide certain statistical disclosures by bank holding companies pursuant to the Securities and Exchange Commission's Industry Guide 3. Certain of those disclosures are as follows for the periods indicated: For the three months ended December 31, 2012 2011 RJF return on assets (1) 1.6% 1.5% RJF return on equity (2) 10.3% 10.3% RJF equity to assets (3) 15.3% 14.6% RJF dividend payout ratio(4) 23.0% 24.5% (1) Computed as net income attributable to RJF for the period indicated, divided by average assets of RJF (the sum of total consolidated assets at the beginning and end of the period, divided by two) the product of which is then annualized.

(2) Computed as net income attributable to RJF for the period indicated, divided by average equity attributable to RJF (the sum of total equity attributable to RJF at the beginning and end of the period, divided by two) the product of which is then annualized.

(3) Computed as average equity attributable to RJF (the sum of total equity attributable to RJF at the beginning and end of the period, divided by two), divided by average assets of RJF (the sum of total consolidated assets at the beginning and end of the period, divided by two).

(4) 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 in this Form 10-Q for the other required disclosures.

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 departments assist in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure as well as maintain 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 statement.

Cash provided by operating activities during the three months ended December 31, 2012 was $238 million. Operating cash generated by successful operating results over the period resulted in a $130 million increase in cash. The increase in operating cash included an increase in brokerage client payables and other accounts payable of $959 million, largely the result of an increase in client cash deposits during the quarter. Partially offsetting this increase, assets segregated pursuant to regulations and other segregated assets increased $637 million due to the increase in brokerage client deposits. A decrease in brokerage client receivables resulted in $226 million of operating cash, largely resulting from a decrease in uncleared brokerage transactions as of December 31, 2012 as compared to September 30, 2012. We used $155 million in operating cash as the accrued compensation, commissions and benefits decreased partially resulting from the annual payment of certain incentive awards. A decrease in the stock loaned, net of stock borrowed balances resulted in a $130 million use of operating cash, due to a decrease in stock loan demand. The purchase and origination of loans held for sale resulted in the use of $75 million of operating cash. An increase in prepaid expenses and other assets resulted in a $47 million use of operating cash. An increase in trading instruments held used $28 million in operating cash. A greater increase in our securities purchased under agreements to resell than in our securities sold under agreements to repurchase used $8 million in operating cash. All other components of operating activities combined to net a $3 million increase in operating cash.

83-------------------------------------------------------------------------------- Index Investing activities resulted in the use of $383 million of cash during the three months ended December 31, 2012. The primary investing activity was the use of $387 million in cash to fund the increase in bank loans. Additionally, we invested $19 million in fixed assets, and invested $4 million in private equity and other investments. Net of the cash acquired, we invested $6 million in the acquisition of a 45% interest in ClariVest. Partially offsetting the use of cash, we generated $35 million of cash from the available for sale securities maturations, repayments and redemptions, a portion thereof resulting from redemptions of certain ARS securities.

Financing activities provided $354 million of cash during the three months ended December 31, 2012. Increases in RJ Bank customer deposits provided $347 million, while proceeds from short-term borrowings provided $132 million of cash.

Partially offsetting the increases, $129 million of cash was used to repay a borrowing from Regions Bank, which was converted to a secured revolving credit facility.

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.

Sources of Liquidity Approximately $581 million of our total December 31, 2012 cash and cash equivalents (a portion of which is invested on behalf of the parent company by RJ&A) was available to us without restrictions. Total cash and cash equivalents held were as follows: Cash and cash equivalents: December 31, 2012 (in thousands) RJF $ 255,672 RJ&A(1) 491,260 Morgan Keegan & Company, Inc. 329,622 RJ Bank 873,322 Other 237,831Total cash and cash equivalents $ 2,187,707 (1) RJF has loaned $329 million to RJ&A as of December 31, 2012, which RJ&A has invested on behalf of RJF in cash and cash equivalents.

In addition to the liquidity on hand described above, we have other various potential sources of liquidity which are described below.

Liquidity Available from Subsidiaries Liquidity is principally available to the parent company from RJ&A, MK & Co., and RJ Bank.

RJ&A 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 December 31, 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 $261 million, of which approximately $63 million is available for dividend while still maintaining its internal target net capital ratio of 15% of aggregate debit items. There are also limitations on the amount of dividends that may be declared by a broker-dealer without Financial Industry Regulatory Authority ("FINRA") approval.

MK & Co. is also required to maintain net capital equal to the greater of $1 million or 2% of aggregate debit balances arising from customer transactions. At December 31, 2012, MK & Co. exceeded the minimum regulatory net capital requirements. At that date, MK & Co. had excess net capital of approximately $264 million, of which approximately $218 million is available for dividend while still maintaining its internal target net capital ratio of 15% of aggregate debit items. Limitations on the amount of dividends that may be declared by a broker-dealer without FINRA approval also apply to MK & Co.

84-------------------------------------------------------------------------------- Index 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 and the previous two calendar years' retained net income, and RJ Bank maintains its targeted capital to risk-weighted assets ratios. During the three months ended December 31, 2012, RJ Bank made $25 million in dividend payments to RJF. RJ Bank had approximately $99 million of capital in excess of the amount it would need as of December 31, 2012 to maintain its desired total capital to risk-weighted assets ratio of 12%.

Liquidity available to us from our subsidiaries, other than RJ&A, MK & Co., and RJ Bank, 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 that we generally utilize to finance a portion of our fixed income securities trading instruments held, and the outstanding balances related thereto, as of December 31, 2012: Committed secured(1) Uncommitted secured (1)(2) Uncommitted unsecured (1)(2) Total Financing Outstanding Financing Outstanding Financing Outstanding Financing Outstanding amount balance amount balance amount balance amount balance ($ in thousands) RJ&A $ 350,000 $ 110,000 $ 2,150,000 $ 267,937 $ 325,000 $ - $ 2,825,000 $ 377,937 MK & Co. - - - - 40,000 - 40,000 - RJ Securities, Inc.(3) 97,500 5,000 - - - - 97,500 5,000 RJF - - - - 100,000 - 100,000 - Total $ 447,500 $ 115,000 $ 2,150,000 $ 267,937 $ 465,000 $ - $ 3,062,500 $ 382,937 Total number of agreements 4 7 8 19 (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.

(3) RJ Securities, Inc. is the borrower under the "New Regions Credit Agreement," see Note 12 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for discussion of the terms of this committed secured borrowing facility.

The committed domestic financing arrangements are in the form of either tri-party 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 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 December 31, 2012.

RJ Bank has $971 million in immediate credit available from the FHLB on December 31, 2012 and total available credit of 30% of total assets, with the pledge of additional collateral to the FHLB.

RJ Bank is eligible to participate in the Board of Governors of the Federal Reserve System's (the "Fed") discount-window program; however, RJ Bank does not view borrowings from the Fed 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 Fed.

85-------------------------------------------------------------------------------- Index 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 December 31, 2012, collateralized financings outstanding in the amount of $373 million are included in securities sold under agreements to repurchase on the Condensed Consolidated Statements of Financial Condition. Of this total, outstanding balances on the committed and uncommitted Repurchase Agreements (which are reflected in the table of domestic financing arrangements above) were $141 million and $110 million, respectively, as of December 31, 2012. Such financings are generally collateralized by non-customer, RJ&A or MK & Co. owned securities. The required market value of the collateral associated with the committed secured facilities ranges from 102% to 133% of the amount financed.

The average daily balance outstanding during the five most recent successive quarters, the maximum month-end balance outstanding during the quarter and the period end balances for Repurchase Agreements and Reverse Repurchase Agreements of RJF are as follows: Repurchase transactions Reverse repurchase transactions Maximum Maximum month-end month-end balance balance Average daily outstanding End of period Average daily outstanding End of period For the quarter balance during the balance balance during the balance ended: outstanding quarter outstanding outstanding quarter outstanding (in thousands) December 31, 2012 $ 377,775 $ 459,567 $ 373,290 $ 647,885 $ 753,041 $ 598,579 September 30, 2012 346,654 349,495 348,036 600,959 588,740 565,016 June 30, 2012 411,238 506,618 506,618 660,983 748,569 706,713 March 31, 2012 180,875 176,335 137,026 410,578 413,527 340,158 December 31, 2011 184,925 244,961 184,061 433,170 468,848 400,455 At December 31, 2012, in addition to the financing arrangements described above, we had corporate debt of $1.2 billion. The balance is comprised of $350 million outstanding on our 6.90% senior notes due 2042, $249 million outstanding on our 5.625% senior notes due 2024, $300 million outstanding on our 8.60% senior notes due August 2019, $250 million outstanding on our 4.25% senior notes due April 2016, $48 million outstanding on a mortgage loan for our home-office complex, and $3 million outstanding on term loan financing provided to RJES.

Our current senior long-term debt ratings are: Rating Agency Rating Outlook Standard & Poor's ("S&P") BBB Negative Moody's Investor Service ("Moody's") Baa2 Stable The S&P rating and outlook reflected above are as presented in their March, 2012 report.

The Moody's rating and outlook reflected above are as presented in their April, 2012 report.

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.

86-------------------------------------------------------------------------------- Index 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 New Regions Credit Agreement 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 downgrade below investment grade could also result in the termination of certain derivative contracts and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing overnight collateralization on our derivative instruments in liability positions (see Note 14 of our Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information). 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. The policies which we could readily borrow against have a cash surrender value of approximately $153 million as of December 31, 2012 and we are able to borrow up to 90%, or $137 million of the December 31, 2012 total, without restriction. There are no borrowings outstanding against any of these policies as of December 31, 2012.

On May 24, 2012 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.

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

Potential impact of Morgan Keegan matters subject to indemnification by Regions on our liquidity As more fully described in Note 3 on pages 118 - 121 of our 2012 Form 10-K, on January 11, 2012, RJF entered into a Stock Purchase Agreement ("SPA") to acquire all of the issued and outstanding shares of Morgan Keegan from Regions Financial Corporation ("Regions"). On April 2, 2012, we completed the purchase transaction. Under the terms of the SPA, in addition to customary indemnity for breaches of representations and warranties and covenants, the SPA also provides that Regions will indemnify RJF for losses incurred in connection with any litigation or similar matter related to pre-closing actions. As a result of these indemnifications, we do not anticipate the resolution of any pre-Closing Date Morgan Keegan litigation matters to negatively impact our liquidity (see Note 16 of the Notes to Condensed Consolidated Financial Statements, and Part II Item 1 - Legal Proceedings, in this Form 10-Q for further information regarding the indemnifications and the nature of the pre-Closing Date matters).

We are incurring acquisition and integration costs associated with the Morgan Keegan acquisition. We have estimated that approximately $40 million of such costs will be incurred in fiscal year 2013. Given that we incurred $17 million of costs in the three month period ending December 31, 2012, we estimate that an additional $23 million will be incurred over the remaining months of fiscal year 2013.

Statement of financial condition analysis The assets on our condensed consolidated statement of financial condition consist primarily of cash and cash equivalents (a large portion of which is 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 $22.3 billion at December 31, 2012 are approximately $1.1 billion, or 5%, greater than our total assets as of September 30, 2012. The increase in total assets results primarily from a $637 million increase in segregated assets pursuant to federal regulations. This increase was prompted by an inflow of cash into client accounts during the three month period ended December 31, 2012 (refer to the related increase in payables to clients discussed in the following paragraph).

Net bank loans receivable increased $468 million due to growth of RJ Bank's net loan portfolio during the period. Cash and cash equivalents increased $208 million, refer to the discussion of the various sources and uses of cash during the period in the preceding liquidity and capital resources section of this MD&A.

87-------------------------------------------------------------------------------- Index As of December 31, 2012, our liabilities of $18.5 billion were $1 billion, or 6% greater than our liabilities as of September 30, 2012. The increase in liabilities is primarily due to a $969 million increase in payables to clients, which resulted from an inflow of client cash during the quarter, perhaps in part a result of our clients' U.S. fiscal cliff concerns. An increase in our borrowings on secured lines of credit of $132 million during the period were offset by a $129 million reduction in our corporate debt (refer to the discussion of the New Regions Credit Agreement in Notes 12 and 13 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q).

Contractual obligations, commitments and contingencies On November 14, 2012, the outstanding balance of the initial Regions Credit Agreement was repaid, such agreement was terminated, and the New Regions Credit Agreement was executed. Refer to Note 12 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information regarding the New Regions Credit Agreement and Note 13 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for the maturations of our corporate debt outstanding as of December 31, 2012.

Other than the changes in the Regions Credit Agreement described above, as of December 31, 2012 there have been no material changes in our contractual obligations other than in the ordinary course of business since September 30, 2012. See Note 16 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, and the contractual obligations, commitments and contingencies section of Item 7, pages 67 - 68, of our 2012 Form 10-K, for additional information.

Regulatory The following discussion should be read in conjunction with the Regulatory section on pages 68 - 69 of our 2012 Form 10-K.

RJ&A, MK & Co., RJFS, Eagle Fund Distributors, Inc. and Raymond James (USA) Ltd.

all had net capital in excess of minimum requirements as of December 31, 2012.

RJ Ltd. was not in Early Warning Level 1 or Level 2 as of or during the three month period ended December 31, 2012.

We currently invest in selected private equity and merchant banking investments (see the Proprietary Capital section of MD&A). As a financial 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 financial holding company, RJF is subject to the oversight and periodic examination of the Fed. RJF is subject to regulatory reporting requirements which include the maintenance of certain risk-based regulatory capital levels that could impact various capital allocation decisions impacting one or more of our businesses. However, due to our strong capital position, we do not anticipate these capital requirements will have any negative impact on our future business activities.

RJ Bank is subject to various regulatory and capital requirements administered by bank regulators. See the Item 1 Business, Regulation section on pages 10 - 13 of our 2012 Form 10-K for a discussion of the regulatory environment in which RJ Bank operates. Under the regulatory framework for prompt corrective action, RJ Bank met the requirements to be categorized as "well capitalized" as of December 31, 2012. One of RJ Bank's U.S. subsidiaries is an agreement corporation and is subject to regulation by the Fed. As of December 31, 2012, this RJ Bank subsidiary met the capital adequacy guideline requirements.

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 the Item 1 Business, Regulation section in our 2012 Form 10-K referred to above. 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 19 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for further information on regulatory and capital requirements.

88-------------------------------------------------------------------------------- Index Critical accounting estimates 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 2 of the Notes to the Consolidated Financial Statements on pages 100 - 117 of our 2012 Form 10-K, as well as Note 2 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q. We believe that of our significant accounting estimates, those described below involve a high degree of judgment and complexity. These estimates and assumptions 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 critical accounting estimates is important in understanding the reported results of our operations and our financial position.

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 2 pages 101 - 107 of our 2012 Form 10-K for a discussion of our fair value accounting policies regarding financial instruments owned and financial instruments sold but not yet purchased. Since September 30, 2012, we have not implemented any material changes in the accounting policies described therein during the period covered by this report.

"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 December 31, 2012, 12% of our total assets and 3% 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 $579 million as of December 31, 2012 and represent 22% of our assets measured at fair value. Our private equity investments comprise $330 million, or 57%, and our ARS positions comprise $238 million, or 41%, of the Level 3 assets as of December 31, 2012. Level 3 assets represent 15.2% of total equity as of December 31, 2012.

Financial instruments which are liabilities categorized as Level 3 amount to $98 thousand as of December 31, 2012 and represent less than 1% of liabilities measured at fair value.

See Notes 5, 6, 7 and 14 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 in Item 7 on page 74 of our 2012 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. No events have occurred during the three months ended December 31, 2012 that would cause us to update our analysis since the date of our most recent annual impairment testing.

Loss provisions Refer to the discussion of loss provisions in Item 7 on pages 74 -75 of our 2012 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 8 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information.

89-------------------------------------------------------------------------------- Index At December 31, 2012, the amortized cost of all RJ Bank loans was $8.6 billion and an allowance for loan losses of $148 million was recorded against that balance. The total allowance for loan losses is equal to 1.72% of the amortized cost of the loan portfolio.

The condition of the real estate and credit markets continues to influence 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 the income taxes section of Item 7 on page 76 of our 2012 Form 10-K.

Effects of recently issued accounting standards, and accounting standards not yet adopted In June 2011, the Financial Accounting Standards Board ("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 Consolidated Statements of Income and Comprehensive Income and, therefore, the adoption of this new guidance does not impact us.

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. In January 2013, the FASB issued further guidance on this topic, clarifying that the scope of this new guidance applies to derivatives, repurchase agreements, reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. This new guidance, inclusive of the January 2013 clarification, 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.

In February 2013, the FASB issued new guidance intended to improve the reporting of reclassifications out of accumulated other comprehensive income ("AOCI"). The new guidance requires an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This new guidance is effective for our financial report covering the quarter ended March 31, 2013. This new guidance does not change the current requirements for reporting net income or other comprehensive income in financial statements, therefore, this new guidance will only impact the nature of certain AOCI disclosures in our consolidated financial statements.

Off-Balance Sheet arrangements For information regarding our off-balance sheet arrangements, see Note 20 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, and Note 26 pages 179 - 180 of the Notes to Consolidated Financial Statements in our 2012 Form 10-K.

90-------------------------------------------------------------------------------- Index Effects of inflation For information regarding the effects of inflation on our business, see the Effects of Inflation section of Item 7 on page 77 of our 2012 Form 10-K.

[ Back To Technology News's Homepage ]