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Raymond James Financial
RJF
#799
Rank
$31.31 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$158.60
Share price
0.08%
Change (1 day)
-2.00%
Change (1 year)
๐Ÿ’ณ Financial services
Categories
  1. Raymond James Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q1

Raymond James Financial - 10-Q quarterly report FY2020 Q1


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
Commission File Number: 1-9109
RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Florida
 
59-1517485
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
880 Carillon Parkway, St. Petersburg, Florida 33716
(Address of principal executive offices)    (Zip Code)
(727) 567-1000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
RJF
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐                              No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
139,283,886 shares of common stock as of February 6, 2020


INDEX
 
 
 
PAGE
PART I
 
FINANCIAL INFORMATION
 
Item 1.
 
Financial Statements (Unaudited)
3
 
 
Condensed Consolidated Statements of Financial Condition as of December 31, 2019 and September 30, 2019 (Unaudited)
3
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended December 31, 2019 and December 31, 2018 (Unaudited)
4
 
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended December 31, 2019 and December 31, 2018 (Unaudited)
5
 
 
Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2019 and December 31, 2018 (Unaudited)
6
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Note 1 - Organization and basis of presentation
8
 
 
Note 2 - Update of significant accounting policies
9
 
 
Note 3 - Fair value
11
 
 
Note 4 - Available-for-sale securities
16
 
 
Note 5 - Derivative assets and derivative liabilities
18
 
 
Note 6 - Collateralized agreements and financings
19
 
 
Note 7 - Bank loans, net
21
 
 
Note 8 - Variable interest entities
27
 
 
Note 9 - Leases
28
 
 
Note 10 - Bank deposits
29
 
 
Note 11 - Other borrowings
30
 
 
Note 12 - Income taxes
31
 
 
Note 13 - Commitments, contingencies and guarantees
31
 
 
Note 14 - Accumulated other comprehensive income/(loss)
34
 
 
Note 15 - Revenues
35
 
 
Note 16 - Interest income and interest expense
37
 
 
Note 17 - Share-based compensation
37
 
 
Note 18 - Regulatory capital requirements
38
 
 
Note 19 - Earnings per share
40
 
 
Note 20 - Segment information
40
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
71
Item 4.
 
Controls and Procedures
71
PART II
 
OTHER INFORMATION
 
Item 1.
 
Legal Proceedings
72
Item 1A.
 
Risk Factors
72
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
72
Item 3.
 
Defaults Upon Senior Securities
72
Item 4.
 
Mine Safety Disclosures
72
Item 5.
 
Other Information
72
Item 6.
 
Exhibits
73
 
 
Signatures
73


2

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
$ in millions, except per share amounts
 
December 31, 2019
 
September 30, 2019
Assets:
 

 

Cash and cash equivalents
 
$
4,109

 
$
3,957

Cash and cash equivalents segregated pursuant to regulations
 
2,581

 
2,014

Securities purchased under agreements to resell
 
326

 
343

Securities borrowed
 
211

 
248

Financial instruments, at fair value:
 
 
 
 
Trading instruments ($438 and $535 pledged as collateral)
 
632

 
708

Available-for-sale securities ($23 and $24 pledged as collateral)
 
3,222

 
3,093

Derivative assets
 
288

 
338

Other investments ($32 and $32 pledged as collateral)
 
363

 
365

Brokerage client receivables, net
 
2,527

 
2,671

Receivables from brokers, dealers and clearing organizations
 
162

 
281

Other receivables
 
599

 
549

Bank loans, net
 
21,296

 
20,891

Loans to financial advisors, net
 
991

 
983

Property and equipment, net
 
536

 
527

Deferred income taxes, net
 
217

 
231

Goodwill and identifiable intangible assets, net
 
609

 
611

Other assets
 
1,485

 
1,020

Total assets
 
$
40,154

 
$
38,830

 
 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
 
Bank deposits
 
$
22,975

 
$
22,281

Securities sold under agreements to repurchase
 
200

 
150

Securities loaned
 
239

 
323

Financial instruments sold but not yet purchased, at fair value:
 
 
 
 
Trading instruments
 
210

 
296

Derivative liabilities
 
306

 
313

Brokerage client payables
 
4,885

 
4,361

Payables to brokers, dealers and clearing organizations
 
135

 
229

Accrued compensation, commissions and benefits
 
933

 
1,272

Other payables
 
919

 
518

Other borrowings
 
899

 
894

Senior notes payable
 
1,550

 
1,550

Total liabilities
 
33,251


32,187

Commitments and contingencies (see Note 13)
 


 


Shareholders’ equity
 
 
 
 
Preferred stock; $.10 par value; 10,000,000 shares authorized; -0- shares issued and outstanding
 
—

 
—

Common stock; $.01 par value; 350,000,000 shares authorized; 158,571,983 and 158,435,030 shares issued as of December 31, 2019 and September 30, 2019, respectively, and 138,937,307 and 137,841,952 shares outstanding as of December 31, 2019 and September 30, 2019, respectively
 
2

 
2

Additional paid-in capital
 
1,922

 
1,938

Retained earnings
 
6,086

 
5,874

Treasury stock, at cost; 19,634,676 and 20,593,078 common shares as of December 31, 2019 and September 30, 2019, respectively
 
(1,163
)
 
(1,210
)
Accumulated other comprehensive loss
 
(5
)
 
(23
)
Total equity attributable to Raymond James Financial, Inc.
 
6,842

 
6,581

Noncontrolling interests
 
61

 
62

Total shareholders’ equity
 
6,903

 
6,643

Total liabilities and shareholders’ equity
 
$
40,154

 
$
38,830


See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
3

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended December 31,
in millions, except per share amounts
 
2019
 
2018
Revenues:
 
 
 
 
Asset management and related administrative fees
 
$
955

 
$
865

Brokerage revenues:
 
 
 
 
Securities commissions
 
363

 
388

Principal transactions
 
97

 
76

Total brokerage revenues
 
460

 
464

Account and service fees
 
178

 
185

Investment banking
 
141

 
137

Interest income
 
297

 
316

Other
 
29

 
37

Total revenues
 
2,060

 
2,004

Interest expense
 
(51
)
 
(73
)
Net revenues
 
2,009

 
1,931

Non-interest expenses:
 
 

 
 

Compensation, commissions and benefits
 
1,351

 
1,265

Non-compensation expenses:
 
 
 
 
Communications and information processing
 
94

 
92

Occupancy and equipment
 
57

 
51

Business development
 
44

 
43

Investment sub-advisory fees
 
26

 
24

Professional fees
 
21

 
22

Bank loan loss provision/(benefit)
 
(2
)
 
16

Acquisition and disposition-related expenses
 
—

 
15

Other
 
59

 
71

Total non-compensation expenses
 
299

 
334

Total non-interest expenses
 
1,650

 
1,599

Pre-tax income
 
359

 
332

Provision for income taxes
 
91

 
83

Net income
 
$
268

 
$
249

 
 
 
 
 
Earnings per common share – basic
 
$
1.93

 
$
1.73

Earnings per common share – diluted
 
$
1.89

 
$
1.69

Weighted-average common shares outstanding – basic
 
138.3

 
144.2

Weighted-average common and common equivalent shares outstanding – diluted
 
141.5

 
147.3

 
 
 
 
 
Net income
 
$
268


$
249

Other comprehensive income/(loss), net of tax:
 
 

 
 

Available-for-sale securities
 
(1
)
 
22

Currency translations, net of the impact of net investment hedges
 
9

 
(13
)
Cash flow hedges
 
10

 
(17
)
Total other comprehensive income/(loss), net of tax
 
18


(8
)
Total comprehensive income
 
$
286

 
$
241

 












See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
4

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
 
Three months ended December 31,
$ in millions, except per share amounts
 
2019
 
2018
Common stock, par value $.01 per share:
 
 
 
 
Balance beginning of period
 
$
2

 
$
2

Share issuances
 
—

  
—

Balance end of period
 
2

 
2

 
 
 
 
 
Additional paid-in capital:
 
 

 
 

Balance beginning of period
 
1,938

  
1,808

Employee stock purchases
 
6

  
8

Exercise of stock options and vesting of restricted stock units, net of forfeitures
 
(63
)
  
16

Restricted stock, stock option and restricted stock unit expense
 
41

  
39

Balance end of period
 
1,922

 
1,871

 
 
 
 
 
Retained earnings:
 
 

 
 

Balance beginning of period
 
5,874

  
5,032

Net income attributable to Raymond James Financial, Inc.
 
268

  
249

Cash dividends declared (see Note 19)
 
(56
)
 
(50
)
Other
 
—

 
5

Balance end of period
 
6,086

 
5,236

 
 
 
 
 
Treasury stock:
 
 

 
 

Balance beginning of period
 
(1,210
)
 
(447
)
Purchases/surrenders
 
(19
)
 
(464
)
Exercise of stock options and vesting of restricted stock units, net of forfeitures
 
66

 
(16
)
Balance end of period
 
(1,163
)
 
(927
)
 
 
 
 
 
Accumulated other comprehensive loss:
 
 

 
 

Balance beginning of period
 
(23
)
 
(27
)
Other comprehensive income/(loss), net of tax
 
18

 
(8
)
Other
 
—

 
(4
)
Balance end of period
 
(5
)
 
(39
)
Total equity attributable to Raymond James Financial, Inc.
 
$
6,842


$
6,143

 
 
 
 
 
Noncontrolling interests:
 
 

 
 

Balance beginning of period
 
$
62

 
$
84

Net loss attributable to noncontrolling interests
 
(1
)
 
(2
)
Capital contributions
 
—

 
2

Distributions and other
 
—

 
(2
)
Balance end of period
 
61

 
82

Total shareholders’ equity
 
$
6,903

 
$
6,225




See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
5

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
268

 
$
249

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
30

 
26

Deferred income taxes
 
16

 
6

Premium and discount amortization on available-for-sale securities and loss on other investments
 
8

 
3

Provisions for loan losses, legal and regulatory proceedings and bad debts
 
1

 
32

Share-based compensation expense
 
43

 
37

Unrealized (gain)/loss on company-owned life insurance policies, net of expenses
 
(35
)
 
58

Other
 
9

 
9

Net change in:
 
 

 
 

Securities purchased under agreements to resell, net of securities sold under agreements to repurchase
 
68

 
(60
)
Securities loaned, net of securities borrowed
 
(47
)
 
22

Loans provided to financial advisors, net of repayments
 
(12
)
 
2

Brokerage client receivables and other accounts receivable, net
 
188

 
444

Trading instruments, net
 
4

 
62

Derivative instruments, net
 
52

 
(60
)
Other assets
 
(81
)
 
(22
)
Brokerage client payables and other accounts payable
 
465

 
(242
)
Accrued compensation, commissions and benefits
 
(340
)
 
(389
)
Proceeds from sales of securitizations and loans held for sale, net of purchases and originations of loans held for sale
 
(91
)
 
48

Net cash provided by operating activities
 
546

 
225

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Additions to property and equipment
 
(36
)
 
(27
)
Increase in bank loans, net
 
(365
)
 
(461
)
Proceeds from sales of loans held for investment
 
25

 
129

Purchases of available-for-sale securities
 
(314
)
 
(291
)
Available-for-sale securities maturations, repayments and redemptions
 
206

 
151

Other investing activities, net
 
(18
)
 
(34
)
Net cash used in investing activities
 
(502
)
 
(533
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
6

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
Cash flows from financing activities:
 
 
 
 
Proceeds from borrowings on the RJF Credit Facility
 
—

 
300

Proceeds from/(repayments of) short-term borrowings, net
 
6

 
—

Proceeds from Federal Home Loan Bank advances
 
850

 
—

Repayments of Federal Home Loan Bank advances and other borrowed funds
 
(851
)
 
(1
)
Exercise of stock options and employee stock purchases
 
25

 
23

Increase in bank deposits
 
694

 
1,731

Purchases of treasury stock
 
(19
)
 
(480
)
Dividends on common stock
 
(51
)
 
(47
)
Net cash provided by financing activities
 
654

 
1,526

 
 
 
 
 
Currency adjustment:
 
 

 
 

Effect of exchange rate changes on cash
 
21

 
(55
)
Net increase in cash and cash equivalents and cash and cash equivalents segregated pursuant to regulations
 
719

 
1,163

Cash and cash equivalents and cash and cash equivalents segregated pursuant to regulations at beginning of year
 
5,971

 
5,941

Cash and cash equivalents and cash and cash equivalents segregated pursuant to regulations at end of period
 
$
6,690

 
$
7,104

 
 
 
 
 
Cash and cash equivalents
 
$
4,109

 
$
4,322

Cash and cash equivalents segregated pursuant to regulations
 
2,581

 
2,782

Total cash and cash equivalents and cash and cash equivalents segregated pursuant to regulations at end of period
 
$
6,690

 
$
7,104

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest
 
$
39

 
$
62

Cash paid for income taxes, net
 
$
9

 
$
10























See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).
7

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2019

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Organization

Raymond James Financial, Inc. (“RJF,” the “firm” or the “Company”) is a financial holding company which, together with its subsidiaries, is engaged in various financial services activities, including providing investment management services for retail and institutional clients, the underwriting, distribution, trading and brokerage of equity and debt securities, and the sale of mutual funds and other investment products.  The firm also provides corporate and retail banking services, and trust services.  For further information about our business segments, see Note 20 of this Form 10-Q. As used herein, the terms “our,” “we,” or “us” refer to RJF and/or one or more of its subsidiaries.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of RJF and its consolidated subsidiaries that are generally controlled through a majority voting interest. We consolidate all of our 100% owned subsidiaries. In addition, we consolidate any variable interest entity (“VIE”) in which we are the primary beneficiary. Additional information on these VIEs is provided in Note 2 of our Annual Report on Form 10-K (“2019 Form 10-K”) for the year ended September 30, 2019, as filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) and in Note 8 of this Form 10-Q. When we do not have a controlling interest in an entity, but we exert significant influence over the entity, we apply the equity method of accounting. All material intercompany balances and transactions have been eliminated in consolidation.

Accounting estimates and assumptions

Certain financial information that is normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) but is not required for interim reporting purposes has been condensed or omitted. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of our consolidated financial position and results of operations for the periods presented.

The nature of our business is such that the results of any interim period are not necessarily indicative of results for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included in our 2019 Form 10-K. To prepare condensed consolidated financial statements in accordance with GAAP, we must make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates and could have a material impact on the condensed consolidated financial statements.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period’s presentation.



8
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 2 – UPDATE OF SIGNIFICANT ACCOUNTING POLICIES

A summary of our significant accounting policies is included in Note 2 of our 2019 Form 10-K. During the three months ended December 31, 2019, there were no significant changes to our significant accounting policies other than the accounting policies adopted or modified as part of our implementation of new or amended accounting guidance, as noted in the following sections.

Recent accounting developments

Accounting guidance recently adopted

Lease accounting - In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance related to the accounting for leases (ASU 2016-02). The new guidance and subsequent amendments requires the recognition of assets and liabilities on the balance sheet related to the rights and obligations created by lease agreements with terms greater than twelve months, regardless of whether they are classified as finance or operating leases. We adopted this guidance as of October 1, 2019 using the alternative modified retrospective approach, with no adjustments to prior periods presented. In addition, we elected the practical expedients permitted under the transition guidance which, among other things, allowed us to carry forward historical lease classification determinations. On the adoption date, we recognized right-of-use assets (“ROU assets”) and lease liabilities of $333 million and $357 million, respectively, in “Other assets” and “Other payables” on our Condensed Consolidated Statements of Financial Condition. The ROU assets and lease liabilities were primarily related to operating leases. The adoption had no effect on our results of operations or cash flows. The impact of the adoption on our regulatory capital measures was insignificant. See Note 9 for further information.

Derivatives and hedging (interest rate) - In October 2018, the FASB issued guidance amending Derivatives and Hedging (Topic 815) to add the overnight index swap rate based on the Secured Overnight Financing Rate (“SOFR”) to the list of U.S. benchmark interest rates that are eligible during the early stages of the market transition from the London Interbank Offered Rate (“LIBOR”) to SOFR (ASU 2018-16). The amendments to this guidance will provide adequate lead time for entities to prepare for changes to interest rate hedging strategies. We adopted the guidance October 1, 2019 and will apply the guidance prospectively for qualifying new or re-designated hedging relationships. The adoption did not impact our financial position or results of operations.

Accounting guidance not yet adopted as of December 31, 2019

Credit losses - In June 2016, the FASB issued new guidance related to the measurement of credit losses on financial instruments (ASU 2016-13). The amended guidance involves several aspects of the accounting for credit losses related to certain financial instruments including assets measured at amortized cost, available-for-sale debt securities and certain off-balance sheet commitments. The new guidance, and subsequent updates, broadens the information that an entity must consider in developing its estimated credit losses expected to occur over the remaining life of assets measured either collectively or individually to include historical experience, current conditions and reasonable and supportable forecasts, replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses (“CECL”) model.  The new guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This new guidance is first effective for our fiscal year beginning on October 1, 2020 and will be adopted under a modified retrospective approach. Although permitted, we do not plan to early adopt. Our cross-functional team has continued our implementation efforts, including data collection and processing, model development and validation, and establishment of the governance and control processes. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations, which will depend on, among other things, the current and expected macroeconomic conditions and the nature and characteristics of financial assets held by us on the date of adoption.

Internal use software (cloud computing) - In August 2018, the FASB issued guidance on the accounting for implementation costs incurred by customers in cloud computing arrangements (ASU 2018-15). This guidance requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the non-cancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. This amended guidance is first effective for our fiscal year beginning on October 1, 2020 with early adoption permitted, although we do not plan to early adopt. The guidance may be adopted either using the prospective or retrospective approach. We are currently evaluating the impact of this new guidance on our financial position and results of operations.

Consolidation (decision making fees) - In October 2018, the FASB issued guidance on how all entities evaluate decision-making fees under the VIE guidance (ASU 2018-17). Under the new guidance, to determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis, rather than in their entirety. This guidance is first effective for our fiscal year beginning on October 1, 2020. Although permitted, we do not plan

9
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





to early adopt. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.

Income Taxes (simplification) - In December 2019, the FASB issued amended guidance to simplify of the accounting for income taxes (ASU 2019-12). The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles in current guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This new guidance is first effective for our fiscal year beginning on October 1, 2021 with early adoption permitted. We are currently evaluating the impact of this new guidance on our financial position and results of operations.

Equity Securities, Equity Method Investments, and Certain Derivative Instruments - In January 2020, the FASB issued new guidance clarifying the interaction between accounting standards related to equity securities, equity method investments, and certain derivatives (ASU 2020-01). The new guidance, among other things, states that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting, for the purposes of applying the fair value measurement alternative immediately before applying or upon discontinuing the equity method. The new guidance is effective for our fiscal year beginning October 1, 2021 and should be applied prospectively. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.



10
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 3 – FAIR VALUE

Our “Financial instruments owned” and “Financial instruments sold but not yet purchased” on our Condensed Consolidated Statements of Financial Condition are recorded at fair value under GAAP. For further information about such instruments and our significant accounting policies related to fair value, see Note 2 and Note 4 of our 2019 Form 10-K. The following tables present assets and liabilities measured at fair value on a recurring basis. Netting adjustments represent the impact of counterparty and collateral netting on our derivative balances included on our Condensed Consolidated Statements of Financial Condition. See Note 5 for additional information.
$ in millions
 
Level 1
 
Level 2
 
Level 3
 
Netting
adjustments
 
Balance as of
December 31,
2019
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
1

 
$
149

 
$
—

 
$
—

 
$
150

Corporate obligations
 
12

 
80

 
—

 
—

 
92

Government and agency obligations
 
6

 
52

 
—

 
—

 
58

Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)
 
—

 
230

 
—

 
—

 
230

Non-agency CMOs and asset-backed securities (“ABS”)
 
—

 
39

 
—

 
—

 
39

Total debt securities
 
19


550

 
—

 
—

 
569

Equity securities
 
10

 
1

 
—

 
—

 
11

Brokered certificates of deposit
 
—

 
33

 
—

 
—

 
33

Other
 
—

 
—

 
19

 
—

 
19

Total trading instruments
 
29

 
584

 
19

 
—

 
632

Available-for-sale securities (1)
 
10

 
3,212

 
—

 
—

 
3,222

Derivative assets
 
 
 
 
 
 
 
 
 
 
Interest rate - matched book
 
—

 
244

 
—

 
—

 
244

Interest rate - other
 
5

 
128

 
—

 
(89
)
 
44

Total derivative assets
 
5

 
372

 
—

 
(89
)
 
288

Other investments - private equity - not measured at net asset value (“NAV”)
 
—

 
—

 
62

 
—

 
62

All other investments
 
196

 
1

 
24

 
—

 
221

Subtotal
 
240

 
4,169

 
105

 
(89
)
 
4,425

Other investments - private equity - measured at NAV
 
 
 
 
 
 
 
 
 
80

Total assets at fair value on a recurring basis
 
$
240


$
4,169


$
105


$
(89
)

$
4,505

 
 
 
 
 
 
 
 
 
 
 
Liabilities at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments sold but not yet purchased
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
1

 
$
—

 
$
—

 
$
—

 
$
1

Corporate obligations
 
1

 
16

 
—

 
—

 
17

Government and agency obligations
 
187

 
—

 
—

 
—

 
187

Total debt securities
 
189

 
16

 
—

 
—

 
205

Equity securities
 
4

 
—

 
—

 
—

 
4

Other
 
—

 
—

 
1

 
—

 
1

Total trading instruments sold but not yet purchased
 
193

 
16

 
1

 
—

 
210

Derivative liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate - matched book
 
—

 
244

 
—

 
—

 
244

Interest rate - other
 
5

 
107

 
—

 
(71
)
 
41

Foreign exchange
 
—

 
15

 
—

 
—

 
15

Equity
 
—

 
6

 
—

 
—

 
6

Total derivative liabilities
 
5

 
372

 
—

 
(71
)
 
306

Total liabilities at fair value on a recurring basis
 
$
198

 
$
388

 
$
1

 
$
(71
)
 
$
516



(1) Substantially all of our available-for-sale securities consist of agency MBS and CMOs. See Note 4 for further information.

11
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





$ in millions
 
Level 1
 
Level 2
 
Level 3
 
Netting
adjustments
 
Balance as of
September 30,
2019
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
—

 
$
267

 
$
—

 
$
—

 
$
267

Corporate obligations
 
8

 
95

 
—

 
—

 
103

Government and agency obligations
 
12

 
67

 
—

 
—

 
79

Agency MBS and CMOs
 
—

 
147

 
—

 
—

 
147

Non-agency CMOs and ABS
 
—

 
51

 
—

 
—

 
51

Total debt securities
 
20

 
627

 
—

 
—

 
647

Equity securities
 
12

 
1

 
—

 
—

 
13

Brokered certificates of deposit
 
—

 
45

 
—

 
—

 
45

Other
 
—

 
—

 
3

 
—

 
3

Total trading instruments
 
32

 
673

 
3

 
—

 
708

Available-for-sale securities (1)
 
10

 
3,083

 
—

 
—

 
3,093

Derivative assets
 
 
 
 
 
 
 
 
 
 
Interest rate - matched book
 
—

 
280

 
—

  
—

 
280

Interest rate - other
 
3

 
182

 
—

 
(127
)
 
58

Total derivative assets
 
3


462


—


(127
)

338

Other investments - private equity - not measured at NAV
 
—

 
—

 
63

 
—

 
63

All other investments
 
194

 
1

 
24

 
—

 
219

Subtotal
 
239

 
4,219

 
90

 
(127
)
 
4,421

Other investments - private equity - measured at NAV
 
 
 
 
 
 
 
 
 
83

Total assets at fair value on a recurring basis
 
$
239

 
$
4,219

 
$
90

 
$
(127
)
 
$
4,504

 
 
 
 
 
 
 
 
 
 
 
Liabilities at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments sold but not yet purchased
 
 
 
 
 
 
 
 
 
 
Corporate obligations
 
$
2

 
$
20

 
$
—

 
$
—

 
$
22

Government and agency obligations
 
269

 
—

 
—

 
—

 
269

Total debt securities
 
271

 
20

 
—

 
—

 
291

Equity securities
 
4

 
—

 
—

 
—

 
4

Other
 
—

 
—

 
1

 
—

 
1

Total trading instruments sold but not yet purchased
 
275

 
20

 
1

 
—

 
296

Derivative liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate - matched book
 
—

 
280

 
—

 
—

 
280

Interest rate - other
 
4

 
142

 
—

 
(121
)
 
25

Foreign exchange
 
—

 
2

 
—

 
—

 
2

Equity
 
—

 
6

 
—

 
—

 
6

Total derivative liabilities
 
4

 
430

 
—

 
(121
)
 
313

Total liabilities at fair value on a recurring basis
 
$
279

 
$
450

 
$
1

 
$
(121
)
 
$
609



(1)
Substantially all of our available-for-sale securities consist of agency MBS and CMOs. See Note 4 for further information.


12
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Level 3 recurring fair value measurements

The following tables present the changes in fair value for Level 3 assets and liabilities measured at fair value on a recurring basis. The realized and unrealized gains and losses in the tables may include changes in fair value that were attributable to both observable and unobservable inputs. In the following tables, gains/(losses) on trading instruments are reported in “Principal transactions” and gains/(losses) on other investments are reported in “Other” revenues.
Three months ended December 31, 2019
Level 3 instruments at fair value
 
 
Financial assets
 
Financial liabilities
 
 
Trading instruments
 

Other investments
 
Trading instruments
$ in millions
 
Other
 
Private equity investments
 
All other
 
Other
Fair value beginning of period
 
$
3

 
$
63

 
$
24

 
$
(1
)
Total gains/(losses) included in earnings
 
(1
)
 
—

 
—

 
—

Purchases and contributions
 
31

 
—

 
—

 
1

Sales and distributions
 
(14
)
 
(1
)
 
—

 
(1
)
Transfers:
 
 

 
 

 
 

 
 

Into Level 3
 
—

 
—

 
—

 
—

Out of Level 3
 
—

 
—

 
—

 
—

Fair value end of period
 
$
19

 
$
62

 
$
24

 
$
(1
)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period
 
$
—

 
$
—

 
$
—

 
$
—



Three months ended December 31, 2018
Level 3 instruments at fair value
 
 
Financial assets
 
Financial liabilities
 
 
Trading instruments
 
Other investments
 
Trading instruments
$ in millions
 
Other
 
Private equity investments
 
All other
 
Other
Fair value beginning of period
 
$
1

 
$
56

 
$
67

 
$
(7
)
Total gains/(losses) included in earnings
 
1

 
—

 
—

 
2

Purchases and contributions
 
38

 
3

 
—

 
5

Sales and distributions
 
(37
)
 
—

 
—

 
(4
)
Transfers:
 
 
 
 
 
 
 
 
Into Level 3
 
—

 
—

 
—

 
—

Out of Level 3
 
—

 
—

 
—

 
—

Fair value end of period
 
$
3

 
$
59

 
$
67

 
$
(4
)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period
 
$
1

 
$
—

 
$
—

 
$
—



As of December 31, 2019, 11% of our assets and 2% of our liabilities were measured at fair value on a recurring basis.  In comparison, as of September 30, 2019, 12% of our assets and 2% of our liabilities were measured at fair value on a recurring basis. Instruments measured at fair value on a recurring basis categorized as Level 3 represented 2% of our assets measured at fair value as of both December 31, 2019 and September 30, 2019.


13
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Quantitative information about level 3 fair value measurements

The following tables present the valuation techniques and significant unobservable inputs used in the valuation of a majority of our financial instruments classified as level 3. These inputs represent those that a market participant would take into account when pricing these instruments. Weighted averages are calculated by weighting each input by the relative fair value of the related financial instrument.
Level 3 financial instrument
$ in millions
 
Fair value at
December 31, 2019
 
Valuation technique(s)
 
Unobservable input
 
Range
(weighted-average)
Recurring measurements
 
 
 
 
 
 
 
 
Other investments - private equity investments (not measured at NAV)
 
$
50

 
Income approach - discounted cash flow
 
Discount rate
 
25
%
 
 
 
 
 
 
Terminal earnings before interest, tax, depreciation and amortization (“EBITDA”) multiple
 
12.5x

 
 
 
 
 
 
Terminal year
 
2021 - 2042 (2022)

 
 
$
12

 
Transaction price or other investment-specific events (1)
 
Not meaningful (1)
 
Not meaningful (1)


Level 3 financial instrument
$ in millions
 
Fair value at
September 30, 2019
 
Valuation technique(s)
 
Unobservable input
 
Range
(weighted-average)
Recurring measurements
 
 
 
 
 
 
 
 
Other investments - private equity investments (not measured at NAV)
 
$
50

 
Income approach - discounted cash flow
 
Discount rate
 
25
%
 
 
 
 
 
 
Terminal EBITDA multiple
 
12.5x

 
 
 
 
 
 
Terminal year
 
2021 - 2042 (2022)

 
 
$
13

 
Transaction price or other investment-specific events (1)
 
Not meaningful (1)
 
Not meaningful (1)



(1)
Certain investments are valued initially at transaction price and updated as other investment-specific events take place which indicate that a change in the carrying values of these investments is appropriate. Other investment-specific events include such events as our periodic review, significant transactions occur, new developments become known, or we receive information from a fund manager which allows us to update our proportionate share of net assets.

Qualitative information about unobservable inputs

Private equity investments

The significant unobservable inputs used in the fair value measurement of private equity investments generally relate to the financial performance of the investment entity and the market’s required return on investments from entities in industries in which we hold investments. Increases in the discount rate and/or a later terminal year would have resulted in a lower fair value measurement. Increases in the terminal EBITDA multiple would have resulted in a higher fair value measurement.

Investments in private equity measured at net asset value per share

As more fully described in Note 2 of our 2019 Form 10-K, as a practical expedient, we utilize NAV or its equivalent to determine the recorded value of a portion of our private equity investments portfolio. We utilize NAV when the fund investment does not have a readily determinable fair value and the NAV of the fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the investments at fair value.

Our private equity portfolio includes various direct investments, as well as investments in third-party private equity funds and various legacy private equity funds which we sponsor. The portfolio is primarily invested in a broad range of industries including leveraged buyouts, growth capital, distressed capital, venture capital and mezzanine capital. Due to the closed-end nature of certain of our fund investments, such investments cannot be redeemed directly with the funds. Our investment is monetized by distributions received through the liquidation of the underlying assets of those funds, the timing of which is uncertain.


14
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents the recorded value and unfunded commitments related to our private equity investments portfolio.
$ in millions
 
Recorded value
 
Unfunded commitment
December 31, 2019
 
 
 
 
Private equity investments measured at NAV
 
$
80

 
$
13

Private equity investments not measured at NAV
 
62

 
 
Total private equity investments 
 
$
142

 
 
 
 
 
 
 
September 30, 2019
 
 
 
 
Private equity investments measured at NAV
 
$
83

 
$
15

Private equity investments not measured at NAV
 
63

 
 
Total private equity investments
 
$
146

 
 


Of the total private equity investments, the portions we owned were $97 million and $99 million as of December 31, 2019 and September 30, 2019, respectively. The portions of the private equity investments we did not own were $45 million and $47 million as of December 31, 2019 and September 30, 2019, respectively, and were included as a component of noncontrolling interests on our Condensed Consolidated Statements of Financial Condition.

Many of these fund investments meet the definition of prohibited covered funds as defined by the Volcker Rule enacted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. We have received approval from the Board of Governors of the Federal Reserve System (the “Fed”) to continue to hold the majority of our covered fund investments until July 2022. However, our current focus is on the divestiture of this portfolio.

Financial instruments measured at fair value on a nonrecurring basis

The following table presents assets measured at fair value on a nonrecurring basis along with the valuation techniques and significant unobservable inputs used in the valuation of the assets classified as level 3. These inputs represent those that a market participant would take into account when pricing these instruments. Weighted averages are calculated by weighting each input by the relative fair value of the related financial instrument.
$ in millions
 
Level 2
 
Level 3
 
Total fair value
 
Valuation technique(s)
 
Unobservable input
 
Range
(weighted-average)
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans, net:
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans: residential
 
$
5

 
$
14

 
$
19

 
Discounted cash flow
 
Prepayment rate
 
7 yrs. - 12 yrs. (10.4 yrs.)
Impaired loans: corporate
 
$
—

 
$
20

 
$
20

 
Collateral or discounted cash flow (1)
 
Not meaningful (1)
 
Not meaningful (1)
Loan held for sale
 
$
64

 
$
—

 
$
64

 
N/A
 
N/A
 
N/A
Other assets: other real estate owned
 
$
1

 
$
—

 
$
1

 
N/A
 
N/A
 
N/A
 
 
 
 
 
 

 
 
 
 
 
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans, net:
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans: residential
 
$
7

 
$
14

 
$
21

 
Discounted cash flow
 
Prepayment rate
 
7 yrs. - 12 yrs. (10.4 yrs.)
Impaired loans: corporate
 
$
—

 
$
21

 
$
21

 
Collateral or discounted cash flow (1)
 
Not meaningful (1)
 
Not meaningful (1)
Loan held for sale
 
$
66

 
$
—

 
$
66

 
N/A
 
N/A
 
N/A
Other assets: other real estate owned
 
$
1

 
$
—

 
$
1

 
N/A
 
N/A
 
N/A

(1)
The valuation techniques used for the corporate loans are based on collateral value less selling costs for the collateral dependent loans and discounted cash flows for impaired loans that are not collateral dependent.


15
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Financial instruments not recorded at fair value

Many, but not all, of the financial instruments we hold were recorded at fair value on the Condensed Consolidated Statements of Financial Condition. The following table presents the estimated fair value and fair value hierarchy of financial assets and liabilities that are not recorded at fair value in accordance with GAAP on the Condensed Consolidated Statements of Financial Condition at December 31, 2019 and September 30, 2019. This table excludes financial instruments that are carried at amounts which approximate fair value. Refer to Note 4 of our 2019 Form 10-K for a discussion of the fair value hierarchy classification of our financial instruments that are not recorded at fair value.
$ in millions
 
Level 1
 
Level 2
 
Level 3
 
Total estimated fair value
 
Carrying amount
December 31, 2019
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Bank loans, net
 
$
—

 
$
139

 
$
21,034

 
$
21,173

 
$
21,193

Financial liabilities:
 
 
 
 
 
 
 
 

 
 
Bank deposits - certificates of deposit
 
$
—

 
$
—

 
$
1,062

 
$
1,062

 
$
1,056

Senior notes payable
 
$
—

 
$
1,755

 
$
—

 
$
1,755

 
$
1,550

 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Bank loans, net
 
$
—

 
$
75

 
$
20,710

 
$
20,785

 
$
20,783

Financial liabilities:
 
 
 
 
 
 
 
 

 
 
Bank deposits - certificates of deposit
 
$
—

 
$
—

 
$
617

 
$
617

 
$
605

Senior notes payable
 
$
—

 
$
1,760

 
$
—

 
$
1,760

 
$
1,550




NOTE 4 – AVAILABLE-FOR-SALE SECURITIES

Available-for-sale securities are primarily comprised of agency MBS and CMOs owned by Raymond James Bank (“RJ Bank”). Refer to the discussion of our available-for-sale securities accounting policies, including the fair value determination process, in Note 2 of our 2019 Form 10-K.

The following table details the amortized cost and fair values of our available-for-sale securities.
$ in millions
 
Cost basis
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
December 31, 2019
 
 
 
 
 
 
 
 
Agency residential MBS
 
$
1,622

 
$
22

 
$
(1
)
 
$
1,643

Agency commercial MBS
 
343

 
3

 
—

 
346

Agency CMOs
 
1,220

 
6

 
(3
)
 
1,223

Other securities
 
10

 
$
—

 
$
—

 
10

Total available-for-sale securities
 
$
3,195

 
$
31

 
$
(4
)
 
$
3,222

 
 
 
 
 
 
 
 
 
September 30, 2019
 
 

 
 

 
 

 
 

Agency residential MBS
 
$
1,555

 
$
20

 
$
(1
)
 
$
1,574

Agency commercial MBS
 
305

 
5

 
—

 
310

Agency CMOs
 
1,195

 
7

 
(3
)
 
1,199

Other securities
 
10

 
—

 
—

 
10

Total available-for-sale securities
 
$
3,065

 
$
32

 
$
(4
)
 
$
3,093



See Note 3 for additional information regarding the fair value of available-for-sale securities.


16
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table details the contractual maturities, amortized costs, carrying values and current yields for our available-for-sale securities.  Since our MBS and CMO available-for-sale securities are backed by mortgages, actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties. As of December 31, 2019, the average expected duration of our available-for-sale securities portfolio was approximately three years.
 
 
December 31, 2019
$ in millions
 
Within one year
 
After one but
within five years
 
After five but
within ten years
 
After ten years
 
Total
Agency residential MBS
 
 
 
 
 
 
 
 
 
 

Amortized cost
 
$
—

 
$
36

 
$
787

 
$
799

 
$
1,622

Carrying value
 
$
—

 
$
36

 
$
798

 
$
809

 
$
1,643

Agency commercial MBS
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
5

 
$
207

 
$
97

 
$
34

 
$
343

Carrying value
 
$
5

 
$
209

 
$
98

 
$
34

 
$
346

Agency CMOs
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
—

 
$
—

 
$
82

 
$
1,138

 
$
1,220

Carrying value
 
$
—

 
$
—

 
$
82

 
$
1,141

 
$
1,223

Other securities
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
—

 
$
2

 
$
8

 
$
—

 
$
10

Carrying value
 
$
—

 
$
2

 
$
8

 
$
—

 
$
10

Total available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
5

 
$
245

 
$
974

 
$
1,971

 
$
3,195

Carrying value
 
$
5

 
$
247

 
$
986

 
$
1,984

 
$
3,222

Weighted-average yield
 
1.69
%
 
2.33
%
 
2.39
%
 
2.33
%
 
2.35
%


The following table details the gross unrealized losses and fair values of securities that were in a loss position at the reporting period end, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.
 
 
Less than 12 months
 
12 months or more
 
Total
$ in millions
 
Estimated
fair value
 
Unrealized
losses
 
Estimated
fair value
 
Unrealized
losses
 
Estimated
fair value
 
Unrealized
losses
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Agency residential MBS
 
$
122

 
$
—

 
$
96

 
$
(1
)
 
$
218

 
$
(1
)
Agency commercial MBS
 
41

 
—

 
44

 
—

 
85

 
—

Agency CMOs
 
219

 
(1
)
 
297

 
(2
)
 
516

 
(3
)
Other securities
 
10

 
—

 
—

 
—

 
10

 
—

         Total
 
$
392

 
$
(1
)
 
$
437

 
$
(3
)
 
$
829

 
$
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Agency residential MBS
 
$
166

 
$
—

 
$
114

 
$
(1
)
 
$
280

 
$
(1
)
Agency commercial MBS
 
—

 
—

 
44

 
—

 
44

 
—

Agency CMOs
 
145

 
(1
)
 
351

 
(2
)
 
496

 
(3
)
Other securities
 
2

 
—

 
—

 
—

 
2

 
—

Total
 
$
313

 
$
(1
)
 
$
509

 
$
(3
)
 
$
822

 
$
(4
)


The contractual cash flows of our available-for-sale securities are guaranteed by the U.S. government or its agencies. At December 31, 2019, of the 118 available-for-sale securities in an unrealized loss position, 51 were in a continuous unrealized loss position for less than 12 months and 67 were for 12 months or more. At December 31, 2019, debt securities we held in excess of ten percent of our equity included Federal National Home Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) which had an amortized cost of $2.07 billion and $873 million, respectively, and a fair value of $2.08 billion and $881 million, respectively.

During the three months ended December 31, 2019 and 2018, there were no sales of available-for-sale securities.



17
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 5 – DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES

Our derivative assets and derivative liabilities are recorded at fair value and are included in “Derivative assets” and “Derivative liabilities” on our Condensed Consolidated Statements of Financial Condition. Cash flows related to our derivatives are included within operating activities on the Condensed Consolidated Statements of Cash Flows. The significant accounting policies governing our derivatives, including our methodologies for determining fair value, are described in Note 2 of our 2019 Form 10-K.

Derivative balances included on our financial statements

The following table presents the gross fair value and notional amount of derivatives by product type, the amounts of counterparty and cash collateral netting on our Condensed Consolidated Statements of Financial Condition, as well as collateral posted and received under credit support agreements that do not meet the criteria for netting under GAAP.
 
 
December 31, 2019
 
September 30, 2019
$ in millions
 
Derivative assets
 
Derivative liabilities
 
Notional amount
 
Derivative assets
 
Derivative liabilities
 
Notional amount
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate - matched book
 
$
244

 
$
244

 
$
2,281

 
$
280

 
$
280

 
$
2,296

Interest rate - other (1)
 
132

 
112

 
10,846

 
184

 
146

 
10,690

Foreign exchange
 
—

 
6

 
551

 
—

 
1

 
573

Equity
 
—

 
6

 
6

 
—

 
6

 
6

Subtotal
 
376


368


13,684


464


433


13,565

Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
1

 
—

 
850

 
1

 
—

 
850

Foreign exchange
 
—

 
9

 
877

 
—

 
1

 
856

Subtotal
 
1


9


1,727


1


1


1,706

Total gross fair value/notional amount
 
377


377


$
15,411


465


434


$
15,271

Offset on the Condensed Consolidated Statements of Financial Condition
 
 
 
 
 
 
 
 
 
 
 
 
Counterparty netting
 
(19
)
 
(19
)
 
 
 
(24
)
 
(24
)
 
 
Cash collateral netting
 
(70
)
 
(52
)
 
 
 
(103
)
 
(97
)
 
 
Total amounts offset
 
(89
)
 
(71
)
 
 
 
(127
)
 
(121
)
 
 
Net amounts presented on the Condensed Consolidated Statements of Financial Condition
 
288


306

 
 
 
338

 
313

 
 
Gross amounts not offset on the Condensed Consolidated Statements of Financial Condition
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments (2)
 
(254
)
 
(244
)
 
 
 
(297
)
 
(280
)
 
 
Total
 
$
34

 
$
62

 
 
 
$
41

 
$
33

 
 


(1)
Substantially all relates to interest rate derivatives entered into as part of our fixed income business operations, including to be announced (“TBA”) security contracts that are accounted for as derivatives.

(2)
Although the matched book derivative arrangements do not meet the definition of a master netting arrangement as specified by GAAP, the agreement with the third-party intermediary includes terms that are similar to a master netting agreement. As a result, we present the matched book amounts net in the preceding table.

The following table details the gains/(losses) included in accumulated other comprehensive income (“AOCI”), net of income taxes, on derivatives designated as hedging instruments. These gains/(losses) included any amounts reclassified from AOCI to net income during the period. See Note 14 for additional information.
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
Interest rate (cash flow hedges)
 
$
10

 
$
(17
)
Foreign exchange (net investment hedges)
 
(13
)
 
37

Total gains/(losses) in AOCI, net of taxes
 
$
(3
)
 
$
20



There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for each of the three months ended December 31, 2019 and 2018. We expect to reclassify an insignificant amount of interest expense out of AOCI and into earnings within the next 12 months. The maximum length of time over which forecasted transactions are or will be hedged is 8 years.

18
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table details the gains/(losses) on derivatives not designated as hedging instruments recognized on the Condensed Consolidated Statements of Income and Comprehensive Income.
$ in millions
 
Location of gain/(loss) included on the
Condensed Consolidated Statements of Income
and Comprehensive Income
 
Gain/(loss) recognized during the three months ended December 31,
 
 
2019
 
2018
Interest rate
 
Principal transactions/other revenues
 
$
5

 
$
2

Foreign exchange
 
Other revenues
 
$
(11
)
 
$
26

Equity
 
Compensation, commissions and benefits expense
 
$
—

 
$
5



Risks associated with our derivatives and related risk mitigation

Credit risk

We are exposed to credit losses in the event of nonperformance by the counterparties to forward foreign exchange derivative agreements and interest rate derivatives that are not cleared through a clearing organization. Where we are subject to credit exposure, we perform a credit evaluation of counterparties prior to entering into derivative transactions and we monitor their credit standings.  We may require initial margin or collateral from counterparties in the form of cash deposits or other marketable securities to support certain of these obligations as established by the credit threshold specified by the agreement and/or as a result of monitoring the credit standing of the counterparties.

Our only exposure to credit risk in the matched book derivatives operations is related to our uncollected derivative transaction fee revenues, which were insignificant as of both December 31, 2019 and September 30, 2019. We are not exposed to market risk on these derivatives due to the pass-through transaction structure described in Note 2 of our 2019 Form 10-K.

Interest rate and foreign exchange risk

We are exposed to interest rate risk related to certain of our interest rate derivatives. We are also exposed to foreign exchange risk related to our forward foreign exchange derivatives.  On a daily basis, we monitor our risk exposure on our derivatives based on established limits with respect to a number of factors, including interest rate, foreign exchange spot and forward rates, spread, ratio, basis and volatility risks, both for the total portfolio and by maturity period.

Derivatives with credit-risk-related contingent features

Certain of our derivative contracts contain provisions that require our debt to maintain an investment-grade rating from one or more of the major credit rating agencies. If our debt were to fall below investment-grade, the counterparties to the derivative instruments could terminate and request immediate payment or demand immediate and ongoing overnight collateralization on our derivative instruments in liability positions. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that were in a liability position was insignificant as of both December 31, 2019 and September 30, 2019.


NOTE 6 – COLLATERALIZED AGREEMENTS AND FINANCINGS

Collateralized agreements are securities purchased under agreements to resell (“reverse repurchase agreements”) and securities borrowed. Collateralized financings are securities sold under agreements to repurchase (“repurchase agreements”) and securities loaned. We enter into these transactions in order to facilitate client activities, invest excess cash, acquire securities to cover short positions and finance certain firm activities. The significant accounting policies governing our collateralized agreements and financings are described in Note 2 of our 2019 Form 10-K.


19
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





For financial statement purposes, we do not offset our reverse repurchase agreements, repurchase agreements, securities borrowing and securities lending transactions because the conditions for netting as specified by GAAP are not met. Our reverse repurchase agreements, repurchase agreements, securities borrowing and securities lending transactions are governed by master agreements that are widely used by counterparties and that may allow for net settlements of payments in the normal course, as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of the parties to the transaction. Although not offset on the Condensed Consolidated Statements of Financial Condition, these transactions are included in the following table.
 
 
Assets
 
Liabilities
$ in millions
 
Reverse repurchase agreements
 
Securities borrowed
 
Repurchase agreements
 
Securities loaned
December 31, 2019
 
 
 
 
 
 
 
 
Gross amounts of recognized assets/liabilities
 
$
326

 
$
211

 
$
200

 
$
239

Gross amounts offset on the Condensed Consolidated Statements of Financial Condition
 
—

 
—

 
—

 
—

Net amounts presented on the Condensed Consolidated Statements of Financial Condition
 
326


211


200


239

Gross amounts not offset on the Condensed Consolidated Statements of Financial Condition
 
(326
)
 
(207
)
 
(200
)
 
(229
)
Net amounts
 
$
—

 
$
4

 
$
—

 
$
10

 
 
 
 
 
 
 
 
 
September 30, 2019
 
 
 
 
 
 
 
 
Gross amounts of recognized assets/liabilities
 
$
343

 
$
248

 
$
150

 
$
323

Gross amounts offset on the Condensed Consolidated Statements of Financial Condition
 
—

 
—

 
—

 
—

Net amounts presented on the Condensed Consolidated Statements of Financial Condition
 
343


248


150


323

Gross amounts not offset on the Condensed Consolidated Statements of Financial Condition
 
(343
)
 
(243
)
 
(150
)
 
(311
)
Net amounts
 
$
—

 
$
5

 
$
—

 
$
12



Total collateral received under reverse repurchase agreements and the total amount of collateral posted under repurchase agreements exceeds the carrying value of these agreements on our Condensed Consolidated Statements of Financial Condition.

Collateral received and pledged

We receive cash and securities as collateral, primarily in connection with reverse repurchase agreements, securities borrowed, derivative transactions and client margin loans. The collateral we receive reduces our credit exposure to individual counterparties.

In many cases, we are permitted to deliver or repledge financial instruments we have received as collateral to satisfy our collateral requirements under our repurchase agreements, securities lending agreements or other secured borrowings, to satisfy deposit requirements with clearing organizations, or to otherwise meet either our or our clients’ settlement requirements.

The following table presents financial instruments at fair value that we received as collateral, were not included on our Condensed Consolidated Statements of Financial Condition, and that were available to be delivered or repledged, along with the balances of such instruments that were delivered or repledged, to satisfy one of our purposes previously described.
$ in millions
 
December 31,
2019
 
September 30,
2019
Collateral we received that was available to be delivered or repledged
 
$
2,860

 
$
2,931

Collateral that we delivered or repledged
 
$
860

 
$
897




20
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Encumbered assets

We pledge certain of our assets to collateralize either repurchase agreements or other secured borrowings, maintain lines of credit, or to satisfy our collateral or settlement requirements with counterparties or clearing organizations who may or may not have the right to deliver or repledge such instruments. The following table presents information about our assets that have been pledged for one of the purposes previously described.
$ in millions
 
December 31,
2019
 
September 30,
2019
Had the right to deliver or repledge
 
$
493

 
$
591

Did not have the right to deliver or repledge
 
$
65

 
$
65

Bank loans, net pledged at Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank
 
$
4,905

 
$
4,653


Repurchase agreements, repurchase-to-maturity transactions and securities loaned accounted for as secured borrowings

The following table presents the remaining contractual maturity of repurchase agreements and securities lending transactions accounted for as secured borrowings.
$ in millions
 
Overnight and continuous
 
Up to 30 days
 
30-90 days
 
Greater than 90 days
 
Total
December 31, 2019
 
 
 
 
 
 
 
 
 
 
Repurchase agreements:
 
 
 
 
 
 
 
 
 
 
Government and agency obligations
 
$
77

 
$
—

 
$
—

 
$
—

 
$
77

Agency MBS and CMOs
 
123

 
—

 
—

 
—

 
123

Total repurchase agreements
 
200


—


—


—


200

Securities loaned:
 
 
 
 
 
 
 
 
 
 
Equity securities
 
239

 
—

 
—

 
—

 
239

Total
 
$
439


$
—


$
—


$
—


$
439

 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
Repurchase agreements:
 
 
 
 
 
 
 
 
 
 
Government and agency obligations
 
$
70

 
$
—

 
$
—

 
$
—

 
$
70

Agency MBS and CMOs
 
80

 
—

 
—

 
—

 
80

Total repurchase agreements
 
150


—


—


—


150

Securities loaned:
 
 
 
 
 
 
 
 
 
 
Equity securities
 
323

 
—

 
—

 
—

 
323

Total
 
$
473

 
$
—

 
$
—

 
$
—

 
$
473



As of both December 31, 2019 and September 30, 2019, we did not have any “repurchase-to-maturity” agreements, which are repurchase agreements where a security is transferred under an agreement to repurchase and the maturity date of the repurchase agreement matches the maturity date of the underlying security.


NOTE 7 – BANK LOANS, NET

Bank client receivables are comprised of loans originated or purchased by RJ Bank and include commercial and industrial (“C&I”) loans, tax-exempt loans, commercial and residential real estate loans, securities-based loans (“SBL”) and other loans. These receivables are collateralized by first and, to a lesser extent, second mortgages on residential or other real property, other assets of the borrower, a pledge of revenue or are unsecured. See Note 2 of our 2019 Form 10-K for a discussion of accounting policies related to bank loans and allowances for losses.

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


21
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents the balances for both the held for sale and held for investment loan portfolios, as well as the associated percentage of each portfolio segment in RJ Bank’s total loan portfolio. “Loans held for sale, net” and “Total loans held for investment, net” in the following table are presented net of unearned income and deferred expenses, which include purchase premiums, purchase discounts and net deferred origination fees and costs.
 
 
December 31, 2019
 
September 30, 2019
$ in millions
 
Balance
 
%
 
Balance
 
%
Loans held for investment:
 
 

 
 

 
 

 
 

C&I loans
 
$
8,043

 
37
%
 
$
8,098

 
38
%
CRE construction loans
 
167

 
1
%
 
185

 
1
%
CRE loans
 
3,773

 
17
%
 
3,652

 
17
%
Tax-exempt loans
 
1,220

 
6
%
 
1,241

 
6
%
Residential mortgage loans
 
4,705

 
22
%
 
4,454

 
21
%
SBL and other
 
3,411

 
16
%
 
3,349

 
16
%
Total loans held for investment
 
21,319

 
 

 
20,979

 
 

Net unearned income and deferred expenses
 
(10
)
 
 

 
(12
)
 
 

Total loans held for investment, net
 
21,309

 
 

 
20,967

 
 

Loans held for sale, net
 
203

 
1
%
 
142

 
1
%
Total loans held for sale and investment
 
21,512

 
100
%
 
21,109

 
100
%
Allowance for loan losses
 
(216
)
 
 

 
(218
)
 
 

Bank loans, net
 
$
21,296

 
 

 
$
20,891

 
 



At December 31, 2019, the FHLB had a blanket lien on RJ Bank’s residential mortgage loan portfolio as security for the repayment of certain borrowings. See Note 11 for more information regarding borrowings from the FHLB.

Loans held for sale

RJ Bank originated or purchased $706 million and $792 million of loans held for sale during the three months ended December 31, 2019, and 2018, respectively. Proceeds from the sale of these held for sale loans amounted to $214 million and $257 million during the three months ended December 31, 2019, and 2018, respectively. Net gains resulting from such sales were insignificant during the three months ended December 31, 2019 and 2018.

Purchases and sales of loans held for investment

The following table presents purchases and sales of any loans held for investment by portfolio segment.
$ in millions
 
C&I loans
 
Residential mortgage loans
 
Total
Three months ended December 31, 2019
 
 
 
 
 
 
Purchases
 
$
67

 
$
158

 
$
225

Sales
 
$
20

 
$
—

 
$
20

Three months ended December 31, 2018
 
 
 
 
 
 
Purchases
 
$
262

 
$
76

 
$
338

Sales
 
$
69

 
$
—

 
$
69



Sales in the preceding table represent the recorded investment of loans held for investment that were transferred to loans held for sale and subsequently sold to a third party during the respective period. As more fully described in Note 2 of our 2019 Form 10-K, corporate loan (C&I, CRE and CRE construction) sales generally occur as part of our credit management activities.


22
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Aging analysis of loans held for investment

The following table presents an analysis of the payment status of loans held for investment. Amounts in the table exclude any net unearned income and deferred expenses.
$ in millions
 
30-89
days and accruing
 
90 days or more and accruing
 
Total past due and accruing
 
Nonaccrual
 
Current and accruing
 
Total loans held for investment
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
—

 
$
—

 
$
—

 
$
16

 
$
8,027

 
$
8,043

CRE construction loans
 
—

 
—

 
—

 
—

 
167

 
167

CRE loans
 
—

 
—

 
—

 
7

 
3,766

 
3,773

Tax-exempt loans
 
—

 
—

 
—

 
—

 
1,220

 
1,220

Residential mortgage loans:
 
 
 
 
 


 
 
 
 
 


First mortgage loans
 
1

 
—

 
1

 
15

 
4,664

 
4,680

Home equity loans/lines
 
—

 
—

 
—

 
—

 
25

 
25

SBL and other
 
—

 
—

 
—

 
—

 
3,411

 
3,411

Total loans held for investment
 
$
1

 
$
—

 
$
1

 
$
38

 
$
21,280

 
$
21,319

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
—

 
$
—

 
$
—

 
$
19

 
$
8,079

 
$
8,098

CRE construction loans
 
—

 
—

 
—

 
—

 
185

 
185

CRE loans
 
—

 
—

 
—

 
8

 
3,644

 
3,652

Tax-exempt loans
 
—

 
—

 
—

 
—

 
1,241

 
1,241

Residential mortgage loans:
 
 
 
 
 
 
 
 
 
 
 

First mortgage loans
 
2

 
—

 
2

 
16

 
4,409

 
4,427

Home equity loans/lines
 
—

 
—

 
—

 
—

 
27

 
27

SBL and other
 
—

 
—

 
—

 
—

 
3,349

 
3,349

Total loans held for investment
 
$
2

 
$
—

 
$
2

 
$
43

 
$
20,934

 
$
20,979



The preceding table includes $28 million and $32 million at December 31, 2019 and September 30, 2019, respectively, of nonaccrual loans which were current pursuant to their contractual terms.

Other real estate owned, included in “Other assets” on our Condensed Consolidated Statements of Financial Condition, was $3 million at both December 31, 2019 and September 30, 2019. The recorded investment in mortgage loans secured by one-to-four family residential properties for which formal foreclosure proceedings were in process was $7 million at both December 31, 2019 and September 30, 2019.

Impaired loans and troubled debt restructurings

The following table provides a summary of RJ Bank’s impaired loans.
 
 
December 31, 2019
 
September 30, 2019
$ in millions
 
Gross
recorded
investment
 
Unpaid
principal
balance
 
Allowance
for losses
 
Gross
recorded
investment
 
Unpaid
principal
balance
 
Allowance
for losses
Impaired loans with allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
16

 
$
18

 
$
3

 
$
19

 
$
20

 
$
6

Residential - first mortgage loans
 
9

 
12

 
1

 
11

 
13

 
1

Total
 
25

 
30

 
4

 
30

 
33

 
7

Impaired loans without allowance for loan losses:
 
 
 
 

 
 

 
 

 
 

 
 

CRE loans
 
7

 
13

 
—

 
8

 
13

 
—

Residential - first mortgage loans
 
11

 
17

 
—

 
11

 
17

 
—

Total
 
18

 
30

 
—

 
19

 
30

 
—

Total impaired loans
 
$
43

 
$
60

 
$
4

 
$
49

 
$
63

 
$
7



23
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Impaired loan balances with allowances for loan losses have had reserves established based upon management’s analysis. There is no allowance required when the discounted cash flow, collateral value or market value of a loan equals or exceeds the carrying value.  These are generally loans in process of foreclosure that have already been adjusted to fair value.

The preceding table includes C&I, CRE and residential first mortgage loans troubled debt restructurings (“TDRs”) of $16 million, $7 million and $17 million, respectively, at December 31, 2019 and $19 million, $8 million and $18 million, respectively, at September 30, 2019.

The average balance of the total impaired loans was as follows.
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
C&I loans
 
$
18

 
$
10

CRE loans
 
7

 
—

Residential - first mortgage loans
 
21

 
27

Total average impaired loan balance
 
$
46

 
$
37



Credit quality indicators

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

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

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

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

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

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


24
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents the credit quality of RJ Bank’s held for investment loan portfolio.
$ in millions
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Total
December 31, 2019
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
7,799

 
$
98

 
$
146

 
$
—

 
$
8,043

CRE construction loans
 
167

 
—

 
—

 
—

 
167

CRE loans
 
3,701

 
36

 
36

 
—

 
3,773

Tax-exempt loans
 
1,220

 
—

 
—

 
—

 
1,220

Residential mortgage loans:
 
 
 
 
 
 
 
 
 
 
First mortgage loans
 
4,647

 
9

 
24

 
—

 
4,680

Home equity loans/lines
 
25

 
—

 
—

 
—

 
25

SBL and other
 
3,411

 
—

 
—

 
—

 
3,411

Total loans held for investment
 
$
20,970

 
$
143

 
$
206

 
$
—

 
$
21,319

 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
 
 
 
 
 
 
 
 
C&I loans
 
$
7,870

 
$
152

 
$
76

 
$
—

 
$
8,098

CRE construction loans
 
185

 
—

 
—

 
—

 
185

CRE loans
 
3,630

 
—

 
22

 
—

 
3,652

Tax-exempt loans
 
1,241

 
—

 
—

 
—

 
1,241

Residential mortgage loans:
 
 
 
 
 
 
 
 
 
 
First mortgage loans
 
4,392

 
10

 
25

 
—

 
4,427

Home equity loans/lines
 
27

 
—

 
—

 
—

 
27

SBL and other
 
3,349

 
—

 
—

 
—

 
3,349

Total loans held for investment
 
$
20,694

 
$
162

 
$
123

 
$
—

 
$
20,979



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

Allowance for loan losses and reserve for unfunded lending commitments

The following table presents changes in the allowance for loan losses of RJ Bank by portfolio segment.
 
 
Loans held for investment
$ in millions
 
C&I loans
 
CRE construction loans
 
CRE loans
 
Tax-exempt loans
 
Residential mortgage loans
 
SBL and other
 
Total
Three months ended December 31, 2019
 
 
 
 

 
 

 
 
 
 

 
 

 
 

Balance at beginning of period
 
$
139

 
$
3

 
$
46

 
$
9

 
$
16

 
$
5

 
$
218

Provision/(benefit) for loan losses
 
—

 
(1
)
 
—

 
(1
)
 
1

 
(1
)
 
(2
)
Net (charge-offs)/recoveries:
 
 

 
 

 
 

 
 
 
 

 
 
 
 

Charge-offs
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Recoveries
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Net charge-offs
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Foreign exchange translation adjustment
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at end of period
 
$
139

 
$
2

 
$
46

 
$
8

 
$
17

 
$
4

 
$
216

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
123

 
$
3

 
$
47

 
$
9

 
$
17

 
$
4

 
$
203

Provision/(benefit) for loan losses
 
15

 
—

 
(1
)
 
—

 
1

 
1

 
16

Net (charge-offs)/recoveries:
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Charge-offs
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Recoveries
 
—

 
—

 
—

 
—

 
1

 
—

 
1

Net (charge-offs)/recoveries
 
—

 
—

 
—

 
—

 
1

 
—

 
1

Foreign exchange translation adjustment
 
(1
)
 
—

 
—

 
—

 
—

 
—

 
(1
)
Balance at end of period
 
$
137

 
$
3

 
$
46

 
$
9

 
$
19

 
$
5

 
$
219




25
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents, by loan portfolio segment, RJ Bank’s recorded investment (excluding any net unearned income and deferred expenses) and the related allowance for loan losses.
 
 
Loans held for investment
 
 
Allowance for loan losses
 
Recorded investment
$ in millions
 
Individually evaluated for impairment
 
Collectively evaluated for impairment
 
Total
 
Individually evaluated for impairment
 
Collectively evaluated for impairment
 
Total
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
3

 
$
136

 
$
139

 
$
16

 
$
8,027

 
$
8,043

CRE construction loans
 
—

 
2

 
2

 
—

 
167

 
167

CRE loans
 
—

 
46

 
46

 
7

 
3,766

 
3,773

Tax-exempt loans
 
—

 
8

 
8

 
—

 
1,220

 
1,220

Residential mortgage loans
 
1

 
16

 
17

 
26

 
4,679

 
4,705

SBL and other
 
—

 
4

 
4

 
—

 
3,411

 
3,411

Total
 
$
4

 
$
212

 
$
216

 
$
49

 
$
21,270

 
$
21,319

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
6

 
$
133

 
$
139

 
$
19

 
$
8,079

 
$
8,098

CRE construction loans
 
—

 
3

 
3

 
—

 
185

 
185

CRE loans
 
—

 
46

 
46

 
8

 
3,644

 
3,652

Tax-exempt loans
 
—

 
9

 
9

 
—

 
1,241

 
1,241

Residential mortgage loans
 
1

 
15

 
16

 
28

 
4,426

 
4,454

SBL and other
 
—

 
5

 
5

 
—

 
3,349

 
3,349

Total
 
$
7

 
$
211

 
$
218

 
$
55

 
$
20,924

 
$
20,979


The reserve for unfunded lending commitments, which is included in “Other payables” on our Condensed Consolidated Statements of Financial Condition, was $8 million and $9 million at December 31, 2019 and September 30, 2019, respectively.



26
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 8 – VARIABLE INTEREST ENTITIES

A VIE requires consolidation by the entity’s primary beneficiary.  We evaluate all of the entities in which we are involved to determine if the entity is a VIE and if so, whether we hold a variable interest and are the primary beneficiary. Refer to Note 2 of our 2019 Form 10-K for a discussion of our principal involvement with VIEs and the accounting policies regarding determination of whether we are deemed to be the primary beneficiary of VIEs.

VIEs where we are the primary beneficiary

Of the VIEs in which we hold an interest, we have determined that certain limited partnerships which are part of our private equity portfolio (“Private Equity Interests”), certain Low-Income Housing Tax Credit (“LIHTC”) funds and the trust we utilize in connection with restricted stock unit (“RSU”) awards granted to certain employees of one of our Canadian subsidiaries (the “Restricted Stock Trust Fund”) require consolidation in our financial statements, as we are deemed the primary beneficiary of such VIEs.  The aggregate assets and liabilities of the VIEs we consolidate are provided in the following table. Aggregate assets and aggregate liabilities may differ from the consolidated carrying value of assets and liabilities due to the elimination of intercompany assets and liabilities held by the consolidated VIE.
$ in millions
 
Aggregate assets
 
Aggregate liabilities
December 31, 2019
 
 
 
 
Private Equity Interests
 
$
63

 
$
4

LIHTC funds
 
77

 
4

Restricted Stock Trust Fund
 
21

 
21

Total
 
$
161

 
$
29

 
 
 
 
 
September 30, 2019
 
 

 
 

Private Equity Interests
 
$
65

 
$
4

LIHTC funds
 
80

 
5

Restricted Stock Trust Fund
 
14

 
14

Total
 
$
159

 
$
23



The following table presents information about the carrying value of the assets and liabilities of the VIEs which we consolidate and which are included on our Condensed Consolidated Statements of Financial Condition. Intercompany balances are eliminated in consolidation and not reflected in the following table.
$ in millions
 
December 31, 2019
 
September 30, 2019
Assets:
 
 
 
 
Cash, cash equivalents and cash segregated pursuant to regulations
 
$
6

 
$
7

Other investments
 
60

 
63

Other assets
 
72

 
75

Total assets
 
$
138

 
$
145

Liabilities:
 
 

 
 

Other payables
 
$
2

 
$
4

Total liabilities
 
$
2

 
$
4

Noncontrolling interests
 
$
57

 
$
60



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

As discussed in Note 2 of our 2019 Form 10-K, we have concluded that for certain VIEs we are not the primary beneficiary and therefore do not consolidate these VIEs. Such VIEs include certain Private Equity Interests, certain LIHTC funds, and other limited partnerships. Our risk of loss for these VIEs is limited to our investments in, advances to, and/or receivables due from these VIEs.


27
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Aggregate assets, liabilities and risk of loss

The aggregate assets, liabilities, and our exposure to loss from those VIEs in which we hold a variable interest, but as to which we have concluded we are not the primary beneficiary, are provided in the following table.
 
 
December 31, 2019
 
September 30, 2019
$ in millions
 
Aggregate
assets
 
Aggregate
liabilities
 
Our risk
of loss
 
Aggregate
assets
 
Aggregate
liabilities
 
Our risk
of loss
Private Equity Interests
 
$
5,672

 
$
117

 
$
63

 
$
6,317

 
$
117

 
$
63

LIHTC funds
 
6,254

 
2,117

 
42

 
6,001

 
2,221

 
64

Other
 
208

 
115

 
4

 
205

 
115

 
4

Total
 
$
12,134


$
2,349


$
109


$
12,523


$
2,453


$
131




NOTE 9 – LEASES

We have operating leases for the premises we occupy in many of our U.S. and foreign locations, including our employee-based branch office operations. We also lease certain office and technology equipment. At inception, we determine if an arrangement to utilize a building or piece of equipment is a lease and, if so, the appropriate lease classification. If the arrangement is determined to be a lease, we recognize a ROU asset and a corresponding lease liability on our balance sheet. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. We have elected the practical expedient, where leases with an initial term of 12 months or less are not recorded as an ROU asset or lease liability. Our lease terms include any noncancelable periods and may reflect periods covered by options to extend or terminate when it is reasonably certain that we will exercise those options. As of December 31, 2019, the weighted average remaining lease term for our operating leases was 5 years.

We record our operating lease ROU assets at the amount of the lease liability plus any prepaid rent and initial direct costs, less any lease incentives and accrued rent. We record lease liabilities at commencement date based on the present value of lease payments over the lease term, which is discounted using our commencement date incremental borrowing rate. Our incremental borrowing rate considers the weighted average yields on our senior notes payable, adjusted for collateralization and tenor. As of December 31, 2019, the weighted-average discount rate for our operating leases was 3.85%. Payments that vary because of changes in facts or circumstances occurring after the commencement date are considered variable and are expensed in the period incurred. For our real estate leases, we elected the practical expedient to account for the lease and non-lease components as a single lease. We have not elected the practical expedient for our equipment leases and account for lease and non-lease components separately. As of December 31, 2019, ROU assets of $324 million and lease liabilities of $349 million were included as components of “Other assets” and “Other payables,” respectively, on our Condensed Consolidated Statements of Financial Condition.

Lease expense

Lease expense for operating lease payments is recognized on a straight-line basis over the lease term if the ROU asset has not been impaired or abandoned.

The components of lease expense were as follows.
$ in million
 
Three months ended December 31, 2019
Operating lease cost
 
$
23

Variable lease cost (1)
 
$
8


(1)
Includes payments for common area maintenance charges and other variable costs that are not reflected in the measurement of ROU assets and lease liabilities.

Finance leases and sublease income were immaterial for all periods presented. Short-term lease expense for the three months ended December 31, 2019 was immaterial.


28
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Lease liabilities

Maturities of lease liabilities as of December 31, 2019 were as follows.
Maturity of lease liabilities for fiscal year ended September 30,
 
$ in millions
Remainder of 2020
 
$
65

2021
 
91

2022
 
67

2023
 
54

2024
 
39

After 2024
 
73

Total lease payments
 
389

Less: interest
 
40

Present value of lease liabilities
 
$
349



Operating lease payments in the preceding table exclude $98 million of legally binding minimum lease payments for leases signed but not yet commenced. These leases are estimated to commence between fiscal year 2020 and 2021 with lease terms ranging from 2 years to 10 years.

Statement of cash flows supplemental information
$ in millions
 
Three months ended December 31, 2019
Cash outflows - lease liabilities
 
$
23

Non-cash - ROU assets recorded for new and modified leases
 
$
12



Minimum future lease commitments (under previous GAAP)

As of the date of adoption, our undiscounted minimum annual rental commitments under operating leases were materially unchanged from the disclosure in Note 17 of our 2019 Form 10-K, which is included in the following table.
Fiscal year ended September 30,
 
$ in millions
2020
 
$
103

2021
 
95

2022
 
79

2023
 
66

2024
 
49

Thereafter
 
127

Total
 
$
519




NOTE 10 – BANK DEPOSITS

Bank deposits include savings and money market accounts, certificates of deposit with RJ Bank, Negotiable Order of Withdrawal (“NOW”) accounts and demand deposits. The following table presents a summary of bank deposits including the weighted-average rate, the calculation of which was based on the actual deposit balances at each respective period.
 
 
December 31, 2019
 
September 30, 2019
$ in millions
 
Balance
 
Weighted-average rate
 
Balance
 
Weighted-average rate
Savings and money market accounts
 
$
21,896

 
0.17
%
 
$
21,654

 
0.25
%
Certificates of deposit
 
1,056

 
2.07
%
 
605

 
2.33
%
NOW accounts
 
6

 
0.01
%
 
6

 
0.01
%
Demand deposits (non-interest-bearing)
 
17

 
—

 
16

 
—

Total
 
$
22,975

 
0.26
%
 
$
22,281

 
0.31
%


29
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Total bank deposits in the preceding table exclude affiliate deposits of $164 million at December 31, 2019 and $163 million at September 30, 2019, all of which were held in a deposit account at RJ Bank on behalf of RJF.

Savings and money market accounts in the preceding table consist primarily of deposits that are cash balances swept from the client investment accounts maintained at Raymond James & Associates, Inc. (“RJ&A”) to RJ Bank. These balances are held in Federal Deposit Insurance Corporation (“FDIC”)-insured bank accounts through the Raymond James Bank Deposit Program (“RJBDP”). The aggregate amount of individual time deposit account balances that exceeded the FDIC insurance limit at December 31, 2019 was approximately $45 million.

The following table sets forth the scheduled maturities of certificates of deposit.
 
 
December 31, 2019
 
September 30, 2019
$ in millions
 
Denominations
greater than or
equal to $100,000
 
Denominations
less than $100,000
 
Denominations
greater than or
equal to $100,000
 
Denominations
less than $100,000
Three months or less
 
$
40

 
$
22

 
$
24

 
$
19

Over three through six months
 
59

 
19

 
26

 
21

Over six through twelve months
 
101

 
93

 
75

 
37

Over one through two years
 
21

 
108

 
32

 
36

Over two through three years
 
53

 
194

 
40

 
93

Over three through four years
 
69

 
137

 
66

 
47

Over four through five years
 
19

 
121

 
38

 
51

Total certificates of deposit
 
$
362

 
$
694

 
$
301

 
$
304



Interest expense on deposits, excluding interest expense related to affiliate deposits, is summarized in the following table.
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
Savings, money market, and NOW accounts
 
$
12

 
$
33

Certificates of deposit
 
4

 
2

Total interest expense on deposits
 
$
16

 
$
35




NOTE 11 – OTHER BORROWINGS
 
The following table details the components of other borrowings.
$ in millions
 
December 31, 2019
 
September 30, 2019
FHLB advances
 
$
875

 
$
875

Unsecured lines of credit
 
6

 
—

Mortgage notes payable and other
 
18

 
19

Total other borrowings
 
$
899

 
$
894



FHLB advances

Borrowings from the FHLB as of December 31, 2019 and September 30, 2019, were comprised of both floating and fixed-rate advances. As of December 31, 2019 and September 30, 2019, the floating-rate advances totaled $850 million. The interest rates on the floating-rate advances, which mature in December 2022, reset quarterly and are generally based on LIBOR. We use interest rate swaps to manage the risk of increases in interest rates associated with these floating-rate advances by converting the balances subject to variable interest rates to a fixed interest rate. Refer to Note 2 of our 2019 Form 10-K for information regarding these interest rate swaps, which are accounted for as hedging instruments. As of both December 31, 2019 and September 30, 2019, the fixed-rate advance totaled $25 million and bears interest at a fixed rate of 3.4%. This advance matures in October 2020. All of the advances were secured by a blanket lien granted to the FHLB on our residential mortgage loan portfolio. The weighted average interest rate on these FHLB advances as of December 31, 2019 and September 30, 2019 was 2.11% and 2.17%, respectively.


30
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Secured and unsecured financing arrangements

On February 19, 2019, RJF and RJ&A entered into an unsecured revolving credit facility agreement (the “Credit Facility”). The Credit Facility has a maturity date of February 2024 and the lenders include a number of financial institutions. This committed unsecured borrowing facility provides for maximum borrowings of up to $500 million, with a sublimit of $300 million for RJF, at variable rates of interest based on LIBOR, as adjusted for RJF’s credit rating. There were no borrowings outstanding on the Credit Facility as of December 31, 2019. There is a facility fee associated with the Credit Facility, which also varies with RJF’s credit rating. Based upon RJF’s credit rating as of December 31, 2019, the variable rate facility fee, which is applied to the committed amount, was 0.175% per annum.

In addition to the Credit Facility, we maintain various secured and unsecured lines of credit, which are generally utilized to finance certain fixed income securities or for cash management purposes. Borrowings during the period were generally day-to-day. The interest rates for these arrangements are variable and are based on the Fed Funds rate, LIBOR, a lenders prime rate, or the Canadian prime rate, as applicable. The weighted average interest rate on our outstanding borrowings as of December 31, 2019 was 2.87%.

We also have other collateralized financings included in “Securities sold under agreements to repurchase” and “Securities loaned” on our Condensed Consolidated Statements of Financial Condition. See Note 6 for information regarding our other collateralized financing arrangements.

Mortgage notes payable and other

Mortgage notes payable pertain to mortgage loans on certain of our corporate headquarters offices located in St. Petersburg, Florida. These mortgage loans are secured by land, buildings, and improvements.  These mortgage loans bear a fixed interest rate of 5.7% with repayment terms of monthly interest and principal debt service and have a January 2023 maturity.


NOTE 12 – INCOME TAXES

The income tax provision for interim periods is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items.  We estimate the annual effective tax rate quarterly based on the forecasted pretax results of our U.S. and non-U.S. operations. Items unrelated to current year ordinary income are recognized entirely in the period identified as a discrete item of tax.  These discrete items generally relate to changes in tax laws, adjustments to the actual liability determined upon filing tax returns, excess tax benefits related to share-based compensation and adjustments to previously recorded reserves for uncertain tax positions. For discussion of income tax accounting policies and other income tax related information, see Notes 2 and 16 of our 2019 Form 10-K.

Effective tax rate

Our effective income tax rate was 25.3% for the three months ended December 31, 2019, a slight increase compared with the 24.8% effective tax rate for fiscal year 2019.

Uncertain tax positions

We anticipate that the uncertain tax position liability balance will not change significantly over the next twelve months.


NOTE 13 – COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments and contingencies

Loan and underwriting commitments

In the normal course of business, we enter into commitments for fixed income and equity underwritings. As of December 31, 2019, we had two such open underwriting commitments, which were subsequently settled in open market transactions and none of which resulted in a significant loss.

We offer loans to prospective financial advisors and certain key revenue producers primarily for recruiting, transitional cost assistance, and retention purposes (see Note 2 of our 2019 Form 10-K for a discussion of our accounting policies governing these transactions).

31
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





These offers are contingent upon certain events occurring, including the individuals joining us and meeting certain conditions outlined in their offer. Our unfunded loan commitments related to such offers were insignificant as of December 31, 2019.

Commitments to extend credit and other credit-related financial instruments

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

The following table presents RJ Bank’s commitments to extend credit and other credit-related off-balance sheet financial instruments outstanding.
$ in millions
 
December 31, 2019
 
September 30, 2019
Open-end consumer lines of credit (primarily SBL)
 
$
10,091

 
$
9,328

Commercial lines of credit
 
$
1,566

 
$
1,527

Unfunded loan commitments
 
$
606

 
$
599

Standby letters of credit
 
$
45

 
$
40



Open-end consumer lines of credit primarily represent the unfunded amounts of RJ Bank loans to consumers that are secured by marketable securities at advance rates consistent with industry standards. The proceeds from repayment or, if necessary, the liquidation of collateral, which is monitored daily, are expected to satisfy the amounts drawn against these existing lines of credit. These lines of credit are primarily uncommitted, as we reserve the right to not make any advances or may terminate these lines at any time.
  
Because many of our lending commitments expire without being funded in whole or part, the contractual amounts are not estimates of our actual future credit exposure or future liquidity requirements. We maintain a reserve to provide for potential losses related to the unfunded lending commitments. See Note 7 for further discussion of this reserve for unfunded lending commitments.

RJ&A enters into margin lending arrangements which allow customers to borrow against the value of qualifying securities. Margin loans are collateralized by the securities held in the customer’s account at RJ&A. Collateral levels and established credit terms are monitored daily and we require customers to deposit additional collateral or reduce balances as necessary.

Investment commitments

We had unfunded commitments to various investments, including private equity investments and certain RJ Bank investments, of $44 million as of December 31, 2019.

Other commitments
 
Raymond James Tax Credit Funds, Inc. (“RJTCF”) sells investments in project partnerships to various LIHTC funds, which have third-party investors, and for which RJTCF serves as the managing member or general partner. RJTCF typically sells investments in project partnerships to LIHTC funds within 90 days of their acquisition. Until such investments are sold to LIHTC funds, RJTCF is responsible for funding investment commitments to such partnerships. As of December 31, 2019, RJTCF had committed approximately $197 million to project partnerships that had not yet been sold to LIHTC funds. Because we expect to sell these project partnerships to LIHTC funds and the equity funding events arise over future periods, the contractual commitments are not expected to impact our future liquidity requirements. RJTCF may also make short-term loans or advances to project partnerships and LIHTC funds.

As a part of our fixed income public finance operations, we enter into forward commitments to purchase agency MBS (see the discussion of these activities within Note 2 of our 2019 Form 10-K).  At December 31, 2019, we had $224 million principal amount of outstanding forward MBS purchase commitments, which were expected to be purchased within 90 days following commitment.  In order to hedge the market interest rate risk to which we would otherwise be exposed between the date of the commitment and the date of sale of the MBS, we enter into TBA security contracts with investors for generic MBS at specific rates and prices to be delivered on settlement dates in the future. We may be subject to loss if the timing of, or the actual amount of, the MBS differs significantly from the term and notional amount of the TBA security contract to which we entered.  These TBA securities and related purchase commitments are accounted for at fair value. As of December 31, 2019, the fair value of the TBA securities and the estimated fair value of the purchase commitments were insignificant.


32
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Guarantees

Our U.S. broker-dealer subsidiaries are required by federal law to be members of the Securities Investors Protection Corporation (“SIPC”). The SIPC fund provides protection up to $500 thousand per client for securities and cash held in client accounts, including a limitation of $250 thousand on claims for cash balances. We have purchased excess SIPC coverage through various syndicates of Lloyd’s of London. For RJ&A, our clearing broker-dealer, the additional protection currently provided has an aggregate firm limit of $750 million for cash and securities, including a sub-limit of $1.9 million per client for cash above basic SIPC. Account protection applies when a SIPC member fails financially and is unable to meet obligations to clients. This coverage does not protect against market fluctuations. RJF has provided an indemnity to Lloyd’s of London against any and all losses they may incur associated with the excess SIPC policies.

We guarantee the debt of one of our private equity investments. The amount of such debt, including the undrawn portion of a revolving credit facility, was $13 million as of December 31, 2019. The debt, which matures in 2021, is secured by substantially all of the assets of the borrower.

Legal and regulatory matter contingencies

In addition to any matters that may be specifically described in the following sections, in the normal course of our business, we have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our activities as a diversified financial services institution.

RJF and certain of its subsidiaries are subject to regular reviews and inspections by regulatory authorities and self-regulatory organizations. Reviews can result in the imposition of sanctions for regulatory violations, ranging from non-monetary censures to fines and, in serious cases, temporary or permanent suspension from conducting business, or limitations on certain business activities. In addition, regulatory agencies and self-regulatory organizations institute investigations from time to time into industry practices, which can also result in the imposition of such sanctions.

We may contest liability and/or the amount of damages, as appropriate, in each pending matter. Over the last several years, the level of litigation and investigatory activity (both formal and informal) by government and self-regulatory agencies has increased significantly in the financial services industry. There can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be material.

For many legal and regulatory matters, we are unable to estimate a range of reasonably possible loss as we cannot predict if, how or when such proceedings or investigations will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be. A large number of factors may contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental proceedings, potential fines and penalties); the matters present significant legal uncertainties; we have not engaged in settlement discussions; discovery is not complete; there are significant facts in dispute; and numerous parties are named as defendants (including where it is uncertain how liability might be shared among defendants). Subject to the foregoing, after consultation with counsel, we believe that the outcome of such litigation and regulatory proceedings will not have a material adverse effect on our consolidated financial condition. However, the outcome of such litigation and proceedings could be material to our operating results and cash flows for a particular future period, depending on, among other things, our revenues or income for such period.

There are certain matters for which we are unable to estimate the upper end of the range of reasonably possible loss. With respect to legal and regulatory matters for which management has been able to estimate a range of reasonably possible loss as of December 31, 2019, we estimated the upper end of the range of reasonably possible aggregate loss to be approximately $80 million in excess of the aggregate accruals for such matters.  Refer to Note 2 of our 2019 Form 10-K for a discussion of our criteria for recognizing liabilities for contingencies.

We may from time to time include in any descriptions of individual matters herein certain quantitative information about the plaintiff’s claim against us as alleged in the plaintiff’s pleadings or other public filings. Although this information may provide insight into the potential magnitude of a matter, it does not represent our estimate of reasonably possible loss or our judgment as to any currently appropriate accrual related thereto.



33
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

All of the components of other comprehensive income (“OCI”), net of tax, were attributable to RJF. The following table presents the net change in AOCI as well as the changes, and the related tax effects, of each component of AOCI.
$ in millions
 
Net investment hedges
 
Currency translations
 
Subtotal: net investment hedges and currency translations
 
Available- for-sale securities
 
Cash flow hedges
 
Total
Three months ended December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
AOCI as of beginning of period
 
$
110

 
$
(135
)
 
$
(25
)
 
$
21

 
$
(19
)
 
$
(23
)
OCI:
 
 
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications and taxes
 
(17
)
 
22

 
5

 
(2
)
 
14

 
17

Amounts reclassified from AOCI, before tax
 
—

 
—

 
—

 
—

 
—

 
—

Pre-tax net OCI
 
(17
)
 
22

 
5

 
(2
)
 
14

 
17

Income tax effect
 
4

 
—

 
4

 
1

 
(4
)
 
1

OCI for the period, net of tax
 
(13
)
 
22

 
9

 
(1
)
 
10

 
18

AOCI as of end of period
 
$
97

 
$
(113
)
 
$
(16
)
 
$
20

 
$
(9
)
 
$
(5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
AOCI as of beginning of period
 
$
88

 
$
(111
)
 
$
(23
)
 
$
(46
)
 
$
42

 
$
(27
)
Cumulative effect of adoption of ASU 2016-01
 
—

 
—

 
—

 
(4
)
 
—

 
(4
)
OCI:
 
 
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications and taxes
 
49

 
(50
)
 
(1
)
 
32

 
(24
)
 
7

Amounts reclassified from AOCI, before tax
 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Pre-tax net OCI
 
49

 
(50
)
 
(1
)
 
32

 
(25
)
 
6

Income tax effect
 
(12
)
 
—

 
(12
)
 
(10
)
 
8

 
(14
)
OCI for the period, net of tax
 
37

 
(50
)
 
(13
)
 
22

 
(17
)
 
(8
)
AOCI as of end of period
 
$
125

 
$
(161
)
 
$
(36
)
 
$
(28
)
 
$
25

 
$
(39
)


As of October 1, 2018, we adopted accounting guidance (ASU 2016-01) that generally requires changes in the fair value of equity securities to be recorded in net income. Accordingly, as of the date of adoption, we reclassified a cumulative unrealized gain on such securities, net of tax, from AOCI to retained earnings.

Reclassifications from AOCI to net income, excluding taxes, for the three months ended December 31, 2018 were recorded in “Interest expense” on the Condensed Consolidated Statements of Income and Comprehensive Income.

Our net investment hedges and cash flow hedges relate to our derivatives associated with RJ Bank’s business operations. See Note 2 of our 2019 Form 10-K and Note 5 for additional information on these derivatives.



34
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 15 – REVENUES

The following tables present our sources of revenues by segment. For further information about our significant accounting policies related to revenue recognition, see Note 2 of our 2019 Form 10-K. See Note 20 of this Form 10-Q for additional information on our segment results.
 
 
Three months ended December 31, 2019
$ in millions
 
Private Client Group
 
Capital Markets
 
Asset Management
 
RJ Bank
 
Other and intersegment eliminations
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Asset management and related administrative fees
 
$
782

 
$
2

 
$
176

 
$
—

 
$
(5
)
 
$
955

Brokerage revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Securities commissions:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual and other fund products
 
144

 
3

 
2

 
—

 
(1
)
 
148

Insurance and annuity products
 
101

 
—

 
—

 
—

 
—

 
101

Equities, ETFs and fixed income products
 
85

 
30

 
—

 
—

 
(1
)
 
114

Subtotal securities commissions
 
330


33


2


—


(2
)

363

Principal transactions (1)
 
17

 
82

 
—

 
—

 
(2
)
 
97

Total brokerage revenues
 
347


115


2


—


(4
)

460

Account and services fees:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund and annuity service fees
 
90

 
—

 
1

 
—

 
(1
)
 
90

RJBDP fees
 
105

 
—

 
—

 
—

 
(47
)
 
58

Client account and other fees
 
29

 
1

 
4

 
—

 
(4
)
 
30

Total account and service fees
 
224


1


5


—


(52
)

178

Investment banking:
 
 
 
 
 
 
 
 
 
 
 
 
Merger & acquisition and advisory
 
—

 
60

 
—

 
—

 
—

 
60

Equity underwriting
 
11

 
39

 
—

 
—

 
—

 
50

Debt underwriting
 
—

 
31

 
—

 
—

 
—

 
31

Total investment banking
 
11


130


—


—


—


141

Other:
 
 
 
 
 
 
 
 
 
 
 
 
Tax credit fund revenues
 
—

 
18

 
—

 
—

 
—

 
18

All other (1)
 
9

 
—

 
—

 
6

 
(4
)
 
11

Total other
 
9


18


—


6


(4
)

29

Total non-interest revenues
 
1,373


266


183


6


(65
)

1,763

Interest income (1)
 
49

 
8

 
1

 
231

 
8

 
297

Total revenues
 
1,422

 
274

 
184

 
237

 
(57
)
 
2,060

Interest expense
 
(8
)
 
(6
)
 
—

 
(21
)
 
(16
)
 
(51
)
Net revenues
 
$
1,414

 
$
268

 
$
184

 
$
216

 
$
(73
)
 
$
2,009


(1)
These revenues are generally not in scope of the accounting guidance for revenue from contracts with customers.


35
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





 
 
Three months ended December 31, 2018
$ in millions
 
Private Client Group
 
Capital Markets
 
Asset Management
 
RJ Bank
 
Other and intersegment eliminations
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Asset management and related administrative fees
 
$
707

 
$
2

 
$
161

 
$
—

 
$
(5
)
 
$
865

Brokerage revenues:
 
 
 
 
 
 
 
 
 
 
 

Securities commissions:
 
 
 
 
 
 
 
 
 
 
 

Mutual and other fund products
 
157

 
2

 
3

 
—

 
(2
)
 
160

Insurance and annuity products
 
104

 
—

 
—

 
—

 
—

 
104

Equities, ETFs and fixed income products
 
84

 
40

 
—

 
—

 
—

 
124

Subtotal securities commissions
 
345

 
42

 
3

 
—

 
(2
)
 
388

Principal transactions (1)
 
19

 
57

 
—

 
1

 
(1
)
 
76

Total brokerage revenues
 
364


99


3


1


(3
)

464

Account and services fees:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund and annuity service fees
 
83

 
—

 
1

 
—

 
(3
)
 
81

RJBDP fees
 
109

 
—

 
1

 
—

 
(41
)
 
69

Client account and other fees
 
33

 
—

 
7

 
—

 
(5
)
 
35

Total account and service fees
 
225


—


9


—


(49
)

185

Investment banking:
 
 
 
 
 
 
 
 
 
 
 
 
Merger & acquisition and advisory
 
—

 
85

 
—

 
—

 
—

 
85

Equity underwriting
 
7

 
27

 
—

 
—

 
1

 
35

Debt underwriting
 
—

 
17

 
—

 
—

 
—

 
17

Total investment banking
 
7


129


—


—


1


137

Other:
 
 
 
 
 
 
 
 
 
 
 
 
Tax credit fund revenues
 
—

 
19

 
—

 
—

 
—

 
19

All other (1)
 
7

 
2

 
—

 
5

 
4

 
18

Total other
 
7


21


—


5


4


37

Total non-interest revenues
 
1,310


251


173


6


(52
)

1,688

Interest income (1)
 
56

 
10

 
1

 
239

 
10

 
316

Total revenues
 
1,366


261


174


245


(42
)

2,004

Interest expense
 
(10
)
 
(8
)
 
—

 
(42
)
 
(13
)
 
(73
)
Net revenues
 
$
1,356


$
253


$
174


$
203


$
(55
)

$
1,931


(1)
These revenues are generally not in scope of the accounting guidance for revenue from contracts with customers.

At December 31, 2019 and September 30, 2019, net receivables related to contracts with customers were $320 million and $347 million, respectively.

We record deferred revenue from contracts with customers when payment is received prior to the performance of our obligation to the customer. Deferred revenue balances were not material as of December 31, 2019 and September 30, 2019.

We have elected the practical expedient allowable by the accounting guidance to not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less.



36
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 16 – INTEREST INCOME AND INTEREST EXPENSE

The following table details the components of interest income and interest expense.
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
Interest income:
 
 
 
 
Assets segregated pursuant to regulations
 
$
11

 
$
15

Trading instruments
 
6

 
7

Available-for-sale securities
 
18

 
16

Margin loans
 
27

 
32

Bank loans, net of unearned income
 
206

 
214

Loans to financial advisors
 
5

 
4

Corporate cash and all other
 
24

 
28

Total interest income
 
$
297


$
316

Interest expense:
 
 

 
 

Bank deposits
 
$
16

 
$
35

Trading instruments sold but not yet purchased
 
1

 
2

Brokerage client payables
 
3

 
6

Other borrowings
 
5

 
6

Senior notes payable
 
18

 
18

Other
 
8

 
6

Total interest expense
 
51


73

Net interest income
 
246

 
243

Bank loan loss (provision)/benefit
 
2

 
(16
)
Net interest income after bank loan loss (provision)/benefit
 
$
248

 
$
227



Interest expense related to bank deposits in the preceding table excludes interest expense associated with affiliate deposits, which has been eliminated in consolidation.


NOTE 17 – SHARE-BASED COMPENSATION

We have one share-based compensation plan for our employees, Board of Directors and non-employees (independent contractor financial advisors). Generally, we reissue our treasury shares under The Amended and Restated 2012 Stock Incentive Plan; however, we are also permitted to issue new shares. Annual share-based compensation awards are primarily issued during the first fiscal quarter of each year.  Our share-based compensation accounting policies are described in Note 2 of our 2019 Form 10-K.  Other information related to our share-based awards is presented in Note 21 of our 2019 Form 10-K.  

During the three months ended December 31, 2019, we granted approximately 1.5 million RSUs to employees and outside members of our Board of Directors with a weighted-average grant-date fair value of $89.12. For the three months ended December 31, 2019, total compensation expense for RSUs granted to our employees and members of our Board of Directors was $40 million, compared with $38 million for the three months ended December 31, 2018.

As of December 31, 2019, there were $237 million of total pre-tax compensation costs not yet recognized (net of estimated forfeitures) related to RSUs granted to employees and members of our Board of Directors, including those granted during the three months ended December 31, 2019. These costs are expected to be recognized over a weighted-average period of 3.5 years.



37
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 18 – REGULATORY CAPITAL REQUIREMENTS

RJF, as a bank holding company and financial holding company, RJ Bank, our broker-dealer subsidiaries and Raymond James Trust, N.A. (“RJ Trust”) are subject to capital requirements by various regulatory authorities. Capital levels of each entity are monitored to ensure compliance with our various regulatory capital requirements.  Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on our financial results.

As a bank holding company, RJF is subject to the risk-based capital requirements of the Fed. These risk-based capital requirements are expressed as capital ratios that compare measures of regulatory capital to risk-weighted assets, which involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory guidelines. RJF’s and RJ Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

RJF and RJ Bank are required to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), Tier 1 capital to average assets (as defined), and under rules defined under the Basel III capital framework, Common equity Tier 1 capital (“CET1”) to risk-weighted assets. RJF and RJ Bank each calculate these ratios under the Basel III standardized approach in order to assess compliance with both regulatory requirements and their internal capital policies.  In order to maintain our ability to take certain capital actions, including dividends and common equity repurchases, and to make bonus payments, we must hold a capital conservation buffer above our minimum risk-based capital requirements. As of December 31, 2019, both RJF’s and RJ Bank’s capital levels exceeded the capital conservation buffer requirement and were each categorized as “well-capitalized.”

For further discussion of regulatory capital requirements applicable to certain of our businesses and subsidiaries, see Note 22 of our 2019 Form 10-K.

To meet requirements for capital adequacy purposes or to be categorized as “well-capitalized,” RJF must maintain minimum CET1, Tier 1 capital, Total capital and Tier 1 leverage amounts and ratios as set forth in the following table.
 
 
Actual
 
Requirement for capital
adequacy purposes
 
To be well-capitalized
under regulatory provisions
$ in millions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
RJF as of December 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
CET1
 
$
6,230

 
24.8
%
 
$
1,133

 
4.5
%
 
$
1,636

 
6.5
%
Tier 1 capital
 
$
6,230

 
24.8
%
 
$
1,510

 
6.0
%
 
$
2,014

 
8.0
%
Total capital
 
$
6,465

 
25.7
%
 
$
2,014

 
8.0
%
 
$
2,517

 
10.0
%
Tier 1 leverage
 
$
6,230

 
15.8
%
 
$
1,573

 
4.0
%
 
$
1,967

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
RJF as of September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
CET1
 
$
5,971

 
24.8
%
 
$
1,085

 
4.5
%
 
$
1,567

 
6.5
%
Tier 1 capital
 
$
5,971

 
24.8
%
 
$
1,446

 
6.0
%
 
$
1,928

 
8.0
%
Total capital
 
$
6,207

 
25.8
%
 
$
1,928

 
8.0
%
 
$
2,410

 
10.0
%
Tier 1 leverage
 
$
5,971

 
15.7
%
 
$
1,525

 
4.0
%
 
$
1,906

 
5.0
%


RJF’s Tier 1 capital and Total capital ratios at December 31, 2019 were largely unchanged compared to September 30, 2019, as the impacts of the addition of ROU assets associated with the new lease accounting standard, an increase in market risk-weighted assets related to our trading positions, and growth of the bank loan portfolio were largely offset by positive earnings during the period.


38
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





To meet the requirements for capital adequacy or to be categorized as “well-capitalized,” RJ Bank must maintain CET1, Tier 1 capital, Total capital and Tier 1 leverage amounts and ratios as set forth in the following table.
 
 
Actual
 
Requirement for capital
adequacy purposes
 
To be well-capitalized
under regulatory provisions
$ in millions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
RJ Bank as of December 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
CET1
 
$
2,289

 
13.3
%
 
$
775

 
4.5
%
 
$
1,120

 
6.5
%
Tier 1 capital
 
$
2,289

 
13.3
%
 
$
1,034

 
6.0
%
 
$
1,378

 
8.0
%
Total capital
 
$
2,504

 
14.5
%
 
$
1,378

 
8.0
%
 
$
1,723

 
10.0
%
Tier 1 leverage
 
$
2,289

 
8.8
%
 
$
1,037

 
4.0
%
 
$
1,297

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
RJ Bank as of September 30, 2019:
 
 

 
 

 
 

 
 

 
 

 
 

CET1
 
$
2,246

 
13.2
%
 
$
764

 
4.5
%
 
$
1,103

 
6.5
%
Tier 1 capital
 
$
2,246

 
13.2
%
 
$
1,018

 
6.0
%
 
$
1,358

 
8.0
%
Total capital
 
$
2,458

 
14.5
%
 
$
1,358

 
8.0
%
 
$
1,697

 
10.0
%
Tier 1 leverage
 
$
2,246

 
8.8
%
 
$
1,021

 
4.0
%
 
$
1,276

 
5.0
%


RJ Bank’s Tier 1 capital ratio at December 31, 2019 increased slightly compared to September 30, 2019 due to the impact of positive earnings during the current period, partially offset by growth of the bank loan portfolio.

Certain of our broker-dealer subsidiaries are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934. The following table presents the net capital position of RJ&A.
$ in millions
 
December 31, 2019
 
September 30, 2019
Raymond James & Associates, Inc.:
 
 
 
 
(Alternative Method elected)
 
 
 
 
Net capital as a percent of aggregate debit items
 
41.6
%
 
39.7
%
Net capital
 
$
1,081

 
$
1,056

Less: required net capital
 
(52
)
 
(53
)
Excess net capital
 
$
1,029

 
$
1,003



As of December 31, 2019, RJFS, RJ Ltd., RJ Trust and all of our other active regulated domestic and international subsidiaries were in compliance with and exceeded all applicable capital requirements.



39
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 19 – EARNINGS PER SHARE

The following table presents the computation of basic and diluted earnings per common share.
 
 
Three months ended December 31,
in millions, except per share amounts
 
2019
 
2018
Income for basic earnings per common share:
 
 
 
 
Net income
 
$
268

 
$
249

Less allocation of earnings and dividends to participating securities
 
(1
)
 
—

Net income attributable to RJF common shareholders
 
$
267

 
$
249

Income for diluted earnings per common share:
 
 

 
 

Net income
 
$
268

 
$
249

Less allocation of earnings and dividends to participating securities
 
(1
)
 
—

Net income attributable to RJF common shareholders
 
$
267

 
$
249

Common shares:
 
 

 
 

Average common shares in basic computation
 
138.3

 
144.2

Dilutive effect of outstanding stock options and certain RSUs
 
3.2

 
3.1

Average common shares used in diluted computation
 
141.5

 
147.3

Earnings per common share:
 
 

 
 

Basic
 
$
1.93

 
$
1.73

Diluted
 
$
1.89

 
$
1.69

Stock options and certain RSUs excluded from weighted-average diluted common shares because their effect would be antidilutive
 
1.5

 
1.8



The allocation of earnings and dividends to participating securities in the preceding table represents dividends paid during the period to participating securities plus an allocation of undistributed earnings to participating securities.  Participating securities represent unvested restricted stock and certain RSUs. Participating securities and related dividends paid on these participating securities were insignificant for the three months ended December 31, 2019 and 2018.  Undistributed earnings are allocated to participating securities based upon their right to share in earnings if all earnings for the period had been distributed.

Dividends per common share declared and paid are detailed in the following table for each respective period.
 
Three months ended December 31,
 
2019
 
2018
Dividends per common share - declared
$
0.37

 
$
0.34

Dividends per common share - paid
$
0.34

 
$
0.30




NOTE 20 – SEGMENT INFORMATION

We currently operate through the following five segments: Private Client Group (“PCG”); Capital Markets; Asset Management; RJ Bank; and Other.

The segments are determined based upon factors such as the services provided and the distribution channels served and are consistent with how we assess performance and determine how to allocate our resources throughout our subsidiaries. For a further discussion of our segments, see Note 24 of our 2019 Form 10-K.


40
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following tables present information concerning operations in these segments.
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
Net revenues:
 
 
 
 
Private Client Group
 
$
1,414

 
$
1,356

Capital Markets
 
268

 
253

Asset Management
 
184

 
174

RJ Bank
 
216

 
203

Other
 
(8
)
 
2

Intersegment eliminations
 
(65
)
 
(57
)
Total net revenues
 
$
2,009

 
$
1,931

Pre-tax income/(loss):
 
 
 
 
Private Client Group
 
$
153

 
$
164

Capital Markets
 
29

 
12

Asset Management
 
73

 
64

RJ Bank
 
135

 
110

Other
 
(31
)
 
(18
)
Total pre-tax income
 
$
359

 
$
332



No individual client accounted for more than ten percent of revenues in any of the periods presented.
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
Net interest income/(expense):
 
 
 
 
Private Client Group
 
$
41

 
$
46

Capital Markets
 
2

 
2

Asset Management
 
1

 
1

RJ Bank
 
210

 
197

Other and intersegment eliminations
 
(8
)
 
(3
)
Net interest income
 
$
246

 
$
243



The following table presents our total assets on a segment basis.
$ in millions
 
December 31, 2019
 
September 30, 2019
Total assets:
 
 
 
 
Private Client Group
 
$
9,755

 
$
9,042

Capital Markets
 
2,207

 
2,287

Asset Management
 
381

 
401

RJ Bank
 
26,283

 
25,516

Other
 
1,528

 
1,584

Total
 
$
40,154

 
$
38,830



The following table presents goodwill, which was included in our total assets, on a segment basis.
$ in millions
 
December 31, 2019
 
September 30, 2019
Goodwill:
 
 
 
 
Private Client Group
 
$
276

 
$
275

Capital Markets
 
120

 
120

Asset Management
 
69

 
69

Total
 
$
465

 
$
464




41
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





We have operations in the U.S., Canada and Europe. Substantially all long-lived assets are located in the U.S.  The following table presents our net revenues and pre-tax income classified by major geographic area in which they were earned.
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
Net revenues:
 
 
 
 
U.S.
 
$
1,875

 
$
1,796

Canada
 
95

 
99

Europe
 
39

 
36

Total
 
$
2,009

 
$
1,931

Pre-tax income/(loss):
 
 
 
 

U.S.
 
$
352

 
$
330

Canada
 
8

 
16

Europe (1)
 
(1
)
 
(14
)
Total
 
$
359

 
$
332


(1)
The pre-tax loss in Europe for the three months ended December 31, 2018 reflects a $15 million loss on the sale of our operations related to research, sales and trading of European equities incurred during the first fiscal quarter of 2019.

The following table presents our total assets by major geographic area in which they were held.
$ in millions
 
December 31, 2019
 
September 30, 2019
Total assets:
 
 
 
 
U.S.
 
$
37,285

 
$
35,978

Canada
 
2,751

 
2,754

Europe
 
118

 
98

Total
 
$
40,154

 
$
38,830



The following table presents goodwill, which was included in our total assets, classified by major geographic area in which it was held.
$ in millions
 
December 31, 2019
 
September 30, 2019
Goodwill:
 
 
 
 
U.S.
 
$
433

 
$
433

Canada
 
24

 
23

Europe
 
8

 
8

Total
 
$
465

 
$
464





42

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INDEX
 
 
PAGE
Factors affecting “forward-looking statements”
44
Introduction
44
Executive overview
44
Segments
46
Reconciliation of GAAP measures to non-GAAP financial measures
47
Net interest analysis
47
Results of Operations
 
Private Client Group
49
Capital Markets
52
Asset Management
53
RJ Bank
55
Other
58
Certain statistical disclosures by bank holding companies
58
Liquidity and capital resources
59
Statement of financial condition analysis
62
Contractual obligations
63
Regulatory
63
Critical accounting estimates
63
Recent accounting developments
64
Off-balance sheet arrangements
64
Effects of inflation
64
Risk management
64


43
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Factors affecting “forward-looking statements”

Certain statements made in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning future strategic objectives, business prospects, anticipated savings, financial results (including expenses, earnings, liquidity, cash flow and capital expenditures), industry or market conditions, demand for and pricing of our products, acquisitions and divestitures, anticipated results of litigation, our effective tax rate, regulatory developments, effects of accounting pronouncements, and general economic conditions.  In addition, words such as “believes,” “expects,” “anticipates,” “plans,” “estimates,” “projects,” and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would,” as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions.  Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements.  We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our filings with the SEC from time to time, including our most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q, which are available at www.raymondjames.com and the SEC’s website at www.sec.gov. We expressly disclaim any obligation to update any forward-looking statement in the event it later turns out to be inaccurate, whether as a result of new information, future events or otherwise.

Introduction

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

We operate as a financial holding company and bank holding company. Results in the businesses in which we operate are highly correlated to general economic conditions and, more specifically, to the direction of the U.S. equity and fixed income markets, changes in interest rates, market volatility, corporate and mortgage lending markets and commercial and residential credit trends.  Overall market conditions, 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, including investors, borrowers, and competitors, impacting their level of participation in the financial markets. These factors also impact the level of investment banking activity and asset valuations, which ultimately affect our business results.

Executive overview

Three months ended December 31, 2019 compared with the three months ended December 31, 2018

Net revenues of $2.01 billion increased $78 million, or 4%. Pre-tax income of $359 million increased $27 million, or 8%. Our net income of $268 million increased $19 million, or 8%, and our earnings per diluted share were $1.89, reflecting a 12% increase. We achieved an annualized return on equity (“ROE”) during the three months ended December 31, 2019 of 16.0%, compared with 15.9% for the prior year quarter, and an annualized return on tangible common equity (“ROTCE”) (1) of 17.5%, compared with 17.6% for the prior year quarter.

The $78 million increase in net revenues compared with the prior year quarter reflected higher asset management and related administrative fees, primarily attributable to higher Private Client Group assets in fee-based accounts at the beginning of the quarter, which were 12% higher than fee-based assets as of the beginning of the prior year quarter. Fee-based assets as of December 31, 2019 grew 9% compared with the end of the previous quarter, which will impact asset management and related administrative fees in our second fiscal quarter of 2020.

Compensation, commissions and benefits expense increased $86 million, or 7%, due to an increase in compensable net revenues, which primarily include asset management and related administrative fees, brokerage revenues, and investment banking revenues, as well as increased staffing levels required to support our continued growth and regulatory compliance requirements.

Non-compensation expenses decreased $35 million, or 10%, primarily due to a $2 million loan loss benefit in the current year quarter compared with a $16 million loan loss provision for the prior year quarter, as well as a $15 million loss on the sale of our operations related to research, sales and trading of European equities that occurred in the prior year quarter.


(1) “Return on tangible common equity” is a non-GAAP financial measure. Please see the “Reconciliation of GAAP measures to non-GAAP financial measures” in this MD&A for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure, and for other important disclosures.

44
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Our effective income tax rate was 25.3% for the three months ended December 31, 2019, a slight increase compared with the 24.8% effective tax rate for fiscal year 2019. We estimate our effective income tax rate to be approximately 25% for the remainder of fiscal year 2020. Our future effective income tax rate may be impacted positively or negatively by non-taxable items (such as gains or losses earned on our company-owned life insurance and tax-exempt interest), non-deductible expenses (such as meals and entertainment and certain executive compensation), as well as vesting and exercises of equity compensation.

During the three months ended December 31, 2019, we repurchased 126 thousand shares of common stock under our Board of Directors’ share repurchase authorization for $11 million at an average price of approximately $89.30 per share. As of December 31, 2019, we had $739 million of availability remaining under this authorization.

A summary of our financial results by segment as compared to the prior year quarter is as follows:

•
PCG segment net revenues of $1.41 billion increased 4%, while pre-tax income of $153 million decreased 7%. The increase in net revenues was primarily attributable to an increase in asset management and related administrative fees due to higher assets in fee-based accounts. Non-interest expenses increased $69 million, or 6%, primarily resulting from an increase in compensation expenses due to the growth in compensable net revenues and higher staffing levels to support our continued growth and regulatory compliance requirements. Pre-tax income decreased despite an increase in net revenues due to a shift in the revenue mix, as net interest income and RJBDP fees from third-party banks, which have no associated direct payout expense, declined due to lower short-term interest rates. Meanwhile, revenues that have an associated direct payout expense (e.g., asset management and related administrative fees) increased.

•
Capital Markets net revenues of $268 million increased 6% and pre-tax income of $29 million increased 142%. The increase in net revenues was primarily due to an increase in fixed income brokerage revenues, as well as higher debt and equity underwriting revenues. These increases were partially offset by a decline in merger & acquisition and advisory revenues and lower equity brokerage revenues. Non-interest expenses decreased slightly, as the prior year impact of the aforementioned $15 million loss on the sale of our operations related to research, sales and trading of European equities was partially offset by higher compensation expense.

•
Our Asset Management segment net revenues of $184 million increased 6% and pre-tax income of $73 million increased 14%. The increase in net revenues was driven by growth in Private Client Group assets in fee-based accounts, which increased both in programs managed by the Asset Management segment and in other asset-based programs for which the segment provides administrative support.

•
RJ Bank net revenues of $216 million increased 6% and pre-tax income of $135 million increased 23%. The increase in net revenues reflected higher net interest income due to growth in interest-earning assets, which more than offset the lower net interest margin caused by lower short-term interest rates. Non-interest expenses decreased $12 million, or 13%, due to a $2 million loan loss benefit compared with a $16 million loan loss provision in the prior year quarter, partially offset by an increase in fees for RJBDP paid to PCG.

•
Our Other segment reflected a pre-tax loss that was $13 million larger compared to the prior year quarter, the result of a modest valuation loss on private equity investments, compared with gains in the prior year quarter, and lower interest income on corporate cash balances due to a decline in interest rates. Non-interest expenses increased $3 million, or 15%, primarily due to higher compensation-related expenses.


45
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Segments

We currently operate through five segments. Our business segments are PCG, Capital Markets, Asset Management and RJ Bank. Our Other segment includes our private equity investments, interest income on certain corporate cash balances, and certain corporate overhead costs of RJF, including the interest costs on our public debt.

The following table presents our consolidated and segment net revenues and pre-tax income/(loss) for the periods indicated.
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
 
% change
Total company
 
 
 
 
 
 
Net revenues
 
$
2,009

 
$
1,931

 
4
 %
Pre-tax income
 
$
359

 
$
332

 
8
 %
 
 
 
 
 
 
 
Private Client Group
 
 

 
 

 
 
Net revenues
 
$
1,414

 
$
1,356

 
4
 %
Pre-tax income
 
$
153

 
$
164

 
(7
)%
 
 
 
 
 
 

Capital Markets
 
 

 
 

 

Net revenues
 
$
268

 
$
253

 
6
 %
Pre-tax income
 
$
29

 
$
12

 
142
 %
 
 
 
 
 
 

Asset Management
 
 

 
 

 

Net revenues
 
$
184

 
$
174

 
6
 %
Pre-tax income
 
$
73

 
$
64

 
14
 %
 
 
 
 
 
 

RJ Bank
 
 

 
 

 

Net revenues
 
$
216

 
$
203

 
6
 %
Pre-tax income
 
$
135

 
$
110

 
23
 %
 
 
 
 
 
 

Other
 
 

 
 

 

Net revenues
 
$
(8
)
 
$
2

 
NM

Pre-tax loss
 
$
(31
)
 
$
(18
)
 
(72
)%
 
 
 
 
 
 
 
Intersegment eliminations
 
 

 
 

 
 
Net revenues
 
$
(65
)
 
$
(57
)
 
NM



46
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Reconciliation of GAAP measures to non-GAAP financial measures

We utilize certain non-GAAP financial measures to aid in, and enhance, the understanding of our financial results and related measures. These non-GAAP financial measures have been separately identified in this document. We believe that annualized return on tangible common equity is meaningful to investors as this measure facilitates comparison of our results to the results of other companies. This non-GAAP financial measure should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be comparable to similarly titled non-GAAP financial measures of other companies. The following table provides a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure for the periods indicated.
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
Average equity
 
$
6,712

 
$
6,256

Less:
 
 
 
 
Average goodwill and identifiable intangible assets, net
 
610

 
636

Average deferred tax liabilities, net
 
(30
)
 
(33
)
Average tangible common equity
 
$
6,132

 
$
5,653

 
 
 
 
 
Annualized return on equity
 
16.0
%
 
15.9
%
Annualized return on tangible common equity
 
17.5
%
 
17.6
%

Annualized return on equity is computed by dividing annualized net income for the period indicated by average equity for each respective period or, in the case of annualized return on tangible common equity, computed by dividing annualized net income by average tangible common equity for each respective period.

Average equity is computed by adding the total equity attributable to Raymond James Financial, Inc. as of the date indicated to the prior quarter-end total, and dividing by two, or in the case of average tangible common equity, computed by adding tangible common equity as of the date indicated to the prior quarter-end total, and dividing by two.

Net interest analysis

During our fourth fiscal quarter of 2019, the Federal Reserve decreased its benchmark short-term interest rate twice, each time by 25 basis points, and implemented a third decrease of 25 basis points in October 2019. These decreases in short-term interest rates have had a negative impact on our first fiscal quarter of 2020 results, as we have certain assets and liabilities, primarily held in our PCG, RJ Bank and Other segments, which are sensitive to changes in interest rates. Fees we earn from third-party banks on client cash balances swept to such banks as part of RJBDP are also sensitive to changes in interest rates.

Given the relationship between our interest-sensitive assets and liabilities held in each of these segments and the nature of fees we earn from third-party banks on the RJBDP, decreases in short-term interest rates generally result in an overall decrease in our net earnings, although the magnitude of the impact to our net interest margin depends on the yields on interest-earning assets relative to the cost of interest-bearing liabilities, including deposit rates paid to clients on their cash balances. Conversely, any increases in short-term interest rates and/or decreases in the deposit rates paid to clients generally have a positive impact on our earnings.

Refer to the discussion of the specific components of our net interest income within the “Management’s Discussion and Analysis of Financial Condition - Results of Operations” of our PCG, RJ Bank, and Other segments. Also refer to “Management’s Discussion and Analysis of Financial Condition - Results of Operations - Private Client Group - Clients’ domestic cash sweep balances” for further information on the RJBDP.


47
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


The following table presents our consolidated average balances, interest income and expense and the related yields and rates. Average balances are calculated on a daily basis, with the exception of Loans to financial advisors, net and Corporate cash and all other, which are calculated based on the average of the end-of-month balances for each month within the period.
 
 
Three months ended December 31,
 
 
2019
 
2018
$ in millions
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/cost
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/cost
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Assets segregated pursuant to regulations
 
$
2,323

 
$
11

 
1.85
%
 
$
2,431

 
$
15

 
2.43
%
Trading instruments
 
765

 
6

 
3.05
%
 
722

 
7

 
3.86
%
Available-for-sale securities
 
3,089

 
18

 
2.30
%
 
2,717

 
16

 
2.32
%
Margin loans
 
2,438

 
27

 
4.51
%
 
2,726

 
32

 
4.68
%
Bank loans, net of unearned income and deferred expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
8,078

 
86

 
4.15
%
 
7,763

 
91

 
4.58
%
CRE construction loans
 
233

 
3

 
4.87
%
 
171

 
2

 
5.62
%
CRE loans
 
3,611

 
37

 
4.00
%
 
3,558

 
41

 
4.55
%
Tax-exempt loans
 
1,225

 
8

 
3.36
%
 
1,284

 
9

 
3.33
%
Residential mortgage loans
 
4,641

 
37

 
3.19
%
 
3,891

 
32

 
3.32
%
SBL and other
 
3,337

 
34

 
3.97
%
 
3,102

 
36

 
4.58
%
Loans held for sale
 
161

 
1

 
4.06
%
 
186

 
3

 
5.39
%
Total bank loans, net
 
21,286

 
206

 
3.85
%
 
19,955

 
214

 
4.27
%
Loans to financial advisors, net
 
979

 
5

 
2.10
%
 
916

 
4

 
1.92
%
Corporate cash and all other
 
4,784

 
24

 
2.00
%
 
4,832

 
28

 
2.31
%
Total interest-earning assets
 
$
35,664


$
297

 
3.33
%
 
$
34,299


$
316

 
3.69
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 

 
 

 
 

 
 

 
 

Bank deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
782

 
$
4

 
2.19
%
 
$
462

 
$
2

 
1.98
%
Savings, money market and NOW accounts
 
21,649

 
12

 
0.21
%
 
20,476

 
33

 
0.65
%
Trading instruments sold but not yet purchased
 
285

 
1

 
1.96
%
 
297

 
2

 
2.85
%
Brokerage client payables
 
3,197

 
3

 
0.37
%
 
3,544

 
6

 
0.68
%
Other borrowings
 
893

 
5

 
2.20
%
 
947

 
6

 
2.43
%
Senior notes payable
 
1,550

 
18

 
4.71
%
 
1,550

 
18

 
4.69
%
Other
 
667

 
8

 
3.96
%
 
752

 
6

 
3.20
%
Total interest-bearing liabilities
 
$
29,023

 
$
51

 
0.68
%
 
$
28,028

 
$
73

 
1.05
%
Net interest income
 
 
 
$
246

 
 
 
 
 
$
243

 
 

Nonaccrual loans are included in the average loan balances in the preceding table. Any payments received for corporate nonaccrual loans are applied entirely to principal. Interest income on residential mortgage nonaccrual loans is recognized on a cash basis.

Fee income on bank loans included in interest income for the three months ended December 31, 2019 and 2018 was $4 million and $5 million, respectively.

The yield on tax-exempt loans in the preceding table is presented on a taxable-equivalent basis utilizing the applicable federal statutory rates for each of the years presented.


48
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Results of Operations – Private Client Group

For an overview of our PCG segment operations, as well as a description of the key factors impacting our PCG results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Form 10-K.

Operating results
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
 
% change
Revenues:
 
 
 
 
 
 
Asset management and related administrative fees
 
$
782

 
$
707

 
11
 %
Brokerage revenues:
 
 
 
 
 


Mutual and other fund products
 
144

 
157

 
(8
)%
Insurance and annuity products
 
101

 
104

 
(3
)%
Equities, ETFs and fixed income products
 
102

 
103

 
(1
)%
Total brokerage revenues
 
347

 
364

 
(5
)%
Account and service fees:
 
 
 
 
 


Mutual fund and annuity service fees
 
90

 
83

 
8
 %
RJBDP fees:
 
 
 
 
 


Third-party banks
 
58

 
68

 
(15
)%
RJ Bank
 
47

 
41

 
15
 %
Client account and other fees
 
29

 
33

 
(12
)%
Total account and service fees
 
224

 
225

 
—

Investment banking
 
11

 
7

 
57
 %
Interest income
 
49

 
56

 
(13
)%
All other
 
9

 
7

 
29
 %
Total revenues
 
1,422


1,366


4
 %
Interest expense
 
(8
)
 
(10
)
 
(20
)%
Net revenues
 
1,414

 
1,356

 
4
 %
Non-interest expenses:
 
 

 
 

 


Financial advisor compensation and benefits
 
857

 
803

 
7
 %
Administrative compensation and benefits
 
247

 
229

 
8
 %
Total compensation, commissions and benefits
 
1,104

 
1,032

 
7
 %
Non-compensation expenses:
 
 
 
 
 


Communications and information processing
 
59

 
58

 
2
 %
Occupancy and equipment
 
44

 
38

 
16
 %
Business development
 
27

 
27

 
—

Professional fees
 
8

 
9

 
(11
)%
All other
 
19

 
28

 
(32
)%
Total non-compensation expenses
 
157

 
160

 
(2
)%
Total non-interest expenses
 
$
1,261

 
$
1,192

 
6
 %
Pre-tax income
 
$
153

 
$
164

 
(7
)%


49
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Selected key metrics

PCG client asset balances:
 
 
As of
$ in billions
 
December 31,
2019
 
September 30,
2019
 
December 31,
2018
 
September 30,
2018
Assets under administration (“AUA”)
 
$
855.2

 
$
798.4

 
$
690.7

 
$
755.7

Assets in fee-based accounts (1)
 
$
444.2

 
$
409.1

 
$
338.8

 
$
366.3

Percent of AUA in fee-based accounts
 
51.9
%
 
51.2
%
 
49.1
%
 
48.5
%

(1)
A portion of our “Assets in fee-based accounts” is invested in “managed programs” overseen by our Asset Management segment, specifically our Asset Management Services division of RJ&A (“AMS”). These assets are included in our Financial assets under management as disclosed in the “Selected key metrics” section of our “Management’s Discussion and Analysis - Results of Operations - Asset Management.”

Fee-based accounts within our PCG segment are comprised of a wide array of products and programs that we offer our clients. The majority of assets in fee-based accounts within our PCG segment are invested in programs for which our financial advisors provide investment advisory services, either on a discretionary or non-discretionary basis. Administrative services for such accounts (e.g., record-keeping) are generally performed by our Asset Management segment and, as a result, a portion of the related revenues is shared with the Asset Management segment.

We also offer our clients fee-based accounts that are invested in “managed programs” overseen by AMS, which is part of our Asset Management segment. Fee-billable assets invested in managed programs are included in both “Assets in fee-based accounts” in the preceding table and “Financial assets under management” in the Asset Management segment. Revenues related to managed programs are shared by our PCG and Asset Management segments. The Asset Management segment receives a higher portion of the revenues related to accounts invested in managed programs, as compared to the portion received for non-managed programs, as it is performing portfolio management services in addition to administrative services.

The vast majority of the revenues we earn from fee-based accounts are recorded in “Asset management and related administrative fees” on our Condensed Consolidated Statements of Income and Comprehensive Income. Fees received from such accounts are based on the value of client assets in fee-based accounts and vary based on the specific account types in which the client participates and the level of assets in the client relationship. As fees for substantially all of such accounts are billed based on balances as of the beginning of the quarter, revenues from fee-based accounts may not be immediately impacted by changes in asset values, but rather the impacts are seen in the following quarter.

PCG assets under administration increased compared with the prior year due to the net addition of financial advisors and equity market appreciation. In addition, PCG assets in fee-based accounts continued to increase as a percentage of overall PCG assets under administration due to clients’ preference for fee-based alternatives versus transaction-based accounts. As a result of the continued shift to fee-based accounts, a larger portion of our PCG revenues are more directly impacted by market movements.

Financial advisors:
 
 
December 31, 2019
 
September 30, 2019
 
December 31, 2018
Employees
 
3,331

 
3,301

 
3,166

Independent contractors
 
4,729

 
4,710

 
4,649

Total advisors
 
8,060

 
8,011

 
7,815


The number of financial advisors increased primarily due to continued financial advisor recruiting and high levels of retention, partially offset by planned financial advisor retirements during the December quarter, which is a seasonally typical period for such activity.


50
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Clients’ domestic cash sweep balances:
 
 
As of
$ in millions
 
December 31, 2019
 
September 30, 2019
 
December 31, 2018
RJBDP
 
 
 
 
 
 
RJ Bank
 
$
21,891

 
$
21,649

 
$
21,138

Third-party banks
 
15,061

 
14,043

 
18,320

Subtotal RJBDP
 
36,952

 
35,692

 
39,458

Money market funds
 
—

 
—

 
4,436

Client Interest Program (“CIP”)
 
2,528

 
2,022

 
2,935

Total clients’ domestic cash sweep balances
 
$
39,480

 
$
37,714

 
$
46,829

Average yield on RJBDP - third-party banks
 
1.64
%
 
1.83
%
 
1.74
%

A significant portion of our clients’ cash is included in the RJBDP, a multi-bank sweep program in which clients’ cash deposits in their accounts are swept into interest-bearing deposit accounts at RJ Bank and various third-party banks. We earn servicing fees for the administrative services we provide related to our clients’ deposits that are swept to such banks as part of the RJBDP. The amounts from third-party banks are variable in nature and fluctuate based on client cash balances in the program, as well as the level of short-term interest rates and the interest paid to clients by the third-party banks on balances in the RJBDP. The “Average yield on RJBDP - third party banks” in the preceding table is computed by dividing RJBDP fees from third-party banks, which are net of the interest paid to clients by the third-party banks, by the average daily RJBDP balances at third-party banks. The PCG segment also earns RJBDP servicing fees from RJ Bank, which are based on the number of accounts that are swept to RJ Bank. The fees from RJ Bank are eliminated in consolidation.

RJBDP fees from third-party banks and the average yield on RJBDP (third-party banks) were negatively impacted by the decrease in short-term interest rates implemented by the Fed toward the beginning of our first quarter of fiscal 2020 and two short-term interest rate decreases implemented during the preceding fiscal quarter. The impact on our earnings of any future fluctuations in short-term interest rates will be largely dependent upon the change in the deposit rate paid on client cash balances. Any additional decreases in short-term interest rates, increases in deposit rates paid to clients, and/or a significant decline in our clients’ cash balances will likely have a negative impact on our earnings. Further, PCG segment results are impacted by changes in the allocation of client cash balances in the RJBDP between RJ Bank and third-party banks. PCG generally earns a higher rate on cash held at third-party banks.

Money market funds were discontinued as a sweep option in June 2019. Balances in those funds were converted to the RJBDP or reinvested by the client.

Three months ended December 31, 2019 compared with the three months ended December 31, 2018

Net revenues of $1.41 billion increased $58 million, or 4%, while pre-tax income of $153 million decreased $11 million, or 7%. Pre-tax income decreased despite an increase in net revenues due to a shift in the revenue mix, as net interest income and RJBDP fees from third-party banks, which have no associated direct payout expense, declined due to lower short-term interest rates. Meanwhile, revenues that have an associated direct payout expense (e.g., asset management and related administrative fees) increased.

Asset management and related administrative fees increased $75 million, or 11%, primarily due to higher asset balances in fee-based accounts at the beginning of the quarter, reflecting successful financial advisor recruiting and retention, equity market appreciation and the increased utilization of fee-based accounts.

Brokerage revenues declined $17 million, or 5%, primarily as a result of the decline in mutual fund trails, which were impacted by the conversion of client assets into mutual fund share classes which pay lower rates and the continued shift to fee-based accounts.

Total account and service fees were flat compared with the prior year quarter, as an increase in mutual fund service fees due to higher asset balances and an increase in RJBDP fees from RJ Bank due to an increase in the number of accounts, were offset by a decline in RJBDP fees from third-party banks. The decline in RJBDP fees from third-party banks was driven both by lower short-term interest rates and lower client cash balances compared with the prior year quarter.

Net interest income decreased $5 million, or 11%, driven by a decrease in interest income from client margin loans and assets segregated pursuant to regulations due to a decrease in average balances and a decline in short-term interest rates. Partially offsetting the decrease in interest income, interest expense also decreased due to the impact of lower deposit rates paid on lower client cash balances in CIP.


51
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Compensation-related expenses increased $72 million, or 7%, due to higher compensable net revenues, as well as increased staffing levels to support our continued growth and regulatory compliance requirements.

Non-compensation expenses decreased $3 million, or 2%, as decreased legal reserves compared with the prior-year quarter were offset by higher occupancy and equipment expenses. The increase in occupancy and equipment expenses was driven by branch expansion in our employee affiliation option, rising real estate rental rates, and financial advisor growth.

Results of Operations – Capital Markets

For an overview of our Capital Markets segment operations, as well as a description of the key factors impacting our Capital Markets results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Form 10-K.

Operating results
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
 
% change
Revenues:
 
 
 
 
 
 
Brokerage revenues:
 
 

 
 

 
 
Fixed income
 
$
81

 
$
57

 
42
 %
Equity
 
34

 
42

 
(19
)%
Total brokerage revenues
 
115

 
99

 
16
 %
Investment banking:
 
 
 
 
 


Merger & acquisition and advisory
 
60

 
85

 
(29
)%
Equity underwriting
 
39

 
27

 
44
 %
Debt underwriting
 
31

 
17

 
82
 %
Total investment banking
 
130

 
129

 
1
 %
Interest income
 
8

 
10

 
(20
)%
Tax credit fund revenues
 
18

 
19

 
(5
)%
All other
 
3

 
4

 
(25
)%
Total revenues
 
274

 
261

 
5
 %
Interest expense
 
(6
)
 
(8
)
 
(25
)%
Net revenues
 
268

 
253

 
6
 %
Non-interest expenses:
 
 

 
 

 


Compensation, commissions and benefits
 
166

 
158

 
5
 %
Non-compensation expenses:
 
 
 
 
 
 
Communications and information processing
 
19

 
19

 
—

Occupancy and equipment
 
9

 
9

 
—

Business development
 
16

 
12

 
33
 %
Professional fees
 
10

 
10

 
—

Acquisition and disposition-related expenses
 
—

 
15

 
(100
)%
All other
 
19

 
18

 
6
 %
Total non-compensation expenses
 
73

 
83

 
(12
)%
Total non-interest expenses
 
239

 
241

 
(1
)%
Pre-tax income
 
$
29

 
$
12

 
142
 %

Three months ended December 31, 2019 compared with the three months ended December 31, 2018

Net revenues of $268 million increased $15 million, or 6%, and pre-tax income of $29 million increased $17 million, or 142%.

Total brokerage revenues increased $16 million, or 16%, due to an increase in fixed income brokerage revenues, partially offset by a decrease in equity brokerage revenues. The increase in fixed income brokerage revenues was primarily due to an increase in client activity during the current year quarter, largely a result of higher interest rate volatility. Equity brokerage revenues continue to be challenged by industry trends, including the separate payment for research and execution services and the shift from high- to low-touch execution services.

52
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Total investment banking revenues were flat compared with the prior-year quarter, as increased equity and debt underwriting revenues were offset by decreased merger & acquisition and advisory revenues.

Compensation-related expenses increased $8 million, or 5%, primarily due to the increase in net revenues.

Non-compensation expenses decreased $10 million, or 12%, as the prior year quarter was negatively impacted by a $15 million loss associated with the sale of our operations related to research, sales and trading of European equities.

Results of Operations – Asset Management

For an overview of our Asset Management segment operations as well as a description of the key factors impacting our Asset Management results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Form 10-K.

Operating results
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
 
% change
Revenues:
 
 
 
 
 
 
Asset management and related administrative fees:
 
 
 
 
 
 
Managed programs
 
$
125

 
$
117

 
7
 %
Administration and other
 
51

 
44

 
16
 %
Total asset management and related administrative fees
 
176

 
161

 
9
 %
Account and service fees
 
5

 
9

 
(44
)%
All other
 
3

 
4

 
(25
)%
Net revenues
 
184

 
174

 
6
 %
Non-interest expenses:
 
 

 
 

 


Compensation, commissions and benefits
 
45

 
43

 
5
 %
Non-compensation expenses:
 
 
 
 
 
 
Communications and information processing
 
11

 
11

 
—

Investment sub-advisory fees
 
25

 
24

 
4
 %
All other
 
30

 
32

 
(6
)%
Total non-compensation expenses
 
66

 
67

 
(1
)%
Total non-interest expenses
 
111

 
110

 
1
 %
Pre-tax income
 
$
73

 
$
64

 
14
 %

Selected key metrics

Managed programs

Management fees recorded in our Asset Management segment are generally calculated as a percentage of the value of our fee-billable financial assets under management (“AUM”). These AUM include the portion of fee-based AUA in our PCG segment that is invested in programs overseen by our Asset Management segment (included in the AMS line of the following table), as well as retail accounts managed on behalf of third-party institutions, institutional accounts and proprietary mutual funds that we manage (collectively included in the “Carillon Tower Advisers” line of the following table).

Revenues related to fee-based AUA in our PCG segment are shared by the PCG and Asset Management segments, the amount of which depends on whether clients are invested in assets that are in managed programs overseen by our Asset Management segment and the administrative services provided (see our “Management’s Discussion and Analysis - Results of Operations - Private Client Group” for more information). Our AUM in AMS are impacted by market fluctuations and net inflows or outflows of assets, including transfers between fee-based accounts and transaction-based accounts within our PCG segment.

Revenues earned by Carillon Tower Advisers for retail accounts managed on behalf of third-party institutions, institutional accounts and our proprietary mutual funds are recorded entirely in the Asset Management segment. Our AUM in Carillon Tower Advisers are impacted by market and investment performance and net inflows or outflows of assets.


53
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Fees are generally collected quarterly and are based on balances as of the beginning of the quarter or the end of the quarter, or based on average daily balances during the quarter.

Financial assets under management:
$ in millions
 
December 31,
2019
 
September 30,
2019
 
December 31,
2018
 
September 30,
2018
AMS (1)
 
$
98,648

 
$
91,802

 
$
76,235

 
$
83,289

Carillon Tower Advisers
 
60,637

 
58,521

 
55,925

 
63,330

Subtotal financial assets under management
 
159,285

 
150,323

 
132,160

 
146,619

Less: Assets managed for affiliated entities
 
(7,633
)
 
(7,221
)
 
(5,653
)
 
(5,702
)
Total financial assets under management
 
$
151,652

 
$
143,102

 
$
126,507

 
$
140,917


(1)
Represents the portion of our PCG segment fee-based AUA (as disclosed in “Assets in fee-based accounts” in the “Selected key metrics - PCG client asset balances” section of our “Management’s Discussion and Analysis - Results of Operations - Private Client Group”) that is invested in managed programs overseen by the Asset Management segment.

Activity (including activity in assets managed for affiliated entities):
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
Financial assets under management at beginning of period
 
$
150,323

 
$
146,619

Carillon Tower Advisers - net outflows
 
(372
)
 
(1,580
)
AMS - net inflows
 
2,083

 
518

Net market appreciation/(depreciation) in asset values
 
7,251

 
(13,397
)
Financial assets under management at end of period
 
$
159,285

 
$
132,160


AMS division of RJ&A

See “Management’s Discussion and Analysis - Results of Operations - Private Client Group” for further information about our retail client assets, including those fee-based assets invested in programs managed by AMS.

Carillon Tower Advisers

Assets managed by Carillon Tower Advisers include assets managed by its subsidiaries and affiliates: Eagle Asset Management, ClariVest Asset Management, Cougar Global Investments and the Scout Group. The following table presents Carillon Tower Advisers’ AUM by objective, excluding assets for which it does not exercise discretion, as well as the approximate average client fee rate earned on such assets for the most recent fiscal year period.
$ in millions
 
December 31, 2019
 
Average fee rate
Equity
 
$
29,880

 
0.51%
Fixed income
 
25,649

 
0.18%
Balanced
 
5,108

 
0.37%
Total financial assets under management
 
$
60,637

 
0.36%

Non-discretionary asset-based programs

Assets held in certain non-discretionary asset-based programs for which the Asset Management segment does not exercise discretion but provides administrative support (including for affiliated entities) totaled $251.3 billion, $229.7 billion, $184.3 billion, and $200.1 billion as of December 31, 2019, September 30, 2019, December 31, 2018, and September 30, 2018, respectively. The increase in assets over the prior year level was primarily due to clients moving to fee-based accounts from transaction-based accounts, successful financial advisor recruiting and market appreciation. Administrative fees associated with these programs are predominantly calculated based on balances at the beginning of the quarter.

RJ Trust

Assets held in asset-based programs in RJ Trust (including those managed for affiliated entities) totaled $7.2 billion, $6.6 billion, $5.7 billion, and $6.1 billion as of December 31, 2019, September 30, 2019, December 31, 2018 and September 30, 2018, respectively.

54
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Three months ended December 31, 2019 compared with the three months ended December 31, 2018

Net revenues of $184 million increased $10 million, or 6%, and pre-tax income of $73 million increased $9 million, or 14%.

Asset management and related administrative fees increased $15 million, or 9%, driven by an increase in PCG assets in fee-based accounts compared with the prior year quarter. Assets in fee-based accounts increased both in managed programs overseen by the Asset Management segment and in non-discretionary asset-based programs for which the segment provides administrative support.

Results of Operations – RJ Bank

For an overview of our RJ Bank segment operations, as well as a description of the key factors impacting our RJ Bank results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Form 10-K.

Operating results
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
 
% change
Revenues:
 
 
 
 
 
 
Interest income
 
$
231

 
$
239

 
(3
)%
Interest expense
 
(21
)
 
(42
)
 
(50
)%
Net interest income
 
210

 
197

 
7
 %
All other
 
6

 
6

 
—

Net revenues
 
216

 
203

 
6
 %
Non-interest expenses:
 
 

 
 

 


Compensation and benefits
 
12

 
11

 
9
 %
Non-compensation expenses:
 
 
 
 
 


Loan loss provision/(benefit)
 
(2
)
 
16

 
NM

RJBDP fees to PCG
 
47

 
41

 
15
 %
All other
 
24

 
25

 
(4
)%
Total non-compensation expenses
 
69

 
82

 
(16
)%
Total non-interest expenses
 
81

 
93

 
(13
)%
Pre-tax income
 
$
135

 
$
110

 
23
 %

Three months ended December 31, 2019 compared with the three months ended December 31, 2018

Net revenues of $216 million increased $13 million, or 6%, and pre-tax income of $135 million increased $25 million, or 23%.

Net interest income increased $13 million, or 7%, as higher interest-earning banking assets offset the negative impact from lower short-term interest rates. The increase in average interest-earning banking assets was driven by growth in average loans of $1.33 billion and a $372 million increase in our average available-for-sale securities portfolio. The net interest margin decreased to 3.23% from 3.25%.

The loan loss provision was a benefit of $2 million, compared to an expense of $16 million in the prior year quarter. The benefit in the current year quarter was primarily attributable to payoffs of certain lower-rated corporate loans and a shift in loan mix to a higher portion of residential mortgage loans, which generally have lower allowances for loan losses than corporate loans.

Compensation and benefits expenses increased $1 million due increased staffing levels to support our continued growth.

Non-compensation expenses (excluding the provision for loan losses) increased $5 million, including a $6 million, or 15%, increase in fees for RJBDP paid to PCG, primarily driven by an increase in the number of accounts. These fees are eliminated in consolidation.


55
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


The following table presents average balances, interest income and expense, the related yields and rates, and interest spreads and margins for RJ Bank.
 
 
Three months ended December 31,
 
 
2019
 
2018
$ in millions
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/
cost
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/
cost
Interest-earning banking assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
1,201

 
$
5

 
1.64
%
 
$
1,304

 
$
7

 
2.24
%
Available-for-sale securities
 
3,089

 
18

 
2.30
%
 
2,717

 
16

 
2.32
%
Bank loans, net of unearned income and deferred expenses:
 
 

 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
8,078

 
86

 
4.15
%
 
7,763

 
91

 
4.58
%
CRE construction loans
 
233

 
3

 
4.87
%
 
171

 
2

 
5.62
%
CRE loans
 
3,611

 
37

 
4.00
%
 
3,558

 
41

 
4.55
%
Tax-exempt loans
 
1,225

 
8

 
3.36
%
 
1,284

 
9

 
3.33
%
Residential mortgage loans
 
4,641

 
37

 
3.19
%
 
3,891

 
32

 
3.32
%
SBL and other
 
3,337

 
34

 
3.97
%
 
3,102

 
36

 
4.58
%
Loans held for sale
 
161

 
1

 
4.06
%
 
186

 
3

 
5.39
%
Total bank loans, net
 
21,286

 
206

 
3.85
%
 
19,955

 
214

 
4.27
%
FHLB stock, FRB stock and other
 
215

 
2

 
3.00
%
 
169

 
2

 
3.97
%
Total interest-earning banking assets
 
25,791

 
$
231

 
3.56
%
 
24,145

 
$
239

 
3.94
%
Non-interest-earning banking assets:
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized gain/(loss) on available-for-sale securities
 
29

 
 

 
 

 
(70
)
 
 

 
 

Allowance for loan losses
 
(219
)
 
 

 
 

 
(204
)
 
 

 
 

Other assets
 
358

 
 

 
 

 
420

 
 

 
 

Total non-interest-earning banking assets
 
168

 
 

 
 

 
146

 
 

 
 

Total banking assets
 
$
25,959

 
 

 
 

 
$
24,291

 
 

 
 

Interest-bearing banking liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Bank deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
782

 
$
4

 
2.19
%
 
$
462

 
$
2

 
1.98
%
Savings, money market and NOW accounts
 
21,823

 
12

 
0.22
%
 
20,675

 
34

 
0.66
%
FHLB advances and other
 
888

 
5

 
2.22
%
 
948

 
6

 
2.12
%
Total interest-bearing banking liabilities
 
23,493

 
$
21

 
0.36
%
 
22,085

 
$
42

 
0.75
%
Non-interest-bearing banking liabilities
 
180

 
 

 
 

 
159

 
 

 
 

Total banking liabilities
 
23,673

 
 

 
 

 
22,244

 
 

 
 

Total banking shareholders’ equity
 
2,286

 
 

 
 

 
2,047

 
 

 
 

Total banking liabilities and shareholders’ equity
 
$
25,959

 
 

 
 

 
$
24,291

 
 

 
 

Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income
 
$
2,298

 
$
210

 
 
 
$
2,060

 
$
197

 
 
Bank net interest:
 
 

 
 

 
 
 
 

 
 

 
 
Spread
 
 

 
 

 
3.20
%
 
 

 
 

 
3.19
%
Margin (net yield on interest-earning banking assets)
 
 

 
 

 
3.23
%
 
 

 
 

 
3.25
%
Ratio of interest-earning banking assets to interest-bearing banking liabilities
 
 

 
 

 
109.78
%
 
 

 
 
 
109.33
%

Nonaccrual loans are included in the average loan balances in the preceding table. Any payments received for corporate nonaccrual loans are applied entirely to principal. Interest income on residential mortgage nonaccrual loans is recognized on a cash basis.

Fee income on bank loans included in interest income for the three months ended December 31, 2019 and 2018 was $4 million and $5 million, respectively.

The yield on tax-exempt loans in the preceding table is presented on a taxable-equivalent basis utilizing the applicable federal statutory tax rates for each of the three months ended December 31, 2019 and 2018.


56
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our 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 attributable to both volume and rate have been allocated proportionately.
 
 
Three months ended December 31,
 
 
2019 compared to 2018
 
 
Increase/(decrease) due to
$ in millions
 
Volume
 
Rate
 
Total
Interest income:
 
 
 
 
 
 
Interest-earning banking assets:
 
 
 
 
 
 
Cash
 
$
—

 
$
(2
)
 
$
(2
)
Available-for-sale securities
 
2

 
—

 
2

Bank loans, net of unearned income and deferred expenses:
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 

C&I loans
 
4

 
(9
)
 
(5
)
CRE construction loans
 
2

 
(1
)
 
1

CRE loans
 
1

 
(5
)
 
(4
)
Tax-exempt loans
 
(1
)
 
—

 
(1
)
Residential mortgage loans
 
7

 
(2
)
 
5

SBL and other
 
2

 
(4
)
 
(2
)
Loans held for sale
 
(1
)
 
(1
)
 
(2
)
Total bank loans, net
 
14

 
(22
)
 
(8
)
FHLB stock, FRB stock, and other
 
—

 
—

 
—

Total interest-earning banking assets
 
16

 
(24
)
 
(8
)
Interest expense:
 
 

 
 

 
 

Interest-bearing banking liabilities:
 
 

 
 

 
 

Bank deposits:
 
 

 
 

 
 

Certificates of deposit
 
2

 
—

 
2

Savings, money market, and NOW accounts
 
2

 
(24
)
 
(22
)
FHLB advances and other
 
(3
)
 
2

 
(1
)
Total interest-bearing banking liabilities
 
1

 
(22
)
 
(21
)
Change in net interest income
 
$
15

 
$
(2
)
 
$
13



57
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Results of Operations – Other

This segment includes our private equity investments, interest income on certain corporate cash balances, and certain corporate overhead costs of RJF that are not allocated to other segments, including the interest costs on our public debt. For an overview of our Other segment operations, refer to the information presented in “Item 1 - Business” of our 2019 Form 10-K.

Operating results
 
 
Three months ended December 31,
$ in millions
 
2019
 
2018
 
% change
Revenues:
 
 
 
 
 
 
Interest income
 
$
12

 
$
16

 
(25
)%
Gains/(losses) on private equity investments
 
(2
)
 
4

 
NM

All other
 
2

 
1

 
100
 %
Total revenues
 
12

 
21

 
(43
)%
Interest expense
 
(20
)
 
(19
)
 
5
 %
Net revenues
 
(8
)
 
2

 
NM

Total non-interest expenses
 
23

 
20

 
15
 %
Pre-tax loss
 
$
(31
)
 
$
(18
)
 
(72
)%

Three months ended December 31, 2019 compared with the three months ended December 31, 2018

The pre-tax loss of $31 million was $13 million larger than the loss generated in the prior year quarter.

Net revenues decreased $10 million from income of $2 million in the prior year quarter to a loss of $8 million, due to a modest valuation loss on private equity investments compared with gains in the prior year quarter, and a decrease in interest earned on corporate cash balances due to a decline in interest rates.

Non-interest expenses increased $3 million, or 15%, primarily driven by higher compensation-related expenses.

Certain statistical disclosures by bank holding companies

We are required to provide certain statistical disclosures as a bank holding company under the SEC’s Industry Guide 3.  The following table provides certain of those disclosures.
 
Three months ended December 31,
 
2019
 
2018
Return on assets
2.7%
 
2.6%
Annualized return on equity
16.0%
 
15.9%
Average equity to average assets
17.0%
 
16.5%
Dividend payout ratio
19.6%
 
20.1%

Return on assets is computed by dividing annualized net income for the period indicated by average assets for each respective period. Average assets is computed by adding total assets as of the date indicated to the prior quarter-end total and dividing by two.

Annualized return on equity is computed by dividing annualized net income for the period indicated by average equity for each respective period. Average equity is computed by adding total equity attributable to RJF as of the date indicated to the prior quarter-end total and dividing by two.

Average equity to average assets is computed by dividing average equity by average assets as calculated in accordance with the previous explanations.

Dividend payout ratio is computed by dividing dividends declared per common share during the period by earnings per diluted common share for the period.


58
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Refer to the “Results of Operations - RJ Bank” and “Risk management - Credit risk” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations and to the Notes to Condensed Consolidated Financial Statements of 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 economic and market environments.

Senior management establishes our liquidity and capital management framework. This framework includes senior management’s review of short- and long-term cash flow forecasts, review of monthly capital expenditures, monitoring of the availability of alternative sources of financing, and daily monitoring of liquidity in our significant subsidiaries. Our decisions on the allocation of capital to our business units consider, among other factors, projected profitability and cash flow, risk, and impact on future liquidity needs. Our treasury department assists in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure, and maintains our relationships with various lenders. The objective of this framework is 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 and cash equivalents increased $152 million to $4.11 billion during the three months ended December 31, 2019, due to $654 million of cash provided by financing activities, which was primarily driven by an increase in bank deposits during the current period. Investing activities used $502 million primarily due to an increase in bank loans and the growth of our available-for-sale securities portfolio during the current period.

We believe our existing assets, most of which are liquid in nature, together with funds generated from operations and available from committed and uncommitted financing facilities provide adequate funds for continuing operations at current levels of activity.

Sources of liquidity

Approximately $1.43 billion of our total December 31, 2019 cash and cash equivalents included cash on hand at the parent, as well as parent cash loaned to RJ&A. The following table presents our holdings of cash and cash equivalents. 
$ in millions
 
December 31, 2019
RJF
 
$
444

RJ&A
 
1,456

RJ Bank
 
1,327

RJ Ltd.
 
477

RJFS
 
129

Carillon Tower Advisers
 
82

Other subsidiaries
 
194

Total cash and cash equivalents
 
$
4,109

 
RJF maintained depository accounts at RJ Bank with a balance of $164 million as of December 31, 2019. The portion of this total that was available on demand without restrictions, which amounted to $108 million as of December 31, 2019, is reflected in the RJF total (and is excluded from the RJ Bank cash balance in the preceding table).

RJF had loaned $999 million to RJ&A as of December 31, 2019 (such amount is included in the RJ&A cash balance in the preceding table), which RJ&A has invested on behalf of RJF in cash and cash equivalents or otherwise deployed in its normal business activities.

In addition to the cash balances described, we have various other potential sources of cash available to the parent from subsidiaries, as described in the following section.

Liquidity available from subsidiaries

Liquidity is principally available to RJF, the parent company, from RJ&A and RJ Bank.


59
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Certain of our broker-dealer subsidiaries are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities and Exchange Act of 1934. As a member firm of FINRA, RJ&A is subject to FINRA’s capital requirements, which are substantially the same as Rule 15c3-1. Rule 15c3-1 provides for an “alternative net capital requirement,” which RJ&A has elected. Regulations require that minimum net capital, as defined, be equal to the greater of $1.5 million or 2% of aggregate debit items arising from client transactions. In addition, covenants in RJ&A’s committed financing facilities require its net capital to be a minimum of 10% of aggregate debit items.  At December 31, 2019, RJ&A significantly exceeded the minimum regulatory requirements, the covenants in its financing arrangements pertaining to net capital, as well as its internally-targeted net capital tolerances.  FINRA may impose certain restrictions, such as restricting withdrawals of equity capital, if a member firm were to fall below a certain threshold or fail to meet minimum net capital requirements.

RJ&A, as a nonbank custodian of Individual Retirement Accounts (“IRAs”), must also satisfy certain Internal Revenue Service (“IRS”) regulations in order to accept new IRA and plan accounts and retain the accounts for which it serves as nonbank custodian. To maintain adequate net worth under these regulations, RJ&A may have to limit dividends to RJF. We evaluate regulatory requirements, loan covenants and certain internal tolerances when determining the amount of liquidity available to RJF from RJ&A.

RJ Bank may pay dividends to RJF without prior approval of 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 regulatory capital ratios. At December 31, 2019, RJ Bank had $351 million of capital in excess of the amount it would need at that date to maintain its targeted regulatory capital ratios, and could pay a dividend of such amount without requiring prior approval of its regulator.

Although we have liquidity available to us from our other subsidiaries, the available amounts are not as significant as those previously described and, in certain instances, may be subject to regulatory requirements.

Borrowings and financing arrangements

Committed financing arrangements

Our ability to borrow is dependent upon compliance with the conditions in our various loan agreements and, in the case of secured borrowings, collateral eligibility requirements. Our committed financing arrangements are in the form of either tri-party repurchase agreements or, in the case of the Credit Facility, an unsecured line of credit. The required market value of the collateral associated with the committed secured facilities ranges from 102% to 125% of the amount financed.

The following table presents our committed financing arrangements with third-party lenders, which we generally utilize to finance a portion of our fixed income trading instruments held, and the outstanding balances related thereto.
 
 
December 31, 2019
$ in millions
 
RJ&A
 
RJF
 
Total
 
Total number of arrangements
Financing arrangement:
 
 
 
 
 
 
 
 
Committed secured
 
$
200

 
$
—

 
$
200

 
2

Committed unsecured (1)
 
200

 
300

 
500

 
1

Total committed financing arrangements
 
$
400

 
$
300

 
$
700

 
3

 
 
 
 
 
 
 
 
 
Outstanding borrowing amount:
 
 
 
 
 
 
 
 
Committed secured
 
$
—

 
$
—

 
$
—

 
 
Committed unsecured
 
—

 
—

 
—

 
 
Total outstanding borrowing amount
 
$
—

 
$
—

 
$
—

 
 
 
(1)
The Credit Facility provides for maximum borrowings of up to $500 million, with a sublimit of $300 million for RJF. For additional details on our committed unsecured financing arrangement, see our discussion of the Credit Facility in Note 11 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Uncommitted financing arrangements

Our uncommitted financing arrangements are in the form of secured lines of credit, secured bilateral or tri-party repurchase agreements, or unsecured lines of credit. Our arrangements with third-party lenders are generally utilized to finance a portion of our fixed income securities or for cash management purposes. Our uncommitted secured financing arrangements generally require us to post collateral in excess of the amount borrowed. As of December 31, 2019, we had outstanding borrowings under one uncommitted secured and

60
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


three uncommitted unsecured borrowing arrangements with lenders out of a total of 11 uncommitted financing arrangements (six uncommitted secured and five uncommitted unsecured). However, lenders are under no contractual obligation to lend to us under uncommitted credit facilities.

The following table presents our borrowings on uncommitted financing arrangements, all of which were in RJ&A.
$ in millions
 
December 31, 2019
Outstanding borrowing amount:
 
 
Uncommitted secured
 
$
200

Uncommitted unsecured
 
6

Total outstanding borrowing amount
 
$
206


Other financings

RJ Bank had $875 million in FHLB borrowings outstanding at December 31, 2019, comprised of floating-rate advances totaling $850 million and a $25 million fixed-rate advance, all of which were secured by a blanket lien on RJ Bank’s residential mortgage loan portfolio (see Note 11 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding these borrowings). RJ Bank had an additional $2.62 billion in immediate credit available from the FHLB as of December 31, 2019 and, with the pledge of additional eligible collateral to the FHLB, total available credit of 30% of total assets.

RJ Bank is eligible to participate in the FRB’s discount-window program; however, we do not view borrowings from the FRB as a primary source of funding.  The credit available in this program is subject to periodic review, may be terminated or reduced at the discretion of the FRB, and is secured by pledged C&I loans.

We act as an intermediary between broker-dealers and other financial institutions whereby we borrow securities from one broker-dealer and then lend them to another.  Where permitted, we have also loaned, to broker-dealers and other financial institutions, securities owned by clients or the firm.  We account for each of these types of transactions as collateralized agreements and financings, with the outstanding balances related to the securities loaned included in “Securities loaned” on our Condensed Consolidated Statements of Financial Condition of this Form 10-Q, in the amount of $239 million as of December 31, 2019. See Note 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for more information on our securities borrowed and securities loaned.

From time to time we enter into repurchase agreements and reverse repurchase agreements.  We account for each of these types of transactions as collateralized agreements and financings, with the outstanding balances of the repurchase agreements included in “Securities sold under agreements to repurchase” on our Condensed Consolidated Statements of Financial Condition of this Form 10-Q, in the amount of $200 million as of December 31, 2019. These balances are reflected in the preceding table of uncommitted financing arrangements. Such financings are generally collateralized by non-customer, RJ&A-owned securities or by securities that we have received as collateral under reverse repurchase agreements.
 
The average daily balance outstanding during the five most recent quarters, the maximum month-end balance outstanding during the quarter and the period-end balances for repurchase agreements and reverse repurchase agreements is detailed in the following table.
 
 
Repurchase transactions
 
Reverse repurchase transactions
For the quarter ended:
($ in millions)
 
Average daily
balance
outstanding
 
Maximum month-end
balance outstanding
during the quarter
 
End of period
balance
outstanding
 
Average daily
balance
outstanding
 
Maximum month-end
balance outstanding
during the quarter
 
End of period
balance
outstanding
December 31, 2019
 
$
184

 
$
200

 
$
200

 
$
355

 
$
351

 
$
326

September 30, 2019
 
$
170

 
$
158

 
$
150

 
$
334

 
$
343

 
$
343

June 30, 2019
 
$
211

 
$
212

 
$
165

 
$
442

 
$
479

 
$
411

March 31, 2019
 
$
172

 
$
210

 
$
210

 
$
358

 
$
447

 
$
447

December 31, 2018
 
$
171

 
$
189

 
$
156

 
$
413

 
$
479

 
$
399


At December 31, 2019, in addition to the financing arrangements previously described, we had $18 million outstanding on a mortgage loan for our St. Petersburg, Florida home-office complex that is included in “Other borrowings” on our Condensed Consolidated Statements of Financial Condition of this Form 10-Q.


61
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


At December 31, 2019, we had aggregate outstanding senior notes payable of $1.55 billion. Our senior notes payable, exclusive of any unaccreted premiums or discounts and debt issuance costs, was comprised of $250 million par 5.625% senior notes due 2024, $500 million par 3.625% senior notes due 2026, and $800 million par 4.95% senior notes due 2046. See Note 15 of our 2019 Form 10-K for additional information.

Our issuer and senior long-term debt ratings as of the most current report are detailed in the following table.
Rating Agency
 
Rating
 
Outlook
Standard & Poor’s Ratings Services
 
BBB+
 
Stable
Moody’s Investors Services
 
Baa1
 
Stable

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, capital structure, overall risk management, business diversification and market share, 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 obtain additional financing.

Should our credit rating be downgraded prior to a public debt offering, it is probable that we would have to offer a higher rate of interest to bond holders.  A downgrade to below investment grade may make a public debt offering difficult to execute on terms we would consider to be favorable. A downgrade below investment grade could 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 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information). A credit downgrade could damage our reputation and result in certain counterparties limiting their business with us, result in negative comments by analysts, potentially negatively impact investor and/or clients’ perception of us, and cause a decline in our stock price. None of our borrowing arrangements contains a condition or event of default related to our credit ratings. However, a credit downgrade would result in the firm incurring a higher facility fee on the $500 million Credit Facility, in addition to triggering a higher interest rate applicable to any borrowings outstanding on that line as of and subsequent to such downgrade. Conversely, an improvement in RJF’s current credit rating could have a favorable impact on the facility fee, as well as the interest rate applicable to any borrowings on such line.

Other sources and uses of liquidity

We have company-owned life insurance policies which are utilized to fund certain non-qualified deferred compensation plans and other employee benefit plans. Certain of our non-qualified deferred compensation plans and other employee benefit plans are employee-directed while others are company-directed. Certain policies which we could readily borrow against had a cash surrender value of $615 million as of December 31, 2019, comprised of $350 million related to employee-directed plans and $265 million related to company-directed plans, and we were able to borrow up to 90%, or $554 million, of the December 31, 2019 total without restriction.  To effect any such borrowing, the underlying investments would be converted to money market investments, therefore requiring us to take market risk related to the employee-directed plans. There were no borrowings outstanding against any of these policies as of December 31, 2019.

On May 18, 2018, we filed a “universal” shelf registration statement with the SEC pursuant to which we can issue debt, equity and other capital instruments if and when necessary or perceived by us to be opportune. Subject to certain conditions, this registration statement will be effective through May 18, 2021.
   
See the Contractual obligations section of this MD&A for information regarding our contractual obligations.

Statement of financial condition analysis

The assets on our Condensed Consolidated Statements of Financial Condition consisted primarily of cash and cash equivalents (a large portion of which is segregated for the benefit of clients), receivables including bank loans, financial instruments held either for trading purposes or as investments, and other assets.  A significant portion of our assets were liquid in nature, providing us with flexibility in financing our business.

Total assets of $40.15 billion as of December 31, 2019 were $1.32 billion, or 3%, greater than our total assets as of September 30, 2019. The increase in assets was primarily due to a $567 million increase in cash and cash equivalents segregated pursuant to regulations, a $465 million increase in other assets primarily due to ROU assets recorded as a result of the adoption of new guidance related to the

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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


accounting for leases, and a $405 million increase in bank loans. Offsetting these increases, brokerage client receivables, net and receivables from brokers, dealers and clearing organizations decreased $144 million and $119 million respectively.

As of December 31, 2019, our total liabilities of $33.25 billion were $1.06 billion, or 3%, greater than our total liabilities as of September 30, 2019. The increase in total liabilities was comprised of a $694 million increase in bank deposits, primarily due to higher RJBDP balances held at RJ Bank and certificates of deposit issuances during the period, a $524 million increase in brokerage client payables, primarily due to a seasonal increase in client cash held in our CIP as of December 31, 2019, and a net increase of $401 million in other payables primarily due to operating lease liabilities recorded as a result of the adoption of new guidance related to the accounting for leases. Offsetting these increases was a decrease in accrued compensation, commissions and benefits of $339 million, primarily due to the payment of accrued bonuses during the three months ended December 31, 2019.

See Notes 2 and 9 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information on our adoption of the new leasing guidance.

Contractual obligations

There were no significant changes to the contractual obligations presented in our 2019 Form 10-K, other than in the ordinary course of business, as of December 31, 2019. See Note 13 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding commitments as of December 31, 2019.

Regulatory

Refer to the discussion of the regulatory environment in which we operate and the impact on our operations of certain rules and regulations in Item 1 “Business - Regulation” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory” of our 2019 Form 10-K.

RJF and many of its subsidiaries are each subject to various regulatory capital requirements. As of December 31, 2019, all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. In addition, RJF and RJ Bank were categorized as “well-capitalized” as of December 31, 2019. The maintenance of certain risk-based and other regulatory capital levels could impact various capital allocation decisions impacting one or more of our businesses.  However, due to the current capital position of RJF and its regulated subsidiaries, we do not anticipate these capital requirements will have a negative impact on our future business activities.

See Note 18 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information on regulatory capital requirements.

Critical accounting estimates

The condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during any reporting period in our condensed consolidated financial statements. Management has established detailed policies and control procedures intended to ensure the appropriateness of such estimates and assumptions and their consistent application from period to period. For a description of our significant accounting policies, see Note 2 of the Notes to Consolidated Financial Statements of our 2019 Form 10-K.

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 consolidated financial statements. Therefore, understanding these critical accounting estimates is important in understanding our reported results of operations and financial position. We believe that of our accounting estimates and assumptions, those described in the following sections involve a high degree of judgment and complexity.

Valuation of financial instruments

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 of our 2019 Form 10-K for a discussion of our fair value accounting policies regarding financial instruments owned and financial instruments sold but not yet purchased. See Note 3 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on our financial instruments at fair value.


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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Loss provisions

Refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical accounting estimates - Loss provisions” of our 2019 Form 10-K for more information.

Loss provisions for legal and regulatory matters

The recorded amount of liabilities related to legal and regulatory matters is subject to significant management judgment. For a description of the significant estimates and judgments associated with establishing such accruals, see the “Contingent liabilities” section of Note 2 of our 2019 Form 10-K. In addition, refer to Note 13 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding legal and regulatory matter contingencies as of December 31, 2019.

Loan loss provisions arising from operations of RJ Bank

We provide an allowance for loan losses which reflects our continuing evaluation of the probable losses inherent in RJ Bank’s loan portfolio. See the discussion regarding our methodology in estimating the allowance for loan losses in Note 2 of our 2019 Form 10-K. See Note 7 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on our bank loans.

At December 31, 2019, the amortized cost of all RJ Bank loans was $21.51 billion and the allowance for loan losses was $216 million, which was 1.01% of the held for investment loan portfolio.

Our process of evaluating probable loan losses includes a complex analysis of several quantitative and qualitative factors, requiring management judgment. As a result, the allowance for loan losses could be insufficient to cover actual losses. In such an event, any losses in excess of our allowance would result in a decrease in our net income, as well as a decrease in the level of regulatory capital.

Recent accounting developments

For information regarding our recent accounting developments, see Note 2 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Off-balance sheet arrangements

For information regarding our off-balance sheet arrangements, see Note 2 of the Notes to Consolidated Financial Statements of our 2019 Form 10-K and Note 13 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Effects of inflation

Our assets are primarily liquid in nature and are not significantly affected by inflation. However, the rate of inflation affects our expenses, including employee compensation, communications and information processing, and occupancy costs, which may not be readily recoverable through charges for services we provide to our clients. In addition, to the extent inflation results in rising interest rates and has adverse effects upon the securities markets, it may adversely affect our financial position and results of operations.

Risk management

Risks are an inherent part of our business and activities. Management of these risks is critical to our fiscal soundness and profitability. Our risk management processes are multi-faceted and require communication, judgment and knowledge of financial products and markets. We have a formal Enterprise Risk Management (“ERM”) program to assess and review aggregate risks across the firm. Our management takes an active role in the ERM process, which requires specific administrative and business functions to participate in the identification, assessment, monitoring and control of various risks.

The principal risks related to our business activities are market, credit, liquidity, operational, model, and compliance.

Governance

Our Board of Directors oversees the firm’s management and mitigation of risk, setting a culture that encourages ethical conduct and risk management throughout the firm.  Senior management communicates and reinforces this culture through three lines of risk management and a number of senior-level management committees.  Our first line of risk management, which includes all of our

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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


businesses, owns its risks and is responsible for helping to identify, escalate, and mitigate risks arising from its day-to-day activities.  The second line of risk management, which includes the Compliance, Legal, and Risk Management departments, supports and provides guidance, advice, and oversight to client-facing businesses and other first-line risk management functions in identifying and mitigating risk. The second line of risk management also tests and monitors the effectiveness of controls, escalates risks when appropriate, and reports on these risks.  The third line of risk management, Internal Audit, independently reviews activities conducted by the previous lines of risk management to assess their management and mitigation of risk, providing additional assurance to the Board of Directors and senior management, with a view toward enhancing our oversight, management, and mitigation of risk.

Market risk

Market risk is our risk of loss resulting from the impact of changes in market prices on our trading inventory, derivatives and investment positions. We have exposure to market risk primarily through our broker-dealer trading operations and, to a lesser extent, through our banking operations. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Market risk” of our 2019 Form 10-K for a discussion of our market risk, including how we manage such risk. See Notes 3, 4 and 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for fair value and other information regarding our trading inventories, available-for-sale securities and derivative instruments.

Interest rate risk

Trading activities

We are exposed to interest rate risk as a result of our trading inventory (primarily comprised of fixed income instruments) in our Capital Markets segment. We actively manage the interest rate risk arising from our fixed income trading securities through the use of hedging strategies that involve U.S. Treasury securities, futures contracts, liquid spread products and derivatives.

We monitor the Value-at-Risk (“VaR”) for all of our trading portfolios on a daily basis. VaR is an appropriate statistical technique for estimating potential losses in trading portfolios due to typical adverse market movements over a specified time horizon with a suitable confidence level. We apply the Fed’s Market Risk Rule (“MRR”) for the purpose of calculating our capital ratios. The MRR, also known as the “Risk-Based Capital Guidelines: Market Risk” rule released by the Fed, the Office of the Comptroller of the Currency (“OCC”) and FDIC, requires us to calculate VaR for all of our trading portfolios, including fixed income, equity, foreign exchange and derivatives.

To calculate VaR, we use historical simulation. This approach assumes that historical changes in market conditions, such as in interest rates and equity prices, are representative of future changes. Simulation is based on daily market data for the previous twelve months. VaR is reported at a 99% confidence level for a one-day time horizon. Assuming that future market conditions change as they have in the past twelve months, we would expect to incur losses greater than those predicted by our one-day VaR estimates about once every 100 trading days, or about three times per year on average. For regulatory capital calculation purposes, we also report VaR numbers for a ten-day time horizon.

The Fed’s MRR requires us to perform daily back-testing procedures of our VaR model, whereby we compare each day’s projected VaR to its regulatory-defined daily trading losses, which exclude fees, commissions, reserves, net interest income and intraday trading. Based on these daily “ex ante” versus “ex post” comparisons, we determine whether the number of times that regulatory-defined daily trading losses exceed VaR is consistent with our expectations at a 99% confidence level. During the three months ended December 31, 2019, our regulatory-defined daily loss in our trading portfolios did not exceed our predicted VaR.

The following table sets forth the high, low, period-end and daily average VaR for all of our trading portfolios, including fixed income, equity and derivative instruments, for the period and dates indicated.
 
 
Three months ended December 31, 2019
 
Period-end VaR
 
 
 
Three months ended December 31,
$ in millions
 
High
 
Low
 
December 31,
2019
 
September 30,
2019
 
$ in millions
 
2019
 
2018
Daily VaR
 
$
2

 
$
1

 
$
1

 
$
1

 
Daily average VaR
 
$
1

 
$
1


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


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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Separately, RJF provides additional market risk disclosures to comply with the MRR. The results of the application of this market risk capital rule are available on our website under https://www.raymondjames.com/investor-relations/financial-information/filings-and-reports within “Other Reports and Information.”

Should markets suddenly become more volatile, actual trading losses may exceed VaR results presented on a single day and might accumulate over a longer time horizon, such as a number of consecutive trading days. Accordingly, management applies additional controls including position limits, a daily review of trading results, review of the status of aged inventory, independent controls on pricing, monitoring of concentration risk, review of issuer ratings and stress testing. We utilize stress testing to complement our VaR analysis so as to measure risk under historical and hypothetical adverse scenarios. During volatile markets, we may choose to pare our trading inventories to reduce risk.

Banking operations

RJ Bank maintains an earning asset portfolio that is comprised of cash, C&I loans, tax-exempt loans, commercial and residential real estate loans, SBL and other loans, as well as MBS and CMOs (held in the available-for-sale securities portfolio), Small Business Administration loan securitizations and a trading portfolio of corporate loans.  These earning assets are primarily funded by client deposits.  Based on its current earning asset portfolio, RJ Bank is subject to interest rate risk.  RJ Bank analyzes interest rate risk based on forecasted net interest income, which is the net amount of interest received and interest paid, and the net portfolio valuation, both in a range of interest rate scenarios.

One of the objectives of RJ Bank’s Asset Liability Management Committee is to manage the sensitivity of net interest income to changes in market interest rates. The methods used to measure this sensitivity are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Market risk” of our 2019 Form 10-K.

We utilize a hedging strategy using interest rate swaps as a result of RJ Bank’s asset and liability management process. For further information regarding this hedging strategy, see Note 2 of the Notes to Consolidated Financial Statements of our 2019 Form 10-K.

The following table is an analysis of RJ Bank’s estimated net interest income over a 12 month period based on instantaneous shifts in interest rates (expressed in basis points) using RJ Bank’s own asset/liability model.
Instantaneous changes in rate
 
Net interest income
($ in millions)
 
Projected change in
net interest income
+200
 
$814
 
(2.75)%
+100
 
$849
 
1.43%
0
 
$837
 
—
-100
 
$686
 
(18.04)%

Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net interest analysis” of this Form 10-Q for a discussion of the impact changes in short-term interest rates could have on the firm’s operations.

The following table shows the contractual maturities of RJ Bank’s loan portfolio at December 31, 2019, including contractual principal repayments.  This table does not include any estimates of prepayments, which could shorten the average loan lives and cause the actual timing of the loan repayments to differ significantly from those shown in the table. Loan amounts in the table exclude unearned income and deferred expenses.
 
 
Due in
$ in millions
 
One year or less
 
> One year – five years
 
> 5 years
 
Total
Loans held for investment:
 
 

 
 

 
 
 
 

C&I loans
 
$
185

 
$
3,837

 
$
4,021

 
$
8,043

CRE construction loans
 
44

 
83

 
40

 
167

CRE loans
 
547

 
2,499

 
727

 
3,773

Tax-exempt loans
 
—

 
77

 
1,143

 
1,220

Residential mortgage loans
 
—

 
5

 
4,700

 
4,705

SBL and other
 
3,360

 
51

 
—

 
3,411

Total loans held for investment
 
4,136

 
6,552

 
10,631

 
21,319

Loans held for sale
 
—

 
—

 
188

 
188

Total loans
 
$
4,136

 
$
6,552

 
$
10,819

 
$
21,507


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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


The following table shows the distribution of the recorded investment of those RJ Bank loans that mature in more than one year between fixed and adjustable interest rate loans at December 31, 2019. Loan amounts in the table exclude unearned income and deferred expenses.
 
 
Interest rate type
$ in millions
 
Fixed
 
Adjustable
 
Total
Loans held for investment:
 
 

 
 

 
 

C&I loans
 
$
148

 
$
7,710

 
$
7,858

CRE construction loans
 
—

 
123

 
123

CRE loans
 
108

 
3,118

 
3,226

Tax-exempt loans
 
1,220

 
—

 
1,220

Residential mortgage loans
 
228

 
4,477


4,705

SBL and other
 
1

 
50

 
51

Total loans held for investment
 
1,705

 
15,478

 
17,183

Loans held for sale
 
3

 
185

 
188

Total loans
 
$
1,708

 
$
15,663

 
$
17,371


Contractual loan terms for C&I, CRE, CRE construction and residential mortgage loans may include an interest rate floor, cap and/or fixed interest rates for a certain period of time, which would impact the timing of the interest rate reset for the respective loan. See the discussion within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk - Risk monitoring process” section of this Form 10-Q for additional information regarding RJ Bank’s interest-only residential mortgage loan portfolio.

In our RJ Bank available-for-sale securities portfolio, we hold primarily fixed-rate agency MBS and CMOs which were carried at fair value on our Condensed Consolidated Statements of Financial Condition at December 31, 2019, with changes in the fair value of the portfolio recorded through OCI in our Condensed Consolidated Statements of Income and Comprehensive Income. At December 31, 2019, our RJ Bank available-for-sale securities portfolio had a fair value of $3.22 billion with a weighted-average yield of 2.35% and an average expected duration of three years. See Note 4 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on the fair value of these securities.

Equity price risk

We are exposed to equity price risk as a result of our capital markets activities. Our broker-dealer activities are primarily client-driven, with the objective of meeting clients’ needs while earning revenues to compensate for the risk associated with carrying inventory.  We attempt to reduce the risk of loss inherent in our inventory of equity securities by monitoring those security positions throughout each day and establishing position limits.

Foreign exchange risk

We are subject to foreign exchange risk due to our investments in foreign subsidiaries as well as transactions and resulting balances denominated in a currency other than the U.S. dollar. For example, a portion of our bank loan portfolio includes loans which are denominated in Canadian dollars totaling $1.14 billion and $1.10 billion at December 31, 2019 and September 30, 2019, respectively. A portion of such loans are held by RJ Bank’s Canadian subsidiary, which is discussed in the following sections.

Investments in foreign subsidiaries

RJ Bank has an investment in a Canadian subsidiary, resulting in foreign exchange risk. To mitigate its foreign exchange risk, RJ Bank utilizes short-term, forward foreign exchange contracts. These derivatives are primarily accounted for as net investment hedges in the condensed consolidated financial statements. See Note 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding these derivatives.

We had foreign exchange risk in our investment in RJ Ltd. of CAD 363 million at December 31, 2019, which was not hedged. Foreign exchange gains/losses related to this investment are primarily reflected in OCI on our Condensed Consolidated Statements of Income and Comprehensive Income. See Note 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding our components of OCI.


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Management’s Discussion and Analysis


We also have foreign exchange risk associated with our investments in subsidiaries located in Europe. These investments are not hedged and we do not believe we have material foreign exchange risk either individually, or in the aggregate, pertaining to these subsidiaries.

Transactions and resulting balances denominated in a currency other than the U.S. dollar

We are subject to foreign exchange risk due to our holdings of cash and certain other assets and liabilities resulting from transactions denominated in a currency other than the U.S. dollar. Any currency-related gains/losses arising from these foreign currency denominated balances are reflected in “Other” revenues in our Condensed Consolidated Statements of Income and Comprehensive Income. The foreign exchange risk associated with a portion of such transactions and balances denominated in foreign currency are mitigated utilizing short-term, forward foreign exchange contracts. Such derivatives are not designated hedges and therefore, the related gains/losses associated with these contracts are included in “Other” revenues in our Condensed Consolidated Statements of Income and Comprehensive Income. See Note 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding our derivatives.

Credit risk

Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. The nature and amount of credit risk depends on the type of transaction, the structure and duration of that transaction, and the parties involved. Credit risk is an integral component of the profit assessment of lending and other financing activities. See further discussion of our credit risk, including how we manage such risk, in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk” of our 2019 Form 10-K.

RJ Bank has a substantial loan portfolio.  A significant downturn in the overall economy, deterioration in real estate values or a significant issue within any sector or sectors where RJ Bank has a concentration could result in large provisions for loan losses and/or charge-offs.

Our allowance for loan losses is regularly evaluated with adjustments made on a quarterly basis. Several factors were taken into consideration in evaluating the allowance for loan losses at December 31, 2019, including the risk profile of the portfolios, net charge-offs during the period, the level of nonperforming loans and delinquency ratios. RJ Bank also considered the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. Finally, RJ Bank considered current economic conditions and other factors that might impact the portfolio. RJ Bank determined the allowance that was required for specific loan grades based on relative risk characteristics of the loan portfolio. On an ongoing basis, RJ Bank evaluates its methods for determining the allowance for each class of loans and makes enhancements it considers appropriate. There was no material change in RJ Bank’s methodology for determining the allowance for loan losses during the three months ended December 31, 2019.

RJ Bank’s allowance for loan losses as a percentage of bank loans outstanding was 1.01% and 1.04% at December 31, 2019 and September 30, 2019, respectively. See Note 7 in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for detail on the changes in RJ Bank’s allowance for loan losses.
The loan loss benefit for the three months ended December 31, 2019 was $2 million compared to a loan loss provision of $16 million for the prior year quarter. See further explanation of the loan loss provision increase in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - RJ Bank” of this Form 10-Q.
The level of charge-off activity is a factor that is considered in evaluating the potential for severity of future credit losses. The following table presents net loan (charge-offs)/recoveries and the percentage of net loan (charge-offs)/recoveries to the average outstanding loan balances by loan portfolio segment. 
 
 
Three months ended December 31,
 
 
2019
 
2018
$ in millions
 
Net loan
(charge-off)/recovery
amount
 
% of avg.
outstanding
loans
 
Net loan
(charge-off)/recovery
amount
 
% of avg.
outstanding
loans
Residential mortgage loans
 
—

 
—

 
1

 
0.06
%
Total
 
$
—

 
—
%
 
$
1

 
0.01
%

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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


The level of nonperforming loans is another indicator of potential future credit losses. The following table presents the nonperforming loans balance and total allowance for loan losses for the periods presented.
 
 
December 31, 2019
 
September 30, 2019
$ in millions
 
Nonperforming
loan balance
 
Allowance for
loan losses
balance
 
Nonperforming
loan balance
 
Allowance for
loan losses
balance
Loans held for investment:
 
 

 
 

 
 

 
 

C&I loans
 
$
16

 
$
139

 
$
19

 
$
139

CRE construction loans
 
—

 
2

 
—

 
3

CRE loans
 
7

 
46

 
8

 
46

Tax-exempt loans
 
—

 
8

 
—

 
9

Residential mortgage loans
 
15

 
17

 
16

 
16

SBL and other
 
—

 
4

 
—

 
5

Total
 
$
38

 
$
216

 
$
43

 
$
218

Total nonperforming loans as a % of RJ Bank total loans
 
0.18
%
 
 
 
0.21
%
 
 

Included in nonperforming residential mortgage loans were $9 million in loans for which $4 million in charge-offs were previously recorded, resulting in less exposure within the remaining balance. See Note 7 in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for loan categories as a percentage of total loans receivable.

The nonperforming loan balances in the preceding table exclude $11 million and $12 million as of December 31, 2019 and September 30, 2019, respectively, of residential TDRs which were returned to accrual status in accordance with our policy. Total nonperforming assets, including other real estate acquired in the settlement of residential mortgages, amounted to $41 million and $46 million at December 31, 2019 and September 30, 2019, respectively. Total nonperforming assets as a percentage of RJ Bank total assets was 0.16% and 0.18% at December 31, 2019 and September 30, 2019, respectively.

Loan underwriting policies

RJ Bank’s underwriting policies for the major types of loans are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk” of our 2019 Form 10-K. There were no material changes in RJ Bank’s underwriting policies during the three months ended December 31, 2019.

Risk monitoring process

Another component of credit risk strategy at RJ Bank is the ongoing risk monitoring and review processes for all residential, SBL, corporate and tax-exempt credit exposures, as well as our rigorous processes to manage and limit credit losses arising from loan delinquencies. There are various other factors included in these processes, depending on the loan portfolio. There were no material changes to those processes and policies during the three months ended December 31, 2019.

Residential mortgage and SBL and other loan portfolios

The collateral securing RJ Bank’s SBL and other portfolio is monitored on a recurring basis, with marketable collateral monitored on a daily basis. Collateral adjustments are made by the borrower as necessary to ensure RJ Bank’s loans are adequately secured, resulting in minimizing its credit risk. Collateral calls have been minimal relative to our SBL and other portfolio with no losses incurred to date.

We track and review many factors to monitor credit risk in RJ Bank’s residential mortgage loan portfolio. The factors include, but are not limited to: loan performance trends, loan product parameters and qualification requirements, borrower credit scores, level of documentation, loan purpose, geographic concentrations, average loan size and LTV ratios. These measures, while considered and reviewed in establishing the allowance for loan losses, have not resulted in any material adjustments to RJ Bank’s historical loss rates.


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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


The following table presents a summary of delinquent residential mortgage loans, the vast majority of which are first mortgage loans, which are comprised of loans which are two or more payments past due as well as loans in the process of foreclosure.
 
 
Amount of delinquent residential loans
 
Delinquent residential loans as a percentage of outstanding loan balances
$ in millions
 
30-89 days
 
90 days or more
 
Total
 
30-89 days
 
90 days or more
 
Total
December 31, 2019
 
$
3

 
$
9

 
$
12

 
0.06
%
 
0.19
%
 
0.25
%
September 30, 2019
 
$
2

 
$
10

 
$
12

 
0.04
%
 
0.22
%
 
0.26
%

Our December 31, 2019 percentage continues to compare favorably to the national average for over 30 day delinquencies of 2.64%, as most recently reported by the Fed.

Credit risk is also managed by diversifying the residential mortgage portfolio. The following table details the geographic concentrations (top five states) of RJ Bank’s one-to-four family residential mortgage loans.
 
 
December 31, 2019
 
 
Loans outstanding as a % of RJ Bank total residential mortgage loans
 
Loans outstanding as a % of RJ Bank total loans
CA
 
26.4%
 
5.8%
FL
 
16.5%
 
3.7%
TX
 
7.9%
 
1.7%
NY
 
7.4%
 
1.6%
CO
 
3.8%
 
0.8%

Loans where borrowers may be subject to payment increases include adjustable rate mortgage loans with terms that initially require payment of interest only.  Payments may increase significantly when the interest-only period ends and the loan principal begins to amortize.  At December 31, 2019 and September 30, 2019, these loans totaled $1.40 billion and $1.29 billion, respectively, or approximately 30% of the residential mortgage portfolio as of each of these dates.  The weighted average number of years before the remainder of the loans, which were still in their interest-only period at December 31, 2019, begins amortizing is 6.2 years.

A component of credit risk management for the residential portfolio is the LTV ratio and borrower credit score at origination or purchase. The most recent weighted-average LTV ratios and FICO scores at origination of RJ Bank’s residential first mortgage loan portfolio were 64% and 765, respectively.

Corporate and tax-exempt loans

Credit risk in RJ Bank’s corporate and tax-exempt loan portfolios is monitored on an individual loan basis. The majority of RJ Bank’s tax-exempt loan portfolio is comprised of loans to investment-grade borrowers.

Credit risk is managed by diversifying the corporate loan portfolio. RJ Bank’s corporate loan portfolio does not contain a significant concentration in any single industry. The following table details the industry concentrations (top five categories) of RJ Bank’s corporate loans.
 
 
December 31, 2019
 
 
Loans outstanding as a % of RJ Bank total corporate loans
 
Loans outstanding as a % of RJ Bank total loans
Office real estate
 
8.2%
 
4.5%
Business systems and services
 
7.4%
 
4.1%
Automotive/transportation
 
6.5%
 
3.6%
Hospitality
 
5.9%
 
3.2%
Multifamily
 
5.3%
 
2.9%

Liquidity risk

See the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and capital resources” of this Form 10-Q for information regarding our liquidity and how we manage liquidity risk.


70
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Management’s Discussion and Analysis


Operational risk

Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, business disruptions, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems and inadequacies or breaches in our control processes, including cybersecurity incidents. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Operational risk” of our 2019 Form 10-K for a discussion of our operational risk and certain of our risk mitigation processes. There have been no material changes in such processes during the three months ended December 31, 2019.

As more fully described in the discussion of our business technology risks included in various risk factors presented in Item 1A “Risk Factors” of our 2019 Form 10-K, despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, cyberattacks and other information security breaches, and other events that could have an impact on the security and stability of our operations.  To-date, we have not experienced any material losses relating to cyberattacks or other information security breaches; however, there can be no assurances that we will not suffer such losses in the future.

Model risk

Model risk refers to the possibility of unintended business outcomes arising from the design, implementation or use of models. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Model risk” of our 2019 Form 10-K for information regarding how we utilize models throughout the firm and how we manage model risk.

Compliance risk

Compliance risk is the risk of legal or regulatory sanctions, financial loss, or reputational damage that the firm may suffer from a failure to comply with applicable laws, external standards, or internal requirements. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Compliance risk” of our 2019 Form 10-K for information on our compliance risks, including how we manage such risks. There have been no material changes in our risk mitigation processes during the three months ended December 31, 2019.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management” of this Form 10-Q for our quantitative and qualitative disclosures about market risk.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls are procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Securities Exchange Act of 1934 Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


71

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A. RISK FACTORS

Not applicable.

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

We did not have any sales of unregistered securities for the three months ended December 31, 2019.

We purchase our own stock from time to time in conjunction with a number of activities, each of which is described in the following paragraphs. The following table presents information on our purchases of our own stock, on a monthly basis, for the three months ended December 31, 2019.
 
Total number of shares
purchased
 
Average price
per share
 
Number of shares purchased as part of publicly announced plans or programs
 
Approximate dollar value (in millions) at each month-end, of securities that may yet be purchased under the plans or programs
 
 
 
 
 
 
 
 
October 1, 2019 – October 31, 2019
5,582

 
$
84.80

 
—

 
$750
November 1, 2019 – November 30, 2019
86,720

 
$
89.35

 
—

 
$750
December 1, 2019 – December 31, 2019
132,723

 
$
89.33

 
125,567

 
$739
First quarter
225,025

 
$
89.23

 
125,567

 
 

In the preceding table, the total number of shares purchased includes shares purchased pursuant to our Restricted Stock Trust Fund, which was established to acquire our common stock in the open market and used to settle RSUs granted as a retention vehicle for certain employees of our wholly owned Canadian subsidiaries. For more information on this trust fund, see Note 2 of the Notes to Consolidated Financial Statements of our 2019 Form 10-K and Note 8 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. These activities do not utilize the repurchase authorization presented in the preceding table.

The total number of shares purchased also includes shares repurchased as a result of employees surrendering shares as payment for option exercises or withholding taxes. These activities do not utilize the repurchase authorization presented in the preceding table.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.


72

ITEM 6. EXHIBITS
Exhibit Number

Description
3.1

Restated Articles of Incorporation of Raymond James Financial, Inc. as filed with the Secretary of State of Florida on November 25, 2008, incorporated by reference to Exhibit 3(i).1 to the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on November 28, 2008.
3.2

Amended and Restated By-Laws of Raymond James Financial, Inc., reflecting amendments adopted by the Board of Directors on November 30, 2017, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 5, 2017.
31.1

Certification of Paul C. Reilly pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2

Certification of Paul M. Shoukry pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32

Certification of Paul C. Reilly and Paul M. Shoukry pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS

XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.).
101.SCH

Inline XBRL Taxonomy Extension Schema Document.
101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104

Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
RAYMOND JAMES FINANCIAL, INC.
 
 
 
(Registrant)
 
 
 
 
Date:
February 7, 2020
 
/s/ Paul C. Reilly
 
 
 
Paul C. Reilly
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
Date:
February 7, 2020
 
/s/ Paul M. Shoukry
 
 
 
Paul M. Shoukry
 
 
 
Chief Financial Officer and Treasurer

73

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