Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INDEX
	PAGE
Introduction	34
Executive overview	34
Segments	36
Reconciliation of GAAP measures to non-GAAP financial measures	37
Net interest analysis	38
Results of Operations
Private Client Group	40
Capital Markets	43
Asset Management	45
RJ Bank	47
Other	51
Certain statistical disclosures by bank holding companies	51
Liquidity and capital resources	52
Sources of liquidity	52
Statement of financial condition analysis	56
Contractual obligations	56
Regulatory	57
Critical accounting estimates	57
Recent accounting developments	58
Off-balance sheet arrangements	58
Effects of inflation	58
Risk management	59

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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 consolidated financial statements and accompanying notes to consolidated financial statements. Where “NM” is used in various percentage change computations, the computed percentage change has been determined 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, market volatility, corporate and mortgage lending markets and commercial and residential credit trends. Overall market conditions, interest rates, economic, political and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control. These factors affect the financial decisions made by market participants, 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

Year ended September 30, 2019 compared with the year ended September 30, 2018

Net revenues of $7.74 billion increased $466 million, or 6%. Pre-tax income of $1.38 billion increased $64 million, or 5%. Our net income of $1.03 billion increased $177 million, or 21%, compared with the prior year, which included a loss of $105 million related to the Tax Cuts and Jobs Act (“Tax Act”), and our earnings per diluted share were $7.17, reflecting a 25% increase. We achieved a return on equity of 16.2% for fiscal 2019, compared with 14.4% for the prior year.

Excluding a $15 million loss on the sale of our operations related to research, sales and trading of European equities and a $19 million goodwill impairment associated with our Canadian Capital Markets business, adjusted net income was $1.07 billion(1), an increase of 11% compared with adjusted net income of $965 million(1) for the prior year. Adjusted earnings per diluted share were $7.40(1), a 14% increase compared with adjusted earnings per diluted share of $6.47(1) for the prior year. Our adjusted return on equity was 16.7%(1) for fiscal 2019, compared with adjusted return on equity of 16.0%(1) for the prior year.

The $466 million increase in net revenues compared with the prior year reflected higher asset management and related administrative fees, net interest income and investment banking revenues. Partially offsetting these increases, brokerage revenues declined compared with the prior year.

Compensation, commissions and benefits expense increased $292 million, or 6%, due to the increase in compensable net revenues, as well as increased staffing levels required to support our continued growth and regulatory compliance requirements. Non-compensation expenses increased $110 million, or 9%. The increase in non-compensation expenses consisted of: the aforementioned $19 million goodwill impairment charge associated with our Canadian Capital Markets business and $15 million loss on the sale of our operations related to research, sales and trading of European equities; a gross-up of $31 million due to new accounting guidance that we adopted in fiscal 2019 which changed the presentation of certain costs (primarily related to investment banking transactions) from a net presentation to a gross presentation; and a $45 million increase in other non-compensation expenses, which included increases in communications and information processing, occupancy and equipment, and business development expenses due to continued investments to support our growth.

Our effective income tax rate was 24.8% for fiscal 2019, reflecting a federal corporate statutory tax rate of 21.0% as a result of the Tax Act enacted in December 2017. Our future effective income tax rate may be impacted positively or negatively by non-taxable items (such as the 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 fiscal 2019, we repurchased 9.83 million shares of common stock under our Board repurchase authorization for $752 million, an average price of approximately $76.50 per share. In total, we repurchased approximately 6.5% of shares outstanding at the beginning of the fiscal year and returned total capital of approximately $945 million to shareholders through the combination of dividends and share repurchases. As of September 30, 2019, we had $750 million of availability under the Board’s share repurchase authorization announced in August 2019.

1. “Adjusted net income,” “adjusted earnings per diluted share,” and “adjusted return on equity” are each non-GAAP financial measures. Please see the “Reconciliation of GAAP measures to non-GAAP measures” in this MD&A, for a reconciliation of our non-GAAP measures to the most directly comparable GAAP measures, and for other important disclosures.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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

•

PCG segment net revenues of $5.36 billion increased 5% and pre-tax income increased 1% to $579 million. The increase in net revenues was primarily attributable to an increase in asset management and related administrative fees, primarily due to higher assets in fee-based accounts compared with the prior year. The segment also benefited from an increase in account and service fees related to the RJBDP, the majority of which related to an increase in the per-account servicing fee from RJ Bank. These increases were partially offset by a decline in brokerage revenues. Non-interest expenses increased $263 million, or 6%, primarily resulting from a $237 million increase in compensation-related expenses due to higher compensable net revenues and increased staffing levels to support our continued growth and regulatory compliance requirements. Non-compensation expenses increased $26 million, or 4%, over the prior year.

•

Capital Markets net revenues of $1.08 billion increased 12% and pre-tax income increased 21% to $110 million. The increase in net revenues was primarily attributable to an increase in investment banking revenues, largely due to merger & acquisition activity. Brokerage revenues also increased, due to an increase in fixed income brokerage revenues, partially offset by a decline in equity brokerage revenues. Non-interest expenses increased $100 million, or 11%, including the aforementioned $19 million goodwill impairment associated with our Canadian Capital Markets business, $15 million loss on the sale of our operations related to research, sales and trading of European equities, $23 million gross-up of certain investment banking transaction-related expenses which were previously netted against revenues, as well as a $30 million increase in compensation expense primarily resulting from the increase in compensable net revenues.

•

Asset Management segment net revenues of $691 million increased 6% and pre-tax income increased 8% to $253 million. The increase in net revenues was driven by growth in fee-based accounts for PCG clients compared with the prior year. Assets in fee-based accounts increased both in programs managed by the Asset Management segment and in other asset-based programs for which the segment provides administrative support. Non-interest expenses increased $19 million, or 5%, primarily resulting from increased expenses to support the growth of the business and a full year of the Scout Group, which was acquired in November 2017.

•

RJ Bank net revenues of $846 million increased 16% and pre-tax income increased 5% to $515 million. The increase in net revenues primarily resulted from an increase in net interest income due to growth in average interest-earning assets and an increase in net interest margin, lifted by higher short-term interest rates for most of the year. Non-interest expenses increased $96 million, or 41%, primarily reflecting an increase in RJBDP servicing fees paid to PCG, largely due to an increase in the per-account fee effective October 1, 2018.

•	Our Other segment reflected a pre-tax loss that was flat compared to the prior year, as higher interest income was offset by an increase in non-interest expenses for the segment.

Year ended September 30, 2018 compared with the year ended September 30, 2017

Refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K for a discussion of our fiscal 2018 results compared to fiscal 2017.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Segments

The following table presents our consolidated and segment net revenues and pre-tax income/(loss) for the years indicated.

		Year ended September 30,												% change
$ in millions		2019				2018				2017				2019 vs. 2018			2018 vs. 2017
Total company
Net revenues		$	7,740			$	7,274			$	6,371			6	%		14	%
Pre-tax income		$	1,375			$	1,311			$	925			5	%		42	%
Private Client Group
Net revenues		$	5,359			$	5,093			$	4,422			5	%		15	%
Pre-tax income		$	579			$	576			$	373			1	%		54	%
Capital Markets
Net revenues		$	1,083			$	964			$	1,014			12	%		(5	)%
Pre-tax income		$	110			$	91			$	141			21	%		(35	)%
Asset Management
Net revenues		$	691			$	654			$	488			6	%		34	%
Pre-tax income		$	253			$	235			$	172			8	%		37	%
RJ Bank
Net revenues		$	846			$	727			$	593			16	%		23	%
Pre-tax income		$	515			$	492			$	409			5	%		20	%
Other
Net revenues		$	5			$	(15	)		$	(30	)		NM			50	%
Pre-tax loss		$	(82	)		$	(83	)		$	(170	)		1	%		51	%
Intersegment eliminations
Net revenues		$	(244	)		$	(149	)		$	(116	)

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 as additional measures to aid in, and enhance, the understanding of our financial results and related measures. These non-GAAP financial measures include adjusted net income, adjusted earnings per diluted share, and adjusted return on equity. We believe each of these non-GAAP financial measures provides useful information to management and investors by excluding certain material items that may not be indicative of our core operating results. We utilize these non-GAAP financial measures in assessing the financial performance of the business, as they facilitate a meaningful comparison of current- and prior-period results. In the following table, the tax effect of non-GAAP adjustments reflects the statutory rate associated with each non-GAAP item. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP. In addition, our non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of other companies. The following table provides a reconciliation of GAAP measures to non-GAAP financial measures for those periods which include non-GAAP adjustments.

		Year ended September 30,
$ in millions, except per share amounts		2019				2018				2017
Net income		$	1,034			$	857			$	636
Non-GAAP adjustments:
Acquisition and disposition-related expenses		15				4				18
Goodwill impairment		19				—				—
Losses on extinguishment of debt		—				—				46
Jay Peak matter		—				—				130
Tax effect of non-GAAP adjustments		—				(1		)		(62		)
Impact of the Tax Act		—				105				—
Total non-GAAP adjustments, net of tax		34				108				132
Adjusted net income		$	1,068			$	965			$	768
Earnings per diluted share		$	7.17			$	5.75			$	4.33
Non-GAAP adjustments:
Acquisition and disposition-related expenses		0.10				0.03				0.12
Goodwill impairment		0.13				—				—
Losses on extinguishment of debt		—				—				0.31
Jay Peak matter		—				—				0.89
Tax effect of non-GAAP adjustments		—				(0.01		)		(0.42		)
Impact of the Tax Act		—				0.70				—
Total non-GAAP adjustments, net of tax		0.23				0.72				0.90
Adjusted earnings per diluted share		$	7.40			$	6.47			$	5.23
Return on equity
Average equity		$	6,392			$	5,949			$	5,235
Non-GAAP adjustments:
Acquisition and disposition-related expenses		12				3				12
Goodwill impairment		4				—				—
Losses on extinguishment of debt		—				—				12
Jay Peak matter		—				—				84
Tax effect of non-GAAP adjustments		—				(1		)		(33		)
Impact of the Tax Act		—				92				—
Total non-GAAP adjustments, net of tax		16				91				75
Adjusted average equity		$	6,408			$	6,043			$	5,310
Return on equity		16.2		%		14.4		%		12.2		%
Adjusted return on equity		16.7		%		16.0		%		14.5		%

Average equity is computed by adding the total equity attributable to RJF as of each quarter-end date during the indicated fiscal year to the beginning of the year total and dividing by five. Adjusted average equity is computed by adjusting for the impact on average equity of the non-GAAP adjustments, as applicable for each respective period.

Return on equity is computed by dividing net income by average equity for each respective period or, in the case of adjusted return on equity, computed by dividing adjusted net income by adjusted average equity for each respective period.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Further information about these non-GAAP adjustment can be found in the following Notes to Consolidated Financial Statements of this Form 10-K: Notes 3 and 24 for acquisition and disposition-related expenses; Note 11 for the goodwill impairment; Note 16 for more information related to the impact of the Tax Act; and Note 15 for more information related to the losses on extinguishment of debt. For more information regarding the Jay Peak matter, see our 2018 Form 10-K.

Net interest analysis

Short-term interest rates for the majority of fiscal 2019 were higher than in fiscal 2018, as the Federal Reserve raised its benchmark short-term interest rate by 25 basis points in December 2018, in addition to 25 basis point increases in each quarter of fiscal 2018. These increases in short-term interest rates, along with similar increases in fiscal 2017, have had a significant impact on our overall financial performance, as we have certain assets and liabilities, primarily held in our PCG and RJ Bank segments, which are sensitive to changes in interest rates. However, during our fourth fiscal quarter of 2019, the Federal Reserve announced two decreases in its benchmark short-term interest rate of 25 basis points each, which had a negative impact on our financial performance toward the end of fiscal 2019, and a third decrease of 25 basis points in October 2019. These three rate cuts are expected to have a negative impact on our fiscal 2020 results.

Given the relationship of our interest-sensitive assets to liabilities held in each of these segments, increases in short-term interest rates generally result in an overall increase 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 decreases in short-term interest rates and/or increases in the deposit rates paid to clients generally have a negative impact on our earnings. Effective May 6, 2019, we modified our methodology for crediting interest on client cash balances, changing the basis from total relationship assets at the firm to total relationship cash balances at the firm. Accordingly, although the crediting schedule was revised upward on that date, we experienced a decrease in the average cost to the firm.

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” for our PCG, RJ Bank, and Other segments.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The following table presents our consolidated average balance, interest income and expense and the related yield 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.

		Year ended September 30,
		2019											2018											2017
$ in millions		Average balance				Interest inc./exp.				Average yield/cost			Average balance				Interest inc./exp.				Average yield/cost			Average balance				Interest inc./exp.				Average yield/cost
Interest-earning assets:
Assets segregated pursuant to regulations		$	2,399			$	59			2.47	%		$	3,011			$	53			1.76	%		$	3,822			$	38			0.99	%
Trading instruments		733				26				3.56	%		693				23				3.32	%		655				21				3.22	%
Available-for-sale securities		2,872				69				2.39	%		2,531				52				2.07	%		1,588				28				1.76	%
Margin loans		2,584				122				4.73	%		2,590				107				4.14	%		2,403				86				3.57	%
Bank loans, net:
Loans held for investment:
C&I loans		8,070				378				4.62	%		7,619				326				4.22	%		7,340				281				3.78	%
CRE construction loans		221				12				5.51	%		166				8				5.08	%		129				6				4.73	%
CRE loans		3,451				159				4.53	%		3,231				133				4.06	%		2,832				101				3.50	%
Tax-exempt loans		1,284				35				3.36	%		1,146				30				3.42	%		892				23				3.98	%
Residential mortgage loans		4,091				135				3.30	%		3,448				109				3.16	%		2,803				84				2.94	%
SBL and other		3,139				145				4.57	%		2,690				111				4.09	%		2,124				72				3.36	%
Loans held for sale		151				7				4.73	%		126				5				4.01	%		159				5				3.34	%
Total bank loans, net		20,407				871				4.26	%		18,426				722				3.93	%		16,279				572				3.55	%
Loans to financial advisors, net		916				18				2.01	%		882				15				1.71	%		836				13				1.60	%
Corporate cash and all other		4,658				116				2.48	%		4,007				72				1.79	%		3,327				44				1.32	%
Total interest-earning assets		$	34,569			$	1,281			3.71	%		$	32,140			$	1,044			3.25	%		$	28,910			$	802			2.77	%
Interest-bearing liabilities:
Bank deposits:
Certificates of deposit		$	536			$	12			2.24	%		$	372			$	6			1.67	%		294				4				1.47	%
Savings, money market and Negotiable Order of Withdrawal (“NOW”) accounts		20,889				120				0.58	%		18,473				60				0.32	%		15,567				13				0.08	%
Trading instruments sold but not yet purchased		292				7				2.50	%		278				7				2.64	%		289				6				2.12	%
Brokerage client payables		3,326				21				0.62	%		4,147				15				0.37	%		4,645				5				0.11	%
Other borrowings		926				21				2.30	%		914				22				2.41	%		856				17				1.94	%
Senior notes payable		1,550				73				4.70	%		1,549				73				4.69	%		1,689				95				5.60	%
Other		738				29				3.91	%		599				19				3.10	%		739				14				1.94	%
Total interest-bearing liabilities		$	28,257			$	283			1.00	%		$	26,332			$	202			0.77	%		$	24,079			$	154			0.64	%
Net interest income						$	998										$	842										$	648

Nonaccrual loans are included in the average loan balances in the preceding table. Payment or income received on corporate nonaccrual loans are applied to principal. Income on residential mortgage nonaccrual loans is recognized on a cash basis.

Fee income on all loans included in interest income for the years ended September 30, 2019, 2018 and 2017 was $18 million, $24 million and $38 million, respectively.

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

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Results of Operations – Private Client Group

Through our PCG segment, we provide financial planning, investment advisory and securities transaction services for which we charge either asset-based fees (presented in “Asset management and related administrative fees”) or sales commissions (presented in “Brokerage revenues”). We also earn revenues for distribution and related support services performed related primarily to mutual funds, fixed and variable annuities and insurance products. Revenues of this segment are correlated with the level of PCG client assets under administration, including fee-based accounts, as well as the overall U.S. equity markets. In periods where equity markets improve, assets under administration and client activity generally increase, thereby having a favorable impact on net revenues.

We also earn certain servicing fees, such as omnibus and education and marketing support (“EMS”) fees from mutual fund and annuity companies whose products we distribute. Servicing fees earned from mutual fund and annuity companies are generally based on the level of assets or number of positions in such programs. We also earn fees from banks to which we sweep client cash in the RJBDP, including both third-party banks and RJ Bank. Such fees are included in “Account and service fees.” See “Clients’ domestic cash sweep balances” in the “Selected key metrics” section for further information about fees earned from the RJBDP.

Net interest revenue in the PCG segment is primarily generated by interest earnings on margin loans provided to clients and on assets segregated pursuant to regulations, less interest paid on client cash balances in the Client Interest Program (“CIP”). Higher client cash balances generally lead to increased interest income, depending on spreads realized in the CIP. For more information on client cash balances, see “Clients’ domestic cash sweep balances” in the “Selected key metrics” section.

For an overview of our PCG segment operations, refer to the information presented in Item 1 “Business” of this Form 10-K.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Operating results

		Year ended September 30,												% change
$ in millions		2019				2018				2017				2019 vs. 2018			2018 vs. 2017
Revenues:
Asset management and related administrative fees		$	2,820			$	2,517			$	2,022			12	%		24	%
Brokerage revenues:
Mutual and other fund products		599				703				698				(15	)%		1	%
Insurance and annuity products		412				414				385				—			8	%
Equities, ETFs and fixed income products		378				432				424				(13	)%		2	%
Total brokerage revenues		1,389				1,549				1,507				(10	)%		3	%
Account and service fees:
Mutual fund and annuity service fees		334				332				291				1	%		14	%
RJBDP fees:
Third-party banks		280				262				202				7	%		30	%
RJ Bank		173				92				68				88	%		35	%
Client account and other fees		122				111				116				10	%		(4	)%
Total account and service fees		909				797				677				14	%		18	%
Investment banking		32				35				62				(9	)%		(44	)%
Interest income		225				193				153				17	%		26	%
All other		26				30				17				(13	)%		76	%
Total revenues		5,401				5,121				4,438				5	%		15	%
Interest expense		(42		)		(28		)		(16		)		50	%		75	%
Net revenues		5,359				5,093				4,422				5	%		15	%
Non-interest expenses:
Financial advisor compensation and benefit costs		3,190				3,051				2,653				5	%		15	%
Administrative compensation and benefit costs		933				835				713				12	%		17	%
Total compensation, commissions and benefits		4,123				3,886				3,366				6	%		15	%
Non-compensation expenses:
Communications and information processing		235				220				180				7	%		22	%
Occupancy and equipment costs		168				154				146				9	%		5	%
Business development		124				115				98				8	%		17	%
Professional fees		33				46				30				(28	)%		53	%
Jay Peak matter		—				—				130				—			(100	)%
All other		97				96				99				1	%		(3	)%
Total non-compensation expenses		657				631				683				4	%		(8	)%
Total non-interest expenses		4,780				4,517				4,049				6	%		12	%
Pre-tax income		$	579			$	576			$	373			1	%		54	%
Pre-tax margin on net revenues		10.8		%		11.3		%		8.4		%

Selected key metrics

PCG client asset balances:

		As of September 30,
$ in billions		2019				2018				2017
AUA		$	798.4			$	755.7			$	659.5
Assets in fee-based accounts (1)		$	409.1			$	366.3			$	294.5
Percent of AUA in fee-based accounts		51.2		%		48.5		%		44.7		%

(1)	A portion of our “Assets in fee-based accounts” is invested in “managed programs” overseen by our Asset Management segment, specifically 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.”

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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 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 traditional transaction-based accounts. As a result of the shift to fee-based accounts, a larger portion of our PCG revenues are more directly impacted by market movements.

Financial advisors:

		September 30,
		2019			2018			2017
Employees		3,301			3,167			3,041
Independent contractors		4,710			4,646			4,305
Total advisors		8,011			7,813			7,346

The number of financial advisors increased primarily due to continued financial advisor recruiting and high levels of retention.

Clients’ domestic cash sweep balances:

		As of
$ in millions		September 30, 2019				September 30, 2018				September 30, 2017
RJBDP
RJ Bank		$	21,649			$	19,446			$	17,387
Third-party banks		14,043				15,564				20,704
Subtotal RJBDP		35,692				35,010				38,091
Money market funds		—				3,240				1,818
CIP		2,022				2,807				3,101
Total clients’ domestic cash sweep balances		$	37,714			$	41,057			$	43,010

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 relative to interest paid to clients on balances in the RJBDP. 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. On October 1, 2018, the per-account servicing fee from RJ Bank was increased to reflect the current cost of administration.

While the level of short-term interest rates has generally risen in recent years due to several rate increases by the Federal Reserve, market deposit rates paid on client cash balances did not increase to as great a degree, resulting in an increase in RJBDP fees earned

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

from third-party banks. However, the rate decreases announced by the Fed during the fourth quarter of fiscal 2019 caused a decline in our RJBDP fees from third-party banks toward the end of the year. Any additional decreases in short-term interest rates, such as the one announced by the Federal Reserve in October 2019, increases in deposit rates paid to clients, and/or a significant decline in our clients’ cash balances would likely have a negative impact on our earnings. 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. 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.

Year ended September 30, 2019 compared with the year ended September 30, 2018

Net revenues of $5.36 billion increased $266 million, or 5%, compared with the prior year while pre-tax income of $579 million increased $3 million, or 1%.

Asset management and related administrative fees increased $303 million, or 12%, primarily due to higher assets in fee-based accounts compared with the prior year, reflecting successful financial advisor recruiting and retention, the continued shift to fee-based accounts from traditional transaction-based accounts, and equity market appreciation.

Brokerage revenues declined $160 million, or 10%, primarily as a result of a decline in mutual fund trails, which were impacted by a 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 increased $112 million, or 14%, primarily due to higher RJBDP fees from RJ Bank due to an increase in the per-account servicing fee and, to a lesser extent, an increase in the number of accounts. RJBDP fees from third-party banks also increased, driven by higher short-term interest rates for most of fiscal 2019.

Net interest income increased $18 million, or 11%, driven by an increase in interest income from client margin loans due to higher average short-term interest rates. Offsetting the increase in interest income, interest expense also increased due to the impact of higher average interest rates paid on client cash balances in the CIP, partially offset by lower client cash balances.

Compensation-related expenses increased $237 million, or 6%, due to higher compensable net revenues, as well as increased staffing levels to support our continued growth and regulatory compliance requirements.

Non-compensation expenses increased $26 million, or 4%, primarily due to higher communications and information processing expense as a result of our continued investment in technology infrastructure to support our growth, and higher occupancy and equipment and business development expenses, which were driven by branch expansion in our employee affiliation option as well as financial advisor growth. These increases were offset by a decrease in professional fees, primarily as a result of decreased consulting expenses.

Year ended September 30, 2018 compared with the year ended September 30, 2017

Refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K for a discussion of our fiscal 2018 results compared to fiscal 2017.

Results of Operations – Capital Markets

Our Capital Markets segment conducts fixed income and equity institutional sales and trading activities, equity research, investment banking and the syndication and related management of investments that qualify for tax credits.

We earn brokerage revenues for the sale of both equity and fixed income products, which are driven primarily through trade volume, resulting from a combination of participation in public offerings, general market activity, and by the Capital Markets group’s ability to find attractive investment opportunities for clients. In certain cases, we transact on a principal basis, which involves the purchase of securities from, and the sale of securities to, our clients as well as other dealers who may be purchasing or selling securities for their own account or acting on behalf of their clients. Profits and losses related to this activity are primarily derived from the spreads between bid and ask prices, as well as market trends for the individual securities during the period we hold them. To facilitate such transactions, we carry inventories of financial instruments. In our fixed income businesses, we also enter into interest rate swaps and futures contracts to facilitate client transactions or to actively manage risk exposures.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

We provide various investment banking services, including public and private equity and debt financing activities, public financing activities, merger and acquisition advisory, and other advisory services. Revenues from investment banking activities are driven principally by our role in the transaction and the number and dollar value of the transactions with which we are involved.

For an overview of our Capital Markets segment operations, refer to the information presented in Item 1 “Business” of this Form 10-K.

Operating results

		Year ended September 30,												% change
$ in millions		2019				2018				2017				2019 vs. 2018			2018 vs. 2017
Revenues:
Brokerage revenues:
Equity		$	131			$	156			$	173			(16	)%		(10	)%
Fixed income		283				245				311				16	%		(21	)%
Total brokerage revenues		414				401				484				3	%		(17	)%
Investment banking:
Equity underwriting		100				93				117				8	%		(21	)%
Merger & acquisition and advisory		369				297				228				24	%		30	%
Fixed income investment banking		95				76				84				25	%		(10	)%
Total investment banking		564				466				429				21	%		9	%
Interest income		38				32				27				19	%		19	%
Tax credit fund revenues		86				79				79				9	%		—
All other		15				14				16				7	%		(13	)%
Total revenues		1,117				992				1,035				13	%		(4	)%
Interest expense		(34		)		(28		)		(21		)		21	%		33	%
Net revenues		1,083				964				1,014				12	%		(5	)%
Non-interest expenses:
Compensation, commissions and benefits		665				635				646				5	%		(2	)%
Non-compensation expenses:
Communications and information processing		75				73				70				3	%		4	%
Occupancy and equipment costs		35				34				34				3	%		—
Business development		48				45				38				7	%		18	%
Professional fees		45				14				14				221	%		—
Acquisition and disposition-related expenses		15				—				—				NM			—
Goodwill impairment		19				—				—				NM			—
All other		71				72				71				(1	)%		1	%
Total non-compensation expenses		308				238				227				29	%		5	%
Total non-interest expenses		973				873				873				11	%		—
Pre-tax income		$	110			$	91			$	141			21	%		(35	)%
Pre-tax margin on net revenues		10.2		%		9.4		%		13.9		%

Year ended September 30, 2019 compared with the year ended September 30, 2018

Net revenues of $1.08 billion increased $119 million, or 12%, and pre-tax income of $110 million increased $19 million, or 21%.

Total brokerage revenues increased $13 million, or 3%, with an increase in fixed income brokerage revenues more than offsetting a decline in equity brokerage revenues. The increase in fixed income brokerage revenues was primarily due to an increase in client activity during the current year, as a result of increased interest rate volatility and client reinvestment. Equity brokerage revenues continue to be challenged by the industry trend toward the separate payment for research and execution services and the shift from high- to low-touch execution services.

Investment banking revenues increased $98 million, or 21%, led by increased merger & acquisition and advisory activity and, to a lesser extent, an increase in fixed income investment banking net revenues.

Compensation-related expenses increased $30 million, or 5%, primarily attributable to the increase in compensable net revenues.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Non-compensation expenses increased $70 million, or 29%, as the current year was negatively impacted by a $15 million loss associated with the sale of our operations related to research, sales and trading of European equities and a $19 million goodwill impairment associated with our Canadian Capital Markets business. In addition, professional fees increased $31 million, largely due to new accounting guidance that we adopted effective October 1, 2018, which changed the presentation of certain costs related to investment banking transactions from a net presentation to a gross presentation.

Year ended September 30, 2018 compared with the year ended September 30, 2017

Refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K for a discussion of our fiscal 2018 results compared to fiscal 2017.

Results of Operations – Asset Management

Our Asset Management segment earns asset management fees for providing asset management, portfolio management and related administrative services for retail and institutional clients. This segment oversees the portion of our fee-based AUA invested in “managed programs” for our PCG clients through AMS and through RJ Trust. This segment also provides asset management services through Carillon Tower Advisers for retail accounts managed on behalf of third-party institutions, institutional accounts or proprietary mutual funds that we manage. Asset management fees are based on fee-billable AUM, which is impacted by market fluctuations and net inflows or outflows of assets. Rising equity markets have historically had a positive impact on revenues as existing accounts increase in value.

Our Asset Management segment also earns administrative fees on certain fee-based assets within PCG that are not overseen by our Asset Management segment, but for which the segment provides administrative support (e.g., record-keeping). These administrative fees are based on asset balances, which are impacted by market fluctuations and net inflows or outflows of assets.

For an overview of our Asset Management segment operations, refer to the information presented in Item 1 “Business” of this Form 10-K.

Operating results

		Year ended September 30,												% change
$ in millions		2019				2018				2017				2019 vs. 2018			2018 vs. 2017
Revenues:
Asset management and related administrative fees:
Managed programs		$	467			$	454			$	326			3	%		39	%
Administration and other		178				156				127				14	%		23	%
Total asset management and related administrative fees		645				610				453				6	%		35	%
Account and service fees		31				28				20				11	%		40	%
All other		15				16				15				(6	)%		7	%
Net revenues		691				654				488				6	%		34	%
Non-interest expenses:
Compensation, commissions and benefits		179				170				123				5	%		38	%
Non-compensation expenses:
Communications and information processing		44				38				30				16	%		27	%
Investment sub-advisory fees		93				90				75				3	%		20	%
All other		122				121				88				1	%		38	%
Total non-compensation expenses		259				249				193				4	%		29	%
Total non-interest expenses		438				419				316				5	%		33	%
Pre-tax income		$	253			$	235			$	172			8	%		37	%
Pre-tax margin on net revenues		36.6		%		35.9		%		35.2		%

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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 AUM. These AUM include the portion of fee-based AUA in our PCG segment that are 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 or proprietary mutual funds that we manage (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 financial assets under management in AMS are impacted by market fluctuations and net inflows or outflows of assets, including transfers between fee-based accounts and traditional transaction-based accounts within our PCG segment.

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

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.

Financial assets under management:

		September 30,
$ in millions		2019				2018				2017
AMS (1)		$	91,802			$	83,289			$	69,962
Carillon Tower Advisers		58,521				63,330				31,831
Subtotal financial assets under management		150,323				146,619				101,793
Less: Assets managed for affiliated entities		(7,221		)		(5,702		)		(5,397		)
Total financial assets under management		$	143,102			$	140,917			$	96,396

(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):

		Year ended September 30,
$ in millions		2019				2018				2017
Financial assets under management at beginning of year		$	146,619			$	101,793			$	81,729
Carillon Tower Advisers:
Scout Group acquisition		—				27,087				—
Other - net inflows/(outflows)		(5,784		)		(63		)		246
AMS - net inflows		5,962				9,279				9,666
Net market appreciation in asset values		3,526				8,523				10,152
Financial assets under management at end of year		$	150,323			$	146,619			$	101,793

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.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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		September 30, 2019				Average fee rate
Equity		$	28,923			0.51%
Fixed income		24,776				0.18%
Balanced		4,822				0.37%
Total financial assets under management		$	58,521			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 $229.7 billion, $200.1 billion, and $157.0 billion as of September 30, 2019, 2018 and 2017, respectively. The increase in assets over the prior year was primarily due to clients moving to fee-based accounts from traditional 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 $6.6 billion, $6.1 billion, and $5.5 billion as of September 30, 2019, 2018 and 2017, respectively.

Year ended September 30, 2019 compared with the year ended September 30, 2018

Net revenues of $691 million increased $37 million, or 6%, and pre-tax income of $253 million increased $18 million, or 8%.

Total asset management and related administrative fee revenues increased $35 million, or 6%, driven by growth in fee-based accounts for PCG clients compared with the prior year. 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.

Compensation and benefits expense increased $9 million, or 5%, primarily due to an increase in personnel to support the growth of the business and, to a lesser extent, a full year of expenses related to the Scout Group, which was acquired in November 2017.

Non-compensation expenses increased $10 million, or 4%, primarily due to an increase in communications and information processing expenses as we invest in technology to support our growth.

Year ended September 30, 2018 compared to the year ended September 30, 2017

Refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K for a discussion of our fiscal 2018 results compared to fiscal 2017.

Results of Operations – RJ Bank

RJ Bank provides various types of loans, including corporate loans, tax-exempt loans, residential loans, SBL and other loans. RJ Bank is active in corporate loan syndications and participations and also provides FDIC-insured deposit accounts, including to clients of our broker-dealer subsidiaries. RJ Bank generates net interest revenue principally through the interest income earned on loans and an investment portfolio of securities, which is offset by the interest expense it pays on client deposits and on its borrowings. Higher interest-earning asset balances generally lead to increased net interest earnings, depending upon spreads realized on interest-bearing liabilities. For more information on average interest-earning asset and interest-bearing liability balances, see the following discussion in this MD&A.

For an overview of our RJ Bank segment operations, refer to the information presented in Item 1 “Business” of this Form 10-K.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Operating results

		Year ended September 30,												% change
$ in millions		2019				2018				2017				2019 vs. 2018			2018 vs. 2017
Revenues:
Interest income		$	975			$	793			$	610			23	%		30	%
Interest expense		(155		)		(89		)		(35		)		74	%		154	%
Net interest income		820				704				575				16	%		22	%
All other		26				23				18				13	%		28	%
Net revenues		846				727				593				16	%		23	%
Non-interest expenses:
Compensation and benefits		49				41				34				20	%		21	%
Non-compensation expenses:
Loan loss provision		22				20				13				10	%		54	%
RJBDP fees to PCG		173				92				68				88	%		35	%
All other		87				82				69				6	%		19	%
Total non-compensation expenses		282				194				150				45	%		29	%
Total non-interest expenses		331				235				184				41	%		28	%
Pre-tax income		$	515			$	492			$	409			5	%		20	%
Pre-tax margin on net revenues		60.9		%		67.7		%		69.0		%

Year ended September 30, 2019 compared with the year ended September 30, 2018

Net revenues of $846 million increased $119 million, or 16%, and pre-tax income of $515 million increased $23 million, or 5%.

Net interest income increased $116 million, or 16%, due to a $2.74 billion increase in average interest-earning banking assets, as well as an increase in net interest margin. The increase in average interest-earning banking assets was driven by growth in average loans of $1.98 billion and a $442 million increase in our average available-for-sale securities portfolio. The net interest margin increased to 3.32% from 3.22% due to an increase in asset yields, reflecting higher short-term interest rates for much of the year, partially offset by an increase in total cost of funds. The increase in total cost of funds resulted from higher deposit costs due to higher interest rates. Corresponding to the increase in average interest-earning banking assets, average interest-bearing banking liabilities increased $2.52 billion.

The loan loss provision of $22 million was $2 million higher than the prior year and was largely attributable to provisions related to certain credits downgraded during the current year, partially offset by lower reserve rates on pass-rated loans.

Compensation and benefits expense increased $8 million, or 20%, due to increased staffing levels to support our continued growth.

Non-compensation expenses (excluding the provision for loan losses) increased $86 million, or 49%, including an $81 million, or 88%, increase in RJBDP fees paid to PCG, primarily driven by an increase in the per-account servicing fee effective October 1, 2018 in addition to an increase in the number of accounts.

Year ended September 30, 2018 compared to the year ended September 30, 2017

Refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K for a discussion of our fiscal 2018 results compared to fiscal 2017.

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.

		Year ended September 30,
		2019											2018											2017
$ in millions		Average balance				Interest inc./exp.				Average yield/ cost			Average balance				Interest inc./exp.				Average yield/ cost			Average balance				Interest inc./exp.				Average yield/ cost
Interest-earning banking assets:
Cash		$	1,239			$	28			2.29	%		$	957			$	15			1.57	%		$	859			$	8			0.90	%
Available-for-sale securities		2,872				69				2.39	%		2,430				50				2.04	%		1,463				26				1.78	%
Bank loans, net of unearned income:
Loans held for investment:
C&I loans		8,070				378				4.62	%		7,619				326				4.22	%		7,340				281				3.78	%
CRE construction loans		221				12				5.51	%		166				8				5.08	%		129				6				4.73	%
CRE loans		3,451				159				4.53	%		3,231				133				4.06	%		2,832				101				3.50	%
Tax-exempt loans		1,284				35				3.36	%		1,146				30				3.42	%		892				23				3.98	%
Residential mortgage loans		4,091				135				3.30	%		3,448				109				3.16	%		2,803				84				2.94	%
SBL and other		3,139				145				4.57	%		2,690				111				4.09	%		2,124				72				3.36	%
Loans held for sale		151				7				4.73	%		126				5				4.01	%		159				5				3.34	%
Total loans, net		20,407				871				4.26	%		18,426				722				3.93	%		16,279				572				3.55	%
FHLB stock, Federal Reserve Bank (“FRB”) stock and other		172				7				4.01	%		138				6				4.33	%		157				4				2.63	%
Total interest-earning banking assets		24,690				$	975			3.95	%		21,951				$	793			3.62	%		18,758				$	610			3.28	%
Non-interest-earning banking assets:
Unrealized loss on available-for-sale securities		(22		)									(44		)									(7		)
Allowance for loan losses		(214		)									(193		)									(194		)
Other assets		394											379											375
Total non-interest-earning banking assets		158											142											174
Total banking assets		$	24,848										$	22,093										$	18,932
Interest-bearing banking liabilities:
Bank deposits:
Certificates of deposit		$	536			$	12			2.24	%		$	372			$	6			1.67	%		$	294			$	4			1.47	%
Savings, money market and NOW accounts		21,058				124				0.59	%		18,694				63				0.34	%		15,975				16				0.10	%
FHLB advances and other		911				19				2.08	%		917				20				2.13	%		741				15				1.95	%
Total interest-bearing banking liabilities		22,505				$	155			0.69	%		19,983				$	89			0.44	%		17,010				$	35			0.20	%
Non-interest-bearing banking liabilities		200											195											172
Total banking liabilities		22,705											20,178											17,182
Total banking shareholder’s equity		2,143											1,915											1,750
Total banking liabilities and shareholders’ equity		$	24,848										$	22,093										$	18,932
Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income		$	2,185			$	820						$	1,968			$	704						$	1,748			$	575
Bank net interest:
Spread										3.26	%										3.18	%										3.08	%
Margin (net yield on interest-earning banking assets)										3.32	%										3.22	%										3.10	%
Ratio of interest-earning banking assets to interest-bearing banking liabilities										109.71	%										109.85	%										110.28	%

Nonaccrual loans are included in the average loan balances in the preceding table. Payment or income received on corporate nonaccrual loans are applied to principal. Income on residential mortgage nonaccrual loans is recognized on a cash basis.

Fee income on bank loans included in interest income for the years ended September 30, 2019, 2018 and 2017 was $18 million, $24 million, and $38 million, respectively.

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

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 year’s average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year’s volume. Changes attributable to both volume and rate have been allocated proportionately.

		Year ended September 30,
		2019 compared to 2018												2018 compared to 2017
		Increase/(decrease) due to												Increase/(decrease) due to
$ in millions		Volume				Rate				Total				Volume				Rate				Total
Interest income:
Interest-earning banking assets:
Cash		$	4			$	9			$	13			$	1			$	6			$	7
Available-for-sale securities		9				10				19				17				7				24
Bank loans, net of unearned income:
Loans held for investment:
C&I loans		19				33				52				11				34				45
CRE construction loans		3				1				4				2				—				2
CRE loans		9				17				26				14				18				32
Tax-exempt loans		4				1				5				7				—				7
Residential mortgage loans		20				6				26				19				6				25
SBL and other		19				15				34				19				20				39
Loans held for sale		1				1				2				(1		)		1				—
Total bank loans, net		75				74				149				71				79				150
FHLB stock, FRB stock and other		2				(1		)		1				(1		)		3				2
Total interest-earning banking assets		$	90			$	92			$	182			$	88			$	95			$	183
Interest expense:
Interest-bearing banking liabilities:
Bank deposits:
Certificates of deposit		$	3			$	3			$	6			$	1			$	1			$	2
Savings, money market and NOW accounts		8				53				61				3				44				47
FHLB advances and other		—				(1		)		(1		)		4				1				5
Total interest-bearing banking liabilities		11				55				66				8				46				54
Change in net interest income		$	79			$	37			$	116			$	80			$	49			$	129

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, losses on extinguishment of debt, and the acquisition and integration costs associated with certain acquisitions. For an overview of our Other segment operations, refer to the information presented in Item 1 “Business” of this Form 10-K.

Operating results

	Year ended September 30,												% change
$ in millions	2019				2018				2017				2019 vs. 2018			2018 vs. 2017
Revenues:
Interest income	$	63			$	42			$	25			50	%		68	%
Gains on private equity investments	14				9				31				56	%		(71	)%
All other	3				9				9				(67	)%		—
Total revenues	80				60				65				33	%		(8	)%
Interest expense	(75		)		(75		)		(95		)		—			21	%
Net revenues	5				(15		)		(30		)		NM			50	%
Non-interest expenses:
Compensation and all other	87				64				76				36	%		(16	)%
Acquisition-related expenses	—				4				18				(100	)%		(78	)%
Losses on extinguishment of debt	—				—				46				—			(100	)%
Total non-interest expenses	87				68				140				28	%		(51	)%
Pre-tax loss	$	(82	)		$	(83	)		$	(170	)		1	%		51	%

Year ended September 30, 2019 compared to the year ended September 30, 2018

The pre-tax loss of $82 million was flat compared to the loss generated in the prior year.

Net revenues increased $20 million, primarily due to an increase in interest income as a result of higher average interest rates earned on higher corporate cash balances and, to a lesser extent, an increase in gains on private equity investments.

Non-interest expenses increased $19 million, or 28%, including higher compensation-related expenses and a change in the impact of noncontrolling interests compared to the prior year.

Year ended September 30, 2018 compared to the year ended September 30, 2017

Refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K for a discussion of our fiscal 2018 results compared to fiscal 2017.

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.

		Year ended September 30,
		2019		2018		2017
Return on assets		2.7%		2.4%		1.9%
Return on equity		16.2%		14.4%		12.2%
Average equity to average assets		16.7%		16.5%		15.9%
Dividend payout ratio		19.0%		19.1%		20.3%

Return on assets is computed by dividing net income for the year indicated by average assets for each respective fiscal year. Average assets is computed by adding total assets as of each quarter-end date during the indicated fiscal year to the beginning of the year total and dividing by five.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Return on equity is computed by dividing net income for the year indicated by average equity for each respective fiscal year. Average equity is computed by adding the total equity attributable to RJF as of each quarter-end date during the indicated fiscal year to the beginning of the year total and dividing by five.

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 fiscal year by earnings per diluted common share.

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 Consolidated Financial Statements of this Form 10-K 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 $457 million during the year to $3.96 billion at September 30, 2019 primarily due to $1.37 billion of cash provided by financing activities, which was primarily driven by an increase in bank deposits, partially offset by our open-market share repurchases and dividends on our common stock. Additionally, a reduction in the amount of cash required to be segregated pursuant to regulations and our operating activities provided $1.00 billion of cash during the current year. Investing activities used $1.90 billion, primarily due to an increase in bank loans and the growth of our available-for-sale securities portfolio during the current year.

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 $1.35 billion of our total September 30, 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		September 30, 2019
RJF		$	540
RJ&A		1,430
RJ Bank		1,113
RJ Ltd.		457
RJFS		134
Carillon Tower Advisers		103
Other subsidiaries		180
Total cash and cash equivalents		$	3,957

RJF maintained depository accounts at RJ Bank with a balance of $163 million as of September 30, 2019. The portion of this total that was available on demand without restrictions, which amounted to $107 million as of September 30, 2019, is reflected in the RJF total (and is excluded from the RJ Bank cash balance in the preceding table).

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

RJF had loaned $827 million to RJ&A as of September 30, 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.

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 September 30, 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 (and not be required to relinquish) the accounts for which it services 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 the 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 September 30, 2019, RJ Bank had $337 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.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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.

		September 30, 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 14 of the Notes to Consolidated Financial Statements of this Form 10-K.

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 September 30, 2019, we had outstanding borrowings under one uncommitted secured 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		September 30, 2019
Outstanding borrowing amount:
Uncommitted secured		$	150
Uncommitted unsecured		—
Total outstanding borrowing amount		$	150

Other financings

RJ Bank had $875 million in FHLB borrowings outstanding at September 30, 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 14 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information regarding these borrowings). RJ Bank had an additional $2.41 billion in immediate credit available from the FHLB as of September 30, 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 Consolidated Statements of Financial Condition of this Form 10-K, in the amount of $323 million as of September 30, 2019. See Note 2 and Note 7 of the Notes to Consolidated Financial Statements of this Form 10-K for more information on our securities borrowed and securities loaned.

From time to time we purchase securities under agreements to resell (“reverse repurchase agreements”) and sell securities under agreements to repurchase (“repurchase agreements”). We account for each of these types of transactions as collateralized agreements and financings, with the outstanding balances of the repurchase agreements included in “Securities sold under agreements to repurchase”

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

on our Consolidated Statements of Financial Condition of this Form 10-K, in the amount $150 million as of September 30, 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
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
September 30, 2018		$	117			$	186			$	186			$	355			$	376			$	373

At September 30, 2019, in addition to the financing arrangements previously described, we had $19 million outstanding on a mortgage loan for our St. Petersburg, Florida home-office complex that is included in “Other borrowings” on our Consolidated Statements of Financial Condition of this Form 10-K.

At September 30, 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 the Notes to Consolidated Financial Statements of this 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 6 of the Notes to Consolidated Financial Statements of this Form 10-K 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

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

$566 million as of September 30, 2019, comprised of $336 million related to employee-directed plans and $230 million related to company-directed plans, and we were able to borrow up to 90%, or $509 million, of the September 30, 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 September 30, 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 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 for either 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 $38.83 billion as of September 30, 2019 were $1.42 billion, or 4%, greater than our total assets as of September 30, 2018. The increase in assets was primarily due to a $1.37 billion increase in net bank loans and a $397 million increase in our available-for-sale securities portfolio, in line with our growth plan for such assets. Offsetting these increases, brokerage client receivables decreased $672 million.

As of September 30, 2019, our total liabilities of $32.19 billion were $1.23 billion, or 4%, greater than our total liabilities as of September 30, 2018. The increase in total liabilities included a $2.34 billion increase in bank deposits, primarily due to higher RJBDP balances held at RJ Bank. Offsetting this increase was a decrease in brokerage client payables of $1.26 billion, primarily due to a decline in client cash held in our CIP as of September 30, 2019.

Contractual obligations

The following table sets forth our contractual obligations and payments due thereunder by fiscal year.

						Year ended September 30,
$ in millions		Total				2020				2021				2022				2023				2024				Thereafter
Long-term debt obligations:
Senior notes payable - principal		$	1,550			$	—			$	—			$	—			$	—			$	250			$	1,300
Long-term portion of other borrowings		889				—				881				6				2				—				—
Total long-term debt obligations		2,439				—				881				6				2				250				1,300
Contractual interest payments		1,286				87				73				73				73				72				908
Operating lease obligations		519				103				95				79				66				49				127
Purchase obligations		349				153				70				49				31				24				22
Other long-term liabilities:
Certificates of deposit (including interest)		639				215				77				140				117				90				—
Other		5				2				2				1				—				—				—
Total other long-term liabilities		644				217				79				141				117				90				—
Total contractual obligations		$	5,237			$	560			$	1,198			$	348			$	289			$	485			$	2,357

Contractual interest payments represent estimated future interest payments related to our senior notes, mortgage note payable, FHLB advances, and unsecured borrowings with original maturities greater than one year based on applicable interest rates at September 30, 2019. Estimated future interest payments for FHLB advances include the effect of the related interest rate hedges, which swap variable interest rate payments to fixed interest payments. See Notes 14 and 15 of the Notes to Consolidated Financial Statements of this Form 10-K for information regarding our other borrowings and senior notes payable.

In the normal course of our business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. Purchase obligations for purposes of this table include amounts associated with agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms including: minimum quantities

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Our most significant purchase obligations are vendor contracts for data services, communication services, processing services, computer software contracts and our stadium naming rights contract which goes through 2027. Most of our contracts have provisions for early termination. For purposes of this table, we have assumed we would not pursue early termination of such contracts.

We have entered into investment commitments, lending commitments and other commitments to extend credit for which we are unable to reasonably predict the timing of future payments. See Note 17 of the Notes to Consolidated Financial Statements of this Form 10-K for further information.

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” of this Form 10-K.

RJF and many of its subsidiaries are each subject to various regulatory capital requirements. As of September 30, 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 September 30, 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 22 of the Notes to Consolidated Financial Statements of this Form 10-K for information on regulatory capital requirements.

Critical accounting estimates

The 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 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 this 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 on our Consolidated Statements of Income and Comprehensive Income, is fundamental to our financial statements and our risk management processes. “Financial instruments owned” and “Financial instruments sold but not yet purchased” are reflected on the Consolidated Statements of Financial Condition at fair value. Unrealized gains and losses related to these financial instruments are reflected in our net income or our other comprehensive income/(loss) (“OCI”), depending on the underlying purpose of the instrument.

We measure the fair value of our financial instruments in accordance with GAAP, which defines fair value, establishes a framework that we use to measure fair value, and provides for certain disclosures in our financial statements. Fair value is defined by GAAP as the price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for the asset or liability.

In determining the fair value of our financial instruments, we use various valuation approaches, including market and/or income approaches. Our fair value measurements reflect assumptions that we believe market participants would use in pricing the asset or liability at the measurement date. A hierarchy for inputs is used in measuring fair value that maximizes the use of observable prices and inputs and minimizes the use of unobservable prices and inputs by requiring that the relevant observable inputs be used when available. The hierarchy is broken down into three levels: Level 1 represents quoted prices in active markets for identical instruments; Level 2 represents valuations based on inputs other than quoted prices in active markets, but for which all significant inputs are observable; and Level 3 consists of valuation techniques that incorporate significant unobservable inputs and, therefore, requires the greatest use of judgment. The availability of observable inputs can vary from instrument to instrument and, in certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement of an instrument requires judgment and consideration of factors specific to the instrument.

The fair values for certain of our financial instruments are derived using pricing models and other valuation techniques that involve management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of our financial instruments. Financial instruments which are actively traded will generally have a higher degree of price transparency than financial instruments that are less frequently traded. As a result, the valuation of certain financial instruments included management judgment in determining the relevance and reliability of market information available. These instruments are classified in Level 3 of the fair value hierarchy.

See Notes 2 and 4 of the Notes to Consolidated Financial Statements of this Form 10-K for further information about the level within the fair value hierarchy, specific valuation techniques and inputs, and other significant accounting policies pertaining to financial instruments at fair value.

Loss provisions

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 the Notes to Consolidated Financial Statements of this Form 10-K. In addition, refer to Note 17 of the Notes to the Consolidated Financial Statements of this Form 10-K for information regarding legal and regulatory matter contingencies as of September 30, 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. Refer to Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K for discussion of RJ Bank’s policies regarding the allowance for loan losses, and refer to Note 8 of the Notes to Consolidated Financial Statements of this Form 10-K for quantitative information regarding the allowance balance as of September 30, 2019.

At September 30, 2019, the amortized cost of all RJ Bank loans was $21.11 billion and the allowance for loan losses was $218 million, which was 1.04% 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 Consolidated Financial Statements of this Form 10-K.

Off-balance sheet arrangements

For information regarding our off-balance sheet arrangements, see Notes 2 and 17 of the Notes to Consolidated Financial Statements of this Form 10-K.

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.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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 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. Our broker-dealer subsidiaries, primarily RJ&A, act as market makers in equity and debt securities and maintain inventories in order to ensure availability of securities and to facilitate client transactions. We also hold investments in agency MBS and CMOs within RJ Bank’s available-for-sale securities portfolio, and from time-to-time may hold SBA loan securitizations not yet transferred.

See Notes 2, 4, 5 and 6 of the Notes to Consolidated Financial Statements of this Form 10-K for fair value and other information regarding our trading inventories, available-for-sale securities and derivative instruments.

Changes in value of our trading inventory may result from fluctuations in interest rates, credit spreads, equity prices, macroeconomic factors, asset liquidity and dynamic relationships among these factors. We manage our trading inventory by product type and have established trading desks with responsibility for particular product types. Our primary method of controlling risk in our trading inventory is through the establishment and monitoring of risk-based limits and limits on the dollar amount of securities positions held overnight in inventory. A hierarchy of limits exists at multiple levels including firm, division, trading desk (e.g., for OTC equities, corporate bonds, municipal bonds), product sub-type (e.g., below-investment-grade positions) and individual trader. Position limits in trading inventory accounts are monitored on a daily basis. Consolidated position and exposure reports are prepared and distributed daily to senior management. Trading positions are carefully monitored for potential limit violations. Management likewise monitors inventory levels and trading results, as well as inventory aging, pricing, concentration and securities ratings. For our derivatives positions, which are composed primarily of interest rate swaps but include futures contracts and forward foreign exchange contracts, we monitor daily exposure against established limits with respect to a number of factors, including interest rates, foreign exchange spot and forward rates, spread, ratio, basis and volatility risk, both for the total portfolio and by maturity period.

In the normal course of business, we enter into underwriting commitments. RJ&A and RJ Ltd., as a lead or co-lead manager or syndicate member in underwritings, may be subject to market risk on any unsold shares issued in offerings to which we are committed. Risk exposure is controlled by limiting participation, the deal size or through the syndication process.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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, 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 year ended September 30, 2019, our regulatory-defined daily loss in our trading portfolios exceeded our predicted VaR once.

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.

		Year ended September 30, 2019								Period end VaR										For the year ended September 30,
$ in millions		High				Low				September 30, 2019				September 30, 2018				$ 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.

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 agency MBS and CMOs (held in the available-for-sale securities portfolio), SBA 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.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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. This committee uses several measures to monitor and limit RJ Bank’s interest rate risk, including scenario analysis and economic value of equity.

RJ Bank uses simulation models and estimation techniques to assess the sensitivity of net interest income to movements in interest rates. To ensure that RJ Bank remains within its tolerances established for net interest income, a sensitivity analysis of net interest income to interest rate conditions is estimated under a variety of scenarios. The model estimates the sensitivity by calculating interest income and interest expense in a dynamic balance sheet environment using current repricing, prepayment, and reinvestment of cash flow assumptions over a twelve month time horizon. Various interest rate scenarios are modeled in order to determine the effect those scenarios may have on net interest income. Scenarios presented include instantaneous interest rate shocks of up 100 and 200 basis points and down 100 basis points. While not presented, additional rate scenarios are performed, including interest rate ramps and yield curve shifts that may more realistically mimic the speed of potential interest rate movements. RJ Bank also performs simulations on time horizons up to five years to assess longer term impacts to various interest rate scenarios. On a quarterly basis, RJ Bank tests expected model results to actual performance. Additionally, any changes made to key assumptions in the model are documented and approved by RJ Bank’s Asset Liability Management Committee.

We utilize a hedging strategy using interest rate swaps as a result of RJ Bank’s asset and liability management process previously described. For further information regarding this hedging strategy, see Notes 2 and 6 of the Notes to Consolidated Financial Statements of this 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		$903		1.69%
+100		$916		3.15%
0		$888		—
-100		$745		(16.10)%

Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net interest analysis” of this Form 10-K 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 September 30, 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		$	139			$	4,222			$	3,737			$	8,098
CRE construction loans		53				132				—				185
CRE loans		369				2,722				561				3,652
Tax-exempt loans		—				44				1,197				1,241
Residential mortgage loans		—				5				4,449				4,454
SBL and other		3,305				44				—				3,349
Total loans held for investment		3,866				7,169				9,944				20,979
Loans held for sale		—				14				118				132
Total loans		$	3,866			$	7,183			$	10,062			$	21,111

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 September 30, 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		$	104			$	7,855			$	7,959
CRE construction loans		—				132				132
CRE loans		107				3,176				3,283
Tax-exempt loans		1,241				—				1,241
Residential mortgage loans		235				4,219				4,454
SBL and other		2				42				44
Total loans held for investment		1,689				15,424				17,113
Loans held for sale		5				127				132
Total loans		$	1,694			$	15,551			$	17,245

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-K 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 Consolidated Statements of Financial Condition at September 30, 2019, with changes in the fair value of the portfolio recorded through OCI on our Consolidated Statements of Income and Comprehensive Income. At September 30, 2019, our RJ Bank available-for-sale securities portfolio had a fair value of $3.09 billion with a weighted-average yield of 2.40% and average expected duration of three years. See Note 5 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information.

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 $1.10 billion and $1.05 billion at September 30, 2019 and 2018, 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 consolidated financial statements. See Notes 2 and 6 of the Notes to Consolidated Financial Statements of this Form 10-K for further information regarding these derivatives.

We had foreign exchange risk in our investment in RJ Ltd. of CAD 358 million at September 30, 2019, which was not hedged. Foreign exchange gains/losses related to this investment are primarily reflected in OCI on our Consolidated Statements of Income and Comprehensive Income. See Note 18 of the Notes to Consolidated Financial Statements of this Form 10-K for further information regarding our components of OCI.

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.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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 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 Consolidated Statements of Income and Comprehensive Income. See Note 6 of the Notes to Consolidated Financial Statements of this Form 10-K 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.

We are engaged in various trading and brokerage activities in which our counterparties primarily include broker-dealers, banks and other financial institutions. We are exposed to risk that these counterparties may not fulfill their obligations. The risk of default depends on the creditworthiness of the counterparty and/or the issuer of the instrument. We manage this risk by imposing and monitoring individual and aggregate position limits within each business segment for each counterparty, conducting regular credit reviews of financial counterparties, reviewing security and loan concentrations, holding and calculating the fair value of collateral on certain transactions and conducting business through clearing organizations, which may guarantee performance.

Our client activities involve the execution, settlement, and financing of various transactions on behalf of our clients. Client activities are transacted on either a cash or margin basis. Credit exposure results from client margin accounts, which are monitored daily and are collateralized. We monitor exposure to industry sectors and individual securities and perform analysis on a regular basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions. In addition, when clients execute a purchase, we are at some risk that the client will renege on the trade. If this occurs, we may have to liquidate the position at a loss. However, most retail clients have available funds in the account before the trade is executed.

We offer loans to financial advisors and certain other key revenue producers primarily for recruiting, transitional cost assistance and retention purposes. We have credit risk and may incur a loss in the event that such borrower declares bankruptcy or is no longer affiliated with us. Historically, such losses have not been significant due to our strong advisor retention and successful collection efforts.

We are subject to concentration risk if we hold large positions, extend large loans to, or have large commitments with a single counterparty, borrower, or group of similar counterparties or borrowers (e.g., in the same industry). Securities purchased under agreements to resell consist primarily of securities issued by the U.S. government or its agencies. Receivables from and payables to clients and securities borrowing and lending activities are conducted with a large number of clients and counterparties and potential concentration is carefully monitored. Inventory and investment positions taken and commitments made, including underwritings, may involve exposure to individual issuers and businesses. We seek to limit this risk through careful review of the underlying business and the use of limits established by senior management, taking into consideration factors including the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment and other positions or commitments outstanding.

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.

RJ Bank’s strategy for credit risk management includes well-defined credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all corporate, tax-exempt, residential, SBL and other credit exposures. The strategy also includes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of all corporate and tax-exempt loans as well as individual delinquent residential loans. The credit risk management process also includes an annual independent review of the credit risk monitoring process that performs assessments of compliance with credit policies, risk ratings, and other critical credit information. RJ Bank seeks to identify potential problem loans early, record any necessary risk rating changes and charge-offs promptly, and maintain appropriate reserve levels for probable inherent losses. RJ Bank utilizes a comprehensive credit risk rating system to measure the credit quality of individual corporate and tax-exempt loans and related unfunded lending

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

commitments, including the probability of default and/or loss given default of each corporate and tax-exempt loan and commitment outstanding. For its SBL and residential mortgage loans, RJ Bank utilizes the credit risk rating system used by bank regulators in measuring the credit quality of each homogeneous class of loans.

RJ Bank’s allowance for loan losses methodology is described in Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K. As RJ Bank’s loan portfolio is segregated into six portfolio segments, likewise, the allowance for loan losses is segregated by these same segments. The risk characteristics relevant to each portfolio segment are as follows.

C&I: Loans in this segment are made to businesses and are generally secured by all assets of the business. Repayment is expected from the cash flows of the respective business. Unfavorable economic and political conditions, including the resultant decrease in consumer or business spending, may have an adverse effect on the credit quality of loans in this segment.

CRE: Loans in this segment are primarily secured by income-producing properties. For owner-occupied properties, the cash flows are derived from the operations of the business, and the underlying cash flows may be adversely affected by the deterioration in the financial condition of the operating business. The underlying cash flows generated by non-owner-occupied properties may be adversely affected by increased vacancy and rental rates, which are monitored on a quarterly basis. Adverse developments in either of these areas may have a negative effect on the credit quality of loans in this segment.

CRE construction: Loans in this segment have similar risk characteristics of loans in the CRE segment as previously described. In addition, project budget overruns and performance variables related to the contractor and subcontractors may affect the credit quality of loans in this segment. With respect to commercial construction of residential developments, there is also the risk that the builder has a geographical concentration of developments. Adverse developments in all of these areas may significantly affect the credit quality of the loans in this segment.

Tax-exempt: Loans in this segment are made to governmental and nonprofit entities and are generally secured by a pledge of revenue and, in some cases, by a security interest in or a mortgage on the asset being financed. For loans to governmental entities, repayment is expected from a pledge of certain revenues or taxes. For nonprofit entities, repayment is expected from revenues which may include fundraising proceeds. These loans are subject to demographic risk, therefore much of the credit assessment of tax-exempt loans is driven by the entity’s revenue base and general economic environment. Adverse developments in either of these areas may have a negative effect on the credit quality of loans in this segment.

Residential mortgage (includes home equity loans/lines): All of RJ Bank’s residential mortgage loans adhere to stringent underwriting parameters pertaining to credit score and credit history, debt-to-income ratio of borrower, loan-to-value (“LTV”), and combined LTV (including second mortgage/home equity loans). RJ Bank does not originate or purchase option adjustable rate mortgage (“ARM”) loans with negative amortization, reverse mortgages, or loans to subprime borrowers. Loans with deeply discounted teaser rates are not originated or purchased. All loans in this segment are collateralized by residential real estate and repayment is primarily dependent on the credit quality of the individual borrower. A decline in the strength of the economy, particularly unemployment rates and housing prices, among other factors, could have a significant effect on the credit quality of loans in this segment.

SBL and other: Loans in this segment are collateralized generally by the borrower’s marketable securities at advance rates consistent with industry standards. These loans are monitored daily for adherence to LTV guidelines and when a loan exceeds the required LTV, a collateral call is issued. Past due loans are minimal as any past due amounts result in a notice to the client for payment or the potential sale of the collateral which will bring the loan to a current status.

In evaluating credit risk, RJ Bank considers trends in loan performance, the level of allowance coverage relative to similar banking institutions, industry or customer concentrations, the loan portfolio composition and macroeconomic factors. These factors have a potentially negative impact on loan performance and net charge-offs. However, during fiscal year 2019, corporate borrowers have continued to access the markets for new equity and debt.

Several factors were taken into consideration in evaluating the allowance for loan losses at September 30, 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 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 year ended September 30, 2019.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The following table presents RJ Bank’s changes in the allowance for loan losses.

		Year ended September 30,
$ in millions		2019				2018				2017				2016				2015
Allowance for loan losses beginning of year		$	203			$	190			$	197			$	172			$	148
Provision for loan losses		22				20				13				28				24
Charge-offs:
C&I loans		(2		)		(10		)		(26		)		(3		)		(1		)
CRE loans		(5		)		—				—				—				—
Residential mortgage loans		(1		)		—				(1		)		(1		)		(2		)
Total charge-offs		(8		)		(10		)		(27		)		(4		)		(3		)
Recoveries:
CRE loans		—				—				5				—				4
Residential mortgage loans		2				2				1				1				1
Total recoveries		2				2				6				1				5
Net (charge-offs)/recoveries		(6		)		(8		)		(21		)		(3		)		2
Foreign exchange translation adjustment		(1		)		1				1				—				(2		)
Allowance for loan losses end of year		$	218			$	203			$	190			$	197			$	172
Allowance for loan losses to total bank loans outstanding		1.04		%		1.04		%		1.11		%		1.30		%		1.32		%

See explanation of the loan loss provision in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - RJ Bank” of this Form 10-K.

The level of charge-off activity is a factor that is considered in evaluating the potential for severity of future credit losses. The following tables present net loan (charge-offs)/recoveries and the percentage of net loan (charge-offs)/recoveries to the average outstanding loan balances by loan portfolio segment.

		Year ended September 30,
		2019							2018							2017
$ in millions		Net loan (charge-off)/recovery amount				% of avg. outstanding loans			Net loan (charge-off)/recovery amount				% of avg. outstanding loans			Net loan (charge-off)/recovery amount				% of avg. outstanding loans
C&I loans		$	(2	)		0.02	%		$	(10	)		0.13	%		$	(26	)		0.35	%
CRE loans		(5		)		0.14	%		—				—			5				0.18	%
Residential mortgage loans		1				0.02	%		2				0.06	%		—				—
Total		$	(6	)		0.04	%		$	(8	)		0.04	%		$	(21	)		0.13	%

		Year ended September 30,
		2016							2015
$ in millions		Net loan (charge-off)/recovery amount				% of avg. outstanding loans			Net loan (charge-off)/recovery amount				% of avg. outstanding loans
C&I loans		$	(3	)		0.04	%		$	(1	)		0.01	%
CRE loans		—				—			4				0.22	%
Residential mortgage loans		—				—			(1		)		0.02	%
Total		$	(3	)		0.02	%		$	2			0.02	%

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 tables present the nonperforming loans balance and total allowance for loan losses balance for the periods presented.

		September 30,
		2019								2018								2017
$ in millions		Nonperforming loan balance				Allowance for loan losses balance				Nonperforming loan balance				Allowance for loan losses balance				Nonperforming loan balance				Allowance for loan losses balance
Loans held for investment:
C&I loans		$	19			$	139			$	2			$	123			$	5			$	120
CRE construction loans		—				3				—				3				—				1
CRE loans		8				46				—				47				—				42
Tax-exempt loans		—				9				—				9				—				6
Residential mortgage loans		16				16				23				17				34				17
SBL and other		—				5				—				4				—				4
Total		$	43			$	218			$	25			$	203			$	39			$	190
Total nonperforming loans as a % of RJ Bank total loans		0.21		%						0.12		%						0.23		%

		September 30,
		2016								2015
$ 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		$	35			$	138			$	—			$	118
CRE construction loans		—				1				—				3
CRE loans		4				36				5				30
Tax-exempt loans		—				4				—				6
Residential mortgage loans		42				13				48				12
SBL and other		—				5				—				3
Total		$	81			$	197			$	53			$	172
Total nonperforming loans as a % of RJ Bank total loans		0.53		%						0.40		%

Included in nonperforming residential mortgage loans were $9 million in loans for which $5 million in charge-offs were previously recorded, resulting in less exposure within the remaining balance. See Note 8 in the Notes to the Consolidated Financial Statements of this Form 10-K for loan categories as a percentage of total loans receivable.

The nonperforming loan balances in the preceding table exclude $12 million, $12 million, $14 million, $14 million and $15 million as of September 30, 2019, 2018, 2017, 2016, and 2015, respectively, of residential troubled debt restructurings (“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 $46 million, $28 million, $44 million, $86 million and $57 million as of September 30, 2019, 2018, 2017, 2016, and 2015, respectively. Total nonperforming assets as a percentage of RJ Bank total assets was 0.18%, 0.12%, 0.21%, 0.50% and 0.39% as of September 30, 2019, 2018, 2017, 2016, and 2015 respectively.

Loan underwriting policies

A component of RJ Bank’s credit risk management strategy is conservative, well-defined policies and procedures. RJ Bank’s underwriting policies for the major types of loans are described in the following sections.

Residential mortgage and SBL and other loan portfolios

RJ Bank’s residential mortgage loan portfolio consists of first mortgage loans originated by RJ Bank via referrals from our PCG financial advisors and the general public, as well as first mortgage loans purchased by RJ Bank. All of RJ Bank’s residential mortgage loans adhere to strict underwriting parameters pertaining to credit score and credit history, debt-to-income ratio of the borrower, LTV and combined LTV (including second mortgage/home equity loans). As of September 30, 2019, approximately 70% of the residential loans were fully documented loans to industry standards and 96% of the residential mortgage loan portfolio consisted of owner-occupant borrowers (78% for their primary residences and 18% for second home residences). Approximately 30% of the first lien residential mortgage loans were adjustable rate mortgage loans, which receive interest-only payments based on a fixed rate for an initial period of the loan and then become fully amortizing, subject to annual and lifetime interest rate caps. A significant portion of our originated

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

15 or 30-year fixed-rate mortgage loans are sold in the secondary market. RJ Bank’s SBL and other portfolio is comprised primarily of loans fully collateralized by client’s marketable securities and represented 16% of RJ Bank’s total loan portfolio as of September 30, 2019. The underwriting policy for the SBL and other portfolio primarily includes a review of collateral, including LTV, with a limited review of repayment history.

While RJ Bank has chosen not to participate in any government-sponsored loan modification programs, its loan modification policy does take into consideration some of the programs’ parameters and supports every effort to assist borrowers within the guidelines of safety and soundness. In general, RJ Bank considers the qualification terms outlined in the government-sponsored programs as well as the affordability test and other factors. RJ Bank retains flexibility to determine the appropriate modification structure and required documentation to support the borrower’s current financial situation before approving a modification. Short sales are also used by RJ Bank to mitigate credit losses.

Corporate and tax-exempt loan portfolios

RJ Bank’s corporate and tax-exempt loan portfolios were comprised of approximately 500 borrowers, the majority of which are underwritten, managed and reviewed at our corporate headquarters location, which facilitates close monitoring of the portfolio by credit risk personnel, relationship officers and senior RJ Bank executives. RJ Bank’s corporate loan portfolio is diversified among a number of industries in both the U.S. and Canada and comprised of project finance real estate loans, commercial lines of credit and term loans, the majority of which are participations in Shared National Credit (“SNC”) or other large syndicated loans, and tax-exempt loans. RJ Bank is sometimes involved in the syndication of the loan at inception and some of these loans have been purchased in the secondary trading markets. The remainder of the corporate loan portfolio is comprised of smaller participations and direct loans. There are no subordinated loans or mezzanine financings in the corporate loan portfolio. RJ Bank’s tax-exempt loans are long-term loans to governmental and nonprofit entities. These loans generally have lower overall credit risk, but are subject to other risks that are not usually present with corporate clients, including the risk associated with the constituency served by a local government and the risk in ensuring an obligation has appropriate tax treatment.

Regardless of the source, all corporate and tax-exempt loans are independently underwritten to RJ Bank credit policies and are subject to approval by a loan committee, and credit quality is monitored on an on-going basis by RJ Bank’s lending staff. RJ Bank credit policies include criteria related to LTV limits based upon property type, single borrower loan limits, loan term and structure parameters (including guidance on leverage, debt service coverage ratios and debt repayment ability), industry concentration limits, secondary sources of repayment, municipality demographics, and other criteria. A large portion of RJ Bank’s corporate loans are to borrowers in industries in which we have expertise, through coverage provided by our Capital Markets research analysts. More than half of RJ Bank’s corporate borrowers are public companies. RJ Bank’s corporate loans are generally secured by all assets of the borrower, in some instances are secured by mortgages on specific real estate, and with respect to tax-exempt loans, are generally secured by a pledge of revenue. In a limited number of transactions, loans in the portfolio are extended on an unsecured basis. In addition, all corporate and tax-exempt loans are subject to RJ Bank’s regulatory review.

Risk monitoring process

Another component of the 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.

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.

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
September 30, 2019		2			10			12			0.04	%		0.22	%		0.26	%
September 30, 2018		2			13			15			0.06	%		0.33	%		0.39	%

Our September 30, 2019 percentage continues to compare favorably to the national average for over 30 day delinquencies of 2.77%, as most recently reported by the Fed.

To manage and limit credit losses, we maintain a rigorous process to manage our loan delinquencies. With all residential first mortgages serviced by a third party, the primary collection effort resides with the servicer. RJ Bank personnel direct and actively monitor the servicers’ efforts through extensive communications regarding individual loan status changes and requirements of timely and appropriate collection or property management actions and reporting, including management of third parties used in the collection process (appraisers, attorneys, etc.). Additionally, every residential mortgage loan over 60 days past due is reviewed by RJ Bank personnel monthly and documented in a written report detailing delinquency information, balances, collection status, appraised value, and other data points. RJ Bank senior management meets quarterly to discuss the status, collection strategy and charge-off recommendations on every residential mortgage loan over 60 days past due. Updated collateral valuations are obtained for loans over 90 days past due and charge-offs are taken on individual loans based on these valuations.

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.

		September 30, 2019
		Loans outstanding as a % of RJ Bank total residential mortgage loans		Loans outstanding as a % of RJ Bank total loans
CA		25.4%		5.4%
FL		16.8%		3.6%
TX		8.0%		1.7%
NY		7.6%		1.6%
CO		3.7%		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 September 30, 2019 and 2018, these loans totaled $1.29 billion and $992 million, respectively, or approximately 30% and 25% of the residential mortgage portfolio, respectively. The weighted average number of years before the remainder of the loans, which were still in their interest-only period at September 30, 2019, begins amortizing is 6.1 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 761, 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 for trends in borrower operating performance, payment history, credit ratings, collateral performance, loan covenant compliance, semi-annual SNC exam results, municipality demographics and other factors including industry performance and concentrations. As part of the credit review process, the loan grade is reviewed at least quarterly to confirm the appropriate risk rating for each credit. The individual loan ratings resulting from the SNC exams are incorporated in RJ Bank’s internal loan ratings when the ratings are received and if the SNC rating is lower on an individual loan than RJ Bank’s internal rating, the loan is downgraded. While RJ Bank considers historical SNC exam results in its loan ratings methodology, differences between the SNC exam and internal ratings on individual loans typically arise due to subjectivity of the loan classification process. These differences may result in additional provision for loan losses in periods when SNC exam results are received. See Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K, specifically the “Bank loans, net” section, for additional information on RJ Bank’s allowance for loan loss policies.

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

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.

		September 30, 2019
		Loans outstanding as a % of RJ Bank total corporate loans		Loans outstanding as a % of RJ Bank total loans
Office real estate		7.8%		4.3%
Business systems and services		7.8%		4.3%
Automotive/transportation		5.8%		3.2%
Hospitality		5.7%		3.2%
Consumer products and services		4.7%		2.6%

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-K for information regarding our liquidity and how we manage liquidity risk.

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 1A “Risk Factors” of this Form 10-K for a discussion of certain cybersecurity risks. We operate different businesses in diverse markets and are reliant on the ability of our employees and systems to process a large number of transactions. These risks are less direct than credit and market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes and complexity. In the event of a breakdown or improper operation of systems or improper action by employees, we could suffer financial loss, regulatory sanctions and damage to our reputation. In order to mitigate and control operational risk, we have developed and continue to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization and within such departments as Finance, Operations, Information Technology, Legal, Compliance, Risk Management and Internal Audit. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits. Business continuity plans exist for critical systems, and redundancies are built into the systems as deemed appropriate.

We have an Operational Risk Management Committee comprised of members of senior management, which reviews and addresses operational risks across our businesses. The committee establishes, and from time-to-time will reassess, risk appetite levels for major operational risks, monitors operating unit performance for adherence to defined risk tolerances, and establishes policies for risk management at the enterprise level.

As more fully described in the discussion of our business technology risks included in various risk factors presented in Item 1A “Risk Factors” of this 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. Models are used throughout the firm for a variety of purposes such as the valuation of financial instruments, assessing risk, stress testing, and to assist in the making of business decisions. Model risk includes the potential risk that management makes incorrect decisions based upon either incorrect model results or incorrect understanding and use of model results. Model risk may also occur when model output experiences a deviation from the expected result. Model risk can result in significant financial loss, inaccurate financial or regulatory reporting, misaligned business strategies or damage to our reputation.

Model Risk Management (“MRM”) is a separate department within our Risk Management department and is independent of model owners, users, and developers. Our model risk management framework consists primarily of model governance, maintaining the firm-wide model inventory, validating and approving all material models used across the firm, and on-going monitoring. Results of validations and issues identified are reported to the Enterprise Risk Management Committee and the Audit and Risk Committee of the Board of

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Directors. MRM assumes responsibility for the independent and effective challenge of model completeness, integrity and design based on intended use.

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.

We have established a framework to oversee, manage, and mitigate compliance risk throughout the firm, both within and across businesses, functions, legal entities, and jurisdictions. The framework includes roles and responsibilities for the Board of Directors, senior management, and all three lines of risk management. This framework also includes programs and processes through which the firm identifies, assesses, controls, measures, monitors, and reports on compliance risk and provides compliance-related training throughout the firm. The Compliance department - part of the second line of risk management - plays a key leadership role in the oversight, management, and mitigation of compliance risk throughout Raymond James. It does this by conducting an annual compliance risk assessment, carrying out monitoring and testing activities, implementing policies, training associates on compliance-related topics, and reporting compliance risk-related issues and metrics to the Board of Directors and senior management, among other activities.

We continue to devote resources to expand and support the firm’s compliance risk management framework, including the enhancement of processes and controls to help the firm meet its obligations to oversee, manage, and mitigate compliance risk. We also continue to invest in technology to improve our associates’ ability to monitor and detect compliance risk.