filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Table of Contents
| PAGE | |
| Report of Independent Registered Public Accounting Firm | 72 |
| Consolidated Statements of Financial Condition | 74 |
| Consolidated Statements of Income and Comprehensive Income | 75 |
| Consolidated Statements of Changes in Shareholders’ Equity | 76 |
| Consolidated Statements of Cash Flows | 77 |
| Notes to Consolidated Financial Statements | |
| Note 1 - Organization and basis of presentation | 79 |
| Note 2 - Summary of significant accounting policies | 79 |
| Note 3 - Acquisitions | 97 |
| Note 4 - Fair value | 98 |
| Note 5 - Available-for-sale securities | 104 |
| Note 6 - Derivative assets and derivative liabilities | 107 |
| Note 7 - Collateralized agreements and financings | 109 |
| Note 8 - Bank loans, net | 110 |
| Note 9 - Variable interest entities | 116 |
| Note 10 - Property and equipment | 117 |
| Note 11 - Goodwill and identifiable intangible assets, net | 118 |
| Note 12 - Other assets | 120 |
| Note 13 - Bank deposits | 120 |
| Note 14 - Other borrowings | 121 |
| Note 15 - Senior notes payable | 122 |
| Note 16 - Income taxes | 123 |
| Note 17 - Commitments, contingencies and guarantees | 125 |
| Note 18 - Accumulated other comprehensive income/(loss) | 129 |
| Note 19 - Revenues | 130 |
| Note 20 - Interest income and interest expense | 133 |
| Note 21 - Share-based and other compensation | 133 |
| Note 22 - Regulatory capital requirements | 135 |
| Note 23 - Earnings per share | 137 |
| Note 24 - Segment information | 138 |
| Note 25 - Condensed financial information (parent company only) | 140 |
| Supplementary data | 144 |
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Raymond James Financial, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Raymond James Financial, Inc. and subsidiaries (the Company) as of September 30, 2019 and 2018, the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended September 30, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 26, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the allowance for loan losses related to both the commercial and industrial (C&I) and the commercial real estate (CRE) loan portfolios that are collectively evaluated for impairment
As discussed in Notes 2 and 8 to the consolidated financial statements, the Company’s allowance for loan losses related to loans collectively evaluated for impairment (ALL) was based on quantitative historical loss rates adjusted by an estimate of the loss emergence period. The Company also adjusted the quantitative historical loss rates by considering qualitative factors that cause the estimated losses to differ from quantitatively calculated amounts. The Company recorded a total allowance for loan losses of $218 million as of September 30, 2019. Of that amount, the ALL for C&I loans was $133 million or 61% of the total allowance, and the ALL for CRE loans was $49 million or 22% of the total allowance.
We identified the assessment of the ALL related to the C&I and CRE loan portfolios as a critical audit matter because it required a significant degree of subjective auditor judgment and specialized industry knowledge and experience. There was subjectivity in performing procedures over key factors and assumptions used by the Company, including selection of proxy data used to develop loss rates and the evaluation of loss emergence periods. There were also subjective judgments and specialized knowledge needed to assess loan characteristics, such as loan risk ratings, and to evaluate the development and application of the ALL methodology and the use of qualitative factors.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s ALL process, including controls related to the (1) development and approval of the ALL methodology, (2) determination and calculation of key factors and assumptions as well as qualitative factors, and (3) analysis of the ALL results, trends, and ratios. We evaluated the relevance of the historical proxy data used to develop loss rates by comparing the Company’s C&I loan portfolio characteristics to the proxy data characteristics. In addition, we tested the CRE loss estimates by comparing them to loss data from independently determined industry peer groups. We evaluated the loss emergence period by testing the loss triggering and confirmation dates for a selection of loans. We assessed how the underlying assumptions used by the Company incorporated accurate metrics and other information and were applied in accordance with the qualitative framework. In addition, we involved credit risk professionals with specialized industry knowledge and experience, who assisted in testing the Company’s process, including:
| • | evaluating the Company’s ALL methodology to determine if it is sufficiently structured, transparent, and repeatable to produce an estimate that is compliant with U.S. generally accepted accounting principles, |
| • | performing credit file reviews on a selection of loans to assess loan characteristics, such as loan risk ratings, and |
| • | evaluating the conceptual soundness of the qualitative framework to determine if it identified the relevant incremental risks not captured by the quantitative estimate. |
/s/ KPMG LLP
We have served as the Company’s auditor since 2001.
Tampa, Florida
November 26, 2019
| RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION | ||||||||
|---|---|---|---|---|---|---|---|---|
| September 30, | ||||||||
| $ in millions, except per share amounts | 2019 | 2018 | ||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 3,957 | $ | 3,500 | ||||
| Cash segregated pursuant to regulations | 2,014 | 2,441 | ||||||
| Securities purchased under agreements to resell | 343 | 373 | ||||||
| Securities borrowed | 248 | 255 | ||||||
| Financial instruments, at fair value: | ||||||||
| Trading instruments ($535 and $465 pledged as collateral) | 708 | 702 | ||||||
| Available-for-sale securities ($24 and $20 pledged as collateral) | 3,093 | 2,696 | ||||||
| Derivative assets | 338 | 180 | ||||||
| Other investments ($32 and $25 pledged as collateral) | 365 | 349 | ||||||
| Brokerage client receivables, net | 2,671 | 3,343 | ||||||
| Receivables from brokers, dealers and clearing organizations | 281 | 257 | ||||||
| Other receivables | 549 | 592 | ||||||
| Bank loans, net | 20,891 | 19,518 | ||||||
| Loans to financial advisors, net | 983 | 925 | ||||||
| Property and equipment, net | 527 | 486 | ||||||
| Deferred income taxes, net | 231 | 203 | ||||||
| Goodwill and identifiable intangible assets, net | 611 | 639 | ||||||
| Other assets | 1,020 | 954 | ||||||
| Total assets | $ | 38,830 | $ | 37,413 | ||||
| Liabilities and shareholders’ equity: | ||||||||
| Bank deposits | $ | 22,281 | $ | 19,942 | ||||
| Securities sold under agreements to repurchase | 150 | 186 | ||||||
| Securities loaned | 323 | 423 | ||||||
| Financial instruments sold but not yet purchased, at fair value: | ||||||||
| Trading instruments | 296 | 235 | ||||||
| Derivative liabilities | 313 | 247 | ||||||
| Brokerage client payables | 4,361 | 5,625 | ||||||
| Payables to brokers, dealers and clearing organizations | 229 | 206 | ||||||
| Accrued compensation, commissions and benefits | 1,272 | 1,189 | ||||||
| Other payables | 518 | 459 | ||||||
| Other borrowings | 894 | 899 | ||||||
| Senior notes payable | 1,550 | 1,550 | ||||||
| Total liabilities | 32,187 | 30,961 | ||||||
| Commitments and contingencies (see Note 17) | ||||||||
| Shareholders’ equity | ||||||||
| Preferred stock; $.10 par value; 10,000,000 shares authorized; -0- shares issued and outstanding | — | — | ||||||
| Common stock; $.01 par value; 350,000,000 shares authorized; 158,435,030 and 156,363,615 shares issued as of September 30, 2019 and 2018, respectively, and 137,841,952 and 145,642,437 shares outstanding as of September 30, 2019 and 2018, respectively | 2 | 2 | ||||||
| Additional paid-in capital | 1,938 | 1,808 | ||||||
| Retained earnings | 5,874 | 5,032 | ||||||
| Treasury stock, at cost; 20,593,078 and 10,693,026 common shares as of September 30, 2019 and 2018, respectively | (1,210 | ) | (447 | ) | ||||
| Accumulated other comprehensive loss | (23 | ) | (27 | ) | ||||
| Total equity attributable to Raymond James Financial, Inc. | 6,581 | 6,368 | ||||||
| Noncontrolling interests | 62 | 84 | ||||||
| Total shareholders’ equity | 6,643 | 6,452 | ||||||
| Total liabilities and shareholders’ equity | $ | 38,830 | $ | 37,413 |
See accompanying Notes to Consolidated Financial Statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| Year ended September 30, | ||||||||||||
| in millions, except per share amounts | 2019 | 2018 | 2017 | |||||||||
| Revenues: | ||||||||||||
| Asset management and related administrative fees | $ | 3,451 | $ | 3,119 | $ | 2,471 | ||||||
| Brokerage revenues: | ||||||||||||
| Securities commissions | 1,450 | 1,626 | 1,578 | |||||||||
| Principal transactions | 357 | 329 | 418 | |||||||||
| Total brokerage revenues | 1,807 | 1,955 | 1,996 | |||||||||
| Account and service fees | 738 | 713 | 612 | |||||||||
| Investment banking | 596 | 501 | 491 | |||||||||
| Interest income | 1,281 | 1,044 | 802 | |||||||||
| Other | 150 | 144 | 153 | |||||||||
| Total revenues | 8,023 | 7,476 | 6,525 | |||||||||
| Interest expense | (283 | ) | (202 | ) | (154 | ) | ||||||
| Net revenues | 7,740 | 7,274 | 6,371 | |||||||||
| Non-interest expenses: | ||||||||||||
| Compensation, commissions and benefits | 5,087 | 4,795 | 4,228 | |||||||||
| Non-compensation expenses: | ||||||||||||
| Communications and information processing | 373 | 352 | 297 | |||||||||
| Occupancy and equipment costs | 218 | 202 | 191 | |||||||||
| Business development | 194 | 181 | 155 | |||||||||
| Investment sub-advisory fees | 94 | 92 | 79 | |||||||||
| Professional fees | 85 | 74 | 55 | |||||||||
| Bank loan loss provision | 22 | 20 | 13 | |||||||||
| Acquisition and disposition-related expenses | 15 | 4 | 18 | |||||||||
| Losses on extinguishment of debt | — | — | 46 | |||||||||
| Other | 277 | 243 | 364 | |||||||||
| Total non-compensation expenses | 1,278 | 1,168 | 1,218 | |||||||||
| Total non-interest expenses | 6,365 | 5,963 | 5,446 | |||||||||
| Pre-tax income | 1,375 | 1,311 | 925 | |||||||||
| Provision for income taxes | 341 | 454 | 289 | |||||||||
| Net income | $ | 1,034 | $ | 857 | $ | 636 | ||||||
| Earnings per common share – basic | $ | 7.32 | $ | 5.89 | $ | 4.43 | ||||||
| Earnings per common share – diluted | $ | 7.17 | $ | 5.75 | $ | 4.33 | ||||||
| Weighted-average common shares outstanding – basic | 141.0 | 145.3 | 143.3 | |||||||||
| Weighted-average common and common equivalent shares outstanding – diluted | 144.0 | 148.8 | 146.6 | |||||||||
| Net income | $ | 1,034 | $ | 857 | $ | 636 | ||||||
| Other comprehensive income/(loss), net of tax: | ||||||||||||
| Available-for-sale securities | 71 | (42 | ) | 2 | ||||||||
| Currency translations, net of the impact of net investment hedges | (2 | ) | (3 | ) | 16 | |||||||
| Cash flow hedges | (61 | ) | 33 | 23 | ||||||||
| Total other comprehensive income/(loss), net of tax | $ | 8 | $ | (12 | ) | $ | 41 | |||||
| Total comprehensive income | $ | 1,042 | $ | 845 | $ | 677 |
See accompanying Notes to Consolidated Financial Statements.
| RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended September 30, | ||||||||||||
| $ in millions, except per share amounts | 2019 | 2018 | 2017 | |||||||||
| Common stock, par value $.01 per share: | ||||||||||||
| Balance beginning of year | $ | 2 | $ | 2 | $ | 2 | ||||||
| Share issuances | — | — | — | |||||||||
| Balance end of year | 2 | 2 | 2 | |||||||||
| Additional paid-in capital: | ||||||||||||
| Balance beginning of year | 1,808 | 1,645 | 1,499 | |||||||||
| Employee stock purchases | 34 | 31 | 26 | |||||||||
| Exercise of stock options and vesting of restricted stock units, net of forfeitures | 21 | 32 | 28 | |||||||||
| Restricted stock, stock option and restricted stock unit expense | 107 | 98 | 91 | |||||||||
| Acquisition of noncontrolling interest and other | (32 | ) | 2 | 1 | ||||||||
| Balance end of year | 1,938 | 1,808 | 1,645 | |||||||||
| Retained earnings: | ||||||||||||
| Balance beginning of year | 5,032 | 4,340 | 3,835 | |||||||||
| Net income attributable to Raymond James Financial, Inc. | 1,034 | 857 | 636 | |||||||||
| Cash dividends declared (see Note 23) | (196 | ) | (164 | ) | (131 | ) | ||||||
| Other | 4 | (1 | ) | — | ||||||||
| Balance end of year | 5,874 | 5,032 | 4,340 | |||||||||
| Treasury stock: | ||||||||||||
| Balance beginning of year | (447 | ) | (390 | ) | (363 | ) | ||||||
| Purchases/surrenders | (759 | ) | (45 | ) | (9 | ) | ||||||
| Exercise of stock options and vesting of restricted stock units, net of forfeitures | (4 | ) | (12 | ) | (18 | ) | ||||||
| Balance end of year | (1,210 | ) | (447 | ) | (390 | ) | ||||||
| Accumulated other comprehensive loss: | ||||||||||||
| Balance beginning of year | (27 | ) | (15 | ) | (56 | ) | ||||||
| Other comprehensive income/(loss), net of tax | 8 | (12 | ) | 41 | ||||||||
| Other | (4 | ) | — | — | ||||||||
| Balance end of year | (23 | ) | (27 | ) | (15 | ) | ||||||
| Total equity attributable to Raymond James Financial, Inc. | $ | 6,581 | $ | 6,368 | $ | 5,582 | ||||||
| Noncontrolling interests: | ||||||||||||
| Balance beginning of year | $ | 84 | $ | 112 | $ | 146 | ||||||
| Net income/(loss) attributable to noncontrolling interests | (14 | ) | (6 | ) | 3 | |||||||
| Capital contributions | 2 | — | 10 | |||||||||
| Distributions and other | (10 | ) | (22 | ) | (47 | ) | ||||||
| Balance end of year | 62 | 84 | 112 | |||||||||
| Total shareholders’ equity | $ | 6,643 | $ | 6,452 | $ | 5,694 |
See accompanying Notes to Consolidated Financial Statements.
| RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 1,034 | $ | 857 | $ | 636 | ||||||
| Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | ||||||||||||
| Depreciation and amortization | 112 | 99 | 84 | |||||||||
| Deferred income taxes | (23 | ) | 117 | (12 | ) | |||||||
| Premium and discount amortization on available-for-sale securities and (gain)/loss on other investments | 14 | 21 | (28 | ) | ||||||||
| Provisions for loan losses, legal and regulatory proceedings and bad debts | 59 | 55 | 36 | |||||||||
| Share-based compensation expense | 112 | 99 | 109 | |||||||||
| Unrealized gain on company-owned life insurance policies, net of expenses | (10 | ) | (32 | ) | (43 | ) | ||||||
| Losses on extinguishment of debt | — | — | 46 | |||||||||
| Goodwill impairment | 19 | — | — | |||||||||
| Other | 51 | 17 | 35 | |||||||||
| Net change in: | ||||||||||||
| Securities sold under agreements to repurchase, net of securities purchased under agreements to resell | (8 | ) | (5 | ) | 97 | |||||||
| Securities loaned, net of securities borrowed | (93 | ) | (78 | ) | (262 | ) | ||||||
| Loans provided to financial advisors, net of repayments | (79 | ) | (87 | ) | (51 | ) | ||||||
| Brokerage client receivables and other accounts receivable, net | 696 | (518 | ) | (54 | ) | |||||||
| Trading instruments, net | 41 | (143 | ) | 57 | ||||||||
| Derivative instruments, net | (144 | ) | 73 | 58 | ||||||||
| Other assets | (85 | ) | 27 | 97 | ||||||||
| Brokerage client payables and other accounts payable | (1,231 | ) | 346 | (1,133 | ) | |||||||
| Accrued compensation, commissions and benefits | 80 | 132 | 160 | |||||||||
| Purchases and originations of loans held for sale, net of proceeds from sales of securitizations and loans held for sale | 32 | (96 | ) | 189 | ||||||||
| Jay Peak matter payments | — | — | (146 | ) | ||||||||
| Net cash provided by/(used in) operating activities | 577 | 884 | (125 | ) | ||||||||
| Cash flows from investing activities: | ||||||||||||
| Additions to property and equipment | (138 | ) | (134 | ) | (190 | ) | ||||||
| Increase in bank loans, net | (1,605 | ) | (2,818 | ) | (2,254 | ) | ||||||
| Proceeds from sales of loans held for investment | 235 | 193 | 333 | |||||||||
| Purchases of available-for-sale securities | (1,027 | ) | (1,124 | ) | (1,733 | ) | ||||||
| Available-for-sale securities maturations, repayments and redemptions | 644 | 495 | 299 | |||||||||
| Proceeds from sales of available-for-sale securities | — | 45 | 94 | |||||||||
| Business acquisitions, net of cash acquired | (5 | ) | (159 | ) | — | |||||||
| Other investing activities, net | (1 | ) | 26 | 75 | ||||||||
| Net cash used in investing activities | (1,897 | ) | (3,476 | ) | (3,376 | ) | ||||||
See accompanying Notes to Consolidated Financial Statements.
| RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued from previous page) | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from borrowings on the RJF Credit Facility | 300 | 300 | — | |||||||||
| Repayment of borrowings on the RJF Credit Facility | (300 | ) | (300 | ) | — | |||||||
| Proceeds from/(repayments of) short-term borrowings, net | — | (610 | ) | 610 | ||||||||
| Proceeds from Federal Home Loan Bank advances | 850 | 850 | 950 | |||||||||
| Repayments of Federal Home Loan Bank advances and other borrowed funds | (855 | ) | (855 | ) | (655 | ) | ||||||
| Proceeds from senior note issuances, net of debt issuance costs paid | — | — | 508 | |||||||||
| Extinguishment of senior notes payable | — | — | (650 | ) | ||||||||
| Premium paid on extinguishment of senior notes payable | — | — | (37 | ) | ||||||||
| Acquisition-related contingent consideration (paid)/received, net | — | (7 | ) | 3 | ||||||||
| Exercise of stock options and employee stock purchases | 65 | 63 | 57 | |||||||||
| Increase in bank deposits | 2,339 | 2,210 | 3,470 | |||||||||
| Purchases of treasury stock | (778 | ) | (62 | ) | (34 | ) | ||||||
| Dividends on common stock | (191 | ) | (151 | ) | (127 | ) | ||||||
| Acquisitions of and distributions to noncontrolling interests, net | (57 | ) | (18 | ) | (30 | ) | ||||||
| Net cash provided by financing activities | 1,373 | 1,420 | 4,065 | |||||||||
| Currency adjustment: | ||||||||||||
| Effect of exchange rate changes on cash | (23 | ) | (33 | ) | 47 | |||||||
| Net increase/(decrease) in cash, cash equivalents, and cash segregated pursuant to regulations | 30 | (1,205 | ) | 611 | ||||||||
| Cash, cash equivalents, and cash segregated pursuant to regulations at beginning of year | 5,941 | 7,146 | 6,535 | |||||||||
| Cash, cash equivalents, and cash segregated pursuant to regulations at end of year | $ | 5,971 | $ | 5,941 | $ | 7,146 | ||||||
| Cash and cash equivalents | $ | 3,957 | $ | 3,500 | $ | 3,670 | ||||||
| Cash segregated pursuant to regulations | 2,014 | 2,441 | 3,476 | |||||||||
| Total cash, cash equivalents, and cash segregated pursuant to regulations at end of year | $ | 5,971 | $ | 5,941 | $ | 7,146 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 283 | $ | 201 | $ | 156 | ||||||
| Cash paid for income taxes, net | $ | 390 | $ | 231 | $ | 349 |
See accompanying Notes to Consolidated Financial Statements.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Organization
Raymond James Financial, Inc. (“RJF,” the “firm” or the “Company”) is a financial holding company which, together with its subsidiaries, is engaged in various financial services activities, including providing investment management services for retail and institutional clients, the underwriting, distribution, trading and brokerage of equity and debt securities and the sale of mutual funds and other investment products. The firm also provides corporate and retail banking services, and trust services. For further information about our business segments, see Note 24 of this Form 10-K. As used herein, the terms “our,” “we,” or “us” refer to RJF and/or one or more of its subsidiaries.
Basis of presentation
The accompanying consolidated financial statements include the accounts of RJF and its consolidated subsidiaries that are generally controlled through a majority voting interest. We consolidate all of our 100% owned subsidiaries. In addition, we consolidate any variable interest entity (“VIE”) in which we are the primary beneficiary. Additional information on these VIEs is provided in Note 2 and in Note 9 of this Form 10-K. When we do not have a controlling interest in an entity, but we exert significant influence over the entity, we apply the equity method of accounting. All material intercompany balances and transactions have been eliminated in consolidation.
Accounting estimates and assumptions
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates and could have a material impact on the consolidated financial statements.
Reclassifications
Effective with the firm’s first fiscal quarter ended December 31, 2018, we have reclassified certain revenues among income statement line items and renamed certain line items. These reclassifications do not affect the Company’s reported total revenues or the total revenues in any of our segments for any of the previously reported periods. Prior period results have been conformed to the current presentation.
In addition to the reclassifications discussed in the preceding paragraph, certain other prior period amounts have been reclassified to conform to the current year’s presentation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recognition of revenues
On October 1, 2018, we adopted new accounting guidance for revenue from contracts with customers. Under the new guidance, revenue is recognized when promised goods or services are delivered to our customers in an amount we expect to receive in exchange for those goods or services (i.e., the transaction price). Contracts with customers can include multiple services, which are accounted for as separate “performance obligations” if they are determined to be distinct. Our performance obligations to our customers are generally satisfied when we transfer the promised good or service to our customer, either at a point in time or over time. Revenue from a performance obligation transferred at a point in time is recognized at the time that the customer obtains control over the promised good or service. Revenue from our performance obligations satisfied over time are recognized in a manner that depicts our performance in transferring control of the good or service, which is generally measured based on time elapsed, as our customers simultaneously receive and consume the benefit of our services as they are provided.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Payment for the majority of our services is considered to be variable consideration, as the amount of revenues we expect to receive is subject to factors outside of our control, including market conditions. Variable consideration is only included in revenue when amounts are not subject to significant reversal, which is generally when uncertainty around the amount of revenue to be received is resolved.
We involve third parties in providing services to the customer for some of our contracts with customers. Under the new guidance, we are generally deemed to control the promised services before they are transferred to the customer. Accordingly, beginning with adoption of the new guidance, we present the related revenues gross of the related costs.
Asset management and related administrative fees
We earn asset management and related administrative fees for performing asset management, portfolio management and related administrative services for retail and institutional clients. Such fees are generally calculated as a percentage of the value of assets in fee-based accounts under administration in our Private Client Group (“PCG”) segment or the net asset value of institutional accounts, retail accounts we manage on behalf of third-party institutions or proprietary mutual funds that we manage in our Asset Management segment. The value of these assets is impacted by market fluctuations and net inflows or outflows of assets. Fees are generally collected quarterly and are based on balances either at the beginning of the quarter or the end of the quarter, or average balances throughout the quarter. Asset management and related administrative fees are recognized on a monthly basis (i.e., over time) as the services are performed.
Revenues related to fee-based accounts under administration in PCG are shared by the PCG and Asset Management segments, the amount of which depends on whether clients are invested in “managed programs” that are overseen by our Asset Management segment (i.e., included in financial assets under management (“AUM”) in the Asset Management segment) and the administrative services being provided. Asset management revenues earned for retail accounts managed on behalf of third-party institutions, institutional accounts or proprietary mutual funds that we manage are recorded entirely in the Asset Management segment.
Brokerage revenues
Securities commissions
Mutual and other fund products and insurance and annuity products
We earn revenues for distribution and related support services performed related to mutual and other funds, fixed and variable annuities and insurance products. Depending on the product sold, we may receive an upfront fee for our services, a trailing commission, or some combination thereof. Upfront commissions received are generally based on a fixed rate applied, as a percentage, to amounts invested or the value of the contract at the time of sale and are recognized at the time of sale (or, in the case of insurance and annuity products, when the policy is accepted by the carrier). Trailing commissions are generally based on a fixed rate applied, as a percentage, to the net asset value of the fund, or the value of the insurance policy or annuity contract. Trailing commissions are generally received monthly or quarterly while our client holds the investment or holds the contract. As these trailing commissions are based on factors outside of our control, including market movements and client behavior (i.e., how long clients hold their investment, insurance policy or annuity contract), such revenue is recognized when it is probable that a significant reversal will not occur.
Equities, exchange-traded funds (“ETFs”) and fixed income products
We earn commissions for executing and clearing transactions for customers, primarily in listed and OTC equity securities, including ETFs, and options. Such revenues primarily arise from transactions for retail clients in our PCG segment, as well as services related to sales and trading activities transacted on an agency basis in our Capital Markets segment. Commissions are recognized on trade date, generally received from the customer on settlement date, and we record a receivable between the trade date and the date collected from the customer.
Principal transaction revenues
Principal transactions include revenues from customers’ purchases and sales of financial instruments, including fixed income and equity securities and derivatives, in which we transact on a principal basis. To facilitate such transactions, we carry inventories of financial instruments. The gains and losses on such inventories, both realized and unrealized, are reported as principal transactions revenues.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Account and service fees
Mutual fund and annuity service fees
We earn servicing fees for providing sales and marketing support to product partners and for supporting the availability and distribution of their products on our platforms. We also earn servicing fees from such partners for accounting and administrative services. These fees, which are received monthly or quarterly, are generally based on the market value of assets or number of positions in such programs or, in certain cases, are a fixed annual fee, and are recognized over time as the services are performed.
Raymond James Bank Deposit Program (“RJBDP”) fees
We earn servicing fees from various banks for administrative services we provide related to our clients’ deposits that are swept to such banks as part of the RJBDP, our multi-bank sweep program. The amounts received 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 fees are earned over time as the related administrative services are performed and are received monthly. Our PCG segment also earns servicing fees from RJ Bank, which are based on the number of accounts that are swept to RJ Bank. These fees are eliminated in consolidation.
Investment banking revenues
We earn revenue from investment banking transactions, including public and private equity and debt financing, merger & acquisition advisory services, and other advisory services. Underwriting revenues, which are typically deducted from the proceeds remitted to the issuer, are recognized on trade date if there is no uncertainty or contingency related to the amount to be paid. Fees from merger & acquisition and advisory assignments are generally recognized at the time the services related to the transaction are completed under the terms of the engagement. Fees for advisory services are typically received upfront, as non-refundable retainer fees, or as a success fee upon completion of a transaction. Expenses related to investment banking transactions are generally deferred until the related revenue is recognized or the assignment is otherwise concluded. Beginning October 1, 2018, such expenses have been included in “Professional fees” on our Consolidated Statements of Income and Comprehensive Income.
See Note 19 in the accompanying Notes to the Consolidated Financial Statements for additional information on our revenue streams.
Cash and cash equivalents
Our cash equivalents include money market funds or highly liquid investments with original maturities of 3 months or less, other than those used for trading purposes.
Cash segregated pursuant to regulations
In accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Raymond James & Associates, Inc. (“RJ&A”), as a broker-dealer carrying client accounts, is subject to requirements to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of its clients. The amounts included in Cash segregated pursuant to regulations on our Consolidated Statements of Financial Condition represented the amounts of cash actually on deposit in our segregated reserve accounts for regulatory purposes as of each respective period-end. In addition, Raymond James Ltd. (“RJ Ltd.”) is required to hold client Registered Retirement Savings Plan funds in trust. Raymond James Bank, N.A. (“RJ Bank”) maintains cash in an interest-bearing pass-through account at the Federal Reserve Bank (“FRB”) in accordance with Regulation D of the Federal Reserve Act, which requires depository institutions to maintain minimum average reserve balances against its deposits.
Securities purchased under agreements to resell and securities sold under agreements to repurchase
We purchase securities under short-term agreements to resell (“reverse repurchase agreements”). Additionally, we sell securities under agreements to repurchase (“repurchase agreements”). Both reverse repurchase agreements and repurchase agreements are accounted for as collateralized financings and are carried at contractual amounts plus accrued interest. To mitigate credit exposure under reverse repurchase agreements, we receive collateral with a fair value that is typically equal to or in excess of the principal amount loaned under such agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral values are evaluated on a recurring basis, and collateral is obtained from or returned to the counterparty when contractually required. In addition, under repurchase agreements, we are required to post collateral in an amount that typically exceeds the carrying value of these agreements. In the event that the market value of the securities we pledge as collateral declines, we may have to post additional collateral or reduce borrowing amounts. See Note 7 for additional information regarding collateralized agreements and financings.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Securities borrowed and securities loaned
We act as an intermediary between broker-dealers and other financial institutions whereby we borrow securities from one broker-dealer and then either lend them to another broker-dealer or use them to cover short positions. Where permitted, we have also loaned, to broker-dealers and other financial institutions, securities owned by the firm or our clients or others we have received as collateral. Securities borrowed and securities loaned transactions are reported as collateralized financings and are recorded at the amount of cash advanced or received. In securities borrowed transactions, we are required to deposit cash with the lender. With respect to securities loaned, we generally receive cash in an amount in excess of the market value of securities loaned. We evaluate the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. See Note 7 for additional information regarding collateralized agreements and financings.
Financial instruments, financial instruments sold but not yet purchased, at fair value
“Financial instruments owned” and “Financial instruments sold, but not yet purchased” are recorded at fair value. Fair value is defined by GAAP as the price that would be received to sell 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 in accordance with GAAP, we use various valuation approaches, including market and/or income approaches. Fair value is a market-based measurement considered from the perspective of a market participant. As such, our fair value measurements reflect assumptions that we believe market participants would use in pricing the asset or liability at the measurement date. GAAP provides for the following three levels to be used to classify our fair value measurements.
Level 1 - Financial instruments included in Level 1 are highly liquid instruments valued using unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 - Financial instruments reported in Level 2 include those that have pricing inputs that are other than quoted prices in active markets, but which are either directly or indirectly observable as of the reporting date (i.e., prices for similar instruments).
Level 3 - Financial instruments reported in Level 3 have little, if any, market activity and are measured using one or more inputs that are significant to the fair value measurement and unobservable. These valuations require judgment or estimation. These instruments are generally valued using discounted cash flow techniques, market multiples, or investment-specific events.
GAAP requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when performing our fair value measurements. 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 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.
Valuation techniques and inputs
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. In accordance with GAAP, the criteria used to determine whether the market for a financial instrument is active or inactive is based on the particular asset or liability. For equity securities, our definition of actively traded is based on average daily trading volume and other market statistics. We have determined the market for certain other types of financial instruments, including private equity investments and auction-rate securities (“ARS”), to be uncertain or inactive as of both September 30, 2019 and 2018. As a result, the valuation of these financial instruments included management judgment in determining the relevance and reliability of market information available.
The level within the fair value hierarchy, specific valuation techniques, and other significant accounting policies pertaining to financial instruments presented on our Consolidated Statements of Financial Condition are described as follows:
Trading instruments and trading instruments sold but not yet purchased
Trading instruments and trading instruments sold but not yet purchased are comprised primarily of the financial instruments held by our broker-dealer subsidiaries and include debt securities, equity securities, brokered certificates of deposit, and other securities. These instruments are recorded at fair value with realized and unrealized gains and losses reflected in current period net income.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
When available, we use quoted prices in active markets to determine the fair value of our trading instruments. Such instruments are classified within Level 1 of the fair value hierarchy.
When trading instruments are traded in secondary markets and quoted market prices for identical instruments do not exist, we utilize valuation techniques, including matrix pricing, to estimate fair value. Matrix pricing generally utilizes spread-based models periodically re-calibrated to observable inputs such as market trades or to dealer price bids in similar securities in order to derive the fair value of the instruments. Valuation techniques may also rely on other observable inputs such as yield curves, interest rates and expected principal repayments and default probabilities. We utilize prices from third-party pricing services to corroborate our estimates of fair value. Depending upon the type of security, the pricing service may provide a listed price, a matrix price or use other methods including broker-dealer price quotations. Securities valued using these techniques are classified within Level 2 of the fair value hierarchy.
We offset our long and short positions for identical securities recorded at fair value as part of our trading instruments (long positions) and trading instruments sold but not yet purchased (short positions).
Available-for-sale securities
Available-for-sale securities are generally classified at the date of purchase and are comprised primarily of agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”) held by RJ Bank. Available-for-sale securities held at RJ Bank are used primarily as part of its interest rate risk and liquidity management strategies and may be sold in response to changes in interest rates, changes in prepayment risks, or other factors.
Interest on available-for-sale securities is recognized in interest income on an accrual basis. Discounts are accreted and premiums are amortized as an adjustment to yield over the estimated average life of the security. Realized gains and losses on sales of available-for-sale securities are recognized using the specific identification method and reflected in other revenue in the period sold. Unrealized gains or losses on available-for-sale securities, except for those that are deemed to be other-than-temporary, are recorded through other comprehensive income/(loss) (“OCI”) and are thereafter presented in equity as a component of accumulated other comprehensive income (“AOCI”) on our Consolidated Statements of Financial Condition.
For any available-for-sale securities in an unrealized loss position at a reporting period end, we make an assessment whether such securities are impaired on an other-than-temporary basis. The following factors are considered in order to determine whether an impairment is other-than-temporary: our intention to sell the security, our assessment of whether it is more likely than not that we will be required to sell the security before the recovery of its amortized cost basis, and whether the evidence indicating that we will recover the amortized cost basis of a security in full outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to period end, recent events specific to the issuer or industry and forecasted performance of the security. We do not consider our agency available-for-sale securities to be other-than-temporarily-impaired due to the guarantee of the full payment of principal and interest by the U.S. government and the fact that we have the ability and intent to hold these securities.
The fair value of our available-for-sale securities is determined by obtaining third-party pricing service bid quotations from two independent pricing services. Third-party pricing service bid quotations are based on either current market data or the most recently available market data. The third-party pricing services provide comparable price evaluations utilizing available market data for similar securities, which includes observable data comprised of benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data including market research publications, and loan performance experience. On a quarterly basis, we utilize bid quotations from other third-party pricing services to corroborate the pricing information obtained from the primary pricing service. Securities valued using these valuation techniques are classified within Level 2 of the fair value hierarchy.
Derivative assets and derivative liabilities
Our derivative assets and derivative liabilities are recorded at fair value and are included in “Derivative assets” and “Derivative liabilities” on our Consolidated Statements of Financial Condition. To reduce credit exposure on certain of our derivative transactions, we may enter into a master netting arrangement that allows for net settlement of all derivative transactions with each counterparty. In addition, the credit support annex allows parties to the master netting agreement to mitigate their credit risk by requiring the party which is out of the money to post collateral. We accept collateral in the form of cash or other marketable securities. Where permitted, we elect to net-by-counterparty certain derivative contracts entered into under a legally enforceable master netting agreement and, therefore, the fair value of those derivative contracts are netted by counterparty on our Consolidated Statements of Financial Condition. As we elect to net-by-counterparty the fair value of such derivative contracts, we also net-by-counterparty cash collateral exchanged as part of those derivative agreements. We may also require certain counterparties to make a deposit at the inception of a derivative
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
agreement, referred to as “initial margin.” This initial margin is included in “Other payables” on our Consolidated Statements of Financial Condition.
We are also required to maintain deposits with the clearing organizations we utilize to clear certain of our interest rate derivatives, for which we have posted securities collateral. This “initial margin” is included as a component of “Other investments” or “Available-for-sale securities” on our Consolidated Statements of Financial Condition. On a daily basis, we also pay cash to or receive cash from these clearing organizations due to changes in the fair value of the derivatives which they clear. Such payments are referred to as “variation margin” and are considered to be settlement of the related derivatives.
Fixed income business operations
We enter into interest rate derivatives in our fixed income business to facilitate client transactions or to actively manage risk exposures that arise from our client activity, including a portion of our trading inventory. The majority of these derivatives are traded in the over-the-counter market and are executed directly with another counterparty or are cleared and settled through a clearing organization. Realized or unrealized gains or losses, including interest, on our fixed income derivatives are recorded in “Principal transactions” on our Consolidated Statements of Income and Comprehensive Income. The fair value of these interest rate derivatives is obtained from internal pricing models that consider current market trading levels and the contractual prices for the underlying financial instruments, as well as time value, yield curve and other volatility factors underlying the positions. Since our model inputs can be observed in a liquid market and the models do not require significant judgment, such derivatives are classified within Level 2 of the fair value hierarchy. We utilize values obtained from third-party derivatives dealers to corroborate the output of our internal pricing models.
Matched book
We also facilitate matched book derivative transactions in which we enter into interest rate derivatives with clients. For every derivative we enter into with a client, we also enter into an offsetting derivative on terms that mirror the client transaction with a credit support provider, which is a third-party financial institution. Any collateral required to be exchanged under these derivatives is administered directly between the client and the third-party financial institution. Due to this pass-through transaction structure, we have completely mitigated the market and credit risk on these derivatives. As a result, derivatives for which the fair value is in an asset position have an equal and offsetting derivative liability. Fair value is determined using an internal pricing model which includes inputs from independent pricing sources to project future cash flows under each underlying derivative. Since any changes in fair value are completely offset by a change in fair value of the offsetting derivative, there is no net impact on our Consolidated Statements of Income and Comprehensive Income from changes in the fair value of these derivatives. We recognize revenue on these derivatives on the transaction date, computed as the present value of the expected cash flows we expect to receive from the third-party financial institution over the life of the derivative. The difference between the present value of these cash flows at the date of inception and the gross amount potentially received is accreted to revenue over the term of the contract. The revenue from these transactions is included within “Other” revenues on our Consolidated Statements of Income and Comprehensive Income.
RJ Bank derivatives
We enter into three-month forward foreign exchange contracts primarily to hedge the risks related to RJ Bank’s investment in its Canadian subsidiary, as well as its risk resulting from transactions denominated in currencies other than the U.S. dollar. The majority of these derivatives are designated as net investment hedges. The gain or loss related to RJ Bank’s designated net investment hedges is recorded, net of tax, in shareholders’ equity as part of the cumulative translation adjustment component of AOCI with such balance impacting “Other” revenues in the event the net investment is sold or substantially liquidated. Gains and losses on the undesignated derivative instruments are recorded in earnings on our Consolidated Statements of Income and Comprehensive Income. Hedge effectiveness is assessed at each reporting period using a method that is based on changes in forward rates and measured using the hypothetical derivatives method. As the terms of the hedging instrument and hypothetical derivative generally match at inception, the hedge is expected to be highly effective.
The fair value of our forward foreign exchange contracts is determined by obtaining valuations from a third-party pricing service or model. These valuations are based on observable inputs such as spot rates, foreign exchange rates and both U.S. and foreign interest rate curves. We validate the observable inputs utilized in the third-party valuation model by preparing an independent calculation using a secondary, third-party valuation model. These forward foreign exchange contracts are classified within Level 2 of the fair value hierarchy.
The cash flows associated with certain assets held by RJ Bank provide interest income at fixed interest rates. Therefore, the value of these assets, absent any risk mitigation, is subject to fluctuation based upon changes in market rates of interest over time. RJ Bank enters into floating-rate advances from the Federal Home Loan Bank (“FHLB”) to, in part, fund these assets and then enters into interest
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
rate contracts which swap variable interest payments on this debt for fixed interest payments. These interest rate swaps are designated as cash flow hedges and effectively fix RJ Bank’s cost of funds associated with these assets to mitigate a portion of the market risk. The gain or loss on RJ Bank’s cash flow hedge interest rate derivatives is recorded, net of tax, in shareholders’ equity as part of the cash flow hedge component of AOCI and subsequently reclassified to earnings when the hedged transaction affects earnings, specifically upon the incurrence of interest expense on the hedged borrowings. Hedge effectiveness is assessed at inception and at each reporting period utilizing regression analysis. As the key terms of the hedging instrument and hedged transaction match at inception, management expects the hedges to be effective while they are outstanding. The fair value of these interest rate swaps is determined by obtaining valuations from a third-party pricing service. These third-party valuations are based on observable inputs such as time value and yield curves. We validate these observable inputs by preparing an independent calculation using a secondary third-party model. Cash flows from hedging activities are included in the same category as the items being hedged. Cash flows from derivative instruments used to manage interest rates are classified as operating activities. We classify these derivatives within Level 2 of the fair value hierarchy.
Derivative arising from our acquisition of Alex. Brown
As part of our fiscal 2016 acquisition of Alex. Brown, we assumed certain Deutsche Bank restricted stock unit (“DBRSU”) awards, which will ultimately be settled in Deutsche Bank AG (“DB”) common shares, provided certain performance metrics are achieved. The DBRSU obligation results in a derivative, the fair value and notional of which is measured by multiplying the number of outstanding DBRSU awards to be settled in DB common shares as of the end of the reporting period by the end of reporting period DB share price, as traded on the New York Stock Exchange.
Other investments
Other investments consist primarily of private equity investments, marketable securities we hold that are associated with certain of our deferred compensation plans, ARS, term deposits with Canadian financial institutions, and securities pledged as collateral with clearing organizations.
Private equity investments
Private equity investments consist of direct investments and investments in third-party private equity funds and various legacy private equity funds which we sponsor. The private equity funds in which we invest are primarily closed-end funds in which our investments are generally not eligible for redemption. We receive distributions from these funds as the underlying assets are liquidated or distributed. These investments are measured at fair value with any changes recognized in “Other” revenues on our Consolidated Statements of Income and Comprehensive Income. The fair value of private equity investments are determined utilizing either the net asset value (“NAV”) of the fund as a practical expedient or Level 3 valuation techniques.
We utilize NAV or its equivalent as a practical expedient to determine the fair value of our private equity investments when: (1) the fund does not have a readily determinable fair value; (2) the NAV of the fund is calculated in a manner consistent with the measurement principles of investment-company accounting, including measurement of the underlying investments at fair value; and (3) it is not probable that we will sell the investment at an amount other than NAV. The NAV is calculated based on our proportionate share of the net assets of the fund as provided by the fund manager.
The portion of our private equity investment portfolio that is not valued at NAV is valued initially at the transaction price until significant transactions or developments indicate that a change in the carrying values of these investments is appropriate. The carrying values of these investments are adjusted based on financial performance, investment-specific events, financing and sales transactions with third parties and/or discounted cash flow models incorporating changes in market outlook. Investments valued using these valuation techniques are classified within Level 3 of the fair value hierarchy. The valuation of such investments requires judgment due to the absence of quoted market prices, inherent lack of liquidity and long-term nature of these assets. As a result, these values cannot be determined with precision and the calculated fair value estimates may not be realizable in a current sale or immediate settlement of the instrument.
Auction rate securities
We hold ARS which are long-term variable rate securities tied to short-term interest rates. Due to failures in the “Dutch auction” process originally used to transact in these securities, the fair value of the ARS holdings is estimated based on internal pricing models. The pricing models take into consideration the characteristics of the underlying securities, as well as multiple inputs including the issuer and its credit quality, data from recent trades, if any, the expected timing of redemptions and an estimated yield premium that a market participant would require over otherwise comparable securities to compensate for the illiquidity of the ARS. These valuation techniques use unobservable inputs and accordingly are classified within Level 3 of the fair value hierarchy.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other
The non-qualified deferred compensation plans or arrangements are for the benefit of certain employees, and provide a return to the participating employees based upon the performance of various referenced investments. The balances associated with these plans are invested in certain marketable securities that we hold until the vesting date, which is typically five years from the date of the deferral. A liability associated with these deferrals is reflected as a component of “Accrued compensation, commissions and benefits” on our Consolidated Statements of Financial Condition. We use quoted prices in active markets to determine the fair value of these investments. Such instruments are classified within Level 1 of the fair value hierarchy.
Canadian financial institution term deposits are recorded at cost which approximates fair value. These investments are classified within Level 1 of the fair value hierarchy.
Brokerage client receivables, net
Brokerage client receivables include receivables from the clients of our broker-dealer and asset management subsidiaries. The receivables from broker-dealer clients are principally for amounts due on cash and margin transactions and are generally collateralized by securities owned by the clients. The receivables from asset management clients are primarily for accrued asset management fees. Brokerage client receivables are reported at their outstanding principal balance, adjusted for any allowance for doubtful accounts. An allowance is established when collectability is not reasonably assured. When the receivable from a brokerage client is considered to be impaired, the amount of the impairment is generally measured based on the fair value of the securities acting as collateral, which is measured based on current prices from independent sources such as listed market prices or broker-dealer price quotations.
Securities beneficially owned by customers, including those that collateralize margin or other similar transactions, are not reflected on our Consolidated Statements of Financial Condition (see Note 7 for additional information regarding this collateral). We present “Brokerage client receivables, net” at their outstanding principal balance on our Consolidated Statements of Financial Condition, net of any allowance for doubtful accounts. Our allowance for doubtful accounts was insignificant at both September 30, 2019 and 2018.
Receivables from brokers, dealers and clearing organizations
Receivables from brokers, dealers and clearing organizations include amounts receivable for securities failed to deliver and any cash on deposit with clearing organizations. We present “Receivables from brokers, dealers and clearing organizations” on our Consolidated Statements of Financial Condition, net of any allowance for doubtful accounts.
Bank loans, net
Loans held for investment
Bank loans are comprised of loans originated or purchased by RJ Bank and include commercial and industrial (“C&I”) loans, commercial and residential real estate loans, tax-exempt loans and securities-based loans (“SBL”). The loans which we have the intent and the ability to hold until maturity or payoff are recorded at their unpaid principal balance plus any premium paid in connection with the purchase of the loan, less the allowance for loan losses and any discounts received in connection with the purchase of the loan and net of deferred fees and costs on originated loans. Syndicated loans purchased in the secondary market are recognized as of the trade date. Interest income is recognized on an accrual basis. Loan origination fees and direct costs, as well as premiums and discounts on loans that are not revolving, are capitalized and recognized in interest income using the interest method. For revolving loans, the straight-line method is used based on the contractual term.
We segregate our loan portfolio into six loan portfolio segments: C&I, commercial real estate (“CRE”), CRE construction, tax-exempt, residential mortgage, and SBL and other. These portfolio segments also serve as the portfolio loan classes for purposes of credit analysis, except for residential mortgage loans which are further disaggregated into residential first mortgage and residential home equity classes.
Loans held for sale
Certain residential mortgage loans originated and intended for sale in the secondary market due to their fixed interest rate terms, as well as SBA loans purchased and intended for sale in the secondary market but not yet aggregated for securitization into pools, are each carried at the lower of cost or estimated fair value. The fair value of the residential mortgage loans held for sale are estimated using observable prices obtained from counterparties for similar loans. These nonrecurring fair value measurements are classified within Level 2 of the fair value hierarchy.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
We purchase the guaranteed portions of SBA loans and account for these loans in accordance with the policy for loans held for sale. We then aggregate SBA loans with similar characteristics into pools for securitization and sell these pools in the secondary market. Individual loans may be sold prior to securitization.
The determination of the fair value of the SBA loans depends upon their intended disposition. The fair value of the SBA loans to be individually sold are determined based upon their committed sales price. The fair value of the loans to be aggregated into pools for securitization, which are committed to be sold, are determined based upon third-party price quotes. The fair value of all other SBA loans are determined using a third-party pricing service. The prices for the SBA loans, other than those committed to be individually sold, are validated by comparing the third-party price quote or the third-party pricing service prices, as applicable, for a sample of loans to observable market trades obtained from external sources.
Once the SBA loans are securitized into a pool, the respective securities are classified as trading instruments and are carried at fair value based on our intention to sell the securitizations within the near term. Any changes in the fair value of the securitized pools as well as any realized gains or losses earned thereon are reflected in “Principal transactions” on our Consolidated Statements of Income and Comprehensive Income. Sales of the securitizations are accounted for as of settlement date, which is the date we have surrendered control over the transferred assets. We do not retain any interest in the securitizations once they are sold. The fair value for SBA loan securitizations is determined by utilizing observable prices obtained from a third-party pricing service, which provides comparable price evaluations utilizing observable market data for similar securities. We substantiate the prices obtained from the third-party pricing service by comparing such prices for a sample of securities to observable market trades obtained from external sources. The instruments valued using these observable inputs are typically classified within Level 2 of the fair value hierarchy.
Corporate loans, which include C&I, CRE, CRE construction, and tax-exempt loans are designated as held for investment upon inception and recognized in loans receivable. If we subsequently designate a corporate or tax-exempt loan as held for sale, which generally occurs as part of a loan workout situation, we then write down the carrying value of the loan with a partial charge-off, if necessary, to carry it at the lower of cost or estimated fair value.
Gains and losses on sales of residential mortgage loans held for sale, SBA loans that are not part of a securitized pool, and corporate loans transferred from the held for investment portfolio, are included as a component of “Other” revenues on our Consolidated Statements of Income and Comprehensive Income, while interest collected on these assets is included in “Interest income.” Net unrealized losses are recognized through a valuation allowance by charges to income as a component of “Other” revenues on our Consolidated Statements of Income and Comprehensive Income.
Off-balance sheet loan commitments
We have outstanding at any time a significant number of commitments to extend credit and other credit-related off-balance sheet financial instruments such as revolving lines of credit, standby letters of credit and loan purchases. Our policy is generally to require customers to provide collateral at the time of closing. The amount of collateral obtained, if it is deemed necessary upon extension of credit, is based on our credit evaluation of the borrower. Collateral held varies but may include assets such as marketable securities, accounts receivable, inventory, real estate, and income-producing commercial properties. The potential credit loss associated with these off-balance sheet loan commitments is accrued and reflected in “Other payables” on our Consolidated Statements of Financial Condition. Refer to the allowance for loan losses and reserve for unfunded lending commitments section that follows for a discussion of the reserve calculation methodology and Note 17 for further information about these commitments.
We recognize the revenue associated with corporate syndicated standby letters of credit, which is generally received quarterly, on a cash basis, the effect of which does not differ materially from recognizing the revenue in the period the fee is earned. Unused corporate line fees are accounted for on an accrual basis.
Nonperforming assets
Nonperforming assets are comprised of both nonperforming loans and other real estate owned (“OREO”). Nonperforming loans include those loans which have been placed on nonaccrual status and any accruing loans which are 90 days or more past due and in the process of collection. Loans which have been restructured in a manner that grant a concession to a borrower experiencing financial difficulties we would not otherwise consider are deemed to be a troubled debt restructuring (“TDR”). Loans structured as TDRs which are currently placed on nonaccrual status are considered nonperforming loans.
Loans of all classes are placed on nonaccrual status when we determine that full payment of all contractual principal and interest is in doubt, or the loan is past due 90 days or more as to contractual interest or principal unless the loan, in our opinion, is well-secured and in the process of collection. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is written off against
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Notes to Consolidated Financial Statements
interest income and accretion of the net deferred loan origination fees cease. Interest is recognized using the cash method for SBL and other and residential (first mortgage and home equity) loans and the cost recovery method for corporate and tax-exempt loans thereafter until the loan qualifies for return to accrual status. Loans (including first mortgage and home equity residential mortgage TDRs) are returned to an accrual status when the loans have been brought contractually current with the original or amended terms and have been maintained on a current basis for a reasonable period, generally six months. Corporate loan TDRs have generally been partially charged off and therefore, remain on nonaccrual status until the loan is fully resolved.
Other real estate acquired in the settlement of loans, including through, or in lieu of, loan foreclosure, is initially recorded at the lower of cost or fair value less estimated selling costs through a charge to the allowance for loan losses, thus establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed and the assets are carried at the lower of the carrying amount or fair value, as determined by a current appraisal or valuation less estimated costs to sell, and are classified as “Other assets” on our Consolidated Statements of Financial Condition. These nonrecurring fair value measurements are classified within Level 2 of the fair value hierarchy.
Impaired loans
Loans in all classes are considered to be impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest on a loan when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. For individual loans identified as impaired, impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate and taking into consideration the factors described in the following section in relation to the evaluation of the allowance for loan losses, except that as a practical expedient, we measure impairment based on the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Impaired loans include all corporate nonaccrual loans, all residential mortgage nonaccrual loans for which a charge-off had previously been recorded, and all loans which have been modified in TDRs. Interest income on impaired loans is recognized consistently with the recognition policy of nonaccrual loans.
Allowance for loan losses and reserve for unfunded lending commitments
We maintain an allowance for loan losses to provide for probable losses inherent in our loan portfolio based on ongoing evaluations of the portfolio, the related risk characteristics, and the overall economic and environmental conditions affecting the loan portfolio. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
We have developed policies and procedures for assessing the adequacy of the allowance for loan losses that reflect the assessment of risk considering all available information. In developing this assessment, we rely on estimates and exercise judgment in evaluating credit risk. The evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Depending on changes in circumstances, future assessments of credit risk may yield materially different results from the prior estimates, which may require an increase or a decrease in the allowance for loan losses. Estimates that are particularly susceptible to change that may have an impact on the amount of the allowance include:
| • | the selection of proxy data used to calculate loss factors; |
| • | the evaluation of loss emergence and historical loss experience periods; |
| • | our evaluation of the risk profile of loan portfolio segments, including internal risk ratings; |
| • | the value of underlying collateral, which impacts loss severity and certain cash flow assumptions; and |
| • | our selection and evaluation of qualitative factors, which reflect the imprecision that is inherent in the estimation of probable loan losses. |
The allowance for loan losses is comprised of two components: allowances calculated based on formulas for homogeneous classes of loans collectively evaluated for impairment, which are re-evaluated quarterly and adjusted based on our analysis of certain qualitative factors, and specific allowances assigned to certain classified loans individually evaluated for impairment. These homogeneous classes are a result of management’s disaggregation of the loan portfolio and are comprised of the previously mentioned classes: C&I, CRE, CRE construction, tax-exempt, residential first mortgage, residential home equity, and SBL and other.
An annual analysis of the loss emergence period estimate, which is the average length of time between the event that triggers a loss and the confirmation and/or charge-off of that loss, is performed for all loan classes. The analysis is utilized in establishing the allowance for each of the classes of loans through the application of an adjustment to the calculated allowance percentage for the respective loan grade.
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Notes to Consolidated Financial Statements
The loans within the corporate and tax-exempt loan classes are assigned to an internal loan grade based upon the respective loan’s credit characteristics. The loans within the residential first mortgage, residential home equity, and SBL and other classes are assigned loan grades equivalent to the loan classifications utilized by bank regulators, dependent on their respective likelihood of loss. For all loan classes except for CRE loans, we assign each loan grade an allowance percentage based on the estimated incurred loss associated with that grade. The allowance for loan losses for all non-impaired loans within those loan classes is then calculated based on the allowance percentage assigned to the respective loan’s class and grade factoring in the respective loss emergence period. For the CRE loan class, the allowance for loan losses is calculated based on the allowance percentage assigned to each loan. The allowance for loan losses for all impaired loans and those nonaccrual residential first mortgage loans that have been evaluated for a charge-off are based on an individual evaluation of impairment as previously described in the impaired loans section.
The quantitative factors taken into consideration when assigning loan grades and allowance percentages to loans within the corporate and tax-exempt loan classes include: estimates of borrower default probabilities and collateral type; past loss history, Shared National Credit (“SNC”) reviews and examination results from bank regulators. Loan grades for individual C&I and tax-exempt loans are derived from analyzing two aspects of the risk profile in a particular loan: the obligor rating and the facility (collateral) rating. The obligor rating relates to a borrower’s probability of default and the facility rating is utilized to estimate the anticipated loss given default. These two ratings, which are based on historical long-term industry loss rates (proxy data) as we have limited loss history, are considered in combination with certain adjustments for the loss emergence period to derive the final C&I and tax-exempt loan grades and allowance percentages. The allowance for loans within the CRE and CRE construction loan portfolios is based on loan-level probability of default and loss given default estimates in combination with certain adjustments for a loss emergence period.
The quantitative loss rates for corporate and tax-exempt loans are supplemented by considering qualitative factors that may cause estimated losses to differ from quantitatively calculated amounts. These qualitative factors are intended to address developing trends, and include, but are not limited to: trends in delinquencies; loan growth; loan terms; changes in geographic distribution; changes in the value of the underlying collateral for collateral-dependent loans; lending policies; loan review process; experience, ability and depth of lending management and other relevant staff; local, regional, national and international economic conditions; competition; legal and regulatory requirements; and concentrations of credit risk.
Historical loan loss rates, a quantitative factor, are utilized when assigning the allowance percentages for residential first mortgage loans and residential home equity loans. These estimated loss rates are based on our historical loss data over a period of time. We currently utilize a look back period for residential first mortgage and home equity loans reflecting the current housing cycle that includes the last downturn.
The SBL portfolio is not yet seasoned enough to exhibit a loss trend. As a result, the allowance is determined judgmentally by management, primarily utilizing peer benchmarking data and qualitative factors.
For residential first mortgage loan, residential home equity loan and SBL classes, the qualitative factors considered to supplement the quantitative analysis include, but are not limited to, loan performance trends, loan product parameters and qualification requirements, borrower credit scores at origination, occupancy (i.e., owner occupied, second home or investment property), documentation level, loan purpose, geographic concentrations, average loan size, loan policy exceptions, loan-to-value (“LTV”) ratios, as well as the factors previously noted that are utilized for corporate loans.
We reserve for losses inherent in our unfunded lending commitments using a methodology similar to that used for loans in the respective portfolio segment, based upon loan grade and expected funding probabilities for fully binding commitments. This will result in some reserve variability over different periods depending upon the mix of the loan portfolio at the time and funding expectations. All classes of impaired loans which have unfunded lending commitments are analyzed in conjunction with the impaired allowance process previously described.
Loan charge-off policies
Corporate and tax-exempt loans are monitored on an individual basis, and loan grades are reviewed at least quarterly to ensure they reflect the loan’s current credit risk. When we determine that it is likely that a corporate or tax-exempt loan will not be collected in full, the loan is evaluated for potential impairment. After consideration of the borrower’s ability to restructure the loan, alternative sources of repayment, and other factors affecting the borrower’s ability to repay the debt, the portion of the loan deemed to be a confirmed loss, if any, is charged-off. For collateral-dependent loans secured by real estate, the amount of the loan considered a confirmed loss and charged-off is generally equal to the difference between the recorded investment in the loan and the collateral’s appraised value less estimated costs to sell. For C&I and tax-exempt loans, we evaluate all sources of repayment to arrive at the amount considered to be a loss and charged-off. Corporate banking and credit risk managers also meet regularly to review criticized loans
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Notes to Consolidated Financial Statements
(loans that are rated special mention or worse as defined by bank regulators, see Note 8 for further discussion). Additional charge-offs are taken when the value of the collateral changes or there is an adverse change in the expected cash flows.
The majority of our corporate loan portfolio is comprised of participations in either SNCs or other large syndicated loans in the U.S. and Canada. The SNCs are U.S. loan syndications totaling over $100 million that are shared between three or more regulated institutions. The agent bank’s regulator reviews a portion of SNC loans on a semi-annual basis and provides a synopsis of each loan’s regulatory classification, including loans that are designated for nonaccrual status and directed charge-offs. We must be at least as critical with nonaccrual designations, directed charge-offs, and classifications, potentially impacting our allowance for loan losses and charge-offs. Corporate loans are subject to our internal review procedures and regulatory review by the OCC and the Fed as part of the Bank’s regulatory examinations.
Every residential mortgage loan over 60 days past due is reviewed to determine loan status, collection strategy and charge-off recommendations. Charge-offs are typically considered on residential mortgage loans once the loans are delinquent 90 days or more and then generally taken before the loan is 120 days past due. A charge-off is taken against the allowance for loan losses for the difference between the loan amount and the amount that we estimate will ultimately be collected, based on the value of the underlying collateral less estimated costs to sell. We predominantly use broker price opinions (“BPO”) for these valuations. We believe BPOs are more reliable than an automated valuation tool or the use of tax assessed values. A full appraisal is obtained post-foreclosure and further charge-offs are recorded against the owned asset if an appraisal has a lower valuation than the original BPO, however, we do not reverse previously charged-off amounts if the new appraisal is higher. If a loan remains in pre-foreclosure status for more than nine months, an updated valuation is obtained to determine if further charge-offs are necessary.
Loans to financial advisors, net
We offer loans to financial advisors and certain other key revenue producers, primarily for recruiting, transitional cost assistance, and retention purposes. These loans are generally repaid over a five to nine year period with interest recognized as earned and are contingent upon affiliation with us. These loans are not assignable by the financial advisor and may only be assigned by us to a successor in interest. There is no fee income associated with these loans. In the event that the financial advisor is no longer affiliated with us, any unpaid balance of such loan becomes immediately due and payable to us. In determining the allowance for doubtful accounts related to former employees or independent contractors, management primarily considers our historical collection experience as well as other factors including amounts due at termination, the reasons for the terminated relationship, and the former financial advisor’s overall financial position. When the review of these factors indicates that further collection activity is highly unlikely, the outstanding balance of such loan is written-off and the corresponding allowance is reduced. Based upon the nature of these financing receivables, we do not analyze this asset on a portfolio segment or class basis. Further, the aging of this receivable balance is not a determinative factor in computing our allowance for doubtful accounts, as concerns regarding the recoverability of these loans primarily arise in the event that the financial advisor is no longer affiliated with us. We present the outstanding balance of loans to financial advisors on our Consolidated Statements of Financial Condition, net of the allowance for doubtful accounts. Of the gross balance outstanding, the portion associated with financial advisors who are no longer affiliated with us was approximately $22 million and $20 million at September 30, 2019 and 2018, respectively. Our allowance for doubtful accounts was approximately $9 million and $8 million at September 30, 2019 and 2018, respectively.
Property and equipment, net
Property, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Property and equipment primarily consists of software, buildings and leasehold improvements, and furniture. Software includes both purchased software and internally developed software including development in progress. Buildings primarily consists of owned facilities and leasehold improvements. Furniture primarily consists of communications and technology hardware and furniture and fixtures. Depreciation of assets (other than land) is primarily calculated using the straight-line method over the estimated useful lives of the assets outlined in the following table.
| Asset type | Estimated useful life | |
| Buildings, building & land improvements and building components | 10 to 31 years | |
| Furniture, fixtures and equipment | 3 to 5 years | |
| Software | 2 to 10 years | |
| Leasehold improvements | Lesser of useful life or lease term |
Depreciation expense associated with property, equipment and leasehold improvements is included in “Occupancy and equipment costs” on our Consolidated Statements of Income and Comprehensive Income. Amortization expense associated with computer software
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Notes to Consolidated Financial Statements
is included in “Communications and information processing” expense on our Consolidated Statements of Income and Comprehensive Income.
Additions, improvements and expenditures that extend the useful life of an asset are capitalized. Costs for significant internally developed software projects are capitalized when the costs relate to development or modification of internal-use software that results in additional functionality. Costs related to preliminary project and post-project activities are expensed as incurred. Expenditures for repairs and maintenance are charged to operations in the period incurred. Gains and losses on disposals of property and equipment are reflected on our Consolidated Statements of Income and Comprehensive Income in the period realized.
Intangible assets, net
Certain identifiable intangible assets we acquire such as customer relationships, trade names, developed technology, intellectual property, and non-compete agreements, are amortized over their estimated useful lives on a straight-line basis and are evaluated for potential impairment whenever events or changes in circumstances suggest that the carrying value of an asset or asset group may not be fully recoverable. Amortization expense associated with such intangible assets is included in “Other” expenses on our Consolidated Statements of Income and Comprehensive Income.
We also hold indefinite-lived intangible assets, which are not amortized under GAAP. Rather, these assets are subject to an evaluation of potential impairment on an annual basis to determine whether the estimated fair value is in excess of its carrying value, or more often if events or circumstances indicate there may be impairment. In the course of our evaluation of the potential impairment of such indefinite-lived assets, we may perform either a qualitative or a quantitative assessment. If after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value is greater than its carrying amount, we are not required to perform a quantitative analysis. However, if we conclude otherwise, we then perform a quantitative impairment analysis. We have elected January 1 as our annual impairment evaluation date, evaluating balances as of December 31. See Note 11 for additional information regarding the outcome of our impairment assessment.
Goodwill
Goodwill represents the cost of acquired businesses in excess of the fair value of the related net assets acquired. Indefinite-life intangible assets such as goodwill are not amortized, but rather evaluated for impairment at least annually, or whenever events or circumstances indicate potential impairment exists. Impairment exists when the carrying value of a reporting unit, which is generally at the level of or one level below our business segments, exceeds its respective fair value.
In the course of our evaluation of the potential impairment of goodwill, we may elect either a qualitative or a quantitative assessment. Our qualitative assessment considers macro-economic and other industry-specific factors, such as trends in short-term and long-term interest rates, as well as company-specific factors, such as market capitalization, trends in revenue-generating activities, and merger or acquisition activity. We assess these, and other, qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing a quantitative analysis is not required. However, if we conclude otherwise, then we perform a quantitative impairment analysis.
If we either elect not to perform a qualitative assessment, or we elect to perform a qualitative assessment but are unable to qualitatively conclude that no impairment has occurred, then we perform a quantitative evaluation. In our quantitative assessment, we estimate the fair value of the reporting unit with which the goodwill is associated and compare it to the carrying value. We estimate the fair value of our reporting units using an income approach based on a discounted cash flow model that includes significant assumptions about future operating results and cash flows, and, if appropriate, a market approach. If the carrying value of a reporting unit is greater than the estimated fair value, an impairment charge is recognized for the excess.
We have elected January 1 as our annual goodwill impairment evaluation date, evaluating balances as of December 31. See Note 11 for additional information regarding the outcome of our goodwill impairment assessments.
Other assets
Other assets is primarily comprised of investments in company-owned life insurance, prepaid expenses, FHLB stock, FRB stock, and investments in real estate assets partnerships held by consolidated VIEs. See Note 12 for further information.
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Notes to Consolidated Financial Statements
We maintain investments in company-owned life insurance policies utilized to fund certain non-qualified deferred compensation plans and other employee benefit plans (see Note 21 for information on the non-qualified deferred compensation plans). The life insurance policies are carried at cash surrender value as determined by the insurer.
In accordance with certain membership requirements, we carry investments in stock of the FHLB and the FRB. These investments are carried at cost, are restricted, lack a market, and can only be sold to the issuer or another member institution at their respective par values. Annually, or more frequently if events or circumstances indicate necessary, we evaluate our holdings for potential impairment through a review of the capital adequacy, liquidity position and overall financial condition of the FHLB and FRB to determine the ultimate recoverability of the par value of the respective stock. Any cash dividends received from these investments are recognized as “Interest income” on our Consolidated Statements of Income and Comprehensive Income.
Raymond James Tax Credit Funds, Inc. (“RJTCF”), a wholly owned subsidiary of RJF, or one of its affiliates, is the managing member or general partner in Low-Income Housing Tax Credit (“LIHTC”) funds, some of which require consolidation. These funds invest in housing project limited partnerships or limited liability companies (“LLCs”) which purchase and develop affordable housing properties qualifying for federal and state low-income housing tax credits. The investments in project partnerships of all of the LIHTC fund VIEs which require consolidation are included in Other assets.
Contingent liabilities
We recognize liabilities for contingencies when there is an exposure that, when fully analyzed, indicates it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Whether a loss is probable, and if so, the estimated range of possible loss, is based upon currently available information and is subject to significant judgment, a variety of assumptions, and uncertainties. When a range of possible loss can be estimated, we accrue the most likely amount within that range; if the most likely amount of possible loss within that range is not determinable, we accrue a minimum based on the range of possible loss. No liability is recognized for those matters which, in management’s judgment, the determination of a reasonable estimate of loss is not possible.
We record liabilities related to legal and regulatory proceedings in “Other payables” on our Consolidated Statements of Financial Condition. The determination of these liability amounts requires significant judgment on the part of management. Management considers many factors including, but not limited to: the amount of the claim; the amount of the loss in the client’s account; the basis and validity of the claim; the possibility of wrongdoing on the part of one of our employees or financial advisors; previous results in similar cases; and legal precedents and case law. Each legal proceeding or significant regulatory matter is reviewed with counsel in each accounting period and the liability balance is adjusted as deemed appropriate by management. Any change in the liability amount is recorded in our consolidated financial statements and is recognized in net income in that period. The actual costs of resolving legal matters or regulatory proceedings may be substantially higher or lower than the recorded liability amounts for such matters. We expense our cost of defense related to such matters in the period they are incurred. See Note 17 for additional information.
Share-based compensation
We account for share-based awards through the measurement and recognition of compensation expense for all share-based payment awards made to employees, directors, and independent contractors based on estimated fair values. The compensation cost of our share-based awards, net of estimated forfeitures, is recognized over the requisite service period of the awards and is calculated as the market value of the awards on the date of the grant. See Note 21 for additional information on our share-based compensation plan.
Deferred compensation plans
We maintain various deferred compensation plans for the benefit of certain employees and independent contractors that provide a return to the participant based upon the performance of various referenced investments. For certain of these plans, we directly hold investments related to our obligations to perform under the deferred compensation plans. See the other investments discussion within the financial instruments, financial instruments sold but not yet purchased, at fair value section of this note for further discussion of these assets. For the Voluntary Deferred Compensation Plan (the “VDCP”), Long Term Incentive Plan (“LTIP”), and certain other plans, we purchase and hold company-owned life insurance policies on the lives of certain current and former participants to earn a competitive rate of return for participants and to provide a source of funds available to satisfy our obligations under the plan. See Note 12 for information regarding the carrying value of such policies. Compensation expense is recognized for all awards made under such plans with future service requirements over the requisite service period using the straight-line method. Changes in the value of the company-owned life insurance policies and other investments, as well as the expenses associated with the related deferred compensation plans, are recorded in “Compensation, commissions and benefits” expense on our Consolidated Statements of Income and Comprehensive Income. See Note 21 for additional information.
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Notes to Consolidated Financial Statements
Leases
We lease office space and equipment under operating leases. We recognize rent expense related to these operating leases on a straight-line basis over the lease term. The lease term commences on the earlier of the date when we become legally obligated for the rent payments or the date on which we take possession of the property. For tenant improvement allowances and rent holidays, we record a deferred rent liability in “Other payables” on our Consolidated Statements of Financial Condition and amortize the deferred rent over the lease term as a reduction to rent expense on our Consolidated Statements of Income and Comprehensive Income. In instances where the office space or equipment under an operating lease will be abandoned prior to the expiration of the lease term (these instances primarily result from the effects of acquisitions), we accrue an estimate of any projected loss on our Consolidated Statements of Income and Comprehensive Income at the time such abandonment is known and any loss is estimable.
Foreign currency translation
The statements of financial condition of the foreign subsidiaries we consolidate are translated at exchange rates as of the period end. The statements of income are translated either at an average exchange rate for the period or, in in certain cases, at the exchange rate in effect on the date which transactions occur. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars are included in OCI and are thereafter presented in equity as a component of AOCI.
Income taxes
The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year. We utilize the asset and liability method to provide income taxes on all transactions recorded in our consolidated financial statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on the tax rates that we expect to be in effect when the underlying items of income and expense are realized. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns, including the repatriation of undistributed earnings of foreign subsidiaries. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, or liquidity. See Note 16 for further information on our income taxes.
Earnings per share (“EPS”)
Basic EPS is calculated by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding. Earnings available to common shareholders represents net income reduced by the allocation of earnings and dividends to participating securities. Diluted EPS is similar to basic EPS, but adjusts for the dilutive effect of outstanding stock options and restricted stock units (“RSUs”) by application of the treasury stock method.
Evaluation of VIEs to determine whether consolidation is required
A VIE requires consolidation by the entity’s primary beneficiary. Examples of entities that may be VIEs include certain legal entities structured as corporations, partnerships or limited liability companies.
We evaluate all of the entities in which we are involved to determine if the entity is a VIE and if so, whether we hold a variable interest and are the primary beneficiary. We hold variable interests primarily in the following VIEs: certain private equity investments, a trust fund established for employee retention purposes (“Restricted Stock Trust Fund”) and certain LIHTC funds.
Determination of the primary beneficiary of a VIE
We consolidate VIEs that are subject to assessment when we are deemed to be the primary beneficiary of the VIE. The process for determining whether we are the primary beneficiary of the VIE is to conclude whether we are a party to the VIE holding a variable interest that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE, and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.
Private Equity Interests
As part of our private equity investments, we hold interests in a number of limited partnerships (our “Private Equity Interests”). We have concluded that the Private Equity Interests are VIEs, primarily as a result of the treatment of limited partner kick-out and
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Notes to Consolidated Financial Statements
participation rights as a simple majority of the limited partners cannot initiate an action to kick-out the general partner without cause and the limited partners with equity at-risk lack substantive participating rights.
In our analysis of the criteria to determine whether we are the primary beneficiary of the Private Equity Interests VIEs, we analyze the power and benefits criteria. In a number of these entities, we are a passive limited partner investor, and thus, we do not have the power to make decisions that most significantly affect the economic performance of such VIEs. Accordingly, in such circumstances we have determined we are not the primary beneficiary and therefore we do not consolidate the VIE. However, in certain of these entities, we have concluded that we are the primary beneficiary as we meet the power and benefits criteria. In such instances, we consolidate the Private Equity Interests VIE.
Restricted Stock Trust Fund
We utilize a trust in connection with certain of our RSU awards. This trust fund was established and funded for the purpose of acquiring our common stock in the open market to be used to settle RSUs granted as a retention vehicle for certain employees of our Canadian subsidiaries. We are deemed to be the primary beneficiary and, accordingly, consolidate this trust fund.
LIHTC funds
RJTCF is the managing member or general partner in a number of LIHTC funds having one or more investor members or limited partners. These LIHTC funds are organized as LLCs or limited partnerships for the purpose of investing in a number of project partnerships, which are limited partnerships or LLCs that purchase and develop low-income housing properties qualifying for tax credits and/or provide a mechanism for banks and other institutions to meet their Community Reinvestment Act obligations throughout the U.S.
Our determination of the primary beneficiary of each tax credit fund in which RJTCF has a variable interest requires judgment and is based on an analysis of all relevant facts and circumstances, including: (1) an assessment of the characteristics of RJTCF’s variable interest and other involvement it has with the tax credit fund, including involvement of related parties and any de facto agents, as well as the involvement of other variable interest holders, namely, limited partners or investor members, and (2) the tax credit funds’ purpose and design, including the risks that the tax credit fund was designed to create and pass through to its variable interest holders. In the design of tax credit fund VIEs, the overriding premise is that the investor members invest solely for tax attributes associated with the portfolio of low-income housing properties held by the fund, while RJTCF, as the managing member or general partner of the fund, is responsible for overseeing the fund’s operations.
RJTCF sponsors two general types of tax credit funds that generally do not meet VIE consolidation criteria. The types of funds include single investor funds and multi-investor funds. RJTCF does not provide guarantees related to the delivery or funding of tax credits or other tax attributes to the investor members or limited partners of tax credit funds. The investor member(s) or limited partner(s) of the VIEs bear the risk of loss on their investment. Additionally, under the tax credit funds’ designed structure, the investor member(s) or limited partner(s) receive nearly all of the tax credits and tax-deductible loss benefits designed to be delivered by the fund entity, as well as a majority of any proceeds upon a sale of a project partnership held by a tax credit fund (fund level residuals). RJTCF earns fees from the fund for its services in organizing the fund, identifying and acquiring the project partnership investments and ongoing asset management, and receives a share of any residuals arising from sale of project partnerships upon the termination of the fund.
In single investor funds, RJTCF has concluded that the one single investor member or limited partner in such funds, in nearly all instances, has significant participating rights over the activities that most significantly impact the economics of the fund. Therefore RJTCF, as managing member or general partner of such funds, is not the one party with power over such activities and resultantly is not deemed to be the primary beneficiary of such single investor funds and, in nearly all cases, these funds are not consolidated.
In multi-investor funds, RJTCF has concluded that since the participating rights over the activities that most significantly impact the economics of the fund are not held by one single investor member or limited partner, RJTCF is deemed to have the power over such activities. RJTCF then assesses whether its projected benefits to be received from the multi-investor funds, primarily its share of any residuals upon the termination of the fund, are potentially significant to the fund. As such residuals received upon termination are not expected to be significant to the funds, in nearly all cases, these funds are not consolidated.
Direct investments in LIHTC project partnerships
RJ Bank is also the investor member of a LIHTC fund which we have determined to be a VIE, and in which a subsidiary of RJTCF is the managing member. We have determined that RJ Bank is the primary beneficiary of this VIE and therefore, we consolidate the fund. All LIHTC funds which we consolidate are investor members in certain LIHTC project partnerships. Since unrelated third parties are
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Notes to Consolidated Financial Statements
the managing members of the investee project partnerships, we have determined that consolidation of these project partnerships is not required and the funds account for their project partnership investments under the equity method. The carrying value of the funds’ project partnership investments are included in “Other assets” on our Consolidated Statements of Financial Condition.
Recent accounting developments
Accounting guidance recently adopted
Goodwill - In January 2017, the Financial Accounting Standards Board (“FASB”) issued amended guidance to simplify the subsequent measurement of goodwill, eliminating “Step 2” from the goodwill impairment test (ASU 2017-04). Under this amended guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and subsequently recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We early-adopted this guidance on January 1, 2019, our goodwill impairment test date. We applied the amended guidance to the August 2019 impairment assessment of our Canadian Capital Markets business.
Revenue recognition - In May 2014, the FASB issued new guidance related to revenue recognition (ASU 2014-09). The new guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also provides guidance on accounting for certain contract costs and requires additional disclosures. We adopted this guidance as of October 1, 2018, under a modified retrospective approach for all open contracts as of the date of initial adoption. As such, there was no impact on our prior period results.
The primary impact of this guidance was the change in the presentation of certain costs from a net presentation within revenues to a gross presentation, particularly costs related to merger & acquisitions advisory and underwriting transactions and certain administrative costs related to the RJBDP. As a result of this change, “Investment banking” and “Professional fees” were each $23 million higher for the year ended September 30, 2019, and “Account and service fees” and “Other” expense were each $8 million higher for the year ended September 30, 2019. These presentation changes had no impact on our pre-tax or net earnings. There were no material changes in timing of revenues recognized associated with the adoption. As a result, adoption of this guidance had no material impact on our net results of operations or financial position. See Note 19 for further information.
Financial instruments - In January 2016, the FASB issued new guidance related to the accounting for financial instruments (ASU 2016-01). Among its provisions, this new guidance generally requires equity investments to be measured at fair value with changes in fair value recognized in net income, subject to certain exceptions, and amends certain disclosure requirements associated with the fair value of financial instruments. We adopted this guidance as of October 1, 2018, under a modified retrospective approach. As a result, on a prospective basis beginning as of the date of adoption, we record changes in the fair value of our investments in equity securities that were previously classified as available-for-sale in net income. Previously, such unrealized gains/(losses) were reflected in OCI. The impact of adopting the new guidance resulted in a reclassification from AOCI to retained earnings of an accumulated gain of approximately $4 million at October 1, 2018. See Note 5 for further information.
Statement of Cash Flows (classification of certain cash receipts and cash payments) - In August 2016, the FASB issued amended guidance related to the Statement of Cash Flows (ASU 2016-15). The amended guidance provides guidance on disclosure and classification of certain items within the statements of cash flows. We adopted this guidance on October 1, 2018, under a retrospective approach. The adoption did not have a material impact on our consolidated statements of cash flows and did not have an impact on our financial position or results of operations.
Statement of Cash Flows (restricted cash) - In November 2016, the FASB issued new guidance related to the classification and presentation of changes in restricted cash on the statement of cash flows (ASU 2016-18). The guidance requires an entity to include restricted cash and cash equivalents in its total of cash and cash equivalents on its statement of cash flows and to present a reconciliation of the beginning-of-period and end-of-period total of such amounts on the statement of cash flows. We adopted this guidance on October 1, 2018, under a retrospective approach. As a result of adoption, we recorded a decrease of $1.02 billion and $1.43 billion in net cash provided by operating activities for the years ended September 30, 2018 and 2017, respectively, related to reclassifying changes in cash segregated pursuant to regulations from operating activities to the cash and cash equivalents balance on the Consolidated Statements of Cash Flows. The total of cash segregated pursuant to regulations and cash and cash equivalents is included in a separate table on the Consolidated Statements of Cash Flows. The adoption did not have an impact on our financial position or results of operations.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Definition of a business - In January 2017, the FASB issued amended guidance related to the definition of a business (ASU 2017-01). This amended guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We adopted this guidance on October 1, 2018, on a prospective basis. The impact of the adoption of this amended guidance is dependent upon acquisition and disposal activities subsequent to the date of adoption. The adoption did not have any impact on our financial position or results of operations.
Share-based payment awards (modifications) - In May 2017, the FASB issued amended guidance that clarifies when changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting (ASU 2017-09). The amended guidance states an entity should account for the effects of a modification unless certain criteria are met which include that the modified award has the same fair value, vesting conditions and classification as the original award. We adopted the guidance on October 1, 2018, on a prospective basis. We generally do not modify our share-based payments awards. The adoption did not have an impact on our financial position or results of operations.
Share-based payment awards (nonemployee) - In June 2018, the FASB issued amended guidance that aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions (ASU 2018-07). The amended guidance states an entity should measure the fair value of the award by estimating the fair value of the equity instruments to be issued and, for equity-classified awards, the fair value should be measured on the grant date. The amended guidance also clarifies that nonemployee awards that contain a performance condition are to be measured based on the outcome that is probable and that entities may elect, on an award-by-award basis, to use the expected term or contractual term to measure the award. We early-adopted this standard on October 1, 2018, using a modified retrospective approach. The adoption did not have a significant impact on our financial position or results of operations.
Accounting guidance not yet adopted as of September 30, 2019
Lease accounting - In February 2016, the FASB issued new guidance related to the accounting for leases (ASU 2016-02). The new guidance and subsequent amendments requires the recognition of assets and liabilities on the balance sheet related to the rights and obligations created by lease agreements with terms greater than twelve months, regardless of whether they are classified as finance or operating leases. Consistent with the previous guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease will primarily depend upon its classification as a finance or operating lease. The new guidance requires new disclosures to help financial statement users better understand the amount, timing and cash flows arising from leases. We adopted this guidance on October 1, 2019 using the alternative modified retrospective approach for leases effective as of the adoption date. The impact of adopting this guidance as of October 1, 2019 was a gross-up of our consolidated assets and liabilities of approximately $375 million and $400 million, respectively, primarily due to the recognition of right-of-use assets (“ROU assets”) and lease liabilities related to operating leases. The difference between the ROU asset and the lease liability is primarily due to lease incentives. The adoption had no effect on our results of operations or cash flows.
Credit losses - In June 2016, the FASB issued new guidance related to the measurement of credit losses on financial instruments (ASU 2016-13). The amended guidance involves several aspects of the accounting for credit losses related to certain financial instruments including assets measured at amortized cost, available-for-sale debt securities and certain off-balance sheet commitments. The new guidance, and subsequent updates, broadens the information that an entity must consider in developing its estimated credit losses expected to occur over the remaining life of assets measured either collectively or individually to include historical experience, current conditions and reasonable and supportable forecasts, replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses (“CECL”) model. The new guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This new guidance is first effective for our fiscal year beginning on October 1, 2020 and will be adopted under a modified retrospective approach. Although permitted, we do not plan to early adopt. Our cross-functional team has continued our implementation efforts, including data collection and processing, model development and validation, and establishment of the governance and control processes. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations, which will depend on, among other things, the current and expected macroeconomic conditions and the nature and characteristics of financial assets held by us on the date of adoption.
Callable debt securities - In March 2017, the FASB issued new guidance that requires certain premiums on callable debt securities to be amortized to the earliest call date instead of the contractual life of the security (ASU 2017-08). Discounts on callable debt securities will continue to be amortized to the contractual maturity date. We adopted the guidance October 1, 2019 using a modified retrospective approach. The adoption did not have a significant impact on our financial position and results of operations.
Internal use software (cloud computing) - In August 2018, the FASB issued guidance on the accounting for implementation costs incurred by customers in cloud computing arrangements (ASU 2018-15). This guidance requires implementation costs incurred by
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
customers in cloud computing arrangements to be deferred over the non-cancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. This amended guidance is first effective for our fiscal year beginning on October 1, 2020 with early adoption permitted. The guidance may be adopted either using the prospective or retrospective approach. We are currently evaluating the impact of this new guidance on our financial position and results of operations.
Derivatives and hedging (interest rate) - In October 2018, the FASB issued guidance amending Derivatives and Hedging (Topic 815) to add the overnight index swap (“OIS”) rate based on the Secured Overnight Financing Rate (“SOFR”) to the list of U.S. benchmark interest rates that are eligible during the early stages of the market transition from LIBOR to SOFR (ASU 2018-16). The amendments to this guidance will provide adequate lead time for entities to prepare for changes to interest rate hedging strategies. We adopted the guidance October 1, 2019 and will apply the guidance prospectively for qualifying new or re-designated hedging relationships. The adoption did not have a significant impact on our financial position and results of operations.
Consolidation (decision making fees) - In October 2018, the FASB issued guidance on how all entities evaluate decision-making fees under the variable interest entity guidance (ASU 2018-17). Under the new guidance, to determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis, rather than in their entirety. This guidance is first effective for our fiscal year beginning on October 1, 2020. Early adoption is permitted. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.
NOTE 3 – ACQUISITIONS
Acquisitions completed during fiscal year 2019
Effective April 2019, we increased our ownership of ClariVest Asset Management LLC (“ClariVest”) from 45% to 100% making ClariVest a wholly-owned subsidiary of Eagle Asset Management. ClariVest has been included in our consolidated financial statements since our initial investment of the 45% interest as we concluded we were required to consolidate as defined by the accounting guidance. The increase in ownership was accounted for as a shareholders’ equity transaction.
In April 2019, we completed our acquisition of Silver Lane Advisors LLC (“Silver Lane”), a boutique investment bank focused on merger & acquisition advisory. Silver Lane is included in our Capital Markets segment. We accounted for this acquisition under the acquisition method of accounting with the assets and liabilities of Silver Lane recorded as of the acquisition date at their respective fair values in our consolidated financial statements. For purposes of certain acquisition-related financial reporting requirements, the Silver Lane acquisition was not considered a material acquisition. Silver Lane’s results of operations have been included in our results prospectively from April 1, 2019.
Acquisitions completed in prior fiscal years
In November 2017, we completed our acquisition of 100% of the outstanding shares of Scout Investments, Inc. (the “Scout Group”), an asset management and distribution entity, from UMB Financial Corporation. The Scout Group includes Scout Investments (“Scout”) and its Reams Asset Management division (“Reams”), as well as Scout Distributors. The addition of Scout, an equity asset manager, and Reams, an institutional-focused fixed income specialist, broadened the investment solutions available to our clients and has been integrated into our Asset Management segment. For purposes of certain acquisition-related financial reporting requirements, the Scout Group acquisition was not considered a material acquisition. The Scout Group’s results of operations have been included in our results prospectively from November 17, 2017.
The acquisition and integration costs associated with certain acquisitions are included in “Acquisition and disposition-related expenses” on our Consolidated Statements of Income and Comprehensive Income. Such costs include, among other items, legal and regulatory costs, acquisition-related incentive costs and severance costs.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4 – FAIR VALUE
Our “Financial instruments owned” and “Financial instruments sold but not yet purchased” on our Consolidated Statements of Financial Condition are recorded at fair value under GAAP. For further information about such instruments and our significant accounting policies related to fair value, see Note 2. The following tables present assets and liabilities measured at fair value on a recurring basis. Netting adjustments represent the impact of counterparty and collateral netting on our derivative balances included on our Consolidated Statements of Financial Condition. See Note 6 for additional information.
| $ in millions | Level 1 | Level 2 | Level 3 | Netting adjustments | Balance as of September 30, 2019 | |||||||||||||||
| Assets at fair value on a recurring basis: | ||||||||||||||||||||
| Trading instruments | ||||||||||||||||||||
| Municipal and provincial obligations | $ | — | $ | 267 | $ | — | $ | — | $ | 267 | ||||||||||
| Corporate obligations | 8 | 95 | — | — | 103 | |||||||||||||||
| Government and agency obligations | 12 | 67 | — | — | 79 | |||||||||||||||
| Agency MBS and CMOs | — | 147 | — | — | 147 | |||||||||||||||
| Non-agency CMOs and asset-backed securities (“ABS”) | — | 51 | — | — | 51 | |||||||||||||||
| Total debt securities | 20 | 627 | — | — | 647 | |||||||||||||||
| Equity securities | 12 | 1 | — | — | 13 | |||||||||||||||
| Brokered certificates of deposit | — | 45 | — | — | 45 | |||||||||||||||
| Other | — | — | 3 | — | 3 | |||||||||||||||
| Total trading instruments | 32 | 673 | 3 | — | 708 | |||||||||||||||
| Available-for-sale securities | ||||||||||||||||||||
| Agency MBS and CMOs | — | 3,083 | — | — | 3,083 | |||||||||||||||
| Other securities | 10 | — | — | — | 10 | |||||||||||||||
| Total available-for-sale securities | 10 | 3,083 | — | — | 3,093 | |||||||||||||||
| Derivative assets | ||||||||||||||||||||
| Interest rate - matched book | — | 280 | — | — | 280 | |||||||||||||||
| Interest rate - other | 3 | 182 | — | (127 | ) | 58 | ||||||||||||||
| Total derivative assets | 3 | 462 | — | (127 | ) | 338 | ||||||||||||||
| Other investments - private equity - not measured at NAV | — | — | 63 | — | 63 | |||||||||||||||
| All other investments | 194 | 1 | 24 | — | 219 | |||||||||||||||
| Subtotal | 239 | 4,219 | 90 | (127 | ) | 4,421 | ||||||||||||||
| Other investments - private equity - measured at NAV | 83 | |||||||||||||||||||
| Total assets at fair value on a recurring basis | $ | 239 | $ | 4,219 | $ | 90 | $ | (127 | ) | $ | 4,504 | |||||||||
| Liabilities at fair value on a recurring basis: | ||||||||||||||||||||
| Trading instruments sold but not yet purchased | ||||||||||||||||||||
| Corporate obligations | $ | 2 | $ | 20 | $ | — | $ | — | $ | 22 | ||||||||||
| Government and agency obligations | 269 | — | — | — | 269 | |||||||||||||||
| Total debt securities | 271 | 20 | — | — | 291 | |||||||||||||||
| Equity securities | 4 | — | — | — | 4 | |||||||||||||||
| Other | — | — | 1 | — | 1 | |||||||||||||||
| Total trading instruments sold but not yet purchased | 275 | 20 | 1 | — | 296 | |||||||||||||||
| Derivative liabilities | ||||||||||||||||||||
| Interest rate - matched book | — | 280 | — | — | 280 | |||||||||||||||
| Interest rate - other | 4 | 142 | — | (121 | ) | 25 | ||||||||||||||
| Foreign exchange | — | 2 | — | — | 2 | |||||||||||||||
| Equity (DBRSU obligation) | — | 6 | — | — | 6 | |||||||||||||||
| Total derivative liabilities | 4 | 430 | — | (121 | ) | 313 | ||||||||||||||
| Total liabilities at fair value on a recurring basis | $ | 279 | $ | 450 | $ | 1 | $ | (121 | ) | $ | 609 |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| $ in millions | Level 1 | Level 2 | Level 3 | Netting adjustments | Balance as of September 30, 2018 | |||||||||||||||
| Assets at fair value on a recurring basis: | ||||||||||||||||||||
| Trading instruments | ||||||||||||||||||||
| Municipal and provincial obligations | $ | 1 | $ | 247 | $ | — | $ | — | $ | 248 | ||||||||||
| Corporate obligations | 10 | 100 | — | — | 110 | |||||||||||||||
| Government and agency obligations | 19 | 72 | — | — | 91 | |||||||||||||||
| Agency MBS and CMOs | 3 | 124 | — | — | 127 | |||||||||||||||
| Non-agency CMOs and ABS | — | 69 | — | — | 69 | |||||||||||||||
| Total debt securities | 33 | 612 | — | — | 645 | |||||||||||||||
| Equity securities | 15 | — | — | — | 15 | |||||||||||||||
| Brokered certificates of deposit | — | 39 | — | — | 39 | |||||||||||||||
| Other | — | 2 | 1 | — | 3 | |||||||||||||||
| Total trading instruments | 48 | 653 | 1 | — | 702 | |||||||||||||||
| Available-for-sale securities | ||||||||||||||||||||
| Agency MBS and CMOs | — | 2,628 | — | — | 2,628 | |||||||||||||||
| Other securities | 1 | — | — | — | 1 | |||||||||||||||
| ARS preferred | — | — | 67 | — | 67 | |||||||||||||||
| Total available-for-sale securities | 1 | 2,628 | 67 | — | 2,696 | |||||||||||||||
| Derivative assets | ||||||||||||||||||||
| Interest rate - matched book | — | 160 | — | — | 160 | |||||||||||||||
| Interest rate - other | — | 74 | — | (55 | ) | 19 | ||||||||||||||
| Foreign exchange | — | 1 | — | — | 1 | |||||||||||||||
| Total derivative assets | — | 235 | — | (55 | ) | 180 | ||||||||||||||
| Other investments - private equity - not measured at NAV | — | — | 56 | — | 56 | |||||||||||||||
| All other investments | 201 | 1 | — | — | 202 | |||||||||||||||
| Subtotal | 250 | 3,517 | 124 | (55 | ) | 3,836 | ||||||||||||||
| Other investments - private equity - measured at NAV | 91 | |||||||||||||||||||
| Total assets at fair value on a recurring basis | $ | 250 | $ | 3,517 | $ | 124 | $ | (55 | ) | $ | 3,927 | |||||||||
| Liabilities at fair value on a recurring basis: | ||||||||||||||||||||
| Trading instruments sold but not yet purchased | ||||||||||||||||||||
| Municipal and provincial obligations | $ | — | $ | 1 | $ | — | $ | — | $ | 1 | ||||||||||
| Corporate obligations | 2 | 25 | — | — | 27 | |||||||||||||||
| Government and agency obligations | 194 | — | — | — | 194 | |||||||||||||||
| Non-agency CMOs and ABS | — | 1 | — | — | 1 | |||||||||||||||
| Total debt securities | 196 | 27 | — | — | 223 | |||||||||||||||
| Equity securities | 5 | — | — | — | 5 | |||||||||||||||
| Other | — | — | 7 | — | 7 | |||||||||||||||
| Total trading instruments sold but not yet purchased | 201 | 27 | 7 | — | 235 | |||||||||||||||
| Derivative liabilities | ||||||||||||||||||||
| Interest rate - matched book | — | 160 | — | — | 160 | |||||||||||||||
| Interest rate - other | — | 114 | — | (47 | ) | 67 | ||||||||||||||
| Foreign exchange | — | 4 | — | — | 4 | |||||||||||||||
| Equity (DBRSU obligation) | — | 16 | — | — | 16 | |||||||||||||||
| Total derivative liabilities | — | 294 | — | (47 | ) | 247 | ||||||||||||||
| Total liabilities at fair value on a recurring basis | $ | 201 | $ | 321 | $ | 7 | $ | (47 | ) | $ | 482 |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Level 3 recurring fair value measurements
The following tables present the changes in fair value for Level 3 assets and liabilities measured at fair value on a recurring basis. The realized and unrealized gains and losses in the tables may include changes in fair value that were attributable to both observable and unobservable inputs. In the following tables, gains/(losses) on trading instruments are reported in “Principal transactions,” gains/(losses) on other investments are reported in “Other” revenues, and gains/(losses) on available-for-sale securities are reported in either “Other” revenues (when included in earnings) or “Other comprehensive income” on our Consolidated Statements of Income and Comprehensive Income.
| Year ended September 30, 2019 Level 3 instruments at fair value | ||||||||||||||||
| Financial assets | Financial liabilities | |||||||||||||||
| Trading instruments | Other investments | Trading instruments | ||||||||||||||
| $ in millions | Other | Private equity investments | All other (1) | Other | ||||||||||||
| Fair value beginning of year | $ | 1 | $ | 56 | $ | 67 | $ | (7 | ) | |||||||
| Total gains/(losses) included in earnings | (3 | ) | 4 | (3 | ) | 2 | ||||||||||
| Purchases and contributions | 109 | 3 | — | 19 | ||||||||||||
| Sales | (104 | ) | — | (40 | ) | (15 | ) | |||||||||
| Transfers: | ||||||||||||||||
| Into Level 3 | — | — | — | — | ||||||||||||
| Out of Level 3 | — | — | — | — | ||||||||||||
| Fair value end of year | $ | 3 | $ | 63 | $ | 24 | $ | (1 | ) | |||||||
| Unrealized gains/(losses) for the year included in earnings for instruments held at the end of the year | $ | — | $ | 4 | $ | (1 | ) | $ | — |
| (1) | Beginning of period balance includes $67 million of preferred ARS, which were reclassified from available-for-sale securities in connection with the adoption of ASU 2016-01. See Note 2 for additional information. |
| Year ended September 30, 2018 Level 3 instruments at fair value | ||||||||||||||||
| Financial assets | Financial liabilities | |||||||||||||||
| Trading instruments | Available-for-sale securities | Other investments | Trading instruments | |||||||||||||
| $ in millions | Other | ARS - preferred | Private equity investments | Other | ||||||||||||
| Fair value beginning of year | $ | 6 | $ | 106 | $ | 89 | $ | — | ||||||||
| Total gains/(losses) for the year: | ||||||||||||||||
| Included in earnings | (3 | ) | 5 | (5 | ) | (2 | ) | |||||||||
| Included in OCI | — | 1 | — | — | ||||||||||||
| Purchases and contributions | 82 | — | — | 2 | ||||||||||||
| Sales | (84 | ) | (45 | ) | (28 | ) | (7 | ) | ||||||||
| Transfers: | ||||||||||||||||
| Into Level 3 | — | — | — | — | ||||||||||||
| Out of Level 3 | — | — | — | — | ||||||||||||
| Fair value end of year | $ | 1 | $ | 67 | $ | 56 | $ | (7 | ) | |||||||
| Unrealized gains/(losses) for the year included in earnings for instruments held at the end of the year | $ | — | $ | — | $ | (16 | ) | $ | (2 | ) | ||||||
| Unrealized gains/(losses) for the year included in OCI for instruments held at the end of the year | $ | — | $ | 3 | $ | — | $ | — |
As of September 30, 2019, 12% of our assets and 2% of our liabilities were measured at fair value on a recurring basis. In comparison, as of September 30, 2018 10% of our assets and 2% of our liabilities were measured at fair value on a recurring basis. Instruments measured at fair value on a recurring basis categorized as Level 3 as of September 30, 2019 and September 30, 2018 represented 2% and 3%, respectively.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Quantitative information about level 3 fair value measurements
The following tables present the valuation techniques and significant unobservable inputs used in the valuation of a significant majority of our financial instruments classified as level 3. These inputs represent those that a market participant would take into account when pricing these instruments. Weighted averages are calculated by weighting each input by the relative fair value of the related financial instrument.
| Level 3 financial instrument*$ in millions* | Fair value at September 30, 2019 | Valuation technique(s) | Unobservable input | Range (weighted-average) | |||||||
| Recurring measurements | |||||||||||
| Other investments - ARS preferred | $ | 24 | Discounted cash flow | Average discount rate | 5.18% - 6.18% (5.68%) | ||||||
| Average interest rates applicable to future interest income on the securities (1) | 2.01% - 2.01% (2.01%) | ||||||||||
| Prepayment year (2) | 2019 - 2022 (2022) | ||||||||||
| Other investments - private equity investments (not measured at NAV) | $ | 50 | Income approach - discounted cash flow | Discount rate | 25 | % | |||||
| Terminal earnings before interest, tax, depreciation and amortization (“EBITDA”) multiple | 12.5x | ||||||||||
| Terminal year | 2021 - 2042 (2022) | ||||||||||
| $ | 13 | Transaction price or other investment-specific events (3) | Not meaningful (3) | Not meaningful (3) |
| Level 3 financial instrument*$ in millions* | Fair value at September 30, 2018 | Valuation technique(s) | Unobservable input | Range (weighted-average) | |||||||
| Recurring measurements | |||||||||||
| ARS preferred | $ | 67 | Discounted cash flow | Average discount rate | 6.50% - 7.85% (7.13%) | ||||||
| Average interest rates applicable to future interest income on the securities (1) | 4.13% - 5.51% (4.47%) | ||||||||||
| Prepayment year (2) | 2018 - 2021 (2021) | ||||||||||
| Other investments - private equity investments (not measured at NAV) | $ | 43 | Income approach - discounted cash flow | Discount rate | 25 | % | |||||
| Terminal EBITDA multiple | 10.0x | ||||||||||
| Terminal year | 2022 - 2042 (2023) | ||||||||||
| $ | 13 | Transaction price or other investment-specific events (3) | Not meaningful (3) | Not meaningful (3) |
| (1) | Interest rates are projected based upon a forward interest rate path, plus a spread over such projected base rate that is applicable to each future period for each security within this portfolio segment. The interest rates presented represent the average interest rate over all projected periods for securities within the portfolio segment. |
| (2) | Assumed calendar year of at least a partial redemption of the outstanding security by the issuer. |
| (3) | Certain investments are valued initially at transaction price and updated as other investment-specific events take place which indicate that a change in the carrying values of these investments is appropriate. Other investment-specific events include such events as our periodic review, significant transactions occur, new developments become known, or we receive information from a fund manager which allows us to update our proportionate share of net assets. |
Qualitative disclosure about unobservable inputs
For our recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the sensitivity of the fair value measurement to changes in significant unobservable inputs and interrelationships between those unobservable inputs are described in the following sections.
Other investments - ARS preferred
The future interest rate and prepayment assumptions impacting the valuation of the auction rate securities are directly related. As short-term interest rates rise, the penalty interest rates, which are embedded in most of these securities in the event auctions fail to set the security’s interest rate, also increase. As penalty interest rates rise, we estimate that issuers of the securities will have the economic incentive to refinance (and thus prepay) the securities. As such, increases in the interest rate, which would generally result in an earlier prepayment assumption, would have increased the fair value of the securities. Increases in the discount rate would have resulted in a lower fair value of the securities.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Private equity investments
The significant unobservable inputs used in the fair value measurement of private equity investments generally relate to the financial performance of the investment entity and the market’s required return on investments from entities in industries in which we hold investments. Increases in the discount rate and/or a later terminal year would have resulted in a lower fair value measurement. Increases in the terminal EBITDA multiple would have resulted in a higher fair value measurement.
Investments in private equity measured at net asset value per share
As more fully described in Note 2, as a practical expedient, we utilize NAV or its equivalent to determine the recorded value of a portion of our private equity investments portfolio. We utilize NAV when the fund investment does not have a readily determinable fair value and the NAV of the fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the investments at fair value.
Our private equity portfolio as of September 30, 2019 included various direct investments, as well as investments in third-party private equity funds and various legacy private equity funds which we sponsor. The portfolio is primarily invested in a broad range of industries including leveraged buyouts, growth capital, distressed capital, venture capital and mezzanine capital. Due to the closed-end nature of certain of our fund investments, such investments cannot be redeemed directly with the funds. Our investment is monetized by distributions received through the liquidation of the underlying assets of those funds, the timing of which is uncertain.
The following table presents the recorded value and unfunded commitments related to our private equity investments portfolio.
| $ in millions | Recorded value | Unfunded commitment | ||||||
| September 30, 2019 | ||||||||
| Private equity investments measured at NAV | $ | 83 | $ | 15 | ||||
| Private equity investments not measured at NAV | 63 | |||||||
| Total private equity investments | $ | 146 | ||||||
| September 30, 2018 | ||||||||
| Private equity investments measured at NAV | $ | 91 | $ | 18 | ||||
| Private equity investments not measured at NAV | 56 | |||||||
| Total private equity investments | $ | 147 |
Of the total private equity investments, the portions we owned were $99 million and $103 million as of September 30, 2019 and 2018, respectively. The portions of the private equity investments we did not own were $47 million and $44 million as of September 30, 2019 and 2018, respectively, and were included as a component of noncontrolling interests on our Consolidated Statements of Financial Condition.
Many of these fund investments meet the definition of prohibited covered funds as defined by the Volcker Rule enacted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). We have received approval from the Board of Governors of the Federal Reserve System (the “Fed”) to continue to hold the majority of our covered fund investments until July 2022. However, our current focus is the divestiture of this portfolio.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Financial instruments measured at fair value on a nonrecurring basis
The following table presents assets measured at fair value on a nonrecurring basis along with the valuation techniques and significant unobservable inputs used in the valuation of the assets classified as level 3. These inputs represent those that a market participant would take into account when pricing these instruments. Weighted averages are calculated by weighting each input by the relative fair values of the related financial instrument.
| $ in millions | Level 2 | Level 3 | Total fair value | Valuation technique(s) | Unobservable input | Range (weighted-average) | ||||||||||||
| September 30, 2019 | ||||||||||||||||||
| Bank loans, net: | ||||||||||||||||||
| Impaired loans: residential | $ | 7 | $ | 14 | $ | 21 | Discounted cash flow | Prepayment rate | 7 yrs. - 12 yrs. (10.4 yrs.) | |||||||||
| Impaired loans: corporate | $ | — | $ | 21 | $ | 21 | Collateral or discounted cash flow (1) | Not meaningful (1) | Not meaningful (1) | |||||||||
| Loan held for sale | $ | 66 | $ | — | $ | 66 | N/A | N/A | N/A | |||||||||
| Other assets: other real estate owned | $ | 1 | $ | — | $ | 1 | N/A | N/A | N/A | |||||||||
| September 30, 2018 | ||||||||||||||||||
| Bank loans, net: | ||||||||||||||||||
| Impaired loans: residential | $ | 10 | $ | 17 | $ | 27 | Discounted cash flow | Prepayment rate | 7 yrs. - 12 yrs. (10.5 yrs.) | |||||||||
| Impaired loans: corporate | $ | — | $ | 1 | $ | 1 | Collateral or discounted cash flow (1) | Not meaningful (1) | Not meaningful (1) | |||||||||
| Loan held for sale | $ | 41 | $ | — | $ | 41 | N/A | N/A | N/A |
| (1) | The valuation techniques used for the corporate loans are based on collateral value less selling costs for the collateral dependent loans and discounted cash flows for impaired loans that are not collateral dependent. |
Financial instruments that are not recorded at fair value on the Consolidated Statements of Financial Condition
Many, but not all, of the financial instruments we hold were recorded at fair value on the Consolidated Statements of Financial Condition.
The following table presents the estimated fair value and fair value hierarchy of financial assets and liabilities that are not recorded at fair value in accordance with GAAP on the Consolidated Statements of Financial Condition at September 30, 2019 or 2018. This table excludes financial instruments that are carried at amounts which approximate fair value.
Effective October 1, 2018, we adopted new accounting guidance (ASU 2016-01), which requires the fair value of financial instruments not carried at fair value on our statement of financial condition to be estimated utilizing an exit price and eliminates certain disclosure requirements related to these instruments, including exempting certain financial instruments from disclosure (e.g., demand deposits). Prior periods have not been updated to reflect this new accounting guidance.
| $ in millions | Level 1 | Level 2 | Level 3 | Total estimated fair value | Carrying amount | |||||||||||||||
| September 30, 2019 | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Bank loans, net | $ | — | $ | 75 | $ | 20,710 | $ | 20,785 | $ | 20,783 | ||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Bank deposits - certificates of deposit | $ | — | $ | — | $ | 617 | $ | 617 | $ | 605 | ||||||||||
| Senior notes payable | $ | — | $ | 1,760 | $ | — | $ | 1,760 | $ | 1,550 | ||||||||||
| September 30, 2018 | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Bank loans, net | $ | — | $ | 124 | $ | 19,116 | $ | 19,240 | $ | 19,449 | ||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Bank deposits | $ | — | $ | 19,496 | $ | 439 | $ | 19,935 | $ | 19,942 | ||||||||||
| Senior notes payable | $ | — | $ | 1,558 | $ | — | $ | 1,558 | $ | 1,550 |
Short-term financial instruments: The carrying value of short-term financial instruments, including cash and cash equivalents, cash segregated pursuant to federal regulations, repurchase agreements and reverse repurchase agreements are recorded at amounts that
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
approximate the fair value of these instruments. These financial instruments generally expose us to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market rates. Under the fair value hierarchy, cash and cash equivalents and cash segregated pursuant to federal regulations are classified as Level 1. Repurchase agreements and reverse repurchase agreements are classified as Level 2 under the fair value hierarchy as they are generally overnight and are collateralized by U.S. government or agency securities.
Bank loans, net: These financial instruments are primarily comprised of loans originated or purchased by RJ Bank and include C&I loans, commercial and residential real estate loans, tax-exempt loans, and SBL and other loans intended to be held until maturity or payoff, and are primarily recorded at amounts that result from the application of the methodologies for loans held for investment summarized in Note 2. Certain bank loans are held for sale, which are carried at the lower of cost or market value. A portion of these loans held for sale, as well as any impaired loans held for investment, are recorded at fair value as nonrecurring fair value measurements and therefore are excluded from the following table.
Upon adoption of ASU 2016-01 in fiscal 2019, fair values for both variable and fixed-rate loans held for investment, are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, which includes our estimate of future credit losses expected to be incurred. The majority of these loans are classified as Level 3 under the fair value hierarchy. Refer to Note 2 for information regarding the fair value policies specific to loans held for sale.
Receivables and other assets: Brokerage client receivables, receivables from brokers, dealers and clearing organizations, other receivables, and certain other assets are recorded at amounts that approximate fair value and are classified as Level 2 and 3 under the fair value hierarchy. As specified under GAAP, the FHLB and FRB stock are recorded at cost, which we have determined to approximate their estimated fair value, and are classified as Level 2 under the fair value hierarchy.
Loans to financial advisors, net: These financial instruments are primarily comprised of loans provided to financial advisors or key revenue producers, primarily for recruiting, transitional cost assistance, and retention purposes. Loans to financial advisors, net are recorded at amounts that approximate fair value and are classified as Level 2 under the fair value hierarchy. Refer to Note 2 for information regarding loans to financial advisors, net.
Securities borrowed and securities loaned: Securities borrowed and securities loaned are recorded at amounts which approximate fair value and are primarily classified as Level 2 under the fair value hierarchy.
Bank deposits: The carrying amounts of variable-rate money market and savings accounts approximate their fair values as these are short-term in nature. Due to their short-term nature, variable rate money market and savings accounts are classified as Level 2 under the fair value hierarchy. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of expected monthly maturities on time deposits. These fixed rate certificates of deposit are classified as Level 3 under the fair value hierarchy.
Payables: Brokerage client payables, payables to brokers, dealers and clearing organizations, and other payables are recorded at amounts that approximate fair value and are classified as Level 2 under the fair value hierarchy.
Other borrowings: Other borrowings is primarily comprised of RJ Bank’s borrowings from the FHLB. Substantially all of such borrowings reflect terms that approximate current market rates for similar loans and therefore, their carrying value approximates fair value. Under the fair value hierarchy, our other borrowings are classified as Level 2.
Senior notes payable: The fair value of our senior notes payable is calculated based upon recent trades of those debt securities in the market.
NOTE 5 – AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities are primarily comprised of agency MBS and CMOs owned by RJ Bank. See Note 2 for a discussion of our available-for-sale securities accounting policies, including the fair value determination process. As of October 1, 2018, we adopted new accounting guidance related to the classification and measurement of financial instruments (ASU 2016-01), which requires changes in the fair value of equity securities to be recorded in net income. See Note 2 for further information. As a result, on a prospective basis beginning October 1, 2018, unrealized gains/(losses) on our equity securities previously classified and accounted for as available-for-sale are recorded in net income instead of OCI. Accordingly, as of the date of adoption we reclassified approximately $68 million
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
of equity securities, substantially all of which consisted of preferred ARS, from “Available-for-sale securities” to “Other investments” on our Consolidated Statements of Financial Condition.
The following table details the amortized cost and fair values of our available-for-sale securities.
| $ in millions | Cost basis | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
| September 30, 2019 | ||||||||||||||||
| Agency residential MBS | $ | 1,555 | $ | 20 | $ | (1 | ) | $ | 1,574 | |||||||
| Agency commercial MBS | 305 | 5 | — | 310 | ||||||||||||
| Agency CMOs | 1,195 | 7 | (3 | ) | 1,199 | |||||||||||
| Other securities | 10 | — | — | 10 | ||||||||||||
| Total available-for-sale securities | $ | 3,065 | $ | 32 | $ | (4 | ) | $ | 3,093 | |||||||
| September 30, 2018 | ||||||||||||||||
| Agency residential MBS | $ | 1,616 | $ | — | $ | (40 | ) | $ | 1,576 | |||||||
| Agency commercial MBS | 47 | — | — | 47 | ||||||||||||
| Agency CMOs | 1,035 | — | (30 | ) | 1,005 | |||||||||||
| Other securities | 2 | — | (1 | ) | 1 | |||||||||||
| Total RJ Bank available-for-sale securities | 2,700 | — | (71 | ) | 2,629 | |||||||||||
| ARS preferred | 61 | 6 | — | 67 | ||||||||||||
| Total available-for-sale securities | $ | 2,761 | $ | 6 | $ | (71 | ) | $ | 2,696 |
See Note 4 for additional information regarding the fair value of available-for-sale securities.
The following table details the contractual maturities, amortized cost, carrying values and current yields for our available-for-sale securities. Since our MBS and CMO available-for-sale securities are backed by mortgages, actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.
| September 30, 2019 | ||||||||||||||||||||
| $ in millions | Within one year | After one but within five years | After five but within ten years | After ten years | Total | |||||||||||||||
| Agency residential MBS | ||||||||||||||||||||
| Amortized cost | $ | — | $ | 26 | $ | 820 | $ | 709 | $ | 1,555 | ||||||||||
| Carrying value | $ | — | $ | 25 | $ | 830 | $ | 719 | $ | 1,574 | ||||||||||
| Agency commercial MBS | ||||||||||||||||||||
| Amortized cost | $ | 5 | $ | 208 | $ | 58 | $ | 34 | $ | 305 | ||||||||||
| Carrying value | $ | 5 | $ | 211 | $ | 59 | $ | 35 | $ | 310 | ||||||||||
| Agency CMOs | ||||||||||||||||||||
| Amortized cost | $ | — | $ | — | $ | 87 | $ | 1,108 | $ | 1,195 | ||||||||||
| Carrying value | $ | — | $ | — | $ | 87 | $ | 1,112 | $ | 1,199 | ||||||||||
| Other securities | ||||||||||||||||||||
| Amortized cost | $ | — | $ | 2 | $ | 8 | $ | — | $ | 10 | ||||||||||
| Carrying value | $ | — | $ | 2 | $ | 8 | $ | — | $ | 10 | ||||||||||
| Total available-for-sale securities | ||||||||||||||||||||
| Amortized cost | $ | 5 | $ | 236 | $ | 973 | $ | 1,851 | $ | 3,065 | ||||||||||
| Carrying value | $ | 5 | $ | 238 | $ | 984 | $ | 1,866 | $ | 3,093 | ||||||||||
| Weighted-average yield | 1.81 | % | 2.29 | % | 2.38 | % | 2.43 | % | 2.40 | % |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table details the gross unrealized losses and fair value of securities that were in a loss position at the reporting period end, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| $ in millions | Estimated fair value | Unrealized losses | Estimated fair value | Unrealized losses | Estimated fair value | Unrealized losses | ||||||||||||||||||
| September 30, 2019 | ||||||||||||||||||||||||
| Agency residential MBS | $ | 166 | $ | — | $ | 114 | $ | (1 | ) | $ | 280 | $ | (1 | ) | ||||||||||
| Agency commercial MBS | — | — | 44 | — | 44 | — | ||||||||||||||||||
| Agency CMOs | 145 | (1 | ) | 351 | (2 | ) | 496 | (3 | ) | |||||||||||||||
| Other securities | 2 | — | — | — | 2 | — | ||||||||||||||||||
| Total | $ | 313 | $ | (1 | ) | $ | 509 | $ | (3 | ) | $ | 822 | $ | (4 | ) | |||||||||
| September 30, 2018 | ||||||||||||||||||||||||
| Agency residential MBS | $ | 747 | $ | (15 | ) | $ | 753 | $ | (25 | ) | $ | 1,500 | $ | (40 | ) | |||||||||
| Agency commercial MBS | 40 | — | 6 | — | 46 | — | ||||||||||||||||||
| Agency CMOs | 316 | (5 | ) | 666 | (25 | ) | 982 | (30 | ) | |||||||||||||||
| Other securities | — | — | 1 | (1 | ) | 1 | (1 | ) | ||||||||||||||||
| Total | $ | 1,103 | $ | (20 | ) | $ | 1,426 | $ | (51 | ) | $ | 2,529 | $ | (71 | ) |
U.S. government agencies guarantee the contractual cash flows of the agency MBS and CMOs. At September 30, 2019, of the 109 agency MBS and CMOs in an unrealized loss position, 36 were in a continuous unrealized loss position for less than 12 months and 73 were for 12 months or more. At September 30, 2019, debt securities we held in excess of ten percent of our equity included Federal National Home Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) which had an amortized cost of $1.93 billion and $869 million, respectively, and a fair value of $1.95 billion and $877 million, respectively.
For both years ended September 30, 2019 and 2018, there were no sales of agency MBS or CMO available-for-sale securities. During the year ended September 30, 2017, there were $66 million in proceeds, resulting in an insignificant gain, from the sale of agency MBS and agency and non-agency CMOs available-for-sale securities. The gain that resulted from the sale was included in “Other” revenues on our Consolidated Statements of Income and Comprehensive Income.
Sales or redemptions of preferred ARS for the year ended September 30, 2018 resulted in aggregate proceeds of $45 million and a gain of $5 million, which was included in “Other” revenues on our Consolidated Statements of Income and Comprehensive Income. During the year ended September 30, 2017, sales or redemptions of preferred ARS resulted in proceeds of $30 million and an insignificant gain.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6 – DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES
Our derivative assets and derivative liabilities are recorded at fair value and are included in “Derivative assets” and “Derivative liabilities” on our Consolidated Statements of Financial Condition. Cash flows related to our derivatives are included within operating activities on the Consolidated Statements of Cash Flows. The significant accounting policies governing our derivatives, including our methodologies for determining fair value, are described in Note 2.
Derivative balances included on our financial statements
The following table presents the gross fair value and notional amount of derivatives by product type, the amounts of counterparty and cash collateral netting on our Consolidated Statements of Financial Condition, as well as collateral posted and received under credit support agreements that do not meet the criteria for netting under GAAP.
| September 30, 2019 | September 30, 2018 | |||||||||||||||||||||||
| $ in millions | Derivative assets | Derivative liabilities | Notional amount | Derivative assets | Derivative liabilities | Notional amount | ||||||||||||||||||
| Derivatives not designated as hedging instruments | ||||||||||||||||||||||||
| Interest rate - matched book | $ | 280 | $ | 280 | $ | 2,296 | $ | 160 | $ | 160 | $ | 2,416 | ||||||||||||
| Interest rate - other (1) | 184 | 146 | 10,690 | 74 | 113 | 9,398 | ||||||||||||||||||
| Foreign exchange | — | 1 | 573 | 1 | 1 | 549 | ||||||||||||||||||
| Equity (DBRSU obligation) | — | 6 | 6 | — | 16 | 16 | ||||||||||||||||||
| Subtotal | 464 | 433 | 13,565 | 235 | 290 | 12,379 | ||||||||||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||||||||||||
| Interest rate | 1 | — | 850 | — | 1 | 850 | ||||||||||||||||||
| Foreign exchange | — | 1 | 856 | — | 3 | 892 | ||||||||||||||||||
| Subtotal | 1 | 1 | 1,706 | — | 4 | 1,742 | ||||||||||||||||||
| Total gross fair value/notional amount | 465 | 434 | $ | 15,271 | 235 | 294 | $ | 14,121 | ||||||||||||||||
| Offset on the Consolidated Statements of Financial Condition | ||||||||||||||||||||||||
| Counterparty netting | (24 | ) | (24 | ) | (26 | ) | (26 | ) | ||||||||||||||||
| Cash collateral netting | (103 | ) | (97 | ) | (29 | ) | (21 | ) | ||||||||||||||||
| Total amounts offset | (127 | ) | (121 | ) | (55 | ) | (47 | ) | ||||||||||||||||
| Net amounts presented on the Consolidated Statements of Financial Condition | 338 | 313 | 180 | 247 | ||||||||||||||||||||
| Gross amounts not offset on the Consolidated Statements of Financial Condition | ||||||||||||||||||||||||
| Financial instruments (2) | (297 | ) | (280 | ) | (162 | ) | (160 | ) | ||||||||||||||||
| Total | $ | 41 | $ | 33 | $ | 18 | $ | 87 |
| (1) | Substantially all relates to interest rate derivatives entered into as part of our fixed income business operations, including to be announced (“TBA”) security contracts that are accounted for as derivatives. |
| (2) | Although the matched book derivative arrangements do not meet the definition of a master netting arrangement as specified by GAAP, the agreement with the third-party intermediary includes terms that are similar to a master netting agreement. As a result, we present the matched book amounts net in the preceding table. |
The following table details the gains/(losses) included in AOCI, net of income taxes, on derivatives designated as hedging instruments. These gains/(losses) included any amounts reclassified from AOCI to net income during the year. See Note 18 for additional information.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Interest rate (cash flow hedges) | $ | (61 | ) | $ | 33 | $ | 23 | |||||
| Foreign exchange (net investment hedges) | 22 | 28 | (26 | ) | ||||||||
| Total gains/(losses) in AOCI, net of taxes | $ | (39 | ) | $ | 61 | $ | (3 | ) |
There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for any of the years ended September 30, 2019, 2018 or 2017. We expect to reclassify an insignificant amount of interest expense out of AOCI and into earnings within the next 12 months. The maximum length of time over which forecasted transactions are or will be hedged is 8 years.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table details the gains/(losses) on derivatives not designated as hedging instruments recognized on the Consolidated Statements of Income and Comprehensive Income.
| Year ended September 30, | ||||||||||||||
| $ in millions | Location of gain/(loss) included on the Consolidated Statements of Income and Comprehensive Income | 2019 | 2018 | 2017 | ||||||||||
| Interest rate | Principal transactions/other revenues | $ | 7 | $ | 6 | $ | 8 | |||||||
| Foreign exchange | Other revenues | $ | 25 | $ | 18 | $ | (20 | ) | ||||||
| Equity (DBRSU obligation) | Compensation, commissions and benefits expense | $ | 5 | $ | 8 | $ | (6 | ) | ||||||
| Equity (DBRSU obligation) | Acquisition and disposition-related expenses | $ | — | $ | — | $ | (2 | ) |
Risks associated with our derivatives and related risk mitigation
Credit risk
We are exposed to credit losses in the event of nonperformance by the counterparties to forward foreign exchange derivative agreements and interest rate derivatives that are not cleared through a clearing organization. Where we are subject to credit exposure, we perform a credit evaluation of counterparties prior to entering into derivative transactions and we monitor their credit standings. We may require initial margin or collateral from counterparties in the form of cash deposits or other marketable securities to support certain of these obligations as established by the credit threshold specified by the agreement and/or as a result of monitoring the credit standing of the counterparties.
Our only exposure to credit risk in the matched book derivatives operations is related to our uncollected derivative transaction fee revenues, which were insignificant as of both September 30, 2019 and 2018. We are not exposed to market risk on these derivatives due to the pass-through transaction structure previously described in Note 2.
Interest rate and foreign exchange risk
We are exposed to interest rate risk related to certain of our interest rate derivatives. We are also exposed to foreign exchange risk related to our forward foreign exchange derivatives. On a daily basis, we monitor our risk exposure on our derivatives based on established limits with respect to a number of factors, including interest rate, foreign exchange spot and forward rates, spread, ratio, basis and volatility risks, both for the total portfolio and by maturity period.
Derivatives with credit-risk-related contingent features
Certain of our derivative contracts contain provisions that require our debt to maintain an investment-grade rating from one or more of the major credit rating agencies. If our debt were to fall below investment-grade, the counterparties to the derivative instruments could terminate and request immediate payment or demand immediate and ongoing overnight collateralization on our derivative instruments in liability positions. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that were in a liability position was insignificant as of both September 30, 2019 and 2018.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 7 – COLLATERALIZED AGREEMENTS AND FINANCINGS
Collateralized agreements are reverse repurchase agreements and securities borrowed. Collateralized financings are repurchase agreements and securities loaned. We enter into these transactions in order to facilitate client activities, invest excess cash, acquire securities to cover short positions and finance certain firm activities. The significant accounting policies governing our collateralized agreements and financings are described in Note 2.
For financial statement purposes, we do not offset our reverse repurchase agreements, repurchase agreements, securities borrowing and securities lending transactions because the conditions for netting as specified by GAAP are not met. Our reverse repurchase agreements, repurchase agreements, securities borrowing and securities lending transactions are governed by master agreements that are widely used by counterparties and that may allow for net settlements of payments in the normal course, as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of the parties to the transaction. Although not offset on the Consolidated Statements of Financial Condition, these transactions are included in the following table.
| Assets | Liabilities | |||||||||||||||
| $ in millions | Reverse repurchase agreements | Securities borrowed | Repurchase agreements | Securities loaned | ||||||||||||
| September 30, 2019 | ||||||||||||||||
| Gross amounts of recognized assets/liabilities | $ | 343 | $ | 248 | $ | 150 | $ | 323 | ||||||||
| Gross amounts offset on the Consolidated Statements of Financial Condition | — | — | — | — | ||||||||||||
| Net amounts presented on the Consolidated Statements of Financial Condition | 343 | 248 | 150 | 323 | ||||||||||||
| Gross amounts not offset on the Consolidated Statements of Financial Condition | (343 | ) | (243 | ) | (150 | ) | (311 | ) | ||||||||
| Net amount | $ | — | $ | 5 | $ | — | $ | 12 | ||||||||
| September 30, 2018 | ||||||||||||||||
| Gross amounts of recognized assets/liabilities | $ | 373 | $ | 255 | $ | 186 | $ | 423 | ||||||||
| Gross amounts offset on the Consolidated Statements of Financial Condition | — | — | — | — | ||||||||||||
| Net amounts presented on the Consolidated Statements of Financial Condition | 373 | 255 | 186 | 423 | ||||||||||||
| Gross amounts not offset on the Consolidated Statements of Financial Condition | (373 | ) | (248 | ) | (186 | ) | (408 | ) | ||||||||
| Net amount | $ | — | $ | 7 | $ | — | $ | 15 |
The total collateral received under reverse repurchase agreements and the total amount of collateral posted under repurchase agreements exceeds the carrying value of these agreements on our Consolidated Statements of Financial Condition.
Collateral received and pledged
We receive cash and securities as collateral, primarily in connection with reverse repurchase agreements, securities borrowed, derivative transactions and client margin loans. The collateral we receive reduces our credit exposure to individual counterparties.
In many cases, we are permitted to deliver or repledge financial instruments we have received as collateral to satisfy our collateral requirements under our repurchase agreements, securities lending agreements or other secured borrowings, to satisfy deposit requirements with clearing organizations, or to otherwise meet either our or our clients’ settlement requirements.
The following table presents financial instruments at fair value that we received as collateral, were not included on our Consolidated Statements of Financial Condition, and that were available to be delivered or repledged, along with the balances of such instruments that were delivered or repledged, to satisfy one of our purposes previously described.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Collateral we received that was available to be delivered or repledged | $ | 2,931 | $ | 3,165 | ||||
| Collateral that we delivered or repledged | $ | 897 | $ | 1,389 |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Encumbered assets
We pledge certain of our financial instruments to collateralize either repurchase agreements or other secured borrowings, maintain lines of credit, or to satisfy our collateral or settlement requirements with counterparties or clearing organizations who may or may not have the right to deliver or repledge such instruments. The following table presents information about the fair value of our assets that have been pledged for one of the purposes previously described.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Had the right to deliver or repledge | $ | 591 | $ | 510 | ||||
| Did not have the right to deliver or repledge | $ | 65 | $ | 65 | ||||
| Bank loans, net pledged at FHLB and the FRB | $ | 4,653 | $ | 4,075 |
Repurchase agreements, repurchase-to-maturity transactions and securities loaned accounted for as secured borrowings
The following table presents the remaining contractual maturity of repurchase agreements and securities lending transactions accounted for as secured borrowings.
| $ in millions | Overnight and continuous | Up to 30 days | 30-90 days | Greater than 90 days | Total | |||||||||||||||
| September 30, 2019 | ||||||||||||||||||||
| Repurchase agreements: | ||||||||||||||||||||
| Government and agency obligations | $ | 70 | $ | — | $ | — | $ | — | $ | 70 | ||||||||||
| Agency MBS and CMOs | 80 | — | — | — | 80 | |||||||||||||||
| Total repurchase agreements | 150 | — | — | — | 150 | |||||||||||||||
| Securities loaned: | ||||||||||||||||||||
| Equity securities | 323 | — | — | — | 323 | |||||||||||||||
| Total | $ | 473 | $ | — | $ | — | $ | — | $ | 473 | ||||||||||
| September 30, 2018 | ||||||||||||||||||||
| Repurchase agreements: | ||||||||||||||||||||
| Government and agency obligations | $ | 102 | $ | — | $ | — | $ | — | $ | 102 | ||||||||||
| Agency MBS and CMOs | 84 | — | — | — | 84 | |||||||||||||||
| Total repurchase agreements | 186 | — | — | — | 186 | |||||||||||||||
| Securities loaned: | ||||||||||||||||||||
| Equity securities | 423 | — | — | — | 423 | |||||||||||||||
| Total | $ | 609 | $ | — | $ | — | $ | — | $ | 609 |
As of both September 30, 2019 and 2018, we did not have any “repurchase-to-maturity” agreements, which are repurchase agreements where a security is transferred under an agreement to repurchase and the maturity date of the repurchase agreement matches the maturity date of the underlying security.
NOTE 8 – BANK LOANS, NET
Bank client receivables are comprised of loans originated or purchased by RJ Bank and include C&I loans, tax-exempt loans, commercial and residential real estate loans, SBL and other loans. These receivables are collateralized by first and, to a lesser extent, second mortgages on residential or other real property, other assets of the borrower, a pledge of revenue or are unsecured. See Note 2 for a discussion of accounting policies related to bank loans and allowances for losses.
We segregate our loan portfolio into six loan portfolio segments: C&I, CRE, CRE construction, tax-exempt, residential mortgage and SBL and other. These portfolio segments also serve as the portfolio loan classes for purposes of credit analysis, except for residential mortgage loans which are further disaggregated into residential first mortgage and residential home equity classes.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following tables present the balances for both the held for sale and held for investment loan portfolios, as well as the associated percentage of each portfolio segment in RJ Bank’s total loan portfolio. “Loans held for sale, net” and “Total loans held for investment, net” in the following tables are presented net of unearned income and deferred expenses, which include purchase premiums, purchase discounts and net deferred origination fees and costs.
| September 30, | |||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||||||
| $ in millions | Balance | % | Balance | % | Balance | % | |||||||||||||||
| Loans held for investment: | |||||||||||||||||||||
| C&I loans | $ | 8,098 | 38 | % | $ | 7,786 | 40 | % | $ | 7,386 | 43 | % | |||||||||
| CRE construction loans | 185 | 1 | % | 151 | 1 | % | 113 | 1 | % | ||||||||||||
| CRE loans | 3,652 | 17 | % | 3,624 | 18 | % | 3,106 | 18 | % | ||||||||||||
| Tax-exempt loans | 1,241 | 6 | % | 1,227 | 6 | % | 1,018 | 6 | % | ||||||||||||
| Residential mortgage loans | 4,454 | 21 | % | 3,757 | 19 | % | 3,149 | 18 | % | ||||||||||||
| SBL and other | 3,349 | 16 | % | 3,033 | 15 | % | 2,386 | 14 | % | ||||||||||||
| Total loans held for investment | 20,979 | 19,578 | 17,158 | ||||||||||||||||||
| Net unearned income and deferred expenses | (12 | ) | (21 | ) | (31 | ) | |||||||||||||||
| Total loans held for investment, net | 20,967 | 19,557 | 17,127 | ||||||||||||||||||
| Loans held for sale, net | 142 | 1 | % | 164 | 1 | % | 70 | — | |||||||||||||
| Total loans held for sale and investment | 21,109 | 100 | % | 19,721 | 100 | % | 17,197 | 100 | % | ||||||||||||
| Allowance for loan losses | (218 | ) | (203 | ) | (190 | ) | |||||||||||||||
| Bank loans, net | $ | 20,891 | $ | 19,518 | $ | 17,007 |
| September 30, | ||||||||||||||
| 2016 | 2015 | |||||||||||||
| $ in millions | Balance | % | Balance | % | ||||||||||
| Loans held for investment: | ||||||||||||||
| C&I loans | $ | 7,470 | 48 | % | $ | 6,928 | 52 | % | ||||||
| CRE construction loans | 123 | 1 | % | 162 | 1 | % | ||||||||
| CRE loans | 2,554 | 17 | % | 2,054 | 16 | % | ||||||||
| Tax-exempt loans | 741 | 5 | % | 485 | 4 | % | ||||||||
| Residential mortgage loans | 2,442 | 16 | % | 1,963 | 15 | % | ||||||||
| SBL and other | 1,905 | 12 | % | 1,481 | 11 | % | ||||||||
| Total loans held for investment | 15,235 | 13,073 | ||||||||||||
| Net unearned income and deferred expenses | (41 | ) | (32 | ) | ||||||||||
| Total loans held for investment, net | 15,194 | 13,041 | ||||||||||||
| Loans held for sale, net | 214 | 1 | % | 119 | 1 | % | ||||||||
| Total loans held for sale and investment | 15,408 | 100 | % | 13,160 | 100 | % | ||||||||
| Allowance for loan losses | (197 | ) | (172 | ) | ||||||||||
| Bank loans, net | $ | 15,211 | $ | 12,988 |
At September 30, 2019, the FHLB had a blanket lien on RJ Bank’s residential mortgage loan portfolio as security for the repayment of certain borrowings. See Note 14 for more information regarding borrowings from the FHLB.
Loans held for sale
RJ Bank originated or purchased $2.33 billion, $1.69 billion and $1.67 billion of loans held for sale during the years ended September 30, 2019, 2018 and 2017, respectively. Proceeds from the sale of these held for sale loans amounted to $800 million, $606 million and $439 million for the years ended September 30, 2019, 2018 and 2017, respectively. Net gains resulting from such sales were insignificant in each of the years ended September 30, 2019, 2018 and 2017.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Purchases and sales of loans held for investment
The following table presents purchases and sales of any loans held for investment by portfolio segment.
| $ in millions | C&I loans | CRE loans | Residential mortgage loans | Total | ||||||||||||
| Year ended September 30, 2019 | ||||||||||||||||
| Purchases | $ | 1,046 | $ | 42 | $ | 400 | $ | 1,488 | ||||||||
| Sales | $ | 126 | $ | — | $ | — | $ | 126 | ||||||||
| Year ended September 30, 2018 | ||||||||||||||||
| Purchases | $ | 467 | $ | 145 | $ | 303 | $ | 915 | ||||||||
| Sales | $ | 213 | $ | — | $ | — | $ | 213 | ||||||||
| Year ended September 30, 2017 | ||||||||||||||||
| Purchases | $ | 537 | $ | 64 | $ | 264 | $ | 865 | ||||||||
| Sales | $ | 341 | $ | — | $ | — | $ | 341 |
Sales in the preceding table represent the recorded investment of loans held for investment that were transferred to loans held for sale and subsequently sold to a third party during the respective period. As more fully described in Note 2, corporate loan sales generally occur as part of our credit management activities.
Aging analysis of loans held for investment
The following table presents an analysis of the payment status of loans held for investment. Amounts in the table exclude any net unearned income and deferred expenses.
| $ in millions | 30-89 days and accruing | 90 days or more and accruing | Total past due and accruing | Nonaccrual | Current and accruing | Total loans held for investment | ||||||||||||||||||
| September 30, 2019 | ||||||||||||||||||||||||
| C&I loans | $ | — | $ | — | $ | — | $ | 19 | $ | 8,079 | $ | 8,098 | ||||||||||||
| CRE construction loans | — | — | — | — | 185 | 185 | ||||||||||||||||||
| CRE loans | — | — | — | 8 | 3,644 | 3,652 | ||||||||||||||||||
| Tax-exempt loans | — | — | — | — | 1,241 | 1,241 | ||||||||||||||||||
| Residential mortgage loans: | ||||||||||||||||||||||||
| First mortgage loans | 2 | 2 | 16 | 4,409 | 4,427 | |||||||||||||||||||
| Home equity loans/lines | — | — | — | — | 27 | 27 | ||||||||||||||||||
| SBL and other | — | — | — | — | 3,349 | 3,349 | ||||||||||||||||||
| Total loans held for investment | $ | 2 | $ | — | $ | 2 | $ | 43 | $ | 20,934 | $ | 20,979 | ||||||||||||
| September 30, 2018 | ||||||||||||||||||||||||
| C&I loans | $ | — | $ | — | $ | — | $ | 2 | $ | 7,784 | $ | 7,786 | ||||||||||||
| CRE construction loans | — | — | — | — | 151 | 151 | ||||||||||||||||||
| CRE loans | — | — | — | — | 3,624 | 3,624 | ||||||||||||||||||
| Tax-exempt loans | — | — | — | — | 1,227 | 1,227 | ||||||||||||||||||
| Residential mortgage loans: | ||||||||||||||||||||||||
| First mortgage loans | 1 | — | 1 | 23 | 3,707 | 3,731 | ||||||||||||||||||
| Home equity loans/lines | — | — | — | — | 26 | 26 | ||||||||||||||||||
| SBL and other | — | — | — | — | 3,033 | 3,033 | ||||||||||||||||||
| Total loans held for investment | $ | 1 | $ | — | $ | 1 | $ | 25 | $ | 19,552 | $ | 19,578 |
The preceding table includes $32 million and $11 million at September 30, 2019 and 2018, respectively, of nonaccrual loans which were current pursuant to their contractual terms.
Other real estate owned, included in “Other assets” on our Consolidated Statements of Financial Condition, was $3 million at both September 30, 2019 and 2018. The recorded investment in mortgage loans secured by one-to-four family residential properties for which formal foreclosure proceedings were in process was $7 million and $12 million at September 30, 2019 and 2018, respectively.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Impaired loans and troubled debt restructurings
The following table provides a summary of RJ Bank’s impaired loans.
| September 30, | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| $ in millions | Gross recorded investment | Unpaid principal balance | Allowance for losses | Gross recorded investment | Unpaid principal balance | Allowance for losses | ||||||||||||||||||
| Impaired loans with allowance for loan losses: | ||||||||||||||||||||||||
| C&I loans | $ | 19 | $ | 20 | $ | 6 | $ | — | $ | — | $ | — | ||||||||||||
| Residential - first mortgage loans | 11 | 13 | 1 | 15 | 20 | 2 | ||||||||||||||||||
| Total | 30 | 33 | 7 | 15 | 20 | 2 | ||||||||||||||||||
| Impaired loans without allowance for loan losses: | ||||||||||||||||||||||||
| C&I loans | — | — | — | 2 | 2 | — | ||||||||||||||||||
| CRE loans | 8 | 13 | — | — | — | — | ||||||||||||||||||
| Residential - first mortgage loans | 11 | 17 | — | 13 | 20 | — | ||||||||||||||||||
| Total | 19 | 30 | — | 15 | 22 | — | ||||||||||||||||||
| Total impaired loans | $ | 49 | $ | 63 | $ | 7 | $ | 30 | $ | 42 | $ | 2 |
Impaired loan balances with allowances for loan losses have had reserves established based upon management’s analysis. There is no allowance required when the discounted cash flow, collateral value or market value of a loan equals or exceeds the carrying value. These are generally loans in process of foreclosure that have already been adjusted to fair value.
The preceding table includes TDRs of $19 million, $8 million and $18 million related to C&I, CRE and residential first mortgage loans, respectively, at September 30, 2019 and $21 million of residential first mortgage TDRs at September 30, 2018.
The average balances of total impaired loans were as follows.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Average impaired loan balance: | ||||||||||||
| C&I loans | $ | 19 | $ | 4 | $ | 17 | ||||||
| CRE loans | 5 | — | 1 | |||||||||
| Residential - first mortgage loans | 25 | 33 | 44 | |||||||||
| Total | $ | 49 | $ | 37 | $ | 62 |
Credit quality indicators
The credit quality of RJ Bank’s loan portfolio is summarized monthly by management using the standard asset classification system utilized by bank regulators for the SBL and residential mortgage loan portfolios and internal risk ratings, which correspond to the same standard asset classifications for the corporate loan portfolios. These classifications are divided into three groups: Not Classified (Pass), Special Mention, and Classified or Adverse Rating (Substandard, Doubtful and Loss). These terms are defined as follows:
Pass – Loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less costs to acquire and sell, of any underlying collateral in a timely manner.
Special Mention – Loans which have potential weaknesses that deserve management’s close attention. These loans are not adversely classified and do not expose RJ Bank to sufficient risk to warrant an adverse classification.
Substandard – Loans which are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans with this classification are characterized by the distinct possibility that RJ Bank will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans which have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently-known facts, conditions and values.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loss – Loans which are considered by management to be uncollectible and of such little value that their continuance on RJ Bank’s books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted. RJ Bank does not have any loan balances within this classification because, in accordance with its accounting policy, loans, or a portion thereof considered to be uncollectible, are charged-off prior to the assignment of this classification.
The following table presents the credit quality of RJ Bank’s held for investment loan portfolio.
| $ in millions | Pass | Special mention | Substandard | Doubtful | Total | |||||||||||||||
| September 30, 2019 | ||||||||||||||||||||
| C&I loans | $ | 7,870 | $ | 152 | $ | 76 | $ | — | $ | 8,098 | ||||||||||
| CRE construction loans | 185 | — | — | — | 185 | |||||||||||||||
| CRE loans | 3,630 | — | 22 | — | 3,652 | |||||||||||||||
| Tax-exempt loans | 1,241 | — | — | — | 1,241 | |||||||||||||||
| Residential mortgage loans: | ||||||||||||||||||||
| First mortgage loans | 4,392 | 10 | 25 | — | 4,427 | |||||||||||||||
| Home equity loans/lines | 27 | — | — | — | 27 | |||||||||||||||
| SBL and other | 3,349 | — | — | — | 3,349 | |||||||||||||||
| Total | $ | 20,694 | $ | 162 | $ | 123 | $ | — | $ | 20,979 | ||||||||||
| September 30, 2018 | ||||||||||||||||||||
| C&I loans | $ | 7,679 | $ | 48 | $ | 59 | $ | — | $ | 7,786 | ||||||||||
| CRE construction loans | 140 | 11 | — | — | 151 | |||||||||||||||
| CRE loans | 3,547 | 44 | 33 | — | 3,624 | |||||||||||||||
| Tax-exempt loans | 1,227 | — | — | — | 1,227 | |||||||||||||||
| Residential mortgage loans: | ||||||||||||||||||||
| First mortgage loans | 3,693 | 8 | 30 | — | 3,731 | |||||||||||||||
| Home equity loans/lines | 26 | — | — | — | 26 | |||||||||||||||
| SBL and other | 3,033 | — | — | — | 3,033 | |||||||||||||||
| Total | $ | 19,345 | $ | 111 | $ | 122 | $ | — | $ | 19,578 |
Loans classified as special mention, substandard or doubtful are all considered to be “criticized” loans.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Allowance for loan losses and reserve for unfunded lending commitments
The following table presents changes in the allowance for loan losses of RJ Bank by portfolio segment.
| Loans held for investment | ||||||||||||||||||||||||||||
| $ in millions | C&I loans | CRE construction loans | CRE loans | Tax-exempt loans | Residential mortgage loans | SBL and other | Total | |||||||||||||||||||||
| Year ended September 30, 2019 | ||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 123 | $ | 3 | $ | 47 | $ | 9 | $ | 17 | $ | 4 | $ | 203 | ||||||||||||||
| Provision/(benefit) for loan losses | 19 | — | 4 | — | (2 | ) | 1 | 22 | ||||||||||||||||||||
| Net (charge-offs)/recoveries: | ||||||||||||||||||||||||||||
| Charge-offs | (2 | ) | — | (5 | ) | — | (1 | ) | — | (8 | ) | |||||||||||||||||
| Recoveries | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||
| Net (charge-offs)/recoveries | (2 | ) | — | (5 | ) | — | 1 | — | (6 | ) | ||||||||||||||||||
| Foreign exchange translation adjustment | (1 | ) | — | — | — | — | — | (1 | ) | |||||||||||||||||||
| Balance at end of year | $ | 139 | $ | 3 | $ | 46 | $ | 9 | $ | 16 | $ | 5 | $ | 218 | ||||||||||||||
| Year ended September 30, 2018 | ||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 120 | $ | 1 | $ | 42 | $ | 6 | $ | 17 | $ | 4 | $ | 190 | ||||||||||||||
| Provision/(benefit) for loan losses | 12 | 2 | 5 | 3 | (2 | ) | — | 20 | ||||||||||||||||||||
| Net (charge-offs)/recoveries: | ||||||||||||||||||||||||||||
| Charge-offs | (10 | ) | — | — | — | — | — | (10 | ) | |||||||||||||||||||
| Recoveries | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||
| Net (charge-offs)/recoveries | (10 | ) | — | — | — | 2 | — | (8 | ) | |||||||||||||||||||
| Foreign exchange translation adjustment | 1 | — | — | — | — | — | 1 | |||||||||||||||||||||
| Balance at end of year | $ | 123 | $ | 3 | $ | 47 | $ | 9 | $ | 17 | $ | 4 | $ | 203 | ||||||||||||||
| Year ended September 30, 2017 | ||||||||||||||||||||||||||||
| Balance at beginning of year | $ | 138 | $ | 1 | $ | 37 | $ | 4 | $ | 13 | $ | 4 | $ | 197 | ||||||||||||||
| Provision for loan losses | 7 | — | — | 2 | 4 | — | 13 | |||||||||||||||||||||
| Net (charge-offs)/recoveries: | ||||||||||||||||||||||||||||
| Charge-offs | (26 | ) | — | — | — | (1 | ) | — | (27 | ) | ||||||||||||||||||
| Recoveries | — | — | 5 | — | 1 | — | 6 | |||||||||||||||||||||
| Net (charge-offs)/recoveries | (26 | ) | — | 5 | — | — | — | (21 | ) | |||||||||||||||||||
| Foreign exchange translation adjustment | 1 | — | — | — | — | — | 1 | |||||||||||||||||||||
| Balance at end of year | $ | 120 | $ | 1 | $ | 42 | $ | 6 | $ | 17 | $ | 4 | $ | 190 |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents, by loan portfolio segment, RJ Bank’s recorded investment (excluding any net unearned income and deferred expenses) and the related allowance for loan losses.
| Loans held for investment | ||||||||||||||||||||||||
| Allowance for loan losses | Recorded investment | |||||||||||||||||||||||
| $ in millions | Individually evaluated for impairment | Collectively evaluated for impairment | Total | Individually evaluated for impairment | Collectively evaluated for impairment | Total | ||||||||||||||||||
| September 30, 2019 | ||||||||||||||||||||||||
| C&I loans | $ | 6 | $ | 133 | $ | 139 | $ | 19 | $ | 8,079 | $ | 8,098 | ||||||||||||
| CRE construction loans | — | 3 | 3 | — | 185 | 185 | ||||||||||||||||||
| CRE loans | — | 46 | 46 | 8 | 3,644 | 3,652 | ||||||||||||||||||
| Tax-exempt loans | — | 9 | 9 | — | 1,241 | 1,241 | ||||||||||||||||||
| Residential mortgage loans | 1 | 15 | 16 | 28 | 4,426 | 4,454 | ||||||||||||||||||
| SBL and other | — | 5 | 5 | — | 3,349 | 3,349 | ||||||||||||||||||
| Total | $ | 7 | $ | 211 | $ | 218 | $ | 55 | $ | 20,924 | $ | 20,979 | ||||||||||||
| September 30, 2018 | ||||||||||||||||||||||||
| C&I loans | $ | — | $ | 123 | $ | 123 | $ | 2 | $ | 7,784 | $ | 7,786 | ||||||||||||
| CRE construction loans | — | 3 | 3 | — | 151 | 151 | ||||||||||||||||||
| CRE loans | — | 47 | 47 | — | 3,624 | 3,624 | ||||||||||||||||||
| Tax-exempt loans | — | 9 | 9 | — | 1,227 | 1,227 | ||||||||||||||||||
| Residential mortgage loans | 2 | 15 | 17 | 35 | 3,722 | 3,757 | ||||||||||||||||||
| SBL and other | — | 4 | 4 | — | 3,033 | 3,033 | ||||||||||||||||||
| Total | $ | 2 | $ | 201 | $ | 203 | $ | 37 | $ | 19,541 | $ | 19,578 |
The reserve for unfunded lending commitments, which is included in “Other payables” on our Consolidated Statements of Financial Condition, was $9 million and $10 million at September 30, 2019 and 2018, respectively.
NOTE 9 – VARIABLE INTEREST ENTITIES
A VIE requires consolidation by the entity’s primary beneficiary. We evaluate all of the entities in which we are involved to determine if the entity is a VIE and if so, whether we hold a variable interest and are the primary beneficiary. See Note 2 for a discussion of our principal involvement with the VIEs and the accounting policies regarding determination of whether we are deemed to be the primary beneficiary of VIEs.
VIEs where we are the primary beneficiary
Of the VIEs in which we hold an interest, we have determined that certain Private Equity Interests, certain LIHTC funds and the Restricted Stock Trust Fund require consolidation in our financial statements, as we are deemed the primary beneficiary of such VIEs. The aggregate assets and liabilities of the VIEs we consolidate are provided in the following table. Aggregate assets and aggregate liabilities may differ from the consolidated carrying value of assets and liabilities due to the elimination of intercompany assets and liabilities held by the consolidated VIE.
| $ in millions | Aggregate assets | Aggregate liabilities | ||||||
| September 30, 2019 | ||||||||
| Private Equity Interests | $ | 65 | $ | 4 | ||||
| LIHTC funds | 80 | 5 | ||||||
| Restricted Stock Trust Fund | 14 | 14 | ||||||
| Total | $ | 159 | $ | 23 | ||||
| September 30, 2018 | ||||||||
| Private Equity Interests | $ | 67 | $ | 5 | ||||
| LIHTC funds | 111 | 21 | ||||||
| Restricted Stock Trust Fund | 14 | 14 | ||||||
| Total | $ | 192 | $ | 40 |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents information about the carrying value of the assets and liabilities of the VIEs which we consolidate and which are included on our Consolidated Statements of Financial Condition. Intercompany balances are eliminated in consolidation and not reflected in the following table.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Assets: | ||||||||
| Cash, cash equivalents and cash segregated pursuant to regulations | $ | 7 | $ | 7 | ||||
| Other receivables | — | 1 | ||||||
| Other investments | 63 | 63 | ||||||
| Other assets | 75 | 107 | ||||||
| Total assets | $ | 145 | $ | 178 | ||||
| Liabilities: | ||||||||
| Other payables | $ | 4 | $ | 26 | ||||
| Total liabilities | $ | 4 | $ | 26 | ||||
| Noncontrolling interests | $ | 60 | $ | 78 |
VIEs where we hold a variable interest but are not the primary beneficiary
As discussed in Note 2, we have concluded that for certain VIEs we are not the primary beneficiary and therefore do not consolidate these VIEs. Such VIEs include certain Private Equity Interests, certain LIHTC funds, and other limited partnerships. Our risk of loss for these VIEs is limited to our investments in, advances to, and/or receivables due from these VIEs.
Aggregate assets, liabilities and risk of loss
The aggregate assets, liabilities, and our exposure to loss from those VIEs in which we hold a variable interest, but as to which we have concluded we are not the primary beneficiary, are provided in the following table.
| September 30, | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
| $ in millions | Aggregate assets | Aggregate liabilities | Our risk of loss | Aggregate assets | Aggregate liabilities | Our risk of loss | ||||||||||||||||||
| Private Equity Interests | $ | 6,317 | $ | 117 | $ | 63 | $ | 6,908 | $ | 154 | $ | 68 | ||||||||||||
| LIHTC funds | 6,001 | 2,221 | 64 | 5,692 | 1,912 | 93 | ||||||||||||||||||
| Other | 205 | 115 | 4 | 211 | 114 | 4 | ||||||||||||||||||
| Total | $ | 12,523 | $ | 2,453 | $ | 131 | $ | 12,811 | $ | 2,180 | $ | 165 |
NOTE 10 - PROPERTY AND EQUIPMENT
The following table presents our property and equipment, net balances as of the dates presented.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Land | $ | 29 | $ | 29 | ||||
| Software, including development in progress | 486 | 417 | ||||||
| Buildings, leasehold and land improvements | 385 | 350 | ||||||
| Furniture, fixtures and equipment | 278 | 248 | ||||||
| Construction in process | 10 | 16 | ||||||
| Total property and equipment | 1,188 | 1,060 | ||||||
| Less: Accumulated depreciation and amortization | (661 | ) | (574 | ) | ||||
| Total property and equipment, net | $ | 527 | $ | 486 |
Depreciation expense and software amortization was $97 million, $85 million, and $71 million for the fiscal years ended September 30, 2019, 2018, and 2017, respectively.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS, NET
Our goodwill and identifiable intangible assets result from various acquisitions. See Note 2 for a discussion of our goodwill and intangible assets accounting policies. The following table presents our goodwill and net identifiable intangible asset balances as of the dates indicated.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Goodwill | $ | 464 | $ | 478 | ||||
| Identifiable intangible assets, net | 147 | 161 | ||||||
| Total goodwill and identifiable intangible assets, net | $ | 611 | $ | 639 |
Goodwill
The following summarizes our goodwill by segment, and the balances and activity for the years indicated.
| $ in millions | Private Client Group | Capital Markets | Asset Management | Total | ||||||||||||
| Year ended September 30, 2019 | ||||||||||||||||
| Goodwill as of beginning of year | $ | 276 | $ | 133 | $ | 69 | $ | 478 | ||||||||
| Additions | — | 7 | — | 7 | ||||||||||||
| Foreign currency translations | (1 | ) | (1 | ) | — | (2 | ) | |||||||||
| Impairment | — | (19 | ) | — | (19 | ) | ||||||||||
| Goodwill as of end of year | $ | 275 | $ | 120 | $ | 69 | $ | 464 | ||||||||
| Year ended September 30, 2018 | ||||||||||||||||
| Goodwill as of beginning of year | $ | 277 | $ | 134 | $ | — | $ | 411 | ||||||||
| Additions | — | — | 69 | 69 | ||||||||||||
| Foreign currency translations | (1 | ) | (1 | ) | — | (2 | ) | |||||||||
| Goodwill as of end of year | $ | 276 | $ | 133 | $ | 69 | $ | 478 |
The additions to goodwill during the years ended September 30, 2019 and 2018 arose from our acquisitions of Silver Lane and the Scout Group, respectively. The goodwill from these acquisitions primarily represents synergies from combining these entities with our existing businesses. All of the goodwill associated with both Silver Lane and the Scout Group is deductible for tax purposes over 15 years. See Note 3 for additional information regarding our acquisitions.
Qualitative assessments
As described in Note 2, we perform goodwill impairment testing on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We performed our latest annual goodwill impairment testing as of our January 1, 2019 evaluation date, evaluating balances as of December 31, 2018. In that testing, we performed a qualitative assessment for each of our reporting units that had goodwill. For each reporting unit on which we performed a qualitative assessment, we determined whether it was more likely than not that the fair value of the reporting unit was in excess of the carrying value of the reporting unit, including the recorded goodwill. Based upon the outcome of our qualitative assessments as of our annual evaluation date, we concluded that none of the goodwill allocated to any of our reporting units was impaired. Subsequent to our annual goodwill impairment testing, events associated with the RJ Ltd. Capital Markets reporting unit occurred that caused us to update this impairment testing. See quantitative assessment discussion below.
Quantitative assessments
During the quarter ended September 30, 2019, as a result of recent transactions and events in the Canadian capital markets in which we participate, we determined the goodwill associated with our RJ Ltd. Capital Markets reporting unit could be potentially impaired and therefore performed an event-driven impairment assessment. In completing this assessment, we performed a quantitative analysis of such reporting unit.
Our quantitative assessment of the equity value of the RJ Ltd. Capital Markets reporting unit used an income approach utilizing a discounted cash flow model. The estimated fair value of the equity of the reporting unit resulting from this approach was dependent upon estimates of future business unit revenues and costs. Such estimates were subject to critical assumptions regarding the nature
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and health of financial markets in future years, projected future cash flows for the business (taking into account recent market events impacting the business), as well as the discount rate to apply to the projected future cash flows. In estimating future cash flows, a balance sheet as of August 31, 2019 and a statement of operations for the prior twelve months of activity were compiled. Future balance sheets and statements of operations were then projected, and estimated future cash flows were determined by the combination of these projections. The cash flows were discounted at the reporting unit’s estimated cost of equity of approximately 13%, which was derived through application of the capital asset pricing model.
As a result of this quantitative assessment, we recorded an impairment charge of $19 million, which was the entire value of the goodwill assigned to the RJ Ltd. Capital Markets reporting unit.
Identifiable intangible assets, net
The following table sets forth our identifiable intangible asset balances by segment, net of accumulated amortization, and activity for the years indicated.
| $ in millions | Private Client Group | Capital Markets | Asset Management | Total | ||||||||||||
| Year ended September 30, 2019 | ||||||||||||||||
| Net identifiable intangible assets as of beginning of year | $ | 41 | $ | 20 | $ | 100 | $ | 161 | ||||||||
| Additions | — | 1 | — | 1 | ||||||||||||
| Amortization expense | (6 | ) | (4 | ) | (5 | ) | (15 | ) | ||||||||
| Net identifiable intangible assets as of end of year | $ | 35 | $ | 17 | $ | 95 | $ | 147 | ||||||||
| Year ended September 30, 2018 | ||||||||||||||||
| Net identifiable intangible assets as of beginning of year | $ | 47 | $ | 23 | $ | 13 | $ | 83 | ||||||||
| Additions | — | — | 92 | 92 | ||||||||||||
| Amortization expense | (6 | ) | (3 | ) | (5 | ) | (14 | ) | ||||||||
| Net identifiable intangible assets as of end of year | $ | 41 | $ | 20 | $ | 100 | $ | 161 |
The additions of intangible assets during the years ended September 30, 2019 and 2018 were attributable to the Silver Lane acquisition and the Scout Group acquisition, respectively.
As described in Note 2, we perform impairment testing for our indefinite-lived intangible asset on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. We performed our latest annual impairment test as of our January 1, 2019 evaluation date, evaluating balances as of December 31, 2018. In that testing, we performed a qualitative assessment for our indefinite-lived intangible asset. Based upon the outcome of our qualitative assessment, no impairment was identified. No events have occurred since our assessment that would cause us to update this impairment testing.
The following summarizes our identifiable intangible assets by type.
| September 30, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| $ in millions | Gross carrying value | Accumulated amortization | Gross carrying value | Accumulated amortization | ||||||||||||
| Customer relationships | $ | 134 | $ | (50 | ) | $ | 133 | $ | (40 | ) | ||||||
| Non-amortizing customer relationships | 52 | — | 52 | — | ||||||||||||
| Trade name | 12 | (5 | ) | 12 | (4 | ) | ||||||||||
| Developed technology | 3 | (2 | ) | 3 | (1 | ) | ||||||||||
| Intellectual property | 1 | — | 1 | — | ||||||||||||
| Non-compete agreements | 2 | (2 | ) | 3 | (2 | ) | ||||||||||
| Seller relationship agreements | 5 | (3 | ) | 5 | (1 | ) | ||||||||||
| Total | $ | 209 | $ | (62 | ) | $ | 209 | $ | (48 | ) |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth the projected amortization expense by fiscal year associated with our identifiable intangible assets with finite lives.
| Fiscal year ended September 30, | $ in millions | |||
| 2020 | $ | 13 | ||
| 2021 | 12 | |||
| 2022 | 11 | |||
| 2023 | 10 | |||
| 2024 | 10 | |||
| Thereafter | 39 | |||
| Total | $ | 95 |
NOTE 12 - OTHER ASSETS
The following table details the components of other assets. See Note 2 for a discussion of the accounting polices related to these components.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Investments in company-owned life insurance policies | $ | 675 | $ | 605 | ||||
| Prepaid expenses | 123 | 99 | ||||||
| Investments in real estate partnerships held by consolidated variable interest entities | 75 | 107 | ||||||
| Investment in FHLB stock | 52 | 52 | ||||||
| Investment in FRB stock | 25 | 25 | ||||||
| All other | 70 | 66 | ||||||
| Total other assets | $ | 1,020 | $ | 954 |
As of September 30, 2019, the cumulative face value of our company-owned life insurance policies was $1.89 billion.
NOTE 13 – BANK DEPOSITS
Bank deposits include savings and money market accounts, certificates of deposit with RJ Bank, Negotiable Order of Withdrawal (“NOW”) accounts and demand deposits. The following table presents a summary of bank deposits including the weighted-average rate, the calculation of which was based on the actual deposit balances at each respective period.
| September 30, | ||||||||||||||
| 2019 | 2018 | |||||||||||||
| $ in millions | Balance | Weighted-average rate | Balance | Weighted-average rate | ||||||||||
| Savings and money market accounts | $ | 21,654 | 0.25 | % | $ | 19,475 | 0.54 | % | ||||||
| Certificates of deposit | 605 | 2.33 | % | 445 | 2.03 | % | ||||||||
| NOW accounts | 6 | 0.01 | % | 6 | 0.01 | % | ||||||||
| Demand deposits (non-interest-bearing) | 16 | — | 16 | — | ||||||||||
| Total bank deposits | $ | 22,281 | 0.31 | % | $ | 19,942 | 0.57 | % |
Total bank deposits in the preceding table exclude affiliate deposits of $163 million and $279 million at September 30, 2019 and 2018, respectively. These affiliate deposits included $163 million and $277 million at September 30, 2019 and 2018, respectively, held in a deposit account at RJ Bank on behalf of RJF (see Note 25 for additional information).
Savings and money market accounts in the preceding table consist primarily of deposits that are cash balances swept from the client investment accounts maintained at RJ&A to RJ Bank. These balances are held in Federal Deposit Insurance Corporation (“FDIC”) insured bank accounts through the RJBDP. The aggregate amount of individual time deposit account balances that exceeded the FDIC insurance limit at September 30, 2019 was $44 million.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table sets forth the scheduled maturities of certificates of deposit.
| September 30, | ||||||||||||||||
| 2019 | 2018 | |||||||||||||||
| $ in millions | Denominations greater than or equal to $100,000 | Denominations less than $100,000 | Denominations greater than or equal to $100,000 | Denominations less than $100,000 | ||||||||||||
| Three months or less | $ | 24 | $ | 19 | $ | 30 | $ | 17 | ||||||||
| Over three through six months | 26 | 21 | 20 | 13 | ||||||||||||
| Over six through twelve months | 75 | 37 | 38 | 26 | ||||||||||||
| Over one through two years | 32 | 36 | 65 | 40 | ||||||||||||
| Over two through three years | 40 | 93 | 21 | 14 | ||||||||||||
| Over three through four years | 66 | 47 | 44 | 26 | ||||||||||||
| Over four through five years | 38 | 51 | 63 | 28 | ||||||||||||
| Total | $ | 301 | $ | 304 | $ | 281 | $ | 164 |
Interest expense on deposits, excluding interest expense related to affiliate deposits, is summarized in the following table.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Savings, money market, and NOW accounts | $ | 120 | $ | 60 | $ | 13 | ||||||
| Certificates of deposit | 12 | 6 | 4 | |||||||||
| Total interest expense on deposits | $ | 132 | $ | 66 | $ | 17 |
NOTE 14 – OTHER BORROWINGS
The following table details the components of other borrowings.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| FHLB advances | $ | 875 | $ | 875 | ||||
| Mortgage notes payable and other | 19 | 24 | ||||||
| Total other borrowings | $ | 894 | $ | 899 |
FHLB advances
Borrowings from the FHLB as of September 30, 2019 and 2018 were comprised of both floating and fixed-rate advances. As of September 30, 2019 and 2018, the floating-rate advances, which have interest rates that reset quarterly, totaled $850 million. The floating-rate advances mature in December 2020. We use interest rate swaps to manage the risk of increases in interest rates associated with these floating-rate advances by converting the balances subject to variable interest rates to a fixed interest rate. Refer to Note 2 for information regarding these interest rate swaps, which are accounted for as hedging instruments. As of both September 30, 2019 and 2018, the fixed-rate advance totaled $25 million and bears interest at a fixed rate of 3.4%. This advance matures in October 2020. All of the advances were secured by a blanket lien granted to the FHLB on our residential mortgage loan portfolio. The weighted average interest rate on these FHLB advances as of September 30, 2019 and 2018 was 2.17% and 2.41%, respectively.
Secured and unsecured financing arrangements
On February 19, 2019, RJF and RJ&A entered into an unsecured revolving credit facility agreement (the “Credit Facility”) which replaced the previous unsecured revolving credit facility agreement (the “RJF Credit Facility”) entered into by RJF. The Credit Facility has a maturity date of February 2024 and the lenders include a number of financial institutions. This committed unsecured borrowing facility provides for maximum borrowings of up to $500 million, with a sublimit of $300 million for RJF, at variable rates of interest. There were no borrowings outstanding on the Credit Facility as of September 30, 2019. There is a facility fee associated with the Credit Facility, which varies depending upon RJF’s credit rating. Based upon RJF’s credit rating as of September 30, 2019, the variable rate facility fee, which is applied to the committed amount, was 0.175% per annum.
In addition to the Credit Facility, we maintain various secured and unsecured lines of credit, which are generally utilized to finance certain fixed income securities or for cash management purposes. Borrowings during the year were generally day-to-day and there were no borrowings outstanding on these arrangements as of September 30, 2019. The interest rates for these arrangements are variable
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and are based on the Fed Funds rate, London Inter-bank Offered Rate (“LIBOR”), a lenders prime rate, or the Canadian prime rate, as applicable.
We also have other collateralized financings included in “Securities sold under agreements to repurchase” and “Securities loaned” on our Consolidated Statements of Financial Condition. See Note 7 for information regarding our other collateralized financing arrangements.
Mortgage notes payable and other
Mortgage notes payable pertain to mortgage loans on certain of our corporate headquarters offices located in St. Petersburg, Florida. These mortgage loans are secured by land, buildings, and improvements. These mortgage loans bear a fixed interest rate of 5.7% with repayment terms of monthly interest and principal debt service and have a January 2023 maturity.
Our other borrowings as of September 30, 2019, mature as follows based on their contractual terms.
| Fiscal year ended September 30, | $ in millions | |||
| 2020 | $ | 5 | ||
| 2021 | 881 | |||
| 2022 | 6 | |||
| 2023 | 2 | |||
| 2024 | — | |||
| Thereafter | — | |||
| Total | $ | 894 |
NOTE 15 – SENIOR NOTES PAYABLE
The following table summarizes our senior notes payable.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| 5.625% senior notes, due 2024 | $ | 250 | $ | 250 | ||||
| 3.625% senior notes, due 2026 | 500 | 500 | ||||||
| 4.95% senior notes, due 2046 | 800 | 800 | ||||||
| Total principal amount | 1,550 | 1,550 | ||||||
| Unaccreted premium/(discount) | 11 | 12 | ||||||
| Unamortized debt issuance costs | (11 | ) | (12 | ) | ||||
| Total senior notes payable | $ | 1,550 | $ | 1,550 |
In March 2012, we sold in a registered underwritten public offering $250 million in aggregate principal amount of 5.625% senior notes due April 2024. Interest on these senior notes is payable semi-annually. We may redeem some or all of these senior notes at any time prior to their maturity, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the redemption date at a discount rate equal to a designated U.S. Treasury rate, plus 50 basis points, plus accrued and unpaid interest thereon to the redemption date.
In July 2016, we sold in a registered underwritten public offering $500 million in aggregate principal amount of 3.625% senior notes due September 2026. Interest on these senior notes is payable semi-annually. We may redeem some or all of these senior notes at any time prior to their maturity, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the redemption date at a discount rate equal to a designated U.S. Treasury rate, plus 35 basis points, plus accrued and unpaid interest thereon to the redemption date.
In July 2016, we sold in a registered underwritten public offering $300 million in aggregate principal amount of 4.95% senior notes due July 2046. In May 2017, we reopened the offering and sold, in a registered underwritten public offering, an additional $500 million in aggregate principal amount of 4.95% senior notes due July 2046. These additional senior notes were consolidated, formed into a single series, and are fully fungible with the $300 million in aggregate principal amount 4.95% senior notes issued in July 2016. Interest on these senior notes is payable semi-annually. We may redeem some or all of these senior notes at any time prior to their maturity, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes redeemed, or (ii) the sum of the present
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
values of the remaining scheduled payments of principal and interest thereon, discounted to the redemption date at a discount rate equal to a designated U.S. Treasury rate, plus 45 basis points, plus accrued and unpaid interest thereon to the redemption date.
Redemption at par of certain senior notes
During the year ended September 30, 2017, we redeemed all of our outstanding 6.90% senior notes due March 2042 and 8.60% senior notes due August 2019. This redemption resulted in a $46 million loss on extinguishment of debt on our Consolidated Statements of Income and Comprehensive Income for the year ended September 30, 2017, comprised of a make-whole premium and unamortized debt issuance costs.
NOTE 16 – INCOME TAXES
For a discussion of our income tax accounting policies and other income tax-related information see Note 2.
The Tax Act
On December 22, 2017, the Tax Act was enacted, which significantly revised the U.S. corporate income tax system by, among other things, lowering federal corporate income tax rates from 35% to 21%. For the fiscal year ended September 30, 2019, our U.S. federal statutory tax rate was 21.0%. For the fiscal year ended September 30, 2018, our U.S. federal statutory tax rate was 24.5%, which reflects a blended federal statutory rate of 35.0% for our first fiscal quarter and 21.0% for the remaining three fiscal quarters.
Our provision for taxes for the year ended September 30, 2018 included $105 million related to the enactment of the Tax Act, which included: (1) $93 million due to the remeasurement of U.S. deferred tax assets at the lower enacted corporate tax rate; (2) the transition tax on deemed repatriated earnings of foreign subsidiaries of $10 million, including the associated state tax liability; and (3) $2 million due to the evaluation of deferred tax assets related to executive compensation.
Income taxes
The following table details the total income tax provision/(benefit) allocation for each respective period.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Recorded in: | ||||||||||||
| Net income | $ | 341 | $ | 454 | $ | 289 | ||||||
| Equity, arising from available-for-sale securities recorded through OCI | 27 | (19 | ) | 1 | ||||||||
| Equity, arising from currency translations, net of the impact of net investment hedges recorded through OCI | 7 | 10 | (7 | ) | ||||||||
| Equity, arising from cash flow hedges recorded through OCI | (23 | ) | 15 | 14 | ||||||||
| Total provision for income taxes | $ | 352 | $ | 460 | $ | 297 |
The following table details our provision/(benefit) for income taxes included in net income for each respective period.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 286 | $ | 258 | $ | 256 | ||||||
| State and local | 63 | 65 | 38 | |||||||||
| Foreign | 15 | 14 | 7 | |||||||||
| Total current | 364 | 337 | 301 | |||||||||
| Deferred: | ||||||||||||
| Federal | (22 | ) | 121 | (11 | ) | |||||||
| State and local | (1 | ) | (4 | ) | (1 | ) | ||||||
| Total deferred | (23 | ) | 117 | (12 | ) | |||||||
| Total provision for income taxes | $ | 341 | $ | 454 | $ | 289 |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate is detailed in the following table.
| Year ended September 30, | |||||||||
| 2019 | 2018 | 2017 | |||||||
| Provision calculated at statutory rate | 21.0 | % | 24.5 | % | 35.0 | % | |||
| Impact of Tax Act | 0.1 | % | 8.1 | % | — | ||||
| State income tax, net of federal benefit | 3.6 | % | 3.9 | % | 2.7 | % | |||
| Excess tax benefits related to share-based compensation | (0.4 | )% | (0.9 | )% | (2.5 | )% | |||
| Gains on company-owned life insurance policies which are not subject to tax | (0.1 | )% | (0.7 | )% | (1.7 | )% | |||
| Federal tax credits | (0.9 | )% | (0.7 | )% | (1.6 | )% | |||
| Other, net | 1.5 | % | 0.6 | % | (0.7 | )% | |||
| Total provision for income tax | 24.8 | % | 34.8 | % | 31.2 | % |
The following table presents our U.S. and foreign components of pre-tax income for each respective period.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| U.S. | $ | 1,340 | $ | 1,268 | $ | 915 | ||||||
| Foreign | 35 | 43 | 10 | |||||||||
| Pre-tax income | $ | 1,375 | $ | 1,311 | $ | 925 |
The cumulative effects of temporary differences that give rise to significant portions of the deferred tax asset/(liability) items are detailed in the following table.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Deferred tax assets: | ||||||||
| Deferred compensation | $ | 192 | $ | 180 | ||||
| Allowances for loan losses and reserves for unfunded commitments | 56 | 53 | ||||||
| Unrealized loss associated with foreign currency translations | 10 | 6 | ||||||
| Unrealized loss associated with available-for-sale securities | — | 20 | ||||||
| Accrued expenses | 35 | 36 | ||||||
| Partnership investments | 12 | 6 | ||||||
| Other | 18 | 11 | ||||||
| Total deferred tax assets | 323 | 312 | ||||||
| Deferred tax liabilities: | ||||||||
| Goodwill and identifiable intangible assets | (28 | ) | (32 | ) | ||||
| Property and equipment | (57 | ) | (60 | ) | ||||
| Unrealized gain associated with available-for-sale securities | (7 | ) | — | |||||
| Other | — | (17 | ) | |||||
| Total deferred tax liabilities | (92 | ) | (109 | ) | ||||
| Net deferred tax assets | $ | 231 | $ | 203 |
We had a net deferred tax asset at both September 30, 2019 and 2018. We believe that the realization of the net deferred tax asset of $231 million is more likely than not based on expectations of future taxable income.
As of September 30, 2019, we considered all undistributed earnings of non-U.S. subsidiaries to be permanently reinvested. Therefore, we have not provided for any U.S. deferred income taxes. As of September 30, 2019, we had approximately $291 million of cumulative undistributed earnings attributable to foreign subsidiaries, most of which were subject to U.S. tax under the transition tax on foreign earnings due under the Tax Act. Because the time or manner of repatriation is uncertain, we cannot determine the impact of local taxes, withholding taxes and foreign tax credits associated with the future repatriation of such earnings, and therefore, cannot quantify the tax liability that would be payable in the event all such foreign earnings are repatriated.
As of September 30, 2019, the current tax receivable, which is included in “Other receivables” on our Consolidated Statements of Financial Condition, was $22 million, and the current tax payable, which is included in “Other payables,” was $49 million. As of September 30, 2018, the current tax receivable was $6 million and the current tax payable was $50 million.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Uncertain tax positions
We recognize the accrual of interest and penalties related to income tax matters in interest expense and other expense, respectively. As of September 30, 2019 and 2018, accrued interest and penalties were approximately $6 million and $5 million, respectively.
The following table presents the aggregate changes in the balances for uncertain tax positions.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Uncertain tax positions beginning of year | $ | 31 | $ | 20 | $ | 22 | ||||||
| Increases for tax positions related to the current year | 11 | 5 | 3 | |||||||||
| Increases for tax positions related to prior years | 7 | 10 | — | |||||||||
| Decreases for tax positions related to prior years | — | (1 | ) | (1 | ) | |||||||
| Decreases due to lapsed statute of limitations | (2 | ) | (3 | ) | (2 | ) | ||||||
| Decreases related to settlements | (5 | ) | — | (2 | ) | |||||||
| Uncertain tax positions end of year | $ | 42 | $ | 31 | $ | 20 |
Tax positions related to prior years in the preceding table included positions taken in previously filed tax returns with the Internal Revenue Service and certain states, including an analysis of the impact from the 2018 Supreme Court decision in South Dakota v. Wayfair which impacted our state nexus positions in certain states for certain entities. We continue to evaluate these positions and intend to contest any proposed adjustments made by taxing authorities.
The total amount of uncertain tax positions that, if recognized, would impact the effective tax rate (the items included in the preceding table after considering the federal tax benefit associated with any state tax provisions) was $38 million, $27 million, and $15 million at September 30, 2019, 2018 and 2017, respectively. We anticipate that the uncertain tax position balance will not change significantly over the next 12 months.
We file U.S. federal income tax returns as well as returns with various state, local and foreign jurisdictions. With few exceptions, we are generally no longer subject to U.S. federal, state and local, or foreign income tax examination by tax authorities for years prior to fiscal year 2016 for federal tax returns, fiscal year 2015 for state and local tax returns and fiscal year 2015 for foreign tax returns. Various foreign and state audits in process are expected to be completed in fiscal year 2020.
NOTE 17 – COMMITMENTS, CONTINGENCIES AND GUARANTEES
Commitments and contingencies
Loan and underwriting commitments
In the normal course of business, we enter into commitments for fixed income and equity underwritings. As of September 30, 2019, we had three such open underwriting commitments, which were subsequently settled in open market transactions and none of which resulted in a significant loss.
As part of our recruiting efforts, we offer loans to prospective financial advisors and certain key revenue producers primarily for recruiting, transitional cost assistance, and retention purposes (see Note 2 for a discussion of our accounting policies governing these transactions). These commitments are contingent upon certain events occurring, including, but not limited to, the individual joining us. As of September 30, 2019, we had made commitments through the extension of formal offers totaling $165 million; however, it is possible that not all of our offers will be accepted and therefore, we would not fund the total amount of the offers extended. As of September 30, 2019, $118 million of the total amount extended consisted of unfunded commitments to prospective financial advisors who had accepted our offers, or recently hired producers.
Commitments to extend credit and other credit-related financial instruments
RJ Bank has outstanding at any time a significant number of commitments to extend credit and other credit-related off-balance sheet financial instruments such as standby letters of credit and loan purchases, which then extend over varying periods of time. These arrangements are subject to strict underwriting assessments and each customer’s credit worthiness is evaluated on a case-by-case basis. Fixed-rate commitments are also subject to market risk resulting from fluctuations in interest rates and our exposure is limited to the replacement value of those commitments.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents RJ Bank’s commitments to extend credit and other credit-related off-balance sheet financial instruments outstanding.
| $ in millions | September 30, 2019 | September 30, 2018 | ||||||
| Open-end consumer lines of credit (primarily SBL) | $ | 9,328 | $ | 7,332 | ||||
| Commercial lines of credit | $ | 1,527 | $ | 1,643 | ||||
| Unfunded loan commitments | $ | 599 | $ | 541 | ||||
| Standby letters of credit | $ | 40 | $ | 41 |
Open-end consumer lines of credit primarily represent the unfunded amounts of RJ Bank loans to customers that are secured by marketable securities at advance rates consistent with industry standards. The proceeds from repayment or, if necessary, the liquidation of collateral, which is monitored daily, are expected to satisfy the amounts drawn against these existing lines of credit. These lines of credit are primarily uncommitted, as we reserve the right to not make any advances or may terminate these lines at any time.
Because many of our lending commitments expire without being funded in whole or part, the contractual amounts are not estimates of our actual future credit exposure or future liquidity requirements. We maintain a reserve to provide for potential losses related to the unfunded lending commitments. See Note 8 for further discussion of this reserve for unfunded lending commitments. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that the collateral or other security is of no value. We use the same credit approval and monitoring process in extending loan commitments and other credit-related off-balance sheet instruments as we do in making loans.
In the normal course of business, RJ Bank issues or participates in the issuance of standby letters of credit whereby it provides an irrevocable guarantee of payment in the event the letter of credit is drawn down by the beneficiary. These standby letters of credit generally expire in one year or less. In the event that a letter of credit is drawn down, RJ Bank would pursue repayment from the party under the existing borrowing relationship or would liquidate collateral, or both. The proceeds from repayment or liquidation of collateral are expected to satisfy the amounts drawn down under the existing letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved with extending loan commitments to clients and, accordingly, we use a credit evaluation process and collateral requirements similar to those for loan commitments.
RJ&A enters into margin lending arrangements which allow customers to borrow against the value of qualifying securities. Margin loans are collateralized by the securities held in the customer’s account at RJ&A. Collateral levels and established credit terms are monitored daily and we require customers to deposit additional collateral or reduce balances as necessary.
Investment commitments
We had unfunded commitments to various investments, including private equity investments and certain RJ Bank investments, of $30 million as of September 30, 2019.
Lease commitments
Long-term lease agreements expire at various times through fiscal year 2031. Minimum annual rental payments under such agreements for the succeeding five fiscal years are presented in the following table.
| Fiscal year ended September 30, | $ in millions | |||
| 2020 | $ | 103 | ||
| 2021 | 95 | |||
| 2022 | 79 | |||
| 2023 | 66 | |||
| 2024 | 49 | |||
| Thereafter | 127 | |||
| Total | $ | 519 |
Certain leases contain rent holidays, leasehold improvement incentives, renewal options and/or escalation clauses. Rental expense incurred under all leases, including equipment under short-term agreements, aggregated to $129 million, $121 million and $115 million for fiscal years 2019, 2018 and 2017, respectively.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Other commitments
RJF has committed an amount of up to $225 million, subject to certain limitations, to either lend to, or guarantee obligations of RJTCF in connection with RJTCF’s low-income housing development/rehabilitation and syndication activities. At September 30, 2019, RJTCF had $52 million outstanding against this commitment. RJTCF may borrow from RJF in order to make investments in, or fund loans or advances to, either project partnerships that purchase and develop properties qualifying for tax credits or LIHTC funds, or to fund its other activities. Investments in project partnerships are sold to various LIHTC funds, which have third-party investors, and for which RJTCF serves as the managing member or general partner. RJTCF typically sells investments in project partnerships to LIHTC funds within 90 days of their acquisition, and the proceeds from the sales are used to repay RJTCF’s borrowings from RJF. RJTCF may also make short-term loans or advances to project partnerships and LIHTC funds.
As a part of our fixed income public finance operations, we enter into forward commitments to purchase agency MBS. At September 30, 2019, we had $290 million principal amount of outstanding forward MBS purchase commitments, which were expected to be purchased within 90 days following commitment. In order to hedge the market interest rate risk to which we would otherwise be exposed between the date of the commitment and the date of sale of the MBS, we enter into TBA security contracts with investors for generic MBS at specific rates and prices to be delivered on settlement dates in the future. We may be subject to loss if the timing of, or the actual amount of, the MBS differs significantly from the term and notional amount of the TBA security contract to which we entered. These TBA securities and related purchase commitments are accounted for at fair value. As of September 30, 2019, the fair value of the TBA securities and the estimated fair value of the purchase commitments were insignificant.
Guarantees
Our U.S. broker-dealer subsidiaries are required by federal law to be members of the Securities Investors Protection Corporation (“SIPC”). The SIPC fund provides protection up to $500 thousand per client for securities and cash held in client accounts, including a limitation of $250 thousand on claims for cash balances. We have purchased excess SIPC coverage through various syndicates of Lloyd’s of London. For RJ&A, our clearing broker-dealer, the additional protection currently provided has an aggregate firm limit of $750 million for cash and securities, including a sub-limit of $1.9 million per client for cash above basic SIPC. Account protection applies when a SIPC member fails financially and is unable to meet obligations to clients. This coverage does not protect against market fluctuations. RJF has provided an indemnity to Lloyd’s of London against any and all losses they may incur associated with the excess SIPC policies.
We guarantee the debt of one of our private equity investments. The amount of such debt, including the undrawn portion of a revolving credit facility, was $13 million as of September 30, 2019. The debt, which matures in 2021, is secured by substantially all of the assets of the borrower.
Legal and regulatory matter contingencies
In addition to any matters that may be specifically described in the following sections, in the normal course of our business, we have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our activities as a diversified financial services institution.
RJF and certain of its subsidiaries are subject to regular reviews and inspections by regulatory authorities and self-regulatory organizations. Reviews can result in the imposition of sanctions for regulatory violations, ranging from non-monetary censures to fines and, in serious cases, temporary or permanent suspension from conducting business, or limitations on certain business activities. In addition, regulatory agencies and self-regulatory organizations institute investigations from time to time into industry practices, which can also result in the imposition of such sanctions.
We may contest liability and/or the amount of damages, as appropriate, in each pending matter. Over the last several years, the level of litigation and investigatory activity (both formal and informal) by government and self-regulatory agencies has increased significantly in the financial services industry. There can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be material.
For many legal and regulatory matters, we are unable to estimate a range of reasonably possible loss as we cannot predict if, how or when such proceedings or investigations will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be. A large number of factors may contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental proceedings, potential fines and penalties); the matters present significant legal uncertainties; we have not engaged in settlement
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
discussions; discovery is not complete; there are significant facts in dispute; and numerous parties are named as defendants (including where it is uncertain how liability might be shared among defendants). Subject to the foregoing, after consultation with counsel, we believe that the outcome of such litigation and regulatory proceedings will not have a material adverse effect on our consolidated financial condition. However, the outcome of such litigation and proceedings could be material to our operating results and cash flows for a particular future period, depending on, among other things, our revenues or income for such period.
There are certain matters for which we are unable to estimate the upper end of the range of reasonably possible loss. With respect to legal and regulatory matters for which management has been able to estimate a range of reasonably possible loss as of September 30, 2019, we estimated the upper end of the range of reasonably possible aggregate loss to be approximately $35 million in excess of the aggregate accruals for such matters. Refer to Note 2 for a discussion of our criteria for recognizing liabilities for contingencies.
We may from time to time include in any descriptions of individual matters herein certain quantitative information about the plaintiff’s claim against us as alleged in the plaintiff’s pleadings or other public filings. Although this information may provide insight into the potential magnitude of a matter, it does not represent our estimate of reasonably possible loss or our judgment as to any currently appropriate accrual related thereto.
Legal matters
Brink Complaint and Wistar Complaint
On February 17, 2015, Jyll Brink (“Brink”) filed a putative class action complaint in the U.S. District Court for the Southern District of Florida (the “District Court”) under the caption Jyll Brink v. Raymond James & Associates, Inc. (the “Brink Complaint”). The Brink Complaint alleges that Brink, a former customer of RJ&A, was charged a fee in her Passport Investment Account, and that the fee included an unauthorized and undisclosed profit to RJ&A in violation of its customer agreement and applicable industry standards. The Passport Investment Account is a fee-based account in which clients pay asset-based advisory fees and certain processing fees for ongoing investment advice and monitoring of securities holdings. The Brink Complaint seeks, among other relief, damages in the amount of the difference between the actual cost of processing a trade, as alleged by Brink, and the fee charged by RJ&A. On October 19, 2018, the District Court certified a class of former and current customers of RJ&A who executed a Passport Agreement and were charged processing fees during the period between February 17, 2010 and February 17, 2015.
On February 11, 2016, Caleb Wistar (“Wistar”) and Ernest Mayeaux (“Mayeaux”) filed a putative class action complaint in the District Court under the caption Caleb Wistar and Ernest Mayeaux v. Raymond James Financial Services, Inc. and Raymond James Financial Services Advisors, Inc. (as subsequently amended, the “Wistar Complaint”). Similar to the Brink Complaint, the Wistar Complaint alleges that Wistar and Mayeaux, former customers of Raymond James Financial Services, Inc. (“RJFS”) and Raymond James Financial Services Advisors, Inc. (“RJFSA”), were charged a fee in RJFS and RJFSA’s Passport Investment Account and that the fee included an unauthorized and undisclosed profit to RJFS and RJFSA in violation of its customer agreement and applicable industry standards. The Wistar Complaint seeks, among other relief, damages in the amount of the difference between the actual cost of processing a trade, as alleged by Wistar and Mayeaux, and the fee charge by RJFS and RJFSA.
On April 5, 2019, the parties to the Brink Complaint and the Wistar Complaint agreed in principle to an aggregate settlement of $15 million. On October 25, 2019, the District Court entered an order granting final approval of the settlement.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 18 – ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
All of the components of OCI, net of tax, were attributable to RJF. The following table presents the net change in AOCI as well as the changes, and the related tax effects, of each component of AOCI.
| $ in millions | Net investment hedges | Currency translations | Sub-total: net investment hedges and currency translations | Available-for-sale securities | Cash flow hedges | Total | ||||||||||||||||||
| Year ended September 30, 2019 | ||||||||||||||||||||||||
| AOCI as of beginning of year | $ | 88 | $ | (111 | ) | $ | (23 | ) | $ | (46 | ) | $ | 42 | $ | (27 | ) | ||||||||
| Cumulative effect of adoption of ASU 2016-01 | — | — | — | (4 | ) | — | (4 | ) | ||||||||||||||||
| OCI: | ||||||||||||||||||||||||
| OCI before reclassifications and taxes | 29 | (24 | ) | 5 | 98 | (79 | ) | 24 | ||||||||||||||||
| Amounts reclassified from AOCI, before tax | — | — | — | — | (5 | ) | (5 | ) | ||||||||||||||||
| Pre-tax net OCI | 29 | (24 | ) | 5 | 98 | (84 | ) | 19 | ||||||||||||||||
| Income tax effect | (7 | ) | — | (7 | ) | (27 | ) | 23 | (11 | ) | ||||||||||||||
| OCI for the year, net of tax | 22 | (24 | ) | (2 | ) | 71 | (61 | ) | 8 | |||||||||||||||
| AOCI as of end of year | $ | 110 | $ | (135 | ) | $ | (25 | ) | $ | 21 | $ | (19 | ) | $ | (23 | ) | ||||||||
| Year ended September 30, 2018 | ||||||||||||||||||||||||
| AOCI as of beginning of year | $ | 60 | $ | (80 | ) | $ | (20 | ) | $ | (2 | ) | $ | 7 | $ | (15 | ) | ||||||||
| Cumulative effect of adoption of ASU 2018-02 | — | — | — | (2 | ) | 2 | — | |||||||||||||||||
| OCI: | ||||||||||||||||||||||||
| OCI before reclassifications and taxes | 38 | (31 | ) | 7 | (56 | ) | 47 | (2 | ) | |||||||||||||||
| Amounts reclassified from AOCI, before tax | — | — | — | (5 | ) | 1 | (4 | ) | ||||||||||||||||
| Pre-tax net OCI | 38 | (31 | ) | 7 | (61 | ) | 48 | (6 | ) | |||||||||||||||
| Income tax effect | (10 | ) | — | (10 | ) | 19 | (15 | ) | (6 | ) | ||||||||||||||
| OCI for the year, net of tax | 28 | (31 | ) | (3 | ) | (42 | ) | 33 | (12 | ) | ||||||||||||||
| AOCI as of end of year | $ | 88 | $ | (111 | ) | $ | (23 | ) | $ | (46 | ) | $ | 42 | $ | (27 | ) |
As of October 1, 2018, we adopted new accounting guidance related to the classification and measurement of financial instruments (ASU 2016-01), which generally requires changes in the fair value of equity securities to be recorded in net income. As a result, on a prospective basis beginning October 1, 2018, unrealized gains/(losses) on our equity securities previously classified and accounted for as available-for-sale are recorded in net income instead of OCI. Accordingly, we reclassified a cumulative unrealized gain on such securities, net of tax, from AOCI to retained earnings. See Notes 2 and 5 for additional information.
During the year ended September 30, 2018, we adopted accounting guidance (ASU 2018-02) that allows for a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act.
Reclassifications from AOCI to net income, excluding taxes, for the year ended September 30, 2019 were recorded in “Interest expense” on the Consolidated Statements of Income and Comprehensive Income. Reclassifications from AOCI to net income, excluding taxes, for the year ended September 30, 2018 were recorded in “Other” revenue and “Interest expense” on the Consolidated Statements of Income and Comprehensive Income.
Our net investment hedges and cash flow hedges relate to our derivatives associated with RJ Bank’s business operations (see Notes 2 and 6 for additional information on these derivatives).
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 19 - REVENUES
On October 1, 2018, we adopted new accounting guidance for revenue from contracts with customers. See Note 2 for further information about this guidance and for a discussion of our accounting policies related to revenue recognition.
The following tables present our sources of revenues by segment. See Note 24 for additional information on our segment results.
| Year ended September 30, 2019 | ||||||||||||||||||||||||
| $ in millions | Private Client Group | Capital Markets | Asset Management | RJ Bank | Other and intersegment eliminations | Total | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Asset management and related administrative fees | $ | 2,820 | $ | 6 | $ | 645 | $ | — | $ | (20 | ) | $ | 3,451 | |||||||||||
| Brokerage revenues: | ||||||||||||||||||||||||
| Securities commissions: | ||||||||||||||||||||||||
| Mutual and other fund products | 599 | 6 | 10 | — | (4 | ) | 611 | |||||||||||||||||
| Insurance and annuity products | 412 | — | — | — | — | 412 | ||||||||||||||||||
| Equities, ETFs and fixed income products | 304 | 123 | — | — | — | 427 | ||||||||||||||||||
| Subtotal securities commissions | 1,315 | 129 | 10 | — | (4 | ) | 1,450 | |||||||||||||||||
| Principal transactions (1) | 74 | 285 | — | — | (2 | ) | 357 | |||||||||||||||||
| Total brokerage revenues | 1,389 | 414 | 10 | — | (6 | ) | 1,807 | |||||||||||||||||
| Account and services fees: | ||||||||||||||||||||||||
| Mutual fund and annuity service fees | 334 | — | 2 | — | (10 | ) | 326 | |||||||||||||||||
| RJBDP fees | 453 | — | 3 | — | (176 | ) | 280 | |||||||||||||||||
| Client account and other fees | 122 | 5 | 26 | — | (21 | ) | 132 | |||||||||||||||||
| Total account and service fees | 909 | 5 | 31 | — | (207 | ) | 738 | |||||||||||||||||
| Investment banking: | ||||||||||||||||||||||||
| Equity underwriting | 32 | 100 | — | — | — | 132 | ||||||||||||||||||
| Merger & acquisition and advisory | — | 369 | — | — | — | 369 | ||||||||||||||||||
| Fixed income investment banking | — | 95 | — | — | — | 95 | ||||||||||||||||||
| Total investment banking | 32 | 564 | — | — | — | 596 | ||||||||||||||||||
| Other: | ||||||||||||||||||||||||
| Tax credit fund revenues | — | 86 | — | — | — | 86 | ||||||||||||||||||
| All other (1) | 26 | 4 | 2 | 26 | 6 | 64 | ||||||||||||||||||
| Total other | 26 | 90 | 2 | 26 | 6 | 150 | ||||||||||||||||||
| Total non-interest revenues | 5,176 | 1,079 | 688 | 26 | (227 | ) | 6,742 | |||||||||||||||||
| Interest income (1) | 225 | 38 | 3 | 975 | 40 | 1,281 | ||||||||||||||||||
| Total revenues | 5,401 | 1,117 | 691 | 1,001 | (187 | ) | 8,023 | |||||||||||||||||
| Interest expense | (42 | ) | (34 | ) | — | (155 | ) | (52 | ) | (283 | ) | |||||||||||||
| Net revenues | $ | 5,359 | $ | 1,083 | $ | 691 | $ | 846 | $ | (239 | ) | $ | 7,740 |
(1) These revenues are generally not in scope of the new accounting guidance for revenue from contracts with customers.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| Year ended September 30, 2018 | ||||||||||||||||||||||||
| $ in millions | Private Client Group | Capital Markets | Asset Management | RJ Bank | Other and intersegment eliminations | Total | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Asset management and related administrative fees | $ | 2,517 | $ | 8 | $ | 610 | $ | — | $ | (16 | ) | $ | 3,119 | |||||||||||
| Brokerage revenues: | ||||||||||||||||||||||||
| Securities commissions: | ||||||||||||||||||||||||
| Mutual and other fund products | 703 | 7 | 12 | — | (5 | ) | 717 | |||||||||||||||||
| Insurance and annuity products | 414 | — | — | — | — | 414 | ||||||||||||||||||
| Equities, ETFs and fixed income products | 352 | 145 | — | — | (2 | ) | 495 | |||||||||||||||||
| Subtotal securities commissions | 1,469 | 152 | 12 | — | (7 | ) | 1,626 | |||||||||||||||||
| Principal transactions (1) | 80 | 249 | — | 1 | (1 | ) | 329 | |||||||||||||||||
| Total brokerage revenues | 1,549 | 401 | 12 | 1 | (8 | ) | 1,955 | |||||||||||||||||
| Account and services fees: | ||||||||||||||||||||||||
| Mutual fund and annuity service fees | 332 | — | 2 | — | (9 | ) | 325 | |||||||||||||||||
| RJBDP fees | 354 | — | 3 | — | (92 | ) | 265 | |||||||||||||||||
| Client account and other fees | 111 | 5 | 23 | — | (16 | ) | 123 | |||||||||||||||||
| Total account and service fees | 797 | 5 | 28 | — | (117 | ) | 713 | |||||||||||||||||
| Investment banking: | ||||||||||||||||||||||||
| Equity underwriting | 35 | 93 | — | — | — | 128 | ||||||||||||||||||
| Merger & acquisition and advisory | — | 297 | — | — | — | 297 | ||||||||||||||||||
| Fixed income investment banking | — | 76 | — | — | — | 76 | ||||||||||||||||||
| Total investment banking | 35 | 466 | — | — | — | 501 | ||||||||||||||||||
| Other: | ||||||||||||||||||||||||
| Tax credit fund revenues | — | 79 | — | — | — | 79 | ||||||||||||||||||
| All other (1) | 30 | 1 | 2 | 22 | 10 | 65 | ||||||||||||||||||
| Total other | 30 | 80 | 2 | 22 | 10 | 144 | ||||||||||||||||||
| Total non-interest revenues | 4,928 | 960 | 652 | 23 | (131 | ) | 6,432 | |||||||||||||||||
| Interest income (1) | 193 | 32 | 2 | 793 | 24 | 1,044 | ||||||||||||||||||
| Total revenues | 5,121 | 992 | 654 | 816 | (107 | ) | 7,476 | |||||||||||||||||
| Interest expense | (28 | ) | (28 | ) | — | (89 | ) | (57 | ) | (202 | ) | |||||||||||||
| Net revenues | $ | 5,093 | $ | 964 | $ | 654 | $ | 727 | $ | (164 | ) | $ | 7,274 |
(1) These revenues are generally not in scope of the new accounting guidance for revenue from contracts with customers.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| Year ended September 30, 2017 | ||||||||||||||||||||||||
| $ in millions | Private Client Group | Capital Markets | Asset Management | RJ Bank | Other and intersegment eliminations | Total | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Asset management and related administrative fees | $ | 2,022 | $ | 9 | $ | 453 | $ | — | $ | (13 | ) | $ | 2,471 | |||||||||||
| Brokerage revenues: | ||||||||||||||||||||||||
| Securities commissions: | ||||||||||||||||||||||||
| Mutual and other fund products | 698 | 9 | 12 | — | (5 | ) | 714 | |||||||||||||||||
| Insurance and annuity products | 385 | — | — | — | — | 385 | ||||||||||||||||||
| Equities, ETFs and fixed income products | 331 | 152 | — | — | (4 | ) | 479 | |||||||||||||||||
| Subtotal securities commissions | 1,414 | 161 | 12 | — | (9 | ) | 1,578 | |||||||||||||||||
| Principal transactions (1) | 93 | 323 | — | 2 | — | 418 | ||||||||||||||||||
| Total brokerage revenues | 1,507 | 484 | 12 | 2 | (9 | ) | 1,996 | |||||||||||||||||
| Account and services fees: | ||||||||||||||||||||||||
| Mutual fund and annuity service fees | 291 | — | 2 | — | (8 | ) | 285 | |||||||||||||||||
| RJBDP fees | 270 | — | 2 | — | (68 | ) | 204 | |||||||||||||||||
| Client account and other fees | 116 | 5 | 16 | — | (14 | ) | 123 | |||||||||||||||||
| Total account and service fees | 677 | 5 | 20 | — | (90 | ) | 612 | |||||||||||||||||
| Investment banking: | ||||||||||||||||||||||||
| Equity underwriting | 62 | 117 | — | — | — | 179 | ||||||||||||||||||
| Merger & acquisition and advisory | — | 228 | — | — | — | 228 | ||||||||||||||||||
| Fixed income investment banking | — | 84 | — | — | — | 84 | ||||||||||||||||||
| Total investment banking | 62 | 429 | — | — | — | 491 | ||||||||||||||||||
| Other: | ||||||||||||||||||||||||
| Tax credit fund revenues | — | 79 | — | — | — | 79 | ||||||||||||||||||
| All other (1) | 17 | 2 | 2 | 16 | 37 | 74 | ||||||||||||||||||
| Total other | 17 | 81 | 2 | 16 | 37 | 153 | ||||||||||||||||||
| Total non-interest revenues | 4,285 | 1,008 | 487 | 18 | (75 | ) | 5,723 | |||||||||||||||||
| Interest income (1) | 153 | 27 | 1 | 610 | 11 | 802 | ||||||||||||||||||
| Total revenues | 4,438 | 1,035 | 488 | 628 | (64 | ) | 6,525 | |||||||||||||||||
| Interest expense | (16 | ) | (21 | ) | — | (35 | ) | (82 | ) | (154 | ) | |||||||||||||
| Net revenues | $ | 4,422 | $ | 1,014 | $ | 488 | $ | 593 | $ | (146 | ) | $ | 6,371 |
(1) These revenues are generally not in scope of the new accounting guidance for revenue from contracts with customers.
At September 30, 2019 and September 30, 2018, net receivables related to contracts with customers were $347 million and $384 million, respectively.
We record deferred revenue from contracts with customers when payment is received prior to the performance of our obligation to the customer. Deferred revenue balances were not material as of September 30, 2019 and September 30, 2018.
We have elected the practical expedient allowable by the guidance to not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 20 – INTEREST INCOME AND INTEREST EXPENSE
The following table details the components of interest income and interest expense.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Interest income: | ||||||||||||
| Cash segregated pursuant to regulations | $ | 59 | $ | 53 | $ | 38 | ||||||
| Trading instruments | 26 | 23 | 21 | |||||||||
| Available-for-sale securities | 69 | 52 | 28 | |||||||||
| Margin loans | 122 | 107 | 86 | |||||||||
| Bank loans, net of unearned income | 871 | 722 | 572 | |||||||||
| Loans to financial advisors | 18 | 15 | 13 | |||||||||
| Corporate cash and all other | 116 | 72 | 44 | |||||||||
| Total interest income | 1,281 | 1,044 | 802 | |||||||||
| Interest expense: | ||||||||||||
| Bank deposits | 132 | 66 | 17 | |||||||||
| Trading instruments sold but not yet purchased | 7 | 7 | 6 | |||||||||
| Brokerage client payables | 21 | 15 | 5 | |||||||||
| Other borrowings | 21 | 22 | 17 | |||||||||
| Senior notes payable | 73 | 73 | 95 | |||||||||
| Other | 29 | 19 | 14 | |||||||||
| Total interest expense | 283 | 202 | 154 | |||||||||
| Net interest income | 998 | 842 | 648 | |||||||||
| Bank loan loss provision | (22 | ) | (20 | ) | (13 | ) | ||||||
| Net interest income after bank loan loss provision | $ | 976 | $ | 822 | $ | 635 |
Interest expense related to bank deposits in the preceding table excludes interest expense associated with affiliate deposits, which has been eliminated in consolidation.
NOTE 21 - SHARE-BASED AND OTHER COMPENSATION
Our profit sharing plan and employee stock ownership plan (“ESOP”) provide certain death, disability or retirement benefits for all employees who meet certain service requirements. The plans are noncontributory. Our contributions, if any, are determined annually by our Board of Directors on a discretionary basis and are recognized as compensation expense throughout the year. Benefits become fully vested after five years of qualified service, at 65, or if a participant separates from service due to death or disability.
All shares owned by the ESOP are included in earnings per share calculations. Cash dividends paid to the ESOP are reflected as a reduction of retained earnings. The number of shares of our common stock held by the ESOP at September 30, 2019 and 2018 was 4.56 million and 4.61 million, respectively. The market value of our common stock held by the ESOP at September 30, 2019 was $376 million, of which $3 million was unearned (not yet vested) by ESOP plan participants.
We also offer a plan pursuant to section 401(k) of the Internal Revenue Code, which is a qualified plan that may provide for a discretionary contribution or a matching contribution each year. Matching contributions are 75% of the first $1,000 and 25% of the next $1,000 of eligible compensation deferred by each participant annually.
Our LTIP is a non-qualified deferred compensation plan that provides benefits to employees who meet certain compensation or production requirements. We have purchased and hold life insurance on the lives of certain current and former employee participants (see Note 12 for information regarding the carrying value of these company-owned life insurance policies) to earn a competitive rate of return for participants and to provide the primary source of funds available to satisfy our obligations under this plan.
Contributions to the qualified plans and the LTIP, are approved annually by the Board of Directors or a committee thereof.
We have the VDCP, a non-qualified and voluntary opportunity for certain highly compensated employees to defer compensation. Eligible participants may elect to defer a percentage or specific dollar amount of their compensation into the VDCP. Company-owned life insurance is the primary source of funding for this plan.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
We also maintain non-qualified deferred compensation plans or arrangements for the benefit of certain employees that provide a return to the participating employees based upon the performance of various referenced investments. Under the terms of each applicable plan or arrangement, we invest directly as a principal in such investments, which are directly related to our obligations under the respective deferred compensation plan and are included in “Other investments” on our Consolidated Statements of Financial Condition. See Note 4 for the fair value of these investments as of September 30, 2019, and 2018.
Compensation expense associated with all of the qualified and non-qualified plans previously described totaled $162 million, $154 million and $131 million for the fiscal years ended September 30, 2019, 2018 and 2017, respectively.
Share-based compensation plans
We have one share-based compensation plan for our employees, Board of Directors and non-employees (independent contractor financial advisors). The Amended and Restated 2012 Stock Incentive Plan (the “2012 Plan”) authorizes us to grant 40.24 million new shares, including the shares available for grant under six predecessor plans. As of September 30, 2019, 8.16 million shares were available under the 2012 Plan. Effective during the three months ended June 30, 2019, we generally reissue our treasury shares under the 2012 Plan; however, we are also permitted to issue our new shares. Our share-based compensation accounting policies are described in Note 2.
Stock options granted and outstanding to our employees and independent contractors as of September 30, 2019 and the related expense for years ended September 30, 2019, 2018 and 2017 were insignificant. Cash received from stock option exercises during the year ended September 30, 2019 was $32 million.
Restricted stock and RSU awards
We may grant awards under the 2012 Plan in connection with initial employment or under various retention programs for individuals who are responsible for a contribution to our management, growth, and/or profitability. Through our Canadian subsidiary, we established the Restricted Stock Trust Fund, which we funded to enable the trust fund to acquire our common stock in the open market to be used to settle RSUs granted as a retention vehicle for certain employees of our Canadian subsidiaries. We may also grant awards to officers and certain other employees in lieu of cash for 10% to 50% of annual bonus amounts in excess of $250,000. Under the plan, the awards are generally restricted for a three to five year period, during which time the awards are forfeitable in the event of termination other than for death, disability or retirement.
We grant RSUs annually to non-employee members of our Board of Directors. The RSUs granted to these Directors vest over a one year period from their grant date or upon retirement from our Board.
The following table presents the restricted equity award activity which includes restricted stock and RSUs for grants to employees and members of our Board of Directors for the year ended September 30, 2019.
| Shares/Units (in millions) | Weighted- average grant date fair value (per share) | ||||||
| Non-vested as of beginning of year | 4.8 | $ | 68.39 | ||||
| Granted | 1.6 | $ | 76.72 | ||||
| Vested | (1.2 | ) | $ | 55.15 | |||
| Forfeited | (0.2 | ) | $ | 71.58 | |||
| Non-vested as of end of year | 5.0 | $ | 74.08 |
The following table presents expense and income tax benefits related to our restricted equity awards granted to our employees and members of our Board of Directors for the periods indicated.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Total share-based expense | $ | 101 | $ | 89 | $ | 79 | ||||||
| Income tax benefits related to share-based expense | $ | 23 | $ | 23 | $ | 28 |
Total share-based expense for the year ended September 30, 2017 included $5 million, which was included as a component of “Acquisition and disposition-related expenses” on our Consolidated Statements of Income and Comprehensive Income.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the year ended September 30, 2019, we realized $26 million of excess tax benefits related to our restricted equity awards which favorably impacted income tax expense on our Consolidated Statements of Income and Comprehensive Income.
As of September 30, 2019, there was $150 million of total pre-tax compensation costs not yet recognized, net of estimated forfeitures, related to restricted equity awards granted to employees and members of our Board of Directors. These costs are expected to be recognized over a weighted-average period of approximately 3 years. The following RSU activity occurred for the periods indicated.
| Year ended September 30, | ||||||||||||
| $ in millions, except per unit award amounts | 2019 | 2018 | 2017 | |||||||||
| Weighted-average grant date fair value per unit award | $ | 76.72 | $ | 87.33 | $ | 72.39 | ||||||
| Total fair value of shares and unit awards vested | $ | 63 | $ | 51 | $ | 59 |
There were no outstanding RSUs related to our independent contractor financial advisors as of September 30, 2019.
Employee stock purchase plan
Under the 2003 Employee Stock Purchase Plan, we are authorized to issue up to 7.38 million shares of common stock to our full-time employees, nearly all of whom are eligible to participate. Under the terms of the plan, share purchases in any calendar year are limited to the lesser of 1,000 shares or shares with a fair value of $25,000. The purchase price of the stock is 85% of the average high and low market price on the day prior to the purchase date. Under the plan, we sold approximately 424 thousand, 336 thousand and 343 thousand shares to employees during the years ended September 30, 2019, 2018 and 2017, respectively. The compensation cost is calculated as the value of the 15% discount from market value and was $5 million, $5 million and $4 million for the years ended September 30, 2019, 2018 and 2017, respectively.
Non-employee other compensation
We offer non-qualified deferred compensation plans that provide benefits to our independent contractor financial advisors who meet certain production requirements. Company-owned life insurance is the primary source of funding for this plan. The contributions are made in amounts approved annually by management.
Certain independent contractor financial advisors are also eligible to participate in our VDCP. Eligible participants may elect to defer a percentage or specific dollar amount of their compensation into the VDCP. Company-owned life insurance is the primary source of funding for this plan.
NOTE 22 – REGULATORY CAPITAL REQUIREMENTS
RJF, as a bank holding company and financial holding company, RJ Bank, and our broker-dealer subsidiaries are subject to capital requirements by various regulatory authorities. Capital levels of each entity are monitored to ensure compliance with our various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on our financial results.
As a bank holding company, RJF is subject to the risk-based capital requirements of the Fed. These risk-based capital requirements are expressed as capital ratios that compare measures of regulatory capital to risk-weighted assets, which involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory guidelines. RJF’s and RJ Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.
RJF and RJ Bank are required to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), Tier 1 capital to average assets (as defined), and under rules defined under the Basel III capital framework, Common equity Tier 1 capital (“CET1”) to risk-weighted assets. RJF and RJ Bank each calculate these ratios under the Basel III standardized approach in order to assess compliance with both regulatory requirements and their internal capital policies. In order to maintain our ability to take certain capital actions, including dividends and common equity repurchases, and to make bonus payments, we must hold a capital conservation buffer above our minimum risk-based capital requirements. As of September 30, 2019, both RJF’s and RJ Bank’s capital levels exceeded the capital conservation buffer requirement and were each categorized as “well-capitalized.”
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
To meet requirements for capital adequacy purposes or to be categorized as “well-capitalized,” RJF must maintain minimum CET1, Tier 1 capital, Total capital and Tier 1 leverage amounts and ratios as set forth in the following table.
| Actual | Requirement for capital adequacy purposes | To be well-capitalized under regulatory provisions | |||||||||||||||||||
| $ in millions | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
| RJF as of September 30, 2019: | |||||||||||||||||||||
| CET1 | $ | 5,971 | 24.8 | % | $ | 1,085 | 4.5 | % | $ | 1,567 | 6.5 | % | |||||||||
| Tier 1 capital | $ | 5,971 | 24.8 | % | $ | 1,446 | 6.0 | % | $ | 1,928 | 8.0 | % | |||||||||
| Total capital | $ | 6,207 | 25.8 | % | $ | 1,928 | 8.0 | % | $ | 2,410 | 10.0 | % | |||||||||
| Tier 1 leverage | $ | 5,971 | 15.7 | % | $ | 1,525 | 4.0 | % | $ | 1,906 | 5.0 | % | |||||||||
| RJF as of September 30, 2018: | |||||||||||||||||||||
| CET1 | $ | 5,718 | 24.3 | % | $ | 1,057 | 4.5 | % | $ | 1,527 | 6.5 | % | |||||||||
| Tier 1 capital | $ | 5,718 | 24.3 | % | $ | 1,410 | 6.0 | % | $ | 1,880 | 8.0 | % | |||||||||
| Total capital | $ | 5,941 | 25.3 | % | $ | 1,880 | 8.0 | % | $ | 2,350 | 10.0 | % | |||||||||
| Tier 1 leverage | $ | 5,718 | 15.8 | % | $ | 1,451 | 4.0 | % | $ | 1,814 | 5.0 | % |
RJF’s Tier 1 capital and Total capital ratios at September 30, 2019 increased compared to September 30, 2018 due to positive earnings during the current fiscal year, partially offset by the impacts of share repurchases and growth of the bank loan portfolio.
To meet the requirements for capital adequacy or to be categorized as “well-capitalized,” RJ Bank must maintain CET1, Tier 1 capital, Total capital and Tier 1 leverage amounts and ratios as set forth in the following table.
| Actual | Requirement for capital adequacy purposes | To be well-capitalized under regulatory provisions | |||||||||||||||||||
| $ in millions | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||
| RJ Bank as of September 30, 2019: | |||||||||||||||||||||
| CET1 | $ | 2,246 | 13.2 | % | $ | 764 | 4.5 | % | $ | 1,103 | 6.5 | % | |||||||||
| Tier 1 capital | $ | 2,246 | 13.2 | % | $ | 1,018 | 6.0 | % | $ | 1,358 | 8.0 | % | |||||||||
| Total capital | $ | 2,458 | 14.5 | % | $ | 1,358 | 8.0 | % | $ | 1,697 | 10.0 | % | |||||||||
| Tier 1 leverage | $ | 2,246 | 8.8 | % | $ | 1,021 | 4.0 | % | $ | 1,276 | 5.0 | % | |||||||||
| RJ Bank as of September 30, 2018: | |||||||||||||||||||||
| CET1 | $ | 2,029 | 12.7 | % | $ | 721 | 4.5 | % | $ | 1,042 | 6.5 | % | |||||||||
| Tier 1 capital | $ | 2,029 | 12.7 | % | $ | 961 | 6.0 | % | $ | 1,282 | 8.0 | % | |||||||||
| Total capital | $ | 2,229 | 13.9 | % | $ | 1,282 | 8.0 | % | $ | 1,602 | 10.0 | % | |||||||||
| Tier 1 leverage | $ | 2,029 | 8.8 | % | $ | 926 | 4.0 | % | $ | 1,158 | 5.0 | % |
RJ Bank’s Tier 1 and Total capital ratios at September 30, 2019 increased compared to September 30, 2018 due to the impact of positive earnings during the current fiscal year, partially offset by growth of the bank loan portfolio.
Our intention is to maintain RJ Bank’s “well-capitalized” status. In the unlikely event that RJ Bank failed to maintain its “well-capitalized” status, the consequences could include a requirement to obtain a waiver from the FDIC prior to acceptance, renewal, or rollover of brokered deposits and higher FDIC premiums, but would not have a significant impact on our operations.
RJ Bank may pay dividends to RJF without prior approval of its regulator as long as the dividend does not exceed the sum of RJ Bank’s current calendar year and the previous two calendar years’ retained net income, and RJ Bank maintains its targeted regulatory capital ratios.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain of our broker-dealer subsidiaries are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934. As a member firm of the Financial Industry Regulatory Authority (“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 balances. 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. The following table presents the net capital position of RJ&A.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Raymond James & Associates, Inc.: | ||||||||
| (Alternative Method elected) | ||||||||
| Net capital as a percent of aggregate debit items | 39.7 | % | 28.2 | % | ||||
| Net capital | $ | 1,056 | $ | 934 | ||||
| Less: required net capital | (53 | ) | (66 | ) | ||||
| Excess net capital | $ | 1,003 | $ | 868 |
As of September 30, 2019, RJFS, RJ Ltd., Raymond James Trust, N.A. (“RJ Trust”) and all of our other active regulated domestic and international subsidiaries were in compliance with and exceeded all applicable capital requirements.
RJF expects to continue paying cash dividends. However, the payment and rate of dividends on our common stock is subject to several factors including our operating results, financial and regulatory requirements or restrictions, and the availability of funds from our subsidiaries, including our broker-dealer and bank subsidiaries, which may also be subject to restrictions under regulatory capital rules. The availability of funds from subsidiaries may also be subject to restrictions contained in loan covenants of certain broker-dealer loan agreements and restrictions by bank regulators on dividends to the parent from RJ Bank.
NOTE 23 – EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per common share.
| Year ended September 30, | ||||||||||||
| $ in millions, except per share amounts | 2019 | 2018 | 2017 | |||||||||
| Income for basic earnings per common share: | ||||||||||||
| Net income | $ | 1,034 | $ | 857 | $ | 636 | ||||||
| Less allocation of earnings and dividends to participating securities | (2 | ) | (1 | ) | (1 | ) | ||||||
| Net income attributable to RJF common shareholders | $ | 1,032 | $ | 856 | $ | 635 | ||||||
| Income for diluted earnings per common share: | ||||||||||||
| Net income | $ | 1,034 | $ | 857 | $ | 636 | ||||||
| Less allocation of earnings and dividends to participating securities | (2 | ) | (1 | ) | (1 | ) | ||||||
| Net income attributable to RJF common shareholders | $ | 1,032 | $ | 856 | $ | 635 | ||||||
| Common shares: | ||||||||||||
| Average common shares in basic computation | 141.0 | 145.3 | 143.3 | |||||||||
| Dilutive effect of outstanding stock options and certain RSUs | 3.0 | 3.5 | 3.3 | |||||||||
| Average common shares used in diluted computation | 144.0 | 148.8 | 146.6 | |||||||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 7.32 | $ | 5.89 | $ | 4.43 | ||||||
| Diluted | $ | 7.17 | $ | 5.75 | $ | 4.33 | ||||||
| Stock options and certain RSUs excluded from weighted-average diluted common shares because their effect would be antidilutive | 0.4 | 0.5 | 1.7 |
The allocation of earnings and dividends to participating securities in the preceding table represents dividends paid during the year to participating securities plus an allocation of undistributed earnings to participating securities. Participating securities represent unvested restricted stock and certain RSUs. Participating securities and related dividends paid on these participating securities were insignificant for the years ended September 30, 2019, 2018 and 2017. Undistributed earnings are allocated to participating securities based upon their right to share in earnings if all earnings for the period had been distributed.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Dividends per common share declared and paid are detailed in the following table for each respective period.
| Year ended September 30, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Dividends per common share - declared | $ | 1.36 | $ | 1.10 | $ | 0.88 | ||||||
| Dividends per common share - paid | $ | 1.32 | $ | 1.02 | $ | 0.86 |
NOTE 24 – SEGMENT INFORMATION
We currently operate through the following five segments: PCG; Capital Markets; Asset Management; RJ Bank; and Other.
The segments are determined based upon factors such as the services provided and the distribution channels served and are consistent with how we assess performance and determine how to allocate our resources throughout our subsidiaries. The financial results of our segments are presented using the same policies as those described in Note 2. Segment results include allocations of most corporate overhead and benefits expenses to each segment. Refer to the following discussion of the Other segment for a description of the corporate expenses that are not allocated to segments. Intersegment revenues, expenses, receivables and payables are eliminated upon consolidation.
The PCG segment provides financial planning and securities transaction services through our branch office network throughout the U.S., Canada and the United Kingdom. The PCG segment includes revenues from securities transaction services, including the sale of equities, mutual funds, fixed income products, insurance products and annuity products to retail clients. In addition, this segment includes revenues from investment advisory services, for which we charge either a fee computed as a percentage of assets in a client’s account or a flat period fee. The segment includes servicing fee revenues from mutual fund and annuity companies whose products we distribute, and from banks to which we sweep client cash in the RJBDP, our multi-bank sweep program. The segment also includes net interest earnings primarily on client margin loans and cash balances.
Our Capital Markets segment conducts institutional sales, securities trading, equity research, investment banking and the syndication and related management of investments that qualify for tax credits. We primarily conduct these activities in the U.S., Canada and Europe.
Our Asset Management segment earns asset management and related administrative fees for providing asset management, portfolio management and related administrative services for retail and institutional clients. This segment oversees a portion of our fee-based assets under administration for our PCG clients through our asset management services division and through RJ Trust. This segment also provides asset management services through Carillon Tower Advisers and affiliates (collectively, “Carillon Tower Advisers”) for certain retail accounts managed on behalf of third-party institutions, institutional accounts and proprietary mutual funds that we manage.
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.
The Other 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 operating segments, including the interest costs on our public debt.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents information concerning operations in these segments of business.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Net revenues: | ||||||||||||
| Private Client Group | $ | 5,359 | $ | 5,093 | $ | 4,422 | ||||||
| Capital Markets | 1,083 | 964 | 1,014 | |||||||||
| Asset Management | 691 | 654 | 488 | |||||||||
| RJ Bank | 846 | 727 | 593 | |||||||||
| Other | 5 | (15 | ) | (30 | ) | |||||||
| Intersegment eliminations | (244 | ) | (149 | ) | (116 | ) | ||||||
| Total net revenues | $ | 7,740 | $ | 7,274 | $ | 6,371 | ||||||
| Pre-tax income/(loss): | ||||||||||||
| Private Client Group | $ | 579 | $ | 576 | $ | 373 | ||||||
| Capital Markets | 110 | 91 | 141 | |||||||||
| Asset Management | 253 | 235 | 172 | |||||||||
| RJ Bank | 515 | 492 | 409 | |||||||||
| Other | (82 | ) | (83 | ) | (170 | ) | ||||||
| Total pre-tax income | $ | 1,375 | $ | 1,311 | $ | 925 |
No individual client accounted for more than ten percent of revenues in any of the years presented.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Net interest income/(expense): | ||||||||||||
| Private Client Group | $ | 183 | $ | 165 | $ | 137 | ||||||
| Capital Markets | 4 | 4 | 6 | |||||||||
| Asset Management | 3 | 2 | 1 | |||||||||
| RJ Bank | 820 | 704 | 575 | |||||||||
| Other and intersegment eliminations | (12 | ) | (33 | ) | (71 | ) | ||||||
| Net interest income | $ | 998 | $ | 842 | $ | 648 |
The following table presents our total assets on a segment basis.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Total assets: | ||||||||
| Private Client Group | $ | 9,042 | $ | 10,173 | ||||
| Capital Markets | 2,287 | 2,279 | ||||||
| Asset Management | 401 | 387 | ||||||
| RJ Bank | 25,516 | 22,922 | ||||||
| Other | 1,584 | 1,652 | ||||||
| Total | $ | 38,830 | $ | 37,413 |
The following table presents goodwill, which was included in our total assets, on a segment basis.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Goodwill: | ||||||||
| Private Client Group | $ | 275 | $ | 276 | ||||
| Capital Markets | 120 | 133 | ||||||
| Asset Management | 69 | 69 | ||||||
| Total | $ | 464 | $ | 478 |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
We have operations in the U.S., Canada and Europe. Substantially all long-lived assets are located in the U.S. The following table presents our net revenues and pre-tax income classified by major geographic area in which they were earned.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Net revenues: | ||||||||||||
| U.S. | $ | 7,211 | $ | 6,754 | $ | 5,931 | ||||||
| Canada | 391 | 381 | 328 | |||||||||
| Europe | 138 | 139 | 108 | |||||||||
| Other | — | — | 4 | |||||||||
| Total | $ | 7,740 | $ | 7,274 | $ | 6,371 | ||||||
| Pre-tax income/(loss): | ||||||||||||
| U.S. | $ | 1,356 | $ | 1,269 | $ | 919 | ||||||
| Canada | 29 | 47 | 14 | |||||||||
| Europe (1) | (10 | ) | (5 | ) | (4 | ) | ||||||
| Other | — | — | (4 | ) | ||||||||
| Total | $ | 1,375 | $ | 1,311 | $ | 925 |
| (1) | The pre-tax loss in Europe for the year ended September 30, 2019 reflects a $15 million loss on the sale of our operations related to research, sales and trading of European equities incurred during the first fiscal quarter of 2019. |
The following table presents our total assets by major geographic area in which they were held.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Total assets: | ||||||||
| U.S. | $ | 35,978 | $ | 34,651 | ||||
| Canada | 2,754 | 2,673 | ||||||
| Europe | 98 | 89 | ||||||
| Total | $ | 38,830 | $ | 37,413 |
The following table presents goodwill, which was included in our total assets, classified by major geographic area in which it was held.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Goodwill: | ||||||||
| U.S. | $ | 433 | $ | 426 | ||||
| Canada | 23 | 43 | ||||||
| Europe | 8 | 9 | ||||||
| Total | $ | 464 | $ | 478 |
During the year ended September 30, 2019, we recognized an impairment charge of $19 million related to our Canadian Capital Markets. See Note 11 for a discussion of our goodwill impairment testing.
NOTE 25 – CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
As more fully described in Note 1, RJF (or the “Parent”) is a financial holding company whose subsidiaries are engaged in various financial services activities. The Parent’s primary activities include investments in subsidiaries and corporate investments, including cash management, company-owned life insurance policies and private equity investments. The primary source of operating cash available to the Parent is provided by dividends from its subsidiaries.
RJ&A, our principal domestic broker-dealer subsidiary of the Parent, is required by regulations to maintain a minimum amount of net capital. Other broker-dealer, non-bank subsidiaries of the Parent are also required by regulations to maintain a minimum amount of net capital, but the net capital requirements of those other subsidiaries are much less significant. RJ&A is further required by certain covenants in its borrowing agreements to maintain minimum net capital equal to 10% of aggregate debit balances. At September 30, 2019, each of these broker-dealer subsidiaries exceeded their minimum net capital requirements (see Note 22 for further information).
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net assets of approximately $3.10 billion as of September 30, 2019 were restricted under regulatory or other restrictions from being transferred from certain subsidiaries to the Parent without prior approval of the respective entities’ regulator.
Liquidity available to the Parent from its subsidiaries other than its broker-dealer subsidiaries and RJ Bank is not limited by regulatory or other restrictions; however, the available amounts are not as significant as those amounts previously described. The Parent regularly receives a portion of the profits of subsidiaries, other than RJ Bank, as dividends.
Cash and cash equivalents of $1.35 billion and $1.40 billion as of September 30, 2019 and 2018, respectively, were held directly by RJF in depository accounts at third-party financial institutions, held in depository accounts at RJ Bank, or were otherwise invested by one of our subsidiaries on behalf of RJF. The amount held in depository accounts at RJ Bank was $163 million as of September 30, 2019, of which $107 million was available on demand and without restriction. As of September 30, 2018, $277 million was held in depository accounts at RJ Bank, of which $254 million was available on demand and without restriction.
See Notes 14, 15, 17 and 22 for more information regarding borrowings, commitments, contingencies and guarantees, and regulatory capital requirements of the Parent and its subsidiaries.
The following table presents the Parent’s statements of financial condition.
| September 30, | ||||||||
| $ in millions | 2019 | 2018 | ||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 540 | $ | 695 | ||||
| Assets segregated pursuant to regulations | 57 | 23 | ||||||
| Intercompany receivables from subsidiaries (primarily non-bank subsidiaries) | 1,143 | 1,156 | ||||||
| Investments in consolidated subsidiaries: | ||||||||
| Bank subsidiary | 2,248 | 2,021 | ||||||
| Non-bank subsidiaries | 4,093 | 4,031 | ||||||
| Property and equipment, net | 14 | 14 | ||||||
| Goodwill and identifiable intangible assets, net | 32 | 32 | ||||||
| Other assets | 728 | 661 | ||||||
| Total assets | $ | 8,855 | $ | 8,633 | ||||
| Liabilities and equity: | ||||||||
| Accrued compensation and benefits | $ | 514 | $ | 480 | ||||
| Intercompany payables to subsidiaries (primarily non-bank subsidiaries) | 119 | 141 | ||||||
| Other payables | 91 | 94 | ||||||
| Senior notes payable | 1,550 | 1,550 | ||||||
| Total liabilities | 2,274 | 2,265 | ||||||
| Equity | 6,581 | 6,368 | ||||||
| Total liabilities and equity | $ | 8,855 | $ | 8,633 |
Of the total intercompany receivable from non-bank subsidiaries, $827 million and $735 million at September 30, 2019 and 2018, respectively, was invested in cash and cash equivalents by the subsidiary on behalf of the Parent.
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the Parent’s statements of income.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Revenues: | ||||||||||||
| Dividends from non-bank subsidiaries | $ | 632 | $ | 225 | $ | 183 | ||||||
| Dividends from bank subsidiary | 190 | 130 | 125 | |||||||||
| Interest from subsidiaries | 31 | 25 | 16 | |||||||||
| Interest income | 7 | 4 | 2 | |||||||||
| Other | 20 | 20 | 26 | |||||||||
| Total revenues | 880 | 404 | 352 | |||||||||
| Interest expense | (75 | ) | (74 | ) | (95 | ) | ||||||
| Net revenues | 805 | 330 | 257 | |||||||||
| Non-interest expenses: | ||||||||||||
| Compensation and benefits | 73 | 68 | 62 | |||||||||
| Non-compensations expenses: | ||||||||||||
| Communications and information processing | 8 | 9 | 9 | |||||||||
| Occupancy and equipment costs | 1 | 1 | 1 | |||||||||
| Business development | 20 | 20 | 19 | |||||||||
| Losses on extinguishment of debt | — | — | 46 | |||||||||
| Other | 16 | 17 | 14 | |||||||||
| Intercompany allocations and charges | (24 | ) | (32 | ) | (31 | ) | ||||||
| Total non-compensation expenses | 21 | 15 | 58 | |||||||||
| Total non-interest expenses | 94 | 83 | 120 | |||||||||
| Pre-tax income before equity in undistributed net income of subsidiaries | 711 | 247 | 137 | |||||||||
| Income tax benefit | (31 | ) | (12 | ) | (86 | ) | ||||||
| Income before equity in undistributed net income of subsidiaries | 742 | 259 | 223 | |||||||||
| Equity in undistributed net income of subsidiaries | 292 | 598 | 413 | |||||||||
| Net income | $ | 1,034 | $ | 857 | $ | 636 |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents the Parent’s statements of cash flows.
| Year ended September 30, | ||||||||||||
| $ in millions | 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 1,034 | $ | 857 | $ | 636 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Loss/(gain) on investments | 4 | 1 | (15 | ) | ||||||||
| Gain on company-owned life insurance policies, net of expenses | (5 | ) | (37 | ) | (48 | ) | ||||||
| Equity in undistributed net income of subsidiaries | (292 | ) | (598 | ) | (413 | ) | ||||||
| Losses on extinguishment of debt | — | — | 46 | |||||||||
| Other | 100 | 114 | 98 | |||||||||
| Net change in: | ||||||||||||
| Assets segregated pursuant to regulations | — | (1 | ) | — | ||||||||
| Intercompany receivables | (51 | ) | 6 | 179 | ||||||||
| Other assets | (16 | ) | 49 | 80 | ||||||||
| Intercompany payables | (22 | ) | 88 | 39 | ||||||||
| Other payables | (1 | ) | 13 | (1 | ) | |||||||
| Accrued compensation and benefits | 34 | 66 | 68 | |||||||||
| Net cash provided by operating activities | 785 | 558 | 669 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Investments in subsidiaries | (24 | ) | (205 | ) | (36 | ) | ||||||
| Advances to/(repayments from) subsidiaries, net | 63 | 4 | (118 | ) | ||||||||
| Proceeds from sales of investments | 3 | 12 | 5 | |||||||||
| Purchase of investments in company-owned life insurance policies, net | (44 | ) | (70 | ) | (41 | ) | ||||||
| Net cash used in investing activities | (2 | ) | (259 | ) | (190 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from borrowing on the RJF Credit Facility | 300 | 300 | — | |||||||||
| Repayment of borrowings on the RJF Credit Facility | (300 | ) | (300 | ) | — | |||||||
| Proceeds from senior note issuances, net of debt issuance costs paid | — | — | 508 | |||||||||
| Extinguishment of senior notes payable | — | — | (650 | ) | ||||||||
| Premium paid on extinguishment of senior notes payable | — | — | (37 | ) | ||||||||
| Exercise of stock options and employee stock purchases | 65 | 63 | 57 | |||||||||
| Purchase of treasury stock | (778 | ) | (62 | ) | (34 | ) | ||||||
| Dividends on common stock | (191 | ) | (151 | ) | (127 | ) | ||||||
| Net cash used in financing activities | (904 | ) | (150 | ) | (283 | ) | ||||||
| Net increase/(decrease) in cash and cash equivalents | (121 | ) | 149 | 196 | ||||||||
| Cash, cash equivalents, and cash segregated pursuant to regulations at beginning of year | 717 | 568 | 372 | |||||||||
| Cash, cash equivalents, and cash segregated pursuant to regulations at end of year | $ | 596 | $ | 717 | $ | 568 | ||||||
| Cash and cash equivalents | $ | 540 | $ | 695 | $ | 528 | ||||||
| Cash segregated pursuant to regulations | 56 | 22 | 40 | |||||||||
| Total cash, cash equivalents, and cash segregated pursuant to regulations at end of year | $ | 596 | $ | 717 | $ | 568 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 78 | $ | 78 | $ | 99 | ||||||
| Cash paid for income taxes, net | $ | 42 | $ | 163 | $ | 93 | ||||||
| Supplemental disclosures of noncash activity: | ||||||||||||
| Investments in subsidiaries, net | $ | (43 | ) | $ | — | $ | 24 | |||||
| Losses on extinguishment of debt | $ | — | $ | — | $ | 9 |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
SUPPLEMENTARY DATA:
SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
| Fiscal Year 2019 | ||||||||||||||||
| in millions, except per share amounts | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||
| Net revenues | $ | 1,931 | $ | 1,859 | $ | 1,927 | $ | 2,023 | ||||||||
| Non-interest expenses | $ | 1,599 | $ | 1,512 | $ | 1,585 | $ | 1,669 | ||||||||
| Pre-tax income | $ | 332 | $ | 347 | $ | 342 | $ | 354 | ||||||||
| Net income | $ | 249 | $ | 261 | $ | 259 | $ | 265 | ||||||||
| Earnings per common share - basic | $ | 1.73 | $ | 1.85 | $ | 1.84 | $ | 1.90 | ||||||||
| Earnings per common share - diluted | $ | 1.69 | $ | 1.81 | $ | 1.80 | $ | 1.86 | ||||||||
| Dividends per common share - declared | $ | 0.34 | $ | 0.34 | $ | 0.34 | $ | 0.34 |
| Fiscal Year 2018 | ||||||||||||||||
| in millions, except per share amounts | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||
| Net revenues | $ | 1,726 | $ | 1,812 | $ | 1,837 | $ | 1,899 | ||||||||
| Non-interest expenses | $ | 1,415 | $ | 1,480 | $ | 1,519 | $ | 1,549 | ||||||||
| Pre-tax income | $ | 311 | $ | 332 | $ | 318 | $ | 350 | ||||||||
| Net income | $ | 119 | $ | 243 | $ | 232 | $ | 263 | ||||||||
| Earnings per common share - basic | $ | 0.82 | $ | 1.67 | $ | 1.59 | $ | 1.80 | ||||||||
| Earnings per common share - diluted | $ | 0.80 | $ | 1.63 | $ | 1.55 | $ | 1.76 | ||||||||
| Dividends per common share - declared | $ | 0.25 | $ | 0.25 | $ | 0.30 | $ | 0.30 |
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