10-Q 1 rjf-2018063010q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
Commission File Number: 1-9109
RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Florida
 
No. 59-1517485
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
880 Carillon Parkway, St. Petersburg, Florida 33716
(Address of principal executive offices)    (Zip Code)
(727) 567-1000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨                               No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

145,888,459 shares of common stock as of August 6, 2018



INDEX
 
 
 
PAGE
PART I
 
 
Item 1.
 
 
 
Condensed Consolidated Statements of Financial Condition as of June 30, 2018 and September 30, 2017 (Unaudited)
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended June 30, 2018 and June 30, 2017 (Unaudited)
 
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended June 30, 2018 and June 30, 2017 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2018 and June 30, 2017 (Unaudited)
 
 
 
 
 
Note 1 - Organization and basis of presentation
 
 
Note 2 - Update of significant accounting policies
 
 
Note 3 - Acquisitions
 
 
Note 4 - Fair value
 
 
Note 5 - Available-for-sale securities
 
 
Note 6 - Derivative financial instruments
 
 
Note 7 - Collateralized agreements and financings
 
 
Note 8 - Bank loans, net
 
 
Note 9 - Variable interest entities
 
 
Note 10 - Goodwill and identifiable intangible assets, net
 
 
Note 11 - Bank deposits
 
 
Note 12 - Other borrowings
 
 
Note 13 - Income taxes
 
 
Note 14 - Commitments, contingencies and guarantees
 
 
Note 15 - Accumulated other comprehensive income/(loss)
 
 
Note 16 - Interest income and interest expense
 
 
Note 17 - Share-based and other compensation
 
 
Note 18 - Regulatory capital requirements
 
 
Note 19 - Earnings per share
 
 
Note 20 - Segment information
Item 2.
 
Item 3.
 
Item 4.
 
PART II
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 3.
 
Item 4.
 
Mine Safety Disclosures
Item 5.
 
Item 6.
 
 
 


2


PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
$ in thousands, except share amounts
 
June 30, 2018
 
September 30, 2017
Assets:
 

 

Cash and cash equivalents
 
$
3,179,751

 
$
3,669,672

Assets segregated pursuant to regulations and other segregated assets
 
2,687,365

 
3,476,085

Securities purchased under agreements to resell
 
343,052

 
404,462

Securities borrowed
 
164,256

 
138,319

Financial instruments owned, at fair value:
 
 
 
 
Trading instruments (includes $537,169 and $357,099 pledged as collateral)
 
670,350

 
564,263

Available-for-sale securities (includes $21,305 and $- pledged as collateral)
 
2,668,211

 
2,188,282

Derivative assets
 
217,522

 
318,775

Private equity investments
 
164,457

 
198,779

Other investments (includes $26,487 and $6,640 pledged as collateral)
 
214,882

 
220,980

Brokerage client receivables, net
 
2,899,385

 
2,766,771

Receivables from brokers, dealers and clearing organizations
 
237,301

 
268,021

Other receivables
 
671,621

 
652,769

Bank loans, net
 
18,987,806

 
17,006,795

Loans to financial advisors, net
 
928,488

 
873,272

Investments in real estate partnerships held by consolidated variable interest entities
 
99,091

 
111,743

Property and equipment, net
 
471,603

 
437,374

Deferred income taxes, net
 
231,816

 
313,486

Goodwill and identifiable intangible assets, net
 
641,787

 
493,183

Other assets
 
885,365

 
780,425

Total assets
 
$
36,364,109

 
$
34,883,456

 
 
 
 
 
Liabilities and equity:
 
 
 
 
Bank deposits
 
$
19,478,561

 
$
17,732,362

Securities sold under agreements to repurchase
 
115,464

 
220,942

Securities loaned
 
386,651

 
383,953

Financial instruments sold but not yet purchased, at fair value:
 
 
 
 
Trading instruments
 
258,881

 
221,449

Derivative liabilities
 
292,225

 
356,964

Brokerage client payables
 
5,066,586

 
5,411,829

Payables to brokers, dealers and clearing organizations
 
195,560

 
172,714

Accrued compensation, commissions and benefits
 
1,005,598

 
1,059,996

Other payables
 
864,713

 
567,045

Other borrowings
 
900,326

 
1,514,012

Senior notes payable
 
1,549,493

 
1,548,839

Total liabilities
 
30,114,058


29,190,105

Commitments and contingencies (see Note 14)
 


 


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; 156,126,130 and 154,228,235 shares issued as of June 30, 2018 and September 30, 2017, respectively, and 145,754,690 and 144,096,521 shares outstanding as of June 30, 2018 and September 30, 2017, respectively
 
1,561

 
1,542

Additional paid-in capital
 
1,780,994

 
1,645,397

Retained earnings
 
4,814,603

 
4,340,054

Treasury stock, at cost; 10,343,288 and 10,084,038 common shares as of June 30, 2018 and September 30, 2017, respectively
 
(413,202
)
 
(390,081
)
Accumulated other comprehensive loss
 
(26,593
)
 
(15,199
)
Total equity attributable to Raymond James Financial, Inc.
 
6,157,363

 
5,581,713

Noncontrolling interests
 
92,688

 
111,638

Total equity
 
6,250,051

 
5,693,351

Total liabilities and equity
 
$
36,364,109

 
$
34,883,456

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

3


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended June 30,
 
Nine months ended June 30,
in thousands, except per share amounts
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Securities commissions and fees
 
$
1,115,465

 
$
1,017,908

 
$
3,336,311

 
$
2,994,405

Investment banking
 
115,069

 
104,191

 
285,786

 
267,993

Investment advisory and related administrative fees
 
153,627

 
117,378

 
447,083

 
335,901

Interest income
 
271,342

 
204,224

 
751,917

 
579,550

Account and service fees
 
201,264

 
174,084

 
577,056

 
485,856

Net trading profit
 
11,371

 
23,404

 
45,278

 
59,770

Other
 
22,764

 
21,918

 
70,297

 
68,714

Total revenues
 
1,890,902

 
1,663,107


5,513,728


4,792,189

Interest expense
 
(54,307
)
 
(38,560
)
 
(138,340
)
 
(111,203
)
Net revenues
 
1,836,595

 
1,624,547


5,375,388


4,680,986

Non-interest expenses:
 
 

 
 

 
 
 
 
Compensation, commissions and benefits
 
1,207,512

 
1,082,382

 
3,556,927

 
3,124,563

Communications and information processing
 
91,651

 
77,819

 
272,067

 
226,047

Occupancy and equipment costs
 
49,503

 
46,507

 
149,018

 
140,057

Business development
 
56,944

 
39,305

 
133,543

 
116,186

Investment sub-advisory fees
 
23,028

 
20,133

 
68,470

 
57,206

Bank loan loss provision
 
5,226

 
6,209

 
13,791

 
13,097

Acquisition-related expenses
 

 
3,366

 
3,927

 
17,118

Losses on extinguishment of debt
 

 

 

 
8,282

Other
 
84,689

 
71,885

 
216,830

 
332,671

Total non-interest expenses
 
1,518,553

 
1,347,606


4,414,573


4,035,227

Income including noncontrolling interests and before provision for income taxes
 
318,042

 
276,941


960,815


645,759

Provision for income taxes
 
85,800

 
91,590

 
366,725

 
204,160

Net income including noncontrolling interests
 
232,242

 
185,351


594,090


441,599

Net income/(loss) attributable to noncontrolling interests
 
(16
)
 
1,927

 
143

 
(1,147
)
Net income attributable to Raymond James Financial, Inc.
 
$
232,258

 
$
183,424


$
593,947


$
442,746

 
 
 
 
 
 
 
 
 
Earnings per common share – basic
 
$
1.59

 
$
1.27

 
$
4.08

 
$
3.09

Earnings per common share – diluted
 
$
1.55

 
$
1.24

 
$
3.99

 
$
3.02

Weighted-average common shares outstanding – basic
 
145,634

 
143,712

 
145,156

 
143,059

Weighted-average common and common equivalent shares outstanding – diluted
 
149,447

 
147,103

 
148,787

 
146,347

 
 
 
 
 
 
 
 
 
Net income attributable to Raymond James Financial, Inc.
 
$
232,258

 
$
183,424


$
593,947


$
442,746

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

 
 

 
 
 
 
Net change in unrealized gain/(loss) on available-for-sale securities and non-credit portion of other-than-temporary impairment losses
 
(3,848
)
 
1,776

 
(32,428
)
 
(418
)
Net change in unrealized gain/(loss) on currency translations, net of the impact of net investment hedges
 
(6,290
)
 
7,423

 
(8,512
)
 
10,647

Net change in unrealized gain/(loss) on cash flow hedges
 
6,068

 
(3,775
)
 
29,546

 
23,494

Total comprehensive income
 
$
228,188

 
$
188,848


$
582,553


$
476,469

 










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

4


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

 
 
Nine months ended June 30,
$ in thousands, except per share amounts
 
2018
 
2017
Common stock, par value $.01 per share:
 
 
 
 
Balance beginning of year
 
$
1,542

 
$
1,513

Share issuances
 
19

  
27

Balance end of period
 
1,561

 
1,540

 
 
 
 
 
Additional paid-in capital:
 
 

 
 

Balance beginning of year
 
1,645,397

  
1,498,921

Employee stock purchases
 
23,923

  
20,229

Exercise of stock options and vesting of restricted stock units, net of forfeitures
 
33,677

  
31,556

Restricted stock, stock option and restricted stock unit expense
 
76,825

  
72,036

Other
 
1,172

  
826

Balance end of period
 
1,780,994

 
1,623,568

 
 
 
 
 
Retained earnings:
 
 

 
 

Balance beginning of year
 
4,340,054

  
3,834,781

Net income attributable to Raymond James Financial, Inc.
 
593,947

  
442,746

Cash dividends declared
 
(119,288
)
 
(98,644
)
Other
 
(110
)
 

Balance end of period
 
4,814,603

 
4,178,883

 
 
 
 
 
Treasury stock:
 
 

 
 

Balance beginning of year
 
(390,081
)
 
(362,937
)
Purchases/surrenders
 
(8,706
)
 
(9,265
)
Exercise of stock options and vesting of restricted stock units, net of forfeitures
 
(14,415
)
 
(20,507
)
Balance end of period
 
(413,202
)
 
(392,709
)
 
 
 
 
 
Accumulated other comprehensive loss:
 
 

 
 

Balance beginning of year
 
(15,199
)
 
(55,733
)
Net change in unrealized loss on available-for-sale securities and non-credit portion of other-than-temporary impairment losses, net of tax
 
(32,428
)
 
(418
)
Net change in unrealized gain/(loss) on currency translations, net of the impact of net investment hedges, net of tax
 
(8,512
)
 
10,647

Net change in unrealized gain on cash flow hedges, net of tax
 
29,546

 
23,494

Balance end of period
 
(26,593
)
 
(22,010
)
Total equity attributable to Raymond James Financial, Inc.
 
$
6,157,363


$
5,389,272

 
 
 
 
 
Noncontrolling interests:
 
 

 
 

Balance beginning of year
 
$
111,638

 
$
146,431

Net income attributable to noncontrolling interests
 
143

 
(1,147
)
Capital contributions
 

 
9,776

Distributions
 
(18,841
)
 
(39,968
)
Derecognition resulting from sales
 

 
(4,628
)
Other
 
(252
)
 
1,014

Balance end of period
 
92,688

 
111,478

Total equity
 
$
6,250,051

 
$
5,500,750










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

5


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income attributable to Raymond James Financial, Inc.
 
$
593,947

 
$
442,746

Net income/(loss) attributable to noncontrolling interests
 
143

 
(1,147
)
Net income including noncontrolling interests
 
594,090

 
441,599

Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
71,930

 
62,149

Deferred income taxes
 
98,846

 
(56,948
)
Premium and discount amortization on available-for-sale securities and loss/(gain) on other investments
 
2,855

 
(23,468
)
Provisions for loan losses, legal and regulatory proceedings and bad debts
 
33,679

 
159,131

Share-based compensation expense
 
80,724

 
76,419

Compensation expense/(benefit) payable in common stock of an acquiree
 
(5,850
)
 
12,810

Unrealized gain on company owned life insurance, net of expenses
 
(19,657
)
 
(30,076
)
Losses on extinguishment of debt
 

 
8,282

Other
 
21,659

 
18,129

Net change in:
 
 

 
 

Assets segregated pursuant to regulations and other segregated assets
 
765,346

 
1,497,360

Securities purchased under agreements to resell, net of securities sold under agreements to repurchase
 
(47,701
)
 
21,010

Securities loaned, net of securities borrowed
 
(23,567
)
 
(229,170
)
Loans provided to financial advisors, net of repayments
 
(72,877
)
 
(41,779
)
Brokerage client receivables and other accounts receivable, net
 
(149,237
)
 
(68,688
)
Trading instruments, net
 
(88,299
)
 
10

Derivative instruments, net
 
76,850

 
78,879

Other assets
 
(48,812
)
 
54,043

Brokerage client payables and other accounts payable
 
(183,746
)
 
(678,686
)
Accrued compensation, commissions and benefits
 
(51,965
)
 
(17,288
)
Proceeds from sales of securitizations and loans held for sale, net of purchases and originations of loans held for sale
 
(65,119
)
 
44,369

Net cash provided by operating activities
 
989,149

 
1,328,087

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Additions to property, buildings and equipment, including software
 
(96,114
)
 
(152,715
)
Increase in bank loans, net
 
(1,875,301
)
 
(1,731,114
)
Proceeds from sales of loans held for investment
 
140,478

 
287,669

Purchases of available-for-sale securities
 
(899,243
)
 
(1,424,706
)
Available-for-sale securities maturations, repayments and redemptions
 
359,537

 
198,654

Proceeds from sales of available-for-sale securities
 

 
65,656

Business acquisition, net of cash acquired
 
(159,200
)
 

Other investing activities, net
 
32,215

 
84,701

Net cash used in investing activities
 
(2,497,628
)
 
(2,671,855
)
 
 
 
 
 
 
 
 
 
 
(continued on next page)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

6


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued from previous page)
 
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
Cash flows from financing activities:
 
 
 
 
Proceeds from borrowings on the RJF Credit Facility
 
300,000

 

Repayment of borrowings on the RJF Credit Facility
 
(300,000
)
 

Repayments of short-term borrowings, net
 
(610,000
)
 

Proceeds from Federal Home Loan Bank advances
 
850,000

 
850,000

Repayments of Federal Home Loan Bank advances and other borrowed funds
 
(853,686
)
 
(653,461
)
Proceeds from senior note issuances, net of debt issuance costs paid
 

 
508,489

Extinguishment of senior notes payable
 

 
(350,000
)
Acquisition-related contingent consideration received, net of payments
 

 
2,992

Exercise of stock options and employee stock purchases
 
54,695

 
51,183

Increase in bank deposits
 
1,746,199

 
2,048,334

Purchases of treasury stock
 
(23,788
)
 
(32,179
)
Dividends on common stock
 
(107,215
)
 
(95,322
)
Distributions to noncontrolling interests, net
 
(14,101
)
 
(27,782
)
Net cash provided by financing activities
 
1,042,104

 
2,302,254

 
 
 
 
 
Currency adjustment:
 
 

 
 

Effect of exchange rate changes on cash
 
(23,546
)
 
6,541

Net increase/(decrease) in cash and cash equivalents
 
(489,921
)
 
965,027

Cash and cash equivalents at beginning of year
 
3,669,672

 
1,650,452

Cash and cash equivalents at end of period
 
$
3,179,751

 
$
2,615,479

 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest
 
$
127,069

 
$
92,930

Cash paid for income taxes
 
$
191,760

 
$
243,585




























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

7


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2018

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Organization

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

Basis of presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of RJF and its consolidated subsidiaries that are generally controlled through a majority voting interest. We consolidate all of our 100% owned subsidiaries. In addition, we consolidate any variable interest entity (“VIE”) in which we are the primary beneficiary. Additional information on these VIEs is provided in Note 2 and Note 10 of our Annual Report on Form 10-K (the “2017 Form 10-K”) for the year ended September 30, 2017, as filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) and in Note 9 of this Form 10-Q. When we do not have a controlling interest in an entity, but we exert significant influence over the entity, we apply the equity method of accounting. All material intercompany balances and transactions have been eliminated in consolidation.

Accounting estimates and assumptions

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

The nature of our business is such that the results of any interim period are not necessarily indicative of results for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in our 2017 Form 10-K. To prepare condensed consolidated financial statements in conformity with GAAP, we must make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates and could have a material impact on the condensed consolidated financial statements.

Reclassifications

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


NOTE 2 – UPDATE OF SIGNIFICANT ACCOUNTING POLICIES

A summary of our significant accounting policies is included in Note 2 of our 2017 Form 10-K. There have been no significant changes to our significant accounting policies since September 30, 2017.

Loans to financial advisors, net

As more fully described in Note 2 of our 2017 Form 10-K, we offer loans to financial advisors and certain other key revenue producers, primarily for recruiting, transitional cost assistance, and retention purposes. We present the outstanding balance of “Loans to financial advisors, net” on our Condensed 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 $21 million and $22 million at June 30, 2018 and September 30, 2017, respectively. Our allowance for doubtful accounts was approximately $9 million and $8 million at June 30, 2018 and September 30, 2017, respectively.

8

Notes to Condensed Consolidated Financial Statements (Unaudited)





Recent accounting developments

Accounting guidance recently adopted

Income Taxes - In March 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-05, which amended income tax accounting guidance to include guidance issued by the SEC related to the implementation of the Tax Cuts and Jobs Act (the “Tax Act”), which we applied during our first fiscal quarter of 2018 when it was issued by the SEC. See Note 13 for more information.

Reclassification of certain tax effects from accumulated other comprehensive income (“AOCI”) - In February 2018, the FASB issued guidance (ASU 2018-02) allowing companies to reclassify to retained earnings the tax effects related to items within AOCI that the FASB refers to as having been stranded as a result of the Tax Act. We early adopted this amended guidance on January 1, 2018 on a modified retrospective approach. The amount reclassified from AOCI to retained earnings related to the Tax Act was insignificant. See Note 15 for more information.

Derivatives and hedging (accounting for hedging activities) - In August 2017, the FASB issued new guidance amending its hedge accounting model (ASU 2017-12). Among other things, the new guidance:

Expands the ability to hedge nonfinancial and financial risk components.
Reduces complexity in fair value hedges of interest rate risk.
Eliminates the requirement to separately measure and report hedge ineffectiveness.
Generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item.
Modifies accounting for components excluded from the assessment of hedge effectiveness.
Eases certain documentation and hedge effectiveness assessment requirements.

The new guidance is required to be applied to cash flow and net investment hedges that exist on the date of adoption on a modified retrospective basis. Changes to presentation and disclosure requirements are only required on a prospective basis. We early-adopted this new guidance on April 1, 2018 and the adoption had no effect on our financial position and results of operations.

Accounting guidance not yet adopted

Revenue recognition - In May 2014, the FASB issued new guidance regarding 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. This new revenue recognition guidance, including subsequent amendments, is first effective for our fiscal year beginning on October 1, 2018 and allows for full retrospective adoption or modified retrospective adoption. Although permitted for fiscal years beginning after December 15, 2016, we do not plan to early adopt. Upon adoption, we plan to use a modified retrospective approach, with a cumulative effect adjustment to opening retained earnings. Our implementation efforts include analyzing contracts related to revenues within the scope of the new guidance and reviewing potential changes to our existing revenue recognition accounting policies. We are also evaluating the impact to our disclosures as a result of adopting this new guidance. Based on our implementation efforts to date, we expect that we will be required to change our current presentation of certain costs from a net presentation within revenues to a gross presentation, particularly with respect to merger & acquisitions advisory transactions and underwriting transactions. We are still evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.


9

Notes to Condensed Consolidated Financial Statements (Unaudited)





Financial instruments - In January 2016, the FASB issued new guidance related to the accounting for financial instruments (ASU 2016-01). Among its provisions, including subsequent amendments, this new guidance:

Requires equity investments (other than those accounted for under the equity method or those that result from the consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any.
Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment.
Eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
Requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.

This new guidance, including subsequent amendments, is effective for our fiscal year beginning on October 1, 2018, generally under a modified retrospective approach, with the exception of the amendments related to equity investments without a readily determinable fair value and the use of an exit price notion to measure financial instruments for disclosure purposes, which will be applied prospectively as of the date of adoption. Early adoption is generally not permitted. Upon adoption, our investments in equity securities classified as available-for-sale prior to the adoption date will be accounted for at fair value with unrealized gains/(losses) reflected in earnings. Previously, such unrealized gains/(losses) were reflected in other comprehensive income. The adoption of this new guidance is not expected to have a material impact on our financial position and results of operations.

Lease accounting - In February 2016, the FASB issued new guidance related to the accounting for leases (ASU 2016-02). The new guidance 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 current 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. This new guidance, including subsequent amendments, is first effective for our fiscal year beginning on October 1, 2019. Although permitted, we do not plan to early adopt. Upon adoption, we will use a modified retrospective approach, with a cumulative effect adjustment to opening retained earnings. Our implementation efforts include reviewing existing leases and service contracts, which may include embedded leases. We are in the process of identifying changes to our business processes, systems and controls to support adoption of the new guidance. This new guidance will impact our financial position and results of operations. We are evaluating the magnitude of such impact.

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 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 October 1, 2020 and will be adopted under a modified retrospective approach. Early adoption is permitted although not prior to our fiscal year beginning October 1, 2019. We have begun our implementation and evaluation efforts by establishing a cross-functional team to assess the required changes to our credit loss estimation methodologies and systems, as well as determine additional data and resources required to comply with the new guidance. 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.

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 involves several aspects of the classification of certain cash receipts and cash payments including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. This amended guidance is first effective for our fiscal year beginning October 1, 2018 and

10

Notes to Condensed Consolidated Financial Statements (Unaudited)





will be adopted under a retrospective approach. Although permitted, we do not plan to early adopt. The adoption of this new guidance will impact our Consolidated Statement of Cash Flows and will not have an impact on our financial position and 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). Current GAAP does not provide guidance to address how to classify and present changes in restricted cash or restricted cash equivalents that occur when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents. Under the new guidance, an entity should present in their Statement of Cash Flows the changes during the period in the total of cash and cash equivalents and amounts described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and ending-of-period total amounts shown on the statement of cash flows. This guidance is first effective for our fiscal year beginning October 1, 2018 and will be adopted under a retrospective approach. Although permitted, we do not plan to early adopt. The adoption of this new guidance will impact our Consolidated Statement of Cash Flows and will not have an impact on our financial position and results of operations.

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. This guidance is first effective for our fiscal year beginning October 1, 2018 and will be adopted on a prospective basis. Early adoption is permitted. Given the adoption of this amended guidance is dependent upon the nature of future events and circumstances, we are unable to estimate the impact, if any, the adoption of this new guidance will have on our financial position and results of operations.

Goodwill - In January 2017, the FASB issued amended guidance to simplify the subsequent measurement of goodwill, eliminating “Step 2” from the goodwill impairment test (ASU 2017-04). In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. 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. This guidance is first effective for our fiscal year beginning October 1, 2019 and will be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will adopt this simplification guidance in the earliest period it applies to our facts and circumstances.

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. This guidance is first effective for our fiscal year beginning on October 1, 2019 and will be adopted using a modified retrospective approach. 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.

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. This amended guidance is first effective for our fiscal year beginning October 1, 2018 and will be adopted on a prospective basis. Early adoption is permitted. Given that this guidance applies to specific transactions and would only become relevant in certain circumstances, we are unable to estimate the impact, if any, this amended guidance may have on our financial position and 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 the contractual term to measure the award. This amended guidance is first effective for our fiscal year beginning October 1, 2019 and will be adopted using a modified retrospective approach with a cumulative adjustment to retained earnings. Early adoption is permitted, but not before an entity has adopted the amended revenue recognition guidance. We are considering whether we will early adopt this new guidance and the timing thereof, as well as the impact it will have on our financial position and results of operations.



11

Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 3 – ACQUISITIONS

Acquisitions completed during fiscal year 2018

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. We accounted for this acquisition under the acquisition method of accounting with the assets and liabilities of the Scout Group recorded as of the acquisition date at their respective fair values in our condensed consolidated financial statements. The Scout Group’s results of operations have been included in our results prospectively from November 17, 2017.

Acquisition-related expenses

The “Acquisition-related expenses” presented in our Condensed Consolidated Statements of Income and Comprehensive Income for
the nine months ended June 30, 2018 pertain to certain incremental expenses incurred in connection with the Scout Group acquisition. Acquisition-related expenses for the three and nine months ended June 30, 2017 primarily related to our fiscal year 2016 acquisitions of the U.S. Private Client Services unit of Deutsche Bank Wealth Management (“Alex. Brown”) and MacDougall, MacDougall & MacTier Inc. (“3Macs”), which are described further in Note 3 of our 2017 Form 10-K.

The table below presents a summary of acquisition-related expenses incurred in each respective period.
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Legal and regulatory
 
$

 
$
1,509

 
$
2,281

 
$
2,336

Severance
 

 
177

 
990

 
5,734

Information systems integration costs
 

 
29

 
162

 
1,651

Acquisition and integration-related incentive compensation costs
 

 

 

 
5,474

Early termination costs of assumed contracts
 

 

 

 
1,329

Post-closing purchase price contingency
 

 

 

 
(3,499
)
Deutsche Bank restricted stock unit (“DBRSU”) obligation and related hedge
 

 
(28
)
 

 
770

All other
 

 
1,679

 
494

 
3,323

Total acquisition-related expenses
 
$

 
$
3,366

 
$
3,927

 
$
17,118



12

Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 4 – FAIR VALUE

Our “Financial instruments owned” and “Financial instruments sold but not yet purchased” on our Condensed Consolidated Statements of Financial Condition are recorded at fair value under GAAP. For further information about such instruments and our significant accounting policies related to fair value see Note 2 and Note 4 of our 2017 Form 10-K. There have been no material changes to our valuation methodologies or our fair value accounting policies since our year ended September 30, 2017.

The tables below present assets and liabilities measured at fair value on a recurring and nonrecurring basis. Netting adjustments represent the impact of counterparty and collateral netting on our derivative balances included in our Condensed Consolidated Statements of Financial Condition. See Note 6 for additional information. Bank loans held for sale measured at fair value on a nonrecurring basis are recorded at a fair value lower than cost.
$ in thousands
 
Quoted prices
in active
markets for
identical
instruments
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Netting
adjustments
 
Balance as of
June 30,
2018
Assets at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
 
Trading instruments
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
106

 
$
228,326

 
$

 
$

 
$
228,432

Corporate obligations
 
17,029

 
118,103

 

 

 
135,132

Government and agency obligations
 
11,381

 
49,673

 

 

 
61,054

Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)
 
286

 
77,377

 

 

 
77,663

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

 
95,849

 
4

 

 
95,853

Total debt securities
 
28,802


569,328

 
4

 

 
598,134

Equity securities
 
14,557

 
279

 

 

 
14,836

Brokered certificates of deposit
 

 
33,404

 

 

 
33,404

Other
 
36

 
20,000

 
3,940

 

 
23,976

Total trading instruments
 
43,395

 
623,011

 
3,944

 

 
670,350

Available-for-sale securities
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 

 
2,556,072

 

 

 
2,556,072

Other securities
 
897

 

 

 

 
897

Auction rate securities (“ARS”) preferred securities
 

 

 
111,242

 

 
111,242

Total available-for-sale securities
 
897

 
2,556,072

 
111,242

 

 
2,668,211

Derivative assets
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
Matched book
 

 
195,956

 

 

 
195,956

Other
 

 
68,750

 

 
(47,207
)
 
21,543

Foreign exchange contracts
 

 
23

 

 

 
23

Total derivative assets
 

 
264,729

 

 
(47,207
)
 
217,522

Private equity investments
 
 
 
 
 
 
 
 
 


Not measured at net asset value (“NAV”)
 

 

 
71,991

 

 
71,991

Measured at NAV
 
 
 
 
 
 
 
 
 
92,466

Total private equity investments
 

 

 
71,991

 

 
164,457

Other investments
 
213,505

 
613

 
764

 

 
214,882

Total assets at fair value on a recurring basis
 
$
257,797


$
3,444,425


$
187,941


$
(47,207
)

$
3,935,422

 
 
 
 
 
 
 
 
 
 
 
Assets at fair value on a nonrecurring basis
 
 
 
 

 
 

 
 

 
 

Bank loans, net
 
 

 
 

 
 

 
 

 
 

Impaired loans
 
$

 
$
13,261

 
$
22,062

 
$

 
$
35,323

Loans held for sale
 

 
51,751

 

 

 
51,751

Total bank loans, net
 

 
65,012

 
22,062



 
87,074

Other assets: Other real estate owned
 

 
210

 

 

 
210

Total assets at fair value on a nonrecurring basis
 
$

 
$
65,222

 
$
22,062

 
$

 
$
87,284

 
(continued on next page)



13

Notes to Condensed Consolidated Financial Statements (Unaudited)





(continued from previous page)
$ in thousands
 
Quoted prices
in active
markets for
identical
instruments
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Netting
adjustments
 
Balance as of
June 30,
2018
Liabilities at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
 
Trading instruments sold but not yet purchased
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
15

 
$
1,468

 
$

 
$

 
$
1,483

Corporate obligations
 
2,488

 
16,870

 

 

 
19,358

Government obligations
 
224,499

 

 

 

 
224,499

Agency MBS and CMOs
 
1,256

 

 

 

 
1,256

Non-agency MBS and CMOs
 

 
4,175

 

 

 
4,175

Total debt securities
 
228,258

 
22,513

 

 

 
250,771

Equity securities
 
5,721

 
185

 

 

 
5,906

Other
 
5

 

 
2,199

 

 
2,204

Total trading instruments sold but not yet purchased
 
233,984

 
22,698

 
2,199

 

 
258,881

Derivative liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
Matched book
 

 
195,956

 

 

 
195,956

Other
 

 
102,813

 

 
(43,759
)
 
59,054

Foreign exchange contracts
 

 
22,556

 

 

 
22,556

DBRSU obligation (equity)
 

 
14,659

 

 

 
14,659

Total derivative liabilities
 

 
335,984

 

 
(43,759
)
 
292,225

Total liabilities at fair value on a recurring basis
 
$
233,984


$
358,682


$
2,199


$
(43,759
)

$
551,106



14

Notes to Condensed Consolidated Financial Statements (Unaudited)





$ in thousands
 
Quoted prices
in active
markets for
identical
instruments
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Netting
adjustments
 
Balance as of
September 30,
2017
Assets at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
 
Trading instruments
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
83

 
$
221,884

 
$

 
$

 
$
221,967

Corporate obligations
 
9,361

 
81,577

 

 

 
90,938

Government and agency obligations
 
6,354

 
28,977

 

 

 
35,331

Agency MBS and CMOs
 
913

 
133,070

 

 

 
133,983

Non-agency CMOs and ABS
 

 
28,442

 
5

 

 
28,447

Total debt securities
 
16,711

 
493,950

 
5

 

 
510,666

Equity securities
 
16,090

 
389

 

 

 
16,479

Brokered certificates of deposit
 

 
31,492

 

 

 
31,492

Other
 
32

 

 
5,594

 

 
5,626

Total trading instruments
 
32,833

 
525,831

 
5,599

 

 
564,263

Available-for-sale securities
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 

 
2,081,079

 

 

 
2,081,079

Other securities
 
1,032

 

 

 

 
1,032

ARS preferred securities
 

 

 
106,171

 

 
106,171

Total available-for-sale securities
 
1,032

 
2,081,079

 
106,171

 

 
2,188,282

Derivative assets
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
Matched book
 

 
288,035

 

  

 
288,035

Other
 

 
86,436

 

 
(55,728
)
 
30,708

Foreign exchange contracts
 

 
32

 

 

 
32

Total derivative assets
 


374,503




(55,728
)

318,775

Private equity investments
 
 
 
 
 
 
 
 
 


Not measured at NAV
 

 

 
88,885

 

 
88,885

Measured at NAV
 
 
 
 
 
 
 
 
 
109,894

Total private equity investments
 

 

 
88,885

 

 
198,779

Other investments
 
220,312

 
332

 
336

 

 
220,980

Total assets at fair value on a recurring basis
 
$
254,177

 
$
2,981,745

 
$
200,991

 
$
(55,728
)
 
$
3,491,079

 
 
 
 
 
 
 
 
 
 
 
Assets at fair value on a nonrecurring basis
 
 
 
 

 
 

 
 

 
 

Bank loans, net
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$

 
$
17,474

 
$
23,994

 
$

 
$
41,468

Loans held for sale
 

 
11,285

 

 

 
11,285

Total bank loans, net
 

 
28,759

 
23,994

 

 
52,753

Other assets: Other real estate owned
 

 
880

 

 

 
880

Total assets at fair value on a nonrecurring basis
 
$

 
$
29,639

 
$
23,994

 
$

 
$
53,633

 
 
 
 
 
 
 
 
 
 
 
(continued on next page)

















15

Notes to Condensed Consolidated Financial Statements (Unaudited)





(continued from previous page)
$ in thousands
 
Quoted prices
in active
markets for
identical
instruments
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Netting
adjustments
 
Balance as of
September 30,
2017
Liabilities at fair value on a recurring basis
 
 
 
 

 
 

 
 

 
 

Trading instruments sold but not yet purchased
 
 
 
 

 
 

 
 

 
 

Municipal and provincial obligations
 
$
304

 
$

 
$

 
$

 
$
304

Corporate obligations
 
1,286

 
35,272

 

 

 
36,558

Government obligations
 
167,622

 

 

 

 
167,622

Agency MBS and CMOs
 
2,477

 

 

 

 
2,477

Non-agency MBS and CMOs
 

 
5,028

 

 

 
5,028

Total debt securities
 
171,689


40,300






211,989

Equity securities
 
8,118

 
1,342

 

 

 
9,460

Total trading instruments sold but not yet purchased
 
179,807


41,642






221,449

Derivative liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
Matched book
 

 
288,035

 

 

 
288,035

Other
 

 
101,893

 

 
(59,410
)
 
42,483

Foreign exchange contracts
 

 
646

 

 

 
646

DBRSU obligation (equity)
 

 
25,800

 

 

 
25,800

Total derivative liabilities
 


416,374




(59,410
)

356,964

Total liabilities at fair value on a recurring basis
 
$
179,807


$
458,016


$


$
(59,410
)

$
578,413


Transfers between levels

Our policy is to treat transfers between levels of the fair value hierarchy as having occurred at the end of the reporting period. Our transfers of financial instruments between Levels 1 and 2 were insignificant for the three and nine months ended June 30, 2018 and 2017.


16

Notes to Condensed Consolidated Financial Statements (Unaudited)





Level 3 recurring fair value measurements

The tables below 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 below may include changes in fair value that were attributable to both observable and unobservable inputs. Our policy is to treat transfers between levels of the fair value hierarchy as having occurred at the end of the reporting period.
Three months ended June 30, 2018
Level 3 instruments at fair value
 
 
Financial assets
 
Financial
liabilities
 
 
Trading instruments
 
Available-for-sale securities
 
Private equity and other investments
 
Trading instruments
$ in thousands
 
Non-agency
CMOs & ABS
 
Other
 
ARS - preferred
securities
 
Private
equity
investments
 
Other
investments
 
Other
Fair value beginning of period
 
$
5

 
$
704

 
$
108,495

 
$
95,862

 
$
548

 
$
(853
)
Total gains/(losses) for the period:
 
 
 
 

 
 

 
 

 
 

 
 

Included in earnings
 

 
(88
)
 

 
4,167

 
(2
)
 
335

Included in other comprehensive income
 

 

 
2,747

 

 

 

Purchases and contributions
 

 
17,943

 

 

 
218

 

Sales
 

 
(14,619
)
 

 
(28,038
)
 

 
(1,681
)
Distributions
 
(1
)
 

 

 

 

 

Transfers:
 
 

 
 

 
 

 
 

 
 

 
 

Into Level 3
 

 

 

 

 

 

Out of Level 3
 

 

 

 

 

 

Fair value end of period
 
$
4

 
$
3,940

 
$
111,242

 
$
71,991

 
$
764

 
$
(2,199
)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period
 
$

 
$
1,220

 
$
2,747

 
$

 
$
(2
)
 
$


Nine months ended June 30, 2018
Level 3 instruments at fair value
 
 
Financial assets
 
Financial
liabilities
 
 
Trading instruments
 
Available-for-sale securities
 
Private equity and other investments
 
Trading instruments
$ in thousands
 
Non-agency
CMOs & ABS
 
Other
 
ARS - preferred
securities
 
Private
equity
investments
 
Other
investments
 
Other
Fair value beginning of period
 
$
5

 
$
5,594

 
$
106,171

 
$
88,885

 
$
336

 
$

Total gains/(losses) for the period:
 
 
 
 

 
 

 
 

 
 

 
 

Included in earnings
 

 
(591
)
 

 
11,221

 
(8
)
 

Included in other comprehensive income
 

 

 
5,071

 

 

 

Purchases and contributions
 

 
61,785

 

 

 
436

 

Sales
 

 
(62,848
)
 

 
(28,115
)
 

 
(2,199
)
Distributions
 
(1
)
 

 

 

 

 

Transfers:
 
 

 
 

 
 

 
 

 
 

 
 

Into Level 3
 

 

 

 

 

 

Out of Level 3
 

 

 

 

 

 

Fair value end of period
 
$
4

 
$
3,940

 
$
111,242

 
$
71,991

 
$
764

 
$
(2,199
)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period
 
$

 
$
1,193

 
$
5,071

 
$

 
$
(8
)
 
$



17

Notes to Condensed Consolidated Financial Statements (Unaudited)





Three months ended June 30, 2017 Level 3 instruments at fair value
 
 
Financial assets
 
Financial
liabilities
 
 
Trading instruments
 
Available-for-sale securities
 
Private equity and other investments
 
Trading instruments
$ in thousands
 
Non-agency
CMOs &
ABS
 
Other
 
ARS –
municipals obligations
 
ARS -
preferred
securities
 
Private
equity
investments
 
Other
investments
 
Other
Fair value beginning of period
 
$
7

 
$
15,289

 
$
25,728

 
$
105,418

 
$
88,623

 
$
374

 
$

Total gains/(losses) for the period:
 
 
 
 
 
 
 
 
 
 

 
 

 
 

Included in earnings
 

 
(2,527
)
 

 

 
3,995

 
(26
)
 
(1,138
)
Included in other comprehensive income
 

 

 
347

 
696

 

 

 

Purchases and contributions
 

 
14,449

 

 

 

 

 

Sales
 

 
(22,616
)
 

 

 
(168
)
 
(230
)
 

Distributions
 
(1
)
 

 

 

 
(7,407
)
 

 

Transfers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Into Level 3
 

 

 

 

 

 

 

Out of Level 3
 

 

 

 

 

 

 

Fair value end of period
 
$
6

 
$
4,595

 
$
26,075

 
$
106,114

 
$
85,043

 
$
118

 
$
(1,138
)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period
 
$

 
$
(284
)
 
$
347

 
$
696

 
$
3,983

 
$
3

 
$
(1,138
)

Nine months ended June 30, 2017
Level 3 instruments at fair value
 
 
Financial assets
 
Financial
liabilities
 
 
Trading instruments
 
Available-for-sale securities
 
Private equity and other investments
 
Trading instruments
$ in thousands
 
Non-agency
CMOs & ABS
 
Other
 
ARS - municipal
obligations
 
ARS - preferred
securities
 
Private
equity
investments
 
Other
investments
 
Other
Fair value beginning of period
 
$
7

 
$
6,020

 
$
25,147

 
$
100,018

 
$
83,165

 
$
441

 
$

Total gains/(losses) for the period:
 
 
 
 

 
 

 
 

 
 

 
 

 
 
Included in earnings
 

 
(3,351
)
 

 
1

 
4,285

 
117

 
(1,138
)
Included in other comprehensive income
 

 

 
928

 
6,118

 

 

 

Purchases and contributions
 

 
55,550

 

 

 
5,168

 

 

Sales
 

 
(53,624
)
 

 
(23
)
 
(168
)
 
(245
)
 

Distributions
 
(1
)
 

 

 

 
(7,407
)
 

 

Transfers:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Into Level 3
 

 

 

 

 

 

 

Out of Level 3
 

 

 

 

 

 
(195
)
 

Fair value end of period
 
$
6

 
$
4,595

 
$
26,075

 
$
106,114

 
$
85,043

 
$
118

 
$
(1,138
)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period
 
$

 
$
(510
)
 
$
928

 
$
6,117

 
$
4,284

 
$
3

 
$
(1,138
)

As of June 30, 2018, 11% of our assets and 2% of our liabilities were instruments measured at fair value on a recurring basis.  Instruments measured at fair value on a recurring basis categorized as Level 3 as of June 30, 2018 represented 5% of our assets measured at fair value. In comparison as of September 30, 2017, 10% of our assets and 2% of our liabilities represented instruments measured at fair value on a recurring basis. Instruments measured at fair value on a recurring basis categorized as Level 3 as of September 30, 2017 represented 6% of our assets measured at fair value. Level 3 instruments as a percentage of total financial instruments decreased as compared to September 30, 2017 due to the increase in total assets measured at fair value since September 30, 2017, as well as the sale of Level 3 private equity investments during the nine months ended June 30, 2018.


18

Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents the gains/(losses) related to Level 3 recurring fair value measurements included in our Condensed Consolidated Statements of Income and Comprehensive Income.
$ in thousands
 
Net trading profit
 
Other revenues
 
Other comprehensive income
Three months ended June 30, 2018
 
 
 
 
 
 
Total gains/(losses) included in earnings
 
$
247

 
$
4,165

 
$
2,747

Unrealized gains/(losses) for assets held at the end of the reporting period
 
$
1,220

 
$
(2
)
 
$
2,747

 
 
 
 
 
 
 
Nine months ended June 30, 2018
 
 
 
 
 
 
Total gains/(losses) included in earnings
 
$
(591
)
 
$
11,213

 
$
5,071

Unrealized gains/(losses) for assets held at the end of the reporting period
 
$
1,193

 
$
(8
)
 
$
5,071

 
 
 
 
 
 
 
Three months ended June 30, 2017
 
 
 
 
 
 
Total gains/(losses) included in earnings
 
$
(3,665
)
 
$
3,969

 
$
1,043

Unrealized gains/(losses) for assets held at the end of the reporting period
 
$
(1,422
)
 
$
3,986

 
$
1,043

 
 
 
 
 
 
 
Nine months ended June 30, 2017
 
 
 
 
 
 
Total gains/(losses) included in earnings
 
$
(4,489
)
 
$
4,403

 
$
7,046

Unrealized gains/(losses) for assets held at the end of the reporting period
 
$
(1,648
)
 
$
4,287

 
$
7,045


Quantitative information about level 3 fair value measurements

The tables below 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.
Level 3 financial instrument
$ in thousands
 
Fair value at June 30, 2018
 
Valuation technique(s)
 
Unobservable input
 
Range
(weighted-average)
Recurring measurements
 
 
 
 
 
 
 
 
ARS preferred securities
 
$
65,793

 
Discounted cash flow
 
Average discount rate
 
6.29% - 7.74% (6.95%)
 
 
 

 
 
 
Average interest rates applicable to future interest income on the securities (1)
 
3.73% - 4.98% (4.04%)
 
 
 

 
 
 
Prepayment year (2)
 
2018 - 2021 (2021)
 
 
$
45,449

 
Other investment-specific events (3)
 
Not meaningful (3)
 
Not meaningful (3)
Private equity investments (not measured at NAV)
 
$
51,635

 
Income or market approach
 
 
 
 
 
 
 
 
Scenario 1 - income approach - discounted cash flow
 
Discount rate
 
13% - 25% (24.8%)
 
 
 
 
 
 
Terminal growth rate of cash flows
 
3% - 3% (3%)
 
 
 
 
 
 
Terminal year
 
2020 - 2042 (2022)
 
 
 
 
Scenario 2 - market approach - market multiple method
 
EBITDA Multiple
 
6.00 - 7.0 (6.5)
 
 
 
 
 
 
 Weighting assigned to outcome of scenario 1/scenario 2
 
99%/1%
 
 
$
20,356

 
Transaction price or other investment-specific events (3)
 
Not meaningful (3)
 
Not meaningful (3)
Nonrecurring measurements
 
 
 
 
 
 
 
 
Bank loans: impaired loans - residential
 
$
18,328

 
Discounted cash flow
 
Prepayment rate
 
7 yrs - 12 yrs (10.43 yrs)
Bank loans: impaired loans - corporate
 
$
3,734

 
Appraisal or discounted cash flow value (4)
 
Not meaningful (4)
 
Not meaningful (4)


(continued on next page)





19

Notes to Condensed Consolidated Financial Statements (Unaudited)





(continued from previous page)
Level 3 financial instrument
$ in thousands
 
Fair value at
September 30,
2017
 
Valuation technique(s)
 
Unobservable input
 
Range (weighted-average)
Recurring measurements
 
 
 
 
 
 
 
 
ARS preferred securities
 
$
106,171

 
Discounted cash flow
 
Average discount rate
 
5.46% - 6.81% (6.03%)
 
 
 

 
 
 
Average interest rates applicable to future interest income on the securities (1)
 
2.58% - 3.44% (2.72%)
 
 
 

 
 
 
Prepayment year (2)
 
2017 - 2021 (2021)
Private equity investments (not measured at NAV)
 
$
68,454

 
Income or market approach:
 
 
 
 
 
 
 
 
Scenario 1 - income approach - discounted cash flow
 
Discount rate
 
13% - 25% (22.4%)
 
 
 
 
 
 
Terminal growth rate of cash flows
 
3% - 3% (3%)
 
 
 
 
 
 
Terminal year
 
2020 - 2042 (2021)
 
 
 
 
Scenario 2 - market approach - market multiple method
 
EBITDA Multiple
 
5.25 - 7.0 (5.8)
 
 
 
 
 
 
 Weighting assigned to outcome of scenario 1/scenario 2
 
87%/13%
 
 
$
20,431

 
Transaction price or other investment-specific events (3)
 
Not meaningful (3)
 
Not meaningful (3)
Nonrecurring measurements
 
 

 
 
 
 
 
 
Bank loans: impaired loans - residential
 
$
20,736

 
Discounted cash flow
 
Prepayment rate
 
7 yrs. - 12 yrs. (10.4 yrs.)
Bank loans: impaired loans - corporate
 
$
3,258

 
Appraisal or discounted cash flow value (4)
 
Not meaningful (4)
 
Not meaningful (5)


(1)
Future 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.

(4)
The valuation techniques used for the impaired corporate loan portfolio are appraisals less selling costs for the collateral dependent loans and discounted cash flows for impaired loans that are not collateral dependent.

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 below:

Auction rate securities

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

The future interest rate and maturity assumptions impacting the valuation of the auction rate securities are directly related. These securities generally have embedded penalty interest rate provisions in the event auctions fail to set the security’s interest rate. The penalty rates are based upon a stated interest rate spread over what is typically a short-term base interest rate index. As short-term interest rates rise, the penalty rate that is specified in the security increases. Changes in interest rates impact the fair value of our ARS portfolio, as we estimate that at some level of increase in short-term interest rates, issuers of the securities will have the economic

20

Notes to Condensed Consolidated Financial Statements (Unaudited)





incentive to refinance (and thus prepay) the securities. The faster and steeper short-term interest rates rise, the earlier prepayments will likely occur and the higher the fair value of the security. Therefore, the short-term interest rate assumption directly impacts the input related to the timing of any projected prepayment.

Private equity investments

The significant unobservable inputs used in the fair value measurement of private equity investments 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.  Significant increases/(decreases) in our investment entities’ future economic performance will have a corresponding increase/(decrease) on the valuation results.  The value of our investment moves inversely with the market’s expectation of returns from such investments.  Should the market require higher returns from industries in which we are invested, all other factors held constant, our investments will decrease in value.  Should the market accept lower returns from industries in which we are invested, all other factors held constant, our investments will increase in value.

Investments in private equity measured at net asset value per share

As more fully described in Note 2 of our 2017 Form 10-K, as a practical expedient, we utilize NAV or its equivalent to determine the recorded value of a portion of our private equity 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 June 30, 2018 included various direct and third party private equity investments and various 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 through distributions received through the liquidation of the underlying assets of those funds. We anticipate approximately 90% of these underlying assets will be liquidated over a period of four years or less, with the remainder to be liquidated over a period of nine years.

The table below presents the recorded value and unfunded commitments related to our private equity portfolio.
 
 
 
 
Unfunded commitment
$ in thousands
 
Recorded value
 
RJF
 
Noncontrolling interests
 
Total
June 30, 2018
 
 
 
 
 
 
 
 
Private equity investments measured at NAV
 
$
92,466

 
$
18,718

 
$
1,496

 
$
20,214

Private equity investments not measured at NAV
 
71,991

 
 
 
 
 
 
Total private equity investments 
 
$
164,457

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
Private equity investments measured at NAV
 
$
109,894

 
$
20,973

 
$
2,273

 
$
23,246

Private equity investments not measured at NAV
 
88,885

 
 
 
 
 
 
Total private equity investments
 
$
198,779

 
 
 
 
 
 

Of the total private equity investments, the portions we owned were $116 million and $145 million as of June 30, 2018 and September 30, 2017, respectively. The portions of the private equity investments we did not own were $49 million and $54 million as of June 30, 2018 and September 30, 2017, respectively, and were included as a component of noncontrolling interests in our Condensed Consolidated Statements of Financial Condition.

Many of these fund investments meet the definition of prohibited “covered funds” as defined by the Volcker Rule enacted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (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 on the divestiture of this portfolio.

21

Notes to Condensed Consolidated Financial Statements (Unaudited)





Other fair value disclosures

Many, but not all, of the financial instruments we hold are recorded at fair value in the Condensed Consolidated Statements of Financial Condition. Refer to Note 4 of our 2017 Form 10-K for discussion of the methods and assumptions we apply to the determination of fair value of our financial instruments that are not recorded at fair value.

The table below presents the estimated fair values by level within the fair value hierarchy and the carrying amounts of certain of our financial instruments not carried at fair value. The carrying amounts below exclude financial instruments which have been recorded at fair value and those recorded at amounts which approximate fair value in the Condensed Consolidated Statements of Financial Condition.
$ in thousands
 
Quoted prices
in active
markets for
identical
instruments
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
Total estimated fair value
 
Carrying amount
June 30, 2018
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Bank loans, net
 
$

 
$
82,829

 
$
18,599,211

 
$
18,682,040

 
$
18,900,732

Loans to financial advisors, net
 
$

 
$

 
$
719,589

 
$
719,589

 
$
928,488

Financial liabilities:
 
 
 
 
 
 
 
 

 
 
Bank deposits
 
$

 
$
19,063,650

 
$
408,449

 
$
19,472,099

 
$
19,478,561

Other borrowings
 
$

 
$
25,273

 
$

 
$
25,273

 
$
25,204

Senior notes payable
 
$

 
$
1,563,808

 
$

 
$
1,563,808

 
$
1,549,493

 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Bank loans, net
 
$

 
$
23,001

 
$
16,836,745

 
$
16,859,746

 
$
16,954,042

Loans to financial advisors, net
 
$

 
$

 
$
708,487

 
$
708,487

 
$
873,272

Financial liabilities:
 
 
 
 
 
 
 
 

 
 
Bank deposits
 
$

 
$
17,417,678

 
$
313,359

 
$
17,731,037

 
$
17,732,362

Other borrowings
 
$

 
$
29,278

 
$

 
$
29,278

 
$
28,813

Senior notes payable
 
$

 
$
1,647,696

 
$

 
$
1,647,696

 
$
1,548,839




22

Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 5 – AVAILABLE-FOR-SALE SECURITIES

Available-for-sale securities are comprised of agency MBS and CMOs owned by Raymond James Bank, N.A. (“RJ Bank”) and ARS owned by one of our non-broker-dealer subsidiaries. Refer to the discussion of our available-for-sale securities accounting policies, including the fair value determination process, in Note 2 of our 2017 Form 10-K.

The amortized cost and fair values of available-for-sale securities were as follows:
$ in thousands
 
Cost basis
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
June 30, 2018
 
 
 
 
 
 
 
 
Agency MBS and CMOs
 
$
2,614,199

 
$
491

 
$
(58,618
)
 
$
2,556,072

Other securities
 
1,575

 

 
(678
)
 
897

Total RJ Bank available-for-sale securities
 
2,615,774

 
491

 
(59,296
)
 
2,556,969

ARS preferred securities
 
101,674

 
9,568

 

 
111,242

Total available-for-sale securities
 
$
2,717,448


$
10,059


$
(59,296
)

$
2,668,211

 
 
 
 
 
 
 
 
 
September 30, 2017
 
 

 
 

 
 

 
 

Agency MBS and CMOs
 
$
2,089,153

 
$
1,925

 
$
(9,999
)
 
$
2,081,079

Other securities
 
1,575

 

 
(543
)
 
1,032

Total RJ Bank available-for-sale securities
 
2,090,728

 
1,925

 
(10,542
)
 
2,082,111

ARS preferred securities
 
101,674

 
4,497

 

 
106,171

Total available-for-sale securities
 
$
2,192,402


$
6,422


$
(10,542
)

$
2,188,282


See Note 4 for additional information regarding the fair value of available-for-sale securities.

The contractual maturities, amortized cost, carrying values and current yields for our available-for-sale securities were as presented below.  Since RJ Bank’s 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.  Expected maturities of ARS may differ significantly from contractual maturities, as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
June 30, 2018
$ in thousands
 
Within one year
 
After one but
within five years
 
After five but
within ten years
 
After ten years
 
Total
Agency MBS and CMOs:
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
2,672

 
$
242,182

 
$
805,255

 
$
1,564,090

 
$
2,614,199

Carrying value
 
2,654

 
237,187

 
787,433

 
1,528,798

 
2,556,072

Weighted-average yield
 
1.69
%
 
2.26
%
 
2.11
%
 
2.28
%
 
2.22
%
Other securities:
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$

 
$

 
$

 
$
1,575

 
$
1,575

Carrying value
 

 

 

 
897

 
897

Weighted-average yield
 

 

 

 

 

Subtotal agency MBS and CMOs and other securities:
 
 

 
 

Amortized cost
 
$
2,672

 
$
242,182

 
$
805,255

 
$
1,565,665

 
$
2,615,774

Carrying value
 
2,654

 
237,187

 
787,433

 
1,529,695

 
2,556,969

Weighted-average yield
 
1.69
%
 
2.26
%
 
2.11
%
 
2.28
%
 
2.22
%
ARS preferred securities:
 
 

 
 

 
 

 
 

 
 

Amortized cost
 
$

 
$

 
$

 
$
101,674

 
$
101,674

Carrying value
 

 

 

 
111,242

 
111,242

Weighted-average yield
 

 

 

 
3.23
%
 
3.23
%
Total available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

Amortized cost
 
$
2,672

 
$
242,182

 
$
805,255

 
$
1,667,339

 
$
2,717,448

Carrying value
 
2,654

 
237,187

 
787,433

 
1,640,937

 
2,668,211

Weighted-average yield
 
1.69
%
 
2.26
%
 
2.11
%
 
2.34
%
 
2.26
%


23

Notes to Condensed Consolidated Financial Statements (Unaudited)





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, were as follows:
 
 
Less than 12 months
 
12 months or more
 
Total
$ in thousands
 
Estimated
fair value
 
Unrealized
losses
 
Estimated
fair value
 
Unrealized
losses
 
Estimated
fair value
 
Unrealized
losses
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS and CMOs
 
$
1,776,093

 
$
(36,473
)
 
$
662,690

 
$
(22,145
)
 
$
2,438,783

 
$
(58,618
)
Other securities
 

 

 
897

 
(678
)
 
897

 
(678
)
Total
 
$
1,776,093

 
$
(36,473
)
 
$
663,587

 
$
(22,823
)
 
$
2,439,680

 
$
(59,296
)
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS and CMOs
 
$
1,119,715

 
$
(5,621
)
 
$
295,528

 
$
(4,378
)
 
$
1,415,243

 
$
(9,999
)
Other securities
 

 

 
1,032

 
(543
)
 
1,032

 
(543
)
Total
 
$
1,119,715


$
(5,621
)

$
296,560


$
(4,921
)

$
1,416,275


$
(10,542
)

Agency MBS and CMOs and non-agency CMOs

The Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Government National Mortgage Associations (“GNMA”) guarantee the contractual cash flows of the agency MBS and CMOs. At June 30, 2018, of the 232 U.S. government-sponsored enterprise MBS and CMOs in an unrealized loss position, 153 were in a continuous unrealized loss position for less than 12 months and 79 were for 12 months or more. We do not consider these securities to be other-than-temporarily impaired (“OTTI”) due to the guarantee provided by FNMA, FHLMC, and GNMA of the full payment of principal and interest, and the fact that we have the ability and intent to hold these securities. At June 30, 2018, debt securities we held from FNMA and FHLMC had an amortized cost of $1.79 billion and $665 million, respectively, and a fair value of $1.75 billion and $648 million, respectively.

During the three and nine months ended June 30, 2018, there were no sales of agency MBS and CMO available-for-sale securities. There were $33 million and $66 million of proceeds from the sale of available-for-sale securities during the three and nine months ended June 30, 2017, respectively. These sales resulted in a gain of $1 million, which was included in “Other revenues” on our Condensed Consolidated Statements of Income and Comprehensive Income.

ARS

Our cost basis in the ARS we hold is the fair value of the securities in the period in which we acquired them. The par value of the ARS we held as of June 30, 2018 was $120 million. Only those ARS whose amortized cost basis we do not expect to recover in full are considered to be other-than-temporarily impaired, as we have the ability and intent to hold these securities. All of our ARS securities are evaluated for OTTI on a quarterly basis. As of June 30, 2018, there were no ARS preferred securities with a fair value less than cost basis.

During the three and nine months ended June 30, 2018, there were no sales of ARS. During the three and nine months ended June 30, 2017, sales of ARS were insignificant.

Other-than-temporarily impaired securities

Changes in the amount of OTTI related to credit losses recognized in “Other revenues” on available-for-sale securities were as follows:
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Amount related to credit losses on securities we held at the beginning of the period
 
$

 
$
5,754

 
$

 
$
8,107

Decreases to the amount related to credit losses for securities sold during the period
 

 
(5,754
)
 

 
(8,107
)
Amount related to credit losses on securities we held at the end of the period
 
$

 
$

 
$

 
$




24

Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS

Our derivative assets and derivative liabilities are recorded at fair value and are included in “Derivative assets” and “Derivative liabilities” in our Condensed Consolidated Statements of Financial Condition. Cash flows related to our derivative contracts are included within operating activities in the Condensed Consolidated Statements of Cash Flows. The significant accounting policies governing our derivative financial instruments, including our methodologies for determining fair value, are described in Note 2 of our 2017 Form 10-K.

Derivatives arising from our fixed income business operations

We enter into interest rate contracts as part of 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.

We also facilitate matched book derivative transactions in which Raymond James Financial Products, Inc. (“RJFP”), a wholly owned subsidiary, enters into interest rate derivative transactions with clients. For every derivative transaction RJFP enters into with a client, it also enters 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 derivative contracts is administered directly between the client and the third-party financial institution. Due to this pass-through transaction structure, RJFP has completely mitigated the market and credit risk on these derivative contracts. As a result, derivatives for which the fair value is in an asset position have an equal and offsetting derivative liability. RJFP only has credit risk on its uncollected derivative transaction fee revenues. The receivable for uncollected derivative transaction fee revenues of RJFP was $4 million and $5 million at June 30, 2018 and September 30, 2017, respectively, and was included in “Other receivables” on our Condensed Consolidated Statements of Financial Condition.

Derivatives arising from RJ Bank’s business operations
 
We enter into forward foreign exchange contracts and interest rate swaps to hedge certain exposures arising out of RJ Bank’s business operations (see Note 2 of our 2017 Form 10-K for the accounting policies associated with these transactions). Each of these activities is described further below.

We enter into three-month forward foreign exchange contracts primarily to hedge the risks related to RJ Bank’s investment in their Canadian subsidiary as well as their 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 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 of Atlanta (“FHLB”) to, in part, fund these assets and then enters into interest rate swaps 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.

Derivative arising from our acquisition of Alex. Brown

As part of our acquisition of Alex. Brown (see Note 3 of our 2017 Form 10-K for additional information regarding the acquisition), we assumed certain DBRSU awards, including the associated plan terms and conditions. The DBRSU awards contain performance conditions based on Deutsche Bank and subsidiaries attaining certain financial results and will ultimately be settled in Deutsche Bank AG (“DB”) common shares, provided the 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.

Counterparty netting and collateral related to derivative contracts

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

25

Notes to Condensed Consolidated Financial Statements (Unaudited)





in the Condensed 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 agreement, referred to as “initial margin.” This initial margin is included in “Other payables” on our Condensed Consolidated Statements of Financial Condition.

We are also required to maintain cash or marketable security deposits with the clearing organizations we utilize to clear certain of our interest rate derivative transactions. Cash initial margin is included as a component of “Receivables from brokers, dealers and clearing organizations” and marketable securities initial margin is included as a component of “Other investments” or “Available-for-sale securities” in our Condensed 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.

RJ Bank provides to counterparties of its U.S. subsidiaries a guarantee of payment in the event of the subsidiary’s default under forward foreign exchange contracts.  Due to this RJ Bank guarantee and the short-term nature of these derivatives, RJ Bank’s U.S. subsidiaries are generally not required to post collateral with and do not generally receive collateral from the respective counterparties.

Derivative balances included in our financial statements

The table below presents the gross fair value and notional amount of derivative contracts by product type, the amounts of counterparty and cash collateral netting in our Condensed Consolidated Statements of Financial Condition, as well as collateral posted and received under credit support agreements that do not meet the criteria for netting under GAAP.
 
 
June 30, 2018
 
September 30, 2017
$ in thousands
 
Derivative assets
 
Derivative liabilities
 
Notional amount
 
Derivative assets
 
Derivative liabilities
 
Notional amount
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
Matched book
 
$
195,956

 
$
195,956

 
$
2,509,245

 
$
288,035

 
$
288,035

 
$
2,766,488

Other
 
67,696

 
102,813

 
5,949,524

 
86,436

 
100,503

 
4,931,809

Foreign exchange contracts
 
23

 
8,597

 
563,982

 
3

 
530

 
437,783

DBRSU obligation (equity) (1)
 

 
14,659

 
14,659

 

 
25,800

 
25,800

Subtotal
 
263,675


322,025


9,037,410


374,474


414,868


8,161,880

Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
1,054

 

 
850,000

 

 
1,390

 
850,000

Foreign exchange contracts
 

 
13,959

 
857,534

 
29

 
116

 
1,048,646

Subtotal
 
1,054


13,959


1,707,534


29


1,506


1,898,646

Total gross fair value/notional amount
 
264,729


335,984


$
10,744,944


374,503


416,374


$
10,060,526

Offset in the Statements of Financial Condition
 
 
 
 
 
 
 
 
 
 
 
 
Counterparty netting
 
(24,659
)
 
(24,659
)
 
 
 
(6,045
)
 
(6,045
)
 
 
Cash collateral netting
 
(22,548
)
 
(19,100
)
 
 
 
(49,683
)
 
(53,365
)
 
 
Total amounts offset
 
(47,207
)
 
(43,759
)
 
 
 
(55,728
)
 
(59,410
)
 
 
Net amounts presented in the Statements of Financial Condition
 
217,522


292,225

 
 
 
318,775

 
356,964

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross amounts not offset in the Statements of Financial Condition
 
 
 
 
 
 
 
 
 
 
Financial instruments (2)
 
(198,433
)
 
(195,956
)
 
 
 
(293,340
)
 
(288,035
)
 
 
Total
 
$
19,089

 
$
96,269

 
 
 
$
25,435

 
$
68,929

 
 

(1) The DBRSU obligation is not subject to an enforceable master netting arrangement or other similar arrangement. However, we held shares of DB as an economic hedge against this obligation with a fair value of $11 million and $19 million as of June 30, 2018 and September 30, 2017, respectively, which are a component of “Other investments” on our Condensed Consolidated Statements of Financial Condition. See additional discussion of the DBRSUs in Note 17.

(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 table above.


26

Notes to Condensed Consolidated Financial Statements (Unaudited)





Gains/(losses) recognized in AOCI, net of income taxes, on derivatives designated as hedging instruments were as follows (see Note 15 for additional information):
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Interest rate contracts (cash flow hedges)
 
$
6,068

 
$
(3,775
)
 
$
29,546

 
$
23,494

Foreign exchange contracts (net investment hedges)
 
13,418

 
(12,939
)
 
37,955

 
(6,152
)
Total gains/(losses) recognized in AOCI, net of taxes
 
$
19,486

 
$
(16,714
)
 
$
67,501

 
$
17,342


There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for each of the three and nine months ended June 30, 2018 and 2017. We expect to reclassify an estimated $5 million of interest income 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 9 years.

Gains/(losses) on derivatives not designated as hedging instruments recognized on the Condensed Consolidated Statements of Income and Comprehensive Income were as follows:
$ in thousands
 
Location of gain/(loss) included in the
Condensed Consolidated Statements of Income and Comprehensive Income
 
Gain/(loss) recognized during the period
 
 
Three months ended June 30,
 
Nine months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
Matched book
 
Other revenues
 
$
26

 
$
21

 
$
84

 
$
16

Other
 
Net trading profit/other revenues
 
$
3,323

 
$
2,247

 
$
4,703

 
$
6,441

Foreign exchange contracts
 
Other revenues
 
$
14,749

 
$
(11,473
)
 
$
24,016

 
$
(5,837
)
DBRSU obligation (equity)
 
Compensation, commissions and benefits expense
 
$
4,691

 
$
(940
)
 
$
9,356

 
$
(6,409
)
DBRSU obligation (equity)
 
Acquisition-related expenses
 
$

 
$

 
$

 
$
(2,383
)

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

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 contracts 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.  Currently, we anticipate that all of the counterparties will be able to fully satisfy their obligations under those agreements.  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. We are not exposed to market risk as it relates to these derivative contracts due to the pass-through transaction structure previously described.

Interest rate and foreign exchange risk

We are exposed to interest rate risk related to certain of our interest rate derivative agreements. We are also exposed to foreign exchange risk related to our forward foreign exchange derivative agreements.  On a daily basis, we monitor our risk exposure in our derivative agreements based on established limits with respect to a number of factors, including interest rate, foreign exchange spot and forward rates, spread, ratio, basis and volatility risks.  These exposures are monitored both on a total portfolio basis and separately for each agreement for selected maturity periods.

Derivatives with credit-risk-related contingent features

Certain of the derivative instruments arising from our interest rate contracts and forward foreign exchange 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 $11 million at June 30, 2018, for which we had not posted any collateral. Such amounts were not material at September 30, 2017.


27

Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 7 – COLLATERALIZED AGREEMENTS AND FINANCINGS

Collateralized agreements are securities purchased under agreements to resell (“reverse repurchase agreements”) and securities borrowed. Collateralized financings are securities sold under agreements to repurchase (“repurchase agreements”) and securities loaned. We enter into these transactions in order to facilitate client activities, invest excess cash, acquire securities to cover short positions and finance certain firm activities. The significant accounting policies governing our collateralized agreements and financings are described in Note 2 of our 2017 Form 10-K.

For financial statement purposes, we do not offset our reverse repurchase agreements, repurchase agreements, securities borrowing and securities lending transactions because the conditions for netting as specified by GAAP are not met. Our reverse repurchase agreements, repurchase agreements, securities borrowing and securities lending transactions are governed by master agreements that are widely used by counterparties and that may allow for net settlements of payments in the normal course, as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of the parties to the transaction. Although not offset on the Condensed Consolidated Statements of Financial Condition, these transactions are included in the following table.
 
 
Assets
 
Liabilities
$ in thousands
 
Reverse repurchase agreements
 
Securities borrowed
 
Repurchase agreements
 
Securities loaned
June 30, 2018
 
 
 
 
 
 
 
 
Gross amounts of recognized assets/liabilities
 
$
343,052

 
$
164,256

 
$
115,464

 
$
386,651

Gross amounts offset in the Condensed Consolidated Statements of Financial Condition
 

 

 

 

Net amounts presented in the Condensed Consolidated Statements of Financial Condition
 
343,052


164,256


115,464


386,651

Gross amounts not offset in the Condensed Consolidated Statements of Financial Condition
 
(343,052
)
 
(160,484
)
 
(115,464
)
 
(371,379
)
Net amount
 
$

 
$
3,772

 
$

 
$
15,272

September 30, 2017
 
 
 
 
 
 
 
 
Gross amounts of recognized assets/liabilities
 
$
404,462

 
$
138,319

 
$
220,942

 
$
383,953

Gross amounts offset in the Condensed Consolidated Statements of Financial Condition
 

 

 

 

Net amounts presented in the Condensed Consolidated Statements of Financial Condition
 
404,462


138,319


220,942


383,953

Gross amounts not offset in the Condensed Consolidated Statements of Financial Condition
 
(404,462
)
 
(134,304
)
 
(220,942
)
 
(373,132
)
Net amount
 
$

 
$
4,015

 
$

 
$
10,821


The required market value of the collateral associated with collateralized agreements and financings generally exceeds the amount financed. Accordingly, 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 in our Condensed Consolidated Statements of Financial Condition. In the event the market value of the securities we pledge as collateral in these activities declines, we may have to post additional collateral or reduce the borrowing amounts. We monitor such levels daily.

Collateral received and pledged

We receive cash and securities as collateral, primarily in connection with reverse repurchase agreements, securities borrowed, derivative transactions not transacted through a clearing organization, 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, for our own use in our repurchase agreements, securities lending agreements, other secured borrowings, satisfaction of deposit requirements with clearing organizations, or otherwise meeting either our or our clients’ settlement requirements.

The table below presents financial instruments at fair value that we received as collateral, were not included on our Condensed Consolidated Statements of Financial Condition, and that were available to be delivered or repledged, along with the balances of such instruments that were delivered or repledged, to satisfy one of our purposes described above.
$ in thousands
 
June 30,
2018
 
September 30,
2017
Collateral we received that was available to be delivered or repledged
 
$
3,073,459

 
$
3,030,736

Collateral that we delivered or repledged
 
$
1,134,744

 
$
1,068,912



28

Notes to Condensed Consolidated Financial Statements (Unaudited)





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 table below presents information about the fair value of our assets that have been pledged for one of the purposes described above.
$ in thousands
 
June 30,
2018
 
September 30,
2017
Financial instruments owned, at fair value, pledged to counterparties that:
 
 
 
 
Had the right to deliver or repledge
 
$
584,961

 
$
363,739

Did not have the right to deliver or repledge
 
$
64,439

 
$
44,930

Bank loans, net pledged at FHLB and the Federal Reserve
 
$
3,972,416

 
$
3,197,185


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 thousands
 
Overnight and continuous
 
Up to 30 days
 
30-90 days
 
Greater than 90 days
 
Total
June 30, 2018
 
 
 
 
 
 
 
 
 
 
Repurchase agreements:
 
 
 
 
 
 
 
 
 
 
Government and agency obligations
 
$
55,592

 
$

 
$

 
$

 
$
55,592

Agency MBS and CMOs
 
59,872

 

 

 

 
59,872

Total repurchase agreements
 
115,464








115,464

Securities loaned:
 
 
 
 
 
 
 
 
 
 
Equity securities
 
386,651

 

 

 

 
386,651

Total
 
$
502,115


$


$


$


$
502,115

Gross amounts of recognized liabilities for repurchase agreements and securities loaned included in the table within this footnote
 
$
502,115

Amounts related to repurchase agreements and securities loaned not included in the table within this footnote
 
$

September 30, 2017
 
 
 
 
 
 
 
 
 
 
Repurchase agreements:
 
 
 
 
 
 
 
 
 
 
Government and agency obligations
 
$
107,284

 
$

 
$

 
$

 
$
107,284

Agency MBS and CMOs
 
113,658

 

 

 

 
113,658

Total repurchase agreements
 
220,942








220,942

Securities loaned:
 
 
 
 
 
 
 
 
 
 
Equity securities
 
383,953

 

 

 

 
383,953

Total
 
$
604,895

 
$

 
$

 
$

 
$
604,895

Gross amounts of recognized liabilities for repurchase agreements and securities loaned included in the table within this footnote
 
$
604,895

Amounts related to repurchase agreements and securities loaned not included in the table within this footnote
 
$


As of both June 30, 2018 and September 30, 2017, 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 commercial and industrial (“C&I”) loans, tax-exempt loans, securities based loans (“SBL”), and commercial and residential real estate loans. These receivables are collateralized by first or second mortgages on residential or other real property, other assets of the borrower, a pledge of revenue or are unsecured.

We segregate our loan portfolio into six loan portfolio segments: C&I, commercial real estate (“CRE”), CRE construction, tax-exempt, residential mortgage, and SBL. 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.

29

Notes to Condensed Consolidated Financial Statements (Unaudited)





See Note 2 of our 2017 Form 10-K for a discussion of our accounting policies related to bank loans and allowances for losses, including the policies regarding loans held for investment, loans held for sale, off-balance sheet loan commitments, nonperforming assets, troubled debt restructurings (“TDRs”), impaired loans, the allowance for loan losses and reserve for unfunded lending commitments, and loan charge-off policies.

The following table presents the balances for both the held for sale and held for investment loan portfolios, as well as the associated percentage of each portfolio segment in RJ Bank’s total loan portfolio. “Loans held for sale, net” and “Total loans held for investment, net” in the table below are presented net of unearned income and deferred expenses, which include purchase premiums, purchase discounts and net deferred origination fees and costs.
 
 
June 30, 2018
 
September 30, 2017
$ in thousands
 
Balance
 
%
 
Balance
 
%
Loans held for investment:
 
 

 
 

 
 

 
 

C&I loans
 
$
7,838,246

 
41
%
 
$
7,385,910

 
43
%
CRE construction loans
 
145,361

 
1
%
 
112,681

 
1
%
CRE loans
 
3,443,167

 
18
%
 
3,106,290

 
18
%
Tax-exempt loans
 
1,193,117

 
6
%
 
1,017,791

 
6
%
Residential mortgage loans
 
3,580,869

 
18
%
 
3,148,730

 
18
%
SBL
 
2,870,426

 
15
%
 
2,386,697

 
14
%
Total loans held for investment
 
19,071,186

 
 

 
17,158,099

 
 

Net unearned income and deferred expenses
 
(21,803
)
 
 

 
(31,178
)
 
 

Total loans held for investment, net
 
19,049,383

 
 

 
17,126,921

 
 

Loans held for sale, net
 
134,580

 
1
%
 
70,316

 

Total loans held for sale and investment
 
19,183,963

 
100
%
 
17,197,237

 
100
%
Allowance for loan losses
 
(196,157
)
 
 

 
(190,442
)
 
 

Bank loans, net
 
$
18,987,806

 
 

 
$
17,006,795

 
 


At June 30, 2018, the FHLB had a blanket lien on RJ Bank’s residential mortgage loan portfolio as security for the repayment of certain borrowings. See Note 12 for more information regarding borrowings from the FHLB.

Loans held for sale

RJ Bank originated or purchased $444 million and $1.13 billion of loans held for sale during the three and nine months ended June 30, 2018, respectively, and $449 million and $1.28 billion during the three and nine months ended June 30, 2017, respectively. Proceeds from the sale of these held for sale loans amounted to $166 million and $394 million during the three and nine months ended June 30, 2018, respectively, and $114 million and $349 million during the three and nine months ended June 30, 2017, respectively. Net gains resulting from such sales and unrealized losses recorded in the Condensed Consolidated Statements of Income and Comprehensive Income to reflect the loans held for sale at the lower of cost or market value were insignificant in all periods during the three and nine months ended June 30, 2018 and 2017.

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 thousands
 
C&I loans
 
CRE loans
 
Residential mortgage loans
 
Total
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
Purchases
 
$
195,486

 
$
82,060

 
$
122,869

 
$
400,415

Sales
 
$
38,577

 
$

 
$

 
$
38,577

Nine months ended June 30, 2018
 
 
 
 
 
 
 
 
Purchases
 
$
467,544

 
$
144,818

 
$
216,942

 
$
829,304

Sales
 
$
146,089

 
$

 
$

 
$
146,089

Three months ended June 30, 2017
 
 
 
 
 
 
 
 
Purchases
 
$
103,013

 
$

 
$
100,104

 
$
203,117

Sales
 
$
123,225

 
$

 
$

 
$
123,225

Nine months ended June 30, 2017
 
 
 
 
 
 
 
 
Purchases
 
$
300,665

 
$
38,980

 
$
190,523

 
$
530,168

Sales
 
$
295,754

 
$

 
$

 
$
295,754


30

Notes to Condensed Consolidated Financial Statements (Unaudited)





Sales in the preceding table represent the recorded investment of loans held for investment that were transferred to loans held for sale and subsequently sold to a third party during the respective period. As more fully described in Note 2 of our 2017 Form 10-K, corporate loan (C&I, CRE and CRE construction) sales generally occur as part of a loan workout situation.

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 thousands
 
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
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
99

 
$

 
$
99

 
$
5,273

 
$
7,832,874

 
$
7,838,246

CRE construction loans
 

 

 

 

 
145,361

 
145,361

CRE loans
 

 

 

 

 
3,443,167

 
3,443,167

Tax-exempt loans
 

 

 

 

 
1,193,117

 
1,193,117

Residential mortgage loans:
 
 
 
 
 


 
 
 
 
 


First mortgage loans
 
223

 
245

 
468

 
28,888

 
3,525,603

 
3,554,959

Home equity loans/lines
 
3

 

 
3

 
147

 
25,760

 
25,910

SBL
 
421

 

 
421

 

 
2,870,005

 
2,870,426

Total loans held for investment, net
 
$
746

 
$
245

 
$
991

 
$
34,308

 
$
19,035,887

 
$
19,071,186

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$

 
$

 
$

 
$
5,221

 
$
7,380,689

 
$
7,385,910

CRE construction loans
 

 

 

 

 
112,681

 
112,681

CRE loans
 

 

 

 

 
3,106,290

 
3,106,290

Tax-exempt loans
 

 

 

 

 
1,017,791

 
1,017,791

Residential mortgage loans:
 
 
 
 
 
 
 
 
 
 
 

        First mortgage loans
 
1,853

 

 
1,853

 
33,718

 
3,086,701

 
3,122,272

        Home equity loans/lines
 
248

 

 
248

 
31

 
26,179

 
26,458

SBL
 

 

 

 

 
2,386,697

 
2,386,697

Total loans held for investment, net
 
$
2,101

 
$

 
$
2,101

 
$
38,970

 
$
17,117,028

 
$
17,158,099


The table above includes $16 million and $18 million at June 30, 2018 and September 30, 2017, respectively, of nonaccrual loans which were performing pursuant to their contractual terms.

Other real estate owned, included in “Other assets” on our Condensed Consolidated Statements of Financial Condition, was $3 million and $5 million at June 30, 2018 and September 30, 2017, respectively. The recorded investment in mortgage loans secured by one-to-four family residential properties for which formal foreclosure proceedings were in process was $16 million and $18 million at June 30, 2018 and September 30, 2017, respectively.

Impaired loans and troubled debt restructurings

The following table provides a summary of RJ Bank’s impaired loans.
 
 
June 30, 2018
 
September 30, 2017
$ in thousands
 
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
 
$
3,890

 
$
5,195

 
$
1,539

 
$
5,221

 
$
6,160

 
$
1,963

Residential - first mortgage loans
 
19,682

 
25,562

 
2,116

 
23,977

 
31,100

 
2,504

Total
 
23,572

 
30,757

 
3,655

 
29,198

 
37,260

 
4,467

Impaired loans without allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

C&I loans
 
1,383

 
1,500

 

 

 

 

Residential - first mortgage loans
 
14,023

 
21,211

 

 
16,737

 
24,899

 

Total
 
15,406

 
22,711

 

 
16,737

 
24,899

 

Total impaired loans
 
$
38,978

 
$
53,468

 
$
3,655

 
$
45,935

 
$
62,159

 
$
4,467


31

Notes to Condensed Consolidated Financial Statements (Unaudited)





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

The preceding table includes residential first mortgage TDR’s of $23 million and $27 million at June 30, 2018 and September 30, 2017, respectively.

The average balance of the total impaired loans in the Condensed Consolidated Statements of Income and Comprehensive Income were as follows:
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Average impaired loan balance:
 
 
 
 
 
 
 
 
C&I loans
 
$
4,392

 
$
8,606

 
$
4,489

 
$
21,491

CRE loans
 

 

 

 
925

Residential - first mortgage loans
 
33,938

 
42,356

 
33,640

 
44,813

Total
 
$
38,330

 
$
50,962

 
$
38,129

 
$
67,229


Interest income recognized on impaired loans was insignificant in all periods during the three and nine months ended June 30, 2018 and 2017.

Credit quality indicators

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

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

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

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

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

Loss – Loans which are considered by management to be uncollectible and of such little value that their continuance on 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.


32

Notes to Condensed Consolidated Financial Statements (Unaudited)





The credit quality of RJ Bank’s held for investment loan portfolio was as follows:
$ in thousands
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Total
June 30, 2018
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
7,710,838

 
$
90,139

 
$
37,269

 
$

 
$
7,838,246

CRE construction loans
 
137,671

 
7,690

 

 

 
145,361

CRE loans
 
3,384,361

 
38,680

 
20,126

 

 
3,443,167

Tax-exempt loans
 
1,193,117

 

 

 

 
1,193,117

Residential mortgage loans:
 
 
 
 
 
 
 
 
 
 
First mortgage loans
 
3,510,893

 
6,317

 
37,749

 

 
3,554,959

Home equity loans/lines
 
25,760

 
3

 
147

 

 
25,910

SBL
 
2,870,426

 

 

 

 
2,870,426

Total
 
$
18,833,066

 
$
142,829

 
$
95,291

 
$

 
$
19,071,186

 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
 
C&I loans
 
$
7,232,777

 
$
63,964

 
$
89,169

 
$

 
$
7,385,910

CRE construction loans
 
112,681

 

 

 

 
112,681

CRE loans
 
3,048,847

 
57,315

 
128

 

 
3,106,290

Tax-exempt loans
 
1,017,791

 

 

 

 
1,017,791

Residential mortgage loans:
 
 
 
 
 
 
 
 
 
 
First mortgage loans
 
3,068,290

 
8,467

 
45,515

 

 
3,122,272

Home equity loans/lines
 
26,352

 
75

 
31

 

 
26,458

SBL
 
2,386,697

 

 

 

 
2,386,697

Total
 
$
16,893,435

 
$
129,821

 
$
134,843

 
$

 
$
17,158,099


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



33

Notes to Condensed Consolidated Financial Statements (Unaudited)





Allowance for loan losses and reserve for unfunded lending commitments

Changes in the allowance for loan losses of RJ Bank by portfolio segment are as follows:
 
 
Loans held for investment
$ in thousands
 
C&I loans
 
CRE construction loans
 
CRE loans
 
Tax-exempt loans
 
Residential mortgage loans
 
SBL
 
Total
Three months ended June 30, 2018
 
 
 
 

 
 

 
 
 
 

 
 

 
 

Balance at beginning of period
 
$
124,978

 
$
2,218

 
$
42,662

 
$
7,773

 
$
12,491

 
$
4,730

 
$
194,852

Provision/(benefit) for loan losses
 
1,734

 
410

 
2,290

 
(162
)
 
1,950

 
(996
)
 
5,226

Net (charge-offs)/recoveries:
 
 

 
 

 
 

 
 
 
 

 
 
 
 

Charge-offs
 
(4,324
)
 

 

 

 
(84
)
 

 
(4,408
)
Recoveries
 

 

 

 

 
762

 

 
762

Net (charge-offs)/recoveries
 
(4,324
)
 

 

 

 
678

 

 
(3,646
)
Foreign exchange translation adjustment
 
(195
)
 

 
(80
)
 

 

 

 
(275
)
Balance at end of period
 
$
122,193

 
$
2,628

 
$
44,872

 
$
7,611

 
$
15,119

 
$
3,734

 
$
196,157

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
119,901

 
$
1,421

 
$
41,749

 
$
6,381

 
$
16,691

 
$
4,299

 
$
190,442

Provision/(benefit) for loan losses
 
11,291

 
1,207

 
3,339

 
1,230

 
(2,711
)
 
(565
)
 
13,791

Net (charge-offs)/recoveries:
 
 

 
 

 
 

 
 
 
 

 
 

 
 
Charge-offs
 
(8,500
)
 

 

 

 
(383
)
 

 
(8,883
)
Recoveries
 

 

 

 

 
1,522

 

 
1,522

Net (charge-offs)/recoveries
 
(8,500
)
 

 

 

 
1,139

 

 
(7,361
)
Foreign exchange translation adjustment
 
(499
)
 

 
(216
)
 

 

 

 
(715
)
Balance at end of period
 
$
122,193

 
$
2,628

 
$
44,872

 
$
7,611

 
$
15,119

 
$
3,734

 
$
196,157

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
118,660

 
$
1,527

 
$
44,159

 
$
4,353

 
$
12,378

 
$
5,157

 
$
186,234

Provision/(benefit) for loan losses
 
1,719

 
171

 
3,712

 
696

 
(634
)
 
545

 
6,209

Net (charge-offs)/recoveries:
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Charge-offs
 
(1,605
)
 

 

 

 
(177
)
 

 
(1,782
)
Recoveries
 

 

 

 

 
621

 

 
621

Net (charge-offs)/recoveries
 
(1,605
)
 

 

 

 
444

 

 
(1,161
)
Foreign exchange translation adjustment
 
201

 

 
120

 

 

 

 
321

Balance at end of period
 
$
118,975

 
$
1,698

 
$
47,991

 
$
5,049

 
$
12,188

 
$
5,702

 
$
191,603

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
137,701

 
$
1,614

 
$
36,533

 
$
4,100

 
$
12,664

 
$
4,766

 
$
197,378

Provision/(benefit) for loan losses
 
5,460

 
176

 
6,291

 
949

 
(715
)
 
936

 
13,097

Net (charge-offs)/recoveries:
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Charge-offs
 
(24,298
)
 

 

 

 
(742
)
 

 
(25,040
)
Recoveries
 

 

 
5,013

 

 
981

 

 
5,994

Net (charge-offs)/recoveries
 
(24,298
)
 

 
5,013

 

 
239

 

 
(19,046
)
Foreign exchange translation adjustment
 
112

 
(92
)
 
154

 

 

 

 
174

Balance at end of period
 
$
118,975

 
$
1,698

 
$
47,991

 
$
5,049

 
$
12,188

 
$
5,702

 
$
191,603



34

Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents, by loan portfolio segment, RJ Bank’s recorded investment (excluding any net unearned income and deferred expenses) and the related allowance for loan losses.
 
 
Loans held for investment
 
 
Allowance for loan losses
 
Recorded investment
$ in thousands
 
Individually evaluated for impairment
 
Collectively evaluated for impairment
 
Total
 
Individually evaluated for impairment
 
Collectively evaluated for impairment
 
Total
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
1,539

 
$
120,654

 
$
122,193

 
$
5,273

 
$
7,832,973

 
$
7,838,246

CRE construction loans
 

 
2,628

 
2,628

 

 
145,361

 
145,361

CRE loans
 

 
44,872

 
44,872

 

 
3,443,167

 
3,443,167

Tax-exempt loans
 

 
7,611

 
7,611

 

 
1,193,117

 
1,193,117

Residential mortgage loans
 
2,127

 
12,992

 
15,119

 
40,574

 
3,540,295

 
3,580,869

SBL
 

 
3,734

 
3,734

 

 
2,870,426

 
2,870,426

Total
 
$
3,666

 
$
192,491

 
$
196,157

 
$
45,847

 
$
19,025,339

 
$
19,071,186

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
1,963

 
$
117,938

 
$
119,901

 
$
5,221

 
$
7,380,689

 
$
7,385,910

CRE construction loans
 

 
1,421

 
1,421

 

 
112,681

 
112,681

CRE loans
 

 
41,749

 
41,749

 

 
3,106,290

 
3,106,290

Tax-exempt loans
 

 
6,381

 
6,381

 

 
1,017,791

 
1,017,791

Residential mortgage loans
 
2,506

 
14,185

 
16,691

 
47,368

 
3,101,362

 
3,148,730

SBL
 

 
4,299

 
4,299

 

 
2,386,697

 
2,386,697

Total
 
$
4,469

 
$
185,973

 
$
190,442

 
$
52,589

 
$
17,105,510

 
$
17,158,099


The reserve for unfunded lending commitments, which is included in “Other payables” on our Condensed Consolidated Statements of Financial Condition, was $9 million at June 30, 2018 and $11 million at September 30, 2017.



35

Notes to Condensed Consolidated Financial Statements (Unaudited)





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. Refer to Note 2 of our 2017 Form 10-K for a discussion of our principal involvement with VIEs and the accounting policies regarding determination of whether we are deemed to be the primary beneficiary of VIEs.

VIEs where we are the primary beneficiary

Of the VIEs in which we hold an interest, we have determined that certain limited partnerships which are part of our private equity portfolio (“Private Equity Interests”), a Low-Income Housing Tax Credit fund (“LIHTC fund”) in which RJ Bank is an investor and an affiliate of Raymond James Tax Credit Funds, Inc. (“RJTCF”) is the managing member, a multi-investor LIHTC fund where RJTCF provides an investor member with a guaranteed return on their investment (“Guaranteed LIHTC Fund”), certain other LIHTC funds and the trust we utilize in connection with restricted stock unit (“RSU”) awards granted to certain employees of one of our Canadian subsidiaries (the “Restricted Stock Trust Fund”) require consolidation in our financial statements, as we are deemed the primary beneficiary of such VIEs.  The aggregate assets and liabilities of the VIEs we consolidate are provided in the table below. 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 thousands
 
Aggregate assets
 
Aggregate liabilities
June 30, 2018
 
 
 
 
Private Equity Interests
 
$
82,180

 
$
6,796

LIHTC Fund in which RJ Bank is an investor member
 
53,589

 
223

Guaranteed LIHTC Fund
 
40,857

 
3,023

Other LIHTC Funds
 
8,599

 
8,515

Restricted Stock Trust Fund
 
17,332

 
17,332

Total
 
$
202,557

 
$
35,889

 
 
 
 
 
September 30, 2017
 
 

 
 

Private Equity Interests
 
$
104,414

 
$
3,851

LIHTC Fund in which RJ Bank is an investor member
 
57,719

 
1,055

Guaranteed LIHTC Fund
 
51,400

 
2,872

Other LIHTC Funds
 
7,418

 
2,544

Restricted Stock Trust Fund
 
12,122

 
12,122

Total
 
$
233,073

 
$
22,444


See Note 14 of this Form 10-Q for additional information regarding the commitment related to the Guaranteed LIHTC Fund and Note 9 of our 2017 Form 10-K for information regarding the financing asset associated with this fund.

36

Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents information about the carrying value of the assets, liabilities and equity of the VIEs which we consolidate and which are included within our Condensed Consolidated Statements of Financial Condition. The noncontrolling interests presented in this table represent the portion of these net assets which are not ours.
$ in thousands
 
June 30, 2018
 
September 30, 2017
Assets:
 
 
 
 
Cash and cash equivalents
 
$
6,155

 
$
2,052

Assets segregated pursuant to regulations and other segregated assets
 
2,959

 
4,590

Other receivables
 
1,826

 
168

Intercompany receivables
 
444

 
454

Private equity investments
 
74,691

 
101,905

Investments in real estate partnerships held by consolidated variable interest entities
 
99,091

 
111,743

Trust fund investment in RJF common stock
 
17,331

 
12,120

Other assets
 
58

 
41

Total assets
 
$
202,555

 
$
233,073

 
 
 
 
 
Liabilities and equity:
 
 

 
 

Other payables
 
$
15,286

 
$
9,667

Intercompany payables
 
22,296

 
16,520

Total liabilities
 
37,582

 
26,187

RJF equity
 
77,927

 
101,445

Noncontrolling interests
 
87,046

 
105,441

Total equity
 
164,973

 
206,886

Total liabilities and equity
 
$
202,555

 
$
233,073


The trust fund investment in RJF common stock in the table above is the Restricted Stock Trust Fund, which is included in “Treasury stock” in our Condensed Consolidated Statements of Financial Condition.

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

As discussed in Note 2 of our 2017 Form 10-K, we have concluded that for certain VIEs we are not the primary beneficiary and therefore do not consolidate these VIEs. Such VIEs include certain Private Equity Interests, certain LIHTC funds, New Market Tax Credit Funds (“NMTC 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 table below.
 
 
June 30, 2018
 
September 30, 2017
$ in thousands
 
Aggregate
assets
 
Aggregate
liabilities
 
Our risk
of loss
 
Aggregate
assets
 
Aggregate
liabilities
 
Our risk
of loss
Private Equity Interests
 
$
7,913,433

 
$
195,582

 
$
66,420

 
$
10,485,611

 
$
174,354

 
$
73,457

LIHTC Funds
 
5,485,027

 
1,944,217

 
72,830

 
5,372,367

 
2,134,600

 
60,959

NMTC Funds
 
25,290

 
133

 
8

 
30,297

 
105

 
9

Other
 
175,807

 
88,880

 
3,674

 
169,462

 
88,615

 
3,163

Total
 
$
13,599,557


$
2,228,812


$
142,932


$
16,057,737


$
2,397,674


$
137,588




37

Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 10 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS, NET

Our goodwill and identified intangible assets result from various acquisitions. See Note 2 of our 2017 Form 10-K for a discussion of our intangible assets and goodwill accounting policies. The following table presents our goodwill and net identifiable intangible asset balances as of the dates indicated.
$ in thousands
 
June 30, 2018
 
September 30, 2017
Goodwill
 
$
477,556

 
$
410,723

Identifiable intangible assets, net
 
164,231

 
82,460

Total goodwill and identifiable intangible assets, net
 
$
641,787

 
$
493,183


As described in Note 3, we acquired the Scout Group during the nine months ended June 30, 2018, which included a number of identifiable intangible assets as well as goodwill. See Note 12 of our 2017 Form 10-K for a discussion of the components of our goodwill balance and additional information regarding our identifiable intangible assets.

Goodwill

The following summarizes our goodwill by segment, and the balances and activity for the periods indicated.
$ in thousands
 
Private Client Group
 
Capital
Markets
 
Asset Management
 
Total
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
Goodwill as of beginning of period
 
$
275,942

 
$
133,757

 
$
69,234

 
$
478,933

Foreign currency translation
 
(474
)
 
(903
)
 

 
(1,377
)
Goodwill as of end of period
 
$
275,468

 
$
132,854

 
$
69,234

 
$
477,556

 
 
 
 
 
 
 
 
 
Nine months ended June 30, 2018
 
 
 
 
 
 
 
 
Goodwill as of beginning of period
 
$
276,713

 
$
134,010

 
$

 
$
410,723

Additions
 

 

 
69,234

 
69,234

Foreign currency translations
 
(1,245
)
 
(1,156
)
 

 
(2,401
)
Goodwill as of end of period
 
$
275,468


$
132,854


$
69,234

 
$
477,556

 
 
 
 
 
 
 
 
 
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
Goodwill as of beginning of period
 
$
275,203

 
$
131,809

 
$

 
$
407,012

Foreign currency translation
 
570

 
1,091

 

 
1,661

Goodwill as of end of period
 
$
275,773

 
$
132,900

 
$

 
$
408,673

 
 
 
 
 
 
 
 
 
Nine months ended June 30, 2017
 
 
 
 
 
 
 
 
Goodwill as of beginning of period
 
$
275,521

 
$
132,551

 
$

 
$
408,072

Foreign currency translation
 
252

 
349

 

 
601

Goodwill as of end of period
 
$
275,773


$
132,900


$


$
408,673


The addition to goodwill during the nine months ended June 30, 2018 arose from the acquisition of the Scout Group. The goodwill primarily represents synergies from combining the Scout Group with our existing businesses. All of the goodwill associated with the Scout Group is deductible for tax purposes over 15 years.

As described in Note 2 of our 2017 Form 10-K, we perform goodwill testing on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  We performed our latest annual goodwill impairment testing during the quarter ended March 31, 2018, evaluating balances as of December 31, 2017, and no impairment was identified. In that testing, we performed both a qualitative impairment assessment for certain of our reporting units and a quantitative impairment assessment for our two Raymond James Ltd. (“RJ Ltd.”) reporting units operating in Canada.

Qualitative Assessments

For each reporting unit on which we performed a qualitative assessment, we determined whether it was more likely than not that the carrying value of the reporting unit, including the recorded goodwill, was in excess of the fair value of the reporting unit. In any instance in which we are unable to qualitatively conclude that it is more likely than not that the fair value of the reporting unit exceeds the reporting unit carrying value including goodwill, a quantitative analysis of the fair value of the reporting unit would be performed.

38

Notes to Condensed Consolidated Financial Statements (Unaudited)





Based upon the outcome of our qualitative assessments, we determined that no quantitative analysis of the fair value of any of the reporting units we elected to qualitatively analyze was required, and we concluded that none of the goodwill allocated to any of those reporting units was impaired. No events have occurred since our assessments that would cause us to update this impairment testing.

Quantitative Assessments

For our two RJ Ltd. reporting units, we elected to perform a quantitative assessment of the equity value of each RJ Ltd. reporting unit that had an allocation of goodwill. In our determination of the reporting unit fair value of equity, we used a combination of the income approach and the market approach. Under the income approach, we used discounted cash flow models applied to each respective reporting unit. Under the market approach, we calculated an estimated fair value based on a combination of multiples of earnings of guideline companies in the brokerage and capital markets industry that are publicly traded on organized exchanges, and the book value of comparable transactions. The estimated fair value of the equity of the reporting unit resulting from each of these valuation approaches was dependent upon the estimates of future business unit revenues and costs. Such estimates were subject to critical assumptions regarding the nature and health of financial markets in future years, as well as the discount rate to apply to the projected future cash flows. In estimating future cash flows, a balance sheet as of December 31, 2017 and a statement of operations for the prior twelve months of activity for each reporting unit 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, which was derived through application of the capital asset pricing model. The valuation result from the market approach was dependent upon the selection of the comparable guideline companies and transactions and the earnings multiple applied to each respective reporting unit’s projected earnings. Finally, significant management judgment was applied in determining the weight assigned to the outcomes of the income approach and the market approach, which resulted in one single estimate of the fair value of the equity of the reporting unit.

The following summarizes certain key assumptions utilized in our quantitative analysis.
 
 
 
 
 
 
Key assumptions
 
 
 
 
 
 
 
 
 
 
Weight assigned to the outcome of:
Segment
 
Reporting unit
 
Goodwill as of December 31, 2017
(in thousands)
 
Discount rate used in the income approach
 
Multiple applied to revenue/EPS in the market approach
 
Income approach
 
Market approach
Private Client Group
 
RJ Ltd. Private Client Group
 
$
24,285

 
14.3
%
 
1.2x/13.8x
 
75
%
 
25
%
Capital Markets
 
RJ Ltd. Capital Markets
 
$
20,293

 
15.3
%
 
0.9x/14.2x
 
75
%
 
25
%

Based upon the outcome of our quantitative assessments, we concluded that none of the goodwill associated with our two RJ Ltd. reporting units was impaired. However, the assumptions and estimates utilized in determining the fair value of reporting unit equity, including future cash flow projections, are sensitive to changes including, but not limited to, overall market conditions, adverse business trends and changes in regulations. Should we fail to perform as we have projected, the fair value of our reporting unit, and as a result our goodwill, could be impaired.

No events have occurred since our assessments that would cause us to update this impairment testing.


39

Notes to Condensed Consolidated Financial Statements (Unaudited)





Identifiable intangible assets, net

The following table sets forth our identifiable intangible asset balances by segment, net of accumulated amortization, and activity for the periods indicated.
$ in thousands
 
Private Client Group
 
Capital Markets
 
Asset Management
 
Total
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
Net identifiable intangible assets as of beginning of period
 
$
43,994

 
$
21,539

 
$
102,343

 
$
167,876

Amortization expense
 
(1,493
)
 
(770
)
 
(1,265
)
 
(3,528
)
Foreign currency translation
 
(22
)
 

 
(95
)
 
(117
)
Net identifiable intangible assets as of end of period
 
$
42,479

 
$
20,769

 
$
100,983

 
$
164,231

 
 
 
 
 
 
 
 
 
Nine months ended June 30, 2018
 
 
 
 
 
 
 
 
Net identifiable intangible assets as of beginning of period
 
$
47,026

 
$
23,077

 
$
12,357

 
$
82,460

Additions
 

 

 
92,290

 
92,290

Amortization expense
 
(4,485
)
 
(2,308
)
 
(3,404
)
 
(10,197
)
Foreign currency translation
 
(62
)
 

 
(260
)
 
(322
)
Net identifiable intangible assets as of end of period
 
$
42,479

 
$
20,769

 
$
100,983

 
$
164,231

 
 
 
 
 
 
 
 
 
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
Net identifiable intangible assets as of beginning of period
 
$
49,901

 
$
24,777

 
$
13,024

 
$
87,702

Amortization expense
 
(1,490
)
 
(938
)
 
(497
)
 
(2,925
)
Foreign currency translation
 
42

 
7

 
127

 
176

Net identifiable intangible assets as of end of period
 
$
48,453

 
$
23,846

 
$
12,654

 
$
84,953

 
 
 
 
 
 
 
 
 
Nine months ended June 30, 2017
 
 
 
 
 
 
 
 
Net identifiable intangible assets as of beginning of period
 
$
52,936

 
$
27,937

 
$
14,101

 
$
94,974

Amortization expense
 
(4,504
)
 
(4,065
)
 
(1,495
)
 
(10,064
)
Foreign currency translation
 
21

 
(26
)
 
48

 
43

Net identifiable intangible assets as of end of period
 
$
48,453

 
$
23,846

 
$
12,654

 
$
84,953


The addition of intangible assets during the nine months ended June 30, 2018 was attributable to the Scout Group acquisition.

The following table summarizes our acquired intangible asset balances by asset class.
 
 
Weighted average useful life
(in years)
 
Amount acquired
(in thousands)
Customer relationships
 
13
 
$
34,900

Trade name
 
20
 
3,590

Developed technology
 
10
 
1,800

Intangible assets subtotal
 
13
 
$
40,290

Non-amortizing customer relationships
 
Indefinite
 
52,000

Total intangible assets acquired
 
 
 
$
92,290


GAAP does not provide for the amortization of indefinite-lived intangible assets. 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 asset, 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, then performing a quantitative analysis is not required.  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. Based upon the outcome of our qualitative assessment, we determined that no quantitative analysis of the fair value of our indefinite-lived intangible assets was required, and we concluded that there was no impairment. No events have occurred since our assessment that would cause us to update this impairment testing.


40

Notes to Condensed Consolidated Financial Statements (Unaudited)





The following summarizes our identifiable intangible assets by type.
 
 
June 30, 2018
 
September 30, 2017
$ in thousands
 
Gross carrying value
 
Accumulated amortization
 
Gross carrying value
 
Accumulated amortization
Customer relationships
 
$
133,404

 
$
(37,293
)
 
$
99,749

 
$
(31,098
)
Non-amortizing customer relationships
 
52,000

 

 

 

Trade name
 
11,684

 
(3,156
)
 
8,366

 
(2,076
)
Developed technology
 
3,430

 
(1,062
)
 
1,630

 
(706
)
Intellectual property
 
515

 
(163
)
 
542

 
(131
)
Non-compete agreements
 
2,902

 
(1,806
)
 
3,336

 
(1,551
)
Seller relationship agreements
 
5,300

 
(1,524
)
 
5,300

 
(901
)
Total
 
$
209,235

 
$
(45,004
)
 
$
118,923

 
$
(36,463
)


NOTE 11 – BANK DEPOSITS

Bank deposits include savings and money market accounts, certificates of deposit of 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.
 
 
June 30, 2018
 
September 30, 2017
$ in thousands
 
Balance
 
Weighted-average rate
 
Balance
 
Weighted-average rate
Savings and money market accounts
 
$
19,044,215

 
0.50
%
 
$
17,391,091

 
0.14
%
Certificates of deposit
 
414,912

 
1.86
%
 
314,685

 
1.60
%
NOW accounts
 
5,526

 
0.01
%
 
5,197

 
0.01
%
Demand deposits (non-interest-bearing)
 
13,908

 

 
21,389

 

Total bank deposits
 
$
19,478,561

 
0.53
%
 
$
17,732,362

 
0.17
%

Total bank deposits in the table above exclude affiliate deposits of $175 million at June 30, 2018 and $243 million at September 30, 2017. These affiliate deposits include $173 million at June 30, 2018 and $192 million at September 30, 2017, held in a deposit account at RJ Bank on behalf of RJF.

Savings and money market accounts in the table above consist primarily of deposits that are cash balances swept from the client investment accounts maintained at Raymond James & Associates, Inc. (“RJ&A”) to RJ Bank. These balances are held in Federal Deposit Insurance Corporation (“FDIC”) insured bank accounts through the Raymond James Bank Deposit Program (“RJBDP”). The aggregate amount of time deposit account balances that exceeded the FDIC insurance limit at June 30, 2018 was $26 million.

The following table sets forth the scheduled maturities of certificates of deposit.
 
 
June 30, 2018
 
September 30, 2017
$ in thousands
 
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
 
$
45,498

 
$
18,862

 
$
8,704

 
$
4,132

Over three through six months
 
16,795

 
11,795

 
4,692

 
3,894

Over six through twelve months
 
26,925

 
16,940

 
34,005

 
11,865

Over one through two years
 
54,876

 
31,293

 
38,713

 
20,019

Over two through three years
 
34,632

 
20,879

 
48,082

 
27,847

Over three through four years
 
30,513

 
19,965

 
21,819

 
12,761

Over four through five years
 
60,256

 
25,683

 
50,805

 
27,347

Total
 
$
269,495

 
$
145,417

 
$
206,820

 
$
107,865



41

Notes to Condensed Consolidated Financial Statements (Unaudited)





Interest expense on deposits, excluding interest expense related to affiliate deposits, is summarized as follows:
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Savings, money market, and NOW accounts
 
$
17,219

 
$
3,202

 
$
34,291

 
$
7,248

Certificates of deposit
 
1,589

 
1,042

 
4,213

 
3,176

Total interest expense on deposits
 
$
18,808

 
$
4,244

 
$
38,504

 
$
10,424



NOTE 12 – OTHER BORROWINGS
 
The following table details the components of other borrowings.
$ in thousands
 
June 30, 2018
 
September 30, 2017
FHLB advances
 
$
875,000

 
$
875,000

Secured lines of credit
 

 
260,000

Unsecured lines of credit
 

 
350,000

Mortgage notes payable and other
 
25,326

 
29,012

Total other borrowings
 
$
900,326

 
$
1,514,012


Borrowings from the FHLB were comprised of both floating and fixed-rate advances. As of June 30, 2018 and September 30, 2017 the floating-rate advances, which mature in June 2020 and have interest rates which reset quarterly, totaled $850 million. 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 6 for information regarding these interest rate swaps, which are accounted for as hedging instruments. The fixed-rate advance as of both June 30, 2018 and September 30, 2017, in the amount of $25 million, matures in October 2020 and bears interest at a fixed rate of 3.4%. All of the advances were secured by a blanket lien granted to the FHLB on our residential mortgage loan portfolio. The weighted average interest rates on these advances as of June 30, 2018 and September 30, 2017 were 2.37% and 1.41%, respectively.

Any borrowings on secured lines of credit were day-to-day and were generally utilized to finance certain fixed income securities. In addition, we have other collateralized financings included in “Securities sold under agreements to repurchase” on our Condensed Consolidated Statements of Financial Condition. See Note 7 for information regarding our collateralized financing arrangements.

RJF is a party to a revolving credit facility agreement (the “RJF Credit Facility”) with a maturity date of May 2022 in which the lenders are a number of financial institutions. This committed unsecured borrowing facility provides for maximum borrowings of up to $300 million at variable rates of interest. There were no borrowings outstanding on the RJF Credit Facility as of either June 30, 2018 or September 30, 2017. There is a variable rate commitment fee associated with the RJF Credit Facility, which varies depending upon RJF’s credit rating. Based upon RJF’s credit rating as of June 30, 2018 the variable rate commitment fee, which would apply to any difference between the daily borrowed amount and the committed amount, was 0.20% per annum.

The interest rates for all of our U.S. and Canadian secured and unsecured financing facilities are variable 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.

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 interest at 5.7% with repayment terms of monthly interest and principal debt service and have a January 2023 maturity.


NOTE 13 – INCOME TAXES

For discussion of income tax accounting policies and other income tax related information, see Note 2 and Note 16 of our 2017 Form 10-K.

The income tax provision for interim periods is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items.  We estimate the annual effective tax rate quarterly based on the forecasted pretax results of our U.S. and non-U.S. operations. Items unrelated to current year ordinary income are recognized entirely in the period

42

Notes to Condensed Consolidated Financial Statements (Unaudited)





identified as a discrete item of tax.  These discrete items generally relate to changes in tax laws, adjustments to the actual liability determined upon filing tax returns and adjustments to previously recorded reserves for uncertain tax positions.

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 corporate income tax rates from 35% to 21% and implementing a territorial tax system which includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. As the firm’s fiscal year end is September 30th, our U.S. federal statutory tax rate will be 24.5% for our fiscal year ended September 30, 2018, which reflects a blended federal statutory rate of 35% for our first fiscal quarter and 21% for the remaining three fiscal quarters.  This blended statutory rate is the basis for calculating our effective tax rate, which is also impacted by other factors.

In response to the enactment of the Tax Act, the SEC issued guidance, subsequently adopted by the FASB, which summarizes a three-step process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Act. Further to (2) above, a registrant should record provisional amounts during a “measurement period” when the registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete its accounting for the change in tax law. The measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting, not to exceed twelve months from the enactment date of the Tax Act. In accordance with the SEC guidance, our net income for the nine months ended June 30, 2018 included an estimate of the discrete impact of the Tax Act of $117 million, primarily due to the remeasurement of U.S. deferred tax assets at the lower enacted corporate tax rate and, to a lesser extent, the transition tax on deemed repatriated earnings of foreign subsidiaries. This estimate incorporates assumptions made based on our current interpretation of the Tax Act and may change, possibly materially, as we complete our analysis and receive additional clarification and implementation guidance.

Reduction of U.S. federal corporate tax rate

We applied the SEC’s guidance in estimating the remeasurement of U.S. deferred tax assets at the lower enacted corporate tax rate, resulting in an estimated impact of $105 million. This calculation includes projections related to the timing of realization of deferred tax assets during the remainder of fiscal year 2018 and beyond. We will update our calculation throughout the year as more information becomes available. These estimates may change, possibly materially, as we obtain further information regarding the timing of realization of deferred tax assets.

Transition tax

We also applied the SEC’s guidance in estimating the transition tax, which we anticipate will be approximately $12 million, including the state tax liability associated with the deemed repatriation of foreign earnings. Our tax liability calculations include projected amounts of unremitted earnings for our foreign subsidiaries for the remainder of the fiscal year. We will update our calculations as more information on our foreign subsidiaries’ earning and profits becomes available. These estimates incorporate assumptions made based on our current interpretation of the Tax Act and may change, possibly materially, as we complete our analysis and receive additional clarification and implementation guidance.

Executive compensation limitation

We also applied the SEC’s guidance in accounting for the deferred tax assets potentially impacted by the Tax Act legislation. Effective for tax years beginning after December 31, 2017, the Tax Act eliminates the exception for performance-based compensation from the $1 million executive compensation deduction limitation. Our covered employees are paid a portion of performance-based compensation in the form of RSUs and stock awards which creates a deferred tax asset upon grant. The necessary information is not yet available to determine whether the deferred compensation previously granted will be deductible as a business expense as the legislation published to date is unclear on the effects to the deferred tax assets previously recorded. As such, we are unable to calculate a reasonable impact of this tax law change, thus in accordance with the SEC’s guidance, we did not include a provisional amount in our financial statements. We continue to apply accounting guidance based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted. We will report provisional amounts in the first reporting period in which a reasonable estimate can be determined.


43

Notes to Condensed Consolidated Financial Statements (Unaudited)





Indefinite reinvestment assertion

We are in the process of assessing the impact of the Tax Act on our current policy and related assertion of indefinitely reinvesting foreign earnings, as well as any such impact on our consolidated financial statements.  As part of this assessment, we determined that earnings of certain inactive foreign entities may be repatriated. The federal and state tax impact have been estimated and accounted for as part of the transition tax calculation described above. There were no further adjustments included in our Condensed Consolidated Financial Statements for the three and nine months ended June 30, 2018 as a result of this change to our indefinite reinvestment assertion.

Stranded tax effects in AOCI

During the quarter ended March 31, 2018, we adopted new accounting guidance that allows for a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Act. The reclassification is the remeasurement difference of U.S. deferred tax assets at the historical federal statutory tax rate of 35% and the new federal statutory tax rate of 21%. The amount reclassified from AOCI to retained earnings was insignificant for the nine months ended June 30, 2018. See Notes 2 and 15 of this Form 10-Q for more information.

Effective tax rate

Our effective income tax rate was 27.0% for the three months ended June 30, 2018. Our effective income tax rate for the nine months ended June 30, 2018 was 38.2% and included the estimated discrete impact of the Tax Act of $117 million, partially offset by a lower blended federal corporate statutory tax rate of 24.5%. The discrete impact of the Tax Act, including the ongoing remeasurement of deferred tax assets, increased our effective tax rate by 12.2 percentage points. The effective tax rate for fiscal year 2017 was 31.2%.

Uncertain tax positions

We anticipate that the uncertain tax position liability balance may increase, possibly significantly, over the next twelve months as a result of recent judicial developments affecting our state tax positions but are still evaluating the impact of such change.


NOTE 14 – 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 June 30, 2018, we had five open underwriting commitments, which were subsequently sold 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 of our 2017 Form 10-K for a discussion of our accounting policies governing these transactions). These commitments are contingent upon the occurrence of certain events, including, but not limited to, the individual joining us.  As of June 30, 2018, we had made commitments through the extension of formal offers totaling approximately $132 million that had not yet been funded; 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 June 30, 2018, $79 million of the total amount extended consisted of unfunded commitments to prospective financial advisors that had accepted our offers, or recently hired producers.

As of June 30, 2018, we had not settled purchases of $401 million of syndicated loans.  These loan purchases are expected to be settled within 90 days.

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.


44

Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents RJ Bank’s commitments to extend credit and other credit-related off-balance sheet financial instruments outstanding:
$ in thousands
 
June 30, 2018
 
September 30, 2017
Open-end consumer lines of credit (primarily SBL)
 
$
6,795,045

 
$
5,323,003

Commercial lines of credit
 
$
1,652,388

 
$
1,673,272

Unfunded loan commitments
 
$
495,403

 
$
386,950

Standby letters of credit
 
$
34,875

 
$
39,670


Because many of our lending commitments expire without being funded in whole or part, the contract amounts are not estimates of our actual future credit exposure or future liquidity requirements. We maintain a reserve to provide for potential losses related to the unfunded lending commitments. See Note 8 for further discussion of this reserve for unfunded lending commitments.

Investment commitments

A subsidiary of RJ Bank has committed $80 million as an investor member in a LIHTC fund in which a subsidiary of RJTCF is the managing member (see Note 2 of our 2017 Form 10-K for information regarding the accounting policies governing these investments). As of June 30, 2018, the RJ Bank subsidiary had invested $62 million of the committed amount.

We had unfunded commitments to various private equity investments of $19 million as of June 30, 2018, of which $1 million was to internally-sponsored private equity investments in which we control the general partner.

Acquisition-related commitments and contingencies

We have potential contingent payments related to our acquisitions of The Producer’s Choice LLC and Mummert & Company Corporate Finance GmbH. The estimated fair values of such contingent payments were included in our Condensed Consolidated Statements of Financial Condition as of June 30, 2018.

Other commitments
 
RJF has committed an amount of up to $225 million, subject to certain limitations and to annual re-approval by the RJF Board of Directors, to either lend to, or guarantee obligations of RJTCF in connection with RJTCF’s low-income housing development/rehabilitation and syndication activities. At June 30, 2018, RJTCF had $108 million outstanding against this commitment. RJTCF may borrow from RJF in order to make investments in, or fund loans or advances to, either partnerships that purchase and develop properties qualifying for tax credits (“project partnerships”) or LIHTC funds. 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 GNMA or FNMA MBS (see the discussion of these activities within Note 2 of our 2017 Form 10-K).  At June 30, 2018, we had $584 million principal amount of outstanding forward MBS purchase commitments which were expected to be purchased over the following 90 days.  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 to be announced (“TBA”) security contracts with investors for generic MBS at specific rates and prices to be delivered on settlement dates in the future.  These TBA securities and related purchased commitments are accounted for at fair value. As of June 30, 2018, 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.

45

Notes to Condensed Consolidated Financial Statements (Unaudited)





RJTCF has provided a guaranteed return on investment to a third-party investor in the Guaranteed LIHTC Fund and RJF has guaranteed RJTCF’s performance under the arrangement.  Under the terms of the performance guarantee, should the underlying LIHTC project partnerships held by the Guaranteed LIHTC Fund fail to deliver a certain amount of tax credits and other tax benefits to this investor over the next four years, RJTCF is obligated to pay the investor an amount that results in the investor achieving a minimum specified return on their investment.  A $10 million financing asset was included in “Other assets,” and a related $10 million liability was included in “Other payables” on our Condensed Consolidated Statements of Financial Condition as of June 30, 2018 related to this obligation. The maximum exposure to loss under this guarantee was $11 million at June 30, 2018, which represented the undiscounted future payments due the investor.

We guarantee the debt of certain of our private equity investments. These guarantees are generally entity specific and represent an obligation to make payments to beneficiaries if the guaranteed party fails to fulfill its obligation under a contractual arrangement with such beneficiary.

Legal and regulatory matter contingencies

In addition to the matters specifically described below, 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 cannot predict if, how or when such proceedings or investigations will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be. A large number of factors may contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental proceedings, potential fines and penalties); the matters present significant legal uncertainties; we have not engaged in settlement discussions; discovery is not complete; there are significant facts in dispute; and numerous parties are named as defendants (including where it is uncertain how liability might be shared among defendants).

We 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. While we have identified below certain proceedings that we believe could be material, individually or collectively, 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.

We may include in some of the descriptions of individual matters below 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.

Subject to the foregoing, we believe, after consultation with counsel and consideration of the accrued liability amounts included in the accompanying condensed consolidated financial statements, 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.

With respect to legal and regulatory matters for which management has been able to estimate a range of reasonably possible loss (and excluding amounts subject to the below-described indemnification from Regions Financial Corporation (“Regions”)), as of June 30, 2018, we estimated the upper end of the range of reasonably possible aggregate loss to be approximately $75 million in excess of the aggregate reserves for such matters.  Refer to Note 2 of our 2017 Form 10-K for a discussion of our criteria for recognizing liabilities for contingencies.  


46

Notes to Condensed Consolidated Financial Statements (Unaudited)





Morgan Keegan Litigation

Indemnification from Regions

Under the agreement with Regions governing our 2012 acquisition of Morgan Keegan & Company, Inc., and MK Holding, Inc. and certain of its affiliates (collectively referred to as “Morgan Keegan”), Regions is obligated to indemnify us for losses we may incur in connection with any Morgan Keegan legal proceedings pending as of the closing date for that transaction, which was April 2, 2012, or commenced after the closing date but related to pre-closing matters that were received prior to April 2, 2015.

The Morgan Keegan matter described below is subject to such indemnification provisions. As of June 30, 2018, management estimated the range of potential liability of all Morgan Keegan matters subject to indemnification, including the cost of defense, to be from $11 million to $51 million. Any loss arising from such matters, after application of any contractual thresholds and other reductions, as set forth in the agreement, will be borne by Regions. As of June 30, 2018 our Condensed Consolidated Statements of Financial Condition included an indemnification asset of $24 million which was included in “Other assets,” and a liability for potential losses of $24 million which was included within “Other payables,” pertaining to the Morgan Keegan matters subject to indemnification. The amount included within “Other payables” is the amount within the range of potential liability related to such matters which management estimated was more likely than any other amount within such range.

Morgan Keegan matter (subject to indemnification)

In July 2006, Morgan Keegan & Company, Inc., a Morgan Keegan affiliate, and one of its former analysts were named as defendants in a lawsuit filed by Fairfax Financial Holdings Limited and an affiliate in the Superior Court of New Jersey, Law Division, in Morris County, New Jersey. Plaintiffs made claims under a civil RICO statute, for commercial disparagement, tortious interference with contractual relationships, tortious interference with prospective economic advantage and common law conspiracy. Plaintiffs alleged that defendants engaged in a multi-year conspiracy to publish and disseminate false and defamatory information about plaintiffs in order to improperly drive down the stock price of Fairfax, so that others could profit from short positions. Plaintiffs alleged that the defendants’ actions disparaged them and harmed their business relationships. Plaintiffs alleged various categories of damages, including lost insurance business, losses on stock and bond offerings, reputational loss, increased audit fees and directors’ and officers’ insurance premiums, and lost acquisitions. They requested actual and punitive damages and treble damages under their RICO claims. On May 11, 2012, the trial court dismissed the plaintiffs’ RICO claims. On June 27, 2012, the trial court dismissed plaintiffs’ tortious interference with prospective relations claim, but allowed the other claims to go forward. Prior to commencement of a jury trial, the court dismissed the remaining claims with prejudice, and the plaintiffs appealed. On April 27, 2017, the Superior Court of New Jersey, Appellate Division, affirmed the trial court’s dismissal of certain claims against Morgan Keegan, including RICO allegations, while remanding to the trial court the claims of disparagement, tortious interference with prospective business relations, and civil conspiracy, and limiting the actual damages to certain lost insurance business. Plaintiffs petitioned the Supreme Court of New Jersey for review of the Appellate Division’s opinion, but on October 17, 2017, the Supreme Court of New Jersey denied the petition. The trial is currently set to begin in late 2018.


NOTE 15 – ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

In January 2018, we early adopted accounting guidance which reclassified the stranded tax effects resulting from the Tax Act from AOCI to retained earnings. See Notes 2 and 13 for additional information. Our policy is to release tax effects remaining in AOCI on an individual security basis.

Other comprehensive income/(loss)

The activity in other comprehensive income/(loss), net of the respective tax effect, was as follows:
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Net change in unrealized gain/(loss) on available-for-sale securities and non-credit portion of other-than-temporary impairment losses
 
$
(3,848
)
 
$
1,776

 
$
(32,428
)
 
$
(418
)
Net change in unrealized gain/(loss) on currency translations, net of the impact of net investment hedges
 
(6,290
)
 
7,423

 
(8,512
)
 
10,647

Net change in unrealized gain/(loss) on cash flow hedges
 
6,068

 
(3,775
)
 
29,546

 
23,494

Net other comprehensive income/(loss)
 
$
(4,070
)
 
$
5,424

 
$
(11,394
)
 
$
33,723



47

Notes to Condensed Consolidated Financial Statements (Unaudited)





Accumulated other comprehensive income/(loss)

All of the components of other comprehensive income/(loss) described below, net of tax, are attributable to RJF. The following table presents the changes, and the related tax effects, of each component of accumulated other comprehensive income/(loss).
$ in thousands
 
Net investment hedges
 
Currency translations
 
Subtotal: net investment hedges and currency translations
 
Available- for-sale securities
 
Cash flow hedges
 
Total
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income/(loss) as of beginning of period
 
$
84,738

 
$
(106,436
)
 
$
(21,698
)
 
$
(31,052
)
 
$
30,227

 
$
(22,523
)
Other comprehensive income/(loss) before reclassifications and taxes
 
18,283

 
(19,708
)
 
(1,425
)
 
(5,431
)
 
9,284

 
2,428

Amounts reclassified from accumulated other comprehensive income/(loss), before tax
 

 

 

 

 
(619
)
 
(619
)
Pre-tax net other comprehensive income/(loss)
 
18,283

 
(19,708
)
 
(1,425
)
 
(5,431
)
 
8,665

 
1,809

Income tax effect
 
(4,865
)
 

 
(4,865
)
 
1,583

 
(2,597
)
 
(5,879
)
Net other comprehensive income/(loss) for the period, net of tax
 
13,418

 
(19,708
)
 
(6,290
)
 
(3,848
)
 
6,068

 
(4,070
)
Accumulated other comprehensive income/(loss) as of end of period
 
$
98,156

 
$
(126,144
)
 
$
(27,988
)
 
$
(34,900
)
 
$
36,295

 
$
(26,593
)
Nine months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income/(loss) as of beginning of period
 
$
60,201

 
$
(79,677
)
 
$
(19,476
)
 
$
(2,472
)
 
$
6,749

 
$
(15,199
)
Other comprehensive income/(loss) before reclassifications and taxes
 
51,730

 
(46,467
)
 
5,263

 
(45,116
)
 
38,658

 
(1,195
)
Amounts reclassified from accumulated other comprehensive income/(loss), before tax
 

 

 

 

 
1,396

 
1,396

Pre-tax net other comprehensive income/(loss)
 
51,730

 
(46,467
)
 
5,263

 
(45,116
)
 
40,054

 
201

Income tax effect
 
(13,828
)
 

 
(13,828
)
 
14,620

 
(12,745
)
 
(11,953
)
Reclassification of tax effects related to the Tax Act
 
53

 

 
53

 
(1,932
)
 
2,237

 
358

Net other comprehensive income/(loss) for the period, net of tax
 
37,955

 
(46,467
)
 
(8,512
)
 
(32,428
)
 
29,546

 
(11,394
)
Accumulated other comprehensive income/(loss) as of end of period
 
$
98,156

 
$
(126,144
)
 
$
(27,988
)
 
$
(34,900
)
 
$
36,295

 
$
(26,593
)
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income/(loss) as of beginning of period
 
$
93,269

 
$
(125,139
)
 
$
(31,870
)
 
$
(6,350
)
 
$
10,786

 
$
(27,434
)
Other comprehensive income/(loss) before reclassifications and taxes
 
(20,676
)
 
21,444

 
768

 
2,322

 
(7,360
)
 
(4,270
)
Amounts reclassified from accumulated other comprehensive income/(loss), before tax
 

 

 

 
557

 
1,272

 
1,829

Pre-tax net other comprehensive income/(loss)
 
(20,676
)
 
21,444

 
768

 
2,879

 
(6,088
)
 
(2,441
)
Income tax effect
 
7,737

 
(1,082
)
 
6,655

 
(1,103
)
 
2,313

 
7,865

Net other comprehensive income/(loss) for the period, net of tax
 
(12,939
)
 
20,362

 
7,423

 
1,776

 
(3,775
)
 
5,424

Accumulated other comprehensive income/(loss) as of end of period
 
$
80,330

 
$
(104,777
)
 
$
(24,447
)
 
$
(4,574
)
 
$
7,011

 
$
(22,010
)
Nine months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income/(loss) as of beginning of period
 
$
86,482

 
$
(121,576
)
 
$
(35,094
)
 
$
(4,156
)
 
$
(16,483
)
 
$
(55,733
)
Other comprehensive income/(loss) before reclassifications and taxes
 
(9,831
)
 
10,839

 
1,008

 
(1,481
)
 
33,551

 
33,078

Amounts reclassified from accumulated other comprehensive income/(loss), before tax
 

 
6,537

 
6,537

 
639

 
4,342

 
11,518

Pre-tax net other comprehensive income/(loss)
 
(9,831
)
 
17,376

 
7,545

 
(842
)
 
37,893

 
44,596

Income tax effect
 
3,679

 
(577
)
 
3,102

 
424

 
(14,399
)
 
(10,873
)
Net other comprehensive income/(loss) for the period, net of tax
 
(6,152
)
 
16,799

 
10,647

 
(418
)
 
23,494

 
33,723

Accumulated other comprehensive income/(loss) as of end of period
 
$
80,330

 
$
(104,777
)
 
$
(24,447
)
 
$
(4,574
)
 
$
7,011

 
$
(22,010
)

Our net investment hedges and cash flow hedges relate to our derivatives associated with RJ Bank’s business operations (see Note 6 for additional information on these derivatives).
 

48

Notes to Condensed Consolidated Financial Statements (Unaudited)





Reclassifications out of accumulated other comprehensive income/(loss)

The following table presents the income statement line items impacted by reclassifications out of accumulated other comprehensive income/(loss), and the related tax effects.
Accumulated other comprehensive income/(loss) components:
$ in thousands
 
Increase/(decrease) in amounts reclassified from accumulated other comprehensive income/(loss)
 
Affected line items in income statement
Three months ended June 30, 2018
 
 
 
 
RJ Bank cash flow hedges
 
$
(619
)
 
Interest expense
Total before tax
 
(619
)
 
 
Income tax effect
 
177

 
Provision for income taxes
Total reclassifications for the period, net of tax
 
$
(442
)
 

Nine months ended June 30, 2018
 
 
 
 
RJ Bank cash flow hedges
 
$
1,396

 
Interest expense
Total before tax
 
1,396

 

Income tax effect
 
(398
)
 
Provision for income taxes
Total reclassifications for the period, net of tax
 
$
998

 
 
Three months ended June 30, 2017
 
 
 
 
RJ Bank available-for-sale securities
 
$
557

 
Other revenue
RJ Bank cash flow hedges
 
1,272

 
Interest expense
Total before tax
 
1,829

 
 
Income tax effect
 
(699
)
 
Provision for income taxes
Total reclassifications for the period, net of tax
 
$
1,130

 
 
Nine months ended June 30, 2017
 
 
 
 
RJ Bank available-for-sale securities
 
$
639

 
Other revenue
RJ Bank cash flow hedges
 
4,342

 
Interest expense
Currency translations
 
6,537

 
Other expense
Total before tax
 
11,518

 
 
Income tax effect
 
(4,380
)
 
Provision for income taxes
Total reclassifications for the period, net of tax
 
$
7,138

 
 

During the nine months ended June 30, 2017, we sold our interests in a number of Latin American joint ventures, which had operations in Uruguay and Argentina. As a component of our computation of the gain or loss resulting from such sales, we recognized the sold entities’ cumulative currency translation balances which, prior to such reclassification, had been a component of the accumulated other comprehensive loss.



49

Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 16 – INTEREST INCOME AND INTEREST EXPENSE

The components of interest income and interest expense were as follows:
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
 
Assets segregated pursuant to regulations and other segregated assets
 
$
13,544

 
$
10,151

 
$
39,608

 
$
26,310

Securities loaned
 
3,904

 
4,016

 
10,353

 
10,662

Trading instruments
 
6,593

 
5,499

 
17,064

 
15,896

Available-for-sale securities
 
14,212

 
8,811

 
37,419

 
17,886

Margin loans
 
28,393

 
21,637

 
77,374

 
61,930

Bank loans, net of unearned income
 
187,335

 
143,306

 
519,879

 
416,617

Loans to financial advisors
 
3,853

 
3,360

 
10,815

 
9,937

Corporate cash and all other
 
13,508

 
7,444

 
39,405

 
20,312

Total interest income
 
$
271,342


$
204,224


$
751,917


$
579,550

Interest expense:
 
 

 
 

 
 
 
 
Bank deposits
 
$
18,808

 
$
4,244

 
$
38,504

 
$
10,424

Securities borrowed
 
2,067

 
1,866

 
5,239

 
5,038

Trading instruments sold but not yet purchased
 
2,071

 
1,773

 
5,397

 
4,561

Brokerage client payables
 
4,463

 
1,121

 
10,216

 
2,649

Other borrowings
 
5,236

 
4,195

 
16,523

 
11,822

Senior notes payable
 
18,170

 
21,981

 
54,530

 
70,345

Other
 
3,492

 
3,380

 
7,931

 
6,364

Total interest expense
 
54,307


38,560


138,340


111,203

Net interest income
 
217,035

 
165,664

 
613,577

 
468,347

Bank loan loss provision
 
(5,226
)
 
(6,209
)
 
(13,791
)
 
(13,097
)
Net interest income after bank loan loss provision
 
$
211,809

 
$
159,455

 
$
599,786

 
$
455,250


Interest expense related to bank deposits in the above table for the three and nine months ended June 30, 2018 and 2017 excludes interest expense associated with affiliate deposits, which has been eliminated in consolidation.


NOTE 17 – SHARE-BASED AND OTHER COMPENSATION

Share-based compensation plans

We have one share-based compensation plan for our employees, Board of Directors and non-employees (comprised of independent contractor financial advisors). The Amended and Restated 2012 Stock Incentive Plan (the “2012 Plan”) authorizes us to grant 40,244,000 new shares, including the shares available for grant under six predecessor plans. We generally issue new shares under the 2012 Plan; however, we are also permitted to reissue our treasury shares. Our share-based compensation accounting policies are described in Note 2 of our 2017 Form 10-K.  Other information related to our share-based awards are presented in Note 20 of our 2017 Form 10-K.  

Stock options

The following table presents expense and income tax benefits related to our stock option awards granted to employees and independent contractor financial advisors for the periods indicated.
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Total share-based expense
 
$
2,167

 
$
3,049

 
$
7,315

 
$
10,421

Income tax benefit related to share-based expense
 
$
164

 
$
408

 
$
628

 
$
1,379


For the nine months ended June 30, 2018, we realized $1 million of excess tax benefits related to our stock option awards which favorably impacted income tax expense in our Condensed Consolidated Statements of Income and Comprehensive Income.


50

Notes to Condensed Consolidated Financial Statements (Unaudited)





During the three and nine months ended June 30, 2018, we granted no stock options to employees and the stock option awards granted to independent contractor financial advisors were not material.
 
The following table presents pre-tax compensation costs not yet recognized for stock option awards granted to employees and independent contractor financial advisors, net of estimated forfeitures, and the remaining period over which the expense will be recognized as of June 30, 2018.
 
 
Pre-tax compensation costs not yet recognized
 
Remaining weighted-average amortization period
 
 
(in thousands)
 
(in years)
Employees
 
$
9,141

 
2.0
Independent contractor financial advisors
 
$
3,635

 
3.2

Restricted stock and RSU awards

The following table presents expense and income tax benefits related to our restricted equity awards granted to employees and members of our Board of Directors for the periods indicated.
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Total share-based expense
 
$
18,851

 
$
16,863

 
$
69,818

 
$
62,963

Income tax benefit related to share-based expense
 
$
4,865

 
$
6,574

 
$
18,387

 
$
22,263


Total share-based expense during the nine months ended June 30, 2017 included $5 million, which was included as a component of “Acquisition-related expenses” on our Condensed Consolidated Statements of Income and Comprehensive Income.

For the nine months ended June 30, 2018, we realized $9 million of excess tax benefits related to our restricted equity awards which favorably impacted income tax expense in our Condensed Consolidated Statements of Income and Comprehensive Income.

During the three and nine months ended June 30, 2018, we granted 52,000 and 1,212,000 RSUs, respectively, to employees and outside members of our Board of Directors with a weighted-average grant-date fair value of $98.86 and $87.27, respectively.

As of June 30, 2018, there was $156 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 3.1 years.

There were no outstanding RSUs related to our independent contractor financial advisors as of June 30, 2018.

RSU awards associated with Alex. Brown

As part of our acquisition of Alex. Brown, we assumed certain DBRSU awards, including the associated plan terms and conditions. Refer to Note 20 of our 2017 Form 10-K for additional information regarding these awards. The DBRSUs are accounted for as derivatives. See Note 6 for additional information regarding these derivatives.

The following table presents the net impact of the DBRSUs in our Condensed Consolidated Statements of Income and Comprehensive Income, including the related income tax effect, for the periods indicated.
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Amortization of DBRSU prepaid compensation asset
 
$
1,114

 
$
1,240

 
$
3,506

 
$
4,018

Increase/(decrease) in fair value of derivative liability
 
(4,691
)
 
940

 
(9,356
)
 
8,792

Net expense/(gain) before tax
 
$
(3,577
)
 
$
2,180


$
(5,850
)

$
12,810

Income tax benefit/(expense)
 
$
(1,010
)
 
$
828

 
$
(2,048
)
 
$
4,776


The table above includes the impact of DBRSUs forfeited during the periods indicated.

As of June 30, 2018, there was a $6 million prepaid compensation asset included in “Other assets” in our Condensed Consolidated Statements of Financial Condition related to these DBRSUs. This asset is expected to be amortized over a weighted-average period

51

Notes to Condensed Consolidated Financial Statements (Unaudited)





of 1.4 years. As of June 30, 2018, there was a $15 million derivative liability included in “Accrued compensation, commissions and benefits” in our Condensed Consolidated Statements of Financial Condition based on the June 30, 2018 share price of DB shares of $10.62.
We held shares of DB as of June 30, 2018 as an economic hedge against this obligation. Such shares are included in “Other investments” on our Condensed Consolidated Statements of Financial Condition. The gains/losses on this hedge are included as a component of “Compensation, commissions and benefits expense” and offset a portion of the gains/losses on the DBRSUs.


NOTE 18 – 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 Federal Reserve Board. 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 accounting 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.

In July 2013, the Office of the Comptroller of the Currency (“OCC”), the Fed and the FDIC released final U.S. rules implementing the Basel III capital framework developed by the Basel Committee on Banking Supervision and certain Dodd-Frank Act and other capital provisions and updated the prompt corrective action framework to reflect the new regulatory capital minimums (the “U.S. Basel III Rules”). RJF and RJ Bank report regulatory capital under the Basel III standardized approach.

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 in Basel III, Common equity Tier 1 capital (“CET1”) to risk-weighted assets. RJF and RJ Bank each calculate these ratios in order to assess compliance with both regulatory requirements and their internal capital policies.  The minimum CET1, Tier 1 Capital, and Total Capital ratios of RJF and RJ Bank are supplemented by an incremental capital conservation buffer, consisting entirely of capital that qualifies as CET1, that began phasing in on January 1, 2016 in increments of 0.625% per year until it reaches 2.5% of risk-weighted assets on January 1, 2019. Failure to maintain the capital conservation buffer could limit our ability to take certain capital actions, including dividends and common equity repurchases, and to make discretionary bonus payments.  As of June 30, 2018, both RJF’s and RJ Bank’s capital levels exceeded the fully-phased in capital conservation buffer requirement, and are each categorized as “well capitalized.”

For further discussion of regulatory capital requirements applicable to certain of our businesses and subsidiaries, see Note 21 of our 2017 Form 10-K.

To meet requirements for capital adequacy purposes or to be categorized as “well capitalized,” RJF must maintain minimum CET1, Tier 1 capital, Total capital and Tier 1 leverage amounts and ratios as set forth in the table below.
 
 
Actual
 
Requirement for capital
adequacy purposes
 
To be well capitalized under regulatory provisions
$ in thousands
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
RJF as of June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
CET1
 
$
5,496,453

 
23.8
%
 
$
1,037,662

 
4.5
%
 
$
1,498,846

 
6.5
%
Tier 1 capital
 
$
5,496,453

 
23.8
%
 
$
1,383,550

 
6.0
%
 
$
1,844,733

 
8.0
%
Total capital
 
$
5,715,394

 
24.8
%
 
$
1,844,733

 
8.0
%
 
$
2,305,916

 
10.0
%
Tier 1 leverage
 
$
5,496,453

 
15.6
%
 
$
1,412,321

 
4.0
%
 
$
1,765,401

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
RJF as of September 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
CET1
 
$
5,081,335

 
23.0
%
 
$
994,950

 
4.5
%
 
$
1,437,150

 
6.5
%
Tier 1 capital
 
$
5,081,335

 
23.0
%
 
$
1,326,600

 
6.0
%
 
$
1,768,800

 
8.0
%
Total capital
 
$
5,293,331

 
23.9
%
 
$
1,768,800

 
8.0
%
 
$
2,211,000

 
10.0
%
Tier 1 leverage
 
$
5,081,335

 
15.0
%
 
$
1,359,168

 
4.0
%
 
$
1,698,960

 
5.0
%


52

Notes to Condensed Consolidated Financial Statements (Unaudited)





The increase in RJF’s Tier 1 capital and Total capital ratios at June 30, 2018 compared to September 30, 2017 was primarily the result of positive earnings during the nine months ended June 30, 2018, offset by an increase in goodwill and identifiable intangible assets related to the Scout Group acquisition and the growth of the corporate loan portfolio at RJ Bank.

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 table below.
 
 
Actual
 
Requirement for capital
adequacy purposes
 
To be well capitalized under regulatory provisions
$ in thousands
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
RJ Bank as of June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
CET1
 
$
1,972,573

 
12.5
%
 
$
709,104

 
4.5
%
 
$
1,024,261

 
6.5
%
Tier 1 capital
 
$
1,972,573

 
12.5
%
 
$
945,472

 
6.0
%
 
$
1,260,629

 
8.0
%
Total capital
 
$
2,169,655

 
13.8
%
 
$
1,260,629

 
8.0
%
 
$
1,575,786

 
10.0
%
Tier 1 leverage
 
$
1,972,573

 
8.9
%
 
$
884,969

 
4.0
%
 
$
1,106,212

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
RJ Bank as of September 30, 2017:
 
 

 
 

 
 

 
 

 
 

 
 

CET1
 
$
1,821,306

 
12.5
%
 
$
654,901

 
4.5
%
 
$
945,968

 
6.5
%
Tier 1 capital
 
$
1,821,306

 
12.5
%
 
$
873,201

 
6.0
%
 
$
1,164,268

 
8.0
%
Total capital
 
$
2,003,461

 
13.8
%
 
$
1,164,268

 
8.0
%
 
$
1,455,335

 
10.0
%
Tier 1 leverage
 
$
1,821,306

 
8.9
%
 
$
816,304

 
4.0
%
 
$
1,020,379

 
5.0
%

RJ Bank’s Tier 1 and Total capital ratios at June 30, 2018 were flat compared to September 30, 2017 as the growth in earnings at RJ Bank was offset by the growth of the corporate loan portfolio.

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

The following table presents the net capital position of RJ&A.
 
 
As of
$ in thousands
 
June 30, 2018
 
September 30, 2017
Raymond James & Associates, Inc.:
 
 
 
 
(Alternative Method elected)
 
 
 
 
Net capital as a percent of aggregate debit items
 
26.96
%
 
21.37
%
Net capital
 
$
779,130

 
$
589,420

Less: required net capital
 
(57,794
)
 
(55,164
)
Excess net capital
 
$
721,336

 
$
534,256


The following table presents the net capital position of Raymond James Financial Services, Inc. (“RJFS”).
 
 
As of
$ in thousands
 
June 30, 2018
 
September 30, 2017
Raymond James Financial Services, Inc.:
 
 
 
 
(Alternative Method elected)
 
 
 
 
Net capital
 
$
27,657

 
$
34,488

Less: required net capital
 
(250
)
 
(250
)
Excess net capital
 
$
27,407

 
$
34,238


The following table presents the risk adjusted capital of RJ Ltd. (in Canadian dollars).
 
 
As of
$ in thousands
 
June 30, 2018
 
September 30, 2017
Raymond James Ltd.:
 
 
 
 
Risk adjusted capital before minimum
 
$
94,839

 
$
108,985

Less: required minimum capital
 
(250
)
 
(250
)
Risk adjusted capital
 
$
94,589

 
$
108,735



53

Notes to Condensed Consolidated Financial Statements (Unaudited)





As of June 30, 2018, all of our other active regulated domestic and international subsidiaries were in compliance with and met all applicable capital requirements.


NOTE 19 – EARNINGS PER SHARE

The following table presents the computation of basic and diluted earnings per common share.
 
 
Three months ended June 30,
 
Nine months ended June 30,
in thousands, except per share amounts
 
2018
 
2017
 
2018
 
2017
Income for basic earnings per common share:
 
 
 
 
 
 
 
 
Net income attributable to RJF
 
$
232,258

 
$
183,424

 
$
593,947

 
$
442,746

Less allocation of earnings and dividends to participating securities
 
(402
)
 
(399
)
 
(1,016
)
 
(975
)
Net income attributable to RJF common shareholders
 
$
231,856

 
$
183,025

 
$
592,931

 
$
441,771

Income for diluted earnings per common share:
 
 

 
 

 
 
 
 
Net income attributable to RJF
 
$
232,258

 
$
183,424

 
$
593,947

 
$
442,746

Less allocation of earnings and dividends to participating securities
 
(393
)
 
(391
)
 
(995
)
 
(957
)
Net income attributable to RJF common shareholders
 
$
231,865

 
$
183,033

 
$
592,952

 
$
441,789

Common shares:
 
 

 
 

 
 
 
 
Average common shares in basic computation
 
145,634

 
143,712

 
145,156

 
143,059

Dilutive effect of outstanding stock options and certain RSUs
 
3,813

 
3,391

 
3,631

 
3,288

Average common shares used in diluted computation
 
149,447

 
147,103

 
148,787

 
146,347

Earnings per common share:
 
 

 
 

 
 
 
 
Basic
 
$
1.59

 
$
1.27

 
$
4.08

 
$
3.09

Diluted
 
$
1.55

 
$
1.24

 
$
3.99

 
$
3.02

Stock options and certain RSUs excluded from weighted-average diluted common shares because their effect would be antidilutive
 
171

 
365

 
1,086

 
1,686


The allocation of earnings and dividends to participating securities in the table above represent dividends paid during the period to participating securities plus an allocation of undistributed earnings to participating securities. Participating securities represent unvested restricted stock and certain RSUs and amounted to weighted-average shares of 257 thousand and 319 thousand for the three months ended June 30, 2018 and 2017, respectively. Participating securities for the nine months ended June 30, 2018 and 2017 amounted to weighted-average shares of 255 thousand and 324 thousand, respectively.  Dividends paid to participating securities were insignificant for the three and nine months ended June 30, 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.

Dividends per common share declared and paid were as follows:
 
Three months ended June 30,
 
Nine months ended June 30,
 
2018
 
2017
 
2018
 
2017
Dividends per common share - declared
$
0.30

 
$
0.22

 
$
0.80

 
$
0.66

Dividends per common share - paid
$
0.25

 
$
0.22

 
$
0.72

 
$
0.64



NOTE 20 – SEGMENT INFORMATION

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

The business segments are determined based upon factors such as the services provided and the distribution channels served and are consistent with how we assess performance and determine how to allocate our resources throughout our subsidiaries. For a further discussion of our business segments, see Note 24 of our 2017 Form 10-K.


54

Notes to Condensed Consolidated Financial Statements (Unaudited)





The following tables present information concerning operations in these segments of business.
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Private Client Group
 
$
1,286,822

 
$
1,131,452

 
$
3,802,765

 
$
3,263,329

Capital Markets
 
250,252

 
265,433

 
709,401

 
762,895

Asset Management
 
168,163

 
125,675

 
481,970

 
356,291

RJ Bank
 
212,465

 
158,989

 
587,036

 
452,203

Other
 
16,223

 
15,417

 
53,285

 
46,885

Intersegment eliminations
 
(43,023
)
 
(33,859
)
 
(120,729
)
 
(89,414
)
Total revenues
 
$
1,890,902

 
$
1,663,107

 
$
5,513,728

 
$
4,792,189

Income/(loss) excluding noncontrolling interests and before provision for income taxes:
Private Client Group
 
$
132,274

 
$
127,951

 
$
444,923

 
$
230,681

Capital Markets
 
21,787

 
34,607

 
42,797

 
97,302

Asset Management
 
58,272

 
43,270

 
171,537

 
122,976

RJ Bank
 
129,154

 
99,990

 
361,395

 
296,022

Other
 
(23,429
)
 
(30,804
)
 
(59,980
)
 
(100,075
)
Pre-tax income excluding noncontrolling interests
 
318,058

 
275,014

 
960,672

 
646,906

Net income/(loss) attributable to noncontrolling interests
 
(16
)
 
1,927

 
143

 
(1,147
)
Income including noncontrolling interests and before provision for income taxes
 
$
318,042

 
$
276,941

 
$
960,815

 
$
645,759


No individual client accounted for more than ten percent of total revenues in any of the periods presented.
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Net interest income/(expense):
 
 
 
 
 
 
 
 
Private Client Group
 
$
43,201

 
$
35,557

 
$
122,119

 
$
99,615

Capital Markets
 
317

 
489

 
3,359

 
5,163

Asset Management
 
572

 
219

 
1,313

 
354

RJ Bank
 
180,516

 
145,521

 
515,678

 
418,304

Other
 
(7,571
)
 
(16,122
)
 
(28,892
)
 
(55,089
)
Net interest income
 
$
217,035

 
$
165,664

 
$
613,577

 
$
468,347


The following table presents our total assets on a segment basis.
$ in thousands
 
June 30, 2018
 
September 30, 2017
Total assets:
 
 
 
 
Private Client Group
 
$
9,248,308

 
$
9,967,320

Capital Markets
 
2,336,609

 
2,396,033

Asset Management
 
364,743

 
151,111

RJ Bank
 
22,808,413

 
20,611,898

Other
 
1,606,036

 
1,757,094

Total
 
$
36,364,109

 
$
34,883,456


Total assets in the PCG segment included $275 million and $277 million of goodwill as of June 30, 2018 and September 30, 2017, respectively. Total assets in the Capital Markets segment included $133 million and $134 million of goodwill as of June 30, 2018 and September 30, 2017, respectively. Total assets in the Asset Management segment included $69 million of goodwill as of June 30, 2018 which was entirely attributable to our fiscal year 2018 acquisition of the Scout Group.


55

Notes to Condensed Consolidated Financial Statements (Unaudited)





We have operations in the U.S., Canada and Europe. Substantially all long-lived assets are located in the U.S.  Revenues and income before provision for income taxes and excluding noncontrolling interests, classified by major geographic areas in which they were earned, were as follows:
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
U.S.
 
$
1,749,274

 
$
1,552,369

 
$
5,093,473

 
$
4,446,928

Canada
 
107,710

 
86,602

 
316,390

 
263,633

Europe
 
33,918

 
24,132

 
103,865

 
77,358

Other
 

 
4

 

 
4,270

Total
 
$
1,890,902

 
$
1,663,107

 
$
5,513,728

 
$
4,792,189

 
 
 
 
 
 
 
 
 
Pre-tax income/(loss) excluding noncontrolling interests:
 
 
 
 

 
 
 
 
U.S.
 
$
303,281

 
$
273,811

 
$
924,734

 
$
644,621

Canada
 
16,036

 
4,732

 
39,144

 
9,557

Europe
 
(1,259
)
 
(2,184
)
 
(3,206
)
 
(2,771
)
Other
 

 
(1,345
)
 

 
(4,501
)
Total
 
$
318,058

 
$
275,014

 
$
960,672

 
$
646,906


The following table presents our total assets classified by major geographic area in which they were held.
$ in thousands
 
June 30, 2018
 
September 30, 2017
Total assets:
 
 
 
 
U.S.
 
$
33,675,646

 
$
32,200,852

Canada
 
2,597,696

 
2,592,480

Europe
 
81,995

 
81,090

Other
 
8,772

 
9,034

Total
 
$
36,364,109

 
$
34,883,456


Total assets in the U.S. included $425 million and $356 million of goodwill at June 30, 2018 and September 30, 2017, respectively. Total assets in Canada included $43 million and $45 million of goodwill at June 30, 2018 and September 30, 2017, respectively. Total assets in Europe included $9 million and $10 million of goodwill at June 30, 2018 and September 30, 2017, respectively.

56


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

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



57

Management's Discussion and Analysis


Introduction

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

Factors affecting “forward-looking statements”

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

Executive overview

We operate as a financial holding company and a bank holding company. Results in the businesses in which we operate are highly correlated to general economic conditions and, more specifically, to the direction of the U.S. equity and fixed income markets, market volatility, corporate and mortgage lending markets and commercial and residential credit trends.  Overall market conditions, interest rates, economic, political and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control.  These factors affect the financial decisions made by market participants who include investors, borrowers, and competitors, impacting their level of participation in the financial markets. These factors also impact the level of investment banking activity as well as trading profits and asset valuations, which ultimately affect our business results.

Quarter ended June 30, 2018 compared with the quarter ended June 30, 2017

We achieved net revenues of $1.84 billion for the quarter, a $212 million, or 13%, increase over the prior year quarter. Our pre-tax income was $318 million, an increase of $43 million, or 16%. Our net income of $232 million reflected an increase of $49 million, or 27%, and our earnings per diluted share amounted to $1.55, a 25% increase.

The growth in net revenues was driven by an increase in client assets compared with the prior year quarter as well as strong investment banking revenues. In addition, we benefited from the impact of higher short-term interest rates, which increased both net interest income and fees earned from third-party banks on balances in our RJBDP. Offsetting these increases was a decline in institutional fixed income commissions, which continued to be impacted by a challenging market environment. Total client assets under administration reached $754.3 billion at June 30, 2018, a 14% increase, primarily attributable to strong financial advisor recruiting and retention, as well as equity market appreciation.

Non-interest expenses increased $171 million, or 13%. The increase primarily resulted from higher compensation, commissions and benefits expenses, most of which was associated with the increase in net revenues, as well as increased staffing levels required to support our continued growth and regulatory compliance requirements. An increase in business development expense compared with the prior year quarter was the result of the timing of conferences for financial advisors as well as increased recruiting and onboarding-related expenses. Communications and information processing expenses increased compared with the prior year quarter as a result of our continued investment in technology infrastructure to support our growth. Other expenses also increased, primarily due to increased legal and regulatory reserves and, to a lesser extent, professional fees.

Our effective tax rate was 27.0% for the current quarter, a decrease from 33.3% in the prior year quarter. The decrease was primarily attributable to the impact of a reduced federal statutory tax rate as a result of the Tax Act enacted in December 2017.

58

Management's Discussion and Analysis


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

Our PCG segment generated net revenues of $1.28 billion, a 13% increase, and pre-tax income of $132 million, a 3% increase.  The increase in net revenues was primarily attributable to an increase in securities commissions and fees, driven by increased client assets resulting from higher equity markets and strong financial advisor recruiting and retention. The segment also benefited from higher short-term interest rates, resulting in an increase in net interest income, as well as increased account and service fees related to client cash balances in RJBDP. Non-interest expenses increased $148 million, or 15%, primarily resulting from increases in compensation, commissions and benefits expenses and business development expenses.

The Capital Markets segment generated net revenues of $242 million, a 7% decrease, and pre-tax income of $22 million, a 37% decrease. The decrease in net revenues was primarily driven by lower institutional fixed income commissions and net trading profit, partially offset by a significant increase in merger & acquisition and advisory fee revenues. Non-interest expenses decreased $4 million, or 2%.

Our Asset Management segment generated a 34% increase in net revenues to $168 million, while pre-tax income increased 35% to $58 million. The increase in net revenues was primarily the result of an increase in financial assets under management, which were 49% higher than the prior year, including the addition of $27 billion of assets under management in November 2017 from the Scout Group acquisition. Non-discretionary asset-based administration fees also increased as a result of higher assets in such programs. Non-interest expenses increased $27 million, or 33%, largely driven by incremental expenses related to the acquisition of the Scout Group.

RJ Bank generated a 25% increase in net revenues to $188 million, while pre-tax income increased 29% to $129 million. The increase in net revenues resulted primarily from an increase in net interest income due to growth in average interest-earning assets as well as an increase in net interest margin. Non-interest expenses increased $8 million, primarily reflecting higher affiliate deposit fees paid to PCG due to an increase in client account balances.

Our Other segment reflected a pre-tax loss of $23 million, or 24% less than the loss in the prior year quarter, primarily due a decrease in interest expense on our senior notes payable, due to a lower average balance outstanding and a decrease in the average rate on such balances, as well as an increase in interest income as a result of an increase in interest rates earned on higher corporate cash balances.

Nine months ended June 30, 2018 compared with the nine months ended June 30, 2017

We achieved net revenues of $5.38 billion, a $694 million, or 15%, increase. Our pre-tax income was $961 million, an increase of $314 million, or 49%. Our net income of $594 million increased $151 million, or 34%, and our earnings per diluted share were $3.99, a 32% increase.

During the nine months ended June 30, 2018, earnings were negatively affected by the estimated discrete impact of the Tax Act of $117 million, primarily related to the remeasurement of U.S. deferred tax assets at a lower enacted corporate tax rate. Excluding this discrete impact and $4 million of acquisition-related expenses, adjusted net income was $714 million (1), an increase of 30% compared with adjusted net income of $551 million (1) in the prior year period, which excluded expenses related to the Jay Peak matter, acquisition-related expenses and losses on the extinguishment of certain of our senior notes. Adjusted earnings per diluted share were $4.79 (1), a 27% increase compared with adjusted earnings per diluted share of $3.76 (1) in the prior year period.

The increase in net revenues reflected significant growth in client assets as well as the impact of higher short-term interest rates, which increased both net interest income and account and service fees earned on balances in our RJBDP. Offsetting these increases, institutional equity and fixed income commissions declined compared with the prior year period, reflecting market-driven challenges. Total client assets under administration reached $754.3 billion at June 30, 2018, a 14% increase, primarily attributable to strong financial advisor recruiting and retention, as well as equity market appreciation.

Non-interest expenses increased $379 million, or 9%. The increase primarily resulted from increased compensation, commissions and benefit expenses associated with the increase in net revenues, as well as increased staffing levels required to support our continued growth and regulatory compliance requirements. Communications and information processing expenses also increased compared with the prior year period as a result of our continued investment in our technology infrastructure to support our growth. Offsetting these increases was a $130 million decrease in legal expenses as the Jay Peak matter impacted the prior fiscal year.


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

59

Management's Discussion and Analysis


Our effective tax rate was 38.2% for the nine months ended June 30, 2018, reflecting the estimated discrete impact of the Tax Act of $117 million, partially offset by a lower blended federal corporate statutory tax rate of 24.5%. Excluding the estimated discrete impact of the Tax Act, our adjusted effective tax rate was 26.0% (1) for the nine months ended June 30, 2018. We estimate our effective tax rate to be approximately 27% for the remainder of our fiscal year, which reflects the blended federal corporate statutory tax rate, and approximately 24% for fiscal year 2019, reflecting the lower federal corporate statutory tax rate of 21% for the full year.  Our future effective tax rates are estimates based on our current interpretation of the Tax Act and may change, possibly materially, as we complete our analysis.  Our future effective tax rate will also be impacted positively or negatively by non-taxable items (such as the gains or losses earned on our COLI and tax-exempt interest), non-deductible expenses (such as meals and entertainment) and vesting and exercises of equity compensation.  See Note 13 of this Form 10-Q for further information on the Tax Act.
 
A summary of our financial results by segment as compared to the prior year period is as follows:

Our PCG segment generated net revenues of $3.78 billion, a 16% increase, and pre-tax income of $445 million, an increase of 93% over the prior year period, which included $130 million of legal expenses related to the Jay Peak matter. The increase in net revenues was primarily attributable to an increase in securities commissions and fees, driven by increased client assets resulting from higher equity markets and continued strong financial advisor recruiting and retention. The segment also benefited from the impact of higher short-term interest rates, resulting in an increase in account and service fees related to client cash balances in RJBDP and higher net interest income. Non-interest expenses increased $317 million, or 10%, primarily resulting from increases in compensation, commissions and benefits expenses and communications and information processing expenses, offset by a decrease in the aforementioned legal expenses.

The Capital Markets segment generated net revenues of $689 million, an 8% decrease over the prior year period, and pre-tax income declined 56% to $43 million. The decrease in net revenues was primarily due to market-driven decreases in institutional fixed income and equity commissions and net trading profit. Investment banking revenues increased due to higher merger & acquisition and advisory fees, partially offset by lower equity underwriting fees and tax credit fund syndication fees. Non-interest expenses decreased $7 million, or 1%, compared with the prior year period.

Our Asset Management segment generated a 35% increase in net revenues to $482 million, and a pre-tax income increase of 39% to $172 million. The increase in net revenues primarily reflected increases in advisory fee revenues from managed programs and, to a lesser degree, non-discretionary asset-based administration fee revenues. Financial assets under management increased 49% over the prior year, aided by the acquisition of the Scout Group, which added $27 billion of additional assets under management in November 2017. Non-interest expenses increased $74 million, or 32%, primarily resulting from incremental expenses related to the Scout Group acquisition and increased investment sub-advisory fees.

RJ Bank generated a 24% increase in net revenues to $532 million, while pre-tax income increased 22% to $361 million. The increase in net revenues resulted primarily from an increase in net interest income due to growth in interest-earning assets and an increase in net interest margin. Non-interest expenses increased $36 million, or 27%, primarily reflecting higher affiliate deposit fees paid to PCG due to increased client account balances.

Our Other segment reflected a pre-tax loss that was $40 million, or 40%, less than the loss in the prior year period, primarily due to a decrease in net interest expense, lower acquisition-related expenses and not incurring losses on the extinguishment of certain of our senior notes as we did in the prior year period. The decline in net interest expense reflected lower interest expense due to a decrease in the outstanding balance and average interest rate of our senior notes payable, as well as an increase in interest income related to the increased interest rates earned on higher corporate cash balances.













(1) “Adjusted effective tax rate” is a non-GAAP financial measure. Please see the “reconciliation of GAAP measures to non-GAAP measures” in this MD&A, for a reconciliation of our non-GAAP measures to the most directly comparable GAAP measures, and for other important disclosures.

60

Management's Discussion and Analysis


Segments

We currently operate through four operating segments and our Other segment. The four operating segments are PCG, Capital Markets, Asset Management and RJ Bank. The Other segment captures private equity activities as well as certain corporate overhead costs of RJF that are not allocated to operating segments, including the interest cost on our public debt and the acquisition and integration costs associated with our acquisitions.

The following table presents our consolidated and segment net revenues and pre-tax income/(loss), the latter excluding noncontrolling interests, for the periods indicated.
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
% change
 
2018
 
2017
 
% change
Total company
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
1,836,595

 
$
1,624,547

 
13
 %
 
$
5,375,388

 
$
4,680,986

 
15
 %
Pre-tax income
 
$
318,058

 
$
275,014

 
16
 %
 
$
960,672

 
$
646,906

 
49
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Private Client Group
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
1,279,120

 
$
1,127,285

 
13
 %
 
$
3,783,986

 
$
3,252,551

 
16
 %
Pre-tax income
 
$
132,274

 
$
127,951

 
3
 %
 
$
444,923

 
$
230,681

 
93
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Markets
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
241,686

 
$
258,909

 
(7
)%
 
$
688,967

 
$
748,096

 
(8
)%
Pre-tax income
 
$
21,787

 
$
34,607

 
(37
)%
 
$
42,797

 
$
97,302

 
(56
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Management
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
168,155

 
$
125,664

 
34
 %
 
$
481,940

 
$
356,226

 
35
 %
Pre-tax income
 
$
58,272

 
$
43,270

 
35
 %
 
$
171,537

 
$
122,976

 
39
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
RJ Bank
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
187,820

 
$
150,487

 
25
 %
 
$
531,743

 
$
429,873

 
24
 %
Pre-tax income
 
$
129,154

 
$
99,990

 
29
 %
 
$
361,395

 
$
296,022

 
22
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
(2,235
)
 
$
(7,251
)
 
69
 %
 
$
(3,323
)
 
$
(24,912
)
 
87
 %
Pre-tax loss
 
$
(23,429
)
 
$
(30,804
)
 
24
 %
 
$
(59,980
)
 
$
(100,075
)
 
40
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Intersegment eliminations
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
(37,951
)
 
$
(30,547
)
 

 
$
(107,925
)
 
$
(80,848
)
 




61

Management's Discussion and Analysis


Reconciliation of GAAP measures to non-GAAP measures

We utilize certain non-GAAP measures to enhance the understanding of our financial results and related measures. We believe that the non-GAAP measures provide useful information by excluding certain material items that may not be indicative of our core operating results. We believe that these non-GAAP measures allow for better evaluation of the operating performance of the business and facilitate a meaningful comparison of our results in the current period to those in prior and future periods. These non-GAAP measures should be considered in addition to, not as a substitute for, measures of financial performance prepared in accordance with GAAP. In addition, our non-GAAP measures may not be comparable to similarly-titled non-GAAP measures of other companies. The following table provides a reconciliation of GAAP measures to non-GAAP measures for the periods which include non-GAAP adjustments.
 
 
Three months ended June 30,
 
Nine months ended
June 30,
$ in thousands, except per share amounts
 
2017
 
2018
 
2017
Net income
 
$
183,424

 
$
593,947

 
$
442,746

Non-GAAP adjustments:
 
 
 
 
 
 
Acquisition-related expenses
 
3,366

 
3,927

 
17,118

Losses on extinguishment of debt
 

 

 
8,282

Jay Peak matter
 

 

 
130,000

Sub-total pre-tax non-GAAP adjustments
 
3,366

 
3,927

 
155,400

Tax effect on non-GAAP adjustments above
 
(1,279
)
 
(1,100
)
 
(47,299
)
Discrete impact of the Tax Act
 

 
117,169

 

Total non-GAAP adjustments, net of tax
 
2,087

 
119,996

 
108,101

Adjusted net income
 
$
185,511

 
$
713,943

 
$
550,847

 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
Basic
 
$
1.27

 
$
4.08

 
$
3.09

Diluted
 
$
1.24

 
$
3.99

 
$
3.02

Adjusted basic
 
$
1.29

 
$
4.91

 
$
3.84

Adjusted diluted
 
$
1.26

 
$
4.79

 
$
3.76

Effective tax rate:
 
 
 
 
 
 
For the nine months ended June 30, 2018
($ in thousands)
 
Pre-tax income including noncontrolling interests
 
Provision for income taxes
 
Effective tax rate
 
 
$
960,815

 
$
366,725

 
38.2
%
Less: discrete impact of the Tax Act
 
 
 
117,169

 
 
As adjusted for discrete impact of the Tax Act
 
 
 
$
249,556

 
26.0
%

Net income in the table above excludes noncontrolling interests.

For more information on acquisition related expenses, see Note 3 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

See Part I. Item 3 - Legal proceedings of our 2017 Form 10-K for more information on the Jay Peak matter.

See Note 13 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for more information related to the discrete impact of the Tax Act.

Net interest analysis

The Federal Reserve Bank announced an additional increase of 25 basis points in its benchmark short-term interest rate in June 2018. This increase is in addition to six 25 basis point increases since December 2015. These increases in short-term interest rates have had a significant impact on our overall financial performance, as we have certain assets and liabilities, primarily held in our PCG and RJ Bank segments, which are sensitive to changes in interest rates. Given the relationship of our interest-sensitive assets to liabilities held in each of these segments, increases in short-term interest rates generally result in an overall increase in our net earnings, although the magnitude of the impact to our net interest margin depends on the yields on interest-earning assets relative to the cost of interest-bearing liabilities.


62

Management's Discussion and Analysis


In PCG, we also earn fees from RJBDP, a multi-bank sweep program in which clients’ cash deposits in their brokerage accounts are swept into interest-bearing deposit accounts at RJ Bank and various third-party banks. Fees from third-party banks are recorded in “Account and service fees” in our Condensed Consolidated Statements of Income and Comprehensive Income. RJBDP fees from third-party banks fluctuate based on changes in short-term interest rates relative to deposit rates paid on client cash balances.

The following table details the components of our clients’ domestic cash sweep balances.
 
 
As of
$ in millions
 
June 30, 2018
 
September 30, 2017
 
June 30, 2017
RJBDP
 
 
 
 
 
 
RJ Bank
 
$
19,014

 
$
17,387

 
$
15,964

Third-party banks
 
16,971

 
20,704

 
22,260

Subtotal RJBDP
 
35,985

 
38,091

 
38,224

Money market funds
 
2,687

 
1,818

 
1,846

Client Interest Program
 
2,784

 
3,101

 
3,254

Total clients’ domestic cash sweep balances
 
$
41,456

 
$
43,010

 
$
43,324


The aforementioned short-term interest rate increases had a significant impact on fees earned from RJBDP despite the decline in RJBDP balances at third-party banks, but have not had as significant of an impact on market deposit rates paid on client cash balances. However, we have raised our deposit rates paid on client cash balances following the most recent rate increases and expect market deposit rates to continue to rise with future increases in short-term interest rates. As such, any future increases in short-term interest rates may have less of an impact on fees earned from RJBDP depending on the level of deposit rates paid on client cash balances.

If the Federal Reserve Bank was to reverse its previous actions and decrease the benchmark short-term interest rate, or if deposit rates that we pay on client cash balances increased and resulted in a decline in spreads earned on RJBDP, the positive impact described above on our net interest income and account and service fees would be reversed.


63

Management's Discussion and Analysis


Quarter ended June 30, 2018 compared with the quarter ended June 30, 2017

The following table presents our consolidated average balances, interest income and expense, and the related yields and rates. Average balances are calculated on a daily basis, with the exception of Trading instruments, Loans to financial advisors, net and Corporate cash and all other, which are calculated based on the average of the end-of-month balances for each month within the period.
 
 
Three months ended June 30,
 
 
2018
 
2017
$ in thousands
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/cost
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/cost
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Assets segregated pursuant to regulations and other segregated assets
 
$
2,438,254

 
$
13,544

 
2.22
%
 
$
3,136,032

 
$
10,151

 
1.29
%
Securities loaned
 
379,609

 
3,904

 
4.11
%
 
396,573

 
4,016

 
4.05
%
Trading instruments
 
759,504

 
6,593

 
3.47
%
 
661,553

 
5,499

 
3.32
%
Available-for-sale securities
 
2,643,784

 
14,212

 
2.15
%
 
1,872,822

 
8,811

 
1.88
%
Margin loans
 
2,687,777

 
28,393

 
4.23
%
 
2,365,850

 
21,637

 
3.66
%
Bank loans, net:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
7,647,502

 
85,120

 
4.40
%
 
7,190,234

 
68,765

 
3.79
%
CRE construction loans
 
181,571

 
2,401

 
5.23
%
 
122,616

 
1,703

 
5.49
%
CRE loans
 
3,258,551

 
34,188

 
4.15
%
 
2,944,902

 
25,145

 
3.38
%
Tax-exempt loans
 
1,190,878

 
7,673

 
2.58
%
 
918,606

 
5,955

 
2.59
%
Residential mortgage loans
 
3,514,327

 
27,257

 
3.10
%
 
2,867,452

 
21,435

 
2.96
%
SBL
 
2,740,641

 
29,511

 
4.26
%
 
2,173,748

 
19,009

 
3.46
%
Loans held for sale
 
109,449

 
1,185

 
4.34
%
 
145,811

 
1,294

 
3.74
%
Total bank loans, net
 
18,642,919

 
187,335

 
4.04
%
 
16,363,369

 
143,306

 
3.55
%
Loans to financial advisors, net
 
904,541

 
3,853

 
1.70
%
 
849,767

 
3,360

 
1.58
%
Corporate cash and all other
 
3,357,914

 
13,508

 
1.61
%
 
3,186,368

 
7,444

 
0.93
%
Total interest-earning assets
 
$
31,814,302


$
271,342

 
3.41
%
 
$
28,832,334


$
204,224

 
2.83
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 

 
 

 
 

 
 

 
 

Bank deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
389,393

 
$
1,589

 
1.64
%
 
$
287,365

 
$
1,042

 
1.45
%
Money market, savings and NOW accounts
 
18,423,342

 
17,219

 
0.37
%
 
15,870,566

 
3,202

 
0.08
%
Securities borrowed
 
170,588

 
2,067

 
4.85
%
 
102,206

 
1,866

 
7.30
%
Trading instruments sold but not yet purchased
 
278,954

 
2,071

 
2.97
%
 
292,000

 
1,773

 
2.43
%
Brokerage client payables
 
4,061,248

 
4,463

 
0.44
%
 
4,584,302

 
1,121

 
0.10
%
Other borrowings
 
901,290

 
5,236

 
2.32
%
 
859,373

 
4,195

 
1.95
%
Senior notes payable
 
1,549,185

 
18,170

 
4.69
%
 
1,629,648

 
21,981

 
5.40
%
Other
 
215,734

 
3,492

 
6.47
%
 
274,281

 
3,380

 
4.93
%
Total interest-bearing liabilities
 
$
25,989,734

 
$
54,307

 
0.84
%
 
$
23,899,741

 
$
38,560

 
0.65
%
Net interest income
 
 
 
$
217,035

 
 
 
 
 
$
165,664

 
 

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

Fee income on all loans included in interest income for the three months ended June 30, 2018 and 2017 was $6 million and $9 million, respectively.

Net interest income increased $51 million, or 31%, primarily as a result of increases in our RJ Bank and PCG segments, as well as a decrease in net interest expense in our Other segment.

Net interest income in RJ Bank increased $35 million, or 24%, resulting from increases in the average outstanding balances of loans and available-for-sale securities, as well as an increase in net interest margin. Refer to the discussion of the specific components of RJ Bank’s net interest income in the RJ Bank section of this MD&A.


64

Management's Discussion and Analysis


Net interest income in the PCG segment increased $8 million, or 21%, driven by an increase in interest income from margin loans, due to an increase in short-term interest rates as well as higher average balances, and an increase in interest income from segregated assets due to an increase in short-term interest rates. The favorable impact of higher interest rates on segregated assets was partially offset by a decrease in segregated asset balances. Interest expense in the PCG segment also increased, primarily due to the impact of higher interest rates paid on client cash balances, partially offset by lower average client cash balances.

Net interest expense in the Other segment decreased $9 million, or 53%, due to both a decrease in interest expense and an increase in interest income. The decrease in interest expense was due to a decline in the average outstanding balance and average interest rate on our outstanding senior notes payable as a result of net redemptions during fiscal year 2017. Interest income in the Other segment increased as a result of the increase in interest rates on corporate cash balances.

Nine months ended June 30, 2018 compared with the nine months ended June 30, 2017

The following table presents our consolidated average balances, interest income and expense, and the related yields and rates. Average balances are calculated on a daily basis, with the exception of Trading instruments, Loans to financial advisors, net and Corporate cash and all other, which are calculated based on the average of the end-of-month balances for each month within the period.
 
 
Nine months ended June 30,
 
 
2018
 
2017
$ in thousands
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/cost
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/cost
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Assets segregated pursuant to regulations and other segregated assets
 
$
2,751,748

 
$
39,608

 
1.92
%
 
$
3,391,420

 
$
26,310

 
1.03
%
Securities loaned
 
361,026

 
10,353

 
3.82
%
 
467,520

 
10,662

 
3.04
%
Trading instruments
 
689,129

 
17,064

 
3.30
%
 
647,118

 
15,896

 
3.28
%
Available-for-sale securities
 
2,466,393

 
37,419

 
2.02
%
 
1,404,869

 
17,886

 
1.70
%
Margin loans
 
2,558,510

 
77,374

 
4.03
%
 
2,392,261

 
61,930

 
3.45
%
Bank loans:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
7,537,590

 
237,083

 
4.15
%
 
7,344,545

 
209,027

 
3.76
%
CRE construction loans
 
166,026

 
6,331

 
5.03
%
 
131,996

 
4,730

 
4.73
%
CRE loans
 
3,159,911

 
95,196

 
3.97
%
 
2,760,836

 
71,090

 
3.40
%
Tax-exempt loans
 
1,125,882

 
21,734

 
2.57
%
 
860,627

 
16,695

 
2.59
%
Residential mortgage loans
 
3,362,635

 
77,790

 
3.08
%
 
2,721,116

 
60,411

 
2.93
%
SBL
 
2,594,329

 
78,203

 
3.98
%
 
2,052,784

 
50,948

 
3.27
%
Loans held for sale
 
123,418

 
3,542

 
3.83
%
 
154,617

 
3,716

 
3.34
%
Total bank loans, net
 
18,069,791

 
519,879

 
3.85
%
 
16,026,521

 
416,617

 
3.51
%
Loans to financial advisors, net
 
882,640

 
10,815

 
1.63
%
 
842,522

 
9,937

 
1.57
%
Corporate cash and all other
 
3,783,653

 
39,405

 
1.39
%
 
3,318,560

 
20,312

 
0.82
%
Total interest-earning assets
 
$
31,562,890

 
$
751,917

 
3.18
%
 
$
28,490,791

 
$
579,550

 
2.71
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Bank deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
352,893

 
$
4,213

 
1.60
%
 
$
290,800

 
$
3,176

 
1.46
%
Savings, money market and NOW accounts
 
18,192,714

 
34,291

 
0.25
%
 
15,215,209

 
7,248

 
0.06
%
Securities borrowed
 
149,632

 
5,239

 
4.67
%
 
111,156

 
5,038

 
6.04
%
Trading instruments sold but not yet purchased
 
268,193

 
5,397

 
2.68
%
 
298,814

 
4,561

 
2.04
%
Brokerage client payables
 
4,289,236

 
10,216

 
0.32
%
 
4,799,463

 
2,649

 
0.07
%
Other borrowings
 
919,342

 
16,523

 
2.40
%
 
804,672

 
11,822

 
1.96
%
Senior notes payable
 
1,549,034

 
54,530

 
4.69
%
 
1,642,703

 
70,345

 
5.71
%
Other
 
227,746

 
7,931

 
4.64
%
 
266,599

 
6,364

 
3.18
%
Total interest-bearing liabilities
 
$
25,948,790

 
$
138,340

 
0.71
%
 
$
23,429,416

 
$
111,203

 
0.63
%
Net interest income
 
 

 
$
613,577

 
 

 
 

 
$
468,347

 
 



65

Management's Discussion and Analysis


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

Fee income on all loans included in interest income for the nine months ended June 30, 2018 and 2017 was $19 million and $28 million, respectively.

Net interest income increased $145 million, or 31%, primarily as a result of increases in our RJ Bank and PCG segments, as well as a decrease in net interest expense in our Other segment.

Net interest income in RJ Bank increased $97 million, or 23%, resulting from increases in average loans outstanding and the available-for-sale securities portfolio, as well as an increase in net interest margin. Refer to the discussion of the specific components of RJ Bank’s net interest income in the RJ Bank section of this MD&A.

Net interest income in the PCG segment increased $23 million, or 23%, driven by an increase in interest income from margin loans, due to an increase in short-term interest rates as well as higher average balances, and an increase in interest income from segregated assets due to an increase in short-term interest rates. The favorable impact of higher interest rates on segregated assets was partially offset by a decrease in segregated asset balances. Interest expense in the PCG segment also increased, primarily due to the impact of higher interest rates paid on client cash balances, partially offset by lower average client cash balances.

Net interest expense in the Other segment decreased by $26 million, primarily due to a decrease in interest expense on our senior notes as a result of a decrease in the average rate on our outstanding borrowings, as well as lower outstanding balances as a result of net redemptions in fiscal year 2017. Interest income in the Other segment increased as a result of the increase in interest rates on corporate cash balances.


66

Management's Discussion and Analysis


Results of Operations – Private Client Group

For an overview of our PCG segment operations as well as a description of the key factors impacting our PCG results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2017 Form 10-K.

Operating results
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
% change
 
2018
 
2017
 
% change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Securities commissions and fees:
 
 
 
 
 
 
 
 
 
 
 
 
Fee-based accounts
 
$
641,317

 
$
518,281

 
24
 %
 
$
1,861,296

 
$
1,476,319

 
26
 %
Mutual funds
 
154,431

 
160,323

 
(4
)%
 
487,438

 
484,458

 
1
 %
Insurance and annuity products
 
97,444

 
97,657

 

 
307,956

 
288,833

 
7
 %
Equity products
 
77,639

 
77,933

 

 
249,443

 
233,237

 
7
 %
Fixed income products
 
29,322

 
25,747

 
14
 %
 
86,271

 
86,834

 
(1
)%
New issue sales credits
 
14,512

 
22,542

 
(36
)%
 
35,524

 
62,903

 
(44
)%
Subtotal securities commissions and fees
 
1,014,665

 
902,483

 
12
 %
 
3,027,928

 
2,632,584

 
15
 %
Interest income
 
50,903

 
39,724

 
28
 %
 
140,898

 
110,393

 
28
 %
Account and service fees:
 
 
 
 
 


 
 
 
 
 


Mutual fund and annuity service fees
 
84,720

 
72,642

 
17
 %
 
245,442

 
211,808

 
16
 %
RJBDP fees - third-party banks
 
70,381

 
57,160

 
23
 %
 
197,744

 
140,910

 
40
 %
Affiliate deposit account servicing fees from RJ Bank
 
23,428

 
18,874

 
24
 %
 
66,890

 
46,719

 
43
 %
Client account and service fees
 
25,795

 
24,961

 
3
 %
 
72,302

 
75,553

 
(4
)%
Client transaction fees and other
 
5,606

 
6,184

 
(9
)%
 
17,526

 
19,640

 
(11
)%
Subtotal account and service fees
 
209,930

 
179,821

 
17
 %
 
599,904

 
494,630

 
21
 %
Other
 
11,324

 
9,424

 
20
 %
 
34,035

 
25,722

 
32
 %
Total revenues
 
1,286,822

 
1,131,452

 
14
 %
 
3,802,765

 
3,263,329

 
17
 %
Interest expense
 
(7,702
)
 
(4,167
)
 
85
 %
 
(18,779
)
 
(10,778
)
 
74
 %
Net revenues
 
1,279,120

 
1,127,285

 
13
 %
 
3,783,986

 
3,252,551

 
16
 %
Non-interest expenses:
 
 

 
 

 


 
 

 
 

 


Sales commissions
 
758,461

 
672,894

 
13
 %
 
2,257,678

 
1,958,794

 
15
 %
Admin & incentive compensation and benefit costs
 
215,124

 
183,956

 
17
 %
 
623,730

 
528,043

 
18
 %
Communications and information processing
 
58,532

 
49,449

 
18
 %
 
174,312

 
139,892

 
25
 %
Occupancy and equipment costs
 
38,080

 
35,662

 
7
 %
 
114,059

 
107,546

 
6
 %
Business development
 
38,943

 
26,604

 
46
 %
 
84,261

 
74,868

 
13
 %
Jay Peak matter
 

 

 

 

 
130,000

 
(100
)%
Other
 
37,706

 
30,769

 
23
 %
 
85,023

 
82,727

 
3
 %
Total non-interest expenses
 
1,146,846

 
999,334

 
15
 %
 
3,339,063

 
3,021,870

 
10
 %
Pre-tax income
 
$
132,274

 
$
127,951

 
3
 %
 
$
444,923

 
$
230,681

 
93
 %

Selected key metrics

Client asset balances:
 
 
As of
 
% change from
$ in billions
 
June 30, 2018
 
September 30, 2017
 
June 30, 2017
 
September 30, 2017
 
June 30, 2017
PCG assets under administration
 
$
719.5

 
$
659.5

 
$
631.5

 
9
%
 
14
%
PCG assets in fee-based accounts
 
$
343.1

 
$
294.5

 
$
276.9

 
17
%
 
24
%


67

Management's Discussion and Analysis


Financial advisors:
 
June 30, 2018
 
September 30, 2017
 
June 30, 2017
Employees
3,126

 
3,041

 
2,996

Independent Contractors
4,593

(1) 
4,305

 
4,289

Total advisors
7,719

 
7,346

 
7,285


(1)
Includes 126 registered individuals who met the requirements to be classified as financial advisors in fiscal year 2018 following our periodic review procedures.

PCG assets under administration increased 14% over June 30, 2017, resulting from equity market appreciation and net client inflows. Our net client inflows were primarily attributable to strong financial advisor recruiting. PCG assets in fee-based accounts as a percentage of overall PCG assets under administration increased to 48% at June 30, 2018 compared to 44% at June 30, 2017, due in part to clients moving to fee-based alternatives from traditional transaction-based accounts in response to the regulatory environment.
 
The net increase in financial advisors as of June 30, 2018 compared to June 30, 2017 primarily resulted from strong financial advisor recruiting and high levels of retention. We believe that this increase in financial advisors and assets under administration is a positive indication of potential future revenue growth in this segment.

Quarter ended June 30, 2018 compared with the quarter ended June 30, 2017

Net revenues of $1.28 billion increased $152 million, or 13%. The portion of total segment revenues that we consider to be recurring was 82% for the quarter ended June 30, 2018, an increase from 79% for the quarter ended June 30, 2017.  Recurring revenues include asset-based fees, trailing commissions from mutual funds and variable annuities/insurance products, mutual fund and annuity service fees, fees earned on our RJBDP program and interest.

Pre-tax income of $132 million increased $4 million, or 3%, compared with the quarter ended June 30, 2017.

Securities commissions and fees increased $112 million, or 12%.  The increase in securities commissions and fees revenue was primarily driven by an increase in asset-based fees, resulting from a stronger market environment as well as strong financial advisor recruiting and retention.

Total account and service fees increased $30 million, or 17%, primarily due to higher RJBDP fees and affiliate deposit account servicing fees from RJ Bank, as the benefit from an increase in short-term interest rates more than offset a decline in balances. Mutual fund and annuity service fees increased, due to higher education and marketing support (“EMS”) fees and mutual fund omnibus fees. The increase in EMS fees was primarily due to increased assets in the program, while the increase in omnibus fees was a result of both an increase in assets and the number of positions invested in fund families on the omnibus platform.

As previously discussed, net interest income in the PCG segment increased $8 million, or 21%.
 
Non-interest expenses increased $148 million, or 15%, primarily due to an increase in sales commission expense, which increased $86 million, or 13%, in line with the increase in securities commissions and fees. Administrative and incentive compensation and benefits costs increased $31 million, or 17%, primarily due to increased staffing levels to support our continued growth and regulatory compliance requirements. Business development expense increased $12 million, or 46%, primarily due to the timing of conferences for financial advisors, as well as increased recruiting and onboarding-related expenses. Communications and information processing expense increased $9 million, or 18%, as a result of our continued investment in our technology infrastructure to support our growth. Other expense increased $7 million, or 23%, primarily attributable to increased legal and regulatory expense, as well as increased professional fees during the quarter ended June 30, 2017.

Nine months ended June 30, 2018 compared with the nine months ended June 30, 2017

Net revenues of $3.78 billion increased $531 million, or 16%. The portion of total segment revenues that we consider to be recurring was 82% for the nine months ended June 30, 2018, an increase from 78% for the prior year period. Pre-tax income of $445 million increased $214 million, or 93%, compared with the prior year period, which included a large legal charge related to the Jay Peak matter.

Securities commissions and fees increased $395 million, or 15%.  The increase in securities commissions and fees revenue was primarily driven by an increase in client assets resulting from higher equity markets and strong financial advisor recruiting and retention, partially offset by a decline in new issue sales credits resulting from lower equity underwriting activity.


68

Management's Discussion and Analysis


Total account and service fees increased $105 million, or 21%, primarily due to higher RJBDP fees resulting from an increase in short-term interest rates over the prior year period. Mutual fund and annuity service fees also increased, reflecting higher EMS fees and mutual fund omnibus fees. The increase in EMS fees was primarily due to increased assets in the program, while the increase in omnibus fees was a result of both an increase in assets and the number of positions invested in fund families on the omnibus platform.

As previously discussed, net interest income in the PCG segment increased $23 million, or 23%.

Non-interest expenses increased $317 million, or 10%, primarily due to an increase in sales commission expense, which increased $299 million, or 15%, in line with the increase in securities commissions and fees. Administrative and incentive compensation and benefit costs increased $96 million, or 18%, primarily due to increased staffing levels to support our continued growth and regulatory compliance requirements. Communications and information processing expense increased $34 million, or 25%, as a result of our continued investment in technology infrastructure to support our growth. Offsetting these increases was a $130 million decrease in expenses related to the Jay Peak matter, which was settled in fiscal 2017.

Results of Operations – Capital Markets

For an overview of our Capital Markets segment operations, as well as a description of the key factors impacting our Capital Markets results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis Financial Condition and Results of Operations” of our 2017 Form 10-K.

Operating results
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
% change
 
2018
 
2017
 
% change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Securities commissions and fees:
 
 

 
 

 
 
 
 
 
 
 
 
Equity
 
$
56,793

 
$
58,864

 
(4
)%
 
$
156,328

 
$
182,830

 
(14
)%
Fixed income
 
49,908

 
65,820

 
(24
)%
 
169,306

 
205,854

 
(18
)%
Subtotal securities commissions and fees
 
106,701

 
124,684

 
(14
)%
 
325,634

 
388,684

 
(16
)%
Equity underwriting fees
 
16,594

 
19,172

 
(13
)%
 
38,361

 
55,953

 
(31
)%
Merger & acquisition and advisory fees
 
84,737

 
62,983

 
35
 %
 
200,209

 
143,919

 
39
 %
Fixed income investment banking
 
9,947

 
12,296

 
(19
)%
 
29,291

 
31,694

 
(8
)%
Tax credit funds syndication fees
 
3,771

 
9,581

 
(61
)%
 
17,906

 
35,884

 
(50
)%
Subtotal investment banking
 
115,049

 
104,032

 
11
 %
 
285,767

 
267,450

 
7
 %
Investment advisory fees
 
5,115

 
3,811

 
34
 %
 
19,269

 
14,712

 
31
 %
Net trading profit
 
10,343

 
22,563

 
(54
)%
 
42,722

 
57,208

 
(25
)%
Interest income
 
8,883

 
7,013

 
27
 %
 
23,793

 
19,962

 
19
 %
Other
 
4,161

 
3,330

 
25
 %
 
12,216

 
14,879

 
(18
)%
Total revenues
 
250,252

 
265,433

 
(6
)%
 
709,401

 
762,895

 
(7
)%
Interest expense
 
(8,566
)
 
(6,524
)
 
31
 %
 
(20,434
)
 
(14,799
)
 
38
 %
Net revenues
 
241,686

 
258,909

 
(7
)%
 
688,967

 
748,096

 
(8
)%
Non-interest expenses:
 
 

 
 

 


 
 
 
 
 


Sales commissions
 
35,533

 
44,259

 
(20
)%
 
112,557

 
140,628

 
(20
)%
Admin & incentive compensation and benefit costs
 
124,830

 
122,984

 
2
 %
 
357,603

 
339,140

 
5
 %
Communications and information processing
 
18,122

 
16,506

 
10
 %
 
54,943

 
52,114

 
5
 %
Occupancy and equipment costs
 
8,293

 
8,161

 
2
 %
 
25,374

 
25,141

 
1
 %
Business development
 
12,259

 
9,308

 
32
 %
 
34,576

 
28,648

 
21
 %
Losses and non-interest expenses of real estate partnerships held by consolidated VIEs
 
3,187

 
2,733

 
17
 %
 
8,704

 
10,107

 
(14
)%
Other
 
20,858

 
23,225

 
(10
)%
 
60,974

 
65,493

 
(7
)%
Total non-interest expenses
 
223,082

 
227,176

 
(2
)%
 
654,731

 
661,271

 
(1
)%
Income before taxes and including noncontrolling interests
 
18,604

 
31,733

 
(41
)%
 
34,236

 
86,825

 
(61
)%
Noncontrolling interests
 
(3,183
)
 
(2,874
)
 
(11
)%
 
(8,561
)
 
(10,477
)
 
18
 %
Pre-tax income excluding noncontrolling interests
 
$
21,787

 
$
34,607

 
(37
)%
 
$
42,797

 
$
97,302

 
(56
)%

69

Management's Discussion and Analysis


Quarter ended June 30, 2018 compared with the quarter ended June 30, 2017

Net revenues of $242 million decreased $17 million, or 7%, primarily due to lower commissions and net trading profit, partially offset by higher investment banking revenues. Pre-tax income of $22 million decreased $13 million, or 37%.

Total securities commissions and fees decreased $18 million, or 14%, and net trading profit decreased $12 million, or 54%, both due to a challenging market environment for fixed income. Institutional fixed income commissions continued to reflect low levels of client activity, due to the flattening yield curve and low interest rate volatility.

Investment banking revenues increased $11 million, or 11%, driven by higher merger & acquisition and advisory fees, partially offset by lower tax credit funds syndication fees. Merger & acquisition and advisory fees increased $22 million, or 35%, primarily due to a higher volume of domestic merger & acquisition transactions during the quarter ended June 30, 2018. Tax credit fund syndication fees decreased $6 million, or 61%, due in part to a strong prior year quarter.
Non-interest expenses decreased $4 million, or 2%, primarily due to a decline in compensation expenses due to lower net revenues.

Nine months ended June 30, 2018 compared with the nine months ended June 30, 2017

Net revenues of $689 million decreased $59 million, or 8%. Pre-tax income of $43 million decreased $55 million, or 56%.

Total securities commissions and fees decreased $63 million, or 16%, reflecting decreases in both fixed income and equity institutional commissions. Institutional fixed income commissions continued to reflect challenging market conditions and low levels of client activity due to the flattening yield curve and relatively low interest rate volatility. The decline in equity commissions primarily reflected lower commissions from equity underwriting transactions, as well as market-driven challenges.

Investment banking revenues increased $18 million, or 7%. Merger & acquisition and advisory fees increased $56 million, or 39%, primarily due to a higher volume of transactions and higher average fees per transaction in the current year period. This increase was offset by lower equity underwriting fees, which declined $18 million, or 31%, reflecting lower levels of client activity, primarily in the U.S. Tax credit funds syndication fees decreased $18 million, or 50%, due in part to uncertainty over corporate tax reform impacting new investment activity and the timing of transactions.

Net trading profit declined $14 million, or 25%, reflecting the challenging market conditions for fixed income during the current year period.

Non-interest expenses decreased $7 million, or 1% over the prior year period, as a decline in sales commissions due to the decline in commissions revenues was partially offset by an increase in administrative and incentive compensation and benefits expense.


70

Management's Discussion and Analysis


Results of Operations – Asset Management

For an overview of our Asset Management segment operations as well as a description of the key factors impacting our Asset Management results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2017 Form 10-K.

Operating results
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
% change
 
2018
 
2017
 
% change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Investment advisory and related administrative fees:
 
 
 
 
 
 
 
 
 
 
 
 
Managed programs
 
$
117,037

 
$
84,009

 
39
 %
 
$
334,588

 
$
237,694

 
41
 %
Non-discretionary asset-based administration
 
28,761

 
23,365

 
23
 %
 
84,627

 
66,179

 
28
 %
Subtotal investment advisory and related administrative fees
 
145,798

 
107,374

 
36
 %
 
419,215

 
303,873

 
38
 %
Account and service fees and other
 
22,365

 
18,301

 
22
 %
 
62,755

 
52,418

 
20
 %
Total revenues
 
168,163

 
125,675

 
34
 %
 
481,970

 
356,291

 
35
 %
Interest expense
 
(8
)
 
(11
)
 
(27
)%
 
(30
)
 
(65
)
 
(54
)%
Net revenues
 
168,155

 
125,664

 
34
 %
 
481,940

 
356,226

 
35
 %
Non-interest expenses:
 
 

 
 

 


 
 

 
 

 


Compensation and benefits
 
44,975

 
32,576

 
38
 %
 
126,481

 
91,602

 
38
 %
Communications and information processing
 
9,765

 
7,810

 
25
 %
 
28,569

 
21,840

 
31
 %
Occupancy and equipment costs
 
1,994

 
1,273

 
57
 %
 
5,292

 
3,642

 
45
 %
Business development
 
2,804

 
2,439

 
15
 %
 
8,624

 
7,463

 
16
 %
Investment sub-advisory fees
 
22,452

 
19,405

 
16
 %
 
66,369

 
54,814

 
21
 %
Other
 
26,022

 
17,625

 
48
 %
 
68,596

 
50,295

 
36
 %
Total non-interest expenses
 
108,012

 
81,128

 
33
 %
 
303,931

 
229,656

 
32
 %
Income before taxes and including noncontrolling interests
 
60,143

 
44,536

 
35
 %
 
178,009

 
126,570

 
41
 %
Noncontrolling interests
 
1,871

 
1,266

 
48
 %
 
6,472

 
3,594

 
80
 %
Pre-tax income excluding noncontrolling interests
 
$
58,272

 
$
43,270

 
35
 %
 
$
171,537

 
$
122,976

 
39
 %

Selected key metrics

Managed Programs - Our investment advisory fees recorded in this segment were earned based on balances either at the beginning of the quarter, end of the quarter or average assets throughout the quarter. For the three and nine months ended June 30, 2018, approximately 55% of our fees were determined based on asset balances at the beginning of each quarter, 20% were based on asset balances at the end of each quarter and 25% were based on average assets throughout each quarter.

Financial assets under management:

The following table presents fee-billable financial assets under management in managed programs at the dates indicated.
$ in millions
 
June 30, 2018
 
September 30, 2017
 
June 30, 2017
Asset management services division of RJ&A (“AMS”)
 
$
78,897

 
$
69,962

 
$
65,591

Carillon Tower Advisers and affiliates (“Carillon Tower”)
 
62,210

 
31,831

 
30,694

Subtotal financial assets under management
 
141,107

 
101,793

 
96,285

Less: Assets managed for affiliated entities
 
(5,573
)
 
(5,397
)
 
(5,246
)
Total financial assets under management
 
$
135,534

 
$
96,396

 
$
91,039


In the table above, Carillon Tower includes its subsidiaries and affiliates Eagle Asset Management, ClariVest Asset Management, Cougar Global Investments, and the Scout Group.


71

Management's Discussion and Analysis


The following table presents fee-billable financial assets under management (including assets managed for affiliates) by objective at the dates indicated.
$ in millions
 
June 30, 2018
 
September 30, 2017
 
June 30, 2017
Equity
 
$
61,316

 
$
48,936

 
$
46,439

Fixed
 
32,936

 
11,814

 
11,557

Balanced
 
46,855

 
41,043

 
38,289

Total financial assets under management
 
$
141,107

 
$
101,793

 
$
96,285


Activity (including activity in assets managed for affiliated entities):
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in millions
 
2018
 
2017
 
2018
 
2017
Financial assets under management at beginning of period
 
$
137,842

 
$
90,664

 
$
101,793

 
$
81,729

Carillon Tower:
 
 
 
 
 
 
 
 
Scout group acquisition
 

 

 
27,087

 

Other - net inflows/(outflows)
 
(544
)
 
517

 
862

 
374

AMS - net inflows
 
2,348

 
2,732

 
7,283

 
7,200

Net market appreciation in asset values
 
1,461

 
2,372

 
4,082

 
6,982

Financial assets under management at end of period
 
$
141,107

 
$
96,285

 
$
141,107

 
$
96,285


Non-discretionary asset-based programs - Our assets held in certain non-discretionary asset-based programs for which the asset management segment does not exercise discretion but provides administrative support (including those managed for affiliated entities) totaled $186.4 billion, $157.0 billion, and $144.8 billion as of June 30, 2018, September 30, 2017 and June 30, 2017, respectively. The increase in assets over the prior year level was primarily due to market appreciation and to clients moving to fee-based accounts from the traditional transaction-based accounts partly in response to regulatory changes. The majority of the administrative fees associated with these programs are determined based on balances at the beginning of the quarter.

Quarter ended June 30, 2018 compared with the quarter ended June 30, 2017

Net revenues of $168 million increased $42 million, or 34%. Pre-tax income of $58 million increased $15 million, or 35%.

Total investment advisory and related administrative fee revenues increased $38 million, or 36%, primarily driven by an increase in financial assets under management. The increase in financial assets under management was a result of the Scout Group acquisition, inflows related to financial advisor recruiting and net market appreciation. Administrative fees also increased compared to the prior year quarter due to the aforementioned increase in assets held in non-discretionary asset-based programs.

Account and service fees and other income increased $4 million, or 22%, reflecting increased trust fee revenue due to a 9% increase in assets in RJ Trust, as well as increased shareholder servicing fees as a result of the Scout Group acquisition.

Non-interest expenses increased $27 million, or 33%, primarily resulting from a $12 million increase in compensation and benefits expense, an $8 million increase in other expense and a $3 million increase in investment sub-advisory fees. Compensation and benefits expense increased primarily due to the Scout Group acquisition, annual salary increases and an increase in personnel over the prior year quarter to support the growth of the business. The increase in other expense was primarily driven by the expense incurred to support the new funds offered on our platform as a result of the Scout Group acquisition. The increase in investment sub-advisory fees resulted from increased assets under management in applicable programs.

Nine months ended June 30, 2018 compared with the nine months ended June 30, 2017

Net revenues of $482 million increased $126 million, or 35%. Pre-tax income of $172 million increased $49 million, or 39%.

Total investment advisory and related administrative fee revenues increased $115 million, or 38%, primarily driven by an increase in financial assets under management. The increase in financial assets under management was primarily a result of the Scout Group acquisition, as well as both net market appreciation and inflows related to financial advisor recruiting. Administrative fees also increased over the prior year period due to the aforementioned increase in assets held in non-discretionary asset-based programs.


72

Management's Discussion and Analysis


Account and service fees and other income increased $10 million, or 20%, primarily reflecting increased shareholder servicing fees as a result of the Scout Group acquisition as well as increased trust fee revenue due to a 9% increase in assets in RJ Trust.

Non-interest expenses increased $74 million, or 32%, resulting from a $35 million increase in compensation and benefits expense, an $18 million increase in other expense and a $12 million increase in investment sub-advisory fees. Compensation and benefits expense increased primarily due to the Scout Group acquisition, in addition to annual salary increases and an increase in personnel over the prior year period to support the growth of the business. The increase in other expense was primarily due to certain incremental costs associated with the Scout Group acquisition, including the expense related to the new funds offered on our platform, as well as the amortization of intangible assets arising from the acquisition. The increase in investment sub-advisory fees resulted from increased assets under management in applicable programs.


73

Management's Discussion and Analysis


Results of Operations – RJ Bank

For an overview of our RJ Bank segment operations, as well as a description of the key factors impacting our RJ Bank results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis Financial Condition and Results of Operations” of our 2017 Form 10-K.

Operating results
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
% change
 
2018
 
2017
 
% change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
205,161

 
$
154,023

 
33
 %
 
$
570,971

 
$
440,634

 
30
%
Interest expense
 
(24,645
)
 
(8,502
)
 
190
 %
 
(55,293
)
 
(22,330
)
 
148
%
Net interest income
 
180,516

 
145,521

 
24
 %
 
515,678

 
418,304

 
23
%
Other
 
7,304

 
4,966

 
47
 %
 
16,065

 
11,569

 
39
%
Net revenues
 
187,820

 
150,487

 
25
 %
 
531,743

 
429,873

 
24
%
Non-interest expenses:
 
 

 
 

 


 
 

 
 

 


Compensation and benefits
 
11,037

 
8,735

 
26
 %
 
30,106

 
25,233

 
19
%
Communications and information processing
 
2,227

 
1,972

 
13
 %
 
7,159

 
5,741

 
25
%
Loan loss provision
 
5,226

 
6,209

 
(16
)%
 
13,791

 
13,097

 
5
%
FDIC insurance premiums
 
5,437

 
4,006

 
36
 %
 
15,094

 
12,576

 
20
%
Affiliate deposit account servicing fees to PCG
 
23,428

 
18,874

 
24
 %
 
66,890

 
46,719

 
43
%
Other
 
11,311

 
10,701

 
6
 %
 
37,308

 
30,485

 
22
%
Total non-interest expenses
 
58,666

 
50,497

 
16
 %
 
170,348

 
133,851

 
27
%
Pre-tax income
 
$
129,154

 
$
99,990

 
29
 %
 
$
361,395

 
$
296,022

 
22
%

Quarter ended June 30, 2018 compared with the quarter ended June 30, 2017

Net revenues of $188 million increased $37 million, or 25%, primarily reflecting an increase in net interest income. Pre-tax income of $129 million increased $29 million, or 29%.  

Net interest income increased $35 million, or 24%, due to a $3.15 billion increase in interest-earning banking assets, as well as an increase in net interest margin. The increase in interest-earning banking assets was driven by a $2.28 billion increase in loans, due to broad-based growth in the portfolio, and a $793 million increase in our available-for-sale securities portfolio. The net interest margin increased to 3.30% from 3.14% due to an increase in asset yields, partially offset by an increase in total cost of funds. The increase in asset yields resulted from an increase in the loan portfolio yield, a result of the overall rise in market interest rates. The total cost of funds increased due to an increase in deposit costs, the result of increased balances and rates. Corresponding to the increase in interest-earning banking assets, interest-bearing banking liabilities increased $2.90 billion.

The loan loss provision decreased $1 million, or 16%, due to a decline in corporate criticized loans in the current year quarter despite broad-based loan growth.
Non-interest expenses (excluding provision for loan losses) increased $9 million, or 21%, primarily reflecting a $5 million increase in affiliate deposit account servicing fees due to an increase in client account balances.

74

Management's Discussion and Analysis


The following table presents average balances, interest income and expense, the related yields and rates, and interest spreads and margins for RJ Bank.
 
 
Three months ended June 30,
 
 
2018
 
2017
$ in thousands
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/
cost
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/
cost
Interest-earning banking assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
659,563

 
$
2,949

 
1.79
%
 
$
573,048

 
$
1,468

 
1.03
%
Available-for-sale securities
 
2,534,373

 
13,369

 
2.11
%
 
1,741,328

 
8,229

 
1.89
%
Bank loans, net of unearned income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
7,647,502

 
85,120

 
4.40
%
 
7,190,234

 
68,765

 
3.79
%
CRE construction loans
 
181,571

 
2,401

 
5.23
%
 
122,616

 
1,703

 
5.49
%
CRE loans
 
3,258,551

 
34,188

 
4.15
%
 
2,944,902

 
25,145

 
3.38
%
Tax-exempt loans
 
1,190,878

 
7,673

 
3.41
%
 
918,606

 
5,955

 
3.99
%
Residential mortgage loans
 
3,514,327

 
27,257

 
3.10
%
 
2,867,452

 
21,435

 
2.96
%
SBL
 
2,740,641

 
29,511

 
4.26
%
 
2,173,748

 
19,009

 
3.46
%
Loans held for sale
 
109,449

 
1,185

 
4.34
%
 
145,811

 
1,294

 
3.74
%
Total loans, net
 
18,642,919

 
187,335

 
4.04
%
 
16,363,369

 
143,306

 
3.55
%
FHLB stock, Federal Reserve Bank of Atlanta (“FRB”) stock, and other
 
133,586

 
1,508

 
4.53
%
 
139,935

 
1,020

 
2.92
%
Total interest-earning banking assets
 
21,970,441

 
$
205,161

 
3.75
%
 
18,817,680


$
154,023

 
3.32
%
Non-interest-earning banking assets:
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized loss on available-for-sale securities
 
(57,192
)
 
 

 
 

 
(5,917
)
 
 

 
 

Allowance for loan losses
 
(195,175
)
 
 

 
 

 
(186,870
)
 
 
 
 
Other assets
 
366,590

 
 

 
 

 
392,081

 
 

 
 

Total non-interest-earning banking assets
 
114,223

 
 

 
 

 
199,294

 
 

 
 

Total banking assets
 
$
22,084,664

 
 

 
 

 
$
19,016,974

 
 

 
 

Interest-bearing banking liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Bank deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
389,393

 
$
1,589

 
1.64
%
 
$
287,365

 
$
1,042

 
1.45
%
Savings, money market, and NOW accounts
 
18,634,108

 
18,104

 
0.39
%
 
16,102,703

 
3,763

 
0.09
%
FHLB advances and other
 
1,059,154

 
4,952

 
1.85
%
 
789,896

 
3,697

 
1.85
%
Total interest-bearing banking liabilities
 
20,082,655

 
$
24,645

 
0.49
%
 
17,179,964

 
$
8,502

 
0.20
%
Non-interest-bearing banking liabilities
 
62,424

 
 

 
 

 
72,294

 
 

 
 

Total banking liabilities
 
20,145,079

 
 

 
 

 
17,252,258

 
 

 
 

Total banking shareholder’s equity
 
1,939,585

 
 

 
 

 
1,764,716

 
 

 
 

Total banking liabilities and shareholder’s equity
 
$
22,084,664

 
 

 
 

 
$
19,016,974

 
 

 
 

Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income
 
$
1,887,786

 
$
180,516

 
 
 
$
1,637,716

 
$
145,521

 
 
Bank net interest:
 
 

 
 

 
 
 
 

 
 

 
 
Spread
 
 

 
 

 
3.26
%
 
 

 
 

 
3.12
%
Margin (net yield on interest-earning banking assets)
 
 

 
 

 
3.30
%
 
 

 
 

 
3.14
%
Ratio of interest-earning banking assets to interest-bearing banking liabilities
 
 

 
 

 
109.40
%
 
 

 
 
 
109.53
%

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

Fee income on loans included in interest income for the three months ended June 30, 2018 and 2017 was $6 million and $9 million, respectively.

The yield on tax-exempt loans in the table above is presented on a tax-equivalent basis utilizing the applicable federal statutory tax rates for each of the three months ended June 30, 2018 and 2017.


75

Management's Discussion and Analysis


Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year’s volume. Changes attributable to both volume and rate have been allocated proportionately.
 
 
Three months ended June 30,
 
 
2018 compared to 2017
 
 
Increase/(decrease) due to
$ in thousands
 
Volume
 
Rate
 
Total
Interest revenue:
 
 
 
 
 
 
Interest-earning banking assets:
 
 
 
 
 
 
Cash
 
$
222

 
$
1,259

 
$
1,481

Available-for-sale securities
 
3,748

 
1,392

 
5,140

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

C&I loans
 
4,373

 
11,982

 
16,355

CRE construction loans
 
819

 
(121
)
 
698

CRE loans
 
2,678

 
6,365

 
9,043

Tax-exempt loans
 
1,764

 
(46
)
 
1,718

Residential mortgage loans
 
4,835

 
987

 
5,822

SBL
 
4,957

 
5,545

 
10,502

Loans held for sale
 
(323
)
 
214

 
(109
)
Total bank loans, net
 
19,103


24,926

 
44,029

FHLB stock, FRB stock, and other
 
(46
)
 
534

 
488

Total interest-earning banking assets
 
23,027

 
28,111

 
51,138

Interest expense:
 
 

 
 

 


Interest-bearing banking liabilities:
 
 

 
 

 
 

Bank deposits:
 
 

 
 

 
 

Certificates of deposit
 
370

 
177

 
547

Savings, money market, and NOW accounts
 
592

 
13,749

 
14,341

FHLB advances and other
 
1,260

 
(5
)
 
1,255

Total interest-bearing banking liabilities
 
2,222

 
13,921

 
16,143

Change in net interest income
 
$
20,805

 
$
14,190

 
$
34,995


Nine months ended June 30, 2018 compared with the nine months ended June 30, 2017

Net revenues of $532 million increased $102 million, or 24%, primarily reflecting an increase in net interest income. Pre-tax income of $361 million increased $65 million, or 22%.

Net interest income increased $97 million, or 23%, due to a $3.34 billion increase in interest-earning banking assets, as well as an increase in net interest margin. The increase in interest-earning banking assets was driven by broad-based loan growth of $2.04 billion and a $1.08 billion increase in our available-for-sale securities portfolio. The net interest margin increased to 3.20% from 3.09%, due to an increase in asset yields, offset by an increase in the total cost of funds. The increase in asset yields primarily resulted from an increase in the loan portfolio yield due to an increase in short-term interest rates. The total cost of funds increased primarily due to an increase in deposit costs, a result of increased balances and interest rates. Corresponding to the increase in interest-earning banking assets, interest-bearing banking liabilities increased $3.16 billion.

The loan loss provision increased by approximately $1 million, primarily due to higher corporate loan growth, partially offset by lower reserve rates on pass-rated loans as a result of improved credit characteristics.
Non-interest expenses (excluding provision for loan losses) increased $36 million, or 30%, primarily reflecting a $20 million increase in affiliate deposit account servicing fees due to an increase in client account balances.


76

Management's Discussion and Analysis


The following table presents average balances, interest income and expense, the related yields and rates, and interest spreads and margins for RJ Bank.
 
 
Nine months ended June 30,
 
 
2018
 
2017
$ in thousands
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/
cost
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/
cost
Interest-earning banking assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
1,040,473

 
$
11,536

 
1.48
%
 
$
813,989

 
$
4,597

 
0.76
%
Available-for-sale securities
 
2,358,447

 
35,327

 
2.00
%
 
1,275,583

 
16,537

 
1.73
%
Bank loans, net of unearned income:
 
 

 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
7,537,590

 
237,083

 
4.15
%
 
7,344,545

 
209,027

 
3.76
%
CRE construction loans
 
166,026

 
6,331

 
5.03
%
 
131,996

 
4,730

 
4.73
%
CRE loans
 
3,159,911

 
95,196

 
3.97
%
 
2,760,836

 
71,090

 
3.40
%
Tax-exempt loans
 
1,125,882

 
21,734

 
3.41
%
 
860,627

 
16,695

 
3.98
%
Residential mortgage loans
 
3,362,635

 
77,790

 
3.08
%
 
2,721,116

 
60,411

 
2.93
%
SBL
 
2,594,329

 
78,203

 
3.98
%
 
2,052,784

 
50,948

 
3.27
%
Loans held for sale
 
123,418

 
3,542

 
3.83
%
 
154,617

 
3,716

 
3.34
%
Total loans, net
 
18,069,791

 
519,879

 
3.85
%
 
16,026,521

 
416,617

 
3.51
%
FHLB stock, FRB stock, and other
 
136,830

 
4,229

 
4.13
%
 
147,904

 
2,883

 
2.61
%
Total interest-earning banking assets
 
21,605,541

 
$
570,971

 
3.54
%
 
18,263,997

 
$
440,634

 
3.26
%
Non-interest-earning banking assets:
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized loss on available-for-sale securities
 
(38,516
)
 
 

 
 

 
(7,278
)
 
 

 
 

Allowance for loan losses
 
(192,226
)
 
 

 
 

 
(194,026
)
 
 

 
 

Other assets
 
372,820

 
 

 
 

 
373,464

 
 

 
 

Total non-interest-earning banking assets
 
142,078

 
 

 
 

 
172,160

 
 

 
 

Total banking assets
 
$
21,747,619

 
 

 
 

 
$
18,436,157

 
 

 
 

Interest-bearing banking liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Bank deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
352,893

 
$
4,213

 
1.60
%
 
$
290,800

 
$
3,176

 
1.46
%
Savings, money market, and NOW accounts
 
18,426,101

 
36,715

 
0.27
%
 
15,553,243

 
8,820

 
0.08
%
FHLB advances and other
 
1,004,887

 
14,365

 
1.89
%
 
775,517

 
10,334

 
1.76
%
Total interest-bearing banking liabilities
 
19,783,881

 
$
55,293

 
0.37
%
 
16,619,560

 
$
22,330

 
0.18
%
Non-interest-bearing banking liabilities
 
78,842

 
 

 
 

 
86,722

 
 

 
 

Total banking liabilities
 
19,862,723

 
 

 
 

 
16,706,282

 
 

 
 

Total banking shareholder’s equity
 
1,884,896

 
 

 
 

 
1,729,875

 
 

 
 

Total banking liabilities and shareholder’s equity
 
$
21,747,619

 
 

 
 

 
$
18,436,157

 
 

 
 

Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income
 
$
1,821,660

 
$
515,678

 
 
 
$
1,644,437

 
$
418,304

 
 
Bank net interest:
 
 

 
 

 
 
 
 

 
 

 
 
Spread
 
 

 
 

 
3.17
%
 
 

 
 

 
3.08
%
Margin (net yield on interest-earning banking assets)
 
 

 
 

 
3.20
%
 
 

 
 

 
3.09
%
Ratio of interest-earning banking assets to interest-bearing banking liabilities
 
 

 
 

 
109.21
%
 
 

 
 
 
109.89
%

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

Fee income on loans included in interest income for the nine months ended June 30, 2018 and 2017 was $19 million and $28 million, respectively.

The yield on tax-exempt loans in the table above is presented on a tax-equivalent basis utilizing the applicable federal statutory rates for each of the nine months ended June 30, 2018 and 2017.


77

Management's Discussion and Analysis


Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year’s volume. Changes attributable to both volume and rate have been allocated proportionately.
 
 
Nine months ended June 30,
 
 
2018 compared to 2017
 
 
Increase/(decrease) due to
$ in thousands
 
Volume
 
Rate
 
Total
Interest revenue:
 
 
 
 
 
 
Interest-earning banking assets:
 
 
 
 
 
 
Cash
 
$
1,279

 
$
5,660

 
$
6,939

Available-for-sale securities
 
14,039

 
4,751

 
18,790

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

C&I loans
 
5,494

 
22,562

 
28,056

CRE construction loans
 
1,220

 
381

 
1,601

CRE loans
 
10,276

 
13,830

 
24,106

Tax-exempt loans
 
5,145

 
(106
)
 
5,039

Residential mortgage loans
 
14,242

 
3,137

 
17,379

SBL
 
13,441

 
13,814

 
27,255

Loans held for sale
 
(750
)
 
576

 
(174
)
Total bank loans, net
 
49,068

 
54,194

 
103,262

FHLB stock, FRB stock, and other
 
(216
)
 
1,562

 
1,346

Total interest-earning banking assets
 
64,170

 
66,167

 
130,337

Interest expense:
 
 

 
 

 
 

Interest-bearing banking liabilities:
 
 

 
 

 
 

Bank deposits:
 
 

 
 

 
 

Certificates of deposit
 
678

 
359

 
1,037

Savings, money market, and NOW accounts
 
1,629

 
26,266

 
27,895

FHLB advances and other
 
3,056

 
975

 
4,031

Total interest-bearing banking liabilities
 
5,363

 
27,600

 
32,963

Change in net interest income
 
$
58,807

 
$
38,567

 
$
97,374



78

Management's Discussion and Analysis


Results of Operations – Other

This segment includes our private equity activities as well as certain corporate overhead costs of RJF, the interest cost on our public debt, and the acquisition and integration costs associated with certain acquisitions. For an overview of our Other segment operations, refer to the information presented in “Item 1 - Business” of our 2017 Form 10-K.

Operating results
 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
% change
 
2018
 
2017
 
% change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
10,887

 
$
6,546

 
66
 %
 
$
27,716

 
$
16,708

 
66
 %
Realized/unrealized gains - private equity investments
 
4,106

 
8,321

 
(51
)%
 
21,687

 
26,809

 
(19
)%
Other
 
1,230

 
550

 
124
 %
 
3,882

 
3,368

 
15
 %
Total revenues
 
16,223

 
15,417

 
5
 %
 
53,285

 
46,885

 
14
 %
Interest expense
 
(18,458
)
 
(22,668
)
 
(19
)%
 
(56,608
)
 
(71,797
)
 
(21
)%
Net revenues
 
(2,235
)
 
(7,251
)
 
(69
)%
 
(3,323
)
 
(24,912
)
 
87
 %
Non-interest expenses:
 
 
 
 
 


 
 
 
 
 


Compensation and other
 
19,898

 
16,651

 
20
 %
 
50,498

 
44,026

 
15
 %
Acquisition-related expenses
 

 
3,366

 
(100
)%
 
3,927

 
17,118

 
(77
)%
Losses on extinguishment of debt
 

 

 
NM

 

 
8,282

 
(100
)%
Total non-interest expenses
 
19,898

 
20,017

 
(1
)%
 
54,425

 
69,426

 
(22
)%
Loss before taxes and including noncontrolling interests
 
(22,133
)
 
(27,268
)
 
19
 %
 
(57,748
)
 
(94,338
)
 
39
 %
Noncontrolling interests
 
1,296

 
3,536

 
(63
)%
 
2,232

 
5,737

 
(61
)%
Pre-tax loss excluding noncontrolling interests
 
$
(23,429
)
 
$
(30,804
)
 
24
 %
 
$
(59,980
)
 
$
(100,075
)
 
40
 %

Quarter ended June 30, 2018 compared with the quarter ended June 30, 2017

The pre-tax loss generated by this segment of $23 million was $7 million, or 24% less than the loss generated in the prior year quarter.

Net revenues in this segment increased $5 million, primarily due to a decrease in our net interest expense of $9 million resulting from a decrease in interest expense and an increase in interest income. The decrease in interest expense was due to a decline in the average outstanding balance and average interest rate on our senior notes. Interest income increased as a result of the increase in interest rates and higher corporate cash balances.

Non-interest expenses were essentially unchanged from the prior year quarter, as a decline in acquisition-related expenses was offset by an increase in compensation and other costs.

Nine months ended June 30, 2018 compared with the nine months ended June 30, 2017

The pre-tax loss generated by this segment of $60 million was $40 million, or 40%, less than the loss generated in the prior year period.

Net revenues in this segment increased $22 million due to a decrease in our net interest expense of $26 million, resulting from a decrease in interest expense as well as an increase in interest income. The decrease in interest expense was due to a decline in the average interest rate and average outstanding balance of our senior notes. Interest income increased primarily as a result of the increase in interest rates earned on higher corporate cash balances.

Non-interest expenses decreased $15 million due to lower acquisition-related expenses, as well as the prior year period losses on extinguishment of certain of our senior notes. Acquisition-related expenses for the nine months ended June 30, 2018 related to incremental expenses incurred in connection with our acquisition of the Scout Group, which closed in November 2017. Prior year acquisition-related expenses primarily related to our acquisitions of the Scout Group, as well as Alex. Brown and 3Macs, both of which closed late in fiscal 2016.


79

Management's Discussion and Analysis


Certain statistical disclosures by bank holding companies

We are required to provide certain statistical disclosures required for bank holding companies under the SEC’s Industry Guide 3.  The following table provides certain of those disclosures.
 
Three months ended June 30,
 
Nine months ended June 30,
 
2018
 
2017
 
2018
 
2017
Return on average assets
2.6%
 
2.2%
 
2.2%
 
1.8%
Return on average equity
15.4%
 
13.8%
 
13.6%
 
11.5%
Average equity to average assets
16.7%
 
16.0%
 
16.3%
 
15.9%
Dividend payout ratio
19.4%
 
17.7%
 
20.1%
 
21.9%
 
Return on average assets is computed by dividing annualized net income attributable to RJF for the period indicated by average assets for each respective period. Average assets for the quarter is computed by adding total assets as of the date indicated to the prior quarter-end total, and dividing by two. Average assets for the year is computed by adding total assets as of each quarter-end to the beginning of the year total, and dividing by four.

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

Average equity to average assets is computed by dividing average equity by average assets as calculated in the above explanations.

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

Refer to the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk” and to the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for other required disclosures.

Liquidity and capital resources

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

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

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

Cash provided by operating activities during the nine months ended June 30, 2018 was $989 million. In addition to operating cash flows related to net income, other increases in cash from operations included:

A decrease of $765 million in assets segregated pursuant to regulations and other segregated assets, in part due to decreased client cash balances described below.
An increase in net derivative instruments of $77 million.


80

Management's Discussion and Analysis


Offsetting these, cash used in operations resulted from:

A decrease of $184 million in brokerage client payables and other accounts payable, in part due to decreased client cash balances in our client interest program.
An increase in our brokerage client receivables and other receivables of $149 million, including an increase in margin loans.
An increase in net trading instruments of $88 million.
An increase in loans provided to financial advisors, net of repayments, of $73 million.

Investing activities resulted in the use of $2.5 billion of cash during the nine months ended June 30, 2018.  

The primary investing activities were:
A net increase in RJ Bank loans used $1.73 billion.  
Purchases of available-for-sale securities held at RJ Bank, net of proceeds from maturations, repayments and redemptions within the portfolio, used $540 million.
We used $159 million, net of cash acquired, for our acquisition of the Scout Group.
We used $96 million to fund property investments, primarily software and computer equipment.

Financing activities provided $1.04 billion of cash during the nine months ended June 30, 2018.  Cash provided by financing activities resulted from an increase in RJ Bank deposit balances of $1.75 billion, as RJ Bank retained a higher portion of RJBDP balances, partially offset by net repayments of $610 million on our lines of credit and payment of dividends to our shareholders of $107 million.

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

Sources of liquidity

Approximately $1.3 billion of our total June 30, 2018 cash and cash equivalents included cash on hand held at the parent, as well as parent cash loaned to RJ&A.  Our cash and cash equivalents held were as follows: 
$ in thousands
 
June 30, 2018
RJF
 
$
539,514

RJ&A
 
1,026,155

RJ Bank
 
828,111

RJ Ltd.
 
343,070

RJFS
 
123,689

Carillon Tower Advisers
 
79,940

Other subsidiaries
 
239,272

Total cash and cash equivalents
 
$
3,179,751

 
RJF maintained depository accounts at RJ Bank with a balance of $173 million as of June 30, 2018. The portion of this total that is available on demand without restrictions, which amounted to $154 million at June 30, 2018, is reflected in the RJF total (and is excluded from the RJ Bank total).

RJF had loaned $783 million to RJ&A as of June 30, 2018 (such amount is included in the RJ&A cash balance), which RJ&A has invested on behalf of RJF in cash and cash equivalents or otherwise deployed in its normal business activities.

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

Liquidity available from subsidiaries

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

RJ&A is required to maintain net capital equal to the greater of $1 million or 2% of aggregate debit balances arising from client transactions. In addition, covenants in RJ&A’s committed secured financing facilities require its net capital to be a minimum of 10% of aggregate debit items.  At June 30, 2018, RJ&A significantly exceeded both the minimum regulatory requirements and the covenants in its financing arrangements pertaining to net capital. At that date, RJ&A had excess net capital of $721 million, of which $346 million was available for dividend while still maintaining the internally-targeted net capital ratio of 15% of aggregate debit items.  There are

81

Management's Discussion and Analysis


also limitations on the amount of dividends that may be declared by a broker-dealer without Financial Industry Regulatory Authority approval.

RJ Bank may pay dividends to RJF without the prior approval of its regulator as long as the dividend does not exceed the sum of RJ Bank’s current calendar year and the previous two calendar years’ retained net income, and RJ Bank maintains its targeted regulatory capital ratios. At June 30, 2018, RJ Bank had $200 million of capital in excess of the amount it would need at June 30, 2018 to maintain its targeted regulatory capital ratios, and could pay a dividend of such amount without requiring prior approval of its regulator.

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

Borrowings and financing arrangements

Committed financing arrangements

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

The following table presents our committed financing arrangements with third-party lenders, which we generally utilize to finance a portion of our fixed income trading instruments held, and the outstanding balances related thereto.

 
 
June 30, 2018
$ in thousands
 
RJ&A
 
RJF
 
Total
 
Total number of arrangements
Financing arrangement:
 
 
 
 
 
 
 
 
Committed secured
 
$
300,000

 
$

 
$
300,000

 
3

Committed unsecured
 

 
300,000

 
300,000

 
1

Total committed financing arrangements
 
$
300,000

 
$
300,000

 
$
600,000

 
4

 
 
 
 
 
 
 
 
 
Outstanding borrowing amount:
 
 
 
 
 
 
 
 
Committed secured
 
$

 
$

 
$

 
 
Committed unsecured
 

 

 

 
 
Total outstanding borrowing amount
 
$

 
$

 
$

 
 
 
Uncommitted financing arrangements

Our uncommitted financing arrangements are in the form of secured lines of credit, secured bilateral or tri-party repurchase agreements, or unsecured lines of credit. Our arrangements with third-party lenders are generally utilized to finance a portion of our fixed income securities or for cash management purposes. Our uncommitted secured financing arrangements generally require us to post collateral in excess of the amount borrowed. As of June 30, 2018, we had outstanding borrowings under four uncommitted secured borrowing arrangements with lenders out of a total of 13 uncommitted financing arrangements (seven uncommitted secured and six uncommitted unsecured). However, lenders are under no contractual obligation to lend to us under uncommitted credit facilities.

The following table presents our borrowings on uncommitted financing arrangements, all of which were in RJ&A.
$ in thousands
 
June 30, 2018
Outstanding borrowing amount:
 
 
Uncommitted secured
 
$
115,464

Uncommitted unsecured
 

Total outstanding borrowing amount
 
$
115,464



82

Management's Discussion and Analysis


Other financings

RJ Bank had $875 million in FHLB borrowings outstanding at June 30, 2018, comprised of floating-rate advances totaling $850 million and a $25 million fixed-rate advance, all of which were secured by a blanket lien on RJ Bank’s residential mortgage loan portfolio (see Note 12 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding these borrowings). RJ Bank had an additional $1.65 billion in immediate credit available from the FHLB as of June 30, 2018 and, with the pledge of additional collateral to the FHLB, total available credit of 30% of total assets.
RJ Bank is eligible to participate in the Fed’s discount-window program; however, we do not view borrowings from the Fed as a primary source of funding.  The credit available in this program is subject to periodic review, may be terminated or reduced at the discretion of the Fed, and is secured by pledged C&I loans.

From time to time we enter into repurchase agreements and reverse repurchase agreements.  We account for each of these types of transactions as collateralized agreements and financings, with the outstanding balances on the repurchase agreements included in “Securities sold under agreements to repurchase” on our Condensed Consolidated Statements of Financial Condition included in this Form 10-Q, in the amount of $115 million as of June 30, 2018 (which are reflected in the table of uncommitted financing arrangements). Such financings are generally collateralized by non-customer, RJ&A-owned securities or by securities that we have received as collateral under reverse repurchase agreements.
 
The average daily balance outstanding during the five most recent successive quarters, the maximum month-end balance outstanding during the quarter and the period-end balances for repurchase agreements and reverse repurchase agreements were as follows: 
 
 
Repurchase transactions
 
Reverse repurchase transactions
For the quarter ended:  ($ in thousands)
 
Average daily
balance
outstanding
 
Maximum month-end
balance outstanding
during the quarter
 
End of period
balance
outstanding
 
Average daily
balance
outstanding
 
Maximum month-end
balance outstanding
during the quarter
 
End of period
balance
outstanding
June 30, 2018
 
$
151,233

 
$
164,891

 
$
115,464

 
$
364,410

 
$
368,822

 
$
343,052

March 31, 2018
 
163,923

 
157,466

 
142,791

 
378,109

 
448,474

 
448,474

December 31, 2017
 
218,690

 
229,036

 
229,036

 
443,391

 
506,711

 
307,742

September 30, 2017
 
241,365

 
247,048

 
220,942

 
463,618

 
503,462

 
404,462

June 30, 2017
 
231,378

 
226,972

 
226,972

 
479,653

 
540,823

 
483,820


At June 30, 2018, in addition to the financing arrangements described above, we had $25 million outstanding on a mortgage loan for our St. Petersburg, Florida home-office complex, that is included in “Other borrowings” in our Condensed Consolidated Statements of Financial Condition included of this Form 10-Q.

At June 30, 2018, we had aggregate outstanding senior notes payable of $1.55 billion. Our senior notes payable, exclusive of any unaccreted premiums or discounts and debt issuance costs, was comprised of $250 million par 5.625% senior notes due 2024, $500 million par 3.625% senior notes due 2026, and $800 million par 4.95% senior notes due 2046. See Note 15 of our 2017 Form 10-K for additional information.

Our senior long-term debt ratings as of the most current report are:
Rating Agency
 
Rating
 
Outlook
Standard & Poor’s Ratings Services
 
BBB+
 
Stable
Moody’s Investors Services
 
Baa1
 
Stable

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

Should our credit rating be downgraded prior to a public debt offering, it is probable that we would have to offer a higher rate of interest to bond holders.  A downgrade to below investment grade may make a public debt offering difficult to execute on terms we would consider to be favorable. A downgrade below investment grade could result in the termination of certain derivative contracts and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing overnight

83

Management's Discussion and Analysis


collateralization on our derivative instruments in liability positions (see Note 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information). A credit downgrade could damage our reputation and result in certain counterparties limiting their business with us, result in negative comments by analysts, and potentially negatively impact investor perception of us, and cause a decline in our stock price and/or our clients’ perception of us. A credit downgrade would result in RJF incurring a higher commitment fee on any unused balance on one of its borrowing arrangements, the $300 million RJF Credit Facility, in addition to triggering a higher interest rate applicable to any borrowings outstanding on that line as of and subsequent to such downgrade. Conversely, an improvement in RJF’s current credit rating could have a favorable impact on the commitment fee, as well as the interest rate, applicable to any borrowings on such line. None of our borrowing arrangements contain a condition or event of default related to our credit ratings.  

Other sources and uses of liquidity

We have COLI policies which are utilized to fund certain non-qualified deferred compensation plans and other employee benefit plans. Certain of our non-qualified deferred compensation plans and other employee benefit plans are employee-directed while others are company-directed. The COLI policies that we could readily borrow against had a cash surrender value of approximately $482 million as of June 30, 2018, comprised of $275 million related to employee-directed plans and $207 million related to company-directed plans, and we were able to borrow up to 90%, or $434 million, of the June 30, 2018 total without restriction.  To effect any such borrowing, the underlying investments would be converted to money market investments, therefore requiring us to take market risk related to the employee-directed plans. There were no borrowings outstanding against any of these policies as of June 30, 2018.

On May 18, 2018, we filed a “universal” shelf registration statement with the SEC to be in a position to access the capital markets if and when necessary or perceived by us to be opportune.

See the “Contractual obligations” section below for information regarding our contractual obligations.

Statement of financial condition analysis

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

Total assets of $36.36 billion as of June 30, 2018 were $1.48 billion, or 4%, greater than our total assets as of September 30, 2017. Net bank loans receivable increased $1.98 billion, reflecting growth across the portfolio during the period. Our available-for-sale securities portfolio increased $480 million, as we increased our investments in such securities during the period in line with our growth plan for this portfolio. Goodwill and identifiable intangible assets increased $149 million due to the Scout Group acquisition. Brokerage client receivables increased $133 million, primarily due to increased margin lending. Offsetting these increases was a decrease in assets segregated pursuant to regulations and other segregated assets of $789 million, primarily due to decline in client cash balances in our client interest program and an increase in margin loans. Cash and cash equivalents balances also decreased $490 million; refer to the discussion of the components of this decrease in the “Liquidity and Capital Resources” section within this MD&A.

As of June 30, 2018, our total liabilities of $30.11 billion were $924 million, or 3%, greater than our total liabilities as of September 30, 2017. Bank deposit liabilities increased $1.75 billion, as RJ Bank retained a higher portion of RJBDP balances to fund a portion of our net loan growth and increased securities portfolio. Other payables increased $298 million due to unsettled loan purchases at the end of the period. Offsetting these increases was a decrease in other borrowings of $614 million due to the repayment of certain borrowings during the period. Brokerage client payable balances decreased $345 million, reflecting a decrease in client cash balances in our client interest program.

Contractual obligations

The Tax Act, which was enacted in December 2017, includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, which is permitted to be paid in annual installments over a period of 8 years based on the schedule outlined in the Tax Act. We currently estimate this transition tax to be $9 million (which excludes the related state tax liability), which is included in our provision for income taxes in our Condensed Consolidated Statements of Income and Comprehensive Income for the nine months ended June 30, 2018.

84

Management's Discussion and Analysis


Other than the item described above, as of June 30, 2018, there have been no material changes in our contractual obligations presented in our 2017 Form 10-K, other than in the ordinary course of business. See Note 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding certain commitments as of June 30, 2018.

Regulatory

Refer to the discussion of the regulatory environment in which we operate and the impact on our operations of certain rules and regulations in Item 1 “Business - Regulation” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory” of our 2017 Form 10-K.

On June 21, 2018, the United States Court of Appeals for the Fifth Circuit issued its mandate to officially vacate the U.S. Department of Labor’s final regulation (the “DOL Rule”), which expanded the definition of who is deemed an “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). We continue to evaluate implications of the court’s ruling, including changes we have implemented as a result of the DOL Rule.

The SEC voted on April 18, 2018 to propose rules to change the standard of conduct for broker-dealers when making recommendations of securities transactions or investment strategies to retail investors (“Regulation Best Interest”). We continue to review the proposal, including its potential implications to the firm.

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA”) was signed into law, making certain limited amendments to the Dodd-Frank Act, as well as certain targeted modifications to other post-financial crisis regulations. Among other things, the law raises the asset thresholds for Dodd-Frank Act company-run stress testing, liquidity coverage and living will requirements for bank holding companies to $250 billion, subject to the ability of the Fed to apply such requirements to institutions with assets of $100 billion or more to address financial stability risks or safety and soundness concerns. On July 6, 2018, the Fed, the OCC and the FDIC issued a joint interagency statement regarding the impact of the EGRRCPA. As a result of this statement and the EGRRCPA, RJF and RJ Bank are no longer subject to Dodd-Frank Act stress testing requirements. We are evaluating the provisions and any potential additional implications to RJF.

On June 5, 2018, the five federal regulatory agencies having oversight over the Volcker Rule announced publication of amendment to the rule. The notice of proposed rulemaking contains a number of revisions to the Volcker Rule’s covered fund restrictions. RJF is evaluating the proposal to determine the impact such proposal will have, if any, if it becomes effective.   

RJF and many of its subsidiaries are each subject to various regulatory capital requirements. As of June 30, 2018, all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. In addition, RJF and RJ Bank were categorized as “well capitalized” as of June 30, 2018.

The maintenance of certain risk-based regulatory capital levels could impact various capital allocation decisions impacting one or more of our businesses.  However, due to the strong capital position of RJF and its regulated subsidiaries, we do not anticipate these capital requirements will have a negative impact on our future business activities.

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

Critical accounting estimates

The condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during any reporting period in our condensed consolidated financial statements. Management has established detailed policies and control procedures intended to ensure the appropriateness of such estimates and assumptions and their consistent application from period to period. For a description of our significant accounting policies, see Note 2 of the Notes to Consolidated Financial Statements of our 2017 Form 10-K.

We believe that of our accounting estimates and assumptions, those described below involve a high degree of judgment and complexity. Due to their nature, estimates involve judgment based upon available information. Actual results or amounts could differ from estimates and the difference could have a material impact on the consolidated financial statements. Therefore, understanding these critical accounting estimates is important in understanding our reported results of operations and financial position.


85

Management's Discussion and Analysis


Valuation of financial instruments

The use of fair value to measure financial instruments, with related gains or losses recognized in our Condensed Consolidated Statements of Income and Comprehensive Income, is fundamental to our financial statements and our risk management processes. See Note 2 of our 2017 Form 10-K for a discussion of our fair value accounting policies regarding financial instruments owned and financial instruments sold but not yet purchased.

Assets and liabilities measured at fair value on a recurring basis

As of June 30, 2018, 11% of our total assets and 2% of our total liabilities were financial instruments measured at fair value on a recurring basis. Financial instrument which were assets measured at fair value on a recurring basis categorized as Level 3 amounted to $188 million as of June 30, 2018 and represented 5% of our assets measured at fair value. Of the Level 3 assets as of June 30, 2018, our ARS positions comprised $111 million, or 59%, and our private equity investments not measured at NAV comprised $72 million, or 38%, of the total.  Level 3 assets represented 3% of total equity as of June 30, 2018.

Our investments in private equity measured at NAV amounted to $92 million at June 30, 2018.

Financial instruments which were liabilities categorized as Level 3 were $2 million as of June 30, 2018.

See Notes 4, 5 and 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on our financial instruments at fair value.

Loss provisions

Refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical accounting estimates - Loss provisions” of our 2017 Form 10-K for more information.

Loss provisions arising from legal and regulatory matters

The recorded amount of liabilities related to legal and regulatory matters is subject to significant management judgment. For a description of the significant estimates and judgments associated with establishing such accruals, see the “Contingent liabilities” section of Note 2 of our 2017 Form 10-K. In addition, refer to Note 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding legal and regulatory matter contingencies as of June 30, 2018.

Loss provisions arising from operations of our Broker-Dealers

The recorded amounts of loss provisions associated with brokerage client receivables and loans to financial advisors and certain key revenue producers are subject to significant management judgment. For a description of the significant estimates and judgments associated with establishing these broker-dealer related loss provisions and the related allowances for doubtful accounts, see the “Brokerage client receivables, net” and “Loans to financial advisors, net” sections of Note 2 of our 2017 Form 10-K and Note 2 of this Form 10-Q for information regarding the allowance for doubtful accounts associated with loans to financial advisors as of June 30, 2018.

Loan loss provisions arising from operations of RJ Bank

RJ Bank provides an allowance for loan losses which reflects our continuing evaluation of the probable losses inherent in the loan portfolio. See the discussion regarding RJ Bank’s methodology in estimating its allowance for loan losses in Note 2 of our 2017 Form 10-K.

At June 30, 2018, the amortized cost of all RJ Bank loans was $19.2 billion and an allowance for loan losses of $196 million was recorded against that balance. The total allowance for loan losses was equal to 1.03% of the amortized cost of the loan portfolio.

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


86

Management's Discussion and Analysis


Recent accounting developments

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

Off-balance sheet arrangements

For information regarding our off-balance sheet arrangements, see Note 22 of the Notes to Consolidated Financial Statements of our 2017 Form 10-K and Note 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Effects of inflation

Our assets are primarily liquid in nature and are not significantly affected by inflation. However, the rate of inflation affects our expenses, including employee compensation, communications and information processing, and occupancy costs, which may not be readily recoverable through charges for services we provide to our clients.

Risk management

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

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

Market risk

Market risk is our risk of loss resulting from the impact of changes in market prices on our inventory, derivative and investment positions. We have exposure to market risk primarily through our broker-dealer trading operations and, to a lesser extent, through our banking operations. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Market risk” of our 2017 Form 10-K for a discussion of our market risk including how we manage such risk. See Notes 4, 5 and 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for fair value and other information regarding our trading inventories, available-for-sale securities and derivative instruments.

Interest rate risk

Trading activities

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

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

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


87

Management's Discussion and Analysis


The Fed’s MRR requires us to perform daily back testing procedures of our VaR model, whereby we compare each day’s projected VaR to its regulatory-defined daily trading losses, which exclude fees, commissions, reserves, net interest income and intraday trading. Based on these daily “ex ante” versus “ex post comparisons, we determine whether the number of times that regulatory-defined daily trading losses exceed VaR is consistent with our expectations at a 99% confidence level. Our regulatory-defined daily loss in our trading portfolios exceeded our predicted VaR once during the three months ended June 30, 2018 and twice during the nine months ended June 30, 2018.

The following table sets forth the high, low, period end and daily average VaR for all of our trading portfolios, including fixed income, equity, and derivative instruments, for the period and dates indicated.
 
 
Nine months ended June 30, 2018
 
Period end VaR
$ in thousands
 
High
 
Low
 
June 30,
2018
 
September 30,
2017
Daily VaR
 
$
3,917

 
$
654

 
$
1,695

 
$
1,427


 
 
Three months ended June 30,
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
 
2018
 
2017
Daily average VaR
 
$
1,548

 
$
1,915

 
$
1,444

 
$
1,852


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

Separately, RJF provides additional market risk disclosures to comply with the MRR. The results of the application of this market risk capital rule are available on our website under www.raymondjames.com/investor-relations/financial-report under “Market Risk Rule Disclosure.”

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

As a part of our fixed income public finance operations, we enter into forward commitments to purchase GNMA or FNMA MBS which are issued on behalf of various state and local housing finance agencies.  These activities result in exposure to interest rate risk. In order to hedge the 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. See Note 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding these activities.

Banking operations

RJ Bank maintains an earning asset portfolio that is comprised of cash, C&I loans, tax-exempt loans, SBL, commercial and residential real estate loans, MBS and CMOs (both of which are held in the available-for-sale securities portfolio), Small Business Administration loan securitizations and a trading portfolio of corporate loans.  Those earning assets are primarily funded by client deposits.  Based on its current earning asset portfolio, RJ Bank is subject to interest rate risk.  In recent periods, RJ Bank has focused its interest rate risk analysis on the risk of market interest rates rising given the Federal Reserve Bank’s increases in short-term interest rates.  RJ Bank analyzes interest rate risk based on forecasted net interest income, which is the net amount of interest received and interest paid, and the net portfolio valuation, both in a range of interest rate scenarios.

One of the objectives of RJ Bank’s Asset Liability Management Committee is to manage the sensitivity of net interest income to changes in market interest rates. The methods used to measure this sensitivity are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Market risk” of our 2017 Form 10-K.

We utilize a hedging strategy using interest rate swaps as a result of RJ Bank’s asset and liability management process. For further

88

Management's Discussion and Analysis


information regarding this risk management objective, see the discussion of this hedging strategy in Note 2 of the Notes to Consolidated Financial Statements of our 2017 Form 10-K and in Note 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

The following table is an analysis of RJ Bank’s estimated net interest income over a 12 month period based on instantaneous shifts in interest rates (expressed in basis points) using RJ Bank’s own asset/liability model.
Instantaneous changes in rate
 
Net interest income
($ in thousands)
 
Projected change in
net interest income
+200
 
$767,396
 
(5.44)%
+100
 
$790,476
 
(2.60)%
0
 
$811,559
 
-100
 
$712,959
 
(12.15)%

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

The following table shows the contractual maturities of RJ Bank’s loan portfolio at June 30, 2018, including contractual principal repayments.  This table does not, however, include any estimates of prepayments.  These prepayments could shorten the average loan lives and cause the actual timing of the loan repayments to differ significantly from those shown in the following table. Loan amounts in the table below exclude unearned income and deferred expenses.
 
 
Due in
$ in thousands
 
One year or less
 
> One year – five years
 
> 5 years
 
Total
Loans held for investment:
 
 

 
 

 
 
 
 

C&I loans
 
$
126,898

 
$
3,507,829

 
$
4,203,519

 
$
7,838,246

CRE construction loans
 
45,590

 
74,934

 
24,837

 
145,361

CRE loans
 
454,411

 
2,332,321

 
656,435

 
3,443,167

Tax-exempt loans
 

 
22,630

 
1,170,487

 
1,193,117

Residential mortgage loans
 
907

 
2,356

 
3,577,606

 
3,580,869

SBL
 
2,866,902

 
3,524

 

 
2,870,426

Total loans held for investment
 
3,494,708

 
5,943,594

 
9,632,884

 
19,071,186

Loans held for sale
 

 

 
124,077

 
124,077

Total loans
 
$
3,494,708

 
$
5,943,594

 
$
9,756,961

 
$
19,195,263


The following table shows the distribution of the recorded investment of those RJ Bank loans that mature in more than one year between fixed and adjustable interest rate loans at June 30, 2018. Loan amounts in the table below exclude unearned income and deferred expenses.
 
 
Interest rate type
$ in thousands
 
Fixed
 
Adjustable
 
Total
Loans held for investment:
 
 

 
 

 
 

C&I loans
 
$
21,172

 
$
7,690,176

 
$
7,711,348

CRE construction loans
 

 
99,771

 
99,771

CRE loans
 
77,226

 
2,911,530

 
2,988,756

Tax-exempt loans
 
1,161,217

 
31,900

 
1,193,117

Residential mortgage loans
 
235,293

 
3,344,669


3,579,962

SBL
 
3,524

 

 
3,524

Total loans held for investment
 
1,498,432

 
14,078,046

 
15,576,478

Loans held for sale
 
2,136

 
121,941

 
124,077

Total loans
 
$
1,500,568

 
$
14,199,987

 
$
15,700,555


Contractual loan terms for C&I, CRE, CRE construction and residential mortgage loans may include an interest rate floor and/or fixed interest rates for a certain period of time, which would impact the timing of the interest rate reset for the respective loan.

See the discussion within the “Management’s Discussion and Analysis - Risk management - Credit risk - Risk monitoring process” section of this Form 10-Q for additional information regarding RJ Bank’s interest-only residential mortgage loan portfolio.


89

Management's Discussion and Analysis


In our RJ Bank available-for-sale securities portfolio, we hold primarily fixed-rate agency MBS and CMOs which were carried at fair value in our Condensed Consolidated Statements of Financial Condition at June 30, 2018 with changes in the fair value of the portfolio recorded through “Other comprehensive income” in our Condensed Consolidated Statements of Income and Comprehensive Income. At June 30, 2018, our RJ Bank available-for-sale securities portfolio had a fair value of $2.56 billion with a weighted-average yield of 2.22% and an average expected duration of three years. See Note 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on the fair value of these securities.

Other

We hold ARS, which are long-term variable rate securities tied to short-term interest rates, that are accounted for as available-for-sale and are carried at fair value on our Condensed Consolidated Statements of Financial Condition. These securities generally have embedded penalty interest rate provisions in the event auctions fail to set the security’s interest rate. These penalty rates are based upon a stated interest rate spread over what is typically a short-term base interest rate index.  As short-term interest rates rise, the penalty rate that is specified in the security increases.  Changes in interest rates impact the fair value of our ARS portfolio, as we estimate that at some level of increase in short-term interest rates, issuers of the securities will have the economic incentive to refinance (and thus prepay) the securities.  The faster and steeper short-term interest rates rise, the earlier prepayments will likely occur and the higher the fair value of the security. See Notes 4 and 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on these securities.

Equity price risk

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

In addition, our private equity investments may be impacted by equity prices.

Foreign exchange risk

We are subject to foreign exchange risk due to our investments in foreign subsidiaries as well as transactions and resulting balances denominated in a currency other than the U.S. dollar. For example, a portion of our bank loan portfolio includes loans which are denominated in Canadian dollars totaling $1.08 billion and $1.00 billion at June 30, 2018 and September 30, 2017, respectively. A portion of such loans are held by RJ Bank’s Canadian subsidiary, which is discussed further below.

Investments in foreign subsidiaries

RJ Bank has an investment in a Canadian subsidiary, resulting in foreign exchange risk. To mitigate its foreign exchange risk, RJ Bank utilizes short-term, forward foreign exchange contracts. These derivative agreements are primarily accounted for as net investment hedges in the condensed consolidated financial statements. See Note 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding these derivative contracts.

We had foreign exchange risk in our investment in RJ Ltd. of CDN $339 million at June 30, 2018, which was not hedged. Foreign exchange gains/losses related to this investment are primarily reflected in other comprehensive income/(loss) (“OCI”) on our Condensed Consolidated Statements of Income and Comprehensive Income. See Note 15 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding all of our components of OCI.

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

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

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

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Management's Discussion and Analysis


associated with these contracts are included in “Other revenues” in our Condensed Consolidated Statements of Income and Comprehensive Income. See Note 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding our derivative contracts.

Credit risk

Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. The nature and amount of credit risk depends on the type of transaction, the structure and duration of that transaction, and the parties involved. Credit risk is an integral component of the profit assessment of lending and other financing activities. See further discussion of our credit risk, including how we manage such risk, in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk” of our 2017 Form 10-K.

The Bank has substantial C&I, CRE, tax-exempt, SBL and residential mortgage loan portfolios.  A significant downturn in the overall economy, deterioration in real estate values or a significant issue within any sector or sectors where RJ Bank has a concentration could result in large provisions for loan losses and/or charge-offs.

Our allowance for loan losses is regularly evaluated with adjustments made on a quarterly basis. Several factors were taken into consideration in evaluating the allowance for loan losses at June 30, 2018, including the risk profile of the portfolios, net charge-offs during the period, the level of nonperforming loans and delinquency ratios. RJ Bank also considered the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. Finally, RJ Bank considered current economic conditions that might impact the portfolio. RJ Bank determined the allowance that was required for specific loan grades based on relative risk characteristics of the loan portfolio.
 
The following table presents RJ Bank’s changes in the allowance for loan losses.
 
 
Nine months ended June 30,
$ in thousands
 
2018
 
2017
Allowance for loan losses beginning of year
 
$
190,442

 
$
197,378

Provision for loan losses
 
13,791

 
13,097

Charge-offs:
 
 
 
 

C&I loans
 
(8,500
)
 
(24,298
)
Residential mortgage loans
 
(383
)
 
(742
)
Total charge-offs
 
(8,883
)
 
(25,040
)
Recoveries:
 
 

 
 

CRE loans
 

 
5,013

Residential mortgage loans
 
1,522

 
981

Total recoveries
 
1,522

 
5,994

Net charge-offs
 
(7,361
)
 
(19,046
)
Foreign exchange translation adjustment
 
(715
)
 
174

Allowance for loan losses end of period
 
$
196,157

 
$
191,603

Allowance for loan losses to bank loans outstanding
 
1.03
%
 
1.15
%

The loan loss provision increased to $13.8 million from $13.1 million in the prior year. See further explanation of the loan loss provision increase in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - RJ Bank” of this Form 10-Q. As a result of improved credit quality in the loan portfolio, the total allowance for loan losses to total to bank loans outstanding declined to 1.03% at June 30, 2018 from 1.15% at June 30, 2017.

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Management's Discussion and Analysis


The following table presents net loan (charge-offs)/recoveries and the percentage of net loan (charge-offs)/recoveries to the average outstanding loan balances by loan portfolio segment. 
 
 
Three months ended June 30,
 
Nine months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
$ in thousands
 
Net loan
(charge-off)/recovery
amount
 
% of avg.
outstanding
loans
 
Net loan
(charge-off)/recovery
amount
 
% of avg.
outstanding
loans
 
Net loan
(charge-off)/recovery
amount
 
% of avg.
outstanding
loans
 
Net loan
(charge-off)/recovery
amount
 
% of avg.
outstanding
loans
C&I loans
 
$
(4,324
)
 
0.23
%
 
$
(1,605
)
 
0.09
%
 
$
(8,500
)
 
0.15
%
 
$
(24,298
)
 
0.44
%
CRE loans
 

 

 

 

 

 

 
5,013

 
0.24
%
Residential mortgage loans
 
678

 
0.08
%
 
444

 
0.06
%
 
1,139

 
0.05
%
 
239

 
0.01
%
Total
 
$
(3,646
)
 
0.08
%
 
$
(1,161
)
 
0.03
%
 
$
(7,361
)
 
0.05
%
 
$
(19,046
)
 
0.16
%

The level of charge-off activity is a factor that is considered in evaluating the potential for severity of future credit losses. Net charge-offs for the nine months ended June 30, 2018 decreased $12 million as compared to the prior year. The decrease was due to the prior year reflecting the resolution of one corporate C&I loan which resulted in a significant charge-off.

The table below presents the nonperforming loans balance and total allowance for loan losses.
 
 
June 30, 2018
 
September 30, 2017
$ in thousands
 
Nonperforming
loan balance
 
Allowance for
loan losses
balance
 
Loan category as a % of total loans receivable
 
Nonperforming
loan balance
 
Allowance for
loan losses
balance
 
Loan category as a % of total loans receivable
Loans held for investment:
 
 

 
 

 
 
 
 

 
 

 
 
C&I loans
 
$
5,273

 
$
(122,193
)
 
41
%
 
$
5,221

 
$
(119,901
)
 
43
%
CRE construction loans
 

 
(2,628
)
 
1
%
 

 
(1,421
)
 
1
%
CRE loans
 

 
(44,872
)
 
18
%
 

 
(41,749
)
 
18
%
Tax-exempt loans
 

 
(7,611
)
 
6
%
 

 
(6,381
)
 
6
%
Residential mortgage loans
 
29,280

 
(15,119
)
 
18
%
 
33,749

 
(16,691
)
 
18
%
SBL
 

 
(3,734
)
 
15
%
 

 
(4,299
)
 
14
%
Loans held for sale
 

 

 
1
%
 

 

 
%
Total
 
$
34,553

 
$
(196,157
)
 
100
%
 
$
38,970

 
$
(190,442
)
 
100
%
Total nonperforming loans as a % of RJ Bank total loans
 
0.18
%
 
 
 
 
 
0.23
%
 
 
 
 

The level of nonperforming loans is another indicator of potential future credit losses. The amount of nonperforming loans decreased during the nine months ended June 30, 2018 due to a $4 million decrease in nonperforming residential mortgage loans. Included in nonperforming residential mortgage loans were $26 million in loans for which $13 million in charge-offs were previously recorded, resulting in less exposure within the remaining balance.

The nonperforming loan balances above exclude $12 million and $14 million as of June 30, 2018 and September 30, 2017, respectively, of residential TDRs which were returned to accrual status in accordance with our policy. Total nonperforming assets, including other real estate acquired in the settlement of residential mortgages, amounted to $37 million and $44 million at June 30, 2018 and September 30, 2017, respectively. Total nonperforming assets as a percentage of RJ Bank total assets were 0.16% and 0.21% at June 30, 2018 and September 30, 2017, respectively.

Loan underwriting policies

RJ Bank’s underwriting policies for the major types of loans are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk” of our 2017 Form 10-K. There were no material changes in RJ Bank’s underwriting policies during the nine months ended June 30, 2018.


92

Management's Discussion and Analysis


Risk monitoring process

Another component of credit risk strategy at RJ Bank is the ongoing risk monitoring and review processes for all residential, SBL, corporate and tax-exempt credit exposures, as well as our rigorous processes to manage and limit credit losses arising from loan delinquencies. There are various other factors included in these processes, depending on the loan portfolio. There were no material changes to those processes and policies during the nine months ended June 30, 2018.

SBL and residential mortgage loans

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

We track and review many factors to monitor credit risk in RJ Bank’s residential mortgage loan portfolio. The qualitative factors include, but are not limited to: loan performance trends, loan product parameters and qualification requirements, borrower credit scores, occupancy (i.e., owner occupied, second home or investment property), level of documentation, loan purpose, geographic concentrations, average loan size and loan policy exceptions. These qualitative measures, while considered and reviewed in establishing the allowance for loan losses, have not resulted in any material quantitative adjustments to RJ Bank’s historical loss rates.

The following table presents a summary of delinquent residential mortgage loans, which is comprised of loans which are two or more payments past due as well as loans in the process of foreclosure.
 
 
Amount of delinquent residential loans
 
Delinquent residential loans as a percentage of outstanding loan balances
$ in thousands
 
30-89 days
 
90 days or more
 
Total
 
30-89 days
 
90 days or more
 
Total
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans:
 
 
 
 
 


 
 
 
 
 
 
First mortgage loans
 
$
694

 
$
18,393

 
$
19,087

 
0.02
%
 
0.51
%
 
0.53
%
Home equity loans/lines
 
3

 
123

 
126

 
0.02
%
 
0.46
%
 
0.48
%
Total residential mortgage loans
 
$
697

 
$
18,516

 
$
19,213

 
0.02
%
 
0.51
%
 
0.53
%
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
First mortgage loans
 
$
3,061

 
$
19,823

 
$
22,884

 
0.10
%
 
0.63
%
 
0.73
%
Home equity loans/lines
 
248

 
18

 
266

 
0.91
%
 
0.07
%
 
0.98
%
Total residential mortgage loans
 
$
3,309

 
$
19,841

 
$
23,150

 
0.10
%
 
0.63
%
 
0.73
%

At June 30, 2018, loans over 30 days delinquent (including nonperforming loans) decreased to 0.53% of residential mortgage loans outstanding, compared to 0.73% over 30 days delinquent at September 30, 2017.  Our June 30, 2018 percentage continues to compare favorably to the national average for over 30 day delinquencies of 3.84%, as most recently reported by the Fed. RJ Bank’s significantly lower delinquency rate as compared to its peers is the result of our uniform underwriting policies, the lack of subprime loans and the limited amount of non-traditional loan products.

Credit risk is also managed by diversifying the residential mortgage portfolio. The geographic concentrations (top five states) of RJ Bank’s one-to-four family residential mortgage loans were as follows:
June 30, 2018
 
September 30, 2017
 
Loans outstanding as a % of RJ Bank total residential mortgage loans
 
Loans outstanding as a % of RJ Bank total loans
 
 
Loans outstanding as a % of RJ Bank total residential mortgage loans
 
Loans outstanding as a % of RJ Bank total loans
CA
25.7%
 
4.8%
 
CA
23.8%
 
4.4%
FL
17.6%
 
3.3%
 
FL
18.9%
 
3.5%
TX
7.4%
 
1.4%
 
TX
7.8%
 
1.4%
NY
7.4%
 
1.4%
 
NY
6.8%
 
1.3%
CO
3.5%
 
0.7%
 
CO
3.4%
 
0.6%

Loans where borrowers may be subject to payment increases include adjustable rate mortgage loans with terms that initially require payment of interest only.  Payments may increase significantly when the interest-only period ends and the loan principal begins to

93

Management's Discussion and Analysis


amortize.  At June 30, 2018 and September 30, 2017, these loans totaled $914 million and $683 million, respectively, or approximately 25% and 20% of the residential mortgage portfolio, respectively.  The weighted average number of years before the remainder of the loans, which were still in their interest-only period at June 30, 2018, begins amortizing is 6.7 years.  

A component of credit risk management for the residential portfolio is the LTV ratio and borrower credit score at origination or purchase. The most recent weighted-average LTV ratios and FICO scores at origination of RJ Bank’s residential first mortgage loan portfolio were as follows:
 
June 30, 2018
 
September 30, 2017
Residential first mortgage loan weighted-average LTV/FICO
65%/760
 
65%/758

Corporate and tax-exempt loans

Other than loans classified as nonperforming, the amount of corporate and tax-exempt loans that were delinquent greater than 30 days was not significant as of June 30, 2018.

Credit risk is also managed by diversifying the corporate loan portfolio. RJ Bank’s corporate loan portfolio does not contain a significant concentration in any single industry. The industry concentrations (top five categories) of RJ Bank’s corporate loans were as follows:
June 30, 2018
 
September 30, 2017
 
Loans outstanding as a % of RJ Bank total corporate loans
 
Loans outstanding as a % of RJ Bank total loans
 
 
Loans outstanding as a % of RJ Bank total corporate loans
 
Loans outstanding as a % of RJ Bank total loans
Office (real estate)
4.9%
 
3.3%
 
Office (real estate)
5.9%
 
4.0%
Hospitality
4.9%
 
3.2%
 
Retail real estate
5.3%
 
3.6%
Retail real estate
4.6%
 
3.0%
 
Consumer products and services
5.2%
 
3.5%
Business systems and services
4.5%
 
3.0%
 
Hospitality
4.7%
 
3.2%
Consumer products and services
4.2%
 
2.8%
 
Business systems and services
4.5%
 
3.1%

 
 
 
 

 
 
 

Liquidity risk

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

Operational risk

Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, business disruptions, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems and inadequacies or breaches in our control processes including cyber security incidents. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Operational risk” of our 2017 Form 10-K for a discussion of our operational risk and certain of our risk mitigation processes. There have been no material changes in such processes during the nine months ended June 30, 2018.

As more fully described in the discussion of our business technology risks included in various risk factors presented in “Item 1A - Risk Factors” of our 2017 Form 10-K, despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, computer viruses and other malicious code and other events that could have an impact on the security and stability of our operations.  Notwithstanding the precautions we take, if one or more of these events were to occur, this could jeopardize the information we confidentially maintain, including that of our clients and counterparties, which is processed, stored in and transmitted through our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our clients or counterparties. To-date, we have not experienced any material losses relating to cyberattacks or other information security breaches; however, there can be no assurances that we will not suffer such losses in the future. 





94

Management's Discussion and Analysis


Model risk

Model risk refers to the possibility of unintended business outcomes arising from the design, implementation or use of models. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Model Risk” of our 2017 Form 10-K for information regarding how we utilize models throughout the firm and how we manage model risk.

Regulatory and legal risk

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Regulatory and legal risk” of our 2017 Form 10-K for information on our regulatory and legal risks, including how we manage such risks. There have been no material changes in our risk mitigation processes during the nine months ended June 30, 2018.


95


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A. RISK FACTORS

Not applicable.


96


ITEM 2.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

We purchase our own stock from time to time in conjunction with a number of activities, each of which is described below. The following table presents information on our purchases of our own stock, on a monthly basis, for the nine months ended June 30, 2018:
 
Total number of shares
purchased
 
Average price
per share
 
Number of shares purchased as part of publicly announced plans or programs
 
Approximate dollar value (in thousands) at each month-end, of securities that may yet be purchased under the plans or programs
 
 
 
 
 
 
 
 
October 1, 2017 – October 31, 2017
8,493

 
$
85.25

 

 
$
135,671

November 1, 2017 – November 30, 2017
18,539

 
$
85.32

 

 
$
135,671

December 1, 2017 – December 31, 2017
205,504

 
$
87.32

 

 
$
135,671

First quarter
232,536

 
$
87.08

 

 
 
 
 
 
 
 
 
 
 
January 1, 2018 – January 31, 2018
18,887

 
$
91.47

 

 
$
135,671

February 1, 2018 – February 28, 2018
5,708

 
$
91.85

 

 
$
135,671

March 1, 2018 – March 31, 2018
861

 
$
97.04

 

 
$
135,671

Second quarter
25,456

 
$
91.74

 

 


 
 
 
 
 
 
 
 
April 1, 2018 – April 30, 2018
1,966

 
$
87.44

 

 
$
135,671

May 1, 2018 – May 31, 2018
9,035

 
$
95.11

 

 
$
250,000

June 1, 2018 – June 30, 2018
1,750

 
$
97.60

 

 
$
250,000

Third quarter
12,751

 
$
94.27

 

 
 
Fiscal year-to-date total
270,743

 
$
87.86

 

 



On May 22, 2018, we announced an increase to $250 million in the amount authorized by our Board of Directors to be used, at the discretion of the Board’s Securities Repurchase Committee, for repurchases of our common stock and outstanding senior notes, subject to market conditions and other factors. Between July 1, 2018 and August 6, 2018, we repurchased approximately 158 thousand shares of our common stock under this authorization at a weighted-average price of $90.76, for total consideration of $14 million.

For the nine months ended June 30, 2018 share purchases pursuant to the Restricted Stock Trust Fund, which was established to acquire our common stock in the open market and used to settle RSUs granted as a retention vehicle for certain employees of our wholly owned Canadian subsidiary, totaled approximately 77 thousand shares for aggregate consideration of $7 million. For more information on this trust fund, see Note 2 of the Notes to Consolidated Financial Statements of our 2017 Form 10-K and Note 9 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. These activities do not utilize the repurchase authority presented in the table above.

We also repurchase shares when employees surrender shares as payment for option exercises or withholding taxes.  Of the total for the nine months ended June 30, 2018, shares surrendered to us by employees for such purposes approximated 194 thousand shares, for a total consideration of $17 million. These activities do not utilize the repurchase authority presented in the table above.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.
OTHER INFORMATION

Not applicable.


97


ITEM 6.
EXHIBITS
Exhibit Number

Description
3.1

3.2

11

Statement Re: Computation of per Share Earnings (the calculation of per share earnings is included in Part I, Item 1 in the Notes to Condensed Consolidated Financial Statements (Earnings Per Share) and is omitted here in accordance with Section (b)(11) of Item 601 of Regulation S-K).
12

31.1

31.2

32

101.INS

XBRL Instance Document.
101.SCH

XBRL Taxonomy Extension Schema Document.
101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB

XBRL Taxonomy Extension Label Linkbase Document.
101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.


SIGNATURES

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

 
 
 
RAYMOND JAMES FINANCIAL, INC.
 
 
 
(Registrant)
 
 
 
 
Date:
August 7, 2018
 
/s/ Paul C. Reilly
 
 
 
Paul C. Reilly
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
Date:
August 7, 2018
 
/s/ Jeffrey P. Julien
 
 
 
Jeffrey P. Julien
 
 
 
Executive Vice President - Finance and Chief Financial Officer

98