10-Q 1 rjf-2019033110q.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 March 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
Commission File Number: 1-9109
RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Florida
 
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
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
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
RJF
New York Stock Exchange
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
140,805,319 shares of common stock as of May 8, 2019


INDEX
 
 
 
PAGE
PART I
 
 
Item 1.
 
 
 
Condensed Consolidated Statements of Financial Condition as of March 31, 2019 and September 30, 2018 (Unaudited)
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended March 31, 2019 and March 31, 2018 (Unaudited)
 
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended March 31, 2019 and March 31, 2018 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2019 and March 31, 2018 (Unaudited)
 
 
 
 
 
Note 1 - Organization and basis of presentation
 
 
Note 2 - Update of significant accounting policies
 
 
Note 3 - Fair value
 
 
Note 4 - Available-for-sale securities
 
 
Note 5 - Derivative assets and derivative liabilities
 
 
Note 6 - Collateralized agreements and financings
 
 
Note 7 - Bank loans, net
 
 
Note 8 - Variable interest entities
 
 
Note 9 - Goodwill and identifiable intangible assets, net
 
 
Note 10 - Bank deposits
 
 
Note 11 - Other borrowings
 
 
Note 12 - Income taxes
 
 
Note 13 - Commitments, contingencies and guarantees
 
 
Note 14 - Accumulated other comprehensive income/(loss)
 
 
Note 15 - Revenues
 
 
Note 16 - Interest income and interest expense
 
 
Note 17 - Share-based 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.
 
Unregistered Sales of Equity Securities and Use of Proceeds
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 millions, except per share amounts
 
March 31, 2019
 
September 30, 2018
Assets:
 

 

Cash and cash equivalents
 
$
3,831

 
$
3,500

Cash segregated pursuant to regulations
 
2,288

 
2,441

Securities purchased under agreements to resell
 
447

 
373

Securities borrowed
 
224

 
255

Financial instruments, at fair value:
 
 
 
 
Trading instruments (includes $521 and $465 pledged as collateral)
 
819

 
702

Available-for-sale securities (includes $17 and $20 pledged as collateral)
 
2,893

 
2,696

Derivative assets
 
251

 
180

Private equity investments
 
144

 
147

Other investments (includes $25 and $25 pledged as collateral)
 
258

 
202

Brokerage client receivables, net
 
2,769

 
3,343

Receivables from brokers, dealers and clearing organizations
 
299

 
257

Other receivables
 
535

 
592

Bank loans, net
 
20,135

 
19,518

Loans to financial advisors, net
 
913

 
925

Investments in real estate partnerships held by consolidated variable interest entities
 
88

 
107

Property and equipment, net
 
498

 
486

Deferred income taxes, net
 
188

 
203

Goodwill and identifiable intangible assets, net
 
630

 
639

Other assets
 
966

 
847

Total assets
 
$
38,176

 
$
37,413

 
 
 
 
 
Liabilities and equity:
 
 
 
 
Bank deposits
 
$
21,618

 
$
19,942

Securities sold under agreements to repurchase
 
210

 
186

Securities loaned
 
710

 
423

Financial instruments sold but not yet purchased, at fair value:
 
 
 
 
Trading instruments
 
321

 
235

Derivative liabilities
 
247

 
247

Brokerage client payables
 
4,467

 
5,625

Payables to brokers, dealers and clearing organizations
 
208

 
206

Accrued compensation, commissions and benefits
 
959

 
1,189

Other payables
 
555

 
459

Other borrowings
 
896

 
899

Senior notes payable
 
1,550

 
1,550

Total liabilities
 
31,741


30,961

Commitments and contingencies (see Note 13)
 


 


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

 
—

Common stock; $.01 par value; 350,000,000 shares authorized; 158,086,495 and 156,363,615 shares issued as of March 31, 2019 and September 30, 2018, respectively, and 140,439,495 and 145,642,437 shares outstanding as of March 31, 2019 and September 30, 2018, respectively
 
2

 
2

Additional paid-in capital
 
1,917

 
1,808

Retained earnings
 
5,448

 
5,032

Treasury stock, at cost; 17,647,000 and 10,693,026 common shares as of March 31, 2019 and September 30, 2018, respectively
 
(976
)
 
(447
)
Accumulated other comprehensive loss
 
(25
)
 
(27
)
Total equity attributable to Raymond James Financial, Inc.
 
6,366

 
6,368

Noncontrolling interests
 
69

 
84

Total equity
 
6,435

 
6,452

Total liabilities and equity
 
$
38,176

 
$
37,413


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 March 31,
 
Six months ended March 31,
in millions, except per share amounts
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Asset management and related administrative fees
 
$
783

 
$
768

 
$
1,648

 
$
1,497

Brokerage revenues:
 
 
 
 
 
 
 
 
Securities commissions
 
349

 
425

 
737

 
841

Principal transactions
 
93

 
85

 
169

 
182

Total brokerage revenues
 
442

 
510

 
906

 
1,023

Account and service fees
 
191

 
177

 
376

 
348

Investment banking
 
163

 
116

 
300

 
204

Interest income
 
324

 
249

 
640

 
481

Other
 
31

 
37

 
68

 
70

Total revenues
 
1,934

 
1,857


3,938


3,623

Interest expense
 
(75
)
 
(45
)
 
(148
)
 
(85
)
Net revenues
 
1,859

 
1,812


3,790


3,538

Non-interest expenses:
 
 

 
 

 
 
 
 
Compensation, commissions and benefits
 
1,225

 
1,196

 
2,490

 
2,349

Communications and information processing
 
94

 
93

 
186

 
173

Occupancy and equipment costs
 
53

 
50

 
104

 
100

Business development
 
41

 
43

 
84

 
77

Investment sub-advisory fees
 
22

 
23

 
46

 
45

Professional fees
 
17

 
16

 
39

 
28

Bank loan loss provision
 
5

 
8

 
21

 
9

Acquisition and disposition-related expenses
 
—

 
—

 
15

 
4

Other
 
67

 
51

 
140

 
110

Total non-interest expenses
 
1,524

 
1,480


3,125


2,895

Income including noncontrolling interests and before provision for income taxes
 
335

 
332


665


643

Provision for income taxes
 
86

 
89

 
169

 
281

Net income including noncontrolling interests
 
249

 
243


496


362

Net loss attributable to noncontrolling interests
 
(12
)
 
—

 
(14
)
 
—

Net income attributable to Raymond James Financial, Inc.
 
$
261

 
$
243


$
510


$
362

 
 
 
 
 
 
 
 
 
Earnings per common share – basic
 
$
1.85

 
$
1.67

 
$
3.58

 
$
2.49

Earnings per common share – diluted
 
$
1.81

 
$
1.63

 
$
3.51

 
$
2.43

Weighted-average common shares outstanding – basic
 
140.8

 
145.4

 
142.5

 
144.9

Weighted-average common and common equivalent shares outstanding – diluted
 
143.9

 
149.0

 
145.4

 
148.5

 
 
 
 
 
 
 
 
 
Net income attributable to Raymond James Financial, Inc.
 
$
261

 
$
243


$
510


$
362

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

 
 

 
 
 
 
Available-for-sale securities
 
19

 
(15
)
 
41

 
(27
)
Currency translations, net of the impact of net investment hedges
 
8

 
(2
)
 
(5
)
 
(2
)
Cash flow hedges
 
(13
)
 
14

 
(30
)
 
21

Total comprehensive income
 
$
275

 
$
240


$
516


$
354

 












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

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

 
$
2

 
$
2

 
$
2

Share issuances
 
—

  
—

 
—

 
—

Balance end of period
 
2

 
2


2


2

 
 
 
 
 
 
 
 
 
Additional paid-in capital:
 
 

 
 

 
 
 
 
Balance beginning of period
 
1,871

  
1,705

 
1,808

 
1,645

Employee stock purchases
 
12

  
10

 
20

 
16

Exercise of stock options and vesting of restricted stock units, net of forfeitures
 
9

  
9

 
25

 
30

Restricted stock, stock option and restricted stock unit expense
 
25

  
23

 
64

 
56

Other
 
—

  
1

 
—

 
1

Balance end of period
 
1,917

 
1,748


1,917


1,748

 
 
 
 
 
 
 
 
 
Retained earnings:
 
 

 
 

 
 
 
 
Balance beginning of period
 
5,236

  
4,420

 
5,032

 
4,340

Net income attributable to Raymond James Financial, Inc.
 
261

  
243

 
510

 
362

Cash dividends declared (see Note 19)
 
(49
)
 
(36
)
 
(99
)
 
(75
)
Other
 
—

 
(1
)
 
5

 
(1
)
Balance end of period
 
5,448

 
4,626

 
5,448

 
4,626

 
 
 
 
 
 
 
 
 
Treasury stock:
 
 

 
 

 
 
 
 
Balance beginning of period
 
(927
)
 
(410
)
 
(447
)
 
(390
)
Purchases/surrenders
 
(48
)
 
(1
)
 
(512
)
 
(8
)
Exercise of stock options and vesting of restricted stock units, net of forfeitures
 
(1
)
 
(1
)
 
(17
)
 
(14
)
Balance end of period
 
(976
)
 
(412
)
 
(976
)
 
(412
)
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive loss:
 
 

 
 

 
 
 
 
Balance beginning of period
 
(39
)
 
(20
)
 
(27
)
 
(15
)
Net change in unrealized loss on available-for-sale securities, net of tax
 
19

 
(15
)
 
41

 
(27
)
Net change in unrealized loss on currency translations, net of the impact of net investment hedges, net of tax
 
8

 
(2
)
 
(5
)
 
(2
)
Net change in unrealized gain on cash flow hedges, net of tax
 
(13
)
 
14

 
(30
)
 
21

Other
 
—

 
—

 
(4
)
 
—

Balance end of period
 
(25
)
 
(23
)
 
(25
)
 
(23
)
Total equity attributable to Raymond James Financial, Inc.
 
$
6,366


$
5,941

 
$
6,366

 
$
5,941

 
 
 
 
 
 
 
 
 
Noncontrolling interests:
 
 

 
 

 
 
 
 
Balance beginning of period
 
$
82

 
$
106

 
$
84

 
$
112

Net loss attributable to noncontrolling interests
 
(12
)
 
—

 
(14
)
 
—

Capital contributions
 
—

 
—

 
2

 
—

Distributions
 
(1
)
 
(5
)
 
(3
)
 
(11
)
Balance end of period
 
69

 
101

 
69

 
101

Total equity
 
$
6,435

 
$
6,042

 
$
6,435

 
$
6,042












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

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended March 31,
$ in millions
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income attributable to Raymond James Financial, Inc.
 
$
510

 
$
362

Net loss attributable to noncontrolling interests
 
(14
)
 
—

Net income including noncontrolling interests
 
496

 
362

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

 
 

Depreciation and amortization
 
53

 
47

Deferred income taxes
 
(1
)
 
105

Premium and discount amortization on available-for-sale securities and (gain)/loss on other investments
 
7

 
(5
)
Provisions for loan losses, legal and regulatory proceedings and bad debts
 
38

 
14

Share-based compensation expense
 
65

 
56

Unrealized (gain)/loss on company-owned life insurance policies, net of expenses
 
8

 
(15
)
Other
 
41

 
14

Net change in:
 
 

 
 

Securities purchased under agreements to resell, net of securities sold under agreements to repurchase
 
(53
)
 
(124
)
Securities borrowed, net of securities loaned
 
319

 
(105
)
Loans provided to financial advisors, net of repayments
 
1

 
(21
)
Brokerage client receivables and other accounts receivable, net
 
587

 
(127
)
Trading instruments, net
 
(36
)
 
(166
)
Derivative instruments, net
 
(93
)
 
46

Other assets
 
(118
)
 
(49
)
Brokerage client payables and other accounts payable
 
(1,088
)
 
770

Accrued compensation, commissions and benefits
 
(229
)
 
(157
)
Proceeds from sales of securitizations and loans held for sale, net of purchases and originations of loans held for sale
 
23

 
(39
)
Net cash provided by operating activities
 
20

 
606

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Additions to property and equipment
 
(59
)
 
(70
)
Increase in bank loans, net
 
(779
)
 
(1,238
)
Proceeds from sales of loans held for investment
 
184

 
91

Purchases of available-for-sale securities
 
(509
)
 
(655
)
Available-for-sale securities maturations, repayments and redemptions
 
295

 
234

Business acquisition, net of cash acquired
 
—

 
(159
)
Other investing activities, net
 
(42
)
 
(18
)
Net cash used in investing activities
 
(910
)
 
(1,815
)
 
 
 
 
 
 
 
 
 
 
(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)
 
 
Six months ended March 31,
$ in millions
 
2019
 
2018
Cash flows from financing activities:
 
 
 
 
Proceeds from borrowings on the RJF Credit Facility
 
300

 
300

Repayment of borrowings on the RJF Credit Facility
 
(300
)
 
(300
)
Repayments of short-term borrowings, net
 
—

 
(610
)
Repayments of other borrowed funds
 
(3
)
 
(2
)
Exercise of stock options and employee stock purchases
 
43

 
44

Increase in bank deposits
 
1,676

 
980

Purchases of treasury stock
 
(521
)
 
(23
)
Dividends on common stock
 
(95
)
 
(71
)
Distributions to noncontrolling interests, net
 
(1
)
 
(6
)
Net cash provided by financing activities
 
1,099

 
312

 
 
 
 
 
Currency adjustment:
 
 

 
 

Effect of exchange rate changes on cash
 
(31
)
 
(30
)
Net increase/(decrease) in cash, cash equivalents, and cash segregated pursuant to regulations
 
178

 
(927
)
Cash, cash equivalents, and cash segregated pursuant to regulations at beginning of year
 
5,941

 
7,146

Cash, cash equivalents, and cash segregated pursuant to regulations at end of period
 
$
6,119

 
$
6,219

 
 
 
 
 
Cash and cash equivalents
 
$
3,831

 
$
3,140

Cash segregated pursuant to regulations
 
2,288

 
3,079

Total cash, cash equivalents, and cash segregated pursuant to regulations at end of period
 
$
6,119

 
$
6,219

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest
 
$
147

 
$
84

Cash paid for income taxes, net
 
$
188

 
$
83























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

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

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Organization

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

Basis of presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of RJF and its consolidated subsidiaries that are generally controlled through a majority voting interest. We consolidate all of our 100% owned subsidiaries. In addition, we consolidate any variable interest entity (“VIE”) in which we are the primary beneficiary. Additional information on these VIEs is provided in Note 2 of our Annual Report on Form 10-K (the “2018 Form 10-K”) for the year ended September 30, 2018, as filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) and in Note 8 of this Form 10-Q. When we do not have a controlling interest in an entity, but we exert significant influence over the entity, we apply the equity method of accounting. All material intercompany balances and transactions have been eliminated in consolidation.

Accounting estimates and assumptions

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

The nature of our business is such that the results of any interim period are not necessarily indicative of results for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in our 2018 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

Effective with the firm’s first fiscal quarter ended December 31, 2018, we have reclassified certain revenues among income statement line items and renamed certain line items. These reclassifications do not affect the Company’s reported total revenues or the total revenues in any of our segments for any of the previously reported periods. Prior period results have been conformed to the current presentation.

In addition to the reclassifications discussed above, certain other prior period amounts have been reclassified to conform to the current period’s presentation.



8
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 2 – UPDATE OF SIGNIFICANT ACCOUNTING POLICIES

A summary of our significant accounting policies is included in Note 2 of our 2018 Form 10-K. During the six months ended March 31, 2019, there were no significant changes to our significant accounting policies other than the accounting policies adopted or modified as part of our implementation of new or amended accounting guidance, as noted below.

Loans to financial advisors, net

We offer loans to financial advisors and certain other key revenue producers, primarily for recruiting, transitional cost assistance, and retention purposes. We present the outstanding balance of loans to financial advisors 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 $22 million and $20 million at March 31, 2019 and September 30, 2018, respectively. Our allowance for doubtful accounts was $9 million and $8 million at March 31, 2019 and September 30, 2018, respectively.

Recent accounting developments

Accounting guidance recently adopted

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). Under this amended guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and subsequently recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We early-adopted this guidance on January 1, 2019, our goodwill impairment test date. The adoption did not have any impact on our financial position or results of operations.

Revenue recognition - In May 2014, the FASB issued new guidance related to revenue recognition (ASU 2014-09). The new guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also provides guidance on accounting for certain contract costs and requires additional disclosures. We adopted this guidance as of October 1, 2018, under a modified retrospective approach for all open contracts as of the date of initial adoption. As such, there was no impact on our prior period results.

The primary impact of this guidance was the change in the presentation of certain costs from a net presentation within revenues to a gross presentation, particularly costs related to merger & acquisitions advisory and underwriting transactions and certain administrative costs related to our multi-bank sweep program.  These presentation changes had no impact on our net earnings.  There were no material changes in timing of revenues recognized associated with the adoption. As a result, adoption of this guidance had no material impact on our net results of operations or financial position. See Note 15 for further information.

Financial instruments - In January 2016, the FASB issued new guidance related to the accounting for financial instruments (ASU 2016-01). Among its provisions, this new guidance generally requires equity investments to be measured at fair value with changes in fair value recognized in net income, subject to certain exceptions, and amends certain disclosure requirements associated with the fair value of financial instruments. We adopted this guidance as of October 1, 2018, under a modified retrospective approach. As a result, on a prospective basis beginning as of the date of adoption, we record changes in the fair value of our investments in equity securities that were previously classified as available-for-sale in net income. Previously, such unrealized gains/(losses) were reflected in other comprehensive income/(loss) (“OCI”). The impact of adopting the new guidance resulted in a reclassification from accumulated other comprehensive income/(loss) (“AOCI”) to retained earnings of an accumulated gain of approximately $4 million at October 1, 2018. See Note 4 for further information.

Statement of Cash Flows (classification of certain cash receipts and cash payments) - In August 2016, the FASB issued amended guidance related to the Statement of Cash Flows (ASU 2016-15). The amended guidance provides guidance on disclosure and classification of certain items within the statements of cash flows. We adopted this guidance on October 1, 2018, under a retrospective approach. The adoption did not have a material impact on our consolidated statements of cash flows and did not have an impact on our financial position or results of operations.


9
Notes to Condensed Consolidated Financial Statements (Unaudited)





Statement of Cash Flows (restricted cash) - In November 2016, the FASB issued new guidance related to the classification and presentation of changes in restricted cash on the statement of cash flows (ASU 2016-18). The guidance requires an entity to include restricted cash and cash equivalents in its total of cash and cash equivalents on its statement of cash flows and to present a reconciliation of the beginning-of-period and end-of-period total of such amounts on the statement of cash flows. We adopted this guidance on October 1, 2018, under a retrospective approach. As a result of adoption, we recorded a decrease of $381 million in net cash provided by operating activities for the six months ended March 31, 2018 related to reclassifying changes in cash segregated pursuant to regulations from operating activities to the cash and cash equivalents balance in the Condensed Consolidated Statements of Cash Flows. The total of cash segregated pursuant to regulations and cash and cash equivalents is included in a separate table in the Condensed Consolidated Statements of Cash Flows. The adoption did not have an impact on our financial position or 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. We adopted this guidance on October 1, 2018, on a prospective basis. The impact of the adoption of this amended guidance is dependent upon acquisition and disposal activities subsequent to the date of adoption. The adoption did not have any impact on our financial position or results of operations.

Share-based payment awards (modifications) - In May 2017, the FASB issued amended guidance that clarifies when changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting (ASU 2017-09). The amended guidance states an entity should account for the effects of a modification unless certain criteria are met which include that the modified award has the same fair value, vesting conditions and classification as the original award. We adopted the guidance on October 1, 2018, on a prospective basis. We generally do not modify our share-based payments awards. The adoption did not have an impact on our financial position or results of operations.

Share-based payment awards (nonemployee) - In June 2018, the FASB issued amended guidance that aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions (ASU 2018-07). The amended guidance states an entity should measure the fair value of the award by estimating the fair value of the equity instruments to be issued and, for equity-classified awards, the fair value should be measured on the grant date. The amended guidance also clarifies that nonemployee awards that contain a performance condition are to be measured based on the outcome that is probable and that entities may elect, on an award-by-award basis, to use the expected term or contractual term to measure the award. We early-adopted this standard on October 1, 2018, using a modified retrospective approach. The adoption did not have a significant impact on our financial position or results of operations.

Accounting guidance not yet adopted as of March 31, 2019

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 increase both our assets and liabilities on our statement of financial condition. We are evaluating the magnitude of such impact. We do not expect a material impact on our results of operations.

Credit losses - In June 2016, the FASB issued new guidance related to the measurement of credit losses on financial instruments (ASU 2016-13). The amended guidance involves several aspects of the accounting for credit losses related to certain financial instruments including assets measured at amortized cost, available-for-sale debt securities and certain off-balance sheet commitments. The new guidance, and subsequent updates, broadens the information that an entity must consider in developing its estimated credit losses expected to occur over the remaining life of assets measured either collectively or individually to include historical experience, current conditions and reasonable and supportable forecasts, replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses (“CECL”) model.  The new guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This new guidance is first effective for our fiscal year beginning on October 1, 2020 and will be adopted under a modified retrospective approach. Early adoption is permitted although not prior to our fiscal year beginning on October 1, 2019. We have continued with our implementation and evaluation efforts, which

10
Notes to Condensed Consolidated Financial Statements (Unaudited)





include a cross-functional team to assess the required changes to our credit loss estimation methodologies and systems, as well as the determination of 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.

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. Although permitted, we do not plan to early adopt. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.

Internal use software (cloud computing) - In August 2018, the FASB issued guidance on the accounting for implementation costs incurred by customers in cloud computing arrangements (ASU 2018-15). This guidance requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the non-cancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. This amended guidance is first effective for our fiscal year beginning on October 1, 2020 with early adoption permitted. The guidance may be adopted either using the prospective or retrospective approach. We are currently evaluating the impact of this new guidance on our financial position and results of operations.

Derivatives and hedging (interest rate) - In October 2018, the FASB issued guidance amending Derivatives and Hedging (Topic 815) to add the overnight index swap (OIS rate) rate based on the Secured Overnight Financing Rate (SOFR) to the list of US benchmark interest rates that are eligible to be hedged (ASU 2018-16). This guidance is first effective for our fiscal year beginning on October 1, 2019. 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.

Consolidation (decision making fees) - In October 2018, the FASB issued guidance on how all entities evaluate decision-making fees under the variable interest entity guidance (ASU 2018-17). Under the new guidance, to determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis, rather than in their entirety. This guidance is first effective for our fiscal year beginning on October 1, 2020. Early adoption is permitted. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.



11
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 3 – FAIR VALUE

Our “Financial instruments owned” and “Financial instruments sold but not yet purchased” on our Condensed Consolidated Statements of Financial Condition are recorded at fair value under GAAP. For further information about such instruments and our significant accounting policies related to fair value, see Note 2 and Note 4 of our 2018 Form 10-K. The following tables present assets and liabilities measured at fair value on a recurring basis. Netting adjustments represent the impact of counterparty and collateral netting on our derivative balances included on our Condensed Consolidated Statements of Financial Condition. See Note 5 for additional information.
$ in millions
 
Level 1
 
Level 2
 
Level 3
 
Netting
adjustments
 
Balance as of
March 31,
2019
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
—

 
$
269

 
$
—

 
$
—

 
$
269

Corporate obligations
 
20

 
112

 
—

 
—

 
132

Government and agency obligations
 
20

 
113

 
—

 
—

 
133

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

 
163

 
—

 
—

 
163

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

 
83

 
—

 
—

 
83

Total debt securities
 
40


740

 
—

 
—

 
780

Equity securities
 
19

 
1

 
—

 
—

 
20

Brokered certificates of deposit
 
—

 
17

 
—

 
—

 
17

Other
 
—

 
—

 
2

 
—

 
2

Total trading instruments
 
59

 
758

 
2

 
—

 
819

Available-for-sale securities - agency MBS and CMOs
 
—

 
2,893

 
—

 
—

 
2,893

Derivative assets
 
 
 
 
 
 
 
 
 
 
Interest rate - Matched book
 
—

 
210

 
—

 
—

 
210

Interest rate - Other
 
6

 
76

 
—

 
(41
)
 
41

Total derivative assets
 
6

 
286

 
—

 
(41
)
 
251

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

 
—

 
59

 
—

 
59

Other investments
 
190

 
1

 
67

 
—

 
258

Subtotal
 
255

 
3,938

 
128

 
(41
)
 
4,280

Private equity investments - measured at NAV
 
 
 
 
 
 
 
 
 
85

Total assets at fair value on a recurring basis
 
$
255


$
3,938


$
128


$
(41
)

$
4,365

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

 
$
1

 
$
—

 
$
—

 
$
1

Corporate obligations
 
3

 
38

 
—

 
—

 
41

Government and agency obligations
 
262

 
—

 
—

 
—

 
262

Agency MBS and CMOs
 
—

 
—

 
—

 
—

 
—

Total debt securities
 
265

 
39

 
—

 
—

 
304

Equity securities
 
10

 
—

 
—

 
—

 
10

Other
 
—

 
—

 
7

 
—

 
7

Total trading instruments sold but not yet purchased
 
275

 
39

 
7

 
—

 
321

Derivative liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate - Matched book
 
—

 
210

 
—

 
—

 
210

Interest rate - Other
 
8

 
79

 
—

 
(63
)
 
24

Foreign exchange
 
—

 
6

 
—

 
—

 
6

Equity - Deutsche Bank restricted stock unit (“DBRSU”) obligation
 
—

 
7

 
—

 
—

 
7

Total derivative liabilities
 
8

 
302

 
—

 
(63
)
 
247

Total liabilities at fair value on a recurring basis
 
$
283

 
$
341

 
$
7

 
$
(63
)
 
$
568


12
Notes to Condensed Consolidated Financial Statements (Unaudited)





$ in millions
 
Level 1
 
Level 2
 
Level 3
 
Netting
adjustments
 
Balance as of
September 30,
2018
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
1

 
$
247

 
$
—

 
$
—

 
$
248

Corporate obligations
 
10

 
100

 
—

 
—

 
110

Government and agency obligations
 
19

 
72

 
—

 
—

 
91

Agency MBS and CMOs
 
3

 
124

 
—

 
—

 
127

Non-agency CMOs and ABS
 
—

 
69

 
—

 
—

 
69

Total debt securities
 
33

 
612

 
—

 
—

 
645

Equity securities
 
15

 
—

 
—

 
—

 
15

Brokered certificates of deposit
 
—

 
39

 
—

 
—

 
39

Other
 
—

 
2

 
1

 
—

 
3

Total trading instruments
 
48

 
653

 
1

 
—

 
702

Available-for-sale securities
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 
—

 
2,628

 
—

 
—

 
2,628

Other securities
 
1

 
—

 
—

 
—

 
1

Auction rate securities (“ARS”) preferred
 
—

 
—

 
67

 
—

 
67

Total available-for-sale securities
 
1

 
2,628

 
67

 
—

 
2,696

Derivative assets
 
 
 
 
 
 
 
 
 
 
Interest rate - Matched book
 
—

 
160

 
—

  
—

 
160

Interest rate - Other
 
—

 
74

 
—

 
(55
)
 
19

Foreign exchange
 
—

 
1

 
—

 
—

 
1

Total derivative assets
 
—


235


—


(55
)

180

Private equity investments - not measured at NAV
 
—

 
—

 
56

 
—

 
56

Other investments
 
201

 
1

 
—

 
—

 
202

Subtotal
 
250

 
3,517

 
124

 
(55
)
 
3,836

Private equity investments - measured at NAV
 
 
 
 
 
 
 
 
 
91

Total assets at fair value on a recurring basis
 
$
250

 
$
3,517

 
$
124

 
$
(55
)
 
$
3,927

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

 
$
1

 
$
—

 
$
—

 
$
1

Corporate obligations
 
2

 
25

 
—

 
—

 
27

Government and agency obligations
 
194

 
—

 
—

 
—

 
194

Non-agency MBS and CMOs
 
—

 
1

 
—

 
—

 
1

Total debt securities
 
196

 
27

 
—

 
—

 
223

Equity securities
 
5

 
—

 
—

 
—

 
5

Other
 
—

 
—

 
7

 
—

 
7

Total trading instruments sold but not yet purchased
 
201

 
27

 
7

 
—

 
235

Derivative liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate - Matched book
 
—

 
160

 
—

 
—

 
160

Interest rate - Other
 
—

 
114

 
—

 
(47
)
 
67

Foreign exchange
 
—

 
4

 
—

 
—

 
4

Equity - DBRSU obligation
 
—

 
16

 
—

 
—

 
16

Total derivative liabilities
 
—

 
294

 
—

 
(47
)
 
247

Total liabilities at fair value on a recurring basis
 
$
201

 
$
321

 
$
7

 
$
(47
)
 
$
482



13
Notes to Condensed Consolidated Financial Statements (Unaudited)





Level 3 recurring fair value measurements

The following tables present the changes in fair value for Level 3 assets and liabilities measured at fair value on a recurring basis. The realized and unrealized gains and losses in the tables may include changes in fair value that were attributable to both observable and unobservable inputs. In the following tables, gains/(losses) on trading instruments are reported in “Principal transactions,” gains/(losses) on private equity and other investments are reported in “Other” revenues, and gains/(losses) on available-for-sale securities are reported in either “Other” revenues (when included in earnings) or “Other comprehensive income” in our Condensed Consolidated Statements of Income and Comprehensive Income.
Three months ended March 31, 2019
Level 3 instruments at fair value
 
 
Financial assets
 
Financial liabilities
$ in millions
 
Trading instruments - Other
 
Private equity investments
 
Other investments
 
Trading instruments - Other
Fair value beginning of period
 
$
3

 
$
59

 
$
67

 
$
(4
)
Total gains/(losses) for the period:
 
 

 
 

 
 

 
 

Included in earnings
 
(1
)
 
—

 
—

 
—

Purchases and contributions
 
22

 
—

 
—

 
4

Sales
 
(22
)
 
—

 
—

 
(7
)
Transfers:
 
 

 
 

 
 

 
 

Into Level 3
 
—

 
—

 
—

 
—

Out of Level 3
 
—

 
—

 
—

 
—

Fair value end of period
 
$
2

 
$
59

 
$
67

 
$
(7
)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period
 
$
1

 
$
—

 
$
—

 
$
—

Six months ended March 31, 2019
Level 3 instruments at fair value
 
 
Financial assets
 
Financial liabilities
$ in millions
 
Trading instruments - Other
 
Private equity investments
 
Other investments (1)
 
Trading instruments - Other
Fair value beginning of period
 
$
1

 
$
56

 
$
67

 
$
(7
)
Total gains/(losses) for the period:
 
 

 
 

 
 

 
 

Included in earnings
 
—

 
—

 
—

 
2

Purchases and contributions
 
60

 
3

 
—

 
9

Sales
 
(59
)
 
—

 
—

 
(11
)
Transfers:
 
 

 
 

 
 

 
 

Into Level 3
 
—

 
—

 
—

 
—

Out of Level 3
 
—

 
—

 
—

 
—

Fair value end of period
 
$
2

 
$
59

 
$
67

 
$
(7
)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period
 
$
—

 
$
—

 
$
—

 
$
—


(1)
Beginning of period balance includes $67 million of preferred ARS, which were reclassified from available-for-sale securities in connection with the adoption of ASU 2016-01. See Note 2 for additional information.

14
Notes to Condensed Consolidated Financial Statements (Unaudited)





Three months ended March 31, 2018
Level 3 instruments at fair value
 
 
Financial assets
 
Financial
liabilities
$ in millions
 
Trading instruments - Other
 
Available-for-sale securities - ARS -
preferred
 
Private equity
investments
 
Trading instruments - Other
Fair value beginning of period
 
$
3

 
$
107

 
$
89

 
$
(1
)
Total gains/(losses) for the period:
 
 
 
 
 
 

 
 

Included in earnings
 
—

 
—

 
7

 
1

Included in other comprehensive income
 
—

 
1

 
—

 
—

Purchases and contributions
 
24

 
—

 
—

 
—

Sales
 
(26
)
 
—

 
—

 
(1
)
Transfers:
 
 
 
 
 
 
 
 
Into Level 3
 
—

 
—

 
—

 
—

Out of Level 3
 
—

 
—

 
—

 
—

Fair value end of period
 
$
1

 
$
108

 
$
96

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

 
$
—

 
$
7

 
$
—

Unrealized gains/(losses) for the period included in other comprehensive income for instruments held at the end of the reporting period
 
$
—

 
$
1

 
$
—

 
$
—

Six months ended March 31, 2018
Level 3 instruments at fair value
 
 
Financial assets
 
Financial
liabilities
$ in millions
 
Trading instruments - Other
 
Available-for-sale securities - ARS -
preferred
 
Private equity
investments
 
Trading instruments - Other
Fair value beginning of period
 
$
6

 
$
106

 
$
89

 
$
—

Total gains/(losses) for the period:
 
 

 
 

 
 

 
 
Included in earnings
 
(1
)
 
—

 
7

 
—

Included in other comprehensive income
 
—

 
2

 
—

 
—

Purchases and contributions
 
44

 
—

 
—

 
—

Sales
 
(48
)
 
—

 
—

 
(1
)
Transfers:
 
 
 
 
 
 
 
 
Into Level 3
 
—

 
—

 
—

 
—

Out of Level 3
 
—

 
—

 
—

 
—

Fair value end of period
 
$
1

 
$
108

 
$
96

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

 
$
—

 
$
7

 
$
—

Unrealized gains/(losses) for the period included in other comprehensive income for instruments held at the end of the reporting period
 
$
—

 
$
2

 
$
—

 
$
—


As of March 31, 2019, 11% of our assets and 2% of our liabilities were measured at fair value on a recurring basis.  In comparison, as of September 30, 2018, 10% of our assets and 2% of our liabilities were measured at fair value on a recurring basis. Instruments measured at fair value on a recurring basis categorized as Level 3 represented 3% of our assets measured at fair value as of both March 31, 2019 and September 30, 2018.


15
Notes to Condensed Consolidated Financial Statements (Unaudited)





Quantitative information about level 3 fair value measurements

The following tables present the valuation techniques and significant unobservable inputs used in the valuation of a significant majority of our financial instruments classified as level 3. These inputs represent those that a market participant would take into account when pricing these instruments. Weighted averages are calculated by weighting each input by the relative fair values of the related financial instrument.
Level 3 financial instrument
$ in millions
 
Fair value at
March 31, 2019
 
Valuation technique(s)
 
Unobservable input
 
Range
(weighted-average)
Recurring measurements
 
 
 
 
 
 
 
 
Other investments - ARS preferred
 
$
67

 
Discounted cash flow
 
Average discount rate
 
5.82% - 7.15% (6.44%)
 
 
 

 
 
 
Average interest rates applicable to future interest income on the securities (1)
 
3.12% - 4.15% (3.38%)
 
 
 

 
 
 
Prepayment year (2)
 
2019 - 2021 (2021)
Private equity investments (not measured at NAV)
 
$
46

 
Income approach - discounted cash flow
 
Discount rate
 
25%
 
 
 
 
 
 
Terminal EBITDA multiple
 
10.0x
 
 
 
 
 
 
Terminal year
 
2022 - 2042 (2023)
 
 
$
13

 
Transaction price or other investment-specific events (3)
 
Not meaningful (3)
 
Not meaningful (3)
Level 3 financial instrument
$ in millions
 
Fair value at
September 30, 2018
 
Valuation technique(s)
 
Unobservable input
 
Range
(weighted-average)
Recurring measurements
 
 
 
 
 
 
 
 
ARS preferred
 
$
67

 
Discounted cash flow
 
Average discount rate
 
6.50% - 7.85% (7.13%)

 
 
 

 
 
 
Average interest rates applicable to future interest income on the securities (1)
 
4.13% - 5.51% (4.47%)

 
 
 

 
 
 
Prepayment year (2)
 
2018 - 2021 (2021)

Private equity investments
(not measured at NAV)
 
$
43

 
Income approach - discounted cash flow
 
Discount rate
 
25
%
 
 
 
 
 
 
Terminal EBITDA multiple
 
10.0x

 
 
 
 
 
 
Terminal year
 
2022 - 2042 (2023)

 
 
$
13

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


(1)
Interest rates are projected based upon a forward interest rate path, plus a spread over such projected base rate that is applicable to each future period for each security within this portfolio segment.  The interest rates presented represent the average interest rate over all projected periods for securities within the portfolio segment.

(2)
Assumed calendar year of at least a partial redemption of the outstanding security by the issuer.

(3)
Certain investments are valued initially at transaction price and updated as other investment-specific events take place which indicate that a change in the carrying values of these investments is appropriate. Other investment-specific events include such events as our periodic review, significant transactions occur, new developments become known, or we receive information from a fund manager which allows us to update our proportionate share of net assets.

Qualitative disclosure about unobservable inputs

For our recurring fair value measurements categorized within Level 3 of the fair value hierarchy, the sensitivity of the fair value measurement to changes in significant unobservable inputs and interrelationships between those unobservable inputs are described in the following sections.

Other investments - ARS preferred

The future interest rate and prepayment assumptions impacting the valuation of the auction rate securities are directly related. As short-term interest rates rise, the penalty interest rates, which are embedded in most of these securities in the event auctions fail to set the security’s interest rate, also increase. As penalty interest rates rise, we estimate that issuers of the securities will have the economic incentive to refinance (and thus prepay) the securities. As such, increases in interest rates, which would generally result in an earlier prepayment assumption, would have increased the fair value of the securities. Increases in the discount rates would have resulted in a lower fair value of the securities.

16
Notes to Condensed Consolidated Financial Statements (Unaudited)





Private equity investments

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

Investments in private equity measured at net asset value per share

As more fully described in Note 2 of our 2018 Form 10-K, as a practical expedient, we utilize NAV or its equivalent to determine the recorded value of a portion of our private equity investments portfolio. We utilize NAV when the fund investment does not have a readily determinable fair value and the NAV of the fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the investments at fair value.

Our private equity portfolio as of March 31, 2019 included various direct investments, as well as investments in third-party private equity funds 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 by distributions received through the liquidation of the underlying assets of those funds, the timing of which is uncertain.

The following table presents the recorded value and unfunded commitments related to our private equity investments portfolio.
$ in millions
 
Recorded value
 
Unfunded commitment
March 31, 2019
 
 
 
 
Private equity investments measured at NAV
 
$
85

 
$
17

Private equity investments not measured at NAV
 
59

 
 
Total private equity investments 
 
$
144

 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
Private equity investments measured at NAV
 
$
91

 
$
18

Private equity investments not measured at NAV
 
56

 
 
Total private equity investments
 
$
147

 
 

Of the total private equity investments, the portions we owned were $100 million and $103 million as of March 31, 2019 and September 30, 2018, respectively. The portions of the private equity investments we did not own were $44 million as of both March 31, 2019 and September 30, 2018, and were included as a component of noncontrolling interests on our Condensed Consolidated Statements of Financial Condition.

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

17
Notes to Condensed Consolidated Financial Statements (Unaudited)





Financial instruments measured at fair value on a nonrecurring basis

The following table presents assets measured at fair value on a nonrecurring basis along with the valuation techniques and significant unobservable inputs used in the valuation of the assets classified as level 3. These inputs represent those that a market participant would take into account when pricing these instruments. Weighted averages are calculated by weighting each input by the relative fair values of the related financial instrument.
$ in millions
 
Level 2
 
Level 3
 
Total fair value
 
Valuation technique(s)
 
Unobservable input
 
Range
(weighted-average)
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans, net:
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans: residential
 
$
8

 
$
15

 
$
23

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

 
$
30

 
$
30

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

 
$
—

 
$
64

 
N/A
 
N/A
 
N/A
Other assets: OREO
 
$
2

 
$
—

 
$
2

 
N/A
 
N/A
 
N/A
 
 
 
 
 
 

 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Bank loans, net:
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans: residential
 
$
10

 
$
17

 
$
27

 
Discounted cash flow
 
Prepayment rate
 
7 yrs. - 12 yrs. (10.5 yrs.)
Impaired loans: corporate
 
$
—

 
$
1

 
$
1

 
Collateral or discounted cash flow (1)
 
Not meaningful (1)
 
Not meaningful (1)
Loan held for sale
 
$
41

 
$
—

 
$
41

 
N/A
 
N/A
 
N/A

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

Financial instruments not measured at fair value

The following table presents the estimated fair value and fair value hierarchy of financial assets and liabilities that are not recorded at fair value on the Condensed Consolidated Statements of Financial Condition. This table excludes financial instruments that are carried at amounts which approximate fair value. Refer to Note 4 of our 2018 Form 10-K for discussion of the fair value hierarchy classification of our financial instruments that are not recorded at fair value.

Effective October 1, 2018, we adopted new accounting guidance (ASU 2016-01), which requires the fair value of financial instruments not carried at fair value on our statement of financial condition to be estimated utilizing an exit price and eliminates certain disclosure requirements related to these instruments, including exempting certain financial instruments from disclosure (e.g., demand deposits). Prior periods have not been updated to reflect this new accounting guidance.
$ in millions
 
Level 1
 
Level 2
 
Level 3
 
Total estimated fair value
 
Carrying amount
March 31, 2019
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Bank loans, net
 
$
—

 
$
79

 
$
19,844

 
$
19,923

 
$
20,018

Financial liabilities:
 
 
 
 
 
 
 
 

 
 
Bank deposits - Certificates of deposit
 
$
—

 
$
—

 
$
586

 
$
586

 
$
582

Senior notes payable
 
$
—

 
$
1,616

 
$
—

 
$
1,616

 
$
1,550

 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Bank loans, net
 
$
—

 
$
124

 
$
19,116

 
$
19,240

 
$
19,449

Financial liabilities:
 
 
 
 
 
 
 
 

 
 
Bank deposits
 
$
—

 
$
19,496

 
$
439

 
$
19,935

 
$
19,942

Senior notes payable
 
$
—

 
$
1,558

 
$
—

 
$
1,558

 
$
1,550




18
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 4 – AVAILABLE-FOR-SALE SECURITIES

Available-for-sale securities are comprised of agency MBS and CMOs owned by Raymond James Bank, N.A. (“RJ Bank”). Refer to the discussion of our available-for-sale securities accounting policies, including the fair value determination process, in Note 2 of our 2018 Form 10-K. As of October 1, 2018, we adopted new accounting guidance related to the classification and measurement of financial instruments (ASU 2016-01), which requires changes in the fair value of equity securities to be recorded in net income. See Note 2 for further information. As a result, on a prospective basis beginning October 1, 2018, unrealized gains/(losses) on our equity securities previously classified and accounted for as available-for-sale are recorded in net income instead of OCI. Accordingly, as of the date of adoption we reclassified approximately $68 million of equity securities, substantially all of which consisted of preferred ARS, from “Available-for-sale securities” to “Other investments” on our Condensed Consolidated Statements of Financial Condition.

The following table details the amortized cost and fair values of our available-for-sale securities.
$ in millions
 
Cost basis
 
Gross
unrealized gains
 
Gross
unrealized losses
 
Fair value
March 31, 2019
 
 
 
 
 
 
 
 
Agency residential MBS
 
$
1,548

 
$
9

 
$
(10
)
 
$
1,547

Agency commercial MBS
 
269

 
1

 
(2
)
 
268

Agency CMOs
 
1,087

 
2

 
(11
)
 
1,078

Total available-for-sale securities
 
$
2,904

 
$
12

 
$
(23
)
 
$
2,893

 
 
 
 
 
 
 
 
 
September 30, 2018
 
 

 
 

 
 

 
 

Agency residential MBS
 
$
1,616

 
$
—

 
$
(40
)
 
$
1,576

Agency commercial MBS
 
47

 
—

 
—

 
47

Agency CMOs
 
1,035

 
—

 
(30
)
 
1,005

Other securities
 
2

 
—

 
(1
)
 
1

Total RJ Bank available-for-sale securities
 
2,700

 
—

 
(71
)
 
2,629

ARS preferred
 
61

 
6

 
—

 
67

Total available-for-sale securities
 
$
2,761


$
6


$
(71
)

$
2,696


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

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

Amortized cost
 
$
—

 
$
28

 
$
900

 
$
620

 
$
1,548

Carrying value
 
$
—

 
$
28

 
$
898

 
$
621

 
$
1,547

Agency commercial MBS
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
5

 
$
217

 
$
21

 
$
26

 
$
269

Carrying value
 
$
5

 
$
216

 
$
21

 
$
26

 
$
268

Agency CMOs
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
—

 
$
—

 
$
90

 
$
997

 
$
1,087

Carrying value
 
$
—

 
$
—

 
$
89

 
$
989

 
$
1,078

Total available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
5

 
$
245

 
$
1,011

 
$
1,643

 
$
2,904

Carrying value
 
$
5

 
$
244

 
$
1,008

 
$
1,636

 
$
2,893

Weighted-average yield
 
1.87
%
 
2.33
%
 
2.42
%
 
2.59
%
 
2.51
%


19
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table details the gross unrealized losses and fair value of securities that were in a loss position at the reporting period end, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position.
 
 
Less than 12 months
 
12 months or more
 
Total
$ in millions
 
Estimated
fair value
 
Unrealized
losses
 
Estimated
fair value
 
Unrealized
losses
 
Estimated
fair value
 
Unrealized
losses
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Agency residential MBS
 
$
27

 
$
—

 
$
855

 
$
(10
)
 
$
882

 
$
(10
)
Agency commercial MBS
 
—

 
—

 
181

 
(2
)
 
181

 
(2
)
Agency CMOs
 
55

 
—

 
734

 
(11
)
 
789

 
(11
)
         Total
 
$
82

 
$
—

 
$
1,770

 
$
(23
)
 
$
1,852

 
$
(23
)
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Agency residential MBS
 
$
747

 
$
(15
)
 
$
753

 
$
(25
)
 
$
1,500

 
$
(40
)
Agency commercial MBS
 
40

 
—

 
6

 
—

 
46

 
—

Agency CMOs
 
316

 
(5
)
 
666

 
(25
)
 
982

 
(30
)
Other securities
 
—

 
—

 
1

 
(1
)
 
1

 
(1
)
Total
 
$
1,103

 
$
(20
)
 
$
1,426

 
$
(51
)
 
$
2,529

 
$
(71
)

U.S. government agencies guarantee the contractual cash flows of the agency MBS and CMOs. At March 31, 2019, of the 208 agency MBS and CMOs in an unrealized loss position, seven were in a continuous unrealized loss position for less than 12 months and 201 were for 12 months or more. We do not consider these securities to be other-than-temporarily impaired due to the guarantee of the full payment of principal and interest, and the fact that we have the ability and intent to hold these securities. At March 31, 2019, debt securities we held in excess of ten percent of our equity included Federal National Home Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) which had an amortized cost of $1.79 billion and $854 million, respectively, and a fair value of $1.78 billion and $851 million, respectively.

During the three and six months ended March 31, 2019 and 2018, there were no sales of agency MBS or CMO available-for-sale securities.


NOTE 5 – DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES

Our derivative assets and derivative liabilities are recorded at fair value and are included in “Derivative assets” and “Derivative liabilities” on our Condensed Consolidated Statements of Financial Condition. Cash flows related to our derivatives are included within operating activities in the Condensed Consolidated Statements of Cash Flows. The significant accounting policies governing our derivatives, including our methodologies for determining fair value, are described in Note 2 of our 2018 Form 10-K.

Derivatives arising from our fixed income business operations

We enter into interest rate derivatives in our fixed income business to facilitate client transactions or to actively manage risk exposures that arise from our client activity, including a portion of our trading inventory. The majority of these derivatives are traded in the over-the-counter market and are executed directly with another counterparty or are cleared and settled through a clearing organization.

We also facilitate matched book derivative transactions in which Raymond James Financial Products, Inc. (“RJFP”), a wholly owned subsidiary, enters into interest rate derivatives with clients. For every derivative 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 derivatives 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 derivatives. 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 insignificant as of March 31, 2019 and September 30, 2018.

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. Each of these activities is described in Note 2 of our 2018 Form 10-K and in the following paragraphs.


20
Notes to Condensed Consolidated Financial Statements (Unaudited)





We enter into three-month forward foreign exchange contracts primarily to hedge the risks related to RJ Bank’s investment in its Canadian subsidiary, as well as 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 (“FHLB”) to, in part, fund these assets and then enters into interest rate contracts which swap variable interest payments on this debt for fixed interest payments. These interest rate swaps are designated as cash flow hedges and effectively fix RJ Bank’s cost of funds associated with these assets to mitigate a portion of the market risk.

Derivative arising from our acquisition of Alex. Brown

As part of our acquisition of Alex. Brown (see Note 3 of our 2018 Form 10-K for additional information regarding the acquisition), we assumed certain DBRSU awards, which will ultimately be settled in Deutsche Bank AG (“DB”) common shares, provided certain performance metrics are achieved. The DBRSU obligation results in a derivative, the fair value and notional of which is measured by multiplying the number of outstanding DBRSU awards to be settled in DB common shares as of the end of the reporting period by the end of reporting period DB share price, as traded on the New York Stock Exchange.

Counterparty netting and collateral related to derivatives

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 derivatives 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 derivatives entered into under a legally enforceable master netting agreement and, therefore, the fair value of those derivatives are netted by counterparty on the Condensed Consolidated Statements of Financial Condition. As we elect to net-by-counterparty the fair value of such derivatives, 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 deposits with the clearing organizations we utilize to clear certain of our interest rate derivatives. This initial margin is included as a component of “Other investments” or “Available-for-sale securities” on 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.

Due to the short-term nature of forward foreign exchange contracts, RJ Bank is generally not required to post collateral with and does not generally receive collateral from its respective counterparties.


21
Notes to Condensed Consolidated Financial Statements (Unaudited)





Derivative balances included in our financial statements

The following table presents the gross fair value and notional amount of derivatives by product type, the amounts of counterparty and cash collateral netting on our Condensed Consolidated Statements of Financial Condition, as well as collateral posted and received under credit support agreements that do not meet the criteria for netting under GAAP.
 
 
March 31, 2019
 
September 30, 2018
$ in millions
 
Derivative assets
 
Derivative liabilities
 
Notional amount
 
Derivative assets
 
Derivative liabilities
 
Notional amount
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate:
 
 
 
 
 
 
 
 
 
 
 
 
Matched book
 
$
210

 
$
210

 
$
2,387

 
$
160

 
$
160

 
$
2,416

Other (1)
 
79

 
87

 
8,692

 
74

 
113

 
9,398

Foreign exchange
 
—

 
2

 
521

 
1

 
1

 
549

Equity - DBRSU obligation (2)
 
—

 
7

 
7

 
—

 
16

 
16

Subtotal
 
289


306


11,607


235


290


12,379

Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
3

 
—

 
850

 
—

 
1

 
850

Foreign exchange
 
—

 
4

 
832

 
—

 
3

 
892

Subtotal
 
3


4


1,682


—


4


1,742

Total gross fair value/notional amount
 
292


310


$
13,289


235


294


$
14,121

Offset on the Condensed Consolidated Statements of Financial Condition
 
 
 
 
 
 
 
 
 
 
 
 
Counterparty netting
 
(12
)
 
(12
)
 
 
 
(26
)
 
(26
)
 
 
Cash collateral netting
 
(29
)
 
(51
)
 
 
 
(29
)
 
(21
)
 
 
Total amounts offset
 
(41
)
 
(63
)
 
 
 
(55
)
 
(47
)
 
 
Net amounts presented on the Condensed Consolidated Statements of Financial Condition
 
251


247

 
 
 
180

 
247

 
 
Gross amounts not offset on the Condensed Consolidated Statements of Financial Condition
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments (3)
 
(217
)
 
(210
)
 
 
 
(162
)
 
(160
)
 
 
Total
 
$
34

 
$
37

 
 
 
$
18

 
$
87

 
 

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

(2)
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 $6 million and $12 million as of March 31, 2019 and September 30, 2018, respectively, which are a component of “Other investments” on our Condensed Consolidated Statements of Financial Condition.

(3)
Although the matched book derivative arrangements do not meet the definition of a master netting arrangement as specified by GAAP, the agreement with the third-party intermediary includes terms that are similar to a master netting agreement. As a result, we present the matched book amounts net in the preceding table.

The following table details the gains/(losses) included in AOCI, net of income taxes, on derivatives designated as hedging instruments. These gains/(losses) include any amounts reclassified from AOCI to income during the period. See Note 14 for additional information.
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
2019
 
2018
Interest rate (cash flow hedges)
 
$
(13
)
 
$
14

 
$
(30
)
 
$
21

Foreign exchange (net investment hedges)
 
(11
)
 
19

 
26

 
25

Total gains/(losses) recognized in AOCI, net of taxes
 
$
(24
)
 
$
33

 
$
(4
)
 
$
46


There were no components of derivative gains or losses excluded from the assessment of hedge effectiveness for each of the three and six months ended March 31, 2019 and 2018. We expect to reclassify an estimated $4 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.


22
Notes to Condensed Consolidated Financial Statements (Unaudited)





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

 
$
—

 
$
2

 
$
2

Foreign exchange
 
Other revenues
 
$
(4
)
 
$
10

 
$
22

 
$
9

Equity - DBRSU obligation
 
Compensation, commissions and benefits expense
 
$
—

 
$
8

 
$
5

 
$
5


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 derivatives that are not cleared through a clearing organization. Where we are subject to credit exposure, we perform a credit evaluation of counterparties prior to entering into derivative transactions and we monitor their credit standings.  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 on these derivatives 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 derivatives. We are also exposed to foreign exchange risk related to our forward foreign exchange derivatives.  On a daily basis, we monitor our risk exposure on our derivatives based on established limits with respect to a number of factors, including interest rate, foreign exchange spot and forward rates, spread, ratio, basis and volatility risks.  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 our derivative contracts contain provisions that require our debt to maintain an investment-grade rating from one or more of the major credit rating agencies. If our debt were to fall below investment-grade, the counterparties to the derivative instruments could terminate and request immediate payment or demand immediate and ongoing overnight collateralization on our derivative instruments in liability positions. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that were in a liability position was insignificant as of both March 31, 2019 and September 30, 2018.


NOTE 6 – COLLATERALIZED AGREEMENTS AND FINANCINGS

Collateralized agreements are securities purchased under agreements to resell (“reverse repurchase agreements”) and securities borrowed. Collateralized financings are securities sold under agreements to repurchase (“repurchase agreements”) and securities loaned. We enter into these transactions in order to facilitate client activities, invest excess cash, acquire securities to cover short positions and finance certain firm activities. The significant accounting policies governing our collateralized agreements and financings are described in Note 2 of our 2018 Form 10-K.


23
Notes to Condensed Consolidated Financial Statements (Unaudited)





For financial statement purposes, we do not offset our reverse repurchase agreements, repurchase agreements, securities borrowing and securities lending transactions because the conditions for netting as specified by GAAP are not met. Our reverse repurchase agreements, repurchase agreements, securities borrowing and securities lending transactions are governed by master agreements that are widely used by counterparties and that may allow for net settlements of payments in the normal course, as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of the parties to the transaction. Although not offset on the Condensed Consolidated Statements of Financial Condition, these transactions are included in the following table.
 
 
Assets
 
Liabilities
$ in millions
 
Reverse repurchase agreements
 
Securities borrowed
 
Repurchase agreements
 
Securities loaned
March 31, 2019
 
 
 
 
 
 
 
 
Gross amounts of recognized assets/liabilities
 
$
447

 
$
224

 
$
210

 
$
710

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

 
—

 
—

 
—

Net amounts presented on the Condensed Consolidated Statements of Financial Condition
 
447


224


210


710

Gross amounts not offset on the Condensed Consolidated Statements of Financial Condition
 
(447
)
 
(221
)
 
(210
)
 
(697
)
Net amounts
 
$
—

 
$
3

 
$
—

 
$
13

September 30, 2018
 
 
 
 
 
 
 
 
Gross amounts of recognized assets/liabilities
 
$
373

 
$
255

 
$
186

 
$
423

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

 
—

 
—

 
—

Net amounts presented on the Condensed Consolidated Statements of Financial Condition
 
373


255


186


423

Gross amounts not offset on the Condensed Consolidated Statements of Financial Condition
 
(373
)
 
(248
)
 
(186
)
 
(408
)
Net amounts
 
$
—

 
$
7

 
$
—

 
$
15


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 on 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 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 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 following table presents financial instruments at fair value that we received as collateral, were not included on our Condensed Consolidated Statements of Financial Condition, and that were available to be delivered or repledged, along with the balances of such instruments that were delivered or repledged, to satisfy one of our purposes previously described.
$ in millions
 
March 31,
2019
 
September 30,
2018
Collateral we received that was available to be delivered or repledged
 
$
3,150

 
$
3,165

Collateral that we delivered or repledged
 
$
1,782

 
$
1,389



24
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 following table presents information about the fair value of our assets that have been pledged for one of the purposes previously described.
$ in millions
 
March 31,
2019
 
September 30,
2018
Financial instruments owned, at fair value, pledged to counterparties that:
 
 
 
 
Had the right to deliver or repledge
 
$
563

 
$
510

Did not have the right to deliver or repledge
 
$
65

 
$
65

Bank loans, net pledged at FHLB and the Federal Reserve Bank
 
$
4,496

 
$
4,075


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

The following table presents the remaining contractual maturity of repurchase agreements and securities lending transactions accounted for as secured borrowings.
$ in millions
 
Overnight and continuous
 
Up to 30 days
 
30-90 days
 
Greater than 90 days
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
 
Repurchase agreements:
 
 
 
 
 
 
 
 
 
 
Government and agency obligations
 
$
82

 
$
—

 
$
—

 
$
—

 
$
82

Agency MBS and CMOs
 
128

 
—

 
—

 
—

 
128

Total repurchase agreements
 
210


—


—


—


210

Securities loaned:
 
 
 
 
 
 
 
 
 
 
Equity securities
 
710

 
—

 
—

 
—

 
710

Total
 
$
920


$
—


$
—


$
—


$
920

 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
Repurchase agreements:
 
 
 
 
 
 
 
 
 
 
Government and agency obligations
 
$
102

 
$
—

 
$
—

 
$
—

 
$
102

Agency MBS and CMOs
 
84

 
—

 
—

 
—

 
84

Total repurchase agreements
 
186


—


—


—


186

Securities loaned:
 
 
 
 
 
 
 
 
 
 
Equity securities
 
423

 
—

 
—

 
—

 
423

Total
 
$
609

 
$
—

 
$
—

 
$
—

 
$
609


As of both March 31, 2019 and September 30, 2018, we did not have any “repurchase-to-maturity” agreements, which are repurchase agreements where a security is transferred under an agreement to repurchase and the maturity date of the repurchase agreement matches the maturity date of the underlying security.


NOTE 7 – BANK LOANS, NET

Bank client receivables are comprised of loans originated or purchased by RJ Bank and include commercial and industrial (“C&I”) loans, tax-exempt loans, securities-based and other loans (“SBL and other”), and commercial and residential real estate loans. These receivables are collateralized by first and, to a lesser extent, second mortgages on residential or other real property, other assets of the borrower, a pledge of revenue or are unsecured. See Note 2 of our 2018 Form 10-K for a discussion of accounting policies related to bank loans and allowances for losses.

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


25
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents the balances for both the held for sale and held for investment loan portfolios, as well as the associated percentage of each portfolio segment in RJ Bank’s total loan portfolio. “Loans held for sale, net” and “Total loans held for investment, net” in the following table are presented net of unearned income and deferred expenses, which include purchase premiums, purchase discounts and net deferred origination fees and costs.
 
 
March 31, 2019
 
September 30, 2018
$ in millions
 
Balance
 
%
 
Balance
 
%
Loans held for investment:
 
 

 
 

 
 

 
 

C&I loans
 
$
8,324

 
41
%
 
$
7,786

 
40
%
CRE construction loans
 
227

 
1
%
 
151

 
1
%
CRE loans
 
3,366

 
16
%
 
3,624

 
18
%
Tax-exempt loans
 
1,286

 
6
%
 
1,227

 
6
%
Residential mortgage loans
 
3,996

 
20
%
 
3,757

 
19
%
SBL and other
 
3,031

 
15
%
 
3,033

 
15
%
Total loans held for investment
 
20,230

 
 

 
19,578

 
 

Net unearned income and deferred expenses
 
(20
)
 
 

 
(21
)
 
 

Total loans held for investment, net
 
20,210

 
 

 
19,557

 
 

Loans held for sale, net
 
143

 
1
%
 
164

 
1
%
Total loans held for sale and investment
 
20,353

 
100
%
 
19,721

 
100
%
Allowance for loan losses
 
(218
)
 
 

 
(203
)
 
 

Bank loans, net
 
$
20,135

 
 

 
$
19,518

 
 


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

Loans held for sale

RJ Bank originated or purchased $475 million and $1.27 billion of loans held for sale during the three and six months ended March 31, 2019, respectively, and $323 million and $681 million during the three and six months ended March 31, 2018 respectively. Proceeds from the sale of these held for sale loans amounted to $100 million and $357 million during the three and six months ended March 31, 2019 and $136 million and $228 million during the three and six months ended March 31, 2018, respectively. Net gains resulting from such sales were insignificant in all periods during the three and six months ended March 31, 2019 and 2018.

Purchases and sales of loans held for investment

The following table presents purchases and sales of any loans held for investment by portfolio segment.
$ in millions
 
C&I loans
 
CRE loans
 
Residential mortgage loans
 
Total
Three months ended March 31, 2019
 
 
 
 
 
 
 
 
Purchases
 
$
428

 
$
25

 
$
46

 
$
499

Sales
 
$
24

 
$
—

 
$
—

 
$
24

Six months ended March 31, 2019
 
 
 
 
 
 
 
 
Purchases
 
$
690

 
$
25

 
$
122

 
$
837

Sales
 
$
93

 
$
—

 
$
—

 
$
93

Three months ended March 31, 2018
 
 
 
 
 
 
 
 
Purchases
 
$
124

 
$
43

 
$
49

 
$
216

Sales
 
$
77

 
$
—

 
$
—

 
$
77

Six months ended March 31, 2018
 
 
 
 
 
 
 
 
Purchases
 
$
272

 
$
63

 
$
94

 
$
429

Sales
 
$
108

 
$
—

 
$
—

 
$
108


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 2018 Form 10-K, corporate loan (C&I, CRE and CRE construction) sales generally occur as part of our credit management activities.


26
Notes to Condensed Consolidated Financial Statements (Unaudited)





Aging analysis of loans held for investment

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

 
$
—

 
$
—

 
$
27

 
$
8,297

 
$
8,324

CRE construction loans
 
—

 
—

 
—

 
—

 
227

 
227

CRE loans
 
—

 
—

 
—

 
10

 
3,356

 
3,366

Tax-exempt loans
 
—

 
—

 
—

 
—

 
1,286

 
1,286

Residential mortgage loans:
 
 
 
 
 


 
 
 
 
 


First mortgage loans
 
6

 
—

 
6

 
19

 
3,944

 
3,969

Home equity loans/lines
 
—

 
—

 
—

 
—

 
27

 
27

SBL and other
 
—

 
—

 
—

 
—

 
3,031

 
3,031

Total loans held for investment
 
$
6

 
$
—

 
$
6

 
$
56

 
$
20,168

 
$
20,230

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
—

 
$
—

 
$
—

 
$
2

 
$
7,784

 
$
7,786

CRE construction loans
 
—

 
—

 
—

 
—

 
151

 
151

CRE loans
 
—

 
—

 
—

 
—

 
3,624

 
3,624

Tax-exempt loans
 
—

 
—

 
—

 
—

 
1,227

 
1,227

Residential mortgage loans:
 
 
 
 
 
 
 
 
 
 
 

First mortgage loans
 
1

 
—

 
1

 
23

 
3,707

 
3,731

Home equity loans/lines
 
—

 
—

 
—

 
—

 
26

 
26

SBL and other
 
—

 
—

 
—

 
—

 
3,033

 
3,033

Total loans held for investment
 
$
1

 
$
—

 
$
1

 
$
25

 
$
19,552

 
$
19,578


The preceding table includes $44 million and $11 million at March 31, 2019 and September 30, 2018, respectively, of nonaccrual loans which were current pursuant to their contractual terms.

Other real estate owned, included in “Other assets” on our Condensed Consolidated Statements of Financial Condition, was $5 million and $3 million at March 31, 2019 and September 30, 2018, respectively. The recorded investment in mortgage loans secured by one-to-four family residential properties for which formal foreclosure proceedings were in process was $8 million and $12 million at March 31, 2019 and September 30, 2018, respectively.

Impaired loans and troubled debt restructurings

The following table provides a summary of RJ Bank’s impaired loans.
 
 
March 31, 2019
 
September 30, 2018
$ in millions
 
Gross
recorded
investment
 
Unpaid
principal
balance
 
Allowance
for losses
 
Gross
recorded
investment
 
Unpaid
principal
balance
 
Allowance
for losses
Impaired loans with allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
25

 
$
26

 
$
7

 
$
—

 
$
—

 
$
—

Residential - first mortgage loans
 
12

 
15

 
1

 
15

 
20

 
2

Total
 
37

 
41

 
8

 
15

 
20

 
2

Impaired loans without allowance for loan losses:
 
 
 
 

 
 

 
 

 
 

 
 

C&I loans
 
2

 
2

 
—

 
2

 
2

 
—

CRE loans
 
10

 
13

 
—

 
—

 
—

 
—

Residential - first mortgage loans
 
12

 
19

 
—

 
13

 
20

 
—

Total
 
24

 
34

 
—

 
15

 
22

 
—

Total impaired loans
 
$
61

 
$
75

 
$
8

 
$
30

 
$
42

 
$
2


27
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 troubled debt restructurings (“TDR”) of $20 million and $21 million at March 31, 2019 and September 30, 2018, respectively.

The average balance of the total impaired loans was as follows.
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
2019
 
2018
Average impaired loan balance:
 
 
 
 
 
 
 
 
C&I loans
 
$
27

 
$
4

 
$
16

 
$
5

CRE loans
 
3

 
—

 
2

 
—

Residential - first mortgage loans
 
25

 
35

 
26

 
37

Total
 
$
55

 
$
39

 
$
44

 
$
42


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 other 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.


28
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents the credit quality of RJ Bank’s held for investment loan portfolio.
$ in millions
 
Pass
 
Special mention
 
Substandard
 
Doubtful
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
8,193

 
$
15

 
$
116

 
$
—

 
$
8,324

CRE construction loans
 
227

 
—

 
—

 
—

 
227

CRE loans
 
3,287

 
55

 
24

 
—

 
3,366

Tax-exempt loans
 
1,286

 
—

 
—

 
—

 
1,286

Residential mortgage loans:
 
 
 
 
 
 
 
 
 
 
First mortgage loans
 
3,933

 
8

 
28

 
—

 
3,969

Home equity loans/lines
 
27

 
—

 
—

 
—

 
27

SBL and other
 
3,031

 
—

 
—

 
—

 
3,031

Total
 
$
19,984

 
$
78

 
$
168

 
$
—

 
$
20,230

 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
C&I loans
 
$
7,679

 
$
48

 
$
59

 
$
—

 
$
7,786

CRE construction loans
 
140

 
11

 
—

 
—

 
151

CRE loans
 
3,547

 
44

 
33

 
—

 
3,624

Tax-exempt loans
 
1,227

 
—

 
—

 
—

 
1,227

Residential mortgage loans:
 
 
 
 
 
 
 
 
 
 
First mortgage loans
 
3,693

 
8

 
30

 
—

 
3,731

Home equity loans/lines
 
26

 
—

 
—

 
—

 
26

SBL and other
 
3,033

 
—

 
—

 
—

 
3,033

Total
 
$
19,345

 
$
111

 
$
122

 
$
—

 
$
19,578


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


29
Notes to Condensed Consolidated Financial Statements (Unaudited)





Allowance for loan losses and reserve for unfunded lending commitments

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

 
 

 
 
 
 

 
 

 
 

Balance at beginning of period
 
$
137

 
$
3

 
$
46

 
$
9

 
$
19

 
$
5

 
$
219

Provision/(benefit) for loan losses
 
6

 
—

 
2

 
(1
)
 
(2
)
 
—

 
5

Net (charge-offs)/recoveries:
 
 

 
 

 
 

 
 
 
 

 
 
 
 

Charge-offs
 
(3
)
 
—

 
(3
)
 
—

 
—

 
—

 
(6
)
Recoveries
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Net charge-offs
 
(3
)
 
—

 
(3
)
 
—

 
—

 
—

 
(6
)
Foreign exchange translation adjustment
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at end of period
 
$
140

 
$
3

 
$
45

 
$
8

 
$
17

 
$
5

 
$
218

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
123

 
$
3

 
$
47

 
$
9

 
$
17

 
$
4

 
$
203

Provision/(benefit) for loan losses
 
21

 
—

 
1

 
(1
)
 
(1
)
 
1

 
21

Net (charge-offs)/recoveries:
 
 

 
 

 
 

 
 
 
 

 
 

 
 
Charge-offs
 
(3
)
 
—

 
(3
)
 
—

 
—

 
—

 
(6
)
Recoveries
 
—

 
—

 
—

 
—

 
1

 
—

 
1

Net (charge-offs)/recoveries
 
(3
)
 
—

 
(3
)
 
—

 
1

 
—

 
(5
)
Foreign exchange translation adjustment
 
(1
)
 
—

 
—

 
—

 
—

 
—

 
(1
)
Balance at end of period
 
$
140

 
$
3

 
$
45

 
$
8

 
$
17

 
$
5

 
$
218

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
121

 
$
2

 
$
41

 
$
7

 
$
16

 
$
4

 
$
191

Provision/(benefit) for loan losses
 
7

 
—

 
2

 
1

 
(2
)
 
—

 
8

Net (charge-offs)/recoveries:
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Charge-offs
 
(3
)
 
—

 
—

 
—

 
(1
)
 
—

 
(4
)
Recoveries
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Net charge-offs
 
(3
)
 
—

 
—

 
—

 
(1
)
 
—

 
(4
)
Foreign exchange translation adjustment
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at end of period
 
$
125

 
$
2

 
$
43

 
$
8

 
$
13

 
$
4

 
$
195

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
120

 
$
1

 
$
42

 
$
6

 
$
17

 
$
4

 
$
190

Provision/(benefit) for loan losses
 
9

 
1

 
1

 
2

 
(4
)
 
—

 
9

Net (charge-offs)/recoveries:
 
 

 
 

 
 

 
 
 
 
 
 
 
 
Charge-offs
 
(4
)
 
—

 
—

 
—

 
—

 
—

 
(4
)
Recoveries
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Net charge-offs
 
(4
)
 
—

 
—

 
—

 
—

 
—

 
(4
)
Foreign exchange translation adjustment
 
—

 
—

 
—

 
—

 
—

 
—

 
—

Balance at end of period
 
$
125

 
$
2

 
$
43

 
$
8

 
$
13

 
$
4

 
$
195



30
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following table presents, by loan portfolio segment, RJ Bank’s recorded investment (excluding any net unearned income and deferred expenses) and the related allowance for loan losses.
 
 
Loans held for investment
 
 
Allowance for loan losses
 
Recorded investment
$ in millions
 
Individually evaluated for impairment
 
Collectively evaluated for impairment
 
Total
 
Individually evaluated for impairment
 
Collectively evaluated for impairment
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
7

 
$
133

 
$
140

 
$
27

 
$
8,297

 
$
8,324

CRE construction loans
 
—

 
3

 
3

 
—

 
227

 
227

CRE loans
 
—

 
45

 
45

 
10

 
3,356

 
3,366

Tax-exempt loans
 
—

 
8

 
8

 
—

 
1,286

 
1,286

Residential mortgage loans
 
1

 
16

 
17

 
30

 
3,966

 
3,996

SBL and other
 
—

 
5

 
5

 
—

 
3,031

 
3,031

Total
 
$
8

 
$
210

 
$
218

 
$
67

 
$
20,163

 
$
20,230

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
$
—

 
$
123

 
$
123

 
$
2

 
$
7,784

 
$
7,786

CRE construction loans
 
—

 
3

 
3

 
—

 
151

 
151

CRE loans
 
—

 
47

 
47

 
—

 
3,624

 
3,624

Tax-exempt loans
 
—

 
9

 
9

 
—

 
1,227

 
1,227

Residential mortgage loans
 
2

 
15

 
17

 
35

 
3,722

 
3,757

SBL and other
 
—

 
4

 
4

 
—

 
3,033

 
3,033

Total
 
$
2

 
$
201

 
$
203

 
$
37

 
$
19,541

 
$
19,578


The reserve for unfunded lending commitments, which is included in “Other payables” on our Condensed Consolidated Statements of Financial Condition, was $9 million and $10 million at March 31, 2019 and September 30, 2018, respectively.



31
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 8 – VARIABLE INTEREST ENTITIES

A VIE requires consolidation by the entity’s primary beneficiary.  We evaluate all of the entities in which we are involved to determine if the entity is a VIE and if so, whether we hold a variable interest and are the primary beneficiary. Refer to Note 2 of our 2018 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 investments 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 following table. Aggregate assets and aggregate liabilities may differ from the consolidated carrying value of assets and liabilities due to the elimination of intercompany assets and liabilities held by the consolidated VIE.
$ in millions
 
Aggregate assets
 
Aggregate liabilities
March 31, 2019
 
 
 
 
Private Equity Interests
 
$
69

 
$
5

LIHTC fund in which RJ Bank is an investor member
 
55

 
—

Guaranteed LIHTC Fund
 
19

 
3

Other LIHTC funds
 
19

 
21

Restricted Stock Trust Fund
 
19

 
19

Total
 
$
181

 
$
48

 
 
 
 
 
September 30, 2018
 
 

 
 

Private Equity Interests
 
$
67

 
$
5

LIHTC fund in which RJ Bank is an investor member
 
53

 
—

Guaranteed LIHTC Fund
 
40

 
3

Other LIHTC funds
 
18

 
18

Restricted Stock Trust Fund
 
14

 
14

Total
 
$
192

 
$
40


See Note 13 of this Form 10-Q for additional information regarding the commitment related to the Guaranteed LIHTC Fund and Note 9 of our 2018 Form 10-K for information regarding the financing asset associated with this fund.


32
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 on 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 millions
 
March 31, 2019
 
September 30, 2018
Assets:
 
 
 
 
Cash, cash equivalents and cash segregated pursuant to regulations
 
$
10

 
$
7

Intercompany and other receivables
 
2

 
1

Private equity investments
 
62

 
63

Investments in real estate partnerships held by consolidated variable interest entities
 
88

 
107

Trust fund investment in RJF common stock
 
19

 
14

Total assets
 
$
181

 
$
192

 
 
 
 
 
Liabilities and equity:
 
 

 
 

Other payables
 
$
23

 
$
27

Intercompany payables
 
22

 
17

Total liabilities
 
45

 
44

RJF equity
 
72

 
70

Noncontrolling interests
 
64

 
78

Total equity
 
136

 
148

Total liabilities and equity
 
$
181

 
$
192


The trust fund investment in RJF common stock in the preceding table relates to the Restricted Stock Trust Fund, which is included in “Treasury stock” on 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 2018 Form 10-K, we have concluded that for certain VIEs we are not the primary beneficiary and therefore do not consolidate these VIEs. Such VIEs include certain Private Equity Interests, certain LIHTC funds, and other limited partnerships. Our risk of loss for these VIEs is limited to our investments in, advances to, and/or receivables due from these VIEs.

Aggregate assets, liabilities and risk of loss

The aggregate assets, liabilities, and our exposure to loss from those VIEs in which we hold a variable interest, but as to which we have concluded we are not the primary beneficiary, are provided in the following table.
 
 
March 31, 2019
 
September 30, 2018
$ in millions
 
Aggregate
assets
 
Aggregate
liabilities
 
Our risk
of loss
 
Aggregate
assets
 
Aggregate
liabilities
 
Our risk
of loss
Private Equity Interests
 
$
5,483

 
$
155

 
$
66

 
$
6,908

 
$
154

 
$
68

LIHTC funds
 
6,150

 
2,117

 
31

 
5,692

 
1,912

 
93

Other
 
215

 
116

 
5

 
211

 
114

 
4

Total
 
$
11,848


$
2,388


$
102


$
12,811


$
2,180


$
165



NOTE 9 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS, NET

Our goodwill and identified intangible assets result from various acquisitions. See Notes 2 and 12 of our 2018 Form 10-K for information about our goodwill and intangible assets, including the related accounting policies.

We perform goodwill and indefinite-lived intangible asset impairment testing on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value or indicate that the asset is impaired.  We performed our latest annual impairment testing for our goodwill and indefinite-lived intangible asset as of our January 1, 2019 evaluation date, evaluating balances as of December 31, 2018. We performed a qualitative impairment assessment for each of our reporting units that had goodwill, as well as for our indefinite-lived intangible asset.


33
Notes to Condensed Consolidated Financial Statements (Unaudited)





Our qualitative assessments consider macroeconomic indicators, such as trends in equity and fixed income markets, GDP, unemployment rates, interest rates, housing markets and trade policy. We also consider regulatory changes, reporting unit specific results, and changes in key personnel and strategy. Changes in these indicators, and our ability to respond to such changes, may trigger the need for impairment testing at a point other than our annual assessment date.  Based upon the outcome of our qualitative assessments, no impairment was identified. No events have occurred since our assessments that would cause us to update this impairment testing.


NOTE 10 – BANK DEPOSITS

Bank deposits include savings and money market accounts, certificates of deposit with RJ Bank, Negotiable Order of Withdrawal (“NOW”) accounts and demand deposits. The following table presents a summary of bank deposits including the weighted-average rate, the calculation of which was based on the actual deposit balances at each respective period.
 
 
March 31, 2019
 
September 30, 2018
$ in millions
 
Balance
 
Weighted-average rate
 
Balance
 
Weighted-average rate
Savings and money market accounts
 
$
21,021

 
0.67
%
 
$
19,475

 
0.54
%
Certificates of deposit
 
582

 
2.35
%
 
445

 
2.03
%
NOW accounts
 
6

 
0.01
%
 
6

 
0.01
%
Demand deposits (non-interest-bearing)
 
9

 
—
%
 
16

 
—

Total bank deposits
 
$
21,618

 
0.71
%
 
$
19,942

 
0.57
%

Total bank deposits in the preceding table exclude affiliate deposits of $155 million at March 31, 2019 and $279 million at September 30, 2018. These affiliate deposits included $146 million at March 31, 2019 and $277 million at September 30, 2018, held in a deposit account at RJ Bank on behalf of RJF.

Savings and money market accounts in the preceding table consist primarily of deposits that are cash balances swept from the client investment accounts maintained at Raymond James & Associates, Inc. (“RJ&A”) to RJ Bank. These balances are held in Federal Deposit Insurance Corporation (“FDIC”) insured bank accounts through the Raymond James Bank Deposit Program (“RJBDP”). The aggregate amount of individual time deposit account balances that exceeded the FDIC insurance limit at March 31, 2019 was approximately $30 million.

The following table sets forth the scheduled maturities of certificates of deposit.
 
 
March 31, 2019
 
September 30, 2018
$ in millions
 
Denominations
greater than or
equal to $100,000
 
Denominations
less than $100,000
 
Denominations
greater than or
equal to $100,000
 
Denominations
less than $100,000
Three months or less
 
$
41

 
$
26

 
$
30

 
$
17

Over three through six months
 
31

 
24

 
20

 
13

Over six through twelve months
 
44

 
32

 
38

 
26

Over one through two years
 
65

 
44

 
65

 
40

Over two through three years
 
22

 
67

 
21

 
14

Over three through four years
 
56

 
29

 
44

 
26

Over four through five years
 
68

 
33

 
63

 
28

Total
 
$
327

 
$
255

 
$
281

 
$
164


Interest expense on deposits, excluding interest expense related to affiliate deposits, is summarized in the following table.
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
2019
 
2018
Savings, money market, and NOW accounts
 
$
34

 
$
10

 
$
67

 
$
17

Certificates of deposit
 
3

 
2

 
5

 
3

Total interest expense on deposits
 
$
37

 
$
12

 
$
72

 
$
20




34
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 11 – OTHER BORROWINGS
 
The following table details the components of other borrowings.
$ in millions
 
March 31, 2019
 
September 30, 2018
FHLB advances
 
$
875

 
$
875

Mortgage notes payable and other
 
21

 
24

Total other borrowings
 
$
896

 
$
899


Borrowings from the FHLB as of March 31, 2019 and September 30, 2018, were comprised of both floating and fixed-rate advances. As of March 31, 2019 and September 30, 2018, the floating-rate advances, which have interest rates that reset quarterly, totaled $850 million. The floating-rate advances mature in June 2020. We use interest rate swaps to manage the risk of increases in interest rates associated with these floating-rate advances by converting the balances subject to variable interest rates to a fixed interest rate. Refer to Note 5 for information regarding these interest rate swaps, which are accounted for as hedging instruments. As of both March 31, 2019 and September 30, 2018, the fixed-rate advance totaled $25 million and bears interest at a fixed rate of 3.4%. This advance matures in October 2020. All of the advances were secured by a blanket lien granted to the FHLB on our residential mortgage loan portfolio. The weighted average interest rate on these FHLB advances as of March 31, 2019 and September 30, 2018 was 2.63% and 2.41%, respectively.

On February 19, 2019, RJF and RJ&A entered into an unsecured revolving credit facility agreement (the “Credit Facility”) which replaced the previous unsecured revolving credit facility agreement (the “RJF Credit Facility”) entered into by RJF. The Credit Facility has a maturity date of February 2024 and the lenders include a number of financial institutions. This committed unsecured borrowing facility provides for maximum borrowings of up to $500 million, with a sublimit of $300 million for RJF, at variable rates of interest. There were no borrowings outstanding on the Credit Facility as of March 31, 2019. There is a variable rate facility fee associated with the Credit Facility, which varies depending upon RJF’s credit rating. Based upon RJF’s credit rating as of March 31, 2019, the variable rate facility fee, which is applied to the committed amount, was 0.175% 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. 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” and “Securities loaned” on our Condensed Consolidated Statements of Financial Condition. See Note 6 for information regarding our collateralized financing arrangements.

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



35
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 12 – INCOME TAXES

The income tax provision for interim periods is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items.  We estimate the annual effective tax rate quarterly based on the forecasted pretax results of our U.S. and non-U.S. operations. Items unrelated to current year ordinary income are recognized entirely in the period identified as a discrete item of tax.  These discrete items generally relate to changes in tax laws, adjustments to the actual liability determined upon filing tax returns, excess tax benefits related to share-based compensation and adjustments to previously recorded reserves for uncertain tax positions. For discussion of income tax accounting policies and other income tax related information, see Note 2 and Note 16 of our 2018 Form 10-K.

Effective tax rate

Our effective income tax rate was 25.4% for the six months ended March 31, 2019, which was lower than the 34.8% effective tax rate for fiscal year 2018. The decrease in the current period effective income tax rate compared to fiscal year 2018’s effective income tax rate was due to the prior year remeasurement of our deferred tax assets at a lower enacted federal corporate tax rate, which negatively impacted the prior year’s effective income tax rate by 8.1%, as well as a decrease in the current year’s federal statutory tax rate from 24.5% to 21.0%.

Uncertain tax positions

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


NOTE 13 – COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments and contingencies

Loan and underwriting commitments

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

As part of our recruiting efforts, we offer loans to prospective financial advisors and certain key revenue producers primarily for recruiting, transitional cost assistance, and retention purposes (see Note 2 of our 2018 Form 10-K for a discussion of our accounting policies governing these transactions). These commitments are contingent upon certain events occurring, including, but not limited to, the individual joining us.  As of March 31, 2019, we had made commitments through the extension of formal offers totaling approximately $159 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 March 31, 2019, $102 million of the total amount extended consisted of unfunded commitments to prospective financial advisors that had accepted our offers, or recently hired producers.

Commitments to extend credit and other credit-related financial instruments

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

The following table presents RJ Bank’s commitments to extend credit and other credit-related off-balance sheet financial instruments outstanding.
$ in millions
 
March 31, 2019
 
September 30, 2018
Open-end consumer lines of credit (primarily SBL)
 
$
8,177

 
$
7,332

Commercial lines of credit
 
$
1,525

 
$
1,643

Unfunded loan commitments
 
$
546

 
$
541

Standby letters of credit
 
$
45

 
$
41



36
Notes to Condensed Consolidated Financial Statements (Unaudited)





Because many of our lending commitments expire without being funded in whole or part, the contractual amounts are not estimates of our actual future credit exposure or future liquidity requirements. We maintain a reserve to provide for potential losses related to the unfunded lending commitments. See Note 7 for further discussion of this reserve for unfunded lending commitments.

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

Investment commitments

RJ Bank has committed approximately $81 million as an investor member in a LIHTC fund in which a subsidiary of RJTCF is the managing member (see Note 2 of our 2018 Form 10-K for information regarding the accounting policies governing these investments). As of March 31, 2019, RJ Bank had invested $71 million of the committed amount.

We had unfunded commitments to various private equity investments of $17 million as of March 31, 2019.

Other commitments
 
RJF has committed an amount of up to $225 million, subject to certain limitations, to either lend to, or guarantee obligations of RJTCF in connection with RJTCF’s low-income housing development/rehabilitation and syndication activities. At March 31, 2019, RJTCF had $68 million outstanding against this commitment. RJTCF may borrow from RJF in order to make investments in, or fund loans or advances to, either project partnerships that purchase and develop properties qualifying for tax credits or LIHTC funds. Investments in project partnerships are sold to various LIHTC funds, which have third-party investors, and for which RJTCF serves as the managing member or general partner. RJTCF typically sells investments in project partnerships to LIHTC funds within 90 days of their acquisition, and the proceeds from the sales are used to repay RJTCF’s borrowings from RJF. RJTCF may also make short-term loans or advances to project partnerships and LIHTC funds.

As a part of our fixed income public finance operations, we enter into forward commitments to purchase agency MBS (see the discussion of these activities within Note 2 of our 2018 Form 10-K).  At March 31, 2019, we had $254 million principal amount of outstanding forward MBS purchase commitments, which were expected to be purchased within 90 days following commitment.  In order to hedge the market interest rate risk to which we would otherwise be exposed between the date of the commitment and the date of sale of the MBS, we enter into TBA security contracts with investors for generic MBS at specific rates and prices to be delivered on settlement dates in the future. We may be subject to loss if the timing of, or the actual amount of, the MBS differs significantly from the term and notional amount of the TBA security contract to which we entered.  These TBA securities and related purchase commitments are accounted for at fair value. As of March 31, 2019, the fair value of the TBA securities and the estimated fair value of the purchase commitments were insignificant.

Guarantees

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

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 March 31, 2019 related to this obligation. The maximum exposure to loss under this guarantee was $10 million at March 31, 2019, which represented the undiscounted future payments due the investor.


37
Notes to Condensed Consolidated Financial Statements (Unaudited)





We guarantee the debt of one of our private equity investments. The amount of such debt, including the undrawn portion of a revolving credit facility, was $14 million as of March 31, 2019. The debt, which matures in 2021, is secured by substantially all of the assets of the borrower.

Legal and regulatory matter contingencies

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

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

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

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 as of March 31, 2019, we estimated the upper end of the range of reasonably possible aggregate loss to be approximately $110 million in excess of the aggregate reserves for such matters.  Refer to Note 2 of our 2018 Form 10-K for a discussion of our criteria for recognizing liabilities for contingencies.

Legal matters

On February 17, 2015, Jyll Brink (“Brink”) filed a putative class action complaint in the U.S. District Court for the Southern District of Florida (the “District Court”) under the caption Jyll Brink v. Raymond James & Associates, Inc. (the “Brink Complaint”). The Brink Complaint alleges that Brink, a former customer of RJ&A, was charged a fee in her Passport Investment Account, and that the fee included an unauthorized and undisclosed profit to RJ&A in violation of its customer agreement and applicable industry standards. The Passport Investment Account is a fee-based account in which clients pay asset-based advisory fees and certain processing fees for ongoing investment advice and monitoring of securities holdings. The Brink Complaint seeks, among other relief, damages in the amount of the difference between the actual cost of processing a trade, as alleged by Brink, and the fee charged by RJ&A. On October 19, 2018, the District Court certified a class of former and current customers of RJ&A who executed a Passport Agreement and were charged processing fees during the period between February 17, 2010 and February 17, 2015. On January 18, 2019, the U.S. Court of Appeals for the Eleventh Circuit (the “Appellate Court”) entered an order granting permission to RJ&A to appeal the District Court’s class certification order. On January 25, 2019, the District Court issued an order staying trial, calendar call and all remaining pretrial

38
Notes to Condensed Consolidated Financial Statements (Unaudited)





deadlines pending resolution of the appeal. On April 5, 2019, Brink and RJ&A agreed in principle to a settlement of the Brink Complaint. The parties are currently negotiating a Stipulation of Settlement. Both the District Court and the Appellate Court have been informed of the foregoing. The settlement amount was included in “Other payables” in our Condensed Consolidated Statement of Financial Condition as of March 31, 2019.
On February 11, 2016, Caleb Wistar (“Wistar”) and Ernest Mayeaux (“Mayeaux”) filed a putative class action complaint in the District Court under the caption Caleb Wistar and Ernest Mayeaux v. Raymond James Financial Services, Inc. and Raymond James Financial Services Advisors, Inc. (as subsequently amended, the “Wistar Complaint”). Similar to the Brink Complaint, the Wistar Complaint alleges that Wistar and Mayeaux, former customers of Raymond James Financial Services, Inc. (“RJFS”) and Raymond James Financial Services Advisors, Inc. (“RJFSA”), were charged a fee in RJFS and RJFSA’s Passport Investment Account and that the fee included an unauthorized and undisclosed profit to RJFS and RJFSA in violation of its customer agreement and applicable industry standards. The Wistar Complaint seeks, among other relief, damages in the amount of the difference between the actual cost of processing a trade, as alleged by Wistar and Mayeaux, and the fee charge by RJFS and RJFSA. On April 5, 2019, Wistar and Mayeaux agreed in principle with RJFS and RJFSA to a settlement of the Wistar Complaint. The parties are currently negotiating a Stipulation of Settlement. The District Court has been informed of the foregoing. The settlement amount was included in “Other payables” in our Condensed Consolidated Statement of Financial Condition as of March 31, 2019.
While the parties have agreed in principle to settlements of the Brink Complaint and Wistar Complaint, there can be no assurance that the parties will execute Stipulations of Settlement, or if the parties do execute Stipulations of Settlement, that the District Court will grant preliminary approval or final approval to either or both settlements.

39
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

All of the components of OCI, net of tax, were attributable to RJF. The following table presents the net change in OCI as well as the changes, and the related tax effects, of each component of AOCI.
$ in millions
 
Net investment hedges
 
Currency translations
 
Subtotal: net investment hedges and currency translations
 
Available- for-sale securities
 
Cash flow hedges
 
Total
Three months ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income/(loss) as of beginning of period
 
$
125

 
$
(161
)
 
$
(36
)
 
$
(28
)
 
$
25

 
$
(39
)
Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income/(loss) before reclassifications and taxes
 
(15
)
 
19

 
4

 
26

 
(16
)
 
14

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

 
—

 
—

 
—

 
(2
)
 
(2
)
Pre-tax net other comprehensive income/(loss)
 
(15
)
 
19

 
4

 
26

 
(18
)
 
12

Income tax effect
 
4

 
—

 
4

 
(7
)
 
5

 
2

Other comprehensive income/(loss) for the period, net of tax
 
(11
)
 
19

 
8

 
19

 
(13
)
 
14

Accumulated other comprehensive income/(loss) as of end of period
 
$
114

 
$
(142
)
 
$
(28
)
 
$
(9
)
 
$
12

 
$
(25
)
Six months ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income/(loss) as of beginning of period
 
$
88

 
$
(111
)
 
$
(23
)
 
$
(46
)
 
$
42

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

 
—

 
—

 
(4
)
 
—

 
(4
)
Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income/(loss) before reclassifications and taxes
 
34

 
(31
)
 
3

 
58

 
(40
)
 
21

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

 
—

 
—

 
—

 
(3
)
 
(3
)
Pre-tax net other comprehensive income/(loss)
 
34

 
(31
)
 
3

 
58

 
(43
)
 
18

Income tax effect
 
(8
)
 
—

 
(8
)
 
(17
)
 
13

 
(12
)
Other comprehensive income/(loss) for the period, net of tax
 
26

 
(31
)
 
(5
)
 
41

 
(30
)
 
6

Accumulated other comprehensive income/(loss) as of end of period
 
$
114

 
$
(142
)
 
$
(28
)
 
$
(9
)
 
$
12

 
$
(25
)
Three months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income/(loss) as of beginning of period
 
$
66

 
$
(86
)
 
$
(20
)
 
$
(14
)
 
$
14

 
$
(20
)
Cumulative effect of adoption of ASU 2018-02
 
—

 
—

 
—

 
(2
)
 
2

 
—

Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income/(loss) before reclassifications and taxes
 
26

 
(21
)
 
5

 
(24
)
 
22

 
3

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

 
—

 
—

 
—

 
1

 
1

Pre-tax net other comprehensive income/(loss)
 
26

 
(21
)
 
5

 
(24
)
 
23

 
4

Income tax effect
 
(7
)
 
—

 
(7
)
 
9

 
(9
)
 
(7
)
Other comprehensive income/(loss) for the period, net of tax
 
19

 
(21
)
 
(2
)
 
(15
)
 
14

 
(3
)
Accumulated other comprehensive income/(loss) as of end of period
 
$
85

 
$
(107
)
 
$
(22
)
 
$
(31
)
 
$
30

 
$
(23
)
Six months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income/(loss) as of beginning of period
 
$
60

 
$
(80
)
 
$
(20
)
 
$
(2
)
 
$
7

 
$
(15
)
Cumulative effect of adoption of ASU 2018-02
 
—

 
—

 
—

 
(2
)
 
2

 
—

Other comprehensive income/(loss):
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income/(loss) before reclassifications and taxes
 
34

 
(27
)
 
7

 
(40
)
 
29

 
(4
)
Amounts reclassified from accumulated other comprehensive income/(loss), before tax
 
—

 
—

 
—

 
—

 
2

 
2

Pre-tax net other comprehensive income/(loss)
 
34

 
(27
)
 
7

 
(40
)
 
31

 
(2
)
Income tax effect
 
(9
)
 
—

 
(9
)
 
13

 
(10
)
 
(6
)
Other comprehensive income/(loss) for the period, net of tax
 
25

 
(27
)
 
(2
)
 
(27
)
 
21

 
(8
)
Accumulated other comprehensive income/(loss) as of end of period
 
$
85

 
$
(107
)
 
$
(22
)
 
$
(31
)
 
$
30

 
$
(23
)


40
Notes to Condensed Consolidated Financial Statements (Unaudited)





As of October 1, 2018, we adopted new accounting guidance related to the classification and measurement of financial instruments (ASU 2016-01), which generally requires changes in the fair value of equity securities to be recorded in net income. As a result, on a prospective basis beginning October 1, 2018, unrealized gains/(losses) on our equity securities previously classified and accounted for as available-for-sale are recorded in net income instead of OCI. Accordingly, we reclassified a cumulative unrealized gain on such securities, net of tax, from AOCI to retained earnings. See Notes 2 and 4 for additional information.

Reclassifications from AOCI to net income, excluding taxes, for each of the three and six months ended March 31, 2019 and 2018 were recorded in “Interest expense” in the Condensed Consolidated Statements of Income and Comprehensive Income.

Our net investment hedges and cash flow hedges relate to our derivatives associated with RJ Bank’s business operations (see Note 5 for additional information on these derivatives).

Our policy is to release tax effects remaining in AOCI on an individual security basis.



41
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 15 – REVENUES

On October 1, 2018, we adopted new accounting guidance for revenue from contracts with customers. Under the new guidance, revenue is recognized when promised goods or services are delivered to our customers in an amount we expect to receive in exchange for those goods or services (i.e., the transaction price). Contracts with customers can include multiple services, which are accounted for as separate “performance obligations” if they are determined to be distinct. Our performance obligations to our customers are generally satisfied when we transfer the promised good or service to our customer, either at a point in time or over time. Revenue from a performance obligation transferred at a point in time is recognized at the time that the customer obtains control over the promised good or service. Revenue from our performance obligations satisfied over time are recognized in a manner that depicts our performance in transferring control of the good or service, which is generally measured based on time elapsed, as our customers simultaneously receive and consume the benefit of our services as they are provided.

Payment for the majority of our services is considered to be variable consideration, as the amount of revenues we expect to receive is subject to factors outside of our control, including market conditions. Variable consideration is only included in revenue when amounts are not subject to significant reversal, which is generally when uncertainty around the amount of revenue to be received is resolved.

We involve third parties in providing services to the customer for some of our contracts with customers. Under the new guidance, we are generally deemed to control the promised services before they are transferred to the customer. Accordingly, beginning with adoption of the new guidance, we present the related revenues gross of the related costs.

The following tables present our sources of revenues by segment. See Note 20 for additional information on our segment results.
 
 
Three months ended March 31, 2019
$ in millions
 
Private Client Group
 
Capital Markets
 
Asset Management
 
RJ Bank
 
Other and intersegment eliminations
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Asset management and related administrative fees
 
$
638

 
$
1

 
$
149

 
$
—

 
$
(5
)
 
$
783

Brokerage revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Securities commissions:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual and other fund products
 
145

 
1

 
2

 
—

 
—

 
148

Insurance and annuity products
 
99

 
—

 
—

 
—

 
—

 
99

Equities, ETFs and fixed income products
 
74

 
30

 
—

 
—

 
(2
)
 
102

Subtotal securities commissions
 
318


31


2


—


(2
)

349

Principal transactions (1)
 
20

 
72

 
—

 
—

 
1

 
93

Total brokerage revenues
 
338


103


2


—


(1
)

442

Account and services fees:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund and annuity service fees
 
82

 
—

 
1

 
—

 
(5
)
 
78

RJBDP fees
 
122

 
—

 
1

 
—

 
(44
)
 
79

Client account and other fees
 
27

 
2

 
8

 
—

 
(3
)
 
34

Total account and service fees
 
231


2


10


—


(52
)

191

Investment banking:
 
 
 
 
 
 
 
 
 
 
 
 
Equity underwriting
 
8

 
18

 
—

 
—

 
(1
)
 
25

Merger & acquisition and advisory
 
—

 
118

 
—

 
—

 
—

 
118

Fixed income investment banking
 
—

 
20

 
—

 
—

 
—

 
20

Total investment banking
 
8


156


—


—


(1
)

163

Other:
 
 
 
 
 
 
 
 
 
 
 
 
Tax credit fund revenues
 
—

 
14

 
—

 
—

 
—

 
14

All other (1)
 
9

 
—

 
—

 
7

 
1

 
17

Total other
 
9


14


—


7


1


31

Total non-interest revenues
 
1,224


276


161


7


(58
)

1,610

Interest income (1)
 
58

 
9

 
1

 
247

 
9

 
324

Total revenues
 
1,282

 
285

 
162

 
254

 
(49
)
 
1,934

Interest expense
 
(11
)
 
(8
)
 
—

 
(42
)
 
(14
)
 
(75
)
Net revenues
 
$
1,271

 
$
277

 
$
162

 
$
212

 
$
(63
)
 
$
1,859


(continued on next page)

42
Notes to Condensed Consolidated Financial Statements (Unaudited)





(continued from previous page)
 
 
Three months ended March 31, 2018
$ in millions
 
Private Client Group
 
Capital Markets
 
Asset Management
 
RJ Bank
 
Other and intersegment eliminations
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Asset management and related administrative fees
 
$
616

 
$
3

 
$
152

 
$
—

 
$
(3
)
 
$
768

Brokerage revenues:
 
 
 
 
 
 
 
 
 
 
 

Securities commissions:
 
 
 
 
 
 
 
 
 
 
 

Mutual and other fund products
 
188

 
2

 
3

 
—

 
—

 
193

Insurance and annuity products
 
100

 
—

 
—

 
—

 
—

 
100

Equities, ETFs and fixed income products
 
96

 
36

 
—

 
—

 
—

 
132

Subtotal securities commissions
 
384

 
38

 
3

 
—

 
—

 
425

Principal transactions (1)
 
20

 
64

 
—

 
1

 
—

 
85

Total brokerage revenues
 
404


102


3


1


—


510

Account and services fees:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund and annuity service fees
 
80

 
—

 
—

 
—

 
(2
)
 
78

RJBDP fees
 
89

 
—

 
1

 
—

 
(22
)
 
68

Client account and other fees
 
26

 
1

 
5

 
—

 
(1
)
 
31

Total account and service fees
 
195


1


6


—


(25
)

177

Investment banking:
 
 
 
 
 
 
 
 
 
 
 
 
Equity underwriting
 
9

 
19

 
—

 
—

 
—

 
28

Merger & acquisition and advisory
 
—

 
72

 
—

 
—

 
—

 
72

Fixed income investment banking
 
—

 
16

 
—

 
—

 
—

 
16

Total investment banking
 
9


107


—


—


—


116

Other:
 
 
 
 
 
 
 
 
 
 
 
 
Tax credit fund revenues
 
—

 
14

 
—

 
—

 
—

 
14

All other (1)
 
7

 
1

 
1

 
6

 
8

 
23

Total other
 
7


15


1


6


8


37

Total non-interest revenues
 
1,231


228


162


7


(20
)

1,608

Interest income (1)
 
47

 
8

 
1

 
190

 
3

 
249

Total revenues
 
1,278


236


163


197


(17
)

1,857

Interest expense
 
(6
)
 
(6
)
 
—

 
(18
)
 
(15
)
 
(45
)
Net revenues
 
$
1,272


$
230


$
163


$
179


$
(32
)

$
1,812


(continued on next page)


43
Notes to Condensed Consolidated Financial Statements (Unaudited)





(continued from previous page)
 
 
Six months ended March 31, 2019
$ in millions
 
Private Client Group
 
Capital Markets
 
Asset Management
 
RJ Bank
 
Other and intersegment eliminations
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Asset management and related administrative fees
 
$
1,345

 
$
3

 
$
310

 
$
—

 
$
(10
)
 
$
1,648

Brokerage revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Securities commissions:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual and other fund products
 
302

 
3

 
5

 
—

 
(2
)
 
308

Insurance and annuity products
 
203

 
—

 
—

 
—

 
—

 
203

Equities, ETFs and fixed income products
 
158

 
70

 
—

 
—

 
(2
)
 
226

Subtotal securities commissions
 
663


73


5


—


(4
)

737

Principal transactions (1)
 
39

 
129

 
—

 
1

 
—

 
169

Total brokerage revenues
 
702


202


5


1


(4
)

906

Account and services fees:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund and annuity service fees
 
165

 
—

 
2

 
—

 
(8
)
 
159

RJBDP fees
 
231

 
—

 
2

 
—

 
(85
)
 
148

Client account and other fees
 
60

 
2

 
15

 
—

 
(8
)
 
69

Total account and service fees
 
456


2


19


—


(101
)

376

Investment banking:
 
 
 
 
 
 
 
 
 
 
 
 
Equity underwriting
 
15

 
45

 
—

 
—

 
—

 
60

Merger & acquisition and advisory
 
—

 
201

 
—

 
—

 
—

 
201

Fixed income investment banking
 
—

 
39

 
—

 
—

 
—

 
39

Total investment banking
 
15


285


—


—


—


300

Other:
 
 
 
 
 
 
 
 
 
 
 
 
Tax credit fund revenues
 
—

 
33

 
—

 
—

 
—

 
33

All other (1)
 
16

 
2

 
—

 
12

 
5

 
35

Total other
 
16


35


—


12


5


68

Total non-interest revenues
 
2,534


527


334


13


(110
)

3,298

Interest income (1)
 
114

 
19

 
2

 
486

 
19

 
640

Total revenues
 
2,648


546


336


499


(91
)

3,938

Interest expense
 
(21
)
 
(16
)
 
—

 
(84
)
 
(27
)
 
(148
)
Net revenues
 
$
2,627


$
530


$
336


$
415


$
(118
)

$
3,790


(continued on next page)






















44
Notes to Condensed Consolidated Financial Statements (Unaudited)





(continued from previous page)
 
 
Six months ended March 31, 2018
$ in millions
 
Private Client Group
 
Capital Markets
 
Asset Management
 
RJ Bank
 
Other and intersegment eliminations
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Asset management and related administrative fees
 
$
1,207

 
$
5

 
$
293

 
$
—

 
$
(8
)
 
$
1,497

Brokerage revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Securities commissions:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual and other fund products
 
363

 
4

 
6

 
—

 
(1
)
 
372

Insurance and annuity products
 
211

 
—

 
—

 
—

 
—

 
211

Equities, ETFs and fixed income products
 
186

 
74

 
—

 
—

 
(2
)
 
258

Subtotal securities commissions
 
760

 
78

 
6

 
—

 
(3
)
 
841

Principal transactions (1)
 
40

 
141

 
—

 
1

 
—

 
182

Total brokerage revenues
 
800

 
219

 
6

 
1

 
(3
)
 
1,023

Account and services fees:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund and annuity service fees
 
161

 
—

 
1

 
—

 
(4
)
 
158

RJBDP fees
 
171

 
—

 
2

 
—

 
(43
)
 
130

Client account and other fees
 
55

 
2

 
10

 
—

 
(7
)
 
60

Total account and service fees
 
387

 
2

 
13

 
—

 
(54
)
 
348

Investment banking:
 
 
 
 
 
 
 
 
 
 
 
 
Equity underwriting
 
16

 
36

 
—

 
—

 
—

 
52

Merger & acquisition and advisory
 
—

 
115

 
—

 
—

 
—

 
115

Fixed income investment banking
 
—

 
37

 
—

 
—

 
—

 
37

Total investment banking
 
16

 
188

 
—

 
—

 
—

 
204

Other:
 
 
 
 
 
 
 
 
 
 
 
 
Tax credit fund revenues
 
—

 
28

 
—

 
—

 
—

 
28

All other (1)
 
16

 
2

 
1

 
8

 
15

 
42

Total other
 
16

 
30

 
1

 
8

 
15

 
70

Total non-interest revenues
 
2,426

 
444

 
313

 
9

 
(50
)
 
3,142

Interest income (1)
 
90

 
15

 
1

 
366

 
9

 
481

Total revenues
 
2,516

 
459

 
314

 
375

 
(41
)
 
3,623

Interest expense
 
(11
)
 
(12
)
 
—

 
(31
)
 
(31
)
 
(85
)
Net revenues
 
$
2,505

 
$
447

 
$
314

 
$
344

 
$
(72
)
 
$
3,538


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

Asset management and related administrative fees

We earn asset management and related administrative fees for performing asset management, investment advisory and related administrative services for retail and institutional clients. Such fees are generally calculated as a percentage of the value of assets in fee-based accounts under administration in our Private Client Group (“PCG”) segment or the net asset value of institutional accounts, retail accounts we manage on behalf of third-party institutions or funds that we manage in our Asset Management segment. The value of these assets is impacted by market fluctuations and net inflows or outflows of assets. Fees are generally collected quarterly and are based on balances either at the beginning of the quarter, the end of the quarter, or average balances throughout the quarter. Asset management and related administrative fees are recognized on a monthly basis (i.e., over time) as the services are performed.

Revenues related to fee-based accounts under administration in PCG are shared by the PCG and Asset Management segments, the amount of which depends on whether clients are invested in assets that are overseen by our Asset Management segment (i.e., included in financial assets under management (“AUM”) in the Asset Management segment) and the administrative services being provided. Asset management revenues earned for retail accounts managed on behalf of third-party institutions, institutional accounts or funds that we manage are recorded entirely in the Asset Management segment.


45
Notes to Condensed Consolidated Financial Statements (Unaudited)





Brokerage revenues

Securities commissions

Mutual and other fund products and insurance and annuity products

We earn revenues for distribution and related support services performed related to mutual and other funds, fixed and variable annuities and insurance products. Depending on the product sold, we may receive an upfront fee for our services, a trailing commission, or some combination thereof. Upfront commissions received are generally based on a fixed rate applied, as a percentage, to amounts invested or the value of the contract at the time of sale and are recognized at the time of sale (or, in the case of insurance and annuity products, when the policy is accepted by the carrier). Trailing commissions are generally based on a fixed rate applied, as a percentage, to the net asset value of the fund, or the value of the insurance policy or annuity contract. Trailing commissions are generally received monthly or quarterly while our client holds the investment or holds the contract. As these trailing commissions are based on factors outside of our control, including market movements and client behavior (i.e., how long clients hold their investment, insurance policy or annuity contract), such revenue is recognized when it is probable that a significant reversal will not occur.

Equities, exchange-traded funds (“ETFs”) and fixed income products

We earn commissions for executing and clearing transactions for customers, primarily in listed and OTC equity securities, including ETFs, and options. Such revenues primarily arise from transactions for retail clients in our PCG segment, as well as services related to sales and trading activities transacted on an agency basis in our Capital Markets segment. Commissions are recognized on trade date, generally received from the customer on settlement date, and we record a receivable between the trade date and the date collected from the customer.

Principal transaction revenues

Principal transactions include revenues from customers’ purchases and sales of financial instruments, including fixed income and equity securities and derivatives, in which we transact on a principal basis. To facilitate such transactions, we carry inventories of financial instruments. The gains and losses on such inventories, both realized and unrealized, are reported as principal transactions revenues.

Account and service fees

Mutual fund and annuity service fees

We earn servicing fees for providing sales and marketing support to product partners and for supporting the availability and distribution of their products on our platforms. We also earn servicing fees from such partners for accounting and administrative services. These fees, which are received monthly or quarterly, are generally based on the market value of assets or number of positions in such programs or, in certain cases, are a fixed annual fee, and are recognized over time as the services are performed.

RJBDP fees

We earn servicing fees from various banks for administrative services we provide related to our clients’ deposits that are swept to such banks as part of RJBDP, our multi-bank sweep program. The amounts received from third-party banks are variable in nature and fluctuate based on client cash balances in the program, as well as the level of short-term interest rates relative to interest paid to clients on balances in the RJBDP. The fees are earned over time as the related administrative services are performed and are received monthly. Our PCG segment also earns servicing fees from RJ Bank, which are based on the number of accounts that are swept to RJ Bank. These fees are eliminated in consolidation.

Investment banking revenues

We earn revenue from investment banking transactions, including public and private equity and debt financing, merger & acquisition advisory services, and other advisory services. Underwriting revenues, which are typically deducted from the proceeds remitted to the issuer, are recognized on trade date if there is no uncertainty or contingency related to the amount to be paid. Fees from merger & acquisition and advisory assignments are generally recognized at the time the services related to the transaction are completed under the terms of the engagement. Fees for advisory services are typically received upfront, as non-refundable retainer fees, or as a success fee upon completion of a transaction. Expenses related to investment banking transactions are generally deferred until the related revenue is recognized or the assignment is otherwise concluded. Beginning October 1, 2018, such expenses have been included in “Professional fees” on our Condensed Consolidated Statements of Income and Comprehensive Income.

46
Notes to Condensed Consolidated Financial Statements (Unaudited)





Impact of adoption

As a result of the adoption of the new accounting guidance, we have changed the presentation of certain costs from a net presentation within revenues to a gross presentation, particularly those related to merger & acquisition, advisory and underwriting transactions and certain administrative costs related to the RJBDP. As a result of this change, “Investment banking” and “Professional fees” were each $4 million higher for the three months ended March 31, 2019 and $10 million higher for the six months ended March 31, 2019, and “Account and service fees” and “Other” expense were each $2 million higher for the three months ended March 31, 2019 and $4 million higher for the six months ended March 31, 2019. These changes had no impact on pre-tax or net income.

Other items

At March 31, 2019 and September 30, 2018, net receivables related to contracts with customers were $339 million and $384 million, respectively.

We record deferred revenue from contracts with customers when payment is received prior to the performance of our obligation to the customer. Deferred revenue balances were not material as of March 31, 2019 and September 30, 2018.

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


NOTE 16 – INTEREST INCOME AND INTEREST EXPENSE

The following table details the components of interest income and interest expense.
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
2019
 
2018
Interest income:
 
 
 
 
 
 
 
 
Cash segregated pursuant to regulations
 
$
15

 
$
14

 
$
29

 
$
26

Trading instruments
 
6

 
5

 
13

 
10

Available-for-sale securities
 
17

 
12

 
33

 
23

Margin loans
 
31

 
25

 
63

 
49

Bank loans, net of unearned income
 
220

 
173

 
434

 
333

Loans to financial advisors
 
5

 
3

 
9

 
7

Corporate cash and all other
 
30

 
17

 
59

 
33

Total interest income
 
$
324


$
249


$
640


$
481

Interest expense:
 
 

 
 

 
 
 
 
Bank deposits
 
$
37

 
$
12

 
$
72

 
$
20

Trading instruments sold but not yet purchased
 
2

 
1

 
4

 
3

Brokerage client payables
 
5

 
3

 
11

 
6

Other borrowings
 
5

 
5

 
11

 
11

Senior notes payable
 
18

 
18

 
36

 
36

Other
 
8

 
6

 
14

 
9

Total interest expense
 
75


45


148


85

Net interest income
 
249

 
204

 
492

 
396

Bank loan loss provision
 
(5
)
 
(8
)
 
(21
)
 
(9
)
Net interest income after bank loan loss provision
 
$
244

 
$
196

 
$
471

 
$
387


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



47
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 17 – SHARE-BASED COMPENSATION

We have one share-based compensation plan for our employees, Board of Directors and non-employees (comprised of independent contractor financial advisors). We generally issue new shares under The Amended and Restated 2012 Stock Incentive Plan; however, we are also permitted to reissue our treasury shares. Annual share-based compensation awards are generally issued during the first fiscal quarter of each year.  Our share-based compensation accounting policies are described in Note 2 of our 2018 Form 10-K.  Other information related to our share-based awards is presented in Note 20 of our 2018 Form 10-K.  

During the three and six months ended March 31, 2019, we granted approximately 100,000 and 1.5 million RSUs, respectively, to employees and outside members of our Board of Directors with a weighted-average grant-date fair value of $81.62 and $76.52, respectively. For the three and six months ended March 31, 2019, total compensation expense for restricted equity awards granted to our employees and members of our Board of Directors was $23 million and $61 million, respectively, compared with $21 million and $51 million, respectively, for the three and six months ended March 31, 2018.

As of March 31, 2019, there were $181 million of total pre-tax compensation costs not yet recognized, net of estimated forfeitures, related to RSUs granted to employees and members of our Board of Directors. These costs are expected to be recognized over a weighted-average period of 3.1 years.


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

RJF and RJ Bank are required to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), Tier 1 capital to average assets (as defined), and under rules defined under the Basel III standardized approach, 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 a capital conservation buffer, consisting entirely of capital that qualifies as CET1, that became fully-phased in at 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 March 31, 2019, both RJF’s and RJ Bank’s capital levels exceeded the capital conservation buffer requirement and were each categorized as “well capitalized.”

For further discussion of regulatory capital requirements applicable to certain of our businesses and subsidiaries, see Note 21 of our 2018 Form 10-K.


48
Notes to Condensed Consolidated Financial Statements (Unaudited)





To meet requirements for capital adequacy purposes or to be categorized as “well capitalized,” RJF must maintain minimum CET1, Tier 1 capital, Total capital and Tier 1 leverage amounts and ratios as set forth in the following table.
 
 
Actual
 
Requirement for capital
adequacy purposes
 
To be well capitalized
under regulatory provisions
$ in millions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
RJF as of March 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
CET1
 
$
5,728

 
24.3
%
 
$
1,061

 
4.5
%
 
$
1,532

 
6.5
%
Tier 1 capital
 
$
5,728

 
24.3
%
 
$
1,414

 
6.0
%
 
$
1,886

 
8.0
%
Total capital
 
$
5,964

 
25.3
%
 
$
1,886

 
8.0
%
 
$
2,357

 
10.0
%
Tier 1 leverage
 
$
5,728

 
15.1
%
 
$
1,515

 
4.0
%
 
$
1,893

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
RJF as of September 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
CET1
 
$
5,718

 
24.3
%
 
$
1,057

 
4.5
%
 
$
1,527

 
6.5
%
Tier 1 capital
 
$
5,718

 
24.3
%
 
$
1,410

 
6.0
%
 
$
1,880

 
8.0
%
Total capital
 
$
5,941

 
25.3
%
 
$
1,880

 
8.0
%
 
$
2,350

 
10.0
%
Tier 1 leverage
 
$
5,718

 
15.8
%
 
$
1,451

 
4.0
%
 
$
1,814

 
5.0
%

RJF’s Tier 1 and Total capital ratios at March 31, 2019 were unchanged compared to September 30, 2018, as the impact of share repurchases during the six months ended March 31, 2019 was offset by positive earnings during the current period.

To meet the requirements for capital adequacy or to be categorized as “well capitalized,” RJ Bank must maintain CET1, Tier 1 capital, Total capital and Tier 1 leverage amounts and ratios as set forth in the following table.
 
 
Actual
 
Requirement for capital
adequacy purposes
 
To be well capitalized
under regulatory provisions
$ in millions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
RJ Bank as of March 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
CET1
 
$
2,132

 
12.8
%
 
$
747

 
4.5
%
 
$
1,080

 
6.5
%
Tier 1 capital
 
$
2,132

 
12.8
%
 
$
996

 
6.0
%
 
$
1,329

 
8.0
%
Total capital
 
$
2,340

 
14.1
%
 
$
1,329

 
8.0
%
 
$
1,661

 
10.0
%
Tier 1 leverage
 
$
2,132

 
8.6
%
 
$
992

 
4.0
%
 
$
1,240

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
RJ Bank as of September 30, 2018:
 
 

 
 

 
 

 
 

 
 

 
 

CET1
 
$
2,029

 
12.7
%
 
$
721

 
4.5
%
 
$
1,042

 
6.5
%
Tier 1 capital
 
$
2,029

 
12.7
%
 
$
961

 
6.0
%
 
$
1,282

 
8.0
%
Total capital
 
$
2,229

 
13.9
%
 
$
1,282

 
8.0
%
 
$
1,602

 
10.0
%
Tier 1 leverage
 
$
2,029

 
8.8
%
 
$
926

 
4.0
%
 
$
1,158

 
5.0
%

RJ Bank’s Tier 1 and Total capital ratios at March 31, 2019 increased slightly compared to September 30, 2018 due to the impact of positive earnings during the current period, partially offset by growth of the bank loan portfolio.

Certain of our broker-dealer subsidiaries are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934. The following table presents the net capital position of RJ&A.

$ in millions
 
March 31, 2019
 
September 30, 2018
Raymond James & Associates, Inc.:
 
 
 
 
(Alternative Method elected)
 
 
 
 
Net capital as a percent of aggregate debit items
 
41.4
%
 
28.2
%
Net capital
 
$
1,099

 
$
934

Less: required net capital
 
(53
)
 
(66
)
Excess net capital
 
$
1,046

 
$
868


As of March 31, 2019, all of our other active regulated domestic and international subsidiaries were in compliance with and exceeded all applicable capital requirements.



49
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 19 – EARNINGS PER SHARE

The following table presents the computation of basic and diluted earnings per common share.
 
 
Three months ended March 31,
 
Six months ended March 31,
in millions, except per share amounts
 
2019
 
2018
 
2019
 
2018
Income for basic earnings per common share:
 
 
 
 
 
 
 
 
Net income attributable to RJF
 
$
261

 
$
243

 
$
510

 
$
362

Less allocation of earnings and dividends to participating securities
 
—

 
—

 
—

 
(1
)
Net income attributable to RJF common shareholders
 
$
261

 
$
243

 
$
510

 
$
361

Income for diluted earnings per common share:
 
 

 
 

 
 
 
 
Net income attributable to RJF
 
$
261

 
$
243

 
$
510

 
$
362

Less allocation of earnings and dividends to participating securities
 
—

 
—

 
—

 
(1
)
Net income attributable to RJF common shareholders
 
$
261

 
$
243

 
$
510

 
$
361

Common shares:
 
 

 
 

 
 
 
 
Average common shares in basic computation
 
140.8

 
145.4

 
142.5

 
144.9

Dilutive effect of outstanding stock options and certain RSUs
 
3.1

 
3.6

 
2.9

 
3.6

Average common shares used in diluted computation
 
143.9

 
149.0

 
145.4

 
148.5

Earnings per common share:
 
 

 
 

 
 
 
 
Basic
 
$
1.85

 
$
1.67

 
$
3.58

 
$
2.49

Diluted
 
$
1.81

 
$
1.63

 
$
3.51

 
$
2.43

Stock options and certain RSUs excluded from weighted-average diluted common shares because their effect would be antidilutive
 
0.5

 
0.3

 
1.6

 
1.2


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

Dividends per common share declared and paid are detailed in the following table for each respective period.
 
Three months ended March 31,
 
Six months ended March 31,
 
2019
 
2018
 
2019
 
2018
Dividends per common share - declared
$
0.34

 
$
0.25

 
$
0.68

 
$
0.50

Dividends per common share - paid
$
0.34

 
$
0.25

 
$
0.64

 
$
0.47



NOTE 20 – SEGMENT INFORMATION

We currently operate through the following five segments: 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 23 of our 2018 Form 10-K.


50
Notes to Condensed Consolidated Financial Statements (Unaudited)





The following tables present information concerning operations in these segments of business.
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Private Client Group
 
$
1,282

 
$
1,278

 
$
2,648

 
$
2,516

Capital Markets
 
285

 
236

 
546

 
459

Asset Management
 
162

 
163

 
336

 
314

RJ Bank
 
254

 
197

 
499

 
375

Other
 
19

 
21

 
40

 
37

Intersegment eliminations
 
(68
)
 
(38
)
 
(131
)
 
(78
)
Total revenues
 
$
1,934

 
$
1,857

 
$
3,938

 
$
3,623

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

 
$
158

 
$
296

 
$
313

Capital Markets
 
41

 
16

 
53

 
21

Asset Management
 
55

 
56

 
119

 
113

RJ Bank
 
136

 
118

 
246

 
232

Other
 
(17
)
 
(16
)
 
(35
)
 
(36
)
Pre-tax income excluding noncontrolling interests
 
347

 
332

 
679

 
643

Net loss attributable to noncontrolling interests
 
(12
)
 
—

 
(14
)
 
—

Income including noncontrolling interests and before provision for income taxes
 
$
335

 
$
332

 
$
665

 
$
643


No individual client accounted for more than ten percent of total revenues in any of the periods presented.
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
2019
 
2018
Net interest income/(expense):
 
 
 
 
 
 
 
 
Private Client Group
 
$
47

 
$
41

 
$
93

 
$
79

Capital Markets
 
1

 
2

 
3

 
3

Asset Management
 
1

 
1

 
2

 
1

RJ Bank
 
205

 
172

 
402

 
335

Other and intersegment eliminations
 
(5
)
 
(12
)
 
(8
)
 
(22
)
Net interest income
 
$
249

 
$
204

 
$
492

 
$
396


The following table presents our total assets on a segment basis.
$ in millions
 
March 31, 2019
 
September 30, 2018
Total assets:
 
 
 
 
Private Client Group
 
$
9,091

 
$
10,173

Capital Markets
 
2,453

 
2,279

Asset Management
 
425

 
387

RJ Bank
 
24,758

 
22,922

Other
 
1,449

 
1,652

Total
 
$
38,176

 
$
37,413


The following table presents goodwill, which was included in our total assets, on a segment basis.
$ in millions
 
March 31, 2019
 
September 30, 2018
Goodwill:
 
 
 
 
Private Client Group
 
$
275

 
$
276

Capital Markets
 
132

 
133

Asset Management
 
69

 
69

Total
 
$
476

 
$
478



51
Notes to Condensed Consolidated Financial Statements (Unaudited)





We have operations in the U.S., Canada and Europe. Substantially all long-lived assets are located in the U.S.  The following table presents our revenues and income before provision for income taxes and excluding noncontrolling interests, classified by major geographic area in which they were earned.
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
U.S.
 
$
1,793

 
$
1,710

 
$
3,650

 
$
3,344

Canada
 
100

 
110

 
211

 
209

Europe
 
41

 
37

 
77

 
70

Total
 
$
1,934

 
$
1,857

 
$
3,938

 
$
3,623

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

 
 
 
 
U.S.
 
$
334

 
$
317

 
$
664

 
$
622

Canada
 
7

 
14

 
23

 
23

Europe (1)
 
6

 
1

 
(8
)
 
(2
)
Total
 
$
347

 
$
332

 
$
679

 
$
643


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

The following table presents our total assets by major geographic area in which they were held.
$ in millions
 
March 31, 2019
 
September 30, 2018
Total assets:
 
 
 
 
U.S.
 
$
35,414

 
$
34,651

Canada
 
2,673

 
2,673

Europe
 
89

 
89

Total
 
$
38,176

 
$
37,413


The following table presents goodwill, which was included in our total assets, classified by major geographic area in which it was held.
$ in millions
 
March 31, 2019
 
September 30, 2018
Goodwill:
 
 
 
 
U.S.
 
$
426

 
$
426

Canada
 
41

 
43

Europe
 
9

 
9

Total
 
$
476

 
$
478



52

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

INDEX
 
 
PAGE
Factors affecting “forward-looking statements”
Introduction
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


53
Management's Discussion and Analysis


Factors affecting “forward-looking statements”

Certain statements made in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning future strategic objectives, business prospects, anticipated savings, financial results (including expenses, earnings, liquidity, cash flow and capital expenditures), industry or market conditions, demand for and pricing of our products, acquisitions and divestitures, anticipated results of litigation, changes in tax rules and our effective tax rate, 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.

Introduction

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

We operate as a financial holding company and bank holding company. Results in the businesses in which we operate are highly correlated to general economic conditions and, more specifically, to the direction of the U.S. equity and fixed income markets, 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 and asset valuations, which ultimately affect our business results.

Executive overview

Quarter ended March 31, 2019 compared with the quarter ended March 31, 2018

Net revenues were $1.86 billion for the quarter, an increase of $47 million, or 3%. Pre-tax income of $347 million increased $15 million, or 5%. Our net income of $261 million increased $18 million, or 7%, and our earnings per diluted share were $1.81, reflecting an 11% increase. We generated an annualized return on equity for the quarter of 16.7%, which was flat compared with the prior year quarter. During the quarter, we repurchased nearly 603,000 shares of common stock under our repurchase authorization by the Board of Directors (the “Board”) for $47 million at an average price of approximately $78 per share. As of March 31, 2019, we had $458 million of availability remaining under this authorization.

The $47 million increase in net revenues primarily reflected higher investment banking revenues and net interest income, partially offset by lower brokerage revenues. Total client assets under administration of $796.0 billion at March 31, 2019 increased $67 billion, or 9%, over the prior year quarter, reflecting the net addition of financial advisors and equity market appreciation since the prior year period.

Non-interest expenses increased $44 million, or 3%. The increase primarily resulted from increased compensation-related expenses associated with the increase in net revenues, as well as increased staffing levels required to support our continued growth and regulatory compliance requirements.

54
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 $1.27 billion, unchanged compared to the prior year quarter and pre-tax income was $132 million, a decrease of 16%.  Account and service fees increased due to increased fees related to our RJBDP, the majority of which related to an increase in the per-account servicing fee from RJ Bank. The segment also benefited from an increase in asset management and related administrative fees, primarily due to starting the quarter with higher assets in fee-based accounts compared to the balances at the beginning of the prior year quarter. These increases were offset by a decline in brokerage revenues. Non-interest expenses increased $25 million, or 2%, including an increase in compensation-related expenses.

•
The Capital Markets segment net revenues of $277 million increased 20%, and pre-tax income increased significantly to $41 million. The increase in net revenues was primarily due to an increase in investment banking revenues, driven by merger & acquisition fees. Non-interest expenses increased $32 million, or 15%, reflecting an increase in compensation-related expenses due to the increased investment banking revenues, as well as an increase in professional fees due to the gross-up of certain investment banking transaction-related expenses which were previously netted against revenues. Non-interest expenses in this segment were also impacted by losses related to a consolidated tax credit fund, nearly all of which were offset in noncontrolling interests.

•
Our Asset Management segment net revenues of $162 million and pre-tax income of $55 million were flat compared to the prior year quarter. Financial assets under management of $139 billion increased 5% over the prior year quarter primarily due to the acquisition of the Scout Group in November 2017.

•
RJ Bank net revenues increased 18% to $212 million, and pre-tax income increased 15% to $136 million. The increase in net revenues resulted from an increase in net interest income due to growth in interest-earning assets and an increase in net interest margin, which was helped by higher short-term interest rates. Non-interest expenses increased $15 million, or 25%, primarily due to an increase in the per-account RJBDP servicing fee paid to PCG effective October 1, 2018.

•
Our Other segment reflected a pre-tax loss that was comparable to the loss generated in the prior year quarter, as a decrease in private equity gains compared to the prior year quarter was offset by an increase in interest income, which was positively impacted by an increase in interest rates earned on higher corporate cash balances.

Six months ended March 31, 2019 compared with the six months ended March 31, 2018

Net revenues of $3.79 billion, increased $252 million, or 7%. Pre-tax income of $679 million increased $36 million, or 6%. Our net income of $510 million increased $148 million, or 41%, compared with the prior year period, which included a loss of $117 million related to the Tax Cuts and Jobs Act (“Tax Act”), and our earnings per diluted share were $3.51, reflecting a 44% increase. We achieved an annualized return on equity during the six months ended March 31, 2019 of 16.2%, compared with 12.6% for the prior year period. During the six months ended March 31, 2019, we repurchased 6.7 million shares of common stock under our Board repurchase authorization for $505 million at an average price of approximately $76 per share. As of March 31, 2019, we had $458 million of availability remaining under this authorization.

Excluding a $15 million loss on the sale of our operations related to research, sales and trading of European equities during the six months ended March 31, 2019, adjusted net income was $525 million (1), an increase of 9% compared with adjusted net income of $482 million (1) for the prior year period. Adjusted earnings per diluted share were $3.61 (1), an 11% increase compared with adjusted earnings per diluted share of $3.24 (1) for the prior year period. Our adjusted annualized return on equity for the six months ended March 31, 2019 was 16.7% (1), compared with adjusted annualized return on equity of 16.6% (1) for the prior year period.

The $252 million increase in net revenues compared with the prior year period reflected higher asset management and related administrative fees, net interest income and investment banking revenues. Partially offsetting these increases, brokerage revenues declined compared with the prior year period.






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

55
Management's Discussion and Analysis


Non-interest expenses increased $230 million, or 8%. The increase primarily resulted from increased compensation-related expenses associated with the increase in net revenues, as well as increased staffing levels required to support our continued growth and regulatory compliance requirements. Other expenses were also higher, reflecting losses related to a consolidated tax credit fund, which were substantially offset in noncontrolling interests, as well as increased legal reserve expenses. Our acquisition and disposition-related expenses in the current year period included the aforementioned $15 million loss on the sale of our operations related to research, sales and trading of European equities.

Our effective income tax rate was 25.4% for the six months ended March 31, 2019, reflecting a lower federal corporate statutory tax rate of 21% as result of the Tax Act enacted in December 2017. We estimate our effective income tax rate to be approximately 25-26% for our fiscal year 2019. Our future effective income tax rate may be impacted positively or negatively by non-taxable items (such as the gains or losses earned on our company-owned life insurance and tax-exempt interest), non-deductible expenses (such as meals and entertainment and certain executive compensation) and vesting and exercises of equity compensation.

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 $2.63 billion, a 5% increase, while pre-tax income of $296 million decreased 5%. The increase in net revenues was primarily attributable to an increase in asset management and related administrative fees, primarily due to higher assets in fee-based accounts compared with the prior year period. The segment also benefited from an increase in account and service fees related to our RJBDP, the majority of which related to an increase in the per-account servicing fee from RJ Bank. These increases were partially offset by a decline in brokerage revenues. Non-interest expenses increased $139 million, or 6%, primarily resulting from an increase in compensation-related expenses.

•
Capital Markets net revenues of $530 million increased 19%, and pre-tax income increased significantly to $53 million. The increase in net revenues was primarily due to an increase in investment banking revenues, largely due to merger & acquisition activity. Both equity and fixed income brokerage revenues declined compared with the prior year period. Non-interest expenses increased $62 million, or 14%, primarily due to the aforementioned $15 million loss on the sale of our operations related to research, sales and trading of European equities, an increase in compensation-related expenses and an increase in professional fees due to the gross-up of certain investment banking transaction-related expenses, which were previously netted against revenues.

•
Our Asset Management segment generated a 7% increase in net revenues to $336 million, and a pre-tax income increase of 5% to $119 million. The increase in net revenues reflected increases in asset management fees from managed programs, due to the current period including a full period of results for the Scout Group which was acquired in November 2017, and higher asset based administration fees. Non-interest expenses increased $19 million, or 10%, primarily resulting from increased expenses related to the addition of the Scout Group.

•
RJ Bank net revenues increased 21% to $415 million, and pre-tax income increased 6% to $246 million. The increase in net revenues primarily resulted from an increase in net interest income due to growth in interest-earning assets and an increase in net interest margin, lifted by higher short-term interest rates. Non-interest expenses increased $57 million, or 51%, primarily reflecting an increase in RJBDP servicing fees paid to PCG largely due to an increase in the per-account fee effective October 1, 2018, as well as an increase in the loan loss provision related to certain credit downgrades in the current year period.

•
Our Other segment reflected a pre-tax loss that was flat compared to the prior year period, as lower gains on private equity investments were offset by an increase in interest income.


56
Management's Discussion and Analysis


Segments

We currently operate through five segments. Our business segments are Private Client Group, Capital Markets, Asset Management and RJ Bank. Our Other segment captures private equity activities as well as certain corporate overhead costs of RJF that are not allocated to business segments, including the interest costs on our public debt.

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 March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
% change
 
2019
 
2018
 
% change
Total company
 
 
 
 
 
 
 
 
 
 
 
 
Net revenues
 
$
1,859

 
$
1,812

 
3
 %
 
$
3,790

 
$
3,538

 
7
 %
Pre-tax income
 
$
347

 
$
332

 
5
 %
 
$
679

 
$
643

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Private Client Group
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
1,271

 
$
1,272

 
—

 
$
2,627

 
$
2,505

 
5
 %
Pre-tax income
 
$
132

 
$
158

 
(16
)%
 
$
296

 
$
313

 
(5
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Markets
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
277

 
$
230

 
20
 %
 
$
530

 
$
447

 
19
 %
Pre-tax income
 
$
41

 
$
16

 
156
 %
 
$
53

 
$
21

 
152
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Management
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
162

 
$
163

 
(1
)%
 
$
336

 
$
314

 
7
 %
Pre-tax income
 
$
55

 
$
56

 
(2
)%
 
$
119

 
$
113

 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
RJ Bank
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
212

 
$
179

 
18
 %
 
$
415

 
$
344

 
21
 %
Pre-tax income
 
$
136

 
$
118

 
15
 %
 
$
246

 
$
232

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
—

 
$
2

 
(100
)%
 
$
2

 
$
(1
)
 
NM

Pre-tax loss
 
$
(17
)
 
$
(16
)
 
(6
)%
 
$
(35
)
 
$
(36
)
 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Intersegment eliminations
 
 

 
 

 
 
 
 
 
 
 
 
Net revenues
 
$
(63
)
 
$
(34
)
 

 
$
(120
)
 
$
(71
)
 




57
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. In the following table, the tax effect of non-GAAP adjustments reflects the statutory tax rate associated with each non-GAAP item. 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. There were no non-GAAP adjustments for the three months ended March 31, 2019 and 2018.
 
 
Six months ended
March 31,
$ in millions, except per share amounts
 
2019
 
2018
Net income
 
$
510

 
$
362

Non-GAAP adjustments:
 
 
 
 
Acquisition and disposition-related expenses
 
15

 
4

Tax effect of non-GAAP adjustments above
 
—

 
(1
)
Impact of the Tax Act
 
—

 
117

Total non-GAAP adjustments, net of tax
 
15

 
120

Adjusted net income
 
$
525

 
$
482

 
 
 
 
 
Earnings per common share:
 
 
 
 
Basic
 
$
3.58

 
$
2.49

Diluted
 
$
3.51

 
$
2.43

Adjusted basic
 
$
3.68

 
$
3.32

Adjusted diluted
 
$
3.61

 
$
3.24

 
 
 
 
 
Average equity
 
$
6,292

 
$
5,740

Return on equity
 
16.2
%
 
12.6
%
Adjusted average equity
 
$
6,302

 
$
5,820

Adjusted return on equity
 
16.7
%
 
16.6
%

Net income in the preceding table excludes noncontrolling interests.

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

Average equity for the 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 three. Adjusted average equity is computed by adjusting for the impact on average equity of the non-GAAP adjustments, as applicable for each respective period.

For more information on acquisition and disposition-related expenses for the six months ended March 31, 2019, see “Results of Operations - Capital Markets” in this MD&A. For more information on the impact of the Tax Act, see Note 16 of our 2018 Form 10-K.


58
Management's Discussion and Analysis


Net interest analysis

The Federal Reserve Bank announced an increase of 25 basis points in its benchmark short-term interest rate in December 2018, as it did in each of the quarters in fiscal year 2018 and three of the quarters in fiscal year 2017. 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, including deposit rates paid to clients on their cash balances. Conversely, any decreases in short-term interest rates and/or increases in the deposit rates paid to clients would likely have a negative impact on our earnings. Effective May 6, 2019, we modified our methodology for crediting interest on client cash balances, changing the basis from total relationship assets at the firm to total relationship cash balances at the firm. Accordingly, although the crediting schedule was revised upward on that date, we do not anticipate a corresponding increase in cost to the firm.

Refer to the discussion of the specific components of our net interest income within the “Management’s Discussion and Analysis of Financial Condition - Results of Operations” of our PCG, RJ Bank, and Other segments.


59
Management's Discussion and Analysis


Quarter ended March 31, 2019 compared with the quarter ended March 31, 2018

The following table presents our consolidated average balances, interest income and expense and the related yields and rates. Average balances are calculated on a daily basis, with the exception of Loans to financial advisors, net and Corporate cash and all other, which are calculated based on the average of the end-of-month balances for each month within the period.
 
 
Three months ended March 31,
 
 
2019
 
2018
$ in millions
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/cost
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/cost
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash segregated pursuant to regulations
 
$
2,104

 
$
15

 
2.85
%
 
$
2,930

 
$
14

 
1.90
%
Trading instruments
 
687

 
6

 
3.49
%
 
656

 
5

 
3.05
%
Available-for-sale securities
 
2,876

 
17

 
2.43
%
 
2,482

 
12

 
2.01
%
Margin loans
 
2,598

 
31

 
4.77
%
 
2,515

 
25

 
3.96
%
Bank loans, net:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
8,160

 
97

 
4.76
%
 
7,553

 
79

 
4.14
%
CRE construction loans
 
197

 
3

 
5.70
%
 
177

 
2

 
5.00
%
CRE loans
 
3,379

 
40

 
4.73
%
 
3,186

 
32

 
4.05
%
Tax-exempt loans
 
1,280

 
8

 
2.50
%
 
1,148

 
7

 
2.56
%
Residential mortgage loans
 
3,979

 
34

 
3.33
%
 
3,329

 
26

 
3.09
%
SBL and other
 
3,066

 
37

 
4.71
%
 
2,573

 
26

 
3.96
%
Loans held for sale
 
144

 
1

 
4.26
%
 
145

 
1

 
3.75
%
Total bank loans, net
 
20,205

 
220

 
4.38
%
 
18,111

 
173

 
3.86
%
Loans to financial advisors, net
 
897

 
5

 
2.23
%
 
864

 
3

 
1.39
%
Corporate cash and all other
 
4,864

 
30

 
2.47
%
 
3,773

 
17

 
1.80
%
Total interest-earning assets
 
$
34,231


$
324

 
3.79
%
 
$
31,331


$
249

 
3.18
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 

 
 

 
 

 
 

 
 

Bank deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
560

 
$
3

 
2.26
%
 
$
346

 
$
2

 
1.58
%
Savings, money market and NOW accounts
 
20,751

 
34

 
0.66
%
 
18,340

 
10

 
0.24
%
Trading instruments sold but not yet purchased
 
286

 
2

 
2.80
%
 
268

 
1

 
1.49
%
Brokerage client payables
 
3,617

 
5

 
0.55
%
 
4,434

 
3

 
0.29
%
Other borrowings
 
991

 
5

 
2.02
%
 
985

 
5

 
2.20
%
Senior notes payable
 
1,550

 
18

 
4.65
%
 
1,549

 
18

 
4.69
%
Other
 
758

 
8

 
4.22
%
 
572

 
6

 
4.20
%
Total interest-bearing liabilities
 
$
28,513

 
$
75

 
1.05
%
 
$
26,494

 
$
45

 
0.68
%
Net interest income
 
 
 
$
249

 
 
 
 
 
$
204

 
 

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

Fee income on bank loans included in interest income was $6 million for both the three months ended March 31, 2019 and 2018.


60
Management's Discussion and Analysis


Six months ended March 31, 2019 compared with the six months ended March 31, 2018

The following table presents our consolidated average balances, interest income and expense and the related yields and rates. Average balances are calculated on a daily basis, with the exception of Loans to financial advisors, net and Corporate cash and all other, which are calculated based on the average of the end-of-month balances for each month within the period.
 
 
Six months ended March 31,
 
 
2019
 
2018
$ in millions
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/cost
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/cost
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash segregated pursuant to regulations
 
$
1,982

 
$
29

 
2.93
%
 
$
2,908

 
$
26

 
1.79
%
Trading instruments
 
705

 
13

 
3.69
%
 
672

 
10

 
2.98
%
Available-for-sale securities
 
2,796

 
33

 
2.38
%
 
2,378

 
23

 
1.95
%
Margin loans
 
2,665

 
63

 
4.73
%
 
2,500

 
49

 
3.92
%
Bank loans:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
7,959

 
188

 
4.67
%
 
7,483

 
152

 
4.02
%
CRE construction loans
 
184

 
5

 
5.66
%
 
158

 
4

 
4.91
%
CRE loans
 
3,469

 
81

 
4.64
%
 
3,111

 
61

 
3.88
%
Tax-exempt loans
 
1,282

 
17

 
2.65
%
 
1,093

 
14

 
2.57
%
Residential mortgage loans
 
3,934

 
66

 
3.32
%
 
3,287

 
51

 
3.08
%
SBL and other
 
3,085

 
73

 
4.65
%
 
2,521

 
49

 
3.82
%
Loans held for sale
 
165

 
4

 
4.90
%
 
130

 
2

 
3.62
%
Total bank loans, net
 
20,078

 
434

 
4.32
%
 
17,783

 
333

 
3.76
%
Loans to financial advisors, net
 
905

 
9

 
1.99
%
 
862

 
7

 
1.62
%
Corporate cash and all other
 
4,957

 
59

 
2.38
%
 
4,114

 
33

 
1.60
%
Total interest-earning assets
 
$
34,088

 
$
640

 
3.75
%
 
$
31,217

 
$
481

 
3.08
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Bank deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
510

 
$
5

 
2.13
%
 
$
335

 
$
3

 
1.57
%
Savings, money market and NOW accounts
 
20,612

 
67

 
0.65
%
 
18,077

 
17

 
0.19
%
Trading instruments sold but not yet purchased
 
292

 
4

 
2.74
%
 
275

 
3

 
2.18
%
Brokerage client payables
 
3,603

 
11

 
0.61
%
 
4,444

 
6

 
0.26
%
Other borrowings
 
964

 
11

 
2.28
%
 
1,008

 
11

 
2.24
%
Senior notes payable
 
1,550

 
36

 
4.65
%
 
1,549

 
36

 
4.69
%
Other
 
752

 
14

 
3.72
%
 
606

 
9

 
2.97
%
Total interest-bearing liabilities
 
$
28,283

 
$
148

 
1.05
%
 
$
26,294

 
$
85

 
0.65
%
Net interest income
 
 

 
$
492

 
 

 
 

 
$
396

 
 


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

Fee income on bank loans included in interest income for the six months ended March 31, 2019 and 2018 was $11 million and $13 million, respectively.


61
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 2018 Form 10-K.

Operating results
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
% change
 
2019
 
2018
 
% change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Asset management and related administrative fees
 
$
638

 
$
616

 
4
 %
 
$
1,345

 
$
1,207

 
11
 %
Brokerage revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual and other fund products
 
145

 
188

 
(23
)%
 
302

 
363

 
(17
)%
Insurance and annuity products
 
99

 
100

 
(1
)%
 
203

 
211

 
(4
)%
Equities, ETFs, and fixed income products
 
94

 
116

 
(19
)%
 
197

 
226

 
(13
)%
Total brokerage revenues
 
338

 
404

 
(16
)%
 
702

 
800

 
(12
)%
Investment banking
 
8

 
9

 
(11
)%
 
15

 
16

 
(6
)%
Interest income
 
58

 
47

 
23
 %
 
114

 
90

 
27
 %
Account and service fees:
 
 
 
 
 


 
 
 
 
 


Mutual fund and annuity service fees
 
82

 
80

 
3
 %
 
165

 
161

 
2
 %
RJBDP fees:
 
 
 
 
 
 
 
 
 
 
 
 
Third-party banks
 
80

 
67

 
19
 %
 
148

 
128

 
16
 %
RJ Bank
 
42

 
22

 
91
 %
 
83

 
43

 
93
 %
Client account and other fees
 
27

 
26

 
4
 %
 
60

 
55

 
9
 %
Total account and service fees
 
231

 
195

 
18
 %
 
456

 
387

 
18
 %
All other
 
9

 
7

 
29
 %
 
16

 
16

 
—

Total revenues
 
1,282


1,278


—


2,648


2,516


5
 %
Interest expense
 
(11
)
 
(6
)
 
83
 %
 
(21
)
 
(11
)
 
91
 %
Net revenues
 
1,271

 
1,272

 
—

 
2,627

 
2,505

 
5
 %
Non-interest expenses:
 
 

 
 

 


 
 

 
 

 


Financial advisor compensation and benefit costs
 
750

 
763

 
(2
)%
 
1,553

 
1,499

 
4
 %
Administrative compensation and benefit costs
 
234

 
210

 
11
 %
 
463

 
409

 
13
 %
Communications and information processing
 
59

 
60

 
(2
)%
 
117

 
109

 
7
 %
Occupancy and equipment costs
 
41

 
38

 
8
 %
 
79

 
76

 
4
 %
Business development
 
26

 
23

 
13
 %
 
53

 
45

 
18
 %
Professional fees
 
7

 
10

 
(30
)%
 
16

 
17

 
(6
)%
All other
 
22

 
10

 
120
 %
 
50

 
37

 
35
 %
Total non-interest expenses
 
1,139

 
1,114

 
2
 %
 
2,331

 
2,192

 
6
 %
Pre-tax income
 
$
132

 
$
158

 
(16
)%
 
$
296

 
$
313

 
(5
)%
Pre-tax margin on net revenues
 
10.4
%
 
12.4
%
 
 
 
11.3
%
 
12.5
%
 
 


62
Management's Discussion and Analysis


Selected key metrics

PCG client asset balances:
 
 
As of
$ in billions
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
March 31,
2018
 
December 31,
2017
 
September 30,
2017
Assets under administration (“AUA”)
 
$
760.0

 
$
690.7

 
$
755.7

 
$
694.8

 
$
692.1

 
$
659.5

Assets in fee-based accounts (1)
 
$
378.4

 
$
338.8

 
$
366.3

 
$
325.1

 
$
316.7

 
$
294.5

Percent of AUA in fee-based accounts
 
49.8
%
 
49.1
%
 
48.5
%
 
46.8
%
 
45.8
%
 
44.7
%

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

PCG assets under administration increased due to the net addition of financial advisors, attributable to continued recruiting and retention. PCG assets in fee-based accounts continued to increase as a percentage of overall PCG assets under administration, due in part to clients moving to fee-based alternatives from traditional transaction-based accounts. As a result of the shift to fee-based accounts, a large portion of our PCG revenues are more directly impacted by market movements. As fees for substantially all of our fee-based accounts are billed based on balances at the beginning of the quarter, revenues from fee-based accounts may not be immediately impacted by changes in asset values, but rather the impacts are seen in the following quarter.

Financial advisors:
 
March 31,
2019
 
December 31,
2018
 
September 30, 2018
 
March 31,
2018
Employees
3,192

 
3,166

 
3,167

 
3,053

Independent Contractors
4,670

 
4,649

 
4,646

 
4,551

Total advisors
7,862

 
7,815

 
7,813

 
7,604


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

Clients’ domestic cash sweep balances:
 
 
As of
$ in millions
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
March 31,
2018
RJBDP
 
 
 
 
 
 
 
 
RJ Bank
 
$
21,023

 
$
21,138

 
$
19,446

 
$
18,305

Third-party banks
 
14,343

 
18,320

 
15,564

 
19,696

Subtotal RJBDP
 
35,366

 
39,458

 
35,010

 
38,001

Money market funds
 
4,001

 
4,436

 
3,240

 
2,004

Client Interest Program (“CIP”)
 
2,349

 
2,935

 
2,807

 
3,367

Total clients’ domestic cash sweep balances
 
$
41,716

 
$
46,829


$
41,057

 
$
43,372


Following a significant increase at December 31, 2018, clients’ domestic cash sweep balances decreased significantly during the quarter ended March 31, 2019 as clients increased their allocations to other investments, largely driven by the improvement of equity market conditions and also due to tax-related seasonal factors.

A significant portion of our clients’ cash is included in our 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. We earn servicing fees for the administrative services we provide related to our clients’ deposits that are swept to such banks as part of the RJBDP. The amounts received from third-party banks are variable in nature and fluctuate based on client cash balances in the program, as well as the level of short-term interest rates relative to interest paid to clients on balances in the RJBDP. The PCG segment also earns RJBDP servicing fees from RJ Bank, which are based on the number of accounts that are swept to RJ Bank. These fees are eliminated in consolidation. On October1, 2018, the per-account servicing fee from RJ Bank was increased to reflect the current cost of administration.


63
Management's Discussion and Analysis


While short-term interest rates have risen due to rate increases by the Fed in recent periods, market deposit rates paid on client cash balances have not been impacted to as great a degree, resulting in an increase in RJBDP fees earned from third-party banks. However, we expect market deposit rates paid to continue to rise with any future increases in short-term interest rates. As such, any future increases in short-term interest rates may have a less positive impact on fees earned from the RJBDP depending on the level of deposit rates paid on client cash balances. Conversely, any decreases in short-term interest rates, increases in deposit rates paid to clients, and/or a significant decline in our clients’ cash balances would likely have a negative impact on our earnings. Further, PCG segment results are impacted by changes in the allocation of client cash balances in RJBDP between RJ Bank and third-party banks.

Quarter ended March 31, 2019 compared with the quarter ended March 31, 2018

Net revenues of $1.27 billion were flat compared with the prior year period, while pre-tax income of $132 million decreased $26 million, or 16%.

Asset management and related administrative fees increased $22 million, or 4%, primarily due to starting the quarter with higher assets in fee-based accounts compared with the balances at the beginning of the prior year period, reflecting successful financial advisor recruiting and retention, as well as equity market appreciation. As substantially all assets in fee-based accounts are billed based on balances at the beginning of the quarter, the 12% increase in fee-based accounts as of March 31, 2019 compared with December 31, 2018 will positively impact asset management and related administrative fees in our third fiscal quarter of 2019.

Brokerage revenues declined $66 million, or 16%, reflecting lower revenues related to mutual funds, due in part to a continued shift to fee-based accounts.

Total account and service fees increased $36 million, or 18%, primarily due to higher RJBDP servicing fees from RJ Bank due to an increase in the per-account fee and, to a lesser extent, an increase in the number of accounts. RJBDP fees from third-party banks also increased, driven by higher short-term interest rates.

Net interest income increased $6 million, or 15%, driven by an increase in interest income from client margin loans due to the increase in short-term interest rates and, to a lesser extent, higher average balances. Offsetting the increase in interest income, interest expense also increased due to the impact of higher interest rates paid on client cash balances in CIP.

Non-interest expenses increased $25 million, or 2%, including an increase in compensation-related expenses due to increased staffing levels to support our continued growth and regulatory compliance requirements, partially offset by lower financial advisor compensation related to the decrease in brokerage revenues.

Six months ended March 31, 2019 compared with the six months ended March 31, 2018

Net revenues of $2.63 billion increased $122 million, or 5%, and pre-tax income of $296 million decreased $17 million, or 5%.

Asset management and related administrative fees increased $138 million, or 11%, primarily due to higher assets in fee-based accounts compared with the prior year period, reflecting successful financial advisor recruiting and retention as well as equity market appreciation.

Brokerage revenues declined $98 million, or 12%, primarily as a result of the decline in mutual fund trails, which were negatively impacted by the decline in the equity markets during the first fiscal quarter of 2019 and the continued shift to fee-based accounts.

Total account and service fees increased $69 million, or 18%, primarily due to higher RJBDP servicing fees from RJ Bank due to an increase in the per-account fee and, to a lesser extent, an increase in the number of accounts. RJBDP fees from third-party banks also increased, driven by higher short-term interest rates.

Net interest income increased $14 million, or 18%, driven by an increase in interest income from client margin loans due to the increase in short-term interest rates and, to a lesser extent, higher average balances. Offsetting the increase in interest income, interest expense also increased due to the impact of higher interest rates paid on client cash balances in CIP.

Non-interest expenses increased $139 million, or 6%, primarily due to an increase in compensation-related expenses due to higher net revenues as well as increased staffing levels to support our continued growth and regulatory compliance requirements. Higher legal reserve expense compared to the prior year period also contributed to the increase.


64
Management's Discussion and Analysis


Results of Operations – Capital Markets

For an overview of our Capital Markets segment operations, as well as a description of the key factors impacting our Capital Markets results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2018 Form 10-K.

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

 
 

 
 
 
 
 
 
 
 
Equity
 
$
32

 
$
39

 
(18
)%
 
$
74

 
$
82

 
(10
)%
Fixed income
 
71

 
63

 
13
 %
 
128

 
137

 
(7
)%
Total brokerage revenues
 
103

 
102

 
1
 %
 
202

 
219

 
(8
)%
Investment banking:
 
 
 
 
 
 
 
 
 
 
 
 
Equity underwriting
 
18

 
19

 
(5
)%
 
45

 
36

 
25
 %
Merger & acquisition and advisory
 
118

 
72

 
64
 %
 
201

 
115

 
75
 %
Fixed income investment banking
 
20

 
16

 
25
 %
 
39

 
37

 
5
 %
Total investment banking
 
156

 
107

 
46
 %
 
285

 
188

 
52
 %
Interest income
 
9

 
8

 
13
 %
 
19

 
15

 
27
 %
Tax credit fund revenues
 
14

 
14

 
—

 
33

 
28

 
18
 %
All other
 
3

 
5

 
(40
)%
 
7

 
9

 
(22
)%
Total revenues
 
285

 
236

 
21
 %
 
546

 
459

 
19
 %
Interest expense
 
(8
)
 
(6
)
 
33
 %
 
(16
)
 
(12
)
 
33
 %
Net revenues
 
277

 
230

 
20
 %
 
530

 
447

 
19
 %
Non-interest expenses:
 
 

 
 

 


 
 
 
 
 


Compensation, commissions and benefits
 
168

 
154

 
9
 %
 
326

 
310

 
5
 %
Communications and information processing
 
19

 
19

 
—

 
38

 
37

 
3
 %
Occupancy and equipment costs
 
9

 
9

 
—

 
18

 
17

 
6
 %
Business development
 
13

 
12

 
8
 %
 
25

 
22

 
14
 %
Professional fees
 
10

 
3

 
233
 %
 
20

 
5

 
300
 %
Acquisition and disposition-related expenses
 
—

 
—

 
—

 
15

 
—

 
NM

All other
 
29

 
19

 
53
 %
 
51

 
40

 
28
 %
Total non-interest expenses
 
248

 
216

 
15
 %
 
493

 
431

 
14
 %
Income before taxes and including noncontrolling interests
 
29

 
14

 
107
 %
 
37

 
16

 
131
 %
Noncontrolling interests
 
(12
)
 
(2
)
 
(500
)%
 
(16
)
 
(5
)
 
(220
)%
Pre-tax income excluding noncontrolling interests
 
$
41

 
$
16

 
156
 %
 
$
53

 
$
21

 
152
 %
Pre-tax margin on net revenues
 
14.8
%
 
7.0
%
 
 
 
10.0
%
 
4.7
%
 
 

Quarter ended March 31, 2019 compared with the quarter ended March 31, 2018

Net revenues of $277 million increased $47 million, or 20%, and pre-tax income of $41 million increased $25 million, or 156%.

Total brokerage revenues were essentially unchanged as an increase in fixed income brokerage revenues was offset by a decline in equity brokerage revenues. Fixed income brokerage revenues improved due to an increase in interest rate volatility and a related increase in client activity during the quarter. Equity brokerage revenues reflected the impact of lower client activity during the quarter and continue to be negatively affected by market-driven challenges, such as the industry trend toward the separate payment for research and execution services and the shift from high to low-touch execution services.

Investment banking revenues increased $49 million, or 46%, primarily due to increased merger & acquisition and advisory activity, as well as higher average fees for such transactions. Offsetting the increase, equity underwriting revenues were challenged by an industry-wide decline in public offerings during the current year quarter, partially due to the U.S. government shutdown and related market uncertainty toward the beginning of the quarter.

65
Management's Discussion and Analysis


Non-interest expenses increased $32 million, or 15%, reflecting increases in compensation-related expenses, professional fees and other expenses. Compensation-related expenses increased as a result of increased investment banking revenues. Professional fees increased largely due to new accounting guidance we adopted effective October 1, 2018, which changed the presentation of certain costs related to investment banking transactions from a net presentation to a gross presentation. The current year quarter included this change, with approximately $6 million of transaction-related expenses included in professional fees. See Notes 2 and 15 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information on the adoption of this new accounting guidance. Other expense for the quarter included losses related to a consolidated tax credit fund, nearly all of which were offset in noncontrolling interests.

Six months ended March 31, 2019 compared with the six months ended March 31, 2018

Net revenues of $530 million increased $83 million, or 19%, and pre-tax income of $53 million increased $32 million, or 152%.

Total brokerage revenues decreased $17 million, or 8%, with declines in both fixed income and equity brokerage revenues. The decline in fixed income brokerage revenues was primarily due to decreased activity related to a program in which our fixed income public finance operations commit to purchase various agency MBS backed by mortgages originated by state and local housing finance agencies through their lending programs. Equity brokerage revenues continue to be challenged due to the industry trend toward the separate payment for research and execution services and the shift from high to low-touch execution services.

Investment banking revenues increased $97 million, or 52%, led by increased merger & acquisition and advisory activity.

Non-interest expenses increased $62 million, or 14%, compared with the prior year period. The current year period was negatively impacted by a $15 million loss associated with the sale of our operations related to research, sales and trading of European equities. Compensation-related expenses increased primarily attributable to the increase in investment banking revenues. Professional fees increased $15 million, largely due to aforementioned new accounting guidance we adopted effective October 1, 2018. The current year period includes approximately $12 million of these transaction-related expenses included in “Professional fees.” Other expenses increased $11 million, primarily due to losses related to a consolidated tax credit fund, nearly all of which were offset in noncontrolling interests.


66
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 2018 Form 10-K.

Operating results
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
% change
 
2019
 
2018
 
% change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Asset management and related administrative fees:
 
 
 
 
 
 
 
 
 
 
 
 
Managed programs
 
$
109

 
$
114

 
(4
)%
 
$
226

 
$
218

 
4
 %
Administration and other
 
40

 
38

 
5
 %
 
84

 
75

 
12
 %
Total asset management and related administrative fees
 
149

 
152

 
(2
)%
 
310

 
293

 
6
 %
Account and service fees
 
10

 
6

 
67
 %
 
19

 
13

 
46
 %
All other
 
3

 
5

 
(40
)%
 
7

 
8

 
(13
)%
Net revenues
 
162

 
163

 
(1
)%
 
336

 
314

 
7
 %
Non-interest expenses:
 
 

 
 

 


 
 

 
 

 


Compensation and benefits
 
45

 
45

 
—

 
88

 
82

 
7
 %
Communications and information processing
 
10

 
11

 
(9
)%
 
21

 
19

 
11
 %
Investment sub-advisory fees
 
21

 
22

 
(5
)%
 
45

 
44

 
2
 %
All other
 
31

 
27

 
15
 %
 
61

 
51

 
20
 %
Total non-interest expenses
 
107

 
105

 
2
 %
 
215

 
196

 
10
 %
Income before taxes and including noncontrolling interests
 
55

 
58

 
(5
)%
 
121

 
118

 
3
 %
Noncontrolling interests
 
—

 
2

 
(100
)%
 
2

 
5

 
(60
)%
Pre-tax income excluding noncontrolling interests
 
$
55

 
$
56

 
(2
)%
 
$
119

 
$
113

 
5
 %
Pre-tax margin on net revenues
 
34.0
%
 
34.4
%
 
 
 
35.4
%
 
36.0
%
 
 

Selected key metrics

Managed programs - Our asset management fees related to managed programs recorded in this segment were earned based on balances of financial assets under management either at the beginning of the quarter, end of the quarter or average assets throughout the quarter. For the three and six months ended March 31, 2019, approximately 60% of these fees were determined based on asset balances at the beginning of the quarter, approximately 15% were based on asset balances at the end of the quarter and the remaining 25% were based on average balances throughout the quarter.

Financial assets under management:
$ in millions
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
March 31,
2018
 
December 31,
2017
 
September 30,
2017
Asset management services division of RJ&A (“AMS”) (1)
 
$
84,906

 
$
76,235

 
$
83,289

 
$
76,091

 
$
74,607

 
$
69,962

Carillon Tower Advisers and affiliates (“Carillon Tower”)
 
59,852

 
55,925

 
63,330

 
61,751

 
61,245

 
31,831

Subtotal financial assets under management
 
144,758

 
132,160

 
146,619

 
137,842

 
135,852

 
101,793

Less: Assets managed for affiliated entities
 
(6,220
)
 
(5,653
)
 
(5,702
)
 
(5,538
)
 
(5,542
)
 
(5,397
)
Total financial assets under management
 
$
138,538

 
$
126,507

 
$
140,917

 
$
132,304

 
$
130,310

 
$
96,396


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

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


67
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
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
March 31,
2018
 
December 31,
2017
Equity
 
$
60,642

 
$
53,558

 
$
64,742

 
$
58,983

 
$
57,971

Fixed
 
33,129

 
32,661

 
32,435

 
33,633

 
33,806

Balanced
 
50,987

 
45,941

 
49,442

 
45,226

 
44,075

Total financial assets under management
 
$
144,758

 
$
132,160

 
$
146,619

 
$
137,842

 
$
135,852


Activity (including activity in assets managed for affiliated entities):
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
2019
 
2018
Financial assets under management at beginning of period
 
$
132,160

 
$
135,852

 
$
146,619

 
$
101,793

Carillon Tower:
 
 
 
 
 
 
 
 
Scout Group acquisition
 
—

 
—

 
—

 
27,087

Other - net inflows/(outflows)
 
(1,094
)
 
686

 
(2,674
)
 
1,406

AMS - net inflows
 
1,869

 
2,757

 
2,387

 
4,935

Net market appreciation/(depreciation) in asset values
 
11,823

 
(1,453
)
 
(1,574
)
 
2,621

Financial assets under management at end of period
 
$
144,758

 
$
137,842

 
$
144,758

 
$
137,842


Non-discretionary asset-based programs - Assets held in certain non-discretionary asset-based programs for which the Asset Management segment does not exercise discretion but provides administrative support (including for affiliated entities) totaled $207.0 billion, $184.3 billion, $200.1 billion, and $175.5 billion as of March 31, 2019, December 31, 2018, September 30, 2018, and March 31, 2018, respectively. The increase in assets over the prior year level was primarily due to clients moving to fee-based accounts from traditional transaction-based accounts. The increase in assets over December 31, 2018 was driven by the equity market appreciation during the quarter. Administrative fees associated with these programs are predominantly determined based on balances at the beginning of the quarter.

RJ Trust - Assets held in asset-based programs in RJ Trust (including those managed for affiliated entities) totaled $6.2 billion, $5.7 billion, $6.1 billion, and $5.6 billion as of March 31, 2019, December 31, 2018, September 30, 2018, and March 31, 2018, respectively.

Quarter ended March 31, 2019 compared with the quarter ended March 31, 2018

Net revenues of $162 million and pre-tax income of $55 million were flat compared to the prior year quarter.

Total asset management and related administrative fee revenues decreased $3 million, or 2%, due to a decrease in net revenues from managed programs. Although financial assets under management at quarter end increased compared to the prior year quarter end, revenues decreased as assets in managed programs are predominantly billed based on balances at the beginning of the quarter, which were lower than at the same point in the prior year period. As a large portion of our financial assets under management are billed based on balances at the beginning of the quarter, the increase in financial assets under management compared with December 31, 2018 will positively impact asset management fees in our third fiscal quarter of 2019. Administrative fees increased over the prior year quarter due to the aforementioned increase in assets held in non-discretionary asset-based programs.

Non-interest expenses increased slightly from the prior year period.

Six months ended March 31, 2019 compared with the six months ended March 31, 2018

Net revenues of $336 million increased $22 million, or 7%, and pre-tax income of $119 million increased $6 million, or 5%.

Total asset management and related administrative fee revenues increased $17 million, or 6%, driven by an increase in net revenues from both managed programs and administrative fees. Managed programs increased due to the current year period including a full period of results for the Scout Group, which was acquired in November 2017. Administrative fees increased over the prior year period due to the aforementioned increase in assets held in non-discretionary asset-based programs.


68
Management's Discussion and Analysis


Non-interest expenses increased $19 million, or 10%, primarily the result of an increase in compensation and benefits expense and other expenses. Compensation and benefits expense increased primarily due to the Scout Group acquisition in November 2017, 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 platform fees related to the new funds offered and the amortization of certain intangible assets arising from the acquisition.

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 2018 Form 10-K.

Operating results
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
% change
 
2019
 
2018
 
% change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
247

 
$
190

 
30
 %
 
$
486

 
$
366

 
33
%
Interest expense
 
(42
)
 
(18
)
 
133
 %
 
(84
)
 
(31
)
 
171
%
Net interest income
 
205

 
172

 
19
 %
 
402

 
335

 
20
%
All other
 
7

 
7

 
—

 
13

 
9

 
44
%
Net revenues
 
212

 
179

 
18
 %
 
415

 
344

 
21
%
Non-interest expenses:
 
 

 
 

 


 
 

 
 

 


Compensation and benefits
 
12

 
10

 
20
 %
 
23

 
19

 
21
%
Loan loss provision
 
5

 
8

 
(38
)%
 
21

 
9

 
133
%
RJBDP fees to PCG
 
42

 
22

 
91
 %
 
83

 
43

 
93
%
All other
 
17

 
21

 
(19
)%
 
42

 
41

 
2
%
Total non-interest expenses
 
76

 
61

 
25
 %
 
169

 
112

 
51
%
Pre-tax income
 
$
136

 
$
118

 
15
 %
 
$
246

 
$
232

 
6
%
Pre-tax margin on net revenues
 
64.2
%
 
65.9
%
 
 
 
59.3
%
 
67.4
%
 
 

Quarter ended March 31, 2019 compared with the quarter ended March 31, 2018

Net revenues of $212 million increased $33 million, or 18%, and pre-tax income of $136 million increased $18 million, or 15%.  

Net interest income increased $33 million, or 19%, due to a $2.89 billion increase in average interest-earning banking assets, primarily reflecting a $2.09 billion increase in average loans, and an increase in net interest margin. The net interest margin increased to 3.35% from 3.21% due to an increase in asset yields, primarily a result of higher short-term interest rates, partially offset by an increase in total cost of funds. The increase in total cost of funds resulted from higher deposit costs primarily due to increased interest rates. Corresponding to the increase in average interest-earning banking assets, average interest-bearing banking liabilities increased $2.56 billion.

The loan loss provision of $5 million was $3 million, or 38% less than the prior year quarter, largely attributable to lower reserve rates on pass-rated loans in the current quarter.
Non-interest expenses (excluding the provision for loan losses) increased $18 million, or 34%, including a $20 million, or 91%, increase in servicing fees for RJBDP paid to PCG, primarily driven by an increase in the per-account fee effective October 1, 2018.

69
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 March 31,
 
 
2019
 
2018
$ in millions
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/
cost
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/
cost
Interest-earning banking assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
1,391

 
$
9

 
2.40
%
 
$
1,105

 
$
4

 
1.53
%
Available-for-sale securities
 
2,876

 
17

 
2.43
%
 
2,375

 
12

 
1.99
%
Bank loans, net of unearned income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
8,160

 
97

 
4.76
%
 
7,553

 
79

 
4.14
%
CRE construction loans
 
197

 
3

 
5.70
%
 
177

 
2

 
5.00
%
CRE loans
 
3,379

 
40

 
4.73
%
 
3,186

 
32

 
4.05
%
Tax-exempt loans
 
1,280

 
8

 
3.34
%
 
1,148

 
7

 
3.39
%
Residential mortgage loans
 
3,979

 
34

 
3.33
%
 
3,329

 
26

 
3.09
%
SBL and other
 
3,066

 
37

 
4.71
%
 
2,573

 
26

 
3.96
%
Loans held for sale
 
144

 
1

 
4.26
%
 
145

 
1

 
3.75
%
Total bank loans, net
 
20,205

 
220

 
4.38
%
 
18,111

 
173

 
3.86
%
FHLB stock, Federal Reserve Bank stock, and other
 
153

 
1

 
4.44
%
 
146

 
1

 
3.66
%
Total interest-earning banking assets
 
24,625

 
$
247

 
4.04
%
 
21,737


$
190

 
3.54
%
Non-interest-earning banking assets:
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized loss on available-for-sale securities
 
(33
)
 
 

 
 

 
(43
)
 
 

 
 

Allowance for loan losses
 
(220
)
 
 

 
 

 
(191
)
 
 
 
 
Other assets
 
400

 
 

 
 

 
348

 
 

 
 

Total non-interest-earning banking assets
 
147

 
 

 
 

 
114

 
 

 
 

Total banking assets
 
$
24,772

 
 

 
 

 
$
21,851

 
 

 
 

Interest-bearing banking liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Bank deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
560

 
$
3

 
2.26
%
 
$
346

 
$
2

 
1.58
%
Savings, money market and NOW accounts
 
20,923

 
35

 
0.66
%
 
18,585

 
12

 
0.25
%
FHLB advances and other
 
914

 
4

 
2.17
%
 
905

 
4

 
2.07
%
Total interest-bearing banking liabilities
 
22,397

 
$
42

 
0.77
%
 
19,836

 
$
18

 
0.36
%
Non-interest-bearing banking liabilities
 
258

 
 

 
 

 
141

 
 

 
 

Total banking liabilities
 
22,655

 
 

 
 

 
19,977

 
 

 
 

Total banking shareholder’s equity
 
2,117

 
 

 
 

 
1,874

 
 

 
 

Total banking liabilities and shareholder’s equity
 
$
24,772

 
 

 
 

 
$
21,851

 
 

 
 

Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income
 
$
2,228

 
$
205

 
 
 
$
1,901

 
$
172

 
 
Bank net interest:
 
 

 
 

 
 
 
 

 
 

 
 
Spread
 
 

 
 

 
3.27
%
 
 

 
 

 
3.18
%
Margin (net yield on interest-earning banking assets)
 
 

 
 

 
3.35
%
 
 

 
 

 
3.21
%
Ratio of interest-earning banking assets to interest-bearing banking liabilities
 
 

 
 

 
109.95
%
 
 

 
 
 
109.58
%

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

Fee income on bank loans included in interest income for both the three months ended March 31, 2019 and 2018 was $6 million.

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


70
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 March 31,
 
 
2019 compared to 2018
 
 
Increase/(decrease) due to
$ in millions
 
Volume
 
Rate
 
Total
Interest revenue:
 
 
 
 
 
 
Interest-earning banking assets:
 
 
 
 
 
 
Cash
 
$
2

 
$
3

 
$
5

Available-for-sale securities
 
2

 
3

 
5

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

C&I loans
 
6

 
12

 
18

CRE construction loans
 
—

 
1

 
1

CRE loans
 
2

 
6

 
8

Tax-exempt loans
 
1

 
—

 
1

Residential mortgage loans
 
5

 
3

 
8

SBL and other
 
5

 
6

 
11

Total bank loans, net
 
19


28

 
47

Total interest-earning banking assets
 
23

 
34

 
57

Interest expense:
 
 

 
 

 


Interest-bearing banking liabilities:
 
 

 
 

 
 

Bank deposits:
 
 

 
 

 
 

Certificates of deposit
 
—

 
1

 
1

Savings, money market, and NOW accounts
 
2

 
21

 
23

Total interest-bearing banking liabilities
 
2

 
22

 
24

Change in net interest income
 
$
21

 
$
12

 
$
33


Six months ended March 31, 2019 compared with the six months ended March 31, 2018

Net revenues of $415 million increased $71 million, or 21%, and pre-tax income of $246 million increased $14 million, or 6%.

Net interest income increased $67 million, or 20%, due to a $2.96 billion increase in average interest-earning banking assets, as well as an increase in net interest margin. The increase in average interest-earning banking assets was driven by growth in average loans of $2.30 billion and a $525 million increase in our average available-for-sale securities portfolio. The net interest margin increased to 3.30% from 3.15% due to an increase in asset yields, primarily a result of higher short-term interest rates, partially offset by an increase in the total cost of funds. The increase in total cost of funds resulted from higher deposit costs due to increased interest rates. Corresponding to the increase in average interest-earning banking assets, average interest-bearing banking liabilities increased $2.69 billion.

The loan loss provision of $21 million was $12 million higher and was largely attributable to provisions related to certain credits downgraded during the current year period.
Non-interest expenses (excluding the provision for loan losses) increased $45 million, or 44%, including a $40 million, or 93%, increase in servicing fees for RJBDP paid to PCG, primarily driven by an increase in the per-account fee effective October 1, 2018.


71
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.
 
 
Six months ended March 31,
 
 
2019
 
2018
$ in millions
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/
cost
 
Average
balance
 
Interest
inc./exp.
 
Average
yield/
cost
Interest-earning banking assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
1,347

 
$
16

 
2.32
%
 
$
1,231

 
$
8

 
1.40
%
Available-for-sale securities
 
2,796

 
33

 
2.38
%
 
2,271

 
22

 
1.93
%
Bank loans, net of unearned income:
 
 

 
 
 
 
 
 
 
 
 
 
Loans held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
C&I loans
 
7,959

 
188

 
4.67
%
 
7,483

 
152

 
4.02
%
CRE construction loans
 
184

 
5

 
5.66
%
 
158

 
4

 
4.91
%
CRE loans
 
3,469

 
81

 
4.64
%
 
3,111

 
61

 
3.88
%
Tax-exempt loans
 
1,282

 
17

 
3.34
%
 
1,093

 
14

 
3.41
%
Residential mortgage loans
 
3,934

 
66

 
3.32
%
 
3,287

 
51

 
3.08
%
SBL and other
 
3,085

 
73

 
4.65
%
 
2,521

 
49

 
3.82
%
Loans held for sale
 
165

 
4

 
4.90
%
 
130

 
2

 
3.62
%
Total bank loans, net
 
20,078

 
434

 
4.32
%
 
17,783

 
333

 
3.76
%
FHLB stock, Federal Reserve Bank stock, and other
 
161

 
3

 
4.19
%
 
138

 
3

 
3.94
%
Total interest-earning banking assets
 
24,382

 
$
486

 
3.99
%
 
21,423

 
$
366

 
3.43
%
Non-interest-earning banking assets:
 
 

 
 

 
 

 
 

 
 

 
 

Unrealized loss on available-for-sale securities
 
(52
)
 
 

 
 

 
(29
)
 
 

 
 

Allowance for loan losses
 
(212
)
 
 

 
 

 
(191
)
 
 

 
 

Other assets
 
411

 
 

 
 

 
376

 
 

 
 

Total non-interest-earning banking assets
 
147

 
 

 
 

 
156

 
 

 
 

Total banking assets
 
$
24,529

 
 

 
 

 
$
21,579

 
 

 
 

Interest-bearing banking liabilities:
 
 

 
 

 
 

 
 

 
 

 
 

Bank deposits:
 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
510

 
$
5

 
2.13
%
 
$
335

 
$
3

 
1.57
%
Savings, money market and NOW accounts
 
20,798

 
69

 
0.66
%
 
18,322

 
19

 
0.20
%
FHLB advances and other
 
931

 
10

 
2.15
%
 
892

 
9

 
2.09
%
Total interest-bearing banking liabilities
 
22,239

 
$
84

 
0.76
%
 
19,549

 
$
31

 
0.31
%
Non-interest-bearing banking liabilities
 
208

 
 

 
 

 
172

 
 

 
 

Total banking liabilities
 
22,447

 
 

 
 

 
19,721

 
 

 
 

Total banking shareholder’s equity
 
2,082

 
 

 
 

 
1,858

 
 

 
 

Total banking liabilities and shareholder’s equity
 
$
24,529

 
 

 
 

 
$
21,579

 
 

 
 

Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income
 
$
2,143

 
$
402

 
 
 
$
1,874

 
$
335

 
 
Bank net interest:
 
 

 
 

 
 
 
 

 
 

 
 
Spread
 
 

 
 

 
3.23
%
 
 

 
 

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

 
 

 
3.30
%
 
 

 
 

 
3.15
%
Ratio of interest-earning banking assets to interest-bearing banking liabilities
 
 

 
 

 
109.64
%
 
 

 
 
 
109.58
%

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

Fee income on bank loans included in interest income for the six months ended March 31, 2019 and 2018 was $11 million and $13 million, respectively.

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


72
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.
 
 
Six months ended March 31,
 
 
2019 compared to 2018
 
 
Increase/(decrease) due to
$ in millions
 
Volume
 
Rate
 
Total
Interest revenue:
 
 
 
 
 
 
Interest-earning banking assets:
 
 
 
 
 
 
Cash
 
$
1

 
$
7

 
$
8

Available-for-sale securities
 
5

 
6

 
11

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

C&I loans
 
10

 
26

 
36

CRE construction loans
 
—

 
1

 
1

CRE loans
 
7

 
13

 
20

Tax-exempt loans
 
2

 
1

 
3

Residential mortgage loans
 
10

 
5

 
15

SBL and other
 
11

 
13

 
24

Loans held for sale
 
1

 
1

 
2

Total bank loans, net
 
41

 
60

 
101

Total interest-earning banking assets
 
47

 
73

 
120

Interest expense:
 
 

 
 

 
 

Interest-bearing banking liabilities:
 
 

 
 

 
 

Bank deposits:
 
 

 
 

 
 

Certificates of deposit
 
1

 
1

 
2

Savings, money market, and NOW accounts
 
3

 
47

 
50

FHLB advances and other
 
1

 
—

 
1

Total interest-bearing banking liabilities
 
5

 
48

 
53

Change in net interest income
 
$
42

 
$
25

 
$
67



73
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 2018 Form 10-K.

Operating results
 
 
Three months ended March 31,
 
Six months ended March 31,
$ in millions
 
2019
 
2018
 
% change
 
2019
 
2018
 
% change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
14

 
$
9

 
56
 %
 
$
30

 
$
17

 
76
 %
Gains on private equity investments
 
2

 
11

 
(82
)%
 
6

 
18

 
(67
)%
All other
 
3

 
1

 
200
 %
 
4

 
2

 
100
 %
Total revenues
 
19

 
21

 
(10
)%
 
40

 
37

 
8
 %
Interest expense
 
(19
)
 
(19
)
 
—

 
(38
)
 
(38
)
 
—

Net revenues
 
—

 
2

 
(100
)%
 
2

 
(1
)
 
NM

Non-interest expenses:
 
 
 
 
 


 
 
 
 
 


Compensation and other
 
17

 
18

 
(6
)%
 
37

 
31

 
19
 %
Acquisition-related expenses
 
—

 
—

 
—

 
—

 
4

 
(100
)%
Total non-interest expenses
 
17

 
18

 
(6
)%
 
37

 
35

 
6
 %
Loss before taxes and including noncontrolling interests
 
(17
)
 
(16
)
 
(6
)%
 
(35
)
 
(36
)
 
3
 %
Noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

Pre-tax loss excluding noncontrolling interests
 
$
(17
)
 
$
(16
)
 
(6
)%
 
$
(35
)
 
$
(36
)
 
3
 %

Quarter ended March 31, 2019 compared with the quarter ended March 31, 2018

The pre-tax loss generated by this segment was essentially unchanged from the loss generated in the prior year quarter.

Net revenues in this segment decreased $2 million, due to a decrease in gains on private equity investments, offset by an increase in interest income. The prior year quarter included gains on certain of our private equity investments that were sold during fiscal year 2018. Interest income increased primarily as a result of the increase in interest rates earned on higher corporate cash balances.

Non-interest expenses decreased $1 million, or 6%, driven by lower marketing-related expenses.

Six months ended March 31, 2019 compared with the six months ended March 31, 2018

The pre-tax loss generated by this segment of $35 million was essentially unchanged from the loss generated in the prior year period.

Net revenues in this segment increased $3 million, due to an increase in interest income, primarily as a result of the increase in interest rates earned on higher corporate cash balances, partially offset by lower gains on private equity investments.

Non-interest expenses increased $2 million, or 6%, driven by higher compensation-related expenses, partially offset by lower marketing and acquisition-related expenses. The prior year period included certain expenses incurred in connection with our acquisition of the Scout Group, which closed in November 2017.


74
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 March 31,
 
Six months ended March 31,
 
2019
 
2018
 
2019
 
2018
Return on assets
2.7%
 
2.7%
 
2.7%
 
2.0%
Return on equity
16.7%
 
16.7%
 
16.2%
 
12.6%
Average equity to average assets
16.3%
 
16.1%
 
16.5%
 
16.1%
Dividend payout ratio
18.8%
 
15.3%
 
19.4%
 
20.6%

Return on 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 to date is computed by adding total assets as of each quarter-end to the beginning of the year total, and dividing by three.

Return on 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 the 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 three.

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

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

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

Liquidity and capital resources

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

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

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

Cash and cash equivalents increased $331 million to $3.83 billion during the six months ended March 31, 2019, primarily due to $1.10 billion of cash provided by financing activities, resulting from an increase in bank deposits partially offset by our open-market share repurchases and dividends on our common stock during the period. Additionally, a decrease in cash segregated pursuant to regulations and our operating activities provided $173 million of cash during the current period. Investing activities used $910 million primarily due to an increase in bank loans and the growth of our available-for-sale securities portfolio during the current period.

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


75
Management's Discussion and Analysis


Sources of liquidity

Approximately $1.18 billion of our total March 31, 2019 cash and cash equivalents included cash on hand at the parent, as well as parent cash loaned to RJ&A. The following table presents our holdings of cash and cash equivalents. 
$ in millions
 
March 31, 2019
RJF
 
$
416

RJ&A
 
1,263

RJ Bank
 
1,342

RJ Ltd.
 
388

RJFS
 
119

Carillon Tower
 
78

Other subsidiaries
 
225

Total cash and cash equivalents
 
$
3,831

 
RJF maintained depository accounts at RJ Bank with a balance of $146 million as of March 31, 2019. The portion of this total that was available on demand without restrictions, which amounted to $106 million as of March 31, 2019, is reflected in the RJF total (and is excluded from the RJ Bank cash balance in the preceding table).

RJF had loaned $782 million to RJ&A as of March 31, 2019 (such amount is included in the RJ&A cash balance in the preceding table), which RJ&A has invested on behalf of RJF in cash and cash equivalents or otherwise deployed in its normal business activities. On April 1, 2019, we deposited approximately $200 million of cash into RJ&A segregated reserve accounts as a result of its period end reserve calculation.

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

Liquidity available from subsidiaries

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

RJ&A is subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities and Exchange Act of 1934. As a member firm of the Financial Industry Regulatory Authority (“FINRA”), RJ&A is subject to FINRA’s capital requirements, which are substantially the same as Rule 15c3-1, and is required to maintain net capital equal to the greater of $1.5 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 March 31, 2019, 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 $1.05 billion, of which $701 million was available for dividend while still maintaining the internally-targeted net capital ratio of 15% of aggregate debit items.  There are also limitations on the amount of dividends that may be declared by a broker-dealer without FINRA 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 March 31, 2019, RJ Bank had $264 million of capital in excess of the amount it would need at that date to maintain its targeted regulatory capital ratios, and could pay a dividend of such amount without requiring prior approval of its regulator.

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

Borrowings and financing arrangements

Committed financing arrangements

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


76
Management's Discussion and Analysis


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

 
$
—

 
$
200

 
2

Committed unsecured (1)
 
200

 
300

 
500

 
1

Total committed financing arrangements
 
$
400

 
$
300

 
$
700

 
3

 
 
 
 
 
 
 
 
 
Outstanding borrowing amount:
 
 
 
 
 
 
 
 
Committed secured
 
$
—

 
$
—

 
$
—

 
 
Committed unsecured
 
—

 
—

 
—

 
 
Total outstanding borrowing amount
 
$
—

 
$
—

 
$
—

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

Uncommitted financing arrangements

Our uncommitted financing arrangements are in the form of secured lines of credit, secured bilateral or tri-party repurchase agreements, or unsecured lines of credit. Our arrangements with third-party lenders are generally utilized to finance a portion of our fixed income securities or for cash management purposes. Our uncommitted secured financing arrangements generally require us to post collateral in excess of the amount borrowed. As of March 31, 2019, we had outstanding borrowings under two uncommitted secured borrowing arrangements with lenders out of a total of 11 uncommitted financing arrangements (six uncommitted secured and five uncommitted unsecured). However, lenders are under no contractual obligation to lend to us under uncommitted credit facilities.

The following table presents our borrowings on uncommitted financing arrangements, all of which were in RJ&A.
$ in millions
 
March 31, 2019
Outstanding borrowing amount:
 
 
Uncommitted secured
 
$
210

Uncommitted unsecured
 
—

Total outstanding borrowing amount
 
$
210


Other financings

RJ Bank had $875 million in FHLB borrowings outstanding at March 31, 2019, comprised of floating-rate advances totaling $850 million and a $25 million fixed-rate advance, all of which were secured by a blanket lien on RJ Bank’s residential mortgage loan portfolio (see Note 11 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding these borrowings). RJ Bank had an additional $2.12 billion in immediate credit available from the FHLB as of March 31, 2019 and, with the pledge of additional eligible collateral to the FHLB, total available credit of 30% of total assets.

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

We act as an intermediary between broker-dealers and other financial institutions whereby we borrow securities from one broker-dealer and then lend them to another.  Where permitted, we have also loaned, to broker-dealers and other financial institutions, securities owned by clients or the firm.  We account for each of these types of transaction as collateralized agreements and financings, with the outstanding balances related to the securities loaned included in “Securities loaned” on our Condensed Consolidated Statements of Financial Condition of this Form 10-Q, in the amount of $710 million as of March 31, 2019. Such financings are generally collateralized by cash or other collateral.  See Note 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for more information on our securities borrowed and securities loaned.


77
Management's Discussion and Analysis


From time to time we enter into repurchase agreements and reverse repurchase agreements.  We account for each of these types of transactions as collateralized agreements and financings, with the outstanding balances of the repurchase agreements included in “Securities sold under agreements to repurchase” on our Condensed Consolidated Statements of Financial Condition of this Form 10-Q, in the amount of $210 million as of March 31, 2019 (which are reflected in the preceding table of uncommitted financing arrangements). Such financings are generally collateralized by non-customer, RJ&A-owned securities or by securities that we have received as collateral under reverse repurchase agreements.
 
The average daily balance outstanding during the five most recent quarters, the maximum month-end balance outstanding during the quarter and the period-end balances for repurchase agreements and reverse repurchase agreements is detailed in the following table.
 
 
Repurchase transactions
 
Reverse repurchase transactions
For the quarter ended:
($ in millions)
 
Average daily
balance
outstanding
 
Maximum month-end
balance outstanding
during the quarter
 
End of period
balance
outstanding
 
Average daily
balance
outstanding
 
Maximum month-end
balance outstanding
during the quarter
 
End of period
balance
outstanding
March 31, 2019
 
$
172

 
$
210

 
$
210

 
$
358

 
$
447

 
$
447

December 31, 2018
 
$
171

 
$
189

 
$
156

 
$
413

 
$
479

 
$
399

September 30, 2018
 
$
117

 
$
186

 
$
186

 
$
355

 
$
376

 
$
373

June 30, 2018
 
$
151

 
$
165

 
$
115

 
$
364

 
$
369

 
$
343

March 31, 2018
 
$
164

 
$
157

 
$
143

 
$
378

 
$
448

 
$
448


At March 31, 2019, in addition to the financing arrangements previously described, we had $21 million outstanding on a mortgage loan for our St. Petersburg, Florida home-office complex that is included in “Other borrowings” on our Condensed Consolidated Statements of Financial Condition of this Form 10-Q.

At March 31, 2019, we had aggregate outstanding senior notes payable of $1.55 billion. Our senior notes payable, exclusive of any unaccreted premiums or discounts and debt issuance costs, was comprised of $250 million par 5.625% senior notes due 2024, $500 million par 3.625% senior notes due 2026, and $800 million par 4.95% senior notes due 2046. See Note 15 of our 2018 Form 10-K for additional information.

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

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

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


78
Management's Discussion and Analysis


Other sources and uses of liquidity

We have company-owned life insurance policies which are utilized to fund certain non-qualified deferred compensation plans and other employee benefit plans. Certain of our non-qualified deferred compensation plans and other employee benefit plans are employee-directed while others are company-directed. Certain policies which we could readily borrow against had a cash surrender value of $536 million as of March 31, 2019, comprised of $312 million related to employee-directed plans and $224 million related to company-directed plans, and we were able to borrow up to 90%, or $482 million, of the March 31, 2019 total without restriction.  To effect any such borrowing, the underlying investments would be converted to money market investments, therefore requiring us to take market risk related to the employee-directed plans. There were no borrowings outstanding against any of these policies as of March 31, 2019.

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 of this MD&A for information regarding our contractual obligations.

Statement of financial condition analysis

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

Total assets of $38.18 billion as of March 31, 2019 were $763 million, or 2%, greater than our total assets as of September 30, 2018. The increase in assets was primarily due to a $617 million increase in net bank loans and a $197 million increase in our available-for-sale securities portfolio, in line with our growth plan for such assets, as well a $178 million increase in cash, cash equivalents, and cash segregated pursuant to regulations Offsetting these increases, brokerage client receivables decreased $574 million.

As of March 31, 2019, our total liabilities of $31.74 billion were $780 million, or 3%, greater than our total liabilities as of September 30, 2018. The increase in total liabilities, reflected a $1.68 billion increase in bank deposits, primarily due to higher RJBDP balances held at RJ Bank, and a $287 million increase in securities loaned due to increased activity. Offsetting these increases was a decrease in brokerage client payables of $1.16 billion, due to a decline in client cash held in our client interest program as of March 31, 2019, and a decrease in accrued compensation, commissions and benefits payable of $230 million due to annual payments of certain incentive compensation made in the six months ended March 31, 2019.

Contractual obligations

There were no significant changes in our contractual obligations presented in our 2018 Form 10-K, other than in the ordinary course of business, as of March 31, 2019. See Note 13 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding commitments as of March 31, 2019.

Regulatory

Refer to the discussion of the regulatory environment in which we operate and the impact on our operations of certain rules and regulations in Item 1 “Business - Regulation” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory” of our 2018 Form 10-K.

RJF and many of its subsidiaries are each subject to various regulatory capital requirements. As of March 31, 2019, all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. In addition, RJF and RJ Bank were categorized as “well capitalized” as of March 31, 2019. 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 current capital position of RJF and its regulated subsidiaries, we do not anticipate these capital requirements will have a negative impact on our future business activities.

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


79
Management's Discussion and Analysis


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 2018 Form 10-K.

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

Valuation of financial instruments

The use of fair value to measure financial instruments, with related gains or losses recognized in our Condensed Consolidated Statements of Income and Comprehensive Income, is fundamental to our financial statements and our risk management processes. See Note 2 of our 2018 Form 10-K for a discussion of our fair value accounting policies regarding financial instruments owned and financial instruments sold but not yet purchased.

Estimating the fair value of instruments classified as Level 3 of the fair value hierarchy requires significant judgment. Financial instrument assets measured at fair value on a recurring basis categorized as Level 3, which primarily consisted of our ARS and private equity investments, were $128 million as of March 31, 2019 and represented 3% of our assets measured at fair value.

See Note 3 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on our financial instruments at fair value.

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 2018 Form 10-K for more information.

Loss provisions for legal and regulatory matters

The recorded amount of liabilities related to legal and regulatory matters is subject to significant management judgment. For a description of the significant estimates and judgments associated with establishing such accruals, see the “Contingent liabilities” section of Note 2 of our 2018 Form 10-K. In addition, refer to Note 13 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding legal and regulatory matter contingencies as of March 31, 2019.

Loan loss provisions for RJ Bank’s loan portfolio

We provide an allowance for loan losses which reflects our continuing evaluation of the probable losses inherent in RJ Bank’s loan portfolio. See the discussion regarding our methodology in estimating the allowance for loan losses in Note 2 of our 2018 Form 10-K. See Note 7 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on our bank loans.

At March 31, 2019, the amortized cost of all RJ Bank loans was $20.35 billion and an allowance for loan losses of $218 million, or 1.08% of the held for investment loan portfolio, was recorded against that balance.

Our process of evaluating 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.


80
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 2 of the Notes to Consolidated Financial Statements of our 2018 Form 10-K and Note 13 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.

Effects of inflation

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

Risk management

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

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

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 2018 Form 10-K for a discussion of our market risk, including how we manage such risk. See Notes 3, 4 and 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for fair value and other information regarding our trading inventories, available-for-sale securities and derivative instruments.

Interest rate risk

Trading activities

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


81
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. During the three and six months ended March 31, 2019, our regulatory-defined daily loss in our trading portfolios did not exceed our predicted VaR.

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

 
$
1

 
$
1

 
$
1

 
Daily average VaR
 
$
1

 
$
1

 
$
1

 
$
1


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

Separately, RJF provides additional market risk disclosures to comply with the MRR. The results of the application of this market risk capital rule are available on our website under 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 agency 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 13 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.  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 in recent periods.  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 2018 Form 10-K.

We utilize a hedging strategy using interest rate swaps as a result of RJ Bank’s asset and liability management process. For further information regarding this risk management objective, see the discussion of this hedging strategy in Note 2 of the Notes to Consolidated Financial Statements of our 2018 Form 10-K and in Note 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.


82
Management's Discussion and Analysis


The following table is an analysis of RJ Bank’s estimated net interest income over a 12 month period based on instantaneous shifts in interest rates (expressed in basis points) using RJ Bank’s own asset/liability model.
Instantaneous changes in rate
 
Net interest income
($ in millions)
 
Projected change in
net interest income
+200
 
$859
 
(1.65)%
+100
 
$867
 
(0.75)%
0
 
$874
 
—
-100
 
$835
 
(4.37)%

Refer to “Net interest analysis” in this MD&A for a discussion of the impact changes in short-term interest rates could have on the firm’s operations.

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

 
 

 
 
 
 

C&I loans
 
$
92

 
$
4,492

 
$
3,740

 
$
8,324

CRE construction loans
 
10

 
195

 
22

 
227

CRE loans
 
422

 
2,337

 
607

 
3,366

Tax-exempt loans
 
—

 
31

 
1,255

 
1,286

Residential mortgage loans
 
—

 
4

 
3,992

 
3,996

SBL and other
 
3,017

 
14

 
—

 
3,031

Total loans held for investment
 
3,541

 
7,073

 
9,616

 
20,230

Loans held for sale
 
—

 
—

 
132

 
132

Total loans
 
$
3,541

 
$
7,073

 
$
9,748

 
$
20,362


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 March 31, 2019. Loan amounts in the table exclude unearned income and deferred expenses.
 
 
Interest rate type
$ in millions
 
Fixed
 
Adjustable
 
Total
Loans held for investment:
 
 

 
 

 
 

C&I loans
 
$
59

 
$
8,173

 
$
8,232

CRE construction loans
 
—

 
217

 
217

CRE loans
 
78

 
2,866

 
2,944

Tax-exempt loans
 
1,254

 
32

 
1,286

Residential mortgage loans
 
238

 
3,758


3,996

SBL and other
 
14

 
—

 
14

Total loans held for investment
 
1,643

 
15,046

 
16,689

Loans held for sale
 
132

 
—

 
132

Total loans
 
$
1,775

 
$
15,046

 
$
16,821


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.

In our RJ Bank available-for-sale securities portfolio, we hold primarily fixed-rate agency MBS and CMOs which were carried at fair value on our Condensed Consolidated Statements of Financial Condition at March 31, 2019, with changes in the fair value of the portfolio recorded through OCI in our Condensed Consolidated Statements of Income and Comprehensive Income. At March 31, 2019, our RJ Bank available-for-sale securities portfolio had a fair value of $2.89 billion with a weighted-average yield of 2.51% and an average expected duration of three years. See Note 4 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on the fair value of these securities.

83
Management's Discussion and Analysis


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 revenues to compensate for the risk associated with carrying inventory.  We attempt to reduce the risk of loss inherent in our inventory of equity securities by monitoring those security positions throughout each day and establishing position limits.

Foreign exchange risk

We are subject to foreign exchange risk due to our investments in foreign subsidiaries as well as transactions and resulting balances denominated in a currency other than the U.S. dollar. For example, a portion of our bank loan portfolio includes loans which are denominated in Canadian dollars totaling $1.02 billion and $1.05 billion at March 31, 2019 and September 30, 2018, respectively. A portion of such loans are held by RJ Bank’s Canadian subsidiary, which is discussed in the following sections.

Investments in foreign subsidiaries

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

We had foreign exchange risk in our investment in RJ Ltd. of CAD 357 million at March 31, 2019, which was not hedged. Foreign exchange gains/losses related to this investment are primarily reflected in OCI in our Condensed Consolidated Statements of Income and Comprehensive Income. See Note 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding our components of OCI.

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

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

We are subject to foreign exchange risk due to our holdings of cash and certain other assets and liabilities resulting from transactions denominated in a currency other than the U.S. dollar. Any currency-related gains/losses arising from these foreign currency denominated balances are reflected in “Other” revenues in our Condensed Consolidated Statements of Income and Comprehensive Income. The foreign exchange risk associated with a portion of such transactions and balances denominated in foreign currency are mitigated utilizing short-term, forward foreign exchange contracts. Such derivatives are not designated hedges and therefore, the related gains/losses associated with these contracts are included in “Other” revenues in our Condensed Consolidated Statements of Income and Comprehensive Income. See Note 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding our 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 2018 Form 10-K.

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

Our allowance for loan losses is regularly evaluated with adjustments made on a quarterly basis. Several factors were taken into consideration in evaluating the allowance for loan losses at March 31, 2019, including the risk profile of the portfolios, net charge-offs during the period, the level of nonperforming loans and delinquency ratios. RJ Bank also considered the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. Finally, RJ Bank considered current economic conditions and other factors that might impact the portfolio. RJ Bank determined the allowance that was required for specific

84
Management's Discussion and Analysis


loan grades based on relative risk characteristics of the loan portfolio. On an ongoing basis, RJ Bank evaluates its methods for determining the allowance for each class of loans and makes enhancements it considers appropriate. There was no material change in RJ Bank’s methodology for determining the allowance for loan losses during the six months ended March 31, 2019.

RJ Bank’s allowance for loan losses as a percentage of bank loans outstanding was 1.08% and 1.04% at March 31, 2019 and September 30, 2018, respectively. See Note 7 in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for detail on the changes RJ Bank’s allowance for loan losses.
The loan loss provision for the six months ended March 31, 2019 increased to $21 million compared to $9 million in the prior year period. See further explanation of the loan loss provision increase in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - RJ Bank” of this Form 10-Q.
The level of charge-off activity is a factor that is considered in evaluating the potential for severity of future credit losses. The following table presents net loan (charge-offs)/recoveries and the percentage of net loan (charge-offs)/recoveries to the average outstanding loan balances by loan portfolio segment. 
 
 
Three months ended March 31,
 
Six months ended March 31,
 
 
2019
 
2018
 
2019
 
2018
$ in millions
 
Net loan
(charge-off)/recovery
amount
 
% of avg.
outstanding
loans
 
Net loan
(charge-off)/recovery
amount
 
% of avg.
outstanding
loans
 
Net loan
(charge-off)/recovery
amount
 
% of avg.
outstanding
loans
 
Net loan
(charge-off)/recovery
amount
 
% of avg.
outstanding
loans
C&I loans
 
$
(3
)
 
0.06
%
 
$
(3
)
 
0.19
%
 
$
(3
)
 
0.06
%
 
$
(4
)
 
0.11
%
CRE loans
 
(3
)
 
0.20
%
 
—

 
—

 
(3
)
 
0.19
%
 
—

 
—

Residential mortgage loans
 
—

 
0.01
%
 
(1
)
 
0.01
%
 
1

 
0.04
%
 
—

 
0.03
%
Total
 
$
(6
)
 
0.06
%
 
$
(4
)
 
0.08
%
 
$
(5
)
 
0.05
%
 
$
(4
)
 
0.04
%

The level of nonperforming loans is another indicator of potential future credit losses. The following table presents the nonperforming loans balance and total allowance for loan losses for the periods presented.
 
 
March 31, 2019
 
September 30, 2018
$ in millions
 
Nonperforming
loan balance
 
Allowance for
loan losses
balance
 
Nonperforming
loan balance
 
Allowance for
loan losses
balance
Loans held for investment:
 
 

 
 

 
 

 
 

C&I loans
 
$
27

 
$
140

 
$
2

 
$
123

CRE construction loans
 
—

 
3

 
—

 
3

CRE loans
 
10

 
45

 
—

 
47

Tax-exempt loans
 
—

 
8

 
—

 
9

Residential mortgage loans
 
19

 
17

 
23

 
17

SBL and other
 
—

 
5

 
—

 
4

Total
 
$
56

 
$
218

 
$
25

 
$
203

Total nonperforming loans as a % of RJ Bank total loans
 
0.28
%
 
 
 
0.12
%
 
 

The amount of nonperforming loans increased $31 million during the six months ended March 31, 2019, due to an increase of $25 million in nonperforming C&I loans and $10 million in nonperforming CRE loans. Included in nonperforming residential mortgage loans were $11 million in loans for which $6 million in charge-offs were previously recorded, resulting in less exposure within the remaining balance. See Note 7 in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for loan categories as a percentage of total loans receivable.

The nonperforming loan balances in the preceding table exclude $11 million and $12 million as of March 31, 2019 and September 30, 2018, 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 $61 million and $28 million at March 31, 2019 and September 30, 2018, respectively. Total nonperforming assets as a percentage of RJ Bank total assets was 0.25% and 0.12% at March 31, 2019 and September 30, 2018, respectively.


85
Management's Discussion and Analysis


Loan underwriting process

RJ Bank’s underwriting processes 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 2018 Form 10-K. There were no material changes in RJ Bank’s underwriting processes during the six months ended March 31, 2019.

Risk monitoring process

Another component of credit risk strategy at RJ Bank is the ongoing risk monitoring and review processes for all residential, SBL and other, 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 six months ended March 31, 2019.

SBL and residential mortgage loans

The marketable collateral securing RJ Bank’s SBL portfolio 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 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 measures, while considered and reviewed in establishing the allowance for loan losses, have not resulted in any material adjustments to RJ Bank’s historical loss rates.

The following table presents, as of the date indicated, a summary of delinquent residential mortgage loans, the vast majority of which are first 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 millions
 
30-89 days
 
90 days or more
 
Total
 
30-89 days
 
90 days or more
 
Total
March 31, 2019
 
$
8

 
$
10

 
$
18

 
0.20
%
 
0.25
%
 
0.45
%
September 30, 2018
 
$
2

 
$
13

 
$
15

 
0.06
%
 
0.33
%
 
0.39
%

At March 31, 2019, loans over 30 days delinquent (including nonperforming loans) increased as a percentage of residential mortgage loans outstanding as compared to September 30, 2018.  Our March 31, 2019 percentage continues to compare favorably to the national average for over 30 day delinquencies of 3.20%, as most recently reported by the Fed.

Credit risk is also managed by diversifying the residential mortgage portfolio. The following table details the geographic concentrations (top five states) of RJ Bank’s one-to-four family residential mortgage loans.
 
 
March 31, 2019
 
 
Loans outstanding as a % of RJ Bank total residential mortgage loans
 
Loans outstanding as a % of RJ Bank total loans
CA
 
24.8%
 
4.9%
FL
 
16.7%
 
3.3%
NY
 
8.5%
 
1.7%
TX
 
7.8%
 
1.5%
CO
 
3.5%
 
0.7%

Loans where borrowers may be subject to payment increases include adjustable rate mortgage loans with terms that initially require payment of interest only.  Payments may increase significantly when the interest-only period ends and the loan principal begins to amortize.  At March 31, 2019 and September 30, 2018, these loans totaled $1.13 billion and $992 million, respectively, or approximately 30% and 25% of the residential mortgage portfolio, respectively.  The weighted average number of years before the remainder of the loans, which were still in their interest-only period at March 31, 2019, begins amortizing is 6.3 years.


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Management's Discussion and Analysis


A component of credit risk management for the residential portfolio is the LTV ratio and borrower credit score at origination or purchase. The following table details the most recent weighted-average LTV ratios and FICO scores at origination of RJ Bank’s residential first mortgage loan portfolio.
 
 
March 31, 2019
Residential first mortgage loan weighted-average LTV/FICO
 
64%/755

Corporate and tax-exempt loans

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

Credit risk is managed by diversifying the corporate loan portfolio. RJ Bank’s corporate loan portfolio does not contain a significant concentration in any single industry. The following table details the industry concentrations (top five categories) of RJ Bank’s corporate loans.
 
 
March 31, 2019
 
 
Loans outstanding as a % of RJ Bank total corporate loans
 
Loans outstanding as a % of RJ Bank total loans
Business systems and services
 
7.3%
 
4.2%
Office real estate
 
6.5%
 
3.8%
Hospitality
 
5.4%
 
3.1%
Automotive/transportation
 
4.8%
 
2.8%
Consumer products and services
 
4.5%
 
2.6%

Liquidity risk

See the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and capital resources” of this Form 10-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 cybersecurity incidents. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Operational risk” of our 2018 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 six months ended March 31, 2019.

As more fully described in the discussion of our business technology risks included in various risk factors presented in Item 1A “Risk Factors” of our 2018 Form 10-K, despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, cyberattacks and other information security breaches, as well as 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.

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 2018 Form 10-K for information regarding how we utilize models throughout the firm and how we manage model risk.

Compliance risk

Compliance risk is the risk of legal or regulatory sanctions, financial loss, or reputational damage that we may suffer from a failure to comply with applicable laws, external standards, or internal requirements. See Item 7 “Management’s Discussion and Analysis of

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Financial Condition and Results of Operations - Risk management - Compliance risk” of our 2018 Form 10-K for information on our compliance risks, including how we manage such risks. There have been no material changes in our risk mitigation processes during the six months ended March 31, 2019.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls are procedures designed to ensure that information required to be disclosed in our reports filed under the 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 March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On February 17, 2015, Jyll Brink (“Brink”) filed a putative class action complaint in the U.S. District Court for the Southern District of Florida (the “District Court”) under the caption Jyll Brink v. Raymond James & Associates, Inc. (the “Brink Complaint”). The Brink Complaint alleges that Brink, a former customer of RJ&A, was charged a fee in her Passport Investment Account, and that the fee included an unauthorized and undisclosed profit to RJ&A in violation of its customer agreement and applicable industry standards. The Passport Investment Account is a fee-based account in which clients pay asset-based advisory fees and certain processing fees for ongoing investment advice and monitoring of securities holdings. The Brink Complaint seeks, among other relief, damages in the amount of the difference between the actual cost of processing a trade, as alleged by Brink, and the fee charged by RJ&A. On October 19, 2018, the District Court certified a class of former and current customers of RJ&A who executed a Passport Agreement and were charged processing fees during the period between February 17, 2010 and February 17, 2015. On January 18, 2019, the U.S. Court of Appeals for the Eleventh Circuit (the “Appellate Court”) entered an order granting permission to RJ&A to appeal the District Court’s class certification order. On January 25, 2019, the District Court issued an order staying trial, calendar call and all remaining pretrial deadlines pending resolution of the appeal. On April 5, 2019, Brink and RJ&A agreed in principle to a settlement of the Brink Complaint. The parties are currently negotiating a Stipulation of Settlement. Both the District Court and the Appellate Court have been informed of the foregoing. The settlement amount was included in “Other payables” in our Condensed Consolidated Statement of Financial Condition as of March 31, 2019.
On February 11, 2016, Caleb Wistar (“Wistar”) and Ernest Mayeaux (“Mayeaux”) filed a putative class action complaint in the District Court under the caption Caleb Wistar and Ernest Mayeaux v. Raymond James Financial Services, Inc. and Raymond James Financial Services Advisors, Inc. (as subsequently amended, the “Wistar Complaint”). Similar to the Brink Complaint, the Wistar Complaint alleges that Wistar and Mayeaux, former customers of Raymond James Financial Services, Inc. (“RJFS”) and Raymond James Financial Services Advisors, Inc. (“RJFSA”), were charged a fee in RJFS and RJFSA’s Passport Investment Account and that the fee included an unauthorized and undisclosed profit to RJFS and RJFSA in violation of its customer agreement and applicable industry standards. The Wistar Complaint seeks, among other relief, damages in the amount of the difference between the actual cost of processing a trade, as alleged by Wistar and Mayeaux, and the fee charge by RJFS and RJFSA. On April 5, 2019, Wistar and Mayeaux agreed in principle with RJFS and RJFSA to a settlement of the Wistar Complaint. The parties are currently negotiating a Stipulation of Settlement. The District Court has been informed of the foregoing. The settlement amount was included in “Other payables” in our Condensed Consolidated Statement of Financial Condition as of March 31, 2019.
While the parties have agreed in principle to settlements of the Brink Complaint and Wistar Complaint, there can be no assurance that the parties will execute Stipulations of Settlement, or if the parties do execute Stipulations of Settlement, that the District Court will grant preliminary approval or final approval to either or both settlements.

ITEM 1A. RISK FACTORS

Not applicable.


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

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

We purchase our own stock from time to time in conjunction with a number of activities, each of which is described in the following paragraphs. The following table presents information on our purchases of our own stock, on a monthly basis, for the six months ended March 31, 2019.
 
Total number of shares
purchased
 
Average price
per share
 
Number of shares purchased as part of publicly announced plans or programs
 
Approximate dollar value (in millions) at each month-end, of securities that may yet be purchased under the plans or programs
 
 
 
 
 
 
 
 
October 1, 2018 – October 31, 2018
469,566

 
$
74.88

 
423,903

 
$182
November 1, 2018 – November 30, 2018
2,420,562

 
$
77.66

 
2,341,466

 
$500
December 1, 2018 – December 31, 2018
3,449,198

 
$
74.55

 
3,287,237

 
$255
First quarter
6,339,326

 
$
75.76

 
6,052,606

 
 
 
 
 
 
 
 
 
 
January 1, 2019 – January 31, 2019
13,408

 
$
75.16

 
—

 
$255
February 1, 2019 – February 28, 2019
4,050

 
$
82.54

 
—

 
$255
March 1, 2019 – March 31, 2019
603,529

 
$
78.23

 
602,938

 
$458
Second quarter
620,987

 
$
78.19

 
602,938

 

Fiscal year-to-date total
6,960,313

 
$
75.98

 
6,655,544

 


During the six months ended March 31, 2019, we utilized the remainder of the previous Board authorization for repurchases of our common stock and outstanding senior notes. Accordingly, the Board approved two increases to the authorization totaling $750 million, including $500 million on November 29, 2018 and $250 million on March 1, 2019.

In the preceding table, the total number of shares purchased includes shares purchased pursuant to our Restricted Stock Trust Fund, which was established to acquire our common stock in the open market and used to settle RSUs granted as a retention vehicle for certain employees of our wholly owned Canadian subsidiaries. For more information on this trust fund, see Note 2 of the Notes to Consolidated Financial Statements of our 2018 Form 10-K and Note 8 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. These activities do not utilize the previously described repurchase authority.

The total number of shares purchased also includes shares repurchased as a result of employees surrendering shares as payment for option exercises or withholding taxes. These activities do not utilize the previously described repurchase authority.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.
OTHER INFORMATION

Not applicable.

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ITEM 6.
EXHIBITS
Exhibit Number

Description
3.1

3.2

10.1

10.2

10.3

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).
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:
May 9, 2019
 
/s/ Paul C. Reilly
 
 
 
Paul C. Reilly
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
Date:
May 9, 2019
 
/s/ Jeffrey P. Julien
 
 
 
Jeffrey P. Julien
 
 
 
Executive Vice President - Finance and Chief Financial Officer

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