0000720005 rjf:LoansHeldForSaleMember 2017-10-01 2018-06-30us-gaap:AccumulatedTranslationAdjustmentMember 2020-03-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
|
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
| THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019March 31, 2020
|
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
| THE SECURITIES EXCHANGE ACT OF 1934 |
|
| | | |
For the transition period from | | to | |
Commission File Number: 1-9109
RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
|
| | |
Florida | | 59-1517485 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
880 Carillon Parkway, St. Petersburg, Florida 33716
(Address of principal executive offices) (Zip Code)
(727) 567-1000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.01 par value | RJF | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes x No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | |
Large accelerated filer | x | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
138,843,196137,030,516 shares of common stock as of August 7, 2019May 5, 2020
|
| | | |
INDEX |
| | | PAGE |
PART I | | | |
Item 1. | | | |
| | Condensed Consolidated Statements of Financial Condition as of June 30, 2019March 31, 2020 and September 30, 20182019 (Unaudited) | |
| | Condensed Consolidated Statements of Income and Comprehensive Income for the three and ninesix months ended June 30,March 31, 2020 and March 31, 2019 and June 30, 2018 (Unaudited) | |
| | Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and ninesix months ended June 30,March 31, 2020 and March 31, 2019 and June 30, 2018 (Unaudited) | |
| | Condensed Consolidated Statements of Cash Flows for the ninesix months ended June 30,March 31, 2020 and March 31, 2019 and June 30, 2018 (Unaudited) | |
| | | |
| | Note 1 - Organization and basis of presentation | |
| | Note 2 - Update of significant accounting policies | |
| | Note 3 - AcquisitionsFair value | |
| | Note 4 - Fair valueAvailable-for-sale securities | |
| | Note 5 - Available-for-sale securitiesDerivative assets and derivative liabilities | |
| | Note 6 - Derivative assetsCollateralized agreements and derivative liabilitiesfinancings | |
| | Note 7 - Collateralized agreements and financingsBank loans, net | |
| | Note 8 - Bank loans, netVariable interest entities | |
| | Note 9 - Variable interest entitiesGoodwill and identifiable intangible assets, net | |
| | Note 10 - Goodwill and identifiable intangible assets, netLeases | |
| | Note 11 - Bank deposits | |
| | Note 12 - Other borrowings | |
| | Note 13 - Income taxesSenior notes payable | |
| | Note 14 - Commitments, contingencies and guaranteesIncome taxes | |
| | Note 15 - Accumulated other comprehensive income/(loss)Commitments, contingencies and guarantees | |
| | Note 16 - RevenuesAccumulated other comprehensive income/(loss) | |
| | Note 17 - Interest income and interest expenseRevenues | |
| | Note 18 - Share-based compensationInterest income and interest expense | |
| | Note 19 - Regulatory capital requirementsShare-based compensation | |
| | Note 20 - Earnings per shareRegulatory capital requirements | |
| | Note 21 - Earnings per share | |
| | Note 22 - 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. | | | |
| | | |
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 | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
Assets: | |
| |
| |
| |
|
Cash and cash equivalents | | $ | 3,596 |
| | $ | 3,500 |
| | $ | 10,648 |
| | $ | 3,957 |
|
Cash segregated pursuant to regulations | | 2,356 |
| | 2,441 |
| |
Cash and cash equivalents segregated pursuant to regulations | | | 4,045 |
| | 2,014 |
|
Securities purchased under agreements to resell | | 411 |
| | 373 |
| | 130 |
| | 343 |
|
Securities borrowed | | 306 |
| | 255 |
| | 250 |
| | 248 |
|
Financial instruments, at fair value: | | | | | | | | |
Trading instruments (includes $557 and $465 pledged as collateral) | | 803 |
| | 702 |
| |
Available-for-sale securities (includes $16 and $20 pledged as collateral) | | 2,960 |
| | 2,696 |
| |
Trading instruments ($236 and $535 pledged as collateral) | | | 445 |
| | 708 |
|
Available-for-sale securities ($28 and $24 pledged as collateral) | | | 4,265 |
| | 3,093 |
|
Derivative assets | | 304 |
| | 180 |
| | 447 |
| | 338 |
|
Private equity investments | | 146 |
| | 147 |
| |
Other investments (includes $24 and $25 pledged as collateral) | | 253 |
| | 202 |
| |
Other investments ($40 and $32 pledged as collateral) | | | 316 |
| | 365 |
|
Brokerage client receivables, net | | 2,613 |
| | 3,343 |
| | 2,491 |
| | 2,671 |
|
Receivables from brokers, dealers and clearing organizations | | 274 |
| | 257 |
| | 445 |
| | 281 |
|
Other receivables | | 631 |
| | 592 |
| | 846 |
| | 549 |
|
Bank loans, net | | 20,691 |
| | 19,518 |
| | 21,788 |
| | 20,891 |
|
Loans to financial advisors, net | | 936 |
| | 925 |
| | 982 |
| | 983 |
|
Investments in real estate partnerships held by consolidated variable interest entities | | 69 |
| | 107 |
| |
Property and equipment, net | | 518 |
| | 486 |
| | 543 |
| | 527 |
|
Deferred income taxes, net | | 210 |
| | 203 |
| | 224 |
| | 231 |
|
Goodwill and identifiable intangible assets, net | | 635 |
| | 639 |
| | 603 |
| | 611 |
|
Other assets | | 965 |
| | 847 |
| | 1,341 |
| | 1,020 |
|
Total assets | | $ | 38,677 |
| | $ | 37,413 |
| | $ | 49,809 |
| | $ | 38,830 |
|
| | | | | | | | |
Liabilities and equity: | | | | | |
Liabilities and shareholders’ equity: | | | | | |
Bank deposits | | $ | 22,166 |
| | $ | 19,942 |
| | $ | 30,023 |
| | $ | 22,281 |
|
Securities sold under agreements to repurchase | | 165 |
| | 186 |
| | 215 |
| | 150 |
|
Securities loaned | | 429 |
| | 423 |
| | 28 |
| | 323 |
|
Financial instruments sold but not yet purchased, at fair value: | | | | | | | | |
Trading instruments | | 287 |
| | 235 |
| | 24 |
| | 296 |
|
Derivative liabilities | | 275 |
| | 247 |
| | 427 |
| | 313 |
|
Brokerage client payables | | 4,343 |
| | 5,625 |
| | 7,076 |
| | 4,361 |
|
Payables to brokers, dealers and clearing organizations | | 174 |
| | 206 |
| | 284 |
| | 229 |
|
Accrued compensation, commissions and benefits | | 1,093 |
| | 1,189 |
| | 929 |
| | 1,272 |
|
Other payables | | 686 |
| | 459 |
| | 1,034 |
| | 518 |
|
Other borrowings | | 945 |
| | 899 |
| | 891 |
| | 894 |
|
Senior notes payable | | 1,550 |
| | 1,550 |
| | 2,044 |
| | 1,550 |
|
Total liabilities | | 32,113 |
|
| 30,961 |
| | 42,975 |
|
| 32,187 |
|
Commitments and contingencies (see Note 14) | |
|
| |
|
| |
Equity | | | | | |
Commitments and contingencies (see Note 15) | | |
|
| |
|
|
Shareholders’ equity | | | | | |
Preferred stock; $.10 par value; 10,000,000 shares authorized; -0- shares issued and outstanding | | — |
| | — |
| | — |
| | — |
|
Common stock; $.01 par value; 350,000,000 shares authorized; 158,316,880 and 156,363,615 shares issued as of June 30, 2019 and September 30, 2018, respectively, and 139,666,546 and 145,642,437 shares outstanding as of June 30, 2019 and September 30, 2018, respectively | | 2 |
| | 2 |
| |
Common stock; $.01 par value; 350,000,000 shares authorized; 158,731,812 and 158,435,030 shares issued as of March 31, 2020 and September 30, 2019, respectively, and 136,787,387 and 137,841,952 shares outstanding as of March 31, 2020 and September 30, 2019, respectively | | | 2 |
| | 2 |
|
Additional paid-in capital | | 1,915 |
| | 1,808 |
| | 1,953 |
| | 1,938 |
|
Retained earnings | | 5,659 |
| | 5,032 |
| | 6,205 |
| | 5,874 |
|
Treasury stock, at cost; 18,650,334 and 10,693,026 common shares as of June 30, 2019 and September 30, 2018, respectively | | (1,060 | ) | | (447 | ) | |
Treasury stock, at cost; 21,944,425 and 20,593,078 common shares as of March 31, 2020 and September 30, 2019, respectively | | | (1,351 | ) | | (1,210 | ) |
Accumulated other comprehensive loss | | (14 | ) | | (27 | ) | | (11 | ) | | (23 | ) |
Total equity attributable to Raymond James Financial, Inc. | | 6,502 |
| | 6,368 |
| | 6,798 |
| | 6,581 |
|
Noncontrolling interests | | 62 |
| | 84 |
| | 36 |
| | 62 |
|
Total equity | | 6,564 |
| | 6,452 |
| |
Total liabilities and equity | | $ | 38,677 |
| | $ | 37,413 |
| |
Total shareholders’ equity | | | 6,834 |
| | 6,643 |
|
Total liabilities and shareholders’ equity | | | $ | 49,809 |
| | $ | 38,830 |
|
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
in millions, except per share amounts | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | | | | | | | | | | | | | | | | |
Asset management and related administrative fees | | $ | 879 |
| | $ | 790 |
| | $ | 2,527 |
| | $ | 2,287 |
| | $ | 1,006 |
| | $ | 783 |
| | $ | 1,961 |
| | $ | 1,648 |
|
Brokerage revenues: | | | | | | | | | | | | | | | | |
Securities commissions | | 358 |
| | 395 |
| | 1,095 |
| | 1,236 |
| | 410 |
| | 349 |
| | 773 |
| | 737 |
|
Principal transactions | | 93 |
| | 73 |
| | 262 |
| | 255 |
| | 105 |
| | 93 |
| | 202 |
| | 169 |
|
Total brokerage revenues | | 451 |
| | 468 |
| | 1,357 |
| | 1,491 |
| | 515 |
| | 442 |
| | 975 |
| | 906 |
|
Account and service fees | | 183 |
| | 187 |
| | 559 |
| | 535 |
| | 172 |
| | 191 |
| | 350 |
| | 376 |
|
Investment banking | | 139 |
| | 145 |
| | 439 |
| | 349 |
| | 148 |
| | 163 |
| | 289 |
| | 300 |
|
Interest income | | 321 |
| | 271 |
| | 961 |
| | 752 |
| | 285 |
| | 324 |
| | 582 |
| | 640 |
|
Other | | 27 |
| | 30 |
| | 95 |
| | 100 |
| | (15 | ) | | 31 |
| | 14 |
| | 68 |
|
Total revenues | | 2,000 |
| | 1,891 |
|
| 5,938 |
|
| 5,514 |
| | 2,111 |
| | 1,934 |
|
| 4,171 |
|
| 3,938 |
|
Interest expense | | (73 | ) | | (54 | ) | | (221 | ) | | (139 | ) | | (43 | ) | | (75 | ) | | (94 | ) | | (148 | ) |
Net revenues | | 1,927 |
| | 1,837 |
|
| 5,717 |
|
| 5,375 |
| | 2,068 |
| | 1,859 |
|
| 4,077 |
|
| 3,790 |
|
Non-interest expenses: | | |
| | |
| | | | | | |
| | |
| | | | |
Compensation, commissions and benefits | | 1,277 |
| | 1,208 |
| | 3,767 |
| | 3,557 |
| | 1,422 |
| | 1,225 |
| | 2,773 |
| | 2,490 |
|
Non-compensation expenses: | | | | | | | | | |
Communications and information processing | | 92 |
| | 89 |
| | 278 |
| | 262 |
| | 99 |
| | 94 |
| | 193 |
| | 186 |
|
Occupancy and equipment costs | | 55 |
| | 49 |
| | 159 |
| | 149 |
| |
Occupancy and equipment | | | 56 |
| | 53 |
| | 113 |
| | 104 |
|
Business development | | 57 |
| | 57 |
| | 141 |
| | 134 |
| | 41 |
| | 41 |
| | 85 |
| | 84 |
|
Investment sub-advisory fees | | 24 |
| | 23 |
| | 70 |
| | 68 |
| | 26 |
| | 22 |
| | 52 |
| | 46 |
|
Professional fees | | 22 |
| | 20 |
| | 61 |
| | 48 |
| | 23 |
| | 17 |
| | 44 |
| | 39 |
|
Bank loan loss provision/(benefit) | | (5 | ) | | 5 |
| | 16 |
| | 14 |
| |
Bank loan loss provision | | | 109 |
| | 5 |
| | 107 |
| | 21 |
|
Acquisition and disposition-related expenses | | — |
| | — |
| | 15 |
| | 4 |
| | — |
| | — |
| | — |
| | 15 |
|
Other | | 65 |
| | 68 |
| | 205 |
| | 178 |
| | 53 |
| | 55 |
| | 112 |
| | 126 |
|
Total non-compensation expenses | | | 407 |
| | 287 |
| | 706 |
| | 621 |
|
Total non-interest expenses | | 1,587 |
| | 1,519 |
|
| 4,712 |
|
| 4,414 |
| | 1,829 |
| | 1,512 |
|
| 3,479 |
|
| 3,111 |
|
Income including noncontrolling interests and before provision for income taxes | | 340 |
| | 318 |
|
| 1,005 |
|
| 961 |
| |
Pre-tax income | | | 239 |
| | 347 |
|
| 598 |
|
| 679 |
|
Provision for income taxes | | 83 |
| | 86 |
| | 252 |
| | 367 |
| | 70 |
| | 86 |
| | 161 |
| | 169 |
|
Net income including noncontrolling interests | | 257 |
| | 232 |
|
| 753 |
|
| 594 |
| |
Net loss attributable to noncontrolling interests | | (2 | ) | | — |
| | (16 | ) | | — |
| |
Net income attributable to Raymond James Financial, Inc. | | $ | 259 |
| | $ | 232 |
|
| $ | 769 |
|
| $ | 594 |
| |
Net income | | | $ | 169 |
| | $ | 261 |
|
| 437 |
|
| 510 |
|
| | | | | | | | | | | | | | | | |
Earnings per common share – basic | | $ | 1.84 |
| | $ | 1.59 |
| | $ | 5.42 |
| | $ | 4.08 |
| | $ | 1.22 |
| | $ | 1.85 |
| | $ | 3.15 |
| | $ | 3.58 |
|
Earnings per common share – diluted | | $ | 1.80 |
| | $ | 1.55 |
| | $ | 5.30 |
| | $ | 3.99 |
| | $ | 1.20 |
| | $ | 1.81 |
| | $ | 3.09 |
| | $ | 3.51 |
|
Weighted-average common shares outstanding – basic | | 140.4 |
| | 145.6 |
| | 141.8 |
| | 145.2 |
| | 138.4 |
| | 140.8 |
| | 138.4 |
| | 142.5 |
|
Weighted-average common and common equivalent shares outstanding – diluted | | 143.6 |
| | 149.4 |
| | 144.8 |
| | 148.8 |
| | 141.1 |
| | 143.9 |
| | 141.3 |
| | 145.4 |
|
| | | | | | | | | | | | | | | | |
Net income attributable to Raymond James Financial, Inc. | | $ | 259 |
| | $ | 232 |
|
| $ | 769 |
|
| $ | 594 |
| |
Net income | | | $ | 169 |
|
| $ | 261 |
|
| $ | 437 |
|
| $ | 510 |
|
Other comprehensive income/(loss), net of tax: | | |
| | |
| | | | | | |
| | |
| | | | |
Available-for-sale securities | | 24 |
| | (4 | ) | | 65 |
| | (31 | ) | | 63 |
| | 19 |
| | 62 |
| | 41 |
|
Currency translations, net of the impact of net investment hedges | | 6 |
| | (6 | ) | | 1 |
| | (8 | ) | | (26 | ) | | 8 |
| | (17 | ) | | (5 | ) |
Cash flow hedges | | (19 | ) | | 6 |
| | (49 | ) | | 27 |
| | (43 | ) | | (13 | ) | | (33 | ) | | (30 | ) |
Total other comprehensive income/(loss), net of tax | | 11 |
|
| (4 | ) |
| 17 |
|
| (12 | ) | | (6 | ) |
| 14 |
|
| 12 |
|
| 6 |
|
Total comprehensive income | | $ | 270 |
| | $ | 228 |
|
| $ | 786 |
|
| $ | 582 |
| | $ | 163 |
| | $ | 275 |
|
| $ | 449 |
|
| $ | 516 |
|
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions, except per share amounts | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Common stock, par value $.01 per share: | | | | | | | | | | | | | | | | |
Balance beginning of period | | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | 2 |
| | $ | 2 |
|
Share issuances | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balance end of period | | 2 |
| | 2 |
|
| 2 |
|
| 2 |
| | 2 |
| | 2 |
|
| 2 |
|
| 2 |
|
| | | | | | | | | | | | | | | | |
Additional paid-in capital: | | |
| | |
| | | | | | |
| | |
| | | | |
Balance beginning of period | | 1,917 |
| | 1,748 |
| | 1,808 |
| | 1,645 |
| | 1,922 |
| | 1,871 |
| | 1,938 |
| | 1,808 |
|
Employee stock purchases | | 7 |
| | 8 |
| | 27 |
| | 24 |
| | 11 |
| | 12 |
| | 17 |
| | 20 |
|
Exercise of stock options and vesting of restricted stock units, net of forfeitures | | 2 |
| | 4 |
| | 27 |
| | 34 |
| | (8 | ) | | 9 |
| | (71 | ) | | 25 |
|
Restricted stock, stock option and restricted stock unit expense | | 21 |
| | 21 |
| | 85 |
| | 77 |
| | 28 |
| | 25 |
| | 69 |
| | 64 |
|
Acquisition of noncontrolling interest and other | | (32 | ) | | — |
| | (32 | ) | | 1 |
| |
Balance end of period | | 1,915 |
| | 1,781 |
|
| 1,915 |
|
| 1,781 |
| | 1,953 |
| | 1,917 |
|
| 1,953 |
|
| 1,917 |
|
| | | | | | | | | | | | | | | | |
Retained earnings: | | |
| | |
| | | | | | |
| | |
| | | | |
Balance beginning of period | | 5,448 |
| | 4,626 |
| | 5,032 |
| | 4,340 |
| | 6,086 |
| | 5,236 |
| | 5,874 |
| | 5,032 |
|
Net income attributable to Raymond James Financial, Inc. | | 259 |
| | 232 |
| | 769 |
| | 594 |
| | 169 |
| | 261 |
| | 437 |
| | 510 |
|
Cash dividends declared (see Note 20) | | (47 | ) | | (44 | ) | | (146 | ) | | (119 | ) | |
Cash dividends declared (see Note 21) | | | (50 | ) | | (49 | ) | | (106 | ) | | (99 | ) |
Other | | (1 | ) | | — |
| | 4 |
| | (1 | ) | | — |
| | — |
| | — |
| | 5 |
|
Balance end of period | | 5,659 |
| | 4,814 |
| | 5,659 |
| | 4,814 |
| | 6,205 |
| | 5,448 |
| | 6,205 |
| | 5,448 |
|
| | | | | | | | | | | | | | | | |
Treasury stock: | | |
| | |
| | | | | | |
| | |
| | | | |
Balance beginning of period | | (976 | ) | | (412 | ) | | (447 | ) | | (390 | ) | | (1,163 | ) | | (927 | ) | | (1,210 | ) | | (447 | ) |
Purchases/surrenders | | (86 | ) | | (1 | ) | | (598 | ) | | (9 | ) | | (203 | ) | | (48 | ) | | (222 | ) | | (512 | ) |
Exercise of stock options and vesting of restricted stock units, net of forfeitures | | 2 |
| | — |
| | (15 | ) | | (14 | ) | | 15 |
| | (1 | ) | | 81 |
| | (17 | ) |
Balance end of period | | (1,060 | ) | | (413 | ) | | (1,060 | ) | | (413 | ) | | (1,351 | ) | | (976 | ) | | (1,351 | ) | | (976 | ) |
| | | | | | | | | | | | | | | | |
Accumulated other comprehensive loss: | | |
| | |
| | | | | | |
| | |
| | | | |
Balance beginning of period | | (25 | ) | | (23 | ) | | (27 | ) | | (15 | ) | | (5 | ) | | (39 | ) | | (23 | ) | | (27 | ) |
Other comprehensive income/(loss), net of tax | | 11 |
| | (4 | ) | | 17 |
| | (12 | ) | | (6 | ) | | 14 |
| | 12 |
| | 6 |
|
Other | | — |
| | — |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | (4 | ) |
Balance end of period | | (14 | ) | | (27 | ) | | (14 | ) | | (27 | ) | | (11 | ) | | (25 | ) | | (11 | ) | | (25 | ) |
Total equity attributable to Raymond James Financial, Inc. | | $ | 6,502 |
|
| $ | 6,157 |
| | $ | 6,502 |
| | $ | 6,157 |
| | $ | 6,798 |
|
| $ | 6,366 |
| | $ | 6,798 |
| | $ | 6,366 |
|
| | | | | | | | | | | | | | | | |
Noncontrolling interests: | | |
| | |
| | | | | | |
| | |
| | | | |
Balance beginning of period | | $ | 69 |
| | $ | 101 |
| | $ | 84 |
| | $ | 112 |
| | $ | 61 |
| | $ | 82 |
| | $ | 62 |
| | $ | 84 |
|
Net loss attributable to noncontrolling interests | | (2 | ) | | — |
| | (16 | ) | | — |
| | (23 | ) | | (12 | ) | | (24 | ) | | (14 | ) |
Capital contributions | | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
Distributions and other | | (5 | ) | | (8 | ) | | (8 | ) | | (19 | ) | | (2 | ) | | (1 | ) | | (2 | ) | | (3 | ) |
Balance end of period | | 62 |
| | 93 |
| | 62 |
| | 93 |
| | 36 |
| | 69 |
| | 36 |
| | 69 |
|
Total equity | | $ | 6,564 |
| | $ | 6,250 |
| | $ | 6,564 |
| | $ | 6,250 |
| |
Total shareholders’ equity | | | $ | 6,834 |
| | $ | 6,435 |
| | $ | 6,834 |
| | $ | 6,435 |
|
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| | | Nine months ended June 30, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | | | | |
Net income attributable to Raymond James Financial, Inc. | | $ | 769 |
| | $ | 594 |
| |
Net loss attributable to noncontrolling interests | | (16 | ) | | — |
| |
Net income including noncontrolling interests | | 753 |
| | 594 |
| |
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: | | |
| | |
| |
Net income | | | $ | 437 |
| | $ | 510 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| | |
|
Depreciation and amortization | | 81 |
| | 72 |
| | 58 |
| | 53 |
|
Deferred income taxes | | (22 | ) | | 99 |
| | (14 | ) | | (1 | ) |
Premium and discount amortization on available-for-sale securities and loss on other investments | | 14 |
| | 3 |
| | 43 |
| | 7 |
|
Provisions for loan losses, legal and regulatory proceedings and bad debts | | 45 |
| | 34 |
| | 124 |
| | 38 |
|
Share-based compensation expense | | 88 |
| | 75 |
| | 74 |
| | 65 |
|
Unrealized gain on company-owned life insurance policies, net of expenses | | (9 | ) | | (20 | ) | |
Unrealized (gain)/loss on company-owned life insurance policies, net of expenses | | | 76 |
| | 8 |
|
Other | | 47 |
| | 22 |
| | (4 | ) | | 27 |
|
Net change in: | | |
| | |
| | |
| | |
|
Securities purchased under agreements to resell, net of securities sold under agreements to repurchase | | (61 | ) | | (48 | ) | | 273 |
| | (53 | ) |
Securities borrowed, net of securities loaned | | (44 | ) | | (24 | ) | |
Securities loaned, net of securities borrowed | | | (297 | ) | | 319 |
|
Loans provided to financial advisors, net of repayments | | (28 | ) | | (78 | ) | | (11 | ) | | 1 |
|
Brokerage client receivables and other accounts receivable, net | | 679 |
| | (144 | ) | | (203 | ) | | 587 |
|
Trading instruments, net | | (52 | ) | | (88 | ) | | — |
| | (36 | ) |
Derivative instruments, net | | (137 | ) | | 77 |
| | (25 | ) | | (93 | ) |
Other assets | | (83 | ) | | (49 | ) | | (176 | ) | | (118 | ) |
Brokerage client payables and other accounts payable | | (1,300 | ) | | (184 | ) | | 2,937 |
| | (1,088 | ) |
Accrued compensation, commissions and benefits | | (99 | ) | | (52 | ) | | (340 | ) | | (229 | ) |
Proceeds from sales of securitizations and loans held for sale, net of purchases and originations of loans held for sale | | 27 |
| | (65 | ) | | (9 | ) | | 23 |
|
Net cash provided by/(used in) operating activities | | (101 | ) | | 224 |
| |
Net cash provided by operating activities | | | 2,943 |
| | 20 |
|
| | | | | | | | |
Cash flows from investing activities: | | |
| | |
| | |
| | |
|
Additions to property and equipment | | (102 | ) | | (96 | ) | | (71 | ) | | (59 | ) |
Increase in bank loans, net | | (1,226 | ) | | (1,875 | ) | | (1,066 | ) | | (779 | ) |
Proceeds from sales of loans held for investment | | 210 |
| | 140 |
| | 25 |
| | 184 |
|
Purchases of available-for-sale securities | | (689 | ) | | (899 | ) | | (1,403 | ) | | (509 | ) |
Available-for-sale securities maturations, repayments and redemptions | | 456 |
| | 360 |
| | 435 |
| | 295 |
|
Business acquisition, net of cash acquired | | (5 | ) | | (159 | ) | |
Other investing activities, net | | (30 | ) | | 31 |
| | (10 | ) | | (42 | ) |
Net cash used in investing activities | | (1,386 | ) | | (2,498 | ) | | (2,090 | ) | | (910 | ) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) |
| | | Nine months ended June 30, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | 2020 | | 2019 |
Cash flows from financing activities: | | | | | | | | |
Proceeds from borrowings on the RJF Credit Facility | | 300 |
| | 300 |
| | — |
| | 300 |
|
Repayments of borrowings on the RJF Credit Facility | | (300 | ) | | (300 | ) | | — |
| | (300 | ) |
Proceeds from/(repayments of) short-term borrowings, net | | 50 |
| | (610 | ) | |
Proceeds from Federal Home Loan Bank advances | | 850 |
| | 850 |
| | 850 |
| | — |
|
Repayments of Federal Home Loan Bank advances and other borrowed funds | | (854 | ) | | (854 | ) | | (853 | ) | | (3 | ) |
Proceeds from senior notes issuances, net of debt issuance costs paid | | | 495 |
| | — |
|
Exercise of stock options and employee stock purchases | | 53 |
| | 54 |
| | 43 |
| | 43 |
|
Increase in bank deposits | | 2,224 |
| | 1,747 |
| | 7,742 |
| | 1,676 |
|
Purchases of treasury stock | | (616 | ) | | (24 | ) | | (222 | ) | | (521 | ) |
Dividends on common stock | | (143 | ) | | (107 | ) | | (103 | ) | | (95 | ) |
Acquisitions of and distributions to noncontrolling interests, net | | (54 | ) | | (14 | ) | |
Distributions to noncontrolling interests, net | | | (1 | ) | | (1 | ) |
Net cash provided by financing activities | | 1,510 |
| | 1,042 |
| | 7,951 |
| | 1,099 |
|
| | | | | | | | |
Currency adjustment: | | |
| | |
| | |
| | |
|
Effect of exchange rate changes on cash | | (12 | ) | | (47 | ) | | (82 | ) | | (31 | ) |
Net increase/(decrease) in cash, cash equivalents, and cash segregated pursuant to regulations | | 11 |
| | (1,279 | ) | |
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 | | $ | 5,952 |
| | $ | 5,867 |
| |
Net increase in cash and cash equivalents and cash and cash equivalents segregated pursuant to regulations | | | 8,722 |
| | 178 |
|
Cash and cash equivalents and cash and cash equivalents segregated pursuant to regulations at beginning of year | | | 5,971 |
| | 5,941 |
|
Cash and cash equivalents and cash and cash equivalents segregated pursuant to regulations at end of period | | | $ | 14,693 |
| | $ | 6,119 |
|
| | | | | | | | |
Cash and cash equivalents | | $ | 3,596 |
| | $ | 3,180 |
| | $ | 10,648 |
| | $ | 3,831 |
|
Cash segregated pursuant to regulations | | 2,356 |
| | 2,687 |
| |
Total cash, cash equivalents, and cash segregated pursuant to regulations at end of period | | $ | 5,952 |
| | $ | 5,867 |
| |
Cash and cash equivalents segregated pursuant to regulations | | | 4,045 |
| | 2,288 |
|
Total cash and cash equivalents and cash and cash equivalents segregated pursuant to regulations at end of period | | | $ | 14,693 |
| | $ | 6,119 |
|
| | | | | | | | |
Supplemental disclosures of cash flow information: | | |
| | |
| | |
| | |
|
Cash paid for interest | | $ | 208 |
| | $ | 127 |
| | $ | 92 |
| | $ | 147 |
|
Cash paid for income taxes, net | | $ | 295 |
| | $ | 192 |
| | $ | 176 |
| | $ | 188 |
|
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019March 31, 2020
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 2122 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(“2019 Form 10-K”) for the year ended September 30, 2018,2019, as filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) and in Note 98 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 statementsConsolidated Financial Statements and notesNotes thereto included in our 20182019 Form 10-K. To prepare condensed consolidated financial statements in conformityaccordance 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 in the preceding paragraph, certain otherCertain prior period amounts have been reclassified to conform to the current period’s presentation.
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 20182019 Form 10-K. During the ninesix months ended June 30, 2019,March 31, 2020, there were no significant changes to our significant accounting policies other than the accounting policies adopted or modified as part of our implementation of new or amended accounting guidance, as noted in the following sections.
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 June 30, 2019 and September 30, 2018, respectively. Our allowance for doubtful accounts was $10 million and $8 million at June 30, 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 16 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 5 for further information.
Statement of Cash Flows (classification of certain cash receipts and cash payments) - In August 2016, the FASB issued amended guidance related to the Statement of Cash Flows (ASU 2016-15). The amended guidance provides guidance on disclosure and classification of certain items within the statements of cash flows. We adopted this guidance on October 1, 2018, under a retrospective approach. The adoption did not have a material impact on our consolidated statements of cash flows and did not have an impact on our financial position or results of operations.
Statement of Cash Flows (restricted cash) - In November 2016, the FASB issued new guidance related to the classification and presentation of changes in restricted cash on the statement of cash flows (ASU 2016-18). The guidance requires an entity to include restricted cash and cash equivalents in its total of cash and cash equivalents on its statement of cash flows and to present a reconciliation of the beginning-of-period and end-of-period total of such amounts on the statement of cash flows. We adopted this guidance on
Notes to Condensed Consolidated Financial Statements (Unaudited)
October 1, 2018, under a retrospective approach. As a result of adoption, we recorded a decrease of $765 million in net cash provided by operating activities for the nine months ended June 30, 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 June 30, 2019
Lease accounting - In February 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued new guidance related to the accounting for leases (ASU 2016-02). The new guidance and subsequent amendments requires the recognition of assets and liabilities on the balance sheet related to the rights and obligations created by lease agreements with terms greater than twelve months, regardless
Notes to Condensed Consolidated Financial Statements (Unaudited)
of whether they are classified as finance or operating leases. Consistent with currentWe adopted this guidance the recognition, measurement and presentationas 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 use2019 using the alternative modified retrospective approach, with a cumulative effect adjustmentno adjustments to opening retained earningsprior periods presented. In addition, we elected the practical expedients permitted under the transition guidance which, among other things, allowed us to carry forward historical lease classification determinations. On the adoption date, we recognized right-of-use assets (“ROU assets”) and lease liabilities of $333 million and $357 million, respectively, in the period“Other assets” and “Other payables” on our Condensed Consolidated Statements of adoption. Our implementation efforts include reviewing existing leases and service contracts, which may include embedded leases. We are near completion with the process of identifying and validating changes to our business policies and processes, systems and controls, and reports to support adoption of the new guidance. This new guidance will increase both ourFinancial Condition. The ROU assets and lease liabilities on our statement of financial condition. We are evaluating the magnitude of such impact. We do not expect a material impactwere primarily related to operating leases. The adoption had no effect on our results of operations or cash flows. The impact of the adoption on our regulatory capital measures was insignificant. See Note 10 for further information.
Derivatives and hedging (interest rate) - In October 2018, the FASB issued guidance amending Derivatives and Hedging (Topic 815) to add the overnight index swap rate based on the Secured Overnight Financing Rate (“SOFR”) to the list of U.S. benchmark interest rates that are eligible during the early stages of the market transition from the London Interbank Offered Rate (“LIBOR”) to SOFR (ASU 2018-16). The amendments to this guidance will provide adequate lead time for entities to prepare for changes to interest rate hedging strategies. We adopted the guidance October 1, 2019 and will apply the guidance prospectively for qualifying new or re-designated hedging relationships. The adoption did not impact our financial position or results of operations.
Reference rate reform - In March 2020, the FASB issued guidance to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR (ASU 2020-04). The guidance simplifies the accounting for modifying contracts (including those in hedging relationships) that refer to LIBOR and other interbank offered rates. In addition, the guidance allows for changes to the critical terms of a hedging relationship affected by reference rate reform without having to dedesignate the relationship. The guidance was effective upon issuance and generally can be applied through December 31, 2022. We have elected certain expedients for cash flow hedges to assert that the hedged forecasted transaction remains probable, regardless of any expected modification in terms related to reference rate reform. The expedient elected did not impact our financial position or results of operations.
Accounting guidance not yet adopted as of March 31, 2020
Credit losses - In June 2016, the FASB issued new guidance related to the measurement of credit losses on financial instruments (ASU 2016-13). The amended guidance involves several aspects of the accounting for credit losses related to certain financial instruments including assets measured at amortized cost, available-for-sale debt securities and certain off-balance sheet commitments. The new guidance, and subsequent updates, broadens the information that an entity must consider in developing its estimated credit losses expected to occur over the remaining life of assets measured either collectively or individually to include historical experience, current conditions and reasonable and supportable forecasts, replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses (“CECL”) model. The new guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This new guidance is first effective for our fiscal year beginning on October 1, 2020 and will be adopted under a modified retrospective approach. Although permitted, we do not plan to early adopt. We haveOur cross-functional team has continued with our implementation and evaluation efforts, which include a cross-functional team to assessefforts. We are in the required changes toprocess of validating our credit loss estimation methodologies and systems,models, as well as the determination of additional dataestablishing formal policies and resources requiredprocedures, including control documentation related to comply withthis new guidance. In addition we are developing the new disclosures required by this new guidance. We are evaluatingcontinue to evaluate the impact the adoption of this new guidance will have on our financial
Notes to Condensed Consolidated Financial Statements (Unaudited)
position and results of operations, whichoperations. The impact will ultimately depend on, among other things, thechanges to our methodologies, management judgments, 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-cancellablenon-cancelable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. This amended guidance is first effective for our fiscal year beginning on October 1, 2020 with early adoption permitted.permitted, although we do not plan to early adopt. The guidance may be adopted either using the prospective or retrospective approach. We are currently evaluating the impact of this new guidance on our financial position and results of operations.
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 entityVIE 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.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.
NOTE 3 - ACQUISITIONS
Effective April 2019, we increased our ownership of ClariVest Asset Management LLC (“ClariVest”) from 45% to 100% making ClariVest a wholly-owned subsidiary of Eagle Asset Management. ClariVest has been included in our consolidated financial statements since our initial investment of the 45% interest as we concluded we were required to consolidate as defined by accounting guidance. The increase in ownership was accounted for as a shareholder’s equity transaction.
In April 2019, we completed our acquisition of Silver Lane Advisors LLC (“Silver Lane”), a boutique investment bank focused on merger & acquisition advisory. Silver Lane has been integrated into our Capital Markets segment. We accounted for this acquisition under the acquisition method of accounting with the assets and liabilities of Silver Lane recorded as of the acquisition date at their respective fair values in our consolidated financial statements. For purposes of certain acquisition-related financial reporting requirements, the Silver Lane acquisition was not considered a material acquisition. Silver Lane’s results of operations have been included in our results prospectively from April 1, 2019.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 43 – 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 20182019 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 65 for additional information.
| | $ in millions | | Level 1 | | Level 2 | | Level 3 | | Netting adjustments | | Balance as of June 30, 2019 | | Level 1 | | Level 2 | | Level 3 | | Netting adjustments | | Balance as of March 31, 2020 |
Assets at fair value on a recurring basis: | | | | | | | | | | | | | | | | | | | | |
Trading instruments | | | | | | | | | | | | | | | | | | | | |
Municipal and provincial obligations | | $ | — |
| | $ | 242 |
| | $ | — |
| | $ | — |
| | $ | 242 |
| | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | 14 |
|
Corporate obligations | | 12 |
| | 111 |
| | — |
| | — |
| | 123 |
| | 12 |
| | 9 |
| | — |
| | — |
| | 21 |
|
Government and agency obligations | | 32 |
| | 84 |
| | — |
| | — |
| | 116 |
| | 30 |
| | 28 |
| | — |
| | — |
| | 58 |
|
Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”) | | — |
| | 198 |
| | — |
| | — |
| | 198 |
| | — |
| | 281 |
| | — |
| | — |
| | 281 |
|
Non-agency CMOs and asset-backed securities (“ABS”) | | — |
| | 71 |
| | — |
| | — |
| | 71 |
| | — |
| | 17 |
| | — |
| | — |
| | 17 |
|
Total debt securities | | 44 |
|
| 706 |
| | — |
| | — |
| | 750 |
| | 42 |
|
| 349 |
| | — |
| | — |
| | 391 |
|
Equity securities | | 12 |
| | 1 |
| | — |
| | — |
| | 13 |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Brokered certificates of deposit | | — |
| | 39 |
| | — |
| | — |
| | 39 |
| | — |
| | 24 |
| | — |
| | — |
| | 24 |
|
Other | | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | 21 |
| | — |
| | 21 |
|
Total trading instruments | | 56 |
| | 746 |
| | 1 |
| | — |
| | 803 |
| | 51 |
| | 373 |
| | 21 |
| | — |
| | 445 |
|
Available-for-sale securities - agency MBS and CMOs | | — |
| | 2,960 |
| | — |
| | — |
| | 2,960 |
| |
Available-for-sale securities (1) | | | 16 |
| | 4,249 |
| | — |
| | — |
| | 4,265 |
|
Derivative assets | | | | | | | | | | | | | | | | | | | | |
Interest rate - Matched book | | — |
| | 246 |
| | — |
| | — |
| | 246 |
| |
Interest rate - Other | | 10 |
| | 127 |
| | — |
| | (80 | ) | | 57 |
| |
Foreign exchange | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| |
Interest rate - matched book | | | — |
| | 351 |
| | — |
| | — |
| | 351 |
|
Interest rate - other | | | 93 |
| | 266 |
| | — |
| | (263 | ) | | 96 |
|
Total derivative assets | | 10 |
| | 374 |
| | — |
| | (80 | ) | | 304 |
| | 93 |
| | 617 |
| | — |
| | (263 | ) | | 447 |
|
Private equity investments - not measured at net asset value (“NAV”) | | — |
| | — |
| | 59 |
| | — |
| | 59 |
| |
Other investments | | 187 |
| | 1 |
| | 65 |
| | — |
| | 253 |
| |
Other investments - private equity - not measured at net asset value (“NAV”) | | | — |
| | — |
| | 30 |
| | — |
| | 30 |
|
All other investments | | | 192 |
| | 1 |
| | 22 |
| | — |
| | 215 |
|
Subtotal | | 253 |
| | 4,081 |
| | 125 |
| | (80 | ) | | 4,379 |
| | 352 |
| | 5,240 |
| | 73 |
| | (263 | ) | | 5,402 |
|
Private equity investments - measured at NAV | | | | | | | | | | 87 |
| |
Other investments - private equity - measured at NAV | | | | | | | | | | | 71 |
|
Total assets at fair value on a recurring basis | | $ | 253 |
|
| $ | 4,081 |
|
| $ | 125 |
|
| $ | (80 | ) |
| $ | 4,466 |
| | $ | 352 |
|
| $ | 5,240 |
|
| $ | 73 |
|
| $ | (263 | ) |
| $ | 5,473 |
|
| | | | | | | | | | | | | | | | | | | | |
Liabilities at fair value on a recurring basis: | | | | | | | | | | | | | | | | | | | | |
Trading instruments sold but not yet purchased | | | | | | | | | | | | | | | | | | | | |
Municipal and provincial obligations | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Corporate obligations | | 1 |
| | 16 |
| | — |
| | — |
| | 17 |
| | 1 |
| | 7 |
| | — |
| | — |
| | 8 |
|
Government and agency obligations | | 260 |
| | — |
| | — |
| | — |
| | 260 |
| | 6 |
| | — |
| | — |
| | — |
| | 6 |
|
Non-agency CMOs and ABS | | | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
Total debt securities | | 262 |
| | 16 |
| | — |
| | — |
| | 278 |
| | 8 |
| | 13 |
| | — |
| | — |
| | 21 |
|
Equity securities | | 6 |
| | — |
| | — |
| | — |
| | 6 |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
Other | | — |
| | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total trading instruments sold but not yet purchased | | 268 |
| | 16 |
| | 3 |
| | — |
| | 287 |
| | 11 |
| | 13 |
| | — |
| | — |
| | 24 |
|
Derivative liabilities | | | | | | | | | | | | | | | | | | | | |
Interest rate - Matched book | | — |
| | 246 |
| | — |
| | — |
| | 246 |
| |
Interest rate - Other | | 12 |
| | 106 |
| | — |
| | (100 | ) | | 18 |
| |
Interest rate - matched book | | | — |
| | 351 |
| | — |
| | — |
| | 351 |
|
Interest rate - other | | | 102 |
| | 185 |
| | — |
| | (218 | ) | | 69 |
|
Foreign exchange | | — |
| | 4 |
| | — |
| | — |
| | 4 |
| | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
Equity - Deutsche Bank restricted stock unit (“DBRSU”) obligation | | — |
| | 7 |
| | — |
| | — |
| | 7 |
| |
Equity | | | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
Total derivative liabilities | | 12 |
| | 363 |
| | — |
| | (100 | ) | | 275 |
| | 102 |
| | 543 |
| | — |
| | (218 | ) | | 427 |
|
Total liabilities at fair value on a recurring basis | | $ | 280 |
| | $ | 379 |
| | $ | 3 |
| | $ | (100 | ) | | $ | 562 |
| | $ | 113 |
| | $ | 556 |
| | $ | — |
| | $ | (218 | ) | | $ | 451 |
|
| |
(1) | Substantially all of our available-for-sale securities consist of agency MBS and CMOs. See Note 4 for further information. |
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | $ in millions | | Level 1 | | Level 2 | | Level 3 | | Netting adjustments | | Balance as of September 30, 2018 | | Level 1 | | Level 2 | | Level 3 | | Netting adjustments | | Balance as of September 30, 2019 |
Assets at fair value on a recurring basis: | | | | | | | | | | | | | | | | | | | | |
Trading instruments | | | | | | | | | | | | | | | | | | | | |
Municipal and provincial obligations | | $ | 1 |
| | $ | 247 |
| | $ | — |
| | $ | — |
| | $ | 248 |
| | $ | — |
| | $ | 267 |
| | $ | — |
| | $ | — |
| | $ | 267 |
|
Corporate obligations | | 10 |
| | 100 |
| | — |
| | — |
| | 110 |
| | 8 |
| | 95 |
| | — |
| | — |
| | 103 |
|
Government and agency obligations | | 19 |
| | 72 |
| | — |
| | — |
| | 91 |
| | 12 |
| | 67 |
| | — |
| | — |
| | 79 |
|
Agency MBS and CMOs | | 3 |
| | 124 |
| | — |
| | — |
| | 127 |
| | — |
| | 147 |
| | — |
| | — |
| | 147 |
|
Non-agency CMOs and ABS | | — |
| | 69 |
| | — |
| | — |
| | 69 |
| | — |
| | 51 |
| | — |
| | — |
| | 51 |
|
Total debt securities | | 33 |
| | 612 |
| | — |
| | — |
| | 645 |
| | 20 |
| | 627 |
| | — |
| | — |
| | 647 |
|
Equity securities | | 15 |
| | — |
| | — |
| | — |
| | 15 |
| | 12 |
| | 1 |
| | — |
| | — |
| | 13 |
|
Brokered certificates of deposit | | — |
| | 39 |
| | — |
| | — |
| | 39 |
| | — |
| | 45 |
| | — |
| | — |
| | 45 |
|
Other | | — |
| | 2 |
| | 1 |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Total trading instruments | | 48 |
| | 653 |
| | 1 |
| | — |
| | 702 |
| | 32 |
| | 673 |
| | 3 |
| | — |
| | 708 |
|
Available-for-sale securities(1) | | |
| | |
| | |
| | |
| | |
| | 10 |
| | 3,083 |
| | — |
| | — |
| | 3,093 |
|
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 |
| |
Interest rate - matched book | | | — |
| | 280 |
| | — |
| | — |
| | 280 |
|
Interest rate - other | | | 3 |
| | 182 |
| | — |
| | (127 | ) | | 58 |
|
Total derivative assets | | — |
|
| 235 |
|
| — |
|
| (55 | ) |
| 180 |
| | 3 |
|
| 462 |
|
| — |
|
| (127 | ) |
| 338 |
|
Private equity investments - not measured at NAV | | — |
| | — |
| | 56 |
| | — |
| | 56 |
| |
Other investments | | 201 |
| | 1 |
| | — |
| | — |
| | 202 |
| |
Other investments - private equity - not measured at NAV | | | — |
| | — |
| | 63 |
| | — |
| | 63 |
|
All other investments | | | 194 |
| | 1 |
| | 24 |
| | — |
| | 219 |
|
Subtotal | | 250 |
| | 3,517 |
| | 124 |
| | (55 | ) | | 3,836 |
| | 239 |
| | 4,219 |
| | 90 |
| | (127 | ) | | 4,421 |
|
Private equity investments - measured at NAV | | | | | | | | | | 91 |
| |
Other investments - private equity - measured at NAV | | | | | | | | | | | 83 |
|
Total assets at fair value on a recurring basis | | $ | 250 |
| | $ | 3,517 |
| | $ | 124 |
| | $ | (55 | ) | | $ | 3,927 |
| | $ | 239 |
| | $ | 4,219 |
| | $ | 90 |
| | $ | (127 | ) | | $ | 4,504 |
|
| | | | | | | | | | | | | | | | | | | | |
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 |
| | $ | 2 |
| | $ | 20 |
| | $ | — |
| | $ | — |
| | $ | 22 |
|
Government and agency obligations | | 194 |
| | — |
| | — |
| | — |
| | 194 |
| | 269 |
| | — |
| | — |
| | — |
| | 269 |
|
Non-agency MBS and CMOs | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| |
Total debt securities | | 196 |
| | 27 |
| | — |
| | — |
| | 223 |
| | 271 |
| | 20 |
| | — |
| | — |
| | 291 |
|
Equity securities | | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | 4 |
| | — |
| | — |
| | — |
| | 4 |
|
Other | | — |
| | — |
| | 7 |
| | — |
| | 7 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Total trading instruments sold but not yet purchased | | 201 |
| | 27 |
| | 7 |
| | — |
| | 235 |
| | 275 |
| | 20 |
| | 1 |
| | — |
| | 296 |
|
Derivative liabilities | | | | | | | | | | | | | | | | | | | | |
Interest rate - Matched book | | — |
| | 160 |
| | — |
| | — |
| | 160 |
| |
Interest rate - Other | | — |
| | 114 |
| | — |
| | (47 | ) | | 67 |
| |
Interest rate - matched book | | | — |
| | 280 |
| | — |
| | — |
| | 280 |
|
Interest rate - other | | | 4 |
| | 142 |
| | — |
| | (121 | ) | | 25 |
|
Foreign exchange | | — |
| | 4 |
| | — |
| | — |
| | 4 |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
Equity - DBRSU obligation | | — |
| | 16 |
| | — |
| | — |
| | 16 |
| |
Equity | | | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
Total derivative liabilities | | — |
| | 294 |
| | — |
| | (47 | ) | | 247 |
| | 4 |
| | 430 |
| | — |
| | (121 | ) | | 313 |
|
Total liabilities at fair value on a recurring basis | | $ | 201 |
| | $ | 321 |
| | $ | 7 |
| | $ | (47 | ) | | $ | 482 |
| | $ | 279 |
| | $ | 450 |
| | $ | 1 |
| | $ | (121 | ) | | $ | 609 |
|
| |
(1) | Substantially all of our available-for-sale securities consist of agency MBS and CMOs. See Note 4 for further information. |
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,”transactions” and 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.revenues.
| | Three months ended June 30, 2019 Level 3 instruments at fair value | |
Three months ended March 31, 2020 Level 3 instruments at fair value | | Three months ended March 31, 2020 Level 3 instruments at fair value |
| | | Financial assets | | Financial liabilities |
| | Financial assets | | Financial liabilities | | Trading instruments | | Other investments | | Trading instruments |
$ in millions | | Trading instruments - Other | | Private equity investments | | Other investments | | Trading instruments - Other | | Other | | Private equity investments | | All other | | Other |
Fair value beginning of period | | $ | 2 |
| | $ | 59 |
| | $ | 67 |
| | $ | (7 | ) | | $ | 19 |
| | $ | 62 |
| | $ | 24 |
| | $ | (1 | ) |
Total gains/(losses) included in earnings | | (1 | ) | | — |
| | (2 | ) | | — |
| | 3 |
| | (32 | ) | | (2 | ) | | — |
|
Purchases and contributions | | 26 |
| | — |
| | — |
| | 7 |
| | 22 |
| | — |
| | — |
| | 1 |
|
Sales | | (26 | ) | | — |
| | — |
| | (3 | ) | |
Sales and distributions | | | (23 | ) | | — |
| | — |
| | — |
|
Transfers: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Into Level 3 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Out of Level 3 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Fair value end of period | | $ | 1 |
| | $ | 59 |
| | $ | 65 |
| | $ | (3 | ) | | $ | 21 |
| | $ | 30 |
| | $ | 22 |
| | $ | — |
|
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period | | $ | 1 |
| | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | 5 |
| | $ | (32 | ) | | $ | (2 | ) | | $ | — |
|
| | Nine months ended June 30, 2019 Level 3 instruments at fair value | |
Six months ended March 31, 2020 Level 3 instruments at fair value | | Six months ended March 31, 2020 Level 3 instruments at fair value |
| | | Financial assets | | Financial liabilities |
| | Financial assets | | Financial liabilities | | Trading instruments | | Other investments | | Trading instruments |
$ in millions | | Trading instruments - Other | | Private equity investments | | Other investments (1) | | Trading instruments - Other | | Other | | Private equity investments | | All other | | Other |
Fair value beginning of period | | $ | 1 |
| | $ | 56 |
| | $ | 67 |
| | $ | (7 | ) | | $ | 3 |
| | $ | 63 |
| | $ | 24 |
| | $ | (1 | ) |
Total gains/(losses) included in earnings | | (1 | ) | | — |
| | (2 | ) | | 2 |
| | 3 |
| | (32 | ) | | (2 | ) | | — |
|
Purchases and contributions | | 86 |
| | 3 |
| | — |
| | 16 |
| | 53 |
| | — |
| | — |
| | 2 |
|
Sales | | (85 | ) | | — |
| | — |
| | (14 | ) | |
Sales and distributions | | | (38 | ) | | (1 | ) | | — |
| | (1 | ) |
Transfers: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Into Level 3 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Out of Level 3 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Fair value end of period | | $ | 1 |
| | $ | 59 |
| | $ | 65 |
| | $ | (3 | ) | | $ | 21 |
| | $ | 30 |
| | $ | 22 |
| | $ | — |
|
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period | | $ | 1 |
| | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | 5 |
| | $ | (32 | ) | | $ | (2 | ) | | $ | — |
|
|
| | | | | | | | | | | | | | | | |
Three months ended March 31, 2019 Level 3 instruments at fair value |
| | Financial assets | | Financial liabilities |
| | Trading instruments | | Other investments | | Trading instruments |
$ in millions | | Other | | Private equity investments | | All other | | Other |
Fair value beginning of period | | $ | 3 |
| | $ | 59 |
| | $ | 67 |
| | $ | (4 | ) |
Total gains/(losses) included in earnings | | (1 | ) | | — |
| | — |
| | — |
|
Purchases and contributions | | 22 |
| | — |
| | — |
| | 4 |
|
Sales and distributions | | (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 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| |
(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. |
Notes to Condensed Consolidated Financial Statements (Unaudited)
| | Three months ended June 30, 2018 Level 3 instruments at fair value | |
Six months ended March 31, 2019 Level 3 instruments at fair value | | Six months ended March 31, 2019 Level 3 instruments at fair value |
| | | Financial assets | | Financial liabilities |
| | Financial assets | | Financial liabilities | | Trading instruments | | Other investments | | Trading instruments |
$ in millions | | Trading instruments - Other | | Available-for-sale securities - ARS - preferred | | Private equity investments | | Trading instruments - Other | | Other | | Private equity investments | | All other | | Other |
Fair value beginning of period | | $ | 1 |
| | $ | 108 |
| | $ | 96 |
| | $ | (1 | ) | | $ | 1 |
| | $ | 56 |
| | $ | 67 |
| | $ | (7 | ) |
Total gains/(losses) for the period: | | | | | | |
| | |
| |
Included in earnings | | — |
| | — |
| | 4 |
| | — |
| |
Included in other comprehensive income | | — |
| | 3 |
| | — |
| | — |
| |
Total gains/(losses) included in earnings | | | — |
| | — |
| | — |
| | 2 |
|
Purchases and contributions | | 18 |
| | — |
| | — |
| | — |
| | 60 |
| | 3 |
| | — |
| | 9 |
|
Sales | | (15 | ) | | — |
| | (28 | ) | | (1 | ) | |
Sales and distributions | | | (59 | ) | | — |
| | — |
| | (11 | ) |
Transfers: | | | | | | | | | | | | | | | | |
Into Level 3 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Out of Level 3 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Fair value end of period | | $ | 4 |
| | $ | 111 |
| | $ | 72 |
| | $ | (2 | ) | | $ | 2 |
| | $ | 59 |
| | $ | 67 |
| | $ | (7 | ) |
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Unrealized gains/(losses) for the period included in other comprehensive income for instruments held at the end of the reporting period | | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| |
|
| | | | | | | | | | | | | | | | |
Nine months ended June 30, 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 | ) | | — |
| | 11 |
| | — |
|
Included in other comprehensive income | | — |
| | 5 |
| | — |
| | — |
|
Purchases and contributions | | 62 |
| | — |
| | — |
| | — |
|
Sales | | (63 | ) | | — |
| | (28 | ) | | (2 | ) |
Transfers: | | | | | | | | |
Into Level 3 | | — |
| | — |
| | — |
| | — |
|
Out of Level 3 | | — |
| | — |
| | — |
| | — |
|
Fair value end of period | | $ | 4 |
| | $ | 111 |
| | $ | 72 |
| | $ | (2 | ) |
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Unrealized gains/(losses) for the period included in other comprehensive income for instruments held at the end of the reporting period | | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
|
The net unrealized losses on our Level 3 private equity investments for the three and six months ended March 31, 2020 were primarily driven by the negative impact of the coronavirus (“COVID-19”) pandemic on certain of our investments.
As of JuneMarch 31, 2020, 11% of our assets and 1% of our liabilities were measured at fair value on a recurring basis. In comparison, as of September 30, 2019, 12% of our assets and 2% of our liabilities were measured at fair value on a recurring basis. In comparison, asAs of March 31, 2020 and September 30, 2018, 10% of our assets and 2% of our liabilities were measured at fair value on a recurring basis. Instruments2019, instruments measured at fair value on a recurring basis categorized as Level 3 represented 3%1% and 2%, respectively, of our assets measured at fair value as of both June 30, 2019 and September 30, 2018.
Notes to Condensed Consolidated Financial Statements (Unaudited)
value.
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 majoritycertain of our financial instrumentsprivate equity investments 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 valuesvalue of the related financial instrument.
|
| | | | | | | | | | | |
Level 3 financial instrument $ in millions | | Fair value at June 30, 2019 | | Valuation technique(s) | | Unobservable input | | Range (weighted-average) |
Recurring measurements | | | | | | | | |
Other investments - ARS preferred | | $ | 24 |
| | Discounted cash flow | | Average discount rate | | 5.35% - 6.35% (5.85%) |
|
| | |
| | | | Average interest rates applicable to future interest income on the securities (1) | | 2.31% - 2.31% (2.31%) |
|
| | |
| | | | Prepayment year (2) | | 2019 - 2022 (2022) |
|
| | $ | 40 |
| | Other investment-specific events (3) | | Not meaningful (3) | | Not meaningful (3) |
|
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 (4) | | Not meaningful (4) | | Not meaningful (4) |
|
|
| | | | | | | | | | | |
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 (4) | | Not meaningful (4) | | Not meaningful (4) |
|
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 or new developments become known.
| |
(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. |
|
| | | | | | | | | | | |
Recurring measurements | | Fair value at March 31, 2020 | | Valuation technique(s) | | Unobservable input | | Range (weighted-average) |
$ in millions | | | | | | | | |
Other investments - private equity investments (not measured at NAV) | | $ | 30 |
| | Discounted cash flow, transaction price or other investment-specific events | | Discount rate | | 25 | % |
| | | | | | Terminal earnings before interest, tax, depreciation and amortization (“EBITDA”) multiple | | 9.0x |
|
| | | | | | Terminal year | | 2021 - 2042 (2024) |
|
| | Fair value at September 30, 2019 | | | | | | |
Other investments - private equity investments (not measured at NAV) | | $ | 63 |
| | Discounted cash flow, transaction price or other investment-specific events | | Discount rate | | 25 | % |
| | | | | | Terminal EBITDA multiple | | 12.5x |
|
| | | | | | Terminal year | | 2021 - 2042 (2022) |
|
| |
(2) | Assumed calendar year of at least a partial redemption of the outstanding security by the issuer. |
| |
(3) | During the third fiscal quarter of 2019, an issuer within our ARS preferred portfolio commenced tender offers to which we tendered holdings with a fair value of $40 million as of June 30, 2019. The tender offers were settled and payment was received in July 2019. |
Notes to Condensed Consolidated Financial Statements (Unaudited)
| |
(4) | 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 disclosureinformation 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
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.section.
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. Increases in the terminal year are dependent upon each investment’s strategy, but generally result in a lower fair value measurement.
Investments in private equity measured at net asset value per share
As more fully described in Note 2 of our 20182019 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 June 30, 2019 includedincludes various direct investments, as well as investments in third-party private equity funds and various legacy private equity funds which we sponsor. The portfolio is primarily invested in a broad range of industries including leveraged buyouts, growth capital, distressed capital, venture capital and mezzanine capital. Due to the closed-end nature of certain of our fund investments, such investments cannot be redeemed directly with the funds. Our investment is monetized by distributions received through the liquidation of the underlying assets of those funds, the timing of which is uncertain.
The following table presents the recorded value and unfunded commitments related to our private equity investments portfolio.
| | $ in millions | | Recorded value | | Unfunded commitment | | Recorded value | | Unfunded commitment |
June 30, 2019 | | | | | |
March 31, 2020 | | | | | |
Private equity investments measured at NAV | | $ | 87 |
| | $ | 15 |
| | $ | 71 |
| | $ | 12 |
|
Private equity investments not measured at NAV | | 59 |
| | | | 30 |
| | |
Total private equity investments | | $ | 146 |
| | | | $ | 101 |
| | |
| | | | | | | | |
September 30, 2018 | | | | | |
September 30, 2019 | | | | | |
Private equity investments measured at NAV | | $ | 91 |
| | $ | 18 |
| | $ | 83 |
| | $ | 15 |
|
Private equity investments not measured at NAV | | 56 |
| | | | 63 |
| | |
Total private equity investments | | $ | 147 |
| | | | $ | 146 |
| | |
Of the total private equity investments, the portions we owned were $101$79 million and $103$99 million as of June 30, 2019March 31, 2020 and September 30, 2018,2019, respectively. The portions of the private equity investments we did not own were $45$22 million and $44$47 million as of June 30, 2019March 31, 2020 and September 30, 2018,2019, respectively, and were included as a component of noncontrolling interests on our Condensed Consolidated Statements of Financial Condition.
Many of these fund investments meet the definition of prohibited covered funds as defined by the Volcker Rule enacted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).2010. We have received approval from the Board of Governors of the Federal Reserve System (the “Fed”) to continue to hold the majority of our covered fund investments until July 2022. However, our current focus is on the divestiture of this portfolio.
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 valuesvalue of the related financial instrument.
| | $ in millions | | Level 2 | | Level 3 | | Total fair value | | Valuation technique(s) | | Unobservable input | | Range (weighted-average) | | Level 2 | | Level 3 | | Total fair value | | Valuation technique(s) | | Unobservable input | | Range (weighted-average) |
June 30, 2019 | | | | | | | | |
March 31, 2020 | | | | | | | | |
Bank loans, net: | | | | | | | | | | | | | | |
Impaired loans: residential | | $ | 7 |
| | $ | 15 |
| | $ | 22 |
| | Discounted cash flow | | Prepayment rate | | 7 yrs. - 12 yrs. (10.4 yrs.) | | $ | 4 |
| | $ | 14 |
| | $ | 18 |
| | Discounted cash flow | | Prepayment rate | | 7 yrs. - 12 yrs. (10.4 yrs.) |
Impaired loans: corporate | | $ | — |
| | $ | 28 |
| | $ | 28 |
| | Collateral or discounted cash flow (1) | | Not meaningful (1) | | Not meaningful (1) | | $ | — |
| | $ | 10 |
| | $ | 10 |
| | Collateral or discounted cash flow (1) | | Not meaningful (1) | | Not meaningful (1) |
Loan held for sale | | $ | 52 |
| | $ | — |
| | $ | 52 |
| | N/A | | N/A | | N/A | | $ | 67 |
| | $ | — |
| | $ | 67 |
| | N/A | | N/A | | N/A |
Other assets: other real estate owned | | $ | 1 |
| | $ | — |
| | $ | 1 |
| | N/A | | N/A | | N/A | | $ | 2 |
| | $ | — |
| | $ | 2 |
| | N/A | | N/A | | N/A |
| | | | | |
| | | | | | |
| |
September 30, 2018 | | | | | | | | |
September 30, 2019 | | | | | | | | |
Bank loans, net: | | | | | | | | | | | | | | |
Impaired loans: residential | | $ | 10 |
| | $ | 17 |
| | $ | 27 |
| | Discounted cash flow | | Prepayment rate | | 7 yrs. - 12 yrs. (10.5 yrs.) | | $ | 7 |
| | $ | 14 |
| | $ | 21 |
| | Discounted cash flow | | Prepayment rate | | 7 yrs. - 12 yrs. (10.4 yrs.) |
Impaired loans: corporate | | $ | — |
| | $ | 1 |
| | $ | 1 |
| | Collateral or discounted cash flow (1) | | Not meaningful (1) | | Not meaningful (1) | | $ | — |
| | $ | 21 |
| | $ | 21 |
| | Collateral or discounted cash flow (1) | | Not meaningful (1) | | Not meaningful (1) |
Loan held for sale | | $ | 41 |
| | $ | — |
| | $ | 41 |
| | N/A | | N/A | | N/A | | $ | 66 |
| | $ | — |
| | $ | 66 |
| | N/A | | N/A | | N/A |
Other assets: other real estate owned | | | $ | 1 |
| | $ | — |
| | $ | 1 |
| | N/A | | N/A | | N/A |
| |
(1) | The valuation techniques used for the corporate loans are based on collateral value less selling costs for the collateral dependent loans and discounted cash flows for impaired loans that are not collateral dependent. |
Financial instruments not measuredrecorded at fair value
Many, but not all, of the financial instruments we hold were recorded at fair value on the Condensed Consolidated Statements of Financial Condition. The following table presents the estimated fair value and fair value hierarchy of financial assets and liabilities that are not recorded at fair value in accordance with GAAP on the Condensed Consolidated Statements of Financial Condition.Condition at March 31, 2020 and September 30, 2019. This table excludes financial instruments that are carried at amounts which approximate fair value. Refer to Note 4 of our 20182019 Form 10-K for a 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 | | Level 2 | | Level 3 | | Total estimated fair value | | Carrying amount |
June 30, 2019 | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | |
Bank loans, net | | $ | — |
| | $ | 81 |
| | $ | 20,474 |
| | $ | 20,555 |
| | $ | 20,589 |
| | $ | 56 |
| | $ | 21,823 |
| | $ | 21,879 |
| | $ | 21,693 |
|
Financial liabilities: | | | | | | | | |
| | | | | | | | |
| | |
Bank deposits - Certificates of deposit | | $ | — |
| | $ | — |
| | $ | 550 |
| | $ | 550 |
| | $ | 543 |
| |
Bank deposits - certificates of deposit | | | $ | — |
| | $ | 1,191 |
| | $ | 1,191 |
| | $ | 1,150 |
|
Senior notes payable | | $ | — |
| | $ | 1,694 |
| | $ | — |
| | $ | 1,694 |
| | $ | 1,550 |
| | $ | 2,208 |
| | $ | — |
| | $ | 2,208 |
| | $ | 2,044 |
|
| | | | | | | | | | | | | | | | | | |
September 30, 2018 | | | | | | | | | | | |
September 30, 2019 | | | | | | | | | |
Financial assets: | | | | | | | | | | | | | | | | | | |
Bank loans, net | | $ | — |
| | $ | 124 |
| | $ | 19,116 |
| | $ | 19,240 |
| | $ | 19,449 |
| | $ | 75 |
| | $ | 20,710 |
| | $ | 20,785 |
| | $ | 20,783 |
|
Financial liabilities: | | | | | | | | |
| | | | | | | | |
| | |
Bank deposits | | $ | — |
| | $ | 19,496 |
| | $ | 439 |
| | $ | 19,935 |
| | $ | 19,942 |
| |
Bank deposits - certificates of deposit | | | $ | — |
| | $ | 617 |
| | $ | 617 |
| | $ | 605 |
|
Senior notes payable | | $ | — |
| | $ | 1,558 |
| | $ | — |
| | $ | 1,558 |
| | $ | 1,550 |
| | $ | 1,760 |
| | $ | — |
| | $ | 1,760 |
| | $ | 1,550 |
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 54 – AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities are primarily 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 20182019 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 | | Cost basis | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
June 30, 2019 | | | | | | | | | |
Agency residential MBS | | $ | 1,529 |
| | $ | 17 |
| | $ | (2 | ) | | $ | 1,544 |
| |
Agency commercial MBS | | 285 |
| | 4 |
| | — |
| | 289 |
| |
Agency CMOs | | 1,125 |
| | 6 |
| | (4 | ) | | 1,127 |
| |
Total available-for-sale securities | | $ | 2,939 |
| | $ | 27 |
| | $ | (6 | ) | | $ | 2,960 |
| |
| | | | | | | | | |
September 30, 2018 | | |
| | |
| | |
| | |
| |
March 31, 2020 | | | | | | | | | |
Agency residential MBS | | $ | 1,616 |
| | $ | — |
| | $ | (40 | ) | | $ | 1,576 |
| | $ | 1,929 |
| | $ | 56 |
| | $ | — |
| | $ | 1,985 |
|
Agency commercial MBS | | 47 |
| | — |
| | — |
| | 47 |
| | 533 |
| | 16 |
| | — |
| | 549 |
|
Agency CMOs | | 1,035 |
| | — |
| | (30 | ) | | 1,005 |
| | 1,677 |
| | 39 |
| | (1 | ) | | 1,715 |
|
Other securities | | 2 |
| | — |
| | (1 | ) | | 1 |
| | 15 |
| | 1 |
| | — |
| | 16 |
|
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 |
| | $ | 4,154 |
| | $ | 112 |
| | $ | (1 | ) | | $ | 4,265 |
|
| | | | | | | | | |
September 30, 2019 | | | |
| | |
| | |
| | |
|
Agency residential MBS | | | $ | 1,555 |
| | $ | 20 |
| | $ | (1 | ) | | $ | 1,574 |
|
Agency commercial MBS | | | 305 |
| | 5 |
| | — |
| | 310 |
|
Agency CMOs | | | 1,195 |
| | 7 |
| | (3 | ) | | 1,199 |
|
Other securities | | | 10 |
| | — |
| | — |
| | 10 |
|
Total available-for-sale securities | | | $ | 3,065 |
| | $ | 32 |
| | $ | (4 | ) | | $ | 3,093 |
|
See Note 43 for additional information regarding the fair value of available-for-sale securities.
The following table details the contractual maturities, amortized cost,costs, carrying values and current yields for our available-for-sale securities. Since our MBS and CMO available-for-sale securities are backed by mortgages, actual maturities may differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties. As of March 31, 2020, the duration of our available-for-sale securities portfolio was approximately three years.
| | | | June 30, 2019 | | March 31, 2020 |
$ in millions | | Within one year | | After one but within five years | | After five but within ten years | | After ten years | | Total | | Within one year | | After one but within five years | | After five but within ten years | | After ten years | | Total |
Agency residential MBS | | | | | | | | | | |
| | | | | | | | | | |
|
Amortized cost | | $ | — |
| | $ | 25 |
| | $ | 869 |
| | $ | 635 |
| | $ | 1,529 |
| | $ | — |
| | $ | 32 |
| | $ | 791 |
| | $ | 1,106 |
| | $ | 1,929 |
|
Carrying value | | $ | — |
| | $ | 25 |
| | $ | 877 |
| | $ | 642 |
| | $ | 1,544 |
| | $ | — |
| | $ | 33 |
| | $ | 818 |
| | $ | 1,134 |
| | $ | 1,985 |
|
Agency commercial MBS | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | 5 |
| | $ | 214 |
| | $ | 32 |
| | $ | 34 |
| | $ | 285 |
| | $ | — |
| | $ | 189 |
| | $ | 265 |
| | $ | 79 |
| | $ | 533 |
|
Carrying value | | $ | 5 |
| | $ | 216 |
| | $ | 33 |
| | $ | 35 |
| | $ | 289 |
| | $ | — |
| | $ | 193 |
| | $ | 276 |
| | $ | 80 |
| | $ | 549 |
|
Agency CMOs | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | — |
| | $ | — |
| | $ | 92 |
| | $ | 1,033 |
| | $ | 1,125 |
| | $ | — |
| | $ | 2 |
| | $ | 79 |
| | $ | 1,596 |
| | $ | 1,677 |
|
Carrying value | | $ | — |
| | $ | — |
| | $ | 92 |
| | $ | 1,035 |
| | $ | 1,127 |
| | $ | — |
| | $ | 2 |
| | $ | 81 |
| | $ | 1,632 |
| | $ | 1,715 |
|
Other securities | | | | | | | | | | | |
Amortized cost | | | $ | — |
| | $ | 3 |
| | $ | 12 |
| | $ | — |
| | $ | 15 |
|
Carrying value | | | $ | — |
| | $ | 4 |
| | $ | 12 |
| | $ | — |
| | $ | 16 |
|
Total available-for-sale securities | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | $ | 5 |
| | $ | 239 |
| | $ | 993 |
| | $ | 1,702 |
| | $ | 2,939 |
| | $ | — |
| | $ | 226 |
| | $ | 1,147 |
| | $ | 2,781 |
| | $ | 4,154 |
|
Carrying value | | $ | 5 |
| | $ | 241 |
| | $ | 1,002 |
| | $ | 1,712 |
| | $ | 2,960 |
| | $ | — |
| | $ | 232 |
| | $ | 1,187 |
| | $ | 2,846 |
| | $ | 4,265 |
|
Weighted-average yield | | 1.85 | % | | 2.31 | % | | 2.39 | % | | 2.53 | % | | 2.46 | % | | — | % | | 2.28 | % | | 2.34 | % | | 2.25 | % | | 2.27 | % |
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table details the gross unrealized losses and fair valuevalues 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 | | 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 | | Estimated fair value | | Unrealized losses | | Estimated fair value | | Unrealized losses | | Estimated fair value | | Unrealized losses |
June 30, 2019 | | | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | | | |
Agency residential MBS | | $ | 37 |
| | $ | — |
| | $ | 397 |
| | $ | (2 | ) | | $ | 434 |
| | $ | (2 | ) | | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7 |
| | $ | — |
|
Agency commercial MBS | | — |
| | — |
| | 48 |
| | — |
| | 48 |
| | — |
| | 14 |
| | — |
| | 22 |
| | — |
| | 36 |
| | — |
|
Agency CMOs | | 19 |
| | — |
| | 529 |
| | (4 | ) | | 548 |
| | (4 | ) | | 63 |
| | (1 | ) | | 18 |
| | — |
| | 81 |
| | (1 | ) |
Total | | $ | 56 |
| | $ | — |
| | $ | 974 |
| | $ | (6 | ) | | $ | 1,030 |
| | $ | (6 | ) | | $ | 84 |
| | $ | (1 | ) | | $ | 40 |
| | $ | — |
| | $ | 124 |
| | $ | (1 | ) |
September 30, 2018 | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
September 30, 2019 | | | | | | | | | | | | | |
Agency residential MBS | | $ | 747 |
| | $ | (15 | ) | | $ | 753 |
| | $ | (25 | ) | | $ | 1,500 |
| | $ | (40 | ) | | $ | 166 |
| | $ | — |
| | $ | 114 |
| | $ | (1 | ) | | $ | 280 |
| | $ | (1 | ) |
Agency commercial MBS | | 40 |
| | — |
| | 6 |
| | — |
| | 46 |
| | — |
| | — |
| | — |
| | 44 |
| | — |
| | 44 |
| | — |
|
Agency CMOs | | 316 |
| | (5 | ) | | 666 |
| | (25 | ) | | 982 |
| | (30 | ) | | 145 |
| | (1 | ) | | 351 |
| | (2 | ) | | 496 |
| | (3 | ) |
Other securities | | — |
| | — |
| | 1 |
| | (1 | ) | | 1 |
| | (1 | ) | | 2 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
|
Total | | $ | 1,103 |
| | $ | (20 | ) | | $ | 1,426 |
| | $ | (51 | ) | | $ | 2,529 |
| | $ | (71 | ) | | $ | 313 |
| | $ | (1 | ) | | $ | 509 |
| | $ | (3 | ) | | $ | 822 |
| | $ | (4 | ) |
U.S. government agencies guarantee theThe contractual cash flows of our available-for-sale securities are guaranteed by the agency MBS and CMOs.U.S. government or its agencies. At June 30, 2019,March 31, 2020, of the 131 agency MBS and CMOs20 available-for-sale securities in an unrealized loss position, six14 were in a continuous unrealized loss position for less than 12 months and 1256 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 June 30, 2019,March 31, 2020, 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 $1.85$2.67 billion and $833 million,$1.22 billion, respectively, and a fair value of $1.86$2.74 billion and $839 million,$1.25 billion, respectively.
During the three and ninesix months ended June 30,March 31, 2020 and 2019, and 2018, there were no sales of agency MBS or CMO available-for-sale securities.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 65 – 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 inon 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 20182019 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 June 30, 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.
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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Derivative balances included inon 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.
| | | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
$ in millions | | Derivative assets | | Derivative liabilities | | Notional amount | | Derivative assets | | Derivative liabilities | | Notional amount | | Derivative assets | | Derivative liabilities | | Notional amount | | Derivative assets | | Derivative liabilities | | Notional amount |
Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate: | | | | | | | | | | | | | |
Matched book | | $ | 246 |
| | $ | 246 |
| | $ | 2,325 |
| | $ | 160 |
| | $ | 160 |
| | $ | 2,416 |
| |
Other (1) | | 133 |
| | 117 |
| | 10,197 |
| | 74 |
| | 113 |
| | 9,398 |
| |
Interest rate - matched book | | | $ | 351 |
| | $ | 351 |
| | $ | 2,265 |
| | $ | 280 |
| | $ | 280 |
| | $ | 2,296 |
|
Interest rate - other (1) | | | 359 |
| | 286 |
| | 16,686 |
| | 184 |
| | 146 |
| | 10,690 |
|
Foreign exchange | | 1 |
| | 1 |
| | 552 |
| | 1 |
| | 1 |
| | 549 |
| | — |
| | 3 |
| | 576 |
| | — |
| | 1 |
| | 573 |
|
Equity - DBRSU obligation | | — |
| | 7 |
| | 7 |
| | — |
| | 16 |
| | 16 |
| |
Equity | | | — |
| | 1 |
| | 1 |
| | — |
| | 6 |
| | 6 |
|
Subtotal | | 380 |
|
| 371 |
|
| 13,081 |
|
| 235 |
|
| 290 |
|
| 12,379 |
| | 710 |
|
| 641 |
|
| 19,528 |
|
| 464 |
|
| 433 |
|
| 13,565 |
|
Derivatives designated as hedging instruments | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate | | 4 |
| | 1 |
| | 850 |
| | — |
| | 1 |
| | 850 |
| | — |
| | 1 |
| | 850 |
| | 1 |
| | — |
| | 850 |
|
Foreign exchange | | — |
| | 3 |
| | 853 |
| | — |
| | 3 |
| | 892 |
| | — |
| | 3 |
| | 816 |
| | — |
| | 1 |
| | 856 |
|
Subtotal | | 4 |
|
| 4 |
|
| 1,703 |
|
| — |
|
| 4 |
|
| 1,742 |
| | — |
|
| 4 |
|
| 1,666 |
|
| 1 |
|
| 1 |
|
| 1,706 |
|
Total gross fair value/notional amount | | 384 |
|
| 375 |
|
| $ | 14,784 |
|
| 235 |
|
| 294 |
|
| $ | 14,121 |
| | 710 |
|
| 645 |
|
| $ | 21,194 |
|
| 465 |
|
| 434 |
|
| $ | 15,271 |
|
Offset on the Condensed Consolidated Statements of Financial Condition | | | | | | | | | | | | | | | | | | | | | | | | |
Counterparty netting | | (16 | ) | | (16 | ) | | | | (26 | ) | | (26 | ) | | | | (93 | ) | | (93 | ) | | | | (24 | ) | | (24 | ) | | |
Cash collateral netting | | (64 | ) | | (84 | ) | | | | (29 | ) | | (21 | ) | | | | (170 | ) | | (125 | ) | | | | (103 | ) | | (97 | ) | | |
Total amounts offset | | (80 | ) | | (100 | ) | | | | (55 | ) | | (47 | ) | | | | (263 | ) | | (218 | ) | | | | (127 | ) | | (121 | ) | | |
Net amounts presented on the Condensed Consolidated Statements of Financial Condition | | 304 |
|
| 275 |
| | | | 180 |
| | 247 |
| | | | 447 |
|
| 427 |
| | | | 338 |
| | 313 |
| | |
Gross amounts not offset on the Condensed Consolidated Statements of Financial Condition | | | | | | | | | | | | | | | | | | | | | | | | |
Financial instruments (2) | | (259 | ) | | (246 | ) | | | | (162 | ) | | (160 | ) | | | | (372 | ) | | (351 | ) | | | | (297 | ) | | (280 | ) | | |
Total | | $ | 45 |
| | $ | 29 |
| | | | $ | 18 |
| | $ | 87 |
| | | | $ | 75 |
| | $ | 76 |
| | | | $ | 41 |
| | $ | 33 |
| | |
| |
(1) | Substantially all relates to interest rate derivatives entered into as part of our fixed income business operations, including to be announced (“TBA”) security contracts that are accounted for as derivatives. |
| |
(2) | Although the matched book derivative arrangements do not meet the definition of a master netting arrangement as specified by GAAP, the agreement with the third-party intermediary includes terms that are similar to a master netting agreement. As a result, we present the matched book amounts net in the preceding table. |
The following table details the gains/(losses) included in AOCI,accumulated other comprehensive income (“AOCI”), net of income taxes, on derivatives designated as hedging instruments. These gains/(losses) includeincluded any amounts reclassified from AOCI to net income during the period. See Note 1516 for additional information.
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Interest rate (cash flow hedges) | | $ | (19 | ) | | $ | 6 |
| | $ | (49 | ) | | $ | 27 |
| | $ | (43 | ) | | $ | (13 | ) | | $ | (33 | ) | | $ | (30 | ) |
Foreign exchange (net investment hedges) | | (12 | ) | | 13 |
| | 14 |
| | 38 |
| | 52 |
| | (11 | ) | | 39 |
| | 26 |
|
Total gains/(losses) in AOCI, net of taxes | | $ | (31 | ) | | $ | 19 |
| | $ | (35 | ) | | $ | 65 |
| | $ | 9 |
| | $ | (24 | ) | | $ | 6 |
| | $ | (4 | ) |
There were no0 components of derivative gains or losses excluded from the assessment of hedge effectiveness for each of the three and ninesix months ended June 30, 2019March 31, 2020 and 2018.2019. We expect to reclassify an insignificant amount$12 million of interest expense out of AOCI and into earnings within the next 12 months. The maximum length of time over which forecasted transactions are or will be hedged is 8 years.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table details the gains/(losses) on derivatives not designated as hedging instruments recognized inon 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, |
| | three months ended June 30, | | nine months ended June 30, | | Location of gain/(loss) | | 2020 | | 2019 | | 2020 | | 2019 |
| | 2019 | | 2018 | | 2019 | | 2018 | |
Interest rate | | Principal transactions/other revenues | | $ | 2 |
| | $ | 3 |
| | $ | 4 |
| | $ | 5 |
| | Principal transactions/other revenues | | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | 2 |
|
Foreign exchange | | Other revenues | | $ | (8 | ) | | $ | 15 |
| | $ | 14 |
| | $ | 24 |
| | Other revenues | | $ | 43 |
| | $ | (4 | ) | | $ | 32 |
| | $ | 22 |
|
Equity - DBRSU obligation | | Compensation, commissions and benefits expense | | $ | — |
| | $ | 4 |
| | $ | 5 |
| | $ | 9 |
| |
Equity | | | Compensation, commissions and benefits expense | | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | 5 |
|
Risks associated with our derivatives and ourrelated 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. 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.revenues, which were insignificant as of both March 31, 2020 and September 30, 2019. We are not exposed to market risk on these derivatives due to the pass-through transaction structure previously described.described in Note 2 of our 2019 Form 10-K.
Interest rate and foreign exchange risk
We are exposed to interest rate risk related to certain of our interest rate derivatives. We are also exposed to foreign exchange risk related to our forward foreign exchange derivatives. On a daily basis, we monitor our risk exposure on our derivatives based on established limits with respect to a number of factors, including interest rate, foreign exchange spot and forward rates, spread, ratio, basis and volatility risks. These exposures are monitoredrisks, both on afor the total portfolio basis and separately for each agreement for selectedby maturity periods.period.
Derivatives with credit-risk-related contingent features
Certain of our derivative contracts contain provisions that require our debt to maintain an investment-grade rating from one1 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 June 30, 2019March 31, 2020 and September 30, 2018.2019.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 76 – 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 20182019 Form 10-K.
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 | | Assets | | Liabilities |
$ in millions | | Reverse repurchase agreements | | Securities borrowed | | Repurchase agreements | | Securities loaned | | Reverse repurchase agreements | | Securities borrowed | | Repurchase agreements | | Securities loaned |
June 30, 2019 | | | | | | | | | |
March 31, 2020 | | | | | | | | | |
Gross amounts of recognized assets/liabilities | | $ | 411 |
| | $ | 306 |
| | $ | 165 |
| | $ | 429 |
| | $ | 130 |
| | $ | 250 |
| | $ | 215 |
| | $ | 28 |
|
Gross amounts offset on the Condensed Consolidated Statements of Financial Condition | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net amounts presented on the Condensed Consolidated Statements of Financial Condition | | 411 |
|
| 306 |
|
| 165 |
|
| 429 |
| | 130 |
|
| 250 |
|
| 215 |
|
| 28 |
|
Gross amounts not offset on the Condensed Consolidated Statements of Financial Condition | | (411 | ) | | (301 | ) | | (165 | ) | | (419 | ) | | (130 | ) | | (240 | ) | | (215 | ) | | (24 | ) |
Net amounts | | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | 10 |
| | $ | — |
| | $ | 4 |
|
September 30, 2018 | | | | | | | | | |
| | | | | | | | | |
September 30, 2019 | | | | | | | | | |
Gross amounts of recognized assets/liabilities | | $ | 373 |
| | $ | 255 |
| | $ | 186 |
| | $ | 423 |
| | $ | 343 |
| | $ | 248 |
| | $ | 150 |
| | $ | 323 |
|
Gross amounts offset on the Condensed Consolidated Statements of Financial Condition | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net amounts presented on the Condensed Consolidated Statements of Financial Condition | | 373 |
|
| 255 |
|
| 186 |
|
| 423 |
| | 343 |
|
| 248 |
|
| 150 |
|
| 323 |
|
Gross amounts not offset on the Condensed Consolidated Statements of Financial Condition | | (373 | ) | | (248 | ) | | (186 | ) | | (408 | ) | | (343 | ) | | (243 | ) | | (150 | ) | | (311 | ) |
Net amounts | | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 12 |
|
The required market value of the collateral associated with collateralized agreements and financings generally exceeds the amount financed. Accordingly, the totalTotal 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 into satisfy our collateral requirements under our repurchase agreements, securities lending agreements or other secured borrowings, satisfaction ofto satisfy deposit requirements with clearing organizations, or to otherwise meetingmeet 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 | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
Collateral we received that was available to be delivered or repledged | | $ | 3,093 |
| | $ | 3,165 |
| | $ | 2,503 |
| | $ | 2,931 |
|
Collateral that we delivered or repledged | | $ | 1,195 |
| | $ | 1,389 |
| | $ | 763 |
| | $ | 897 |
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Encumbered assets
We pledge certain of our financial instrumentsassets 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 | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
Financial instruments owned, at fair value, pledged to counterparties that: | | | | | |
Had the right to deliver or repledge | | $ | 597 |
| | $ | 510 |
| | $ | 304 |
| | $ | 591 |
|
Did not have the right to deliver or repledge | | $ | 65 |
| | $ | 65 |
| | $ | 65 |
| | $ | 65 |
|
Bank loans, net pledged at FHLB and the Federal Reserve Bank | | $ | 4,563 |
| | $ | 4,075 |
| |
Bank loans, net pledged at Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank | | | $ | 5,157 |
| | $ | 4,653 |
|
Repurchase agreements, repurchase-to-maturity transactions and securities loaned accounted for as secured borrowings
The following table presents the remaining contractual maturity of repurchase agreements and securities lending transactions accounted for as secured borrowings.
| | $ in millions | | Overnight and continuous | | Up to 30 days | | 30-90 days | | Greater than 90 days | | Total | | Overnight and continuous | | Up to 30 days | | 30-90 days | | Greater than 90 days | | Total |
June 30, 2019 | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | |
Repurchase agreements: | | | | | | | | | | | | | | | | | | | | |
Government and agency obligations | | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 48 |
| | $ | 45 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 45 |
|
Agency MBS and CMOs | | 117 |
| | — |
| | — |
| | — |
| | 117 |
| | 170 |
| | — |
| | — |
| | — |
| | 170 |
|
Total repurchase agreements | | 165 |
|
| — |
|
| — |
|
| — |
|
| 165 |
| | 215 |
|
| — |
|
| — |
|
| — |
|
| 215 |
|
Securities loaned: | | | | | | | | | | | | | | | | | | | | |
Equity securities | | 429 |
| | — |
| | — |
| | — |
| | 429 |
| | 28 |
| | — |
| | — |
| | — |
| | 28 |
|
Total | | $ | 594 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 594 |
| | $ | 243 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 243 |
|
| | | | | | | | | | | | | | | | | | | | |
September 30, 2018 | | | | | | | | | | | |
September 30, 2019 | | | | | | | | | | | |
Repurchase agreements: | | | | | | | | | | | | | | | | | | | | |
Government and agency obligations | | $ | 102 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 102 |
| | $ | 70 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 70 |
|
Agency MBS and CMOs | | 84 |
| | — |
| | — |
| | — |
| | 84 |
| | 80 |
| | — |
| | — |
| | — |
| | 80 |
|
Total repurchase agreements | | 186 |
|
| — |
|
| — |
|
| — |
|
| 186 |
| | 150 |
|
| — |
|
| — |
|
| — |
|
| 150 |
|
Securities loaned: | | | | | | | | | | | | | | | | | | | | |
Equity securities | | 423 |
| | — |
| | — |
| | — |
| | 423 |
| | 323 |
| | — |
| | — |
| | — |
| | 323 |
|
Total | | $ | 609 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 609 |
| | $ | 473 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 473 |
|
As of both June 30, 2019March 31, 2020 and September 30, 2018,2019, we did not0t 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 87 – 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, securities-based loans (“SBL”) and other loans. These receivables are collateralized by first and, to a lesser extent, second mortgages on residential or other real property, other assets of the borrower, a pledge of revenue or are unsecured. See Note 2 of our 20182019 Form 10-K for a discussion of accounting policies related to bank loans and allowances for losses.
We segregate our loan portfolio into six6 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.
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.
| | | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
$ in millions | | Balance | | % | | Balance | | % | | Balance | | % | | Balance | | % |
Loans held for investment: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
C&I loans | | $ | 8,401 |
| | 40 | % | | $ | 7,786 |
| | 40 | % | | $ | 8,316 |
| | 38 | % | | $ | 8,098 |
| | 38 | % |
CRE construction loans | | 248 |
| | 1 | % | | 151 |
| | 1 | % | | 180 |
| | 1 | % | | 185 |
| | 1 | % |
CRE loans | | 3,468 |
| | 17 | % | | 3,624 |
| | 18 | % | | 3,830 |
| | 17 | % | | 3,652 |
| | 17 | % |
Tax-exempt loans | | 1,296 |
| | 6 | % | | 1,227 |
| | 6 | % | | 1,266 |
| | 5 | % | | 1,241 |
| | 6 | % |
Residential mortgage loans | | 4,198 |
| | 20 | % | | 3,757 |
| | 19 | % | | 4,864 |
| | 22 | % | | 4,454 |
| | 21 | % |
SBL and other | | 3,177 |
| | 15 | % | | 3,033 |
| | 15 | % | | 3,546 |
| | 16 | % | | 3,349 |
| | 16 | % |
Total loans held for investment | | 20,788 |
| | |
| | 19,578 |
| | |
| | 22,002 |
| | |
| | 20,979 |
| | |
|
Net unearned income and deferred expenses | | (16 | ) | | |
| | (21 | ) | | |
| | (13 | ) | | |
| | (12 | ) | | |
|
Total loans held for investment, net | | 20,772 |
| | |
| | 19,557 |
| | |
| | 21,989 |
| | |
| | 20,967 |
| | |
|
Loans held for sale, net | | 134 |
| | 1 | % | | 164 |
| | 1 | % | | 123 |
| | 1 | % | | 142 |
| | 1 | % |
Total loans held for sale and investment | | 20,906 |
| | 100 | % | | 19,721 |
| | 100 | % | | 22,112 |
| | 100 | % | | 21,109 |
| | 100 | % |
Allowance for loan losses | | (215 | ) | | |
| | (203 | ) | | |
| | (324 | ) | | |
| | (218 | ) | | |
|
Bank loans, net | | $ | 20,691 |
| | |
| | $ | 19,518 |
| | |
| | $ | 21,788 |
| | |
| | $ | 20,891 |
| | |
|
At June 30, 2019,March 31, 2020, the FHLB had a blanket lien on RJ Bank’s residential mortgage loan portfolio as security for the repayment of certain borrowings. See Note 12 for more information regarding borrowings from the FHLB.
Loans held for sale
RJ Bank originated or purchased $522$443 million and $1.79$1.15 billion of loans held for sale during the three and ninesix months ended June 30, 2019,March 31, 2020, respectively, and $444$475 million and $1.13$1.27 billion during the three and ninesix months ended June 30, 2018March 31, 2019, respectively. Proceeds from the sale of these held for sale loans amounted to $159$220 million and $516$434 million during the three and ninesix months ended June 30, 2019March 31, 2020, respectively, and $166$100 million and $394$357 million during the three and ninesix months ended June 30, 2018,March 31, 2019, respectively. Net gains resulting from such sales were insignificant in all periods during the three and ninesix months ended June 30, 2019March 31, 2020 and 2018.2019.
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 | | C&I loans | | CRE loans | | Residential mortgage loans | | Total |
Three months ended June 30, 2019 | | | | | | | | | |
Three months ended March 31, 2020 | | | | | | | | | |
Purchases | | $ | 247 |
| | $ | 10 |
| | $ | 132 |
| | $ | 389 |
| | $ | 296 |
| | $ | 5 |
| | $ | 100 |
| | $ | 401 |
|
Sales | | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Nine months ended June 30, 2019 | | | | | | | | | |
Six months ended March 31, 2020 | | | | | | | | | |
Purchases | | $ | 937 |
| | $ | 35 |
| | $ | 254 |
| | $ | 1,226 |
| | $ | 363 |
| | $ | 5 |
| | $ | 258 |
| | $ | 626 |
|
Sales | | $ | 100 |
| | $ | — |
| | $ | — |
| | $ | 100 |
| | $ | 20 |
| | $ | — |
| | $ | — |
| | $ | 20 |
|
Three months ended June 30, 2018 | | | | | | | | | |
Three months ended March 31, 2019 | | | | | | | | | |
Purchases | | $ | 195 |
| | $ | 82 |
| | $ | 123 |
| | $ | 400 |
| | $ | 428 |
| | $ | 25 |
| | $ | 46 |
| | $ | 499 |
|
Sales | | $ | 38 |
| | $ | — |
| | $ | — |
| | $ | 38 |
| | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 24 |
|
Nine months ended June 30, 2018 | | | | | | | | | |
Six months ended March 31, 2019 | | | | | | | | | |
Purchases | | $ | 467 |
| | $ | 145 |
| | $ | 217 |
| | $ | 829 |
| | $ | 690 |
| | $ | 25 |
| | $ | 122 |
| | $ | 837 |
|
Sales | | $ | 146 |
| | $ | — |
| | $ | — |
| | $ | 146 |
| | $ | 93 |
| | $ | — |
| | $ | — |
| | $ | 93 |
|
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 20182019 Form 10-K, corporate loan (C&I, CRE and CRE construction) sales generally occur as part of our credit management activities.
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 | | 30-89 days and accruing | | 90 days or more and accruing | | Total past due and accruing | | Nonaccrual | | Current and accruing | | Total loans held for investment |
June 30, 2019 | | | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | | | |
C&I loans | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 22 |
| | $ | 8,379 |
| | $ | 8,401 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | 8,312 |
| | $ | 8,316 |
|
CRE construction loans | | — |
| | — |
| | — |
| | — |
| | 248 |
| | 248 |
| | — |
| | — |
| | — |
| | — |
| | 180 |
| | 180 |
|
CRE loans | | — |
| | — |
| | — |
| | 10 |
| | 3,458 |
| | 3,468 |
| | — |
| | — |
| | — |
| | 6 |
| | 3,824 |
| | 3,830 |
|
Tax-exempt loans | | — |
| | — |
| | — |
| | — |
| | 1,296 |
| | 1,296 |
| | — |
| | — |
| | — |
| | — |
| | 1,266 |
| | 1,266 |
|
Residential mortgage loans: | | | | | |
|
| | | | | |
|
| | | | | |
|
| | | | | |
|
|
First mortgage loans | | 1 |
| | 5 |
| | 6 |
| | 16 |
| | 4,148 |
| | 4,170 |
| | 1 |
| | — |
| | 1 |
| | 14 |
| | 4,824 |
| | 4,839 |
|
Home equity loans/lines | | — |
| | — |
| | — |
| | — |
| | 28 |
| | 28 |
| | — |
| | — |
| | — |
| | — |
| | 25 |
| | 25 |
|
SBL and other | | — |
| | — |
| | — |
| | — |
| | 3,177 |
| | 3,177 |
| | — |
| | — |
| | — |
| | — |
| | 3,546 |
| | 3,546 |
|
Total loans held for investment | | $ | 1 |
| | $ | 5 |
| | $ | 6 |
| | $ | 48 |
| | $ | 20,734 |
| | $ | 20,788 |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 24 |
| | $ | 21,977 |
| | $ | 22,002 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2018 | | | | | | | | | | | | | |
September 30, 2019 | | | | | | | | | | | | | |
C&I loans | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 7,784 |
| | $ | 7,786 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 19 |
| | $ | 8,079 |
| | $ | 8,098 |
|
CRE construction loans | | — |
| | — |
| | — |
| | — |
| | 151 |
| | 151 |
| | — |
| | — |
| | — |
| | — |
| | 185 |
| | 185 |
|
CRE loans | | — |
| | — |
| | — |
| | — |
| | 3,624 |
| | 3,624 |
| | — |
| | — |
| | — |
| | 8 |
| | 3,644 |
| | 3,652 |
|
Tax-exempt loans | | — |
| | — |
| | — |
| | — |
| | 1,227 |
| | 1,227 |
| | — |
| | — |
| | — |
| | — |
| | 1,241 |
| | 1,241 |
|
Residential mortgage loans: | | | | | | | | | | | |
| | | | | | | | | | | |
|
First mortgage loans | | 1 |
| | — |
| | 1 |
| | 23 |
| | 3,707 |
| | 3,731 |
| | 2 |
| | — |
| | 2 |
| | 16 |
| | 4,409 |
| | 4,427 |
|
Home equity loans/lines | | — |
| | — |
| | — |
| | — |
| | 26 |
| | 26 |
| | — |
| | — |
| | — |
| | — |
| | 27 |
| | 27 |
|
SBL and other | | — |
| | — |
| | — |
| | — |
| | 3,033 |
| | 3,033 |
| | — |
| | — |
| | — |
| | — |
| | 3,349 |
| | 3,349 |
|
Total loans held for investment | | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 25 |
| | $ | 19,552 |
| | $ | 19,578 |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | 43 |
| | $ | 20,934 |
| | $ | 20,979 |
|
The preceding table includes $37$9 million and $11$32 million at June 30, 2019March 31, 2020 and September 30, 2018,2019, respectively, of nonaccrual loans which were current pursuant to their contractual terms.
Other real estate owned, included in “Other assets” on our Condensed Consolidated Statements of Financial Condition, was $3 million at both June 30, 2019March 31, 2020 and September 30, 2018.2019. 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$7 million at June 30, 2019both March 31, 2020 and September 30, 2018, respectively.2019.
Impaired loans and troubled debt restructurings
The following table provides a summary of RJ Bank’s impaired loans. | | | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
$ in millions | | Gross recorded investment | | Unpaid principal balance | | Allowance for losses | | Gross recorded investment | | Unpaid principal balance | | Allowance for losses | | Gross recorded investment | | Unpaid principal balance | | Allowance for losses | | Gross recorded investment | | Unpaid principal balance | | Allowance for losses |
Impaired loans with allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | |
C&I loans | | $ | 19 |
| | $ | 19 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4 |
| | $ | 4 |
| | $ | 1 |
| | $ | 19 |
| | $ | 20 |
| | $ | 6 |
|
Residential - first mortgage loans | | 11 |
| | 14 |
| | 1 |
| | 15 |
| | 20 |
| | 2 |
| | 8 |
| | 10 |
| | 1 |
| | 11 |
| | 13 |
| | 1 |
|
Total | | 30 |
| | 33 |
| | 5 |
| | 15 |
| | 20 |
| | 2 |
| | 12 |
| | 14 |
| | 2 |
| | 30 |
| | 33 |
| | 7 |
|
Impaired loans without allowance for loan losses: | | | | |
| | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| | |
|
C&I loans | | 3 |
| | 3 |
| | — |
| | 2 |
| | 2 |
| | — |
| |
CRE loans | | 10 |
| | 13 |
| | — |
| | — |
| | — |
| | — |
| | 7 |
| | 12 |
| | — |
| | 8 |
| | 13 |
| | — |
|
Residential - first mortgage loans | | 12 |
| | 19 |
| | — |
| | 13 |
| | 20 |
| | — |
| | 11 |
| | 17 |
| | — |
| | 11 |
| | 17 |
| | — |
|
Total | | 25 |
| | 35 |
| | — |
| | 15 |
| | 22 |
| | — |
| | 18 |
| | 29 |
| | — |
| | 19 |
| | 30 |
| | — |
|
Total impaired loans | | $ | 55 |
| | $ | 68 |
| | $ | 5 |
| | $ | 30 |
| | $ | 42 |
| | $ | 2 |
| | $ | 30 |
| | $ | 43 |
| | $ | 2 |
| | $ | 49 |
| | $ | 63 |
| | $ | 7 |
|
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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The preceding table includes CRE and residential first mortgage loans troubled debt restructurings (“TDRs”) of $10$7 million and $19$17 million, related torespectively, at March 31, 2020 and C&I, CRE and residential first mortgage loans respectively, at June 30, 2019TDRs of $19 million, $8 million and $21$18 million, of residential first mortgage TDRsrespectively, at September 30, 2018.2019.
The average balance of the total impaired loans was as follows.
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Average impaired loan balance: | | | | | | | | | |
C&I loans | | $ | 26 |
| | $ | 4 |
| | $ | 19 |
| | $ | 4 |
| | $ | 9 |
| | $ | 27 |
| | $ | 13 |
| | $ | 16 |
|
CRE loans | | 10 |
| | — |
| | 4 |
| | — |
| | 7 |
| | 3 |
| | 7 |
| | 2 |
|
Residential - first mortgage loans | | 24 |
| | 34 |
| | 25 |
| | 34 |
| | 20 |
| | 25 |
| | 21 |
| | 26 |
|
Total | | $ | 60 |
| | $ | 38 |
| | $ | 48 |
| | $ | 38 |
| |
Total average impaired loan balance | | | $ | 36 |
| | $ | 55 |
| | $ | 41 |
| | $ | 44 |
|
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’sour books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted. RJ Bank doesWe do not have any bank loan balances within this classification because, in accordance with itsour accounting policy, loans, or a portion thereof considered to be uncollectible, are charged-off prior to the assignment of this classification.
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 | | Pass | | Special mention | | Substandard | | Doubtful | | Total |
June 30, 2019 | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | |
C&I loans | | $ | 8,296 |
| | $ | 22 |
| | $ | 83 |
| | $ | — |
| | $ | 8,401 |
| | $ | 8,045 |
| | $ | 142 |
| | $ | 129 |
| | $ | — |
| | $ | 8,316 |
|
CRE construction loans | | 248 |
| | — |
| | — |
| | — |
| | 248 |
| | 180 |
| | — |
| | — |
| | — |
| | 180 |
|
CRE loans | | 3,410 |
| | 20 |
| | 38 |
| | — |
| | 3,468 |
| | 3,745 |
| | 36 |
| | 49 |
| | — |
| | 3,830 |
|
Tax-exempt loans | | 1,296 |
| | — |
| | — |
| | — |
| | 1,296 |
| | 1,266 |
| | — |
| | — |
| | — |
| | 1,266 |
|
Residential mortgage loans: | | | | | | | | | | | | | | | | | | | | |
First mortgage loans | | 4,136 |
| | 8 |
| | 26 |
| | — |
| | 4,170 |
| | 4,808 |
| | 8 |
| | 23 |
| | — |
| | 4,839 |
|
Home equity loans/lines | | 28 |
| | — |
| | — |
| | — |
| | 28 |
| | 25 |
| | — |
| | — |
| | — |
| | 25 |
|
SBL and other | | 3,177 |
| | — |
| | — |
| | — |
| | 3,177 |
| | 3,546 |
| | — |
| | — |
| | — |
| | 3,546 |
|
Total | | $ | 20,591 |
| | $ | 50 |
| | $ | 147 |
| | $ | — |
| | $ | 20,788 |
| |
Total loans held for investment | | | $ | 21,615 |
| | $ | 186 |
| | $ | 201 |
| | $ | — |
| | $ | 22,002 |
|
| | | | | | | | | | | | | | | | | | | | |
September 30, 2018 | | | | | | | | | | |
September 30, 2019 | | September 30, 2019 | | | | | | | | | |
C&I loans | | $ | 7,679 |
| | $ | 48 |
| | $ | 59 |
| | $ | — |
| | $ | 7,786 |
| | $ | 7,870 |
| | $ | 152 |
| | $ | 76 |
| | $ | — |
| | $ | 8,098 |
|
CRE construction loans | | 140 |
| | 11 |
| | — |
| | — |
| | 151 |
| | 185 |
| | — |
| | — |
| | — |
| | 185 |
|
CRE loans | | 3,547 |
| | 44 |
| | 33 |
| | — |
| | 3,624 |
| | 3,630 |
| | — |
| | 22 |
| | — |
| | 3,652 |
|
Tax-exempt loans | | 1,227 |
| | — |
| | — |
| | — |
| | 1,227 |
| | 1,241 |
| | — |
| | — |
| | — |
| | 1,241 |
|
Residential mortgage loans: | | | | | | | | | | | | | | | | | | | | |
First mortgage loans | | 3,693 |
| | 8 |
| | 30 |
| | — |
| | 3,731 |
| | 4,392 |
| | 10 |
| | 25 |
| | — |
| | 4,427 |
|
Home equity loans/lines | | 26 |
| | — |
| | — |
| | — |
| | 26 |
| | 27 |
| | — |
| | — |
| | — |
| | 27 |
|
SBL and other | | 3,033 |
| | — |
| | — |
| | — |
| | 3,033 |
| | 3,349 |
| | — |
| | — |
| | — |
| | 3,349 |
|
Total | | $ | 19,345 |
| | $ | 111 |
| | $ | 122 |
| | $ | — |
| | $ | 19,578 |
| |
Total loans held for investment | | | $ | 20,694 |
| | $ | 162 |
| | $ | 123 |
| | $ | — |
| | $ | 20,979 |
|
Loans classified as special mention, substandard or doubtful are all considered to be “criticized” loans.
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 | | Loans held for investment |
$ in millions | | C&I loans | | CRE construction loans | | CRE loans | | Tax-exempt loans | | Residential mortgage loans | | SBL and other | | Total | | C&I loans | | CRE construction loans | | CRE loans | | Tax-exempt loans | | Residential mortgage loans | | SBL and other | | Total |
Three months ended June 30, 2019 | | | | |
| | |
| | | | |
| | |
| | |
| |
Three months ended March 31, 2020 | | | | | |
| | |
| | | | |
| | |
| | |
|
Balance at beginning of period | | $ | 140 |
| | $ | 3 |
| | $ | 45 |
| | $ | 8 |
| | $ | 17 |
| | $ | 5 |
| | $ | 218 |
| | $ | 139 |
| | $ | 2 |
| | $ | 46 |
| | $ | 8 |
| | $ | 17 |
| | $ | 4 |
| | $ | 216 |
|
Provision/(benefit) for loan losses | | (8 | ) | | 1 |
| | 1 |
| | 1 |
| | (1 | ) | | 1 |
| | (5 | ) | |
Provision for loan losses | | | 59 |
| | 1 |
| | 42 |
| | 3 |
| | 1 |
| | 3 |
| | 109 |
|
Net (charge-offs)/recoveries: | | |
| | |
| | |
| | | | |
| | | | |
| | |
| | |
| | |
| | | | |
| | | | |
|
Charge-offs | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Recoveries | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net charge-offs | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| |
Net (charge-offs)/recoveries | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Foreign exchange translation adjustment | | 1 |
| |
|
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Balance at end of period | | $ | 134 |
| | $ | 4 |
| | $ | 46 |
| | $ | 9 |
| | $ | 16 |
| | $ | 6 |
| | $ | 215 |
| | $ | 197 |
| | $ | 3 |
| | $ | 88 |
| | $ | 11 |
| | $ | 18 |
| | $ | 7 |
| | $ | 324 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine months ended June 30, 2019 | | | | | | | | | | | | | | | |
Six months ended March 31, 2020 | | | | | | | | | | | | | | | |
Balance at beginning of period | | | $ | 139 |
| | $ | 3 |
| | $ | 46 |
| | $ | 9 |
| | $ | 16 |
| | $ | 5 |
| | $ | 218 |
|
Provision for loan losses | | | 59 |
| | — |
| | 42 |
| | 2 |
| | 2 |
| | 2 |
| | 107 |
|
Net (charge-offs)/recoveries: | | | |
| | |
| | |
| | | | |
| | |
| | |
Charge-offs | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Recoveries | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net (charge-offs)/recoveries | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Foreign exchange translation adjustment | | | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Balance at end of period | | | $ | 197 |
| | $ | 3 |
| | $ | 88 |
| | $ | 11 |
| | $ | 18 |
| | $ | 7 |
| | $ | 324 |
|
| | | | | | | | | | | | | | | |
Three months ended March 31, 2019 | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 123 |
| | $ | 3 |
| | $ | 47 |
| | $ | 9 |
| | $ | 17 |
| | $ | 4 |
| | $ | 203 |
| | $ | 137 |
| | $ | 3 |
| | $ | 46 |
| | $ | 9 |
| | $ | 19 |
| | $ | 5 |
| | $ | 219 |
|
Provision/(benefit) for loan losses | | 13 |
| | 1 |
| | 2 |
| | — |
| | (2 | ) | | 2 |
| | 16 |
| | 6 |
| | — |
| | 2 |
| | (1 | ) | | (2 | ) | | — |
| | 5 |
|
Net (charge-offs)/recoveries: | | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | | | | | | | |
Charge-offs | | (3 | ) | | — |
| | (3 | ) | | — |
| |
|
| | — |
| | (6 | ) | | (3 | ) | | — |
| | (3 | ) | | — |
| | — |
| | — |
| | (6 | ) |
Recoveries | | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net (charge-offs)/recoveries | | (2 | ) | | — |
| | (3 | ) | | — |
| | 1 |
| | — |
| | (4 | ) | | (3 | ) | | — |
| | (3 | ) | | — |
| | — |
| | — |
| | (6 | ) |
Foreign exchange translation adjustment | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balance at end of period | | $ | 134 |
| | $ | 4 |
| | $ | 46 |
| | $ | 9 |
| | $ | 16 |
| | $ | 6 |
| | $ | 215 |
| | $ | 140 |
| | $ | 3 |
| | $ | 45 |
| | $ | 8 |
| | $ | 17 |
| | $ | 5 |
| | $ | 218 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended June 30, 2018 | | | | | | | | | | | | | | | |
Six months ended March 31, 2019 | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 125 |
| | $ | 2 |
| | $ | 43 |
| | $ | 8 |
| | $ | 13 |
| | $ | 4 |
| | $ | 195 |
| | $ | 123 |
| | $ | 3 |
| | $ | 47 |
| | $ | 9 |
| | $ | 17 |
| | $ | 4 |
| | $ | 203 |
|
Provision/(benefit) for loan losses | | 2 |
| | 1 |
| | 2 |
| | — |
| | 1 |
| | (1 | ) | | 5 |
| | 21 |
| | — |
| | 1 |
| | (1 | ) | | (1 | ) | | 1 |
| | 21 |
|
Net (charge-offs)/recoveries: | | |
| | |
| | |
| | | | | | | | | | |
| | |
| | |
| | | | | | | | |
Charge-offs | | (5 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (3 | ) | | — |
| | (3 | ) | | — |
| | — |
| | — |
| | (6 | ) |
Recoveries | | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Net (charge-offs)/recoveries | | (5 | ) | | — |
| | — |
| | — |
| | 1 |
| | — |
| | (4 | ) | | (3 | ) | | — |
| | (3 | ) | | — |
| | 1 |
| | — |
| | (5 | ) |
Foreign exchange translation adjustment | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
Balance at end of period | | $ | 122 |
| | $ | 3 |
| | $ | 45 |
| | $ | 8 |
| | $ | 15 |
| | $ | 3 |
| | $ | 196 |
| | $ | 140 |
| | $ | 3 |
| | $ | 45 |
| | $ | 8 |
| | $ | 17 |
| | $ | 5 |
| | $ | 218 |
|
| | | | | | | | | | | | | | | |
Nine months ended June 30, 2018 | | | | | | | | | | | | | | | |
Balance at beginning of period | | $ | 120 |
| | $ | 1 |
| | $ | 42 |
| | $ | 6 |
| | $ | 17 |
| | $ | 4 |
| | $ | 190 |
| |
Provision/(benefit) for loan losses | | 11 |
| | 2 |
| | 3 |
| | 2 |
| | (3 | ) | | (1 | ) | | 14 |
| |
Net (charge-offs)/recoveries: | | |
| | |
| | |
| | | | | | | | | |
Charge-offs | | (9 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (9 | ) | |
Recoveries | | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
Net (charge-offs)/recoveries | | (9 | ) | | — |
| | — |
| | — |
| | 1 |
| | — |
| | (8 | ) | |
Foreign exchange translation adjustment | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Balance at end of period | | $ | 122 |
| | $ | 3 |
| | $ | 45 |
| | $ | 8 |
| | $ | 15 |
| | $ | 3 |
| | $ | 196 |
| |
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 | | Loans held for investment |
| | Allowance for loan losses | | Recorded 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 | | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total |
June 30, 2019 | | | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | | | |
C&I loans | | $ | 4 |
| | $ | 130 |
| | $ | 134 |
| | $ | 22 |
| | $ | 8,379 |
| | $ | 8,401 |
| | $ | 1 |
| | $ | 196 |
| | $ | 197 |
| | $ | 4 |
| | $ | 8,312 |
| | $ | 8,316 |
|
CRE construction loans | | — |
| | 4 |
| | 4 |
| | — |
| | 248 |
| | 248 |
| | — |
| | 3 |
| | 3 |
| | — |
| | 180 |
| | 180 |
|
CRE loans | | — |
| | 46 |
| | 46 |
| | 10 |
| | 3,458 |
| | 3,468 |
| | — |
| | 88 |
| | 88 |
| | 6 |
| | 3,824 |
| | 3,830 |
|
Tax-exempt loans | | — |
| | 9 |
| | 9 |
| | — |
| | 1,296 |
| | 1,296 |
| | — |
| | 11 |
| | 11 |
| | — |
| | 1,266 |
| | 1,266 |
|
Residential mortgage loans | | 1 |
| | 15 |
| | 16 |
| | 28 |
| | 4,170 |
| | 4,198 |
| | 1 |
| | 17 |
| | 18 |
| | 25 |
| | 4,839 |
| | 4,864 |
|
SBL and other | | — |
| | 6 |
| | 6 |
| | — |
| | 3,177 |
| | 3,177 |
| | — |
| | 7 |
| | 7 |
| | — |
| | 3,546 |
| | 3,546 |
|
Total | | $ | 5 |
| | $ | 210 |
| | $ | 215 |
| | $ | 60 |
| | $ | 20,728 |
| | $ | 20,788 |
| | $ | 2 |
| | $ | 322 |
| | $ | 324 |
| | $ | 35 |
| | $ | 21,967 |
| | $ | 22,002 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2018 | | | | | | | | | | | | | |
September 30, 2019 | | | | | | | | | | | | | |
C&I loans | | $ | — |
| | $ | 123 |
| | $ | 123 |
| | $ | 2 |
| | $ | 7,784 |
| | $ | 7,786 |
| | $ | 6 |
| | $ | 133 |
| | $ | 139 |
| | $ | 19 |
| | $ | 8,079 |
| | $ | 8,098 |
|
CRE construction loans | | — |
| | 3 |
| | 3 |
| | — |
| | 151 |
| | 151 |
| | — |
| | 3 |
| | 3 |
| | — |
| | 185 |
| | 185 |
|
CRE loans | | — |
| | 47 |
| | 47 |
| | — |
| | 3,624 |
| | 3,624 |
| | — |
| | 46 |
| | 46 |
| | 8 |
| | 3,644 |
| | 3,652 |
|
Tax-exempt loans | | — |
| | 9 |
| | 9 |
| | — |
| | 1,227 |
| | 1,227 |
| | — |
| | 9 |
| | 9 |
| | — |
| | 1,241 |
| | 1,241 |
|
Residential mortgage loans | | 2 |
| | 15 |
| | 17 |
| | 35 |
| | 3,722 |
| | 3,757 |
| | 1 |
| | 15 |
| | 16 |
| | 28 |
| | 4,426 |
| | 4,454 |
|
SBL and other | | — |
| | 4 |
| | 4 |
| | — |
| | 3,033 |
| | 3,033 |
| | — |
| | 5 |
| | 5 |
| | — |
| | 3,349 |
| | 3,349 |
|
Total | | $ | 2 |
| | $ | 201 |
| | $ | 203 |
| | $ | 37 |
| | $ | 19,541 |
| | $ | 19,578 |
| | $ | 7 |
| | $ | 211 |
| | $ | 218 |
| | $ | 55 |
| | $ | 20,924 |
| | $ | 20,979 |
|
The reserve for unfunded lending commitments, which is included in “Other payables” on our Condensed Consolidated Statements of Financial Condition, was $10$9 million at both June 30, 2019March 31, 2020 and September 30, 20182019.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 98 – 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 20182019 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”), acertain Low-Income Housing Tax Credit fund (“LIHTC fund”LIHTC”) 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 |
June 30, 2019 | | | | |
Private Equity Interests | | $ | 69 |
| | $ | 4 |
|
LIHTC fund in which RJ Bank is an investor member | | 61 |
| | — |
|
Guaranteed LIHTC Fund | | 18 |
| | 3 |
|
Other LIHTC funds | | 26 |
| | 28 |
|
Restricted Stock Trust Fund | | 19 |
| | 19 |
|
Total | | $ | 193 |
| | $ | 54 |
|
| | | | |
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 |
|
|
| | | | | | | | |
$ in millions | | Aggregate assets | | Aggregate liabilities |
March 31, 2020 | | | | |
Private Equity Interests | | $ | 34 |
| | $ | 4 |
|
LIHTC funds | | 75 |
| | 5 |
|
Restricted Stock Trust Fund | | 19 |
| | 19 |
|
Total | | $ | 128 |
| | $ | 28 |
|
| | | | |
September 30, 2019 | | |
| | |
|
Private Equity Interests | | $ | 65 |
| | $ | 4 |
|
LIHTC funds | | 80 |
| | 5 |
|
Restricted Stock Trust Fund | | 14 |
| | 14 |
|
Total | | $ | 159 |
| | $ | 23 |
|
See Note 14 of this Form 10-Q for additional information regarding the commitment related to the Guaranteed LIHTC Fund and Note 9 of our 2018 Form 10-K for information regarding the financing asset associated with this fund.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table presents information about the carrying value of the assets liabilities and equityliabilities of the VIEs which we consolidate and which are included on our Condensed Consolidated Statements of Financial Condition. The noncontrolling interests presentedIntercompany balances are eliminated in this table representconsolidation and not reflected in the portion of these net assets which are not ours.following table.
|
| | | | | | | | |
$ in millions | | June 30, 2019 | | September 30, 2018 |
Assets: | | | | |
Cash, cash equivalents and cash segregated pursuant to regulations | | $ | 20 |
| | $ | 7 |
|
Intercompany and other receivables | | — |
| | 1 |
|
Private equity investments | | 62 |
| | 63 |
|
Investments in real estate partnerships held by consolidated variable interest entities | | 69 |
| | 107 |
|
Trust fund investment in RJF common stock | | 19 |
| | 14 |
|
Other assets | | 23 |
| | — |
|
Total assets | | $ | 193 |
| | $ | 192 |
|
| | | | |
Liabilities and equity: | | |
| | |
|
Other payables | | $ | 29 |
| | $ | 27 |
|
Intercompany payables | | 22 |
| | 17 |
|
Total liabilities | | 51 |
| | 44 |
|
RJF equity | | 79 |
| | 70 |
|
Noncontrolling interests | | 63 |
| | 78 |
|
Total equity | | 142 |
| | 148 |
|
Total liabilities and equity | | $ | 193 |
| | $ | 192 |
|
|
| | | | | | | | |
$ in millions | | March 31, 2020 | | September 30, 2019 |
Assets: | | | | |
Cash, cash equivalents and cash segregated pursuant to regulations | | $ | 6 |
| | $ | 7 |
|
Other investments | | 33 |
| | 63 |
|
Other assets | | 70 |
| | 75 |
|
Total assets | | $ | 109 |
| | $ | 145 |
|
Liabilities: | | |
| | |
|
Other payables | | $ | 4 |
| | $ | 4 |
|
Total liabilities | | $ | 4 |
| | $ | 4 |
|
Noncontrolling interests | | $ | 35 |
| | $ | 60 |
|
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 20182019 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Aggregate assets, liabilities and risk of loss
The aggregate assets, liabilities, and our exposure to loss from those VIEs in which we hold a variable interest, but as to which we have concluded we are not the primary beneficiary, are provided in the following table.
| | | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
$ in millions | | Aggregate assets | | Aggregate liabilities | | Our risk of loss | | Aggregate assets | | Aggregate liabilities | | Our risk of loss | | Aggregate assets | | Aggregate liabilities | | Our risk of loss | | Aggregate assets | | Aggregate liabilities | | Our risk of loss |
Private Equity Interests | | $ | 6,170 |
| | $ | 155 |
| | $ | 66 |
| | $ | 6,908 |
| | $ | 154 |
| | $ | 68 |
| | $ | 5,175 |
| | $ | 128 |
| | $ | 59 |
| | $ | 6,317 |
| | $ | 117 |
| | $ | 63 |
|
LIHTC funds | | 5,776 |
| | 2,167 |
| | 62 |
| | 5,692 |
| | 1,912 |
| | 93 |
| | 6,500 |
| | 2,041 |
| | 40 |
| | 6,001 |
| | 2,221 |
| | 64 |
|
Other | | 222 |
| | 125 |
| | 4 |
| | 211 |
| | 114 |
| | 4 |
| | 220 |
| | 129 |
| | 4 |
| | 205 |
| | 115 |
| | 4 |
|
Total | | $ | 12,168 |
|
| $ | 2,447 |
|
| $ | 132 |
|
| $ | 12,811 |
|
| $ | 2,180 |
|
| $ | 165 |
| | $ | 11,895 |
|
| $ | 2,298 |
|
| $ | 103 |
|
| $ | 12,523 |
|
| $ | 2,453 |
|
| $ | 131 |
|
NOTE 109 - GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS, NET
Our goodwill and identified intangible assets result from various acquisitions. See NotesNote 2 and 1211 of our 20182019 Form 10-K for information about our goodwill and intangible assets, including the related accounting policies.
We had an addition to goodwill of $7 million during the three months ended June 30, 2019 due to our acquisition of Silver Lane. See Note 3 of this Form 10-Q for additional information regarding this acquisition.
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
Notes to Condensed Consolidated Financial Statements (Unaudited)
the asset is impaired. We performed our latest annual impairment testing for our goodwill and indefinite-lived intangible asset as of our January 1, 20192020 evaluation date, evaluating balances as of December 31, 2018.2019. We performed a qualitative impairment assessment for each of our reporting units that had goodwill, as well as for our indefinite-lived intangible asset. Based upon the outcome of our qualitative assessments, 0 impairment was identified.
Our qualitative assessments consider macroeconomic indicators, such as trends in equity and fixed income markets, GDP,gross domestic product, 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
Subsequent to our annual impairment testing, as a result of a deterioration in market conditions due to the outcomeCOVID-19 pandemic, we performed an evaluation to determine whether the economic impacts resulting from the pandemic were indicators requiring us to perform an impairment test as of March 31, 2020. Multiple factors, including performance, macroeconomic, and fair value indicators, were assessed with respect to each of our qualitative assessments, noreporting units to determine whether it was more likely than not that the estimated fair value of any of these reporting units was less than its estimated carrying value. As a result of our review, we concluded that the fair value of our reporting units had not more likely than not been reduced below their respective carrying values and that the impact of the COVID-19 pandemic through the end of our second fiscal quarter of 2020 was not a triggering event to perform a quantitative test. We will continue to monitor the effects of the COVID-19 pandemic, including continued market declines, unfavorable economic conditions, declining financial performance, and other factors that could increase the risk of impairment of our goodwill and indefinite-lived intangible asset in future periods.
NOTE 10 – LEASES
We have operating leases for the premises we occupy in many of our U.S. and foreign locations, including our employee-based branch office operations. We also lease certain office and technology equipment. At inception, we determine if an arrangement to utilize a building or piece of equipment is a lease and, if so, the appropriate lease classification. If the arrangement is determined to be a lease, we recognize a ROU asset and a corresponding lease liability on our balance sheet. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. We have elected the practical expedient, where leases with an initial term of 12 months or less are not recorded as an ROU asset or lease liability. Our lease terms include any noncancelable periods and may reflect periods covered by options to extend or terminate when it is reasonably certain that we will exercise those options. As of March 31, 2020, the weighted average remaining lease term for our operating leases was identified. No eventsfive years.
We record our operating lease ROU assets at the amount of the lease liability plus any prepaid rent and initial direct costs, less any lease incentives and accrued rent. We record lease liabilities at commencement date based on the present value of lease payments over the lease term, which is discounted using our commencement date incremental borrowing rate. Our incremental borrowing rate considers the weighted average yields on our senior notes payable, adjusted for collateralization and tenor. As of March 31, 2020, the weighted-
Notes to Condensed Consolidated Financial Statements (Unaudited)
average discount rate for our operating leases was 3.86%. Payments that vary because of changes in facts or circumstances occurring after the commencement date are considered variable and are expensed in the period incurred. For our real estate leases, we elected the practical expedient to account for the lease and non-lease components as a single lease. We have occurred sincenot elected the practical expedient for our assessmentsequipment leases and account for lease and non-lease components separately. As of March 31, 2020, ROU assets of $327 million and lease liabilities of $351 million were included as components of “Other assets” and “Other payables,” respectively, on our Condensed Consolidated Statements of Financial Condition.
Lease expense
Lease expense for operating lease payments is recognized on a straight-line basis over the lease term if the ROU asset has not been impaired or abandoned.
The components of lease expense were as follows.
|
| | | | | | | | |
$ in million | | Three months ended March 31, 2020 | | Six months ended March 31, 2020 |
Operating lease costs | | $ | 23 |
| | $ | 46 |
|
Variable lease costs | | $ | 4 |
| | $ | 12 |
|
Variable lease costs in the preceding table includes payments for common area maintenance charges and other variable costs that would cause usare not reflected in the measurement of ROU assets and lease liabilities.
Finance leases and sublease income were immaterial for all periods presented. Short-term lease expenses for the three and six months ended March 31, 2020 were immaterial.
Lease liabilities
Maturities of lease liabilities as of March 31, 2020 were as follows.
|
| | | | |
Maturity of lease liabilities for fiscal year ended September 30, | | $ in millions |
Remainder of 2020 | | $ | 43 |
|
2021 | | 95 |
|
2022 | | 72 |
|
2023 | | 58 |
|
2024 | | 44 |
|
After 2024 | | 79 |
|
Total lease payments | | 391 |
|
Less: interest | | 40 |
|
Present value of lease liabilities | | $ | 351 |
|
Operating lease payments in the preceding table exclude $93 million of legally binding minimum lease payments for leases signed but not yet commenced. These leases are estimated to update this impairment testing.commence between fiscal year 2020 and 2021 with lease terms ranging from two years to ten years.
Statement of cash flows supplemental information
|
| | | | | | | | |
$ in millions | | Three months ended March 31, 2020 | | Six months ended March 31, 2020 |
Cash outflows - lease liabilities | | $ | 24 |
| | $ | 47 |
|
Non-cash - ROU assets recorded for new and modified leases | | $ | 27 |
| | $ | 39 |
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
Minimum future lease commitments (under previous GAAP)
As of the date of adoption, our undiscounted minimum annual rental commitments under operating leases were materially unchanged from the disclosure in Note 17 of our 2019 Form 10-K, which is included in the following table.
|
| | | | |
Fiscal year ended September 30, | | $ in millions |
2020 | | $ | 103 |
|
2021 | | 95 |
|
2022 | | 79 |
|
2023 | | 66 |
|
2024 | | 49 |
|
Thereafter | | 127 |
|
Total | | $ | 519 |
|
NOTE 11 – 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.
| | | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
$ in millions | | Balance | | Weighted-average rate | | Balance | | Weighted-average rate | | Balance | | Weighted-average rate | | Balance | | Weighted-average rate |
Savings and money market accounts | | $ | 21,605 |
| | 0.54 | % | | $ | 19,475 |
| | 0.54 | % | | $ | 28,715 |
| | 0.01 | % | | $ | 21,654 |
| | 0.25 | % |
Certificates of deposit | | 543 |
| | 2.38 | % | | 445 |
| | 2.03 | % | | 1,150 |
| | 1.99 | % | | 605 |
| | 2.33 | % |
NOW accounts | | 6 |
| | 0.01 | % | | 6 |
| | 0.01 | % | | 136 |
| | 1.92 | % | | 6 |
| | 0.01 | % |
Demand deposits (non-interest-bearing) | | 12 |
| | — |
| | 16 |
| | — |
| | 22 |
| | — |
| | 16 |
| | — |
|
Total bank deposits | | $ | 22,166 |
| | 0.58 | % | | $ | 19,942 |
| | 0.57 | % | |
Total | | | $ | 30,023 |
| | 0.09 | % | | $ | 22,281 |
| | 0.31 | % |
Total bank deposits in the preceding table exclude affiliate deposits of $148$179 million at June 30, 2019March 31, 2020 and $279$163 million at September 30, 2018. These affiliate deposits included $147 million at June 30, 2019, and $277 million at September 30, 2018,all of which were held in a deposit account at RJ Bank on behalf of RJF.
Savings and money market accounts in the preceding table consist primarily of deposits that are cash balances swept from the client investment accounts maintained at Raymond James & Associates, Inc. (“RJ&A”) to RJ Bank. These balances are held in Federal Deposit Insurance Corporation (“FDIC”) insured-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 June 30, 2019March 31, 2020 was approximately $25$65 million.
The following table sets forth the scheduled maturities of certificates of deposit.
| | | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
$ in millions | | Denominations greater than or equal to $100,000 | | Denominations less than $100,000 | | Denominations greater than or equal to $100,000 | | Denominations less than $100,000 | | 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 | | $ | 39 |
| | $ | 26 |
| | $ | 30 |
| | $ | 17 |
| | $ | 84 |
| | $ | 20 |
| | $ | 24 |
| | $ | 19 |
|
Over three through six months | | 22 |
| | 17 |
| | 20 |
| | 13 |
| | 57 |
| | 26 |
| | 26 |
| | 21 |
|
Over six through twelve months | | 47 |
| | 32 |
| | 38 |
| | 26 |
| | 67 |
| | 85 |
| | 75 |
| | 37 |
|
Over one through two years | | 50 |
| | 37 |
| | 65 |
| | 40 |
| | 26 |
| | 175 |
| | 32 |
| | 36 |
|
Over two through three years | | 30 |
| | 73 |
| | 21 |
| | 14 |
| | 54 |
| | 160 |
| | 40 |
| | 93 |
|
Over three through four years | | 58 |
| | 27 |
| | 44 |
| | 26 |
| | 68 |
| | 171 |
| | 66 |
| | 47 |
|
Over four through five years | | 56 |
| | 29 |
| | 63 |
| | 28 |
| | 7 |
| | 150 |
| | 38 |
| | 51 |
|
Total | | $ | 302 |
| | $ | 241 |
| | $ | 281 |
| | $ | 164 |
| |
Total certificates of deposit | | | $ | 363 |
| | $ | 787 |
| | $ | 301 |
| | $ | 304 |
|
Interest expense on deposits, excluding interest expense related to affiliate deposits, is summarized in the following table.
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Nine months ended June 30, |
$ in millions | | 2019 | | 2018 | | 2019 | | 2018 |
Savings, money market, and NOW accounts | | $ | 29 |
| | $ | 18 |
| | $ | 96 |
| | $ | 35 |
|
Certificates of deposit | | 4 |
| | 1 |
| | 9 |
| | 4 |
|
Total interest expense on deposits | | $ | 33 |
| | $ | 19 |
| | $ | 105 |
| | $ | 39 |
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 | | 2020 | | 2019 | | 2020 | | 2019 |
Savings, money market, and NOW accounts | | $ | 6 |
| | $ | 34 |
| | $ | 18 |
| | $ | 67 |
|
Certificates of deposit | | 6 |
| | 3 |
| | 10 |
| | 5 |
|
Total interest expense on deposits | | $ | 12 |
| | $ | 37 |
| | $ | 28 |
| | $ | 72 |
|
NOTE 12 – OTHER BORROWINGS
The following table details the components of other borrowings.
| | $ in millions | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
FHLB advances | | $ | 875 |
| | $ | 875 |
| | $ | 875 |
| | $ | 875 |
|
Secured lines of credit | | 50 |
| | — |
| |
Mortgage notes payable and other | | 20 |
| | 24 |
| | 16 |
| | 19 |
|
Total other borrowings | | $ | 945 |
| | $ | 899 |
| | $ | 891 |
| | $ | 894 |
|
FHLB advances
Borrowings from the FHLB as of June 30, 2019March 31, 2020 and September 30, 2018,2019, were comprised of both floating and fixed-rate advances. As of June 30, 2019March 31, 2020 and September 30, 2018,2019, the floating-rate advances totaled $850 million. The interest rates on the floating-rate advances, which have interest rates that reset quarterly, totaled $850 million. The floating-rate advances mature in December 2020.2022, reset quarterly and are generally based on LIBOR. We use interest rate swaps to manage the risk of increases in interest rates associated with these floating-rate advances by converting the balances subject to variable interest rates to a fixed interest rate. Refer to Note 62 of our 2019 Form 10-K for information regarding these interest rate swaps, which are accounted for as hedging instruments. As of both June 30, 2019March 31, 2020 and September 30, 2018,2019, the fixed-rate advance totaled $25 million and bears interest at a fixed rate of 3.4%. This advance matures in October 2020. All of the advances were secured by a blanket lien granted to the FHLB on our residential mortgage loan portfolio. The weighted average interest rate on these FHLB advances as of June 30, 2019March 31, 2020 and September 30, 20182019 was 2.39%1.42% and 2.41%2.17%, respectively.
Secured and unsecured financing arrangements
On February 19, 2019, RJF and RJ&A entered into an unsecured revolving credit facility agreement (the “Credit Facility”) which replaced the previous unsecured revolving credit facility agreement (the “RJF Credit Facility”) entered into by RJF.. The Credit Facility has a maturity date of February 2024 and the lenders include a number of financial institutions. This committed unsecured borrowing facility provides for maximum borrowings of up to $500 million, with a sublimit of $300 million for RJF, atRJF. RJ&A may borrow up to $500 million under the Credit Facility, depending on the amount of outstanding borrowings of RJF. The interest rates on borrowings under the Credit Facility are variable rates of interest.and based on LIBOR, as adjusted for RJF’s credit rating. There were no0 borrowings outstanding on the Credit Facility as of June 30, 2019.March 31, 2020. There is a facility fee associated with the Credit Facility, which also varies depending uponwith RJF’s credit rating. Based upon RJF’s credit rating as of June 30, 2019,March 31, 2020, the variable rate facility fee, which is applied to the committed amount, was 0.175% per annum.
In addition to the Credit Facility, we maintain various secured and unsecured lines of credit, which are generally utilized to finance certain fixed income securities or for cash management purposes. Borrowings during the period were generally day-to-day and there were no borrowings outstanding on these arrangements as of March 31, 2020. The interest rates for all of our U.S. and Canadian secured and unsecured financing facilitiesthese arrangements are variable and are based on the Fed Funds rate, London Inter-bank Offered Rate (“LIBOR”),LIBOR, a lenders prime rate, or the Canadian prime rate, as applicable. The weighted average interest rate on the borrowings outstanding as of June 30, 2019 was 3.25%. Borrowings on secured lines of credit were day-to-day and were generally utilized to finance certain fixed income securities. In addition, we
We also have other collateralized financings included in “Securities sold under agreements to repurchase” and “Securities loaned” on our Condensed Consolidated Statements of Financial Condition. See Note 76 for information regarding our other collateralized financing arrangements.
Mortgage notes payable and other
Mortgage notes payable pertain to mortgage loans on certain of our corporate headquarters offices located in St. Petersburg, Florida. These mortgage loans are secured by land, buildings, and improvements. These mortgage loans bear a fixed interest rate of 5.7% with repayment terms of monthly interest and principal debt service and have a January 2023 maturity.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 13 – SENIOR NOTES PAYABLE
The following table summarizes our senior notes payable.
|
| | | | | | | | |
$ in millions | | March 31, 2020 | | September 30, 2019 |
5.625% senior notes, due 2024 | | $ | 250 |
| | $ | 250 |
|
3.625% senior notes, due 2026 | | 500 |
| | 500 |
|
4.65% senior notes, due 2030 | | 500 |
| | — |
|
4.95% senior notes, due 2046 | | 800 |
| | 800 |
|
Total principal amount | | 2,050 |
| | 1,550 |
|
Unaccreted premium/(discount) | | 10 |
| | 11 |
|
Unamortized debt issuance costs | | (16 | ) | | (11 | ) |
Total senior notes payable | | $ | 2,044 |
| | $ | 1,550 |
|
In March 2012, we sold in a registered underwritten public offering $250 million in aggregate principal amount of 5.625% senior notes due April 2024. Interest on these senior notes is payable semi-annually. We may redeem some or all of these senior notes at any time prior to their maturity, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the redemption date at a discount rate equal to a designated U.S. Treasury rate, plus 50 basis points, plus accrued and unpaid interest thereon to the redemption date.
In July 2016, we sold in a registered underwritten public offering $500 million in aggregate principal amount of 3.625% senior notes due September 2026. Interest on these senior notes is payable semi-annually. We may redeem some or all of these senior notes at any time prior to their maturity, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the redemption date at a discount rate equal to a designated U.S. Treasury rate, plus 35 basis points, plus accrued and unpaid interest thereon to the redemption date.
In March 2020, we sold in a registered underwritten public offering $500 million in aggregate principal amount of 4.65% senior notes due April 2030. Interest on these senior notes is payable semi-annually. We may redeem some or all of these senior notes at any time prior to January 1, 2030, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the redemption date at a discount rate equal to a designated U.S. Treasury rate, plus 50 basis points; and on or after January 1, 2030, at 100% of the principal amount of the notes redeemed; plus, in each case, accrued and unpaid interest thereon to the redemption date.
In July 2016, we sold in a registered underwritten public offering $300 million in aggregate principal amount of 4.95% senior notes due July 2046. In May 2017, we reopened the offering and sold, in a registered underwritten public offering, an additional $500 million in aggregate principal amount of 4.95% senior notes due July 2046. These additional senior notes were consolidated, formed into a single series, and are fully fungible with the $300 million in aggregate principal amount 4.95% senior notes issued in July 2016. Interest on these senior notes is payable semi-annually. We may redeem some or all of these senior notes at any time prior to their maturity, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the redemption date at a discount rate equal to a designated U.S. Treasury rate, plus 45 basis points, plus accrued and unpaid interest thereon to the redemption date.
NOTE 14 – INCOME TAXES
The income tax provision for interim periods is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items. We estimate the annual effective tax rate quarterly based on the forecasted pretax results of our U.S. and non-U.S. operations. Items unrelated to current year ordinary income are recognized entirely in the period identified as a discrete item of tax. These discrete items generally relate to changes in tax laws, adjustments to the actual liability determined upon filing tax returns, excess tax benefits related to share-based compensation and adjustments to previously recorded reserves for uncertain tax positions. For discussion of income tax accounting policies and other income tax related information, see Notes 2 and 16 of our 20182019 Form 10-K.
Effective tax rate
Our effective income tax rate was 25.1% for the nine months ended June 30, 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 tax rate from 24.5% to 21.0%.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Effective tax rate
Our effective income tax rate was 26.9% for the six months ended March 31, 2020, which was higher than the 24.8% effective tax rate for fiscal year 2019. The increase in the effective tax rate was primarily due to the unfavorable impact in the current period of non-deductible valuation losses associated with our company-owned life insurance policies.
Uncertain tax positions
We anticipate that the uncertain tax position liability balance will not change significantly over the next twelve months.
NOTE 1415 – COMMITMENTS, CONTINGENCIES AND GUARANTEES
Commitments and contingencies
Loan and underwriting commitments
In the normal course of business, we enter into commitments for fixed income and equity underwritings. As of June 30, 2019March 31, 2020, we had three4 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, weWe 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 20182019 Form 10-K for a discussion of our accounting policies governing these transactions). These commitmentsoffers are contingent upon certain events occurring, including but not limitedthe individuals joining us and meeting certain conditions outlined in their offer. Our unfunded loan commitments related to the individual joining us. Assuch offers were insignificant as of June 30, 2019, we had made commitments through the extension of formal offers totaling approximately $214 million; however, it is possible that not all of our offers will be accepted and therefore, we would not fund the total amount of the offers extended. As of June 30, 2019, $128 million of the total amount extended consisted of unfunded commitments to prospective financial advisors that had accepted our offers, or recently hired producers.March 31, 2020.
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 | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
Open-end consumer lines of credit (primarily SBL) | | $ | 8,766 |
| | $ | 7,332 |
| | $ | 10,758 |
| | $ | 9,328 |
|
Commercial lines of credit | | $ | 1,567 |
| | $ | 1,643 |
| | $ | 1,153 |
| | $ | 1,527 |
|
Unfunded loan commitments | | $ | 628 |
| | $ | 541 |
| | $ | 676 |
| | $ | 599 |
|
Standby letters of credit | | $ | 40 |
| | $ | 41 |
| | $ | 40 |
| | $ | 40 |
|
Open-end consumer lines of credit primarily represent the unfunded amounts of RJ Bank loans to consumers that are secured by marketable securities at advance rates consistent with industry standards. The proceeds from repayment or, if necessary, the liquidation of collateral, which is monitored daily, are expected to satisfy the amounts drawn against these existing lines of credit. These lines of credit are primarily uncommitted, as we reserve the right to not make any advances or may terminate these lines at any time.
Because many of our lending commitments expire without being funded in whole or part, the contractual amounts are not estimates of our actual future credit exposure or future liquidity requirements. We maintain a reserve to provide for potential losses related to the unfunded lending commitments. See Note 87 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 which has invested in various project partnerships and 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 June 30, 2019, RJ Bank had invested $80 million of the committed amount.
We had unfunded commitments to various private equity investments of $15 million as of June 30, 2019.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Investment commitments
We had unfunded commitments to various investments, including private equity investments and certain RJ Bank investments, of $41 million as of March 31, 2020.
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 June 30, 2019, RJTCF had $96 million outstanding against this commitment. RJTCF may borrow from RJF in order to makeRaymond James Tax Credit Funds, Inc. (“RJTCF”) sells 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,acquisition. Until such investments are sold to LIHTC funds, RJTCF is responsible for funding investment commitments to such partnerships. As of March 31, 2020, RJTCF had committed approximately $204 million to project partnerships that had not yet been sold to LIHTC funds. Because we expect to sell these project partnerships to LIHTC funds and the proceeds fromequity funding events arise over future periods, the salescontractual commitments are usednot expected to repay RJTCF’s borrowings from RJF.impact our future liquidity requirements. RJTCF may also make short-term loans or advances to project partnerships and LIHTC funds.
As a part of our fixed income public finance operations, we enter into forward commitments to purchase agency MBS (see the discussion of these activities within Note 2 of our 20182019 Form 10-K). At June 30, 2019March 31, 2020, we had $301$331 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 June 30, 2019March 31, 2020, 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 three years, RJTCF is obligated to pay the investor an amount that results in the investor achieving a minimum specified return on their investment. A $5 million financing asset was included in “Other assets,” and a related $5 million liability was included in “Other payables” on our Condensed Consolidated Statements of Financial Condition as of June 30, 2019 related to this obligation. The maximum exposure to loss under this guarantee was $5 million at June 30, 2019, which represented the undiscounted future payments due the investor.
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$13 million as of June 30, 2019.March 31, 2020. The debt, which matures in 2021, is secured by substantially all of the assets of the borrower.
Legal and regulatory matter contingencies
In addition to any matters that may be specifically described in the following sections, in the normal course of our business, we have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our activities as a diversified financial services institution.
RJF and certain of its subsidiaries are subject to regular reviews and inspections by regulatory authorities and self-regulatory organizations. Reviews can result in the imposition of sanctions for regulatory violations, ranging from non-monetary censures to fines and, in serious cases, temporary or permanent suspension from conducting business, or limitations on certain business activities. In addition, regulatory agencies and self-regulatory organizations institute investigations from time to time into industry practices, which can also result in the imposition of such sanctions.
We may contest liability and/or the amount of damages, as appropriate, in each pending matter. Over the last several years, the level of litigation and investigatory activity (both formal and informal) by government and self-regulatory agencies has increased significantly in the financial services industry. There can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be material.
Notes to Condensed Consolidated Financial Statements (Unaudited)
WeFor many legal and regulatory matters, we are unable to estimate a range of reasonably possible loss as we cannot predict if, how or when such proceedings or investigations will be resolved or what the eventual settlement, fine, penalty or other relief, if any, may be. A large number of factors may contribute to this inherent unpredictability: the proceeding is in its early stages; the damages sought are unspecified, unsupported or uncertain; it is unclear whether a case brought as a class action will be allowed to proceed on that basis; the other party is seeking relief other than or in addition to compensatory damages (including, in the case of regulatory and governmental proceedings, potential fines and penalties); the matters present significant legal uncertainties; we have not engaged in settlement discussions; discovery is not complete; there are significant facts in dispute; and numerous parties are named as defendants (including where it is uncertain how liability might be shared among defendants). Subject to the foregoing, after consultation with counsel, we believe that the outcome of such litigation and regulatory proceedings will not have a material adverse effect on our consolidated financial condition. However, the outcome of such litigation and proceedings could be material to our operating results and cash flows for a particular future period, depending on, among other things, our revenues or income for such period.
We contest liability and/orThere are certain matters for which we are unable to estimate the amountupper end of damages,the range of reasonably possible loss. With respect to legal and regulatory matters for which management has been able to estimate a range of reasonably possible loss as appropriate, in each pending matter. Overof March 31, 2020, we estimated the last several years,upper end of the levelrange 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 determinedreasonably possible aggregate loss to be material.approximately $80 million in excess of the aggregate accruals for such matters. Refer to Note 2 of our 2019 Form 10-K for a discussion of our criteria for recognizing liabilities for contingencies.
We may from time to time include in any descriptions of individual matters herein certain quantitative information about the plaintiff’s claim against us as alleged in the plaintiff’s pleadings or other public filings. Although this information may provide insight into the potential magnitude of a matter, it does not represent our estimate of reasonably possible loss or our judgment as to any currently appropriate accrual related thereto.
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 June 30, 2019, we estimated the upper end of the range of reasonably possible aggregate loss to be approximately $85 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 February 11, 2016, Caleb Wistar (“Wistar”) and Ernest Mayeaux (“Mayeaux”) filed a putative class action complaint in the District Court under the caption Caleb Wistar and Ernest Mayeaux v. Raymond James Financial Services, Inc. and Raymond James Financial Services Advisors, Inc. (as subsequently amended, the “Wistar Complaint”). Similar to the Brink Complaint, the Wistar Complaint alleges that Wistar and Mayeaux, former customers of Raymond James Financial Services, Inc. (“RJFS”) and Raymond James Financial Services Advisors, Inc. (“RJFSA”), were charged a fee in RJFS and RJFSA’s Passport Investment Account and that the fee included an unauthorized and undisclosed profit to RJFS and RJFSA in violation of its customer agreement and applicable industry standards. The Wistar Complaint seeks, among other relief, damages in the amount of the difference between the actual cost of processing a trade, as alleged by Wistar and Mayeaux, and the fee charge by RJFS and RJFSA.
On April 5, 2019, the parties to the Brink Complaint and the Wistar Complaint agreed in principle to an aggregate settlement of $15 million. On June 11, 2019, the parties filed a Stipulation of Settlement and Joint Motion for Preliminary Approval of Class Action Settlement and Certification of the Settled Subclasses. On June 12, 2019, the District Court entered an order preliminarily approving the Class Action Settlement and set a hearing date of October 25, 2019 for final approval of the settlement. While the hearing for final approval has been set, the settlement remains subject to approval by the District Court. The settlement amounts for both complaints were included in “Other payables” in our Condensed Consolidated Statement of Financial Condition as of June 30, 2019.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 15 – 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 June 30, 2019 | | | | | | | | | | | | |
AOCI as of beginning of period | | $ | 114 |
| | $ | (142 | ) | | $ | (28 | ) | | $ | (9 | ) | | $ | 12 |
| | $ | (25 | ) |
OCI: | | | | | | | | | | | | |
OCI before reclassifications and taxes | | (16 | ) | | 18 |
| | 2 |
| | 32 |
| | (24 | ) | | 10 |
|
Amounts reclassified from AOCI, before tax | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Pre-tax net OCI | | (16 | ) | | 18 |
| | 2 |
| | 32 |
| | (25 | ) | | 9 |
|
Income tax effect | | 4 |
| | — |
| | 4 |
| | (8 | ) | | 6 |
| | 2 |
|
OCI for the period, net of tax | | (12 | ) | | 18 |
| | 6 |
| | 24 |
| | (19 | ) | | 11 |
|
AOCI as of end of period | | $ | 102 |
| | $ | (124 | ) | | $ | (22 | ) | | $ | 15 |
| | $ | (7 | ) | | $ | (14 | ) |
| | | | | | | | | | | | |
Nine months ended June 30, 2019 | | | | | | | | | | | | |
AOCI as of beginning of period | | $ | 88 |
| | $ | (111 | ) | | $ | (23 | ) | | $ | (46 | ) | | $ | 42 |
| | $ | (27 | ) |
Cumulative effect of adoption of ASU 2016-01 | | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
OCI: | | | | | | | | | | | | |
OCI before reclassifications and taxes | | 18 |
| | (13 | ) | | 5 |
| | 90 |
| | (64 | ) | | 31 |
|
Amounts reclassified from AOCI, before tax | | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
Pre-tax net OCI | | 18 |
| | (13 | ) | | 5 |
| | 90 |
| | (68 | ) | | 27 |
|
Income tax effect | | (4 | ) | | — |
| | (4 | ) | | (25 | ) | | 19 |
| | (10 | ) |
OCI for the period, net of tax | | 14 |
| | (13 | ) | | 1 |
| | 65 |
| | (49 | ) | | 17 |
|
AOCI as of end of period | | $ | 102 |
| | $ | (124 | ) | | $ | (22 | ) | | $ | 15 |
| | $ | (7 | ) | | $ | (14 | ) |
| | | | | | | | | | | | |
Three months ended June 30, 2018 | | | | | | | | | | | | |
AOCI as of beginning of period | | $ | 85 |
| | $ | (107 | ) | | $ | (22 | ) | | $ | (31 | ) | | $ | 30 |
| | $ | (23 | ) |
OCI: | | | | | | | | | | | | |
OCI before reclassifications and taxes | | 18 |
| | (19 | ) | | (1 | ) | | (5 | ) | | 10 |
| | 4 |
|
Amounts reclassified from AOCI, before tax | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Pre-tax net OCI | | 18 |
| | (19 | ) | | (1 | ) | | (5 | ) | | 9 |
| | 3 |
|
Income tax effect | | (5 | ) | | — |
| | (5 | ) | | 1 |
| | (3 | ) | | (7 | ) |
OCI for the period, net of tax | | 13 |
| | (19 | ) | | (6 | ) | | (4 | ) | | 6 |
| | (4 | ) |
AOCI as of end of period | | $ | 98 |
| | $ | (126 | ) | | $ | (28 | ) | | $ | (35 | ) | | $ | 36 |
| | $ | (27 | ) |
| | | | | | | | | | | | |
Nine months ended June 30, 2018 | | | | | | | | | | | | |
AOCI as of beginning of period | | $ | 60 |
| | $ | (80 | ) | | $ | (20 | ) | | $ | (2 | ) | | $ | 7 |
| | $ | (15 | ) |
Cumulative effect of adoption of ASU 2018-02 | | — |
| | — |
| | — |
| | (2 | ) | | 2 |
| | — |
|
OCI: | | | | | | | | | | | | |
OCI before reclassifications and taxes | | 52 |
| | (46 | ) | | 6 |
| | (45 | ) | | 39 |
| | — |
|
Amounts reclassified from AOCI, before tax | | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
Pre-tax net OCI | | 52 |
| | (46 | ) | | 6 |
| | (45 | ) | | 40 |
| | 1 |
|
Income tax effect | | (14 | ) | | — |
| | (14 | ) | | 14 |
| | (13 | ) | | (13 | ) |
OCI for the period, net of tax | | 38 |
| | (46 | ) | | (8 | ) | | (31 | ) | | 27 |
| | (12 | ) |
AOCI as of end of period | | $ | 98 |
| | $ | (126 | ) | | $ | (28 | ) | | $ | (35 | ) | | $ | 36 |
| | $ | (27 | ) |
As of October 1, 2018, we adopted new accounting guidance related to the classification and measurement of financial instruments (ASU 2016-01), which generally requires changes in the fair value of equity securities to be recorded in net income. As a result, on a prospective basis beginning October 1, 2018, unrealized gains/(losses) on our equity securities previously classified and accounted for as available-for-sale are recorded in net income instead of OCI. Accordingly, we reclassified a cumulative unrealized gain on such securities, net of tax, from AOCI to retained earnings. See Notes 2 and 5 for additional information.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Reclassifications from AOCI to net income, excluding taxes, for each of the three and nine months ended June 30, 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 6 for additional information on these derivatives).
Our policy is to release tax effects remaining in AOCI on an individual security basis.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 16 – REVENUESACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
OnAll of the components of other comprehensive income (“OCI”), net of tax, were attributable to RJF. The following table presents the net change in AOCI as well as the changes, and the related tax effects, of each component of AOCI.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
$ in millions | | Net investment hedges | | Currency translations | | Subtotal: net investment hedges and currency translations | | Available- for-sale securities | | Cash flow hedges | | Total |
Three months ended March 31, 2020 | | | | | | | | | | | | |
AOCI as of beginning of period | | $ | 97 |
| | $ | (113 | ) | | $ | (16 | ) | | $ | 20 |
| | $ | (9 | ) | | $ | (5 | ) |
OCI: | | | | | | | | | | | | |
OCI before reclassifications and taxes | | 69 |
| | (78 | ) | | (9 | ) | | 85 |
| | (58 | ) | | 18 |
|
Amounts reclassified from AOCI, before tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Pre-tax net OCI | | 69 |
| | (78 | ) | | (9 | ) | | 85 |
| | (58 | ) | | 18 |
|
Income tax effect | | (17 | ) | | — |
| | (17 | ) | | (22 | ) | | 15 |
| | (24 | ) |
OCI for the period, net of tax | | 52 |
| | (78 | ) | | (26 | ) | | 63 |
| | (43 | ) | | (6 | ) |
AOCI as of end of period | | $ | 149 |
| | $ | (191 | ) | | $ | (42 | ) | | $ | 83 |
| | $ | (52 | ) | | $ | (11 | ) |
| | | | | | | | | | | | |
Six months ended March 31, 2020 | | | | | | | | | | | | |
AOCI as of beginning of period | | $ | 110 |
| | $ | (135 | ) | | $ | (25 | ) | | $ | 21 |
| | $ | (19 | ) | | $ | (23 | ) |
OCI: | | | | | | | | | | | | |
OCI before reclassifications and taxes | | 52 |
| | (56 | ) | | (4 | ) | | 83 |
| | (44 | ) | | 35 |
|
Amounts reclassified from AOCI, before tax | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Pre-tax net OCI | | 52 |
| | (56 | ) | | (4 | ) | | 83 |
| | (44 | ) | | 35 |
|
Income tax effect | | (13 | ) | | — |
| | (13 | ) | | (21 | ) | | 11 |
| | (23 | ) |
OCI for the period, net of tax | | 39 |
| | (56 | ) | | (17 | ) | | 62 |
| | (33 | ) | | 12 |
|
AOCI as of end of period | | $ | 149 |
| | $ | (191 | ) | | $ | (42 | ) | | $ | 83 |
| | $ | (52 | ) | | $ | (11 | ) |
| | | | | | | | | | | | |
Three months ended March 31, 2019 | | | | | | | | | | | | |
AOCI as of beginning of period | | $ | 125 |
| | $ | (161 | ) | | $ | (36 | ) | | $ | (28 | ) | | $ | 25 |
| | $ | (39 | ) |
OCI: | | | | | | | | | | | | |
OCI before reclassifications and taxes | | (15 | ) | | 19 |
| | 4 |
| | 26 |
| | (16 | ) | | 14 |
|
Amounts reclassified from AOCI, before tax | | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
Pre-tax net OCI | | (15 | ) | | 19 |
| | 4 |
| | 26 |
| | (18 | ) | | 12 |
|
Income tax effect | | 4 |
| | — |
| | 4 |
| | (7 | ) | | 5 |
| | 2 |
|
OCI for the period, net of tax | | (11 | ) | | 19 |
| | 8 |
| | 19 |
| | (13 | ) | | 14 |
|
AOCI as of end of period | | $ | 114 |
| | $ | (142 | ) | | $ | (28 | ) | | $ | (9 | ) | | $ | 12 |
| | $ | (25 | ) |
| | | | | | | | | | | | |
Six months ended March 31, 2019 | | | | | | | | | | | | |
AOCI as of beginning of period | | $ | 88 |
| | $ | (111 | ) | | $ | (23 | ) | | $ | (46 | ) | | $ | 42 |
| | $ | (27 | ) |
Cumulative effect of adoption of ASU 2018-02 | | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
OCI: | | | | | | | | | | | | |
OCI before reclassifications and taxes | | 34 |
| | (31 | ) | | 3 |
| | 58 |
| | (40 | ) | | 21 |
|
Amounts reclassified from AOCI, before tax | | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
Pre-tax net OCI | | 34 |
| | (31 | ) | | 3 |
| | 58 |
| | (43 | ) | | 18 |
|
Income tax effect | | (8 | ) | | — |
| | (8 | ) | | (17 | ) | | 13 |
| | (12 | ) |
OCI for the period, net of tax | | 26 |
| | (31 | ) | | (5 | ) | | 41 |
| | (30 | ) | | 6 |
|
AOCI as of end of period | | $ | 114 |
| | $ | (142 | ) | | $ | (28 | ) | | $ | (9 | ) | | $ | 12 |
| | $ | (25 | ) |
As of October 1, 2018, we adopted new accounting guidance for revenue from contracts with customers. Under(ASU 2016-01) that generally requires changes in 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 determinedfair value of equity securities 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 pointrecorded 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 controlnet income. Accordingly, as of the good or service, which is generally measured baseddate of adoption, we reclassified a cumulative unrealized gain on time elapsed, as our customers simultaneously receive and consume the benefitsuch securities, net of our services as they are provided.tax, from AOCI to retained earnings.
PaymentReclassifications from AOCI to net income, excluding taxes, 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 includedthree and six months ended March 31, 2019 were recorded 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 21 for additional information on our segment results.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2019 |
$ in millions | | Private Client Group | | Capital Markets | | Asset Management | | RJ Bank | | Other and intersegment eliminations | | Total |
Revenues: | | | | | | | | | | | | |
Asset management and related administrative fees | | $ | 718 |
| | $ | 2 |
| | $ | 165 |
| | $ | — |
| | $ | (6 | ) | | $ | 879 |
|
Brokerage revenues: | | | | | | | | | | | | |
Securities commissions: | | | | | | | | | | | | |
Mutual and other fund products | | 147 |
| | 1 |
| | 2 |
| | — |
| | — |
| | 150 |
|
Insurance and annuity products | | 105 |
| | — |
| | — |
| | — |
| | — |
| | 105 |
|
Equities, ETFs and fixed income products | | 74 |
| | 29 |
| | — |
| | — |
| | — |
| | 103 |
|
Subtotal securities commissions | | 326 |
|
| 30 |
|
| 2 |
|
| — |
|
| — |
|
| 358 |
|
Principal transactions (1) | | 20 |
| | 74 |
| | — |
| | — |
| | (1 | ) | | 93 |
|
Total brokerage revenues | | 346 |
|
| 104 |
|
| 2 |
|
| — |
|
| (1 | ) |
| 451 |
|
Account and services fees: | | | | | | | | | | | | |
Mutual fund and annuity service fees | | 85 |
| | — |
| | — |
| | — |
| | (1 | ) | | 84 |
|
RJBDP fees | | 111 |
| | — |
| | 1 |
| | — |
| | (46 | ) | | 66 |
|
Client account and other fees | | 32 |
| | 1 |
| | 7 |
| | — |
| | (7 | ) | | 33 |
|
Total account and service fees | | 228 |
|
| 1 |
|
| 8 |
|
| — |
|
| (54 | ) |
| 183 |
|
Investment banking: | | | | | | | | | | | | |
Equity underwriting | | 10 |
| | 27 |
| | — |
| | — |
| | — |
| | 37 |
|
Merger & acquisition and advisory | | — |
| | 78 |
| | — |
| | — |
| | — |
| | 78 |
|
Fixed income investment banking | | — |
| | 24 |
| | — |
| | — |
| | — |
| | 24 |
|
Total investment banking | | 10 |
|
| 129 |
|
| — |
|
| — |
|
| — |
|
| 139 |
|
Other: | | | | | | | | | | | | |
Tax credit fund revenues | | — |
| | 16 |
| | — |
| | — |
| | — |
| | 16 |
|
All other (1) | | 3 |
| | (1 | ) | | 1 |
| | 7 |
| | 1 |
| | 11 |
|
Total other | | 3 |
|
| 15 |
|
| 1 |
|
| 7 |
|
| 1 |
|
| 27 |
|
Total non-interest revenues | | 1,305 |
|
| 251 |
|
| 176 |
|
| 7 |
|
| (60 | ) |
| 1,679 |
|
Interest income (1) | | 56 |
| | 10 |
| | 1 |
| | 246 |
| | 8 |
| | 321 |
|
Total revenues | | 1,361 |
| | 261 |
| | 177 |
| | 253 |
| | (52 | ) | | 2,000 |
|
Interest expense | | (10 | ) | | (10 | ) | | — |
| | (38 | ) | | (15 | ) | | (73 | ) |
Net revenues | | $ | 1,351 |
| | $ | 251 |
| | $ | 177 |
| | $ | 215 |
| | $ | (67 | ) | | $ | 1,927 |
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2018 |
$ in millions | | Private Client Group | | Capital Markets | | Asset Management | | RJ Bank | | Other and intersegment eliminations | | Total |
Revenues: | | | | | | | | | | | | |
Asset management and related administrative fees | | $ | 636 |
| | $ | 1 |
| | $ | 157 |
| | $ | — |
| | $ | (4 | ) | | $ | 790 |
|
Brokerage revenues: | | | | | | | | | | | |
|
Securities commissions: | | | | | | | | | | | |
|
Mutual and other fund products | | 172 |
| | 2 |
| | 3 |
| | — |
| | (3 | ) | | 174 |
|
Insurance and annuity products | | 97 |
| | — |
| | — |
| | — |
| | — |
| | 97 |
|
Equities, ETFs and fixed income products | | 84 |
| | 40 |
| | — |
| | — |
| | — |
| | 124 |
|
Subtotal securities commissions | | 353 |
| | 42 |
| | 3 |
| | — |
| | (3 | ) | | 395 |
|
Principal transactions (1) | | 22 |
| | 52 |
| | — |
| | — |
| | (1 | ) | | 73 |
|
Total brokerage revenues | | 375 |
|
| 94 |
|
| 3 |
|
| — |
|
| (4 | ) |
| 468 |
|
Account and services fees: | | | | | | | | | | | | |
Mutual fund and annuity service fees | | 85 |
| | — |
| | — |
| | — |
| | (2 | ) | | 83 |
|
RJBDP fees | | 94 |
| | — |
| | 1 |
| | — |
| | (24 | ) | | 71 |
|
Client account and other fees | | 30 |
| | 2 |
| | 8 |
| | — |
| | (7 | ) | | 33 |
|
Total account and service fees | | 209 |
|
| 2 |
|
| 9 |
|
| — |
|
| (33 | ) |
| 187 |
|
Investment banking: | | | | | | | | | | | | |
Equity underwriting | | 9 |
| | 30 |
| | — |
| | — |
| | — |
| | 39 |
|
Merger & acquisition and advisory | | — |
| | 85 |
| | — |
| | — |
| | — |
| | 85 |
|
Fixed income investment banking | | — |
| | 21 |
| | — |
| | — |
| | — |
| | 21 |
|
Total investment banking | | 9 |
|
| 136 |
|
| — |
|
| — |
|
| — |
|
| 145 |
|
Other: | | | | | | | | | | | | |
Tax credit fund revenues | | — |
| | 12 |
| | — |
| | — |
| | — |
| | 12 |
|
All other (1) | | 8 |
| | (2 | ) | | (1 | ) | | 8 |
| | 5 |
| | 18 |
|
Total other | | 8 |
|
| 10 |
|
| (1 | ) |
| 8 |
|
| 5 |
|
| 30 |
|
Total non-interest revenues | | 1,237 |
|
| 243 |
|
| 168 |
|
| 8 |
|
| (36 | ) |
| 1,620 |
|
Interest income (1) | | 50 |
| | 9 |
| | — |
| | 205 |
| | 7 |
| | 271 |
|
Total revenues | | 1,287 |
|
| 252 |
|
| 168 |
|
| 213 |
|
| (29 | ) |
| 1,891 |
|
Interest expense | | (8 | ) | | (9 | ) | | — |
| | (25 | ) | | (12 | ) | | (54 | ) |
Net revenues | | $ | 1,279 |
|
| $ | 243 |
|
| $ | 168 |
|
| $ | 188 |
|
| $ | (41 | ) |
| $ | 1,837 |
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended June 30, 2019 |
$ in millions | | Private Client Group | | Capital Markets | | Asset Management | | RJ Bank | | Other and intersegment eliminations | | Total |
Revenues: | | | | | | | | | | | | |
Asset management and related administrative fees | | $ | 2,063 |
| | $ | 5 |
| | $ | 475 |
| | $ | — |
| | $ | (16 | ) | | $ | 2,527 |
|
Brokerage revenues: | | | | | | | | | | | | |
Securities commissions: | | | | | | | | | | | | |
Mutual and other fund products | | 449 |
| | 4 |
| | 7 |
| | — |
| | (2 | ) | | 458 |
|
Insurance and annuity products | | 308 |
| | — |
| | — |
| | — |
| | — |
| | 308 |
|
Equities, ETFs and fixed income products | | 232 |
| | 99 |
| | — |
| | — |
| | (2 | ) | | 329 |
|
Subtotal securities commissions | | 989 |
|
| 103 |
|
| 7 |
|
| — |
|
| (4 | ) |
| 1,095 |
|
Principal transactions (1) | | 59 |
| | 203 |
| | — |
| | 1 |
| | (1 | ) | | 262 |
|
Total brokerage revenues | | 1,048 |
|
| 306 |
|
| 7 |
|
| 1 |
|
| (5 | ) |
| 1,357 |
|
Account and services fees: | | | | | | | | | | | | |
Mutual fund and annuity service fees | | 250 |
| | — |
| | 2 |
| | — |
| | (9 | ) | | 243 |
|
RJBDP fees | | 342 |
| | — |
| | 3 |
| | — |
| | (131 | ) | | 214 |
|
Client account and other fees | | 92 |
| | 3 |
| | 22 |
| | — |
| | (15 | ) | | 102 |
|
Total account and service fees | | 684 |
|
| 3 |
|
| 27 |
|
| — |
|
| (155 | ) |
| 559 |
|
Investment banking: | | | | | | | | | | | | |
Equity underwriting | | 25 |
| | 72 |
| | — |
| | — |
| | — |
| | 97 |
|
Merger & acquisition and advisory | | — |
| | 279 |
| | — |
| | — |
| | — |
| | 279 |
|
Fixed income investment banking | | — |
| | 63 |
| | — |
| | — |
| | — |
| | 63 |
|
Total investment banking | | 25 |
|
| 414 |
|
| — |
|
| — |
|
| — |
|
| 439 |
|
Other: | | | | | | | | | | | | |
Tax credit fund revenues | | — |
| | 49 |
| | — |
| | — |
| | — |
| | 49 |
|
All other (1) | | 19 |
| | 1 |
| | 1 |
| | 19 |
| | 6 |
| | 46 |
|
Total other | | 19 |
|
| 50 |
|
| 1 |
|
| 19 |
|
| 6 |
|
| 95 |
|
Total non-interest revenues | | 3,839 |
|
| 778 |
|
| 510 |
|
| 20 |
|
| (170 | ) |
| 4,977 |
|
Interest income (1) | | 170 |
| | 29 |
| | 3 |
| | 732 |
| | 27 |
| | 961 |
|
Total revenues | | 4,009 |
|
| 807 |
|
| 513 |
|
| 752 |
|
| (143 | ) |
| 5,938 |
|
Interest expense | | (31 | ) | | (26 | ) | | — |
| | (122 | ) | | (42 | ) | | (221 | ) |
Net revenues | | $ | 3,978 |
|
| $ | 781 |
|
| $ | 513 |
|
| $ | 630 |
|
| $ | (185 | ) |
| $ | 5,717 |
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended June 30, 2018 |
$ in millions | | Private Client Group | | Capital Markets | | Asset Management | | RJ Bank | | Other and intersegment eliminations | | Total |
Revenues: | | | | | | | | | | | | |
Asset management and related administrative fees | | $ | 1,843 |
| | $ | 6 |
| | $ | 450 |
| | $ | — |
| | $ | (12 | ) | | $ | 2,287 |
|
Brokerage revenues: | | | | | | | | | | | | |
Securities commissions: | | | | | | | | | | | | |
Mutual and other fund products | | 535 |
| | 6 |
| | 9 |
| | — |
| | (4 | ) | | 546 |
|
Insurance and annuity products | | 308 |
| | — |
| | — |
| | — |
| | — |
| | 308 |
|
Equities, ETFs and fixed income products | | 270 |
| | 114 |
| | — |
| | — |
| | (2 | ) | | 382 |
|
Subtotal securities commissions | | 1,113 |
| | 120 |
| | 9 |
| | — |
| | (6 | ) | | 1,236 |
|
Principal transactions (1) | | 62 |
| | 193 |
| | — |
| | 1 |
| | (1 | ) | | 255 |
|
Total brokerage revenues | | 1,175 |
| | 313 |
| | 9 |
| | 1 |
| | (7 | ) | | 1,491 |
|
Account and services fees: | | | | | | | | | | | | |
Mutual fund and annuity service fees | | 246 |
| | — |
| | 1 |
| | — |
| | (6 | ) | | 241 |
|
RJBDP fees | | 265 |
| | — |
| | 3 |
| | — |
| | (67 | ) | | 201 |
|
Client account and other fees | | 85 |
| | 4 |
| | 18 |
| | — |
| | (14 | ) | | 93 |
|
Total account and service fees | | 596 |
| | 4 |
| | 22 |
| | — |
| | (87 | ) | | 535 |
|
Investment banking: | | | | | | | | | | | | |
Equity underwriting | | 25 |
| | 66 |
| | — |
| | — |
| | — |
| | 91 |
|
Merger & acquisition and advisory | | — |
| | 200 |
| | — |
| | — |
| | — |
| | 200 |
|
Fixed income investment banking | | — |
| | 58 |
| | — |
| | — |
| | — |
| | 58 |
|
Total investment banking | | 25 |
| | 324 |
| | — |
| | — |
| | — |
| | 349 |
|
Other: | | | | | | | | | | | | |
Tax credit fund revenues | | — |
| | 40 |
| | — |
| | — |
| | — |
| | 40 |
|
All other (1) | | 24 |
| | — |
| | — |
| | 16 |
| | 20 |
| | 60 |
|
Total other | | 24 |
| | 40 |
| | — |
| | 16 |
| | 20 |
| | 100 |
|
Total non-interest revenues | | 3,663 |
| | 687 |
| | 481 |
| | 17 |
| | (86 | ) | | 4,762 |
|
Interest income (1) | | 140 |
| | 24 |
| | 1 |
| | 571 |
| | 16 |
| | 752 |
|
Total revenues | | 3,803 |
| | 711 |
| | 482 |
| | 588 |
| | (70 | ) | | 5,514 |
|
Interest expense | | (19 | ) | | (21 | ) | | — |
| | (56 | ) | | (43 | ) | | (139 | ) |
Net revenues | | $ | 3,784 |
| | $ | 690 |
| | $ | 482 |
| | $ | 532 |
| | $ | (113 | ) | | $ | 5,375 |
|
(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.
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“Interest expense” 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.
Notes to Condensed Consolidated Financial Statements (Unaudited)
ImpactOur net investment hedges and cash flow hedges relate to our derivatives associated with RJ Bank’s business operations. See Note 2 of adoptionour 2019 Form 10-K and Note 5 for additional information on these derivatives.
As a result
NOTE 17 – REVENUES
The following tables present our sources of the adoption of the newrevenues by segment. For further information about our significant accounting guidance, we have changed the presentation of certain costs from a net presentation within revenues to a gross presentation, particularly thosepolicies related to merger & acquisition, advisory and underwriting transactions and certain administrative costs related to the RJBDP. As a resultrevenue recognition, see Note 2 of our 2019 Form 10-K. See Note 22 of this change, “Investment banking” and “Professional fees” were each $6 million higherForm 10-Q for the three months ended June 30, 2019 and $16 million higher for the nine months ended June 30, 2019, and “Account and service fees” and “Other” expense were each $1 million higher for the three months ended June 30, 2019 and $5 million higher for the nine months ended June 30, 2019. These changes had no impactadditional information on pre-tax or net income.our segment results.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2020 |
$ in millions | | Private Client Group | | Capital Markets | | Asset Management | | RJ Bank | | Other and intersegment eliminations | | Total |
Revenues: | | | | | | | | | | | | |
Asset management and related administrative fees | | $ | 833 |
| | $ | 1 |
| | $ | 177 |
| | $ | — |
| | $ | (5 | ) | | $ | 1,006 |
|
Brokerage revenues: | | | | | | | | | | | | |
Securities commissions: | | | | | | | | | | | | |
Mutual and other fund products | | 163 |
| | 1 |
| | 2 |
| | — |
| | — |
| | 166 |
|
Insurance and annuity products | | 99 |
| | — |
| | — |
| | — |
| | — |
| | 99 |
|
Equities, ETFs and fixed income products | | 105 |
| | 40 |
| | — |
| | — |
| | — |
| | 145 |
|
Subtotal securities commissions | | 367 |
|
| 41 |
|
| 2 |
|
| — |
|
| — |
|
| 410 |
|
Principal transactions (1) | | 17 |
| | 89 |
| | — |
| | — |
| | (1 | ) | | 105 |
|
Total brokerage revenues | | 384 |
|
| 130 |
|
| 2 |
|
| — |
|
| (1 | ) |
| 515 |
|
Account and services fees: | | | | | | | | | | | | |
Mutual fund and annuity service fees | | 88 |
| | — |
| | — |
| | — |
| | — |
| | 88 |
|
RJBDP fees | | 99 |
| | — |
| | — |
| | — |
| | (48 | ) | | 51 |
|
Client account and other fees | | 35 |
| | 2 |
| | 4 |
| | — |
| | (8 | ) | | 33 |
|
Total account and service fees | | 222 |
|
| 2 |
|
| 4 |
|
| — |
|
| (56 | ) |
| 172 |
|
Investment banking: | | | | | | | | | | | | |
Merger & acquisition and advisory | | — |
| | 72 |
| | — |
| | — |
| | — |
| | 72 |
|
Equity underwriting | | 11 |
| | 43 |
| | — |
| | — |
| | — |
| | 54 |
|
Debt underwriting | | — |
| | 22 |
| | — |
| | — |
| | — |
| | 22 |
|
Total investment banking | | 11 |
|
| 137 |
|
| — |
|
| — |
|
| — |
|
| 148 |
|
Other: | | | | | | | | | | | | |
Tax credit fund revenues | | — |
| | 12 |
| | — |
| | — |
| | — |
| | 12 |
|
All other (1) | | 7 |
| | 4 |
| | 1 |
| | 5 |
| | (44 | ) | | (27 | ) |
Total other | | 7 |
|
| 16 |
|
| 1 |
|
| 5 |
|
| (44 | ) |
| (15 | ) |
Total non-interest revenues | | 1,457 |
|
| 286 |
|
| 184 |
|
| 5 |
|
| (106 | ) |
| 1,826 |
|
Interest income (1) | | 45 |
| | 10 |
| | — |
| | 223 |
| | 7 |
| | 285 |
|
Total revenues | | 1,502 |
| | 296 |
| | 184 |
| | 228 |
| | (99 | ) | | 2,111 |
|
Interest expense | | (7 | ) | | (6 | ) | | — |
| | (18 | ) | | (12 | ) | | (43 | ) |
Net revenues | | $ | 1,495 |
| | $ | 290 |
| | $ | 184 |
| | $ | 210 |
| | $ | (111 | ) | | $ | 2,068 |
|
| |
(1) | These revenues are generally not in scope of the accounting guidance for revenue from contracts with customers. |
Other items
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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: | | | | | | | | | | | | |
Merger & acquisition and advisory | | — |
| | 121 |
| | — |
| | — |
| | — |
| | 121 |
|
Equity underwriting | | 8 |
| | 18 |
| | — |
| | — |
| | (1 | ) | | 25 |
|
Debt underwriting | | — |
| | 17 |
| | — |
| | — |
| | — |
| | 17 |
|
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 |
|
| |
(1) | These revenues are generally not in scope of the accounting guidance for revenue from contracts with customers. |
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended March 31, 2020 |
$ in millions | | Private Client Group | | Capital Markets | | Asset Management | | RJ Bank | | Other and intersegment eliminations | | Total |
Revenues: | | | | | | | | | | | | |
Asset management and related administrative fees | | $ | 1,615 |
| | $ | 3 |
| | $ | 353 |
| | $ | — |
| | $ | (10 | ) | | $ | 1,961 |
|
Brokerage revenues: | | | | | | | | | | | | |
Securities commissions: | | | | | | | | | | | | |
Mutual and other fund products | | 307 |
| | 4 |
| | 4 |
| | — |
| | (1 | ) | | 314 |
|
Insurance and annuity products | | 200 |
| | — |
| | — |
| | — |
| | — |
| | 200 |
|
Equities, ETFs and fixed income products | | 190 |
| | 70 |
| | — |
| | — |
| | (1 | ) | | 259 |
|
Subtotal securities commissions | | 697 |
|
| 74 |
|
| 4 |
|
| — |
|
| (2 | ) |
| 773 |
|
Principal transactions (1) | | 34 |
| | 171 |
| | — |
| | — |
| | (3 | ) | | 202 |
|
Total brokerage revenues | | 731 |
|
| 245 |
|
| 4 |
|
| — |
|
| (5 | ) |
| 975 |
|
Account and services fees: | | | | | | | | | | | | |
Mutual fund and annuity service fees | | 178 |
| | — |
| | 1 |
| | — |
| | (1 | ) | | 178 |
|
RJBDP fees | | 204 |
| | — |
| | — |
| | — |
| | (95 | ) | | 109 |
|
Client account and other fees | | 64 |
| | 3 |
| | 8 |
| | — |
| | (12 | ) | | 63 |
|
Total account and service fees | | 446 |
|
| 3 |
|
| 9 |
|
| — |
|
| (108 | ) |
| 350 |
|
Investment banking: | | | | | | | | | | | |
|
Merger & acquisition and advisory | | — |
| | 132 |
| | — |
| | — |
| | — |
| | 132 |
|
Equity underwriting | | 22 |
| | 82 |
| | — |
| | — |
| | — |
| | 104 |
|
Debt underwriting | | — |
| | 53 |
| | — |
| | — |
| | — |
| | 53 |
|
Total investment banking | | 22 |
|
| 267 |
|
| — |
|
| — |
|
| — |
|
| 289 |
|
Other: | | | | | | | | | | | |
|
Tax credit fund revenues | | — |
| | 30 |
| | — |
| | — |
| | — |
| | 30 |
|
All other (1) | | 16 |
| | 4 |
| | 1 |
| | 11 |
| | (48 | ) | | (16 | ) |
Total other | | 16 |
|
| 34 |
|
| 1 |
|
| 11 |
|
| (48 | ) |
| 14 |
|
Total non-interest revenues | | 2,830 |
|
| 552 |
|
| 367 |
|
| 11 |
|
| (171 | ) |
| 3,589 |
|
Interest income (1) | | 94 |
| | 18 |
| | 1 |
| | 454 |
| | 15 |
| | 582 |
|
Total revenues | | 2,924 |
|
| 570 |
|
| 368 |
|
| 465 |
|
| (156 | ) |
| 4,171 |
|
Interest expense | | (15 | ) | | (12 | ) | | — |
| | (39 | ) | | (28 | ) | | (94 | ) |
Net revenues | | $ | 2,909 |
|
| $ | 558 |
|
| $ | 368 |
|
| $ | 426 |
|
| $ | (184 | ) |
| $ | 4,077 |
|
| |
(1) | These revenues are generally not in scope of the accounting guidance for revenue from contracts with customers. |
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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: | | | | | | | | | | | |
|
Merger & acquisition and advisory | | — |
| | 206 |
| | — |
| | — |
| | — |
| | 206 |
|
Equity underwriting | | 15 |
| | 45 |
| | — |
| | — |
| | — |
| | 60 |
|
Debt underwriting | | — |
| | 34 |
| | — |
| | — |
| | — |
| | 34 |
|
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 |
|
| |
(1) | These revenues are generally not in scope of the accounting guidance for revenue from contracts with customers. |
At June 30, 2019March 31, 2020 and September 30, 2018,2019, net receivables related to contracts with customers were $340$319 million and $384$347 million, respectively.
We record deferred revenue from contracts with customers when payment is received prior to the performance of our obligation to the customer. Deferred revenue balances were not material as of June 30, 2019March 31, 2020 and September 30, 2018.2019.
We have elected the practical expedient allowable by the accounting guidance to not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1718 – INTEREST INCOME AND INTEREST EXPENSE
The following table details the components of interest income and interest expense.
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Interest income: | | | | | | | | | | | | | | | | |
Cash segregated pursuant to regulations | | $ | 13 |
| | $ | 14 |
| | $ | 42 |
| | $ | 40 |
| |
Assets segregated pursuant to regulations | | | $ | 11 |
| | $ | 17 |
| | $ | 22 |
| | $ | 32 |
|
Trading instruments | | 7 |
| | 7 |
| | 20 |
| | 17 |
| | 7 |
| | 6 |
| | 13 |
| | 13 |
|
Available-for-sale securities | | 18 |
| | 14 |
| | 51 |
| | 37 |
| | 19 |
| | 17 |
| | 37 |
| | 33 |
|
Margin loans | | 30 |
| | 28 |
| | 93 |
| | 77 |
| | 21 |
| | 31 |
| | 48 |
| | 63 |
|
Bank loans, net of unearned income | | 221 |
| | 186 |
| | 655 |
| | 519 |
| |
Bank loans, net of unearned income and deferred expenses | | | 198 |
| | 220 |
| | 404 |
| | 434 |
|
Loans to financial advisors | | 5 |
| | 4 |
| | 14 |
| | 11 |
| | 5 |
| | 5 |
| | 10 |
| | 9 |
|
Corporate cash and all other | | 27 |
| | 18 |
| | 86 |
| | 51 |
| | 24 |
| | 28 |
| | 48 |
| | 56 |
|
Total interest income | | $ | 321 |
|
| $ | 271 |
|
| $ | 961 |
|
| $ | 752 |
| | $ | 285 |
|
| $ | 324 |
|
| $ | 582 |
|
| $ | 640 |
|
Interest expense: | | |
| | |
| | | | | | |
| | |
| | | | |
Bank deposits | | $ | 33 |
| | $ | 19 |
| | $ | 105 |
| | $ | 39 |
| | $ | 12 |
| | $ | 37 |
| | $ | 28 |
| | $ | 72 |
|
Trading instruments sold but not yet purchased | | 2 |
| | 2 |
| | 6 |
| | 5 |
| | 1 |
| | 2 |
| | 2 |
| | 4 |
|
Brokerage client payables | | 5 |
| | 4 |
| | 16 |
| | 10 |
| | 3 |
| | 5 |
| | 6 |
| | 11 |
|
Other borrowings | | 5 |
| | 6 |
| | 16 |
| | 17 |
| | 5 |
| | 5 |
| | 10 |
| | 11 |
|
Senior notes payable | | 19 |
| | 19 |
| | 55 |
| | 55 |
| | 19 |
| | 18 |
| | 37 |
| | 36 |
|
Other | | 9 |
| | 4 |
| | 23 |
| | 13 |
| | 3 |
| | 8 |
| | 11 |
| | 14 |
|
Total interest expense | | 73 |
|
| 54 |
|
| 221 |
|
| 139 |
| | 43 |
|
| 75 |
|
| 94 |
|
| 148 |
|
Net interest income | | 248 |
| | 217 |
| | 740 |
| | 613 |
| | 242 |
| | 249 |
| | 488 |
| | 492 |
|
Bank loan loss (provision)/benefit | | 5 |
| | (5 | ) | | (16 | ) | | (14 | ) | |
Net interest income after bank loan loss (provision)/benefit | | $ | 253 |
| | $ | 212 |
| | $ | 724 |
| | $ | 599 |
| |
Bank loan loss provision | | | (109 | ) | | (5 | ) | | (107 | ) | | (21 | ) |
Net interest income after bank loan loss provision | | | $ | 133 |
| | $ | 244 |
| | $ | 381 |
| | $ | 471 |
|
Interest expense related to bank deposits in the preceding table excludes interest expense associated with affiliate deposits, which has been eliminated in consolidation.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1819 – SHARE-BASED COMPENSATION
We have one1 share-based compensation plan for our employees, Board of Directors and non-employees (independent contractor financial advisors). Effective during the three months ended June 30, 2019,Generally, we generally reissue our treasury shares under The Amended and Restated 2012 Stock Incentive Plan; however, we are also permitted to issue new shares. Annual share-based compensation awards are primarily issued during the first fiscal quarter of each year. Our share-based compensation accounting policies are described in Note 2 of our 20182019 Form 10-K. Other information related to our share-based awards is presented in Note 2021 of our 20182019 Form 10-K.
During the ninethree and six months ended June 30, 2019,March 31, 2020, we granted approximately 1.5100 thousand and 1.6 million RSUs, respectively, to employees and outside members of our Board of Directors with a weighted-average grant-date fair value of $76.71. Grants for the three months ended June 30, 2019 were insignificant.$79.73 and $88.53, respectively. For the three and ninesix months ended June 30, 2019,March 31, 2020, total compensation expense for restricted equity awardsRSUs granted to our employees and members of our Board of Directors was $20$27 million and $81$67 million, respectively, compared with $19$23 million and $70$61 million, respectively, for the three and ninesix months ended June 30, 2018.March 31, 2019.
As of June 30, 2019,March 31, 2020, there were $164$216 million of total pre-tax compensation costs not yet recognized net(net of estimated forfeitures,forfeitures) related to RSUs granted to employees and members of our Board of Directors.Directors, including those granted during the six months ended March 31, 2020. These costs are expected to be recognized over a weighted-average period of 3.03.4 years.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1920 – REGULATORY CAPITAL REQUIREMENTS
RJF, as a bank holding company and financial holding company, RJ Bank, and our broker-dealer subsidiaries and Raymond James Trust, N.A. (“RJ Trust”) are subject to capital requirements by various regulatory authorities. Capital levels of each entity are monitored to ensure compliance with our various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions, by regulators that, if undertaken, could have a direct material effect on our financial results.
As a bank holding company, RJF is subject to the risk-based capital requirements of the Fed. These risk-based capital requirements are expressed as capital ratios that compare measures of regulatory capital to risk-weighted assets, which involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory guidelines. RJF’s and RJ Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.
RJF and RJ Bank are required to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), Tier 1 capital to average assets (as defined), and under rules defined under the Basel III standardized approach,capital framework, Common equity Tier 1 capital (“CET1”) to risk-weighted assets. RJF and RJ Bank each calculate these ratios under the Basel III standardized approach in order to assess compliance with both regulatory requirements and their internal capital policies. 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. FailureIn order 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.payments, we must hold a capital conservation buffer above our minimum risk-based capital requirements. As of June 30, 2019,March 31, 2020, both RJF’s and RJ Bank’s capital levels exceeded the capital conservation buffer requirement and were each categorized as “well capitalized.“well-capitalized.”
For further discussion of regulatory capital requirements applicable to certain of our businesses and subsidiaries, see Note 2122 of our 20182019 Form 10-K.
To meet requirements for capital adequacy purposes or to be categorized as “well-capitalized,” RJF must maintain minimum CET1, Tier 1 capital, Total capital and Tier 1 leverage amounts and ratios as set forth in the following table.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Requirement for capital adequacy purposes | | To be well-capitalized under regulatory provisions |
$ in millions | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
RJF as of March 31, 2020: | | | | | | | | | | | | |
CET1 | | $ | 6,183 |
| | 24.1 | % | | $ | 1,156 |
| | 4.5 | % | | $ | 1,669 |
| | 6.5 | % |
Tier 1 capital | | $ | 6,183 |
| | 24.1 | % | | $ | 1,541 |
| | 6.0 | % | | $ | 2,054 |
| | 8.0 | % |
Total capital | | $ | 6,490 |
| | 25.3 | % | | $ | 2,054 |
| | 8.0 | % | | $ | 2,568 |
| | 10.0 | % |
Tier 1 leverage | | $ | 6,183 |
| | 14.2 | % | | $ | 1,745 |
| | 4.0 | % | | $ | 2,181 |
| | 5.0 | % |
| | | | | | | | | | | | |
RJF as of September 30, 2019: | | | | | | | | | | | | |
CET1 | | $ | 5,971 |
| | 24.8 | % | | $ | 1,085 |
| | 4.5 | % | | $ | 1,567 |
| | 6.5 | % |
Tier 1 capital | | $ | 5,971 |
| | 24.8 | % | | $ | 1,446 |
| | 6.0 | % | | $ | 1,928 |
| | 8.0 | % |
Total capital | | $ | 6,207 |
| | 25.8 | % | | $ | 1,928 |
| | 8.0 | % | | $ | 2,410 |
| | 10.0 | % |
Tier 1 leverage | | $ | 5,971 |
| | 15.7 | % | | $ | 1,525 |
| | 4.0 | % | | $ | 1,906 |
| | 5.0 | % |
RJF’s Tier 1 capital and Total capital ratios at March 31, 2020 decreased compared to September 30, 2019, due to the impact of increases to cash segregated pursuant to regulations and growth of bank assets, primarily bank loans, partially offset by the impact of higher equity due to positive earnings, net of share repurchases and dividends. RJF’s Tier 1 leverage ratio at March 31, 2020 decreased compared to September 30, 2019 due to the growth of average assets, primarily related to cash, cash and cash equivalents segregated pursuant to regulations, and bank loans, partially offset by the aforementioned change in equity.
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 June 30, 2019: | | | | | | | | | | | | |
CET1 | | $ | 5,854 |
| | 24.2 | % | | $ | 1,089 |
| | 4.5 | % | | $ | 1,572 |
| | 6.5 | % |
Tier 1 capital | | $ | 5,854 |
| | 24.2 | % | | $ | 1,451 |
| | 6.0 | % | | $ | 1,935 |
| | 8.0 | % |
Total capital | | $ | 6,089 |
| | 25.2 | % | | $ | 1,935 |
| | 8.0 | % | | $ | 2,419 |
| | 10.0 | % |
Tier 1 leverage | | $ | 5,854 |
| | 15.7 | % | | $ | 1,496 |
| | 4.0 | % | | $ | 1,870 |
| | 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 June 30, 2019 decreased slightly compared to September 30, 2018, as the impacts of share repurchases and the growth of the bank loan portfolio during the nine months ended June 30, 2019 were offset by positive earnings during the current period.
To meet the requirements for capital adequacy or to be categorized as “well capitalized,“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 | | Actual | | Requirement for capital adequacy purposes | | To be well-capitalized under regulatory provisions |
$ in millions | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
RJ Bank as of June 30, 2019: | | | | | | | | | | | | | |
RJ Bank as of March 31, 2020: | | | | | | | | | | | | | |
CET1 | | $ | 2,190 |
| | 12.8 | % | | $ | 768 |
| | 4.5 | % | | $ | 1,109 |
| | 6.5 | % | | $ | 2,232 |
| | 12.7 | % | | $ | 792 |
| | 4.5 | % | | $ | 1,144 |
| | 6.5 | % |
Tier 1 capital | | $ | 2,190 |
| | 12.8 | % | | $ | 1,024 |
| | 6.0 | % | | $ | 1,365 |
| | 8.0 | % | | $ | 2,232 |
| | 12.7 | % | | $ | 1,056 |
| | 6.0 | % | | $ | 1,408 |
| | 8.0 | % |
Total capital | | $ | 2,403 |
| | 14.1 | % | | $ | 1,365 |
| | 8.0 | % | | $ | 1,706 |
| | 10.0 | % | | $ | 2,454 |
| | 13.9 | % | | $ | 1,408 |
| | 8.0 | % | | $ | 1,760 |
| | 10.0 | % |
Tier 1 leverage | | $ | 2,190 |
| | 8.8 | % | | $ | 991 |
| | 4.0 | % | | $ | 1,239 |
| | 5.0 | % | | $ | 2,232 |
| | 8.1 | % | | $ | 1,102 |
| | 4.0 | % | | $ | 1,377 |
| | 5.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
RJ Bank as of September 30, 2018: | | |
| | |
| | |
| | |
| | |
| | |
| |
RJ Bank as of September 30, 2019: | | | |
| | |
| | |
| | |
| | |
| | |
|
CET1 | | $ | 2,029 |
| | 12.7 | % | | $ | 721 |
| | 4.5 | % | | $ | 1,042 |
| | 6.5 | % | | $ | 2,246 |
| | 13.2 | % | | $ | 764 |
| | 4.5 | % | | $ | 1,103 |
| | 6.5 | % |
Tier 1 capital | | $ | 2,029 |
| | 12.7 | % | | $ | 961 |
| | 6.0 | % | | $ | 1,282 |
| | 8.0 | % | | $ | 2,246 |
| | 13.2 | % | | $ | 1,018 |
| | 6.0 | % | | $ | 1,358 |
| | 8.0 | % |
Total capital | | $ | 2,229 |
| | 13.9 | % | | $ | 1,282 |
| | 8.0 | % | | $ | 1,602 |
| | 10.0 | % | | $ | 2,458 |
| | 14.5 | % | | $ | 1,358 |
| | 8.0 | % | | $ | 1,697 |
| | 10.0 | % |
Tier 1 leverage | | $ | 2,029 |
| | 8.8 | % | | $ | 926 |
| | 4.0 | % | | $ | 1,158 |
| | 5.0 | % | | $ | 2,246 |
| | 8.8 | % | | $ | 1,021 |
| | 4.0 | % | | $ | 1,276 |
| | 5.0 | % |
RJ Bank’s Tier 1 capital and Total capital ratios at June 30, 2019 increased slightlyMarch 31, 2020 decreased compared to September 30, 20182019 due to dividends paid during the period exceeding earnings and growth in assets, primarily bank loans. RJ Bank’s Tier 1 leverage ratio at March 31, 2020 decreased compared to September 30, 2019 due to the impact of positive earnings duringgrowth in average assets, primarily related to cash and bank loans, as well as the current period, partially offset by growth of the bank loan portfolio.aforementioned change in equity.
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 | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
Raymond James & Associates, Inc.: | | | | | | | | |
(Alternative Method elected) | | | | | | | | |
Net capital as a percent of aggregate debit items | | 41.9 | % | | 28.2 | % | | 41.5 | % | | 39.7 | % |
Net capital | | $ | 1,088 |
| | $ | 934 |
| | $ | 1,122 |
| | $ | 1,056 |
|
Less: required net capital | | (52 | ) | | (66 | ) | | (54 | ) | | (53 | ) |
Excess net capital | | $ | 1,036 |
| | $ | 868 |
| | $ | 1,068 |
| | $ | 1,003 |
|
As of June 30, 2019,March 31, 2020, RJFS, RJ Ltd., RJ Trust and all of our other active regulated domestic and international subsidiaries were in compliance with and exceeded all applicable capital requirements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 2021 – EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per common share.
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
in millions, except per share amounts | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Income for basic earnings per common share: | | | | | | | | | | | | | | | | |
Net income attributable to RJF | | $ | 259 |
| | $ | 232 |
| | $ | 769 |
| | $ | 594 |
| |
Net income | | | $ | 169 |
| | $ | 261 |
| | $ | 437 |
| | $ | 510 |
|
Less allocation of earnings and dividends to participating securities | | (1 | ) | | — |
| | (1 | ) | | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
|
Net income attributable to RJF common shareholders | | $ | 258 |
| | $ | 232 |
| | $ | 768 |
| | $ | 593 |
| | $ | 169 |
| | $ | 261 |
| | $ | 436 |
| | $ | 510 |
|
Income for diluted earnings per common share: | | |
| | |
| | | | | | |
| | |
| | | | |
Net income attributable to RJF | | $ | 259 |
| | $ | 232 |
| | $ | 769 |
| | $ | 594 |
| |
Net income | | | $ | 169 |
| | $ | 261 |
| | $ | 437 |
| | $ | 510 |
|
Less allocation of earnings and dividends to participating securities | | (1 | ) | | — |
| | (1 | ) | | (1 | ) | | — |
| | — |
| | (1 | ) | | — |
|
Net income attributable to RJF common shareholders | | $ | 258 |
| | $ | 232 |
| | $ | 768 |
| | $ | 593 |
| | $ | 169 |
| | $ | 261 |
| | $ | 436 |
| | $ | 510 |
|
Common shares: | | |
| | |
| | | | | | |
| | |
| | | | |
Average common shares in basic computation | | 140.4 |
| | 145.6 |
| | 141.8 |
| | 145.2 |
| | 138.4 |
| | 140.8 |
| | 138.4 |
| | 142.5 |
|
Dilutive effect of outstanding stock options and certain RSUs | | 3.2 |
| | 3.8 |
| | 3.0 |
| | 3.6 |
| | 2.7 |
| | 3.1 |
| | 2.9 |
| | 2.9 |
|
Average common shares used in diluted computation | | 143.6 |
| | 149.4 |
| | 144.8 |
| | 148.8 |
| | 141.1 |
| | 143.9 |
| | 141.3 |
| | 145.4 |
|
Earnings per common share: | | |
| | |
| | | | | | |
| | |
| | | | |
Basic | | $ | 1.84 |
| | $ | 1.59 |
| | $ | 5.42 |
| | $ | 4.08 |
| | $ | 1.22 |
| | $ | 1.85 |
| | $ | 3.15 |
| | $ | 3.58 |
|
Diluted | | $ | 1.80 |
| | $ | 1.55 |
| | $ | 5.30 |
| | $ | 3.99 |
| | $ | 1.20 |
| | $ | 1.81 |
| | $ | 3.09 |
| | $ | 3.51 |
|
Stock options and certain RSUs excluded from weighted-average diluted common shares because their effect would be antidilutive | | 0.2 |
| | 0.2 |
| | 0.5 |
| | 1.1 |
| | 0.7 |
| | 0.5 |
| | 0.6 |
| | 1.6 |
|
The allocation of earnings and dividends to participating securities in the preceding table represents dividends paid during the period to participating securities plus an allocation of undistributed earnings to participating securities. Participating securities represent unvested restricted stock and certain RSUs. Participating securities and related dividends paid on these participating securities were insignificant for the three and ninesix months ended June 30, 2019March 31, 2020 and 2018.2019. 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 June 30, | | Nine months ended June 30, | Three months ended March 31, | | Six months ended March 31, |
| 2019 | | 2018 | | 2019 | | 2018 | 2020 | | 2019 | | 2020 | | 2019 |
Dividends per common share - declared | $ | 0.34 |
| | $ | 0.30 |
| | $ | 1.02 |
| | $ | 0.80 |
| $ | 0.37 |
| | $ | 0.34 |
| | $ | 0.74 |
| | $ | 0.68 |
|
Dividends per common share - paid | $ | 0.34 |
| | $ | 0.25 |
| | $ | 0.98 |
| | $ | 0.72 |
| $ | 0.37 |
| | $ | 0.34 |
| | $ | 0.71 |
| | $ | 0.64 |
|
NOTE 2122 – SEGMENT INFORMATION
We currently operate through the following five5 segments: PCG;Private Client Group (“PCG”); Capital Markets; Asset Management; RJ Bank; and Other.
The business segments are determined based upon factors such as the services provided and the distribution channels served and are consistent with how we assess performance and determine how to allocate our resources throughout our subsidiaries. For a further discussion of our business segments, see Note 2324 of our 20182019 Form 10-K.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following tables present information concerning operations in these segments of business.segments.
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | | | | | | | | | |
Net revenues: | | | | | | | | | |
Private Client Group | | $ | 1,361 |
| | $ | 1,287 |
| | $ | 4,009 |
| | $ | 3,803 |
| | $ | 1,495 |
| | $ | 1,271 |
| | $ | 2,909 |
| | $ | 2,627 |
|
Capital Markets | | 261 |
| | 252 |
| | 807 |
| | 711 |
| | 290 |
| | 277 |
| | 558 |
| | 530 |
|
Asset Management | | 177 |
| | 168 |
| | 513 |
| | 482 |
| | 184 |
| | 162 |
| | 368 |
| | 336 |
|
RJ Bank | | 253 |
| | 213 |
| | 752 |
| | 588 |
| | 210 |
| | 212 |
| | 426 |
| | 415 |
|
Other | | 15 |
| | 16 |
| | 55 |
| | 53 |
| | (44 | ) | | — |
| | (52 | ) | | 2 |
|
Intersegment eliminations | | (67 | ) | | (45 | ) | | (198 | ) | | (123 | ) | | (67 | ) | | (63 | ) | | (132 | ) | | (120 | ) |
Total revenues | | $ | 2,000 |
| | $ | 1,891 |
| | $ | 5,938 |
| | $ | 5,514 |
| |
Income/(loss) excluding noncontrolling interests and before provision for income taxes: | | | | | | | | | |
Total net revenues | | | $ | 2,068 |
| | $ | 1,859 |
| | $ | 4,077 |
| | $ | 3,790 |
|
Pre-tax income/(loss): | | | | | | | | | |
Private Client Group | | $ | 140 |
| | $ | 132 |
| | $ | 436 |
| | $ | 445 |
| | $ | 170 |
| | $ | 132 |
| | $ | 323 |
| | $ | 296 |
|
Capital Markets | | 24 |
| | 22 |
| | 77 |
| | 43 |
| | 28 |
| | 41 |
| | 57 |
| | 53 |
|
Asset Management | | 65 |
| | 58 |
| | 184 |
| | 171 |
| | 73 |
| | 55 |
| | 146 |
| | 119 |
|
RJ Bank | | 138 |
| | 130 |
| | 384 |
| | 362 |
| | 14 |
| | 136 |
| | 149 |
| | 246 |
|
Other | | (25 | ) | | (24 | ) | | (60 | ) | | (60 | ) | | (46 | ) | | (17 | ) | | (77 | ) | | (35 | ) |
Pre-tax income excluding noncontrolling interests | | 342 |
| | 318 |
| | 1,021 |
| | 961 |
| |
Net loss attributable to noncontrolling interests | | (2 | ) | | — |
| | (16 | ) | | — |
| |
Income including noncontrolling interests and before provision for income taxes | | $ | 340 |
| | $ | 318 |
| | $ | 1,005 |
| | $ | 961 |
| |
Total pre-tax income | | | $ | 239 |
| | $ | 347 |
| | $ | 598 |
| | $ | 679 |
|
No individual client accounted for more than ten percent of total revenues in any of the periods presented.
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Net interest income/(expense): | | | | | | | | | | | | | | | | |
Private Client Group | | $ | 46 |
| | $ | 42 |
| | $ | 139 |
| | $ | 121 |
| | $ | 38 |
| | $ | 47 |
| | $ | 79 |
| | $ | 93 |
|
Capital Markets | | — |
| | — |
| | 3 |
| | 3 |
| | 4 |
| | 1 |
| | 6 |
| | 3 |
|
Asset Management | | 1 |
| | — |
| | 3 |
| | 1 |
| | — |
| | 1 |
| | 1 |
| | 2 |
|
RJ Bank | | 208 |
| | 180 |
| | 610 |
| | 515 |
| | 205 |
| | 205 |
| | 415 |
| | 402 |
|
Other and intersegment eliminations | | (7 | ) | | (5 | ) | | (15 | ) | | (27 | ) | | (5 | ) | | (5 | ) | | (13 | ) | | (8 | ) |
Net interest income | | $ | 248 |
| | $ | 217 |
| | $ | 740 |
| | $ | 613 |
| | $ | 242 |
| | $ | 249 |
| | $ | 488 |
| | $ | 492 |
|
The following table presents our total assets on a segment basis.
| | $ in millions | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
Total assets: | | | | | | | | |
Private Client Group | | $ | 8,877 |
| | $ | 10,173 |
| | $ | 12,531 |
| | $ | 9,042 |
|
Capital Markets | | 2,420 |
| | 2,279 |
| | 2,118 |
| | 2,287 |
|
Asset Management | | 390 |
| | 387 |
| | 348 |
| | 401 |
|
RJ Bank | | 25,501 |
| | 22,922 |
| | 33,434 |
| | 25,516 |
|
Other | | 1,489 |
| | 1,652 |
| | 1,378 |
| | 1,584 |
|
Total | | $ | 38,677 |
| | $ | 37,413 |
| | $ | 49,809 |
| | $ | 38,830 |
|
The following table presents goodwill, which was included in our total assets, on a segment basis.
| | $ in millions | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
Goodwill: | | | | | | | | |
Private Client Group | | $ | 276 |
| | $ | 276 |
| | $ | 274 |
| | $ | 275 |
|
Capital Markets | | 139 |
| | 133 |
| | 120 |
| | 120 |
|
Asset Management | | 69 |
| | 69 |
| | 69 |
| | 69 |
|
Total | | $ | 484 |
| | $ | 478 |
| | $ | 463 |
| | $ | 464 |
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
We have operations in the U.S., Canada and Europe. Substantially all long-lived assets are located in the U.S. The following table presents our net revenues and pre-tax income before provision for income taxes and excluding noncontrolling interests, classified by major geographic area in which they were earned.
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | | | | | | | | | |
Net revenues: | | | | | | | | | |
U.S. | | $ | 1,858 |
| | $ | 1,750 |
| | $ | 5,508 |
| | $ | 5,094 |
| | $ | 1,920 |
| | $ | 1,729 |
| | $ | 3,795 |
| | $ | 3,525 |
|
Canada | | 110 |
| | 107 |
| | 321 |
| | 316 |
| | 112 |
| | 90 |
| | 207 |
| | 189 |
|
Europe | | 32 |
| | 34 |
| | 109 |
| | 104 |
| | 36 |
| | 40 |
| | 75 |
| | 76 |
|
Total | | $ | 2,000 |
| | $ | 1,891 |
| | $ | 5,938 |
| | $ | 5,514 |
| | $ | 2,068 |
| | $ | 1,859 |
| | $ | 4,077 |
| | $ | 3,790 |
|
| | | | | | | | | |
Pre-tax income/(loss) excluding noncontrolling interests: | | | | |
| | | | | |
Pre-tax income/(loss): | | | | | |
| | | | |
U.S. | | $ | 330 |
| | $ | 303 |
| | $ | 994 |
| | $ | 925 |
| | $ | 227 |
| | $ | 334 |
| | $ | 579 |
| | $ | 664 |
|
Canada | | 12 |
| | 16 |
| | 35 |
| | 39 |
| | 13 |
| | 7 |
| | 21 |
| | 23 |
|
Europe (1) | | — |
| | (1 | ) | | (8 | ) | | (3 | ) | | (1 | ) | | 6 |
| | (2 | ) | | (8 | ) |
Total | | $ | 342 |
| | $ | 318 |
| | $ | 1,021 |
| | $ | 961 |
| | $ | 239 |
| | $ | 347 |
| | $ | 598 |
| | $ | 679 |
|
| |
(1) | The pre-tax loss in Europe for the ninesix months ended June 30,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 | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
Total assets: | | | | | | | | |
U.S. | | $ | 35,909 |
| | $ | 34,651 |
| | $ | 46,507 |
| | $ | 35,978 |
|
Canada | | 2,673 |
| | 2,673 |
| | 3,189 |
| | 2,754 |
|
Europe | | 95 |
| | 89 |
| | 113 |
| | 98 |
|
Total | | $ | 38,677 |
| | $ | 37,413 |
| | $ | 49,809 |
| | $ | 38,830 |
|
The following table presents goodwill, which was included in our total assets, classified by major geographic area in which it was held.
| | $ in millions | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
Goodwill: | | | | | | | | |
U.S. | | $ | 433 |
| | $ | 426 |
| | $ | 433 |
| | $ | 433 |
|
Canada | | 42 |
| | 43 |
| | 22 |
| | 23 |
|
Europe | | 9 |
| | 9 |
| | 8 |
| | 8 |
|
Total | | $ | 484 |
| | $ | 478 |
| | $ | 463 |
| | $ | 464 |
|
| |
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 financial 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 | |
Management'sManagement’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, changes in interest rates, 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 includeincluding 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 June 30, 2019March 31, 2020 compared with the quarter ended June 30, 2018March 31, 2019
Net revenues were $1.93 billion forOn March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency due to the impact of the pandemic. As a result of the spread of COVID-19, governments and other authorities around the world have imposed measures intended to control the spread of the disease, including restrictions on travel and the conduct of business, such as stay-at-home orders, quarantines, travel bans, border closings, business closures and other similar measures. In response, we activated our business continuity plan endeavoring to safeguard our employees, with nearly all of our employees now working remotely, while still maintaining our standard of client service. Our systems and infrastructure have continued to support the increased volumes of activity, without any significant operational or technology disruptions.
The worldwide COVID-19 pandemic had a negative impact on our business during our quarter ended March 31, 2020, as the spread of the disease and measures intended to prevent its spread have caused significant volatility and disruption in the financial markets both globally and in the U.S. We expect the COVID-19 pandemic and the measures taken to prevent its spread to have a more significant impact on the remainder of fiscal 2020 than it did during the quarter an increaseended March 31, 2020, although the extent of $90such effects will depend on future developments that are highly uncertain and cannot be predicted.
Management’s Discussion and Analysis
During the quarter ended March 31, 2020, net revenues of $2.07 billion increased $209 million, or 5%.11%, compared with the prior-year quarter. Pre-tax income of $342$239 million increased $24decreased $108 million, or 8%. Our31%, and net income of $259$169 million increased $27decreased $92 million, or 12%35%, both primarily due to a significant increase in the bank loan loss provision in response to the rapid and ourwidespread economic deterioration caused by the COVID-19 pandemic. Our earnings per diluted share were $1.80,$1.20, reflecting a 16% increase. We generated an34% decrease. Our annualized return on equity (“ROE”) for the quarter of 16.1%was 9.9%, compared with 15.4%16.7% in the prior yearprior-year quarter, and our annualized return on tangible common equity (“ROTCE”) (1) was 10.8%, compared with 18.5% for the prior-year quarter. During
The $209 million increase in net revenues compared with the prior-year quarter primarily reflected higher asset management and related administrative fees, attributable to higher PCG assets in fee-based accounts at the beginning of the quarter, which were 31% higher than fee-based assets as of the beginning of the prior-year quarter. Brokerage revenues also increased during the quarter as the significant market volatility in March drove an increase in client activity. Offsetting these increases, other revenues were negatively impacted by valuation losses on private equity investments, a portion of which was attributable to noncontrolling interests, which was reflected as an offset in other expenses. RJBDP fees and net interest income were negatively impacted by lower short-term interest rates.
Compensation, commissions and benefits expense increased $197 million, or 16%, due to an increase in compensable net revenues, which primarily include asset management and related administrative fees, brokerage revenues, and investment banking revenues, as well as increased staffing levels required to support our continued growth and regulatory compliance requirements.
Non-compensation expenses increased $120 million, or 42%, primarily due to the aforementioned bank loan loss provision of $109 million.
Pursuant to our Board of Directors’ share repurchase authorization, we repurchased approximately 1.042.5 million shares of common stock under our repurchase authorization byduring the Board of Directors (the “Board”)quarter for $85$202 million at an average price of approximately $81.70$79 per share. AsDue to the heightened market uncertainty as a result of June 30, 2019,the COVID-19 crisis, share buybacks have been suspended since mid-March and, as of March 31, 2020, we had $373$537 million of availability remaining under this authorization.
The $90firm ended the quarter with capital ratios well in excess of regulatory requirements and substantial liquidity, with nearly $2 billion(2) of cash at the parent company, which included the proceeds of a $500 million 10-year senior notes issuance in March.
Certain of the impacts of the COVID-19 pandemic will affect our results in future quarters to a greater extent than in the second fiscal quarter. Equity market declines toward the end of the quarter drove a 14% decline in fee-based assets and a 15% decline in financial assets under management as of March 31, 2020, which will negatively impact asset management and related administrative fees in our PCG and Asset Management segments in our third fiscal quarter of 2020. Our net interest income and RJBDP fees from third-party banks will be negatively affected by the full impact of the 150 basis point reduction in March by the Federal Reserve in its benchmark short-term interest rate. In Capital Markets, while our investment banking pipeline remains healthy, it is likely that we will experience a near-term slowdown in mergers & acquisitions and underwriting activity due to market uncertainty. In addition, if market volatility declines, it is likely that brokerage revenues will decline compared with the second fiscal quarter of 2020. While our results during the second quarter were negatively impacted by the bank loan loss provision and private equity valuation losses, further market deterioration could result in additional provisions and losses in future quarters.
A summary of our financial results by segment as compared to the prior-year quarter is as follows:
Our PCG segment net revenues of $1.50 billion increased 18%, while pre-tax income of $170 million increased 29%. The increase in net revenues was primarily attributable to an increase in asset management and related administrative fees due to higher assets in fee-based accounts at the beginning of the quarter, as well as an increase in brokerage revenues due to strong client activity driven by market volatility toward the end of the quarter. Non-interest expenses increased $186 million, or 16%, primarily resulting from an increase in compensation expenses due to the growth in compensable net revenues and higher staffing levels to support our continued growth and regulatory compliance requirements.
Capital Markets net revenues of $290 million increased 5% and pre-tax income of $28 million decreased 32%. The increase in net revenues was primarily due to an increase in brokerage revenues due to higher client activity as a result of market volatility, as well as an increase in equity underwriting revenues. These increases were partially offset by a decline in merger
(1) “ROTCE” is a non-GAAP financial measure. Please see the “Reconciliation of GAAP measures to non-GAAP financial measures” in this MD&A for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure, and for other important disclosures.
| |
(2) | For additional information, please see the “Liquidity and capital resources - Sources of liquidity” section in this MD&A. |
Management’s Discussion and Analysis
& acquisition revenues compared with a strong prior-year quarter. Non-interest expenses increased $26 million, or 11%, primarily resulting from an increase in compensation expense, primarily due to the mix of revenues.
Our Asset Management segment net revenues of $184 million increased 14% and pre-tax income of $73 million increased 33%. The increase in net revenues was driven by higher average financial assets under management, as well as higher beginning assets in programs for which the segment provides administrative support.
RJ Bank net revenues of $210 million decreased 1% and pre-tax income of $14 million decreased 90%. Net revenues were essentially flat as higher interest-earning banking assets offset the negative impact from lower short-term interest rates. Non-interest expenses increased $120 million, or 158%, as RJ Bank recorded a loan loss provision of $109 million compared to $5 million in the prior-year quarter, in response to the impact of COVID-19.
Our Other segment reflected a pre-tax loss that was $29 million larger compared to the prior-year quarter, primarily the result of private equity valuation losses in the current-year quarter compared with gains of in the prior-year quarter.
Six months ended March 31, 2020 compared with the six months ended March 31, 2019
Net revenues of $4.08 billion increased $287 million, or 8%. Pre-tax income of $598 million decreased $81 million, or 12%. Our net income of $437 million decreased $73 million, or 14%, and our earnings per diluted share were $3.09, reflecting a 12% decrease. Our annualized ROE during the six months ended March 31, 2020 was 13.0%, compared with 16.2% for the prior-year period, and annualized ROTCE (1) was 14.2%, compared with 17.9% for the prior-year period.
The $287 million increase in net revenues primarily reflectedcompared with the prior-year period reflects higher asset management and related administrative fees, primarily attributable to higher PCG assets in fee-based accounts at the beginning of the current-year periods. Brokerage revenues also increased, primarily due to higher market volatility in our second fiscal quarter. Offsetting these increases, other revenues were negatively impacted by valuation losses on private equity investments, a portion of which was attributable to noncontrolling interests, which was reflected as an offset in other expenses. RJBDP fees and net interest income partially offset bywere negatively impacted due to lower brokerage revenues. Total client assets under administration of $824.2 billion at June 30, 2019 increased $70 billion, or 9%, over the prior year, reflecting the net addition of financial advisors and equity market appreciation since the prior year quarter.short-term interest rates.
Non-interest expensesCompensation, commissions and benefits expense increased $68$283 million, or 4%. The11%, due to an increase primarily resulted from increased compensation-related expenses associated with the increase in compensable net revenues, as well as increased staffing levels required to support our continued growth and regulatory compliance requirements.
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 $1.35 billion, an increase of 6%, and pre-tax income also increased 6% to $140 million. The segment benefited from an increase in asset management and related administrative fees, primarily due to starting
Management's Discussion and Analysis
the quarter with higher assets in fee-based accounts compared to the balances at the beginning of the prior year quarter. Account and service fees also increased due to fees related to RJBDP, the majority of which related to an increase in the per-account servicing fee from RJ Bank effective October1, 2018 (which eliminates in consolidation). These increases were offset by a decline in brokerage revenues. Non-interestNon-compensation expenses increased $64$85 million, or 6%14%, primarily due to an increase in compensation-related expenses.
Capital Markets net revenues of $251a $107 million increased 3% and pre-tax income increased 9% to $24 million. The increase in net revenues was primarily due to an increase in fixed income brokerage revenues,bank loan loss provision compared with a $21 million bank loan loss provision for the prior-year period, partially offset by a decline in equity brokerage revenues and investment banking revenues. Non-interest expenses increased $4 million, or 2%, reflecting an increase in professional fees due to the gross-up of certain investment banking transaction-related expenses which were netted against revenues in previous years.
Our Asset Management segment net revenues of $177 million increased 5% and pre-tax income increased 12% to $65 million. Financial assets under management of $143.1 billion increased 6% over the prior year quarter primarily due to equity market appreciation and positive inflows from clients moving to fee-based alternatives from traditional transaction-based accounts.
RJ Bank net revenues of $215 million increased 14% and pre-tax income increased 6% to $138 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 $19 million, or 33%, largely due to the aforementioned increase in the per-account RJBDP servicing fee paid to PCG.
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.
Nine months ended June 30, 2019 compared with the nine months ended June 30, 2018
Net revenues of $5.72 billion increased $342 million, or 6%. Pre-tax income of $1.02 billion increased $60 million, or 6%. Our net income of $769 million increased $175 million, or 29%, 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 $5.30, reflecting a 33% increase. We achieved an annualized return on equity during the nine months ended June 30, 2019 of 16.2%, compared with 13.6% for the prior year period.
Excluding a $15 million loss on the sale of our operations related to research, sales and trading of European equities in December 2018, adjusted net income was $784 million(1), anincrease of 10% compared with adjusted net income of $714 million(1) for the prior year period. Adjusted earnings per diluted share were $5.41(1), a 13% increase compared with adjusted earnings per diluted share of $4.79(1) for the prior year period. Our adjusted annualized return on equity for the nine months ended June 30, 2019 was 16.4%(1), compared with adjusted annualized return on equity of 16.0%(1) for the prior year period.
The $342 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.
Non-interest expenses increased $298 million, or 7%. The increase primarily resulted from higher 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, primarily related to losses on a consolidated tax credit fund, which were substantially offset in noncontrolling interests. Our acquisition and disposition-related expensesthat occurred 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.prior-year period.
Our effective income tax rate was 25.1%26.9% for the ninesix months ended June 30, 2019, reflecting a federal corporate statutoryMarch 31, 2020, an increase compared with the 24.8% effective 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 fiscal year 2019. Our future effective income tax rate may be impacted positively or negatively by non-taxable items (such as2019, primarily due to the gains orunfavorable impact in the current-year period of non-deductible valuation losses earned onassociated with our company-owned life insurance and tax-exempt interest), non-deductible expenses (such as meals and entertainment and certain executive compensation) as well as vesting and exercises of equity compensation.policies.
1) “Adjusted net income,” “adjusted earnings per dilutedPursuant to our Board of Directors’ 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.
Management's Discussion and Analysis
During the nine months ended June 30, 2019, repurchase authorization, we repurchased 7.70approximately 2.7 million shares of common stock under our Board repurchase authorizationduring the six months ended March 31, 2020 for $591$213 million at an average price of approximately $76.70$80 per share. As of June 30, 2019, we had $373 million of availability remaining under this authorization.
A summary of our financial results by segment as compared to the prior yearprior-year period is as follows:
Our PCG segment generated net revenues of $3.98$2.91 billion a 5% increase,increased 11%, while pre-tax income of $436$323 million decreased 2%increased 9%. 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 withat the prior year period. The segment also benefited frombeginning of the current-year periods, as well as an increase in account and service fees relatedbrokerage revenues due to RJBDP, the majority of which related to an increasestrong client activity driven by market volatility in the per-account servicing fee from RJ Bank. Theseour second fiscal quarter. Offsetting these increases were partially offset by a declinedecreases in brokerage revenues.RJBDP fees from third-party banks and net interest income due to lower short-term interest rates. Non-interest expenses increased $203$255 million, or 6%11%, primarily resulting from an increase in financial advisor compensation-relatedcompensation expenses in line withdue to the growth in revenues. Non-compensation expenses also increased $26 million, or 6% over the prior year period.compensable net revenues and higher staffing levels to support our continued growth and regulatory compliance requirements.
Capital Markets net revenues of $781$558 million increased 13%5% and pre-tax income of $57 million increased significantly to $77 million.8%. The increase in net revenues was primarily due to an increase in investment banking revenues, largely due to merger & acquisition activity. The decline in equity brokerage revenues was offset by an increase in fixed income brokerage revenues, compared with the prior year period.due to higher client activity driven by market volatility, as well as an increase in equity and debt underwriting revenues. These increases were partially offset by a decline in merger & acquisition and advisory revenues. Non-interest expenses increased $66 million, or 10%5%, primarily due to higher compensation
(1) “ROTCE” is a non-GAAP financial measure. Please see the “Reconciliation of GAAP measures to non-GAAP financial measures” in this MD&A for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure, and for other important disclosures.
Management’s Discussion and Analysis
expenses, as a result of the increase in revenues, and higher business development expenses, professional fees and other expenses. These increases were partially offset by 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.prior-year period.
Our Asset Management segment net revenues of $513$368 million increased 6%10% and pre-tax income of $146 million increased 8% to $184 million.23%. The increase in net revenues was driven by higher average financial assets under management, as well as higher assets at the beginning of each of the current-year quarters in programs for which the segment provides administrative support.
RJ Bank net revenues of $426 million increased 3% and pre-tax income of $149 million decreased 39%. The increase in net revenues reflected increases in fees from managed programs, a full period of results for Scout Investments and its Reams Asset Management division (“the Scout Group”), which was acquired in November 2017, and higher asset-based administration fees. Non-interest expenses increased $22 million, or 7%, primarily resulting from increased expenses related to the addition of the Scout Group.
RJ Bank net revenues increased 18% to $630 million and pre-tax income increased 6% to $384 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 inwhich more than offset the lower net interest margin liftedcaused by higherlower short-term interest rates. Non-interest expenses increased $76$108 million, or 45%64%, primarily reflectingdue to an $86 million increase in the loan loss provision, as well as an increase in fees for RJBDP servicing fees paid to PCG largely due to an increase in the per-account fee effective October 1, 2018.PCG.
Our Other segment reflected a pre-tax loss that was flat$42 million larger compared to the prior yearprior-year period, as lower gains onprimarily due to private equity investments were offset by an increasevaluation losses, as compared to gains in the prior-year period, and lower interest income.
income on corporate cash balances due to lower short-term interest rates.
Management's Discussion and Analysis
Segments
We currently operate through five segments. Our business segments are Private Client Group,PCG, Capital Markets, Asset Management and RJ Bank. Our Other segment includes our private equity investments, as well asinterest income on certain corporate cash balances, and 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 June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change | | 2020 | | 2019 | | % change | | 2020 | | 2019 | | % change |
Total company | | | | | | | | | | | | | | | | | | | | | | | | |
Net revenues | | $ | 1,927 |
| | $ | 1,837 |
| | 5 | % | | $ | 5,717 |
| | $ | 5,375 |
| | 6 | % | | $ | 2,068 |
| | $ | 1,859 |
| | 11 | % | | $ | 4,077 |
| | $ | 3,790 |
| | 8 | % |
Pre-tax income | | $ | 342 |
| | $ | 318 |
| | 8 | % | | $ | 1,021 |
| | $ | 961 |
| | 6 | % | | $ | 239 |
| | $ | 347 |
| | (31 | )% | | $ | 598 |
| | $ | 679 |
| | (12 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Private Client Group | | |
| | |
| | | | | | | | | | |
| | |
| | | | | | | | |
Net revenues | | $ | 1,351 |
| | $ | 1,279 |
| | 6 | % | | $ | 3,978 |
| | $ | 3,784 |
| | 5 | % | | $ | 1,495 |
| | $ | 1,271 |
| | 18 | % | | $ | 2,909 |
| | $ | 2,627 |
| | 11 | % |
Pre-tax income | | $ | 140 |
| | $ | 132 |
| | 6 | % | | $ | 436 |
| | $ | 445 |
| | (2 | )% | | $ | 170 |
| | $ | 132 |
| | 29 | % | | $ | 323 |
| | $ | 296 |
| | 9 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | |
Capital Markets | | |
| | |
| | | | | | | | | | |
| | |
| |
| | | | | | |
Net revenues | | $ | 251 |
| | $ | 243 |
| | 3 | % | | $ | 781 |
| | $ | 690 |
| | 13 | % | | $ | 290 |
| | $ | 277 |
| | 5 | % | | $ | 558 |
| | $ | 530 |
| | 5 | % |
Pre-tax income | | $ | 24 |
| | $ | 22 |
| | 9 | % | | $ | 77 |
| | $ | 43 |
| | 79 | % | | $ | 28 |
| | $ | 41 |
| | (32 | )% | | $ | 57 |
| | $ | 53 |
| | 8 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | |
Asset Management | | |
| | |
| | | | | | | | | | |
| | |
| |
| | | | | | |
Net revenues | | $ | 177 |
| | $ | 168 |
| | 5 | % | | $ | 513 |
| | $ | 482 |
| | 6 | % | | $ | 184 |
| | $ | 162 |
| | 14 | % | | $ | 368 |
| | $ | 336 |
| | 10 | % |
Pre-tax income | | $ | 65 |
| | $ | 58 |
| | 12 | % | | $ | 184 |
| | $ | 171 |
| | 8 | % | | $ | 73 |
| | $ | 55 |
| | 33 | % | | $ | 146 |
| | $ | 119 |
| | 23 | % |
| | | | | | | | | | | | | | | | | |
| | | | | | |
RJ Bank | | |
| | |
| | | | | | | | | | |
| | |
| |
| | | | | | |
Net revenues | | $ | 215 |
| | $ | 188 |
| | 14 | % | | $ | 630 |
| | $ | 532 |
| | 18 | % | | $ | 210 |
| | $ | 212 |
| | (1 | )% | | $ | 426 |
| | $ | 415 |
| | 3 | % |
Pre-tax income | | $ | 138 |
| | $ | 130 |
| | 6 | % | | $ | 384 |
| | $ | 362 |
| | 6 | % | | $ | 14 |
| | $ | 136 |
| | (90 | )% | | $ | 149 |
| | $ | 246 |
| | (39 | )% |
| | | | | | | | | | | | | | | | | |
| | | | | | |
Other | | |
| | |
| | | | | | | | | | |
| | |
| |
| | | | | | |
Net revenues | | $ | (4 | ) | | $ | (2 | ) | | (100 | )% | | $ | (2 | ) | | $ | (3 | ) | | 33 | % | | $ | (44 | ) | | $ | — |
| | NM |
| | $ | (52 | ) | | $ | 2 |
| | NM |
|
Pre-tax loss | | $ | (25 | ) | | $ | (24 | ) | | (4 | )% | | $ | (60 | ) | | $ | (60 | ) | | — |
| | $ | (46 | ) | | $ | (17 | ) | | (171 | )% | | $ | (77 | ) | | $ | (35 | ) | | (120 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | |
Intersegment eliminations | | |
| | |
| | | | | | | | | | |
| | |
| | | | | | | | |
Net revenues | | $ | (63 | ) | | $ | (39 | ) | |
| | $ | (183 | ) | | $ | (110 | ) | |
|
| | $ | (67 | ) | | $ | (63 | ) | | NM |
| | $ | (132 | ) | | $ | (120 | ) | | NM |
|
Management'sManagement’s Discussion and Analysis
Reconciliation of GAAP measures to non-GAAP financial measures
We utilize certain non-GAAP financial measures to aid in, and enhance, the understanding of our financial results and related measures. These non-GAAP financial measures have been separately identified in this document. We believe that 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 aannualized return on tangible common equity is meaningful to investors as this measure facilitates comparison of our results into the current period to those in prior and future periods. In the following table, the tax effectresults of other companies. This non-GAAP adjustments reflects the statutory tax rate associated with each non-GAAP item. These non-GAAP measuresfinancial measure should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP. In addition, ourthis non-GAAP measuresfinancial measure may not be comparable to similarly-titledsimilarly titled non-GAAP financial measures of other companies. The following table provides a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measures to non-GAAP measuresfinancial measure for the periods which include non-GAAP adjustments. There were no non-GAAP adjustments for the three months ended June 30, 2019 and 2018.indicated.
|
| | | | | | | | |
| | Nine months ended June 30, |
$ in millions, except per share amounts | | 2019 | | 2018 |
Net income | | $ | 769 |
| | $ | 594 |
|
Non-GAAP adjustments: | | | | |
Acquisition and disposition-related expenses | | 15 |
| | 4 |
|
Tax effect of non-GAAP adjustments | | — |
| | (1 | ) |
Impact of the Tax Act | | — |
| | 117 |
|
Total non-GAAP adjustments, net of tax | | 15 |
| | 120 |
|
Adjusted net income | | $ | 784 |
| | $ | 714 |
|
Less allocation of earnings and dividends to participating securities | | (1 | ) | | (1 | ) |
Adjusted net income attributable to RJF common shareholders | | $ | 783 |
| | $ | 713 |
|
| | | | |
Earnings per common share: | | | | |
Basic | | $ | 5.42 |
| | $ | 4.08 |
|
Diluted | | $ | 5.30 |
| | $ | 3.99 |
|
Adjusted basic | | $ | 5.52 |
| | $ | 4.91 |
|
Adjusted diluted | | $ | 5.41 |
| | $ | 4.79 |
|
| | | | |
Average equity | | $ | 6,345 |
| | $ | 5,844 |
|
Annualized return on equity | | 16.2 | % | | 13.6 | % |
Adjusted average equity | | $ | 6,356 |
| | $ | 5,934 |
|
Adjusted annualized return on equity | | 16.4 | % | | 16.0 | % |
Net income in the preceding table excludes noncontrolling interests. |
| | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2020 | | 2019 | | 2020 | | 2019 |
Average equity | | $ | 6,820 |
| | $ | 6,255 |
| | $ | 6,740 |
| | $ | 6,292 |
|
Less: | | | | | | | | |
Average goodwill and identifiable intangible assets, net | | 606 |
| | 632 |
| | 608 |
| | 634 |
|
Average deferred tax liabilities, net | | (31 | ) | | (35 | ) | | (30 | ) | | (34 | ) |
Average tangible common equity | | $ | 6,245 |
| | $ | 5,658 |
| | $ | 6,162 |
| | $ | 5,692 |
|
| | | | | | | | |
Return on equity | | 9.9 | % | | 16.7 | % | | 13.0 | % | | 16.2 | % |
Return on tangible common equity | | 10.8 | % | | 18.5 | % | | 14.2 | % | | 17.9 | % |
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 tangible common equity, computed by dividing annualized adjusted net income attributable to RJF by adjusted average tangible common equity attributable to RJF for each respective period.
Average equity for the year to datequarter-to-date period is computed by adding the total equity attributable to RJFRaymond James Financial, Inc. as of the date indicated to the prior quarter-end total, and dividing by two, or in the case of average tangible common equity, computed by adding tangible common equity as of the date indicated to the prior quarter-end total, and dividing by two. Average equity for the year-to-date period is computed by adding the total equity attributable to Raymond James Financial, Inc. as of each quarter-end date during the indicated year-to-date period to the beginning of the year total, and dividing by four. Adjustedthree, or in the case of average tangible common equity, is computed by adjusting foradding tangible common equity as of each quarter-end date during the impact on average equityindicated year-to-date period to the beginning of the non-GAAP adjustments, as applicable for each respective period.
For more information on acquisitionyear total, and disposition-related expenses, see “Results of Operations - Capital Markets” and “Results of Operations - Other” of this MD&A. For more information on the impact of the Tax Act, see Note 16 of our 2018 Form 10-K.dividing by three.
Management's Discussion and Analysis
Net interest analysis
In response to macroeconomic concerns resulting from the COVID-19 pandemic, The Federal Reserve Bank announced an increase of 25 basis points indecreased its benchmark short-term interest rate in December 2018, as it did in eachtwice toward the end of our second fiscal quarter to a range of 0-0.25%, for a total decrease of 150 basis points during the quarters in fiscal year 2018 and three of the quarters in fiscal year 2017.quarter. These increasesdecreases in short-term interest rates, as well as the three rate cuts implemented in 2019 (225 basis points in total) have had a significantnegative impact on our overall financial performance,fiscal year 2020 results, as we have certain assets and liabilities, primarily held in our PCG, and RJ Bank and Other segments, which are sensitive to changes in interest rates. Fees we earn from third-party banks on client cash balances swept to such banks as part of the RJBDP are also sensitive to changes in interest rates. As the interest rate decreases during our second fiscal quarter occurred in March, we expect that these decreases will have a more significant negative impact on our results for the remainder of fiscal 2020. In addition, during the second fiscal quarter of 2020 we issued $500 million in aggregate principal amount of 4.65% senior notes. While this issuance strengthened our liquidity position, it will also increase our interest expense in future periods.
Given the relationship ofbetween our interest-sensitive assets toand liabilities held in each of these segments increasesand the nature of fees we earn from third-party banks on the RJBDP, decreases in short-term interest rates generally result in an overall increasedecrease 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 decreasesincreases in short-term interest rates and/or increasesdecreases in the deposit rates paid to clients would likelygenerally have a negativepositive 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 did not experience 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. Also refer to “Management’s Discussion and Analysis - Results of Operations - Private Client Group - Clients’ domestic cash sweep balances” for further information on the RJBDP.
Management'sManagement’s Discussion and Analysis
Quarter ended June 30, 2019 compared with the quarter ended June 30, 2018
The following table presentstables present 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.
Quarter ended March 31, 2020 compared with the quarter ended March 31, 2019
| | | | Three months ended June 30, | | Three months ended March 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
$ in millions | | Average balance | | Interest inc./exp. | | Average yield/cost | | Average balance | | Interest inc./exp. | | Average yield/cost | | Average balance | | Interest inc./exp. | | Average yield/cost | | Average balance | | Interest inc./exp. | | Average yield/cost |
Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Assets segregated pursuant to regulations | | $ | 1,613 |
| | $ | 13 |
| | 3.22 | % | | $ | 2,438 |
| | $ | 14 |
| | 2.22 | % | | $ | 2,820 |
| | $ | 11 |
| | 1.58 | % | | $ | 2,711 |
| | $ | 17 |
| | 2.47 | % |
Trading instruments | | 771 |
| | 7 |
| | 3.53 | % | | 760 |
| | 7 |
| | 3.68 | % | | 708 |
| | 7 |
| | 4.21 | % | | 687 |
| | 6 |
| | 3.59 | % |
Available-for-sale securities | | 2,901 |
| | 18 |
| | 2.41 | % | | 2,534 |
| | 14 |
| | 2.11 | % | | 3,443 |
| | 19 |
| | 2.28 | % | | 2,876 |
| | 17 |
| | 2.43 | % |
Margin loans | | 2,531 |
| | 30 |
| | 4.74 | % | | 2,688 |
| | 28 |
| | 4.23 | % | | 2,367 |
| | 21 |
| | 3.55 | % | | 2,599 |
| | 31 |
| | 4.76 | % |
Bank loans, net: | | | | | | | | | | | | | |
Bank loans, net of unearned income and deferred expenses: | | | | | | | | | | | | | |
Loans held for investment: | | | | | | | | | | | | | | | | | | | | | | | | |
C&I loans | | 8,278 |
| | 98 |
| | 4.68 | % | | 7,647 |
| | 85 |
| | 4.40 | % | | 8,043 |
| | 81 |
| | 3.99 | % | | 8,160 |
| | 97 |
| | 4.76 | % |
CRE construction loans | | 248 |
| | 4 |
| | 5.45 | % | | 182 |
| | 2 |
| | 5.23 | % | | 181 |
| | 2 |
| | 4.58 | % | | 197 |
| | 3 |
| | 5.70 | % |
CRE loans | | 3,359 |
| | 39 |
| | 4.53 | % | | 3,259 |
| | 34 |
| | 4.15 | % | | 3,735 |
| | 36 |
| | 3.81 | % | | 3,379 |
| | 40 |
| | 4.73 | % |
Tax-exempt loans | | 1,291 |
| | 9 |
| | 2.79 | % | | 1,191 |
| | 8 |
| | 2.58 | % | | 1,212 |
| | 8 |
| | 3.36 | % | | 1,280 |
| | 8 |
| | 3.34 | % |
Residential mortgage loans | | 4,127 |
| | 34 |
| | 3.32 | % | | 3,514 |
| | 27 |
| | 3.10 | % | | 4,847 |
| | 38 |
| | 3.13 | % | | 3,979 |
| | 34 |
| | 3.33 | % |
SBL and other | | 3,125 |
| | 36 |
| | 4.64 | % | | 2,741 |
| | 29 |
| | 4.26 | % | | 3,469 |
| | 31 |
| | 3.60 | % | | 3,066 |
| | 37 |
| | 4.71 | % |
Loans held for sale | | 118 |
| | 1 |
| | 4.78 | % | | 109 |
| | 1 |
| | 4.34 | % | | 142 |
| | 2 |
| | 3.85 | % | | 144 |
| | 1 |
| | 4.26 | % |
Total bank loans, net | | 20,546 |
| | 221 |
| | 4.30 | % | | 18,643 |
| | 186 |
| | 4.04 | % | | 21,629 |
| | 198 |
| | 3.67 | % | | 20,205 |
| | 220 |
| | 4.38 | % |
Loans to financial advisors, net | | 912 |
| | 5 |
| | 2.06 | % | | 895 |
| | 4 |
| | 1.70 | % | | 979 |
| | 5 |
| | 2.08 | % | | 901 |
| | 5 |
| | 2.01 | % |
Corporate cash and all other | | 4,107 |
| | 27 |
| | 2.72 | % | | 3,518 |
| | 18 |
| | 2.05 | % | | 6,321 |
| | 24 |
| | 1.40 | % | | 4,897 |
| | 28 |
| | 2.38 | % |
Total interest-earning assets | | $ | 33,381 |
|
| $ | 321 |
| | 3.85 | % | | $ | 31,476 |
|
| $ | 271 |
| | 3.44 | % | | $ | 38,267 |
|
| $ | 285 |
| | 2.97 | % | | $ | 34,876 |
|
| $ | 324 |
| | 3.72 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | |
| | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| | |
|
Bank deposits: | | | | | | | | | | | | | | | | | | | | | | | | |
Savings, money market and NOW accounts | | | $ | 22,877 |
| | $ | 6 |
| | 0.12 | % | | $ | 20,751 |
| | $ | 34 |
| | 0.64 | % |
Certificates of deposit | | $ | 561 |
| | $ | 4 |
| | 2.33 | % | | $ | 389 |
| | $ | 1 |
| | 1.64 | % | | 1,094 |
| | 6 |
| | 2.03 | % | | 560 |
| | 3 |
| | 2.26 | % |
Savings, money market and NOW accounts | | 20,842 |
| | 29 |
| | 0.56 | % | | 18,423 |
| | 18 |
| | 0.37 | % | |
Trading instruments sold but not yet purchased | | 307 |
| | 2 |
| | 2.39 | % | | 294 |
| | 2 |
| | 2.72 | % | | 222 |
| | 1 |
| | 1.93 | % | | 286 |
| | 2 |
| | 2.67 | % |
Brokerage client payables | | 3,108 |
| | 5 |
| | 0.64 | % | | 4,061 |
| | 4 |
| | 0.44 | % | | 3,838 |
| | 3 |
| | 0.26 | % | | 3,582 |
| | 5 |
| | 0.58 | % |
Other borrowings | | 897 |
| | 5 |
| | 2.20 | % | | 901 |
| | 6 |
| | 2.32 | % | | 892 |
| | 5 |
| | 2.26 | % | | 967 |
| | 5 |
| | 2.35 | % |
Senior notes payable | | 1,550 |
| | 19 |
| | 4.71 | % | | 1,549 |
| | 19 |
| | 4.69 | % | | 1,556 |
| | 19 |
| | 4.71 | % | | 1,550 |
| | 18 |
| | 4.70 | % |
Other | | 772 |
| | 9 |
| | 4.93 | % | | 595 |
| | 4 |
| | 2.69 | % | | 483 |
| | 3 |
| | 3.84 | % | | 762 |
| | 8 |
| | 3.62 | % |
Total interest-bearing liabilities | | $ | 28,037 |
| | $ | 73 |
| | 1.04 | % | | $ | 26,212 |
| | $ | 54 |
| | 0.82 | % | | $ | 30,962 |
| | $ | 43 |
| | 0.57 | % | | $ | 28,458 |
| | $ | 75 |
| | 1.04 | % |
Net interest income | | | | $ | 248 |
| | | | | | $ | 217 |
| | | | | | $ | 242 |
| | | | | | $ | 249 |
| | |
Management’s Discussion and Analysis
Six months ended March 31, 2020 compared with the six months ended March 31, 2019
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Six months ended March 31, |
| | 2020 | | 2019 |
$ in millions | | Average balance | | Interest inc./exp. | | Average yield/cost | | Average balance | | Interest inc./exp. | | Average yield/cost |
Interest-earning assets: | | | | | | | | | | | | |
Assets segregated pursuant to regulations | | $ | 2,578 |
| | $ | 22 |
| | 1.70 | % | | $ | 2,572 |
| | $ | 32 |
| | 2.45 | % |
Trading instruments | | 738 |
| | 13 |
| | 3.60 | % | | 705 |
| | 13 |
| | 3.73 | % |
Available-for-sale securities | | 3,265 |
| | 37 |
| | 2.29 | % | | 2,796 |
| | 33 |
| | 2.38 | % |
Margin loans | | 2,402 |
| | 48 |
| | 4.04 | % | | 2,665 |
| | 63 |
| | 4.71 | % |
Bank loans, net of unearned income and deferred expenses: | | | | | | | | | | | | |
Loans held for investment: | | | | | | | | | | | | |
C&I loans | | 8,061 |
| | 167 |
| | 4.07 | % | | 7,959 |
| | 188 |
| | 4.67 | % |
CRE construction loans | | 207 |
| | 5 |
| | 4.75 | % | | 184 |
| | 5 |
| | 5.66 | % |
CRE loans | | 3,673 |
| | 73 |
| | 3.91 | % | | 3,469 |
| | 81 |
| | 4.64 | % |
Tax-exempt loans | | 1,218 |
| | 16 |
| | 3.36 | % | | 1,282 |
| | 17 |
| | 3.34 | % |
Residential mortgage loans | | 4,743 |
| | 75 |
| | 3.16 | % | | 3,934 |
| | 66 |
| | 3.32 | % |
SBL and other | | 3,403 |
| | 65 |
| | 3.78 | % | | 3,085 |
| | 73 |
| | 4.65 | % |
Loans held for sale | | 151 |
| | 3 |
| | 3.97 | % | | 165 |
| | 4 |
| | 4.90 | % |
Total bank loans, net | | 21,456 |
| | 404 |
| | 3.76 | % | | 20,078 |
| | 434 |
| | 4.32 | % |
Loans to financial advisors, net | | 977 |
| | 10 |
| | 2.09 | % | | 908 |
| | 9 |
| | 1.97 | % |
Corporate cash and all other | | 5,663 |
| | 48 |
| | 1.63 | % | | 4,850 |
| | 56 |
| | 2.36 | % |
Total interest-earning assets | | $ | 37,079 |
| | $ | 582 |
| | 3.14 | % | | $ | 34,574 |
| | $ | 640 |
| | 3.70 | % |
| | | | | | | | | | | | |
Interest-bearing liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Bank deposits: | | | | | | | | | | | | |
Savings, money market and NOW accounts | | $ | 22,260 |
| | $ | 18 |
| | 0.16 | % | | $ | 20,612 |
| | $ | 67 |
| | 0.64 | % |
Certificates of deposit | | 937 |
| | 10 |
| | 2.10 | % | | 510 |
| | 5 |
| | 2.13 | % |
Trading instruments sold but not yet purchased | | 254 |
| | 2 |
| | 1.94 | % | | 291 |
| | 4 |
| | 2.77 | % |
Brokerage client payables | | 3,513 |
| | 6 |
| | 0.31 | % | | 3,563 |
| | 11 |
| | 0.63 | % |
Other borrowings | | 893 |
| | 10 |
| | 2.23 | % | | 956 |
| | 11 |
| | 2.39 | % |
Senior notes payable | | 1,553 |
| | 37 |
| | 4.71 | % | | 1,550 |
| | 36 |
| | 4.70 | % |
Other | | 573 |
| | 11 |
| | 3.92 | % | | 760 |
| | 14 |
| | 3.41 | % |
Total interest-bearing liabilities | | $ | 29,983 |
| | $ | 94 |
| | 0.62 | % | | $ | 28,242 |
| | $ | 148 |
| | 1.05 | % |
Net interest income | | |
| | $ | 488 |
| | |
| | |
| | $ | 492 |
| | |
|
Nonaccrual loans are included in the average loan balances in the preceding table. Payment or incometables. Any payments received onfor corporate nonaccrual loans are applied entirely to principal. IncomeInterest income on residential mortgage nonaccrual loans is recognized on a cash basis.
Fee income on bank loans included in interest income for thewas $5 million and $9 million during three and six months ended June 30, 2019 and 2018 was $3 millionMarch 31, 2020, respectively, and $6 million and $11 million during three and six months ended March 31, 2019, respectively.
The yield on tax-exempt loans in the preceding tables is presented on a taxable-equivalent basis utilizing the applicable federal statutory rates for each of the years presented.
Management's Discussion and Analysis
Nine months ended June 30, 2019 compared with the nine months ended June 30, 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.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended June 30, |
| | 2019 | | 2018 |
$ in millions | | Average balance | | Interest inc./exp. | | Average yield/cost | | Average balance | | Interest inc./exp. | | Average yield/cost |
Interest-earning assets: | | | | | | | | | | | | |
Assets segregated pursuant to regulations | | $ | 1,859 |
| | $ | 42 |
| | 3.01 | % | | $ | 2,752 |
| | $ | 40 |
| | 1.92 | % |
Trading instruments | | 727 |
| | 20 |
| | 3.66 | % | | 702 |
| | 17 |
| | 3.23 | % |
Available-for-sale securities | | 2,831 |
| | 51 |
| | 2.39 | % | | 2,358 |
| | 37 |
| | 2.09 | % |
Margin loans | | 2,620 |
| | 93 |
| | 4.73 | % | | 2,559 |
| | 77 |
| | 4.03 | % |
Bank loans: | | | | | | | | | | | | |
Loans held for investment: | | | | | | | | | | | | |
C&I loans | | 8,065 |
| | 286 |
| | 4.67 | % | | 7,538 |
| | 237 |
| | 4.15 | % |
CRE construction loans | | 205 |
| | 9 |
| | 5.58 | % | | 166 |
| | 6 |
| | 5.03 | % |
CRE loans | | 3,433 |
| | 120 |
| | 4.60 | % | | 3,160 |
| | 95 |
| | 3.97 | % |
Tax-exempt loans | | 1,285 |
| | 26 |
| | 2.70 | % | | 1,126 |
| | 22 |
| | 2.57 | % |
Residential mortgage loans | | 3,999 |
| | 100 |
| | 3.32 | % | | 3,363 |
| | 78 |
| | 3.08 | % |
SBL and other | | 3,098 |
| | 109 |
| | 4.64 | % | | 2,594 |
| | 78 |
| | 3.98 | % |
Loans held for sale | | 149 |
| | 5 |
| | 4.87 | % | | 123 |
| | 3 |
| | 3.83 | % |
Total bank loans, net | | 20,234 |
| | 655 |
| | 4.32 | % | | 18,070 |
| | 519 |
| | 3.85 | % |
Loans to financial advisors, net | | 907 |
| | 14 |
| | 2.00 | % | | 873 |
| | 11 |
| | 1.68 | % |
Corporate cash and all other | | 4,674 |
| | 86 |
| | 2.50 | % | | 3,882 |
| | 51 |
| | 1.75 | % |
Total interest-earning assets | | $ | 33,852 |
| | $ | 961 |
| | 3.79 | % | | $ | 31,196 |
| | $ | 752 |
| | 3.21 | % |
| | | | | | | | | | | | |
Interest-bearing liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Bank deposits: | | | | | | | | | | | | |
Certificates of deposit | | $ | 527 |
| | $ | 9 |
| | 2.20 | % | | $ | 353 |
| | $ | 4 |
| | 1.60 | % |
Savings, money market and NOW accounts | | 20,689 |
| | 96 |
| | 0.62 | % | | 18,193 |
| | 35 |
| | 0.25 | % |
Trading instruments sold but not yet purchased | | 297 |
| | 6 |
| | 2.63 | % | | 282 |
| | 5 |
| | 2.36 | % |
Brokerage client payables | | 3,430 |
| | 16 |
| | 0.62 | % | | 4,289 |
| | 10 |
| | 0.32 | % |
Other borrowings | | 942 |
| | 16 |
| | 2.32 | % | | 919 |
| | 17 |
| | 2.40 | % |
Senior notes payable | | 1,550 |
| | 55 |
| | 4.70 | % | | 1,549 |
| | 55 |
| | 4.69 | % |
Other | | 759 |
| | 23 |
| | 3.95 | % | | 591 |
| | 13 |
| | 2.93 | % |
Total interest-bearing liabilities | | $ | 28,194 |
| | $ | 221 |
| | 1.05 | % | | $ | 26,176 |
| | $ | 139 |
| | 0.71 | % |
Net interest income | | |
| | $ | 740 |
| | |
| | |
| | $ | 613 |
| | |
|
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 nine months ended June 30, 2019 and 2018 was $14 million and $19 million, respectively.
Management'sManagement’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 20182019 Form 10-K.
Operating results
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change | | 2020 | | 2019 | | % change | | 2020 | | 2019 | | % change |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Asset management and related administrative fees | | $ | 718 |
| | $ | 636 |
| | 13 | % | | $ | 2,063 |
| | $ | 1,843 |
| | 12 | % | | $ | 833 |
| | $ | 638 |
| | 31 | % | | $ | 1,615 |
| | $ | 1,345 |
| | 20 | % |
Brokerage revenues: | | | | | | | | | | | | | | | | | |
|
| | | | | |
|
|
Mutual and other fund products | | 147 |
| | 172 |
| | (15 | )% | | 449 |
| | 535 |
| | (16 | )% | | 163 |
| | 145 |
| | 12 | % | | 307 |
| | 302 |
| | 2 | % |
Insurance and annuity products | | 105 |
| | 97 |
| | 8 | % | | 308 |
| | 308 |
| | — |
| | 99 |
| | 99 |
| | — |
| | 200 |
| | 203 |
| | (1 | )% |
Equities, ETFs and fixed income products | | 94 |
| | 106 |
| | (11 | )% | | 291 |
| | 332 |
| | (12 | )% | | 122 |
| | 94 |
| | 30 | % | | 224 |
| | 197 |
| | 14 | % |
Total brokerage revenues | | 346 |
| | 375 |
| | (8 | )% | | 1,048 |
| | 1,175 |
| | (11 | )% | | 384 |
| | 338 |
| | 14 | % | | 731 |
| | 702 |
| | 4 | % |
Investment banking | | 10 |
| | 9 |
| | 11 | % | | 25 |
| | 25 |
| | — |
| |
Interest income | | 56 |
| | 50 |
| | 12 | % | | 170 |
| | 140 |
| | 21 | % | |
Account and service fees: | | | | | |
|
| | | | | |
|
| | | | | |
|
| | | | | |
|
|
Mutual fund and annuity service fees | | 85 |
| | 85 |
| | — |
| | 250 |
| | 246 |
| | 2 | % | | 88 |
| | 82 |
| | 7 | % | | 178 |
| | 165 |
| | 8 | % |
RJBDP fees: | | | | | | | | | | | | | | | | | |
|
| | | | | |
|
|
Third-party banks | | 67 |
| | 70 |
| | (4 | )% | | 215 |
| | 198 |
| | 9 | % | | 51 |
| | 80 |
| | (36 | )% | | 109 |
| | 148 |
| | (26 | )% |
RJ Bank | | 44 |
| | 24 |
| | 83 | % | | 127 |
| | 67 |
| | 90 | % | | 48 |
| | 42 |
| | 14 | % | | 95 |
| | 83 |
| | 14 | % |
Client account and other fees | | 32 |
| | 30 |
| | 7 | % | | 92 |
| | 85 |
| | 8 | % | | 35 |
| | 27 |
| | 30 | % | | 64 |
| | 60 |
| | 7 | % |
Total account and service fees | | 228 |
| | 209 |
| | 9 | % | | 684 |
| | 596 |
| | 15 | % | | 222 |
| | 231 |
| | (4 | )% | | 446 |
| | 456 |
| | (2 | )% |
Investment banking | | | 11 |
| | 8 |
| | 38 | % | | 22 |
| | 15 |
| | 47 | % |
Interest income | | | 45 |
| | 58 |
| | (22 | )% | | 94 |
| | 114 |
| | (18 | )% |
All other | | 3 |
| | 8 |
| | (63 | )% | | 19 |
| | 24 |
| | (21 | )% | | 7 |
| | 9 |
| | (22 | )% | | 16 |
| | 16 |
| | — |
|
Total revenues | | 1,361 |
|
| 1,287 |
|
| 6 | % |
| 4,009 |
|
| 3,803 |
|
| 5 | % | | 1,502 |
|
| 1,282 |
|
| 17 | % |
| 2,924 |
|
| 2,648 |
|
| 10 | % |
Interest expense | | (10 | ) | | (8 | ) | | 25 | % | | (31 | ) | | (19 | ) | | 63 | % | | (7 | ) | | (11 | ) | | (36 | )% | | (15 | ) | | (21 | ) | | (29 | )% |
Net revenues | | 1,351 |
| | 1,279 |
| | 6 | % | | 3,978 |
| | 3,784 |
| | 5 | % | | 1,495 |
| | 1,271 |
| | 18 | % | | 2,909 |
| | 2,627 |
| | 11 | % |
Non-interest expenses: | | |
| | |
| |
|
| | |
| | |
| |
|
| | |
| | |
| |
|
| | |
| | |
| |
|
|
Financial advisor compensation and benefit costs | | 805 |
| | 759 |
| | 6 | % | | 2,358 |
| | 2,258 |
| | 4 | % | |
Administrative compensation and benefit costs | | 237 |
| | 214 |
| | 11 | % | | 700 |
| | 623 |
| | 12 | % | |
Financial advisor compensation and benefits | | | 915 |
| | 750 |
| | 22 | % | | 1,772 |
| | 1,553 |
| | 14 | % |
Administrative compensation and benefits | | | 245 |
| | 234 |
| | 5 | % | | 492 |
| | 463 |
| | 6 | % |
Total compensation, commissions and benefits | | | 1,160 |
| | 984 |
| | 18 | % | | 2,264 |
| | 2,016 |
| | 12 | % |
Non-compensation expenses: | | | | | | |
|
| | | | | |
|
|
Communications and information processing | | 57 |
| | 55 |
| | 4 | % | | 174 |
| | 164 |
| | 6 | % | | 62 |
| | 59 |
| | 5 | % | | 121 |
| | 117 |
| | 3 | % |
Occupancy and equipment costs | | 43 |
| | 38 |
| | 13 | % | | 122 |
| | 114 |
| | 7 | % | |
Occupancy and equipment | | | 44 |
| | 41 |
| | 7 | % | | 88 |
| | 79 |
| | 11 | % |
Business development | | 37 |
| | 39 |
| | (5 | )% | | 90 |
| | 84 |
| | 7 | % | | 24 |
| | 26 |
| | (8 | )% | | 51 |
| | 53 |
| | (4 | )% |
Professional fees | | 8 |
| | 12 |
| | (33 | )% | | 24 |
| | 29 |
| | (17 | )% | | 9 |
| | 7 |
| | 29 | % | | 17 |
| | 16 |
| | 6 | % |
All other | | 24 |
| | 30 |
| | (20 | )% | | 74 |
| | 67 |
| | 10 | % | | 26 |
| | 22 |
| | 18 | % | | 45 |
| | 50 |
| | (10 | )% |
Total non-compensation expenses | | | 165 |
| | 155 |
| | 6 | % | | 322 |
| | 315 |
| | 2 | % |
Total non-interest expenses | | 1,211 |
| | 1,147 |
| | 6 | % | | 3,542 |
| | 3,339 |
| | 6 | % | | $ | 1,325 |
| | $ | 1,139 |
| | 16 | % | | $ | 2,586 |
| | $ | 2,331 |
| | 11 | % |
Pre-tax income | | $ | 140 |
| | $ | 132 |
| | 6 | % | | $ | 436 |
| | $ | 445 |
| | (2 | )% | | $ | 170 |
| | $ | 132 |
| | 29 | % | | $ | 323 |
| | $ | 296 |
| | 9 | % |
Pre-tax margin on net revenues | | 10.4 | % | | 10.3 | % | | | | 11.0 | % | | 11.8 | % | | | |
Management'sManagement’s Discussion and Analysis
Selected key metrics
PCG client asset balances:
| | | | As of | | As of |
$ in billions | | June 30, 2019 | | March 31, 2019 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 | | September 30, 2017 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 |
Assets under administration (“AUA”) | | $ | 787.4 |
| | $ | 760.0 |
| | $ | 755.7 |
| | $ | 719.5 |
| | $ | 694.8 |
| | $ | 659.5 |
| | $ | 734.0 |
| | $ | 855.2 |
| | $ | 798.4 |
| | $ | 760.0 |
| | $ | 690.7 |
| | $ | 755.7 |
|
Assets in fee-based accounts (1) | | $ | 398.0 |
| | $ | 378.4 |
| | $ | 366.3 |
| | $ | 343.1 |
| | $ | 325.1 |
| | $ | 294.5 |
| | $ | 383.5 |
| | $ | 444.2 |
| | $ | 409.1 |
| | $ | 378.4 |
| | $ | 338.8 |
| | $ | 366.3 |
|
Percent of AUA in fee-based accounts | | 50.5 | % | | 49.8 | % | | 48.5 | % | | 47.7 | % | | 46.8 | % | | 44.7 | % | | 52.2 | % | | 51.9 | % | | 51.2 | % | | 49.8 | % | | 49.1 | % | | 48.5 | % |
| |
(1) | A portion of our “Assets in fee-based accounts” is invested in “managed programs” overseen by our Asset Management segment, specifically our Asset Management Services division of RJ&A (“AMS”). These assets are included in our Financial assets under management as disclosed in the “Selected key metrics” section of our “Management’s Discussion and Analysis - Results of Operations - Asset Management.” |
Fee-based accounts within our PCG segment are comprised of a wide array of products and programs that we offer our clients. The majority of assets in fee-based accounts within our PCG segment are invested in programs for which our financial advisors provide investment advisory services, either on a discretionary or non-discretionary basis. Administrative services for such accounts (e.g., record-keeping) are generally performed by our Asset Management segment and, as a result, a portion of the related revenues is shared with the Asset Management segment.
We also offer our clients fee-based accounts that are invested in “managed programs” overseen by AMS, which is part of our Asset Management segment. Fee-billable assets invested in managed programs are included in both “Assets in fee-based accounts” in the preceding table and “Financial assets under management” in the Asset Management segment. Revenues related to managed programs are shared by our PCG and Asset Management segments. The Asset Management segment receives a higher portion of the revenues related to accounts invested in managed programs, as compared to the portion received for non-managed programs, as it is performing assetportfolio management services in addition to administrative services.
WeThe vast majority of the revenues we earn revenues from fee-based accounts for performing investment advisory, asset management and related administrative services for retail clients, which isare recorded in “Asset management and related administrative fees” inon our Condensed Consolidated Statements of Income and Comprehensive Income. Fees received from such accounts are based on the value of client assets in fee-based accounts and vary based on the specific account types in which the client participates and the level of assets in the client relationship. As fees for substantially all of such accounts are billed based on balances as of the beginning of the quarter, revenues from fee-based accounts may not be immediately impactedaffected by changes in asset values, but rather the impacts are seen in the following quarter.
PCG assets under administration increased due toDespite the net addition of financial advisors andin the current quarter, PCG assets under administration decreased due to the decline in equity market appreciation. In addition,markets as a result of the COVID-19 pandemic. PCG assets in fee-based accounts continued to increase as a percentage of overall PCG assets under administration due to clients’ preference for fee-based alternatives versus traditional transaction-based accounts. As a result of the shift to fee-based accounts over the past several years, a larger portion of our PCG revenues are more directly impacted by market movements. Therefore, further declines in equity markets would negatively affect our PCG revenues.
Financial advisors:
| | | June 30, 2019 | | September 30, 2018 | | June 30, 2018 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | March 31, 2019 |
Employees | 3,228 |
| | 3,167 |
| | 3,126 |
| | 3,376 |
| | 3,331 |
| | 3,301 |
| | 3,192 |
|
Independent Contractors | 4,676 |
| | 4,646 |
| | 4,593 |
| |
Independent contractors | | | 4,772 |
| | 4,729 |
| | 4,710 |
| | 4,670 |
|
Total advisors | 7,904 |
| | 7,813 |
| | 7,719 |
| | 8,148 |
| | 8,060 |
| | 8,011 |
| | 7,862 |
|
The number of financial advisors increased primarily due to continued financial advisor recruiting and high levels of retention. The impact of COVID-19 on future recruiting is uncertain; however, we are likely to see a slowdown in recruiting until travel restrictions and other social distancing measures subside.
Management'sManagement’s Discussion and Analysis
Clients’ domestic cash sweep balances:
| | | | As of | | As of |
$ in millions | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | March 31, 2019 |
RJBDP | | | | | | | | | | | | | | | | | | |
RJ Bank | | $ | 21,600 |
| | $ | 21,023 |
| | $ | 21,138 |
| | $ | 19,446 |
| | $ | 19,014 |
| | $ | 28,711 |
| | $ | 21,891 |
| | $ | 21,649 |
| | $ | 21,023 |
|
Third-party banks | | 14,425 |
| | 14,343 |
| | 18,320 |
| | 15,564 |
| | 16,971 |
| | 20,379 |
| | 15,061 |
| | 14,043 |
| | 14,343 |
|
Subtotal RJBDP | | 36,025 |
| | 35,366 |
| | 39,458 |
| | 35,010 |
| | 35,985 |
| | 49,090 |
| | 36,952 |
| | 35,692 |
| | 35,366 |
|
Money market funds | | — |
| | 4,001 |
| | 4,436 |
| | 3,240 |
| | 2,687 |
| | — |
| | — |
| | — |
| | 4,001 |
|
Client Interest Program (“CIP”) | | 2,130 |
| | 2,349 |
| | 2,935 |
| | 2,807 |
| | 2,784 |
| | 3,782 |
| | 2,528 |
| | 2,022 |
| | 2,349 |
|
Total clients’ domestic cash sweep balances | | $ | 38,155 |
| | $ | 41,716 |
| | $ | 46,829 |
|
| $ | 41,057 |
| | $ | 41,456 |
| | $ | 52,872 |
| | $ | 39,480 |
| | $ | 37,714 |
| | $ | 41,716 |
|
|
| | | | | | | | | | | | |
| | Three months ended March 31, | | Six months ended March 31, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Average yield on RJBDP - third-party banks | | 1.33 | % | | 2.00 | % | | 1.48 | % | | 1.87 | % |
A significant portion of our clients’ cash is included in ourthe RJBDP, a multi-bank sweep program in which clients’ cash deposits in their accounts are swept into interest-bearing deposit accounts at RJ Bank and various third-party banks. We earn servicing fees for the administrative services we provide related to our clients’ deposits that are swept to such banks as part of the RJBDP. The amounts from third-party banks are variable in nature and fluctuate based on client cash balances in the program, as well as the level of short-term interest rates relative toand the interest paid to clients by the third-party banks on balances in the RJBDP. The “Average yield on RJBDP - third party banks” in the preceding table is computed by dividing annualized RJBDP fees from third-party banks, which are net of the interest expense paid to clients by the third-party banks, by the average daily RJBDP balance at third-party banks. The PCG segment also earns RJBDP servicing fees from RJ Bank, which are based on the number of accounts that are swept to RJ Bank. The fees from RJ Bank are eliminated in consolidation. On October 1, 2018, the per-account servicing fee from RJ Bank was increased to reflect the current cost of administration.
WhileRJBDP fees from third-party banks and the average yield on RJBDP (third-party banks) were negatively impacted by the significant decrease in short-term interest rates have risen duerates. The Federal Reserve decreased its benchmark short-term interest rate twice toward the end of our second fiscal quarter, to a range of 0-0.25%, a total decrease of 150 basis points. These decreases were in addition to the three rate increases bycuts implemented in 2019 (225 basis points in total). As the Fedinterest rate decreases during our second fiscal quarter of 2020 occurred in recent periods, market deposit rates paidMarch, we expect that our average yield on client cash balances have not been impactedRJBDP (third-party banks) will decrease to as great a degree, resulting in an increase in RJBDP fees earned from third-party banks.approximately 0.30% beginning with our third fiscal quarter. Any additional decreases in short-term interest rates, such as the one announced by the Fed in July 2019, increases in deposit rates paid to clients, and/or a significant decline in our clients’ cash balances wouldwill likely have a negative impact on our earnings. The impact on our earnings of any future rate increases will be largely dependent upon the change in the deposit rate paid on client cash balances. Further, PCG segment results are impacted by changes in the allocation of client cash balances in the RJBDP between RJ Bank and third-party banks.
Money market funds were discontinued as a sweep option during the three months endedin June 30, 2019. Balances in those funds were converted to the RJBDP or reinvested by the client.
The significant increase in clients’ cash balances as of March 31, 2020 was a result of the market volatility and the steep declines in the equity markets during the second fiscal quarter of 2020.
Quarter ended June 30, 2019March 31, 2020 compared with the quarter ended June 30, 2018March 31, 2019
Net revenues of $1.35$1.50 billion increased $72$224 million, or 6%18%, over the prior year quarter, and pre-tax income of $140$170 million increased $8$38 million, or 6%29%.
Asset management and related administrative fees increased $82$195 million, or 13%31%, resulting fromdue to higher asset balances in fee-based accounts at the 16% increase inbeginning of the quarter. As assets in fee-based accounts asare billed primarily on balances at the beginning of March 31, 2019 compared with March 31, 2018, reflecting successful financial advisor recruiting and retention, as well as equity market appreciation.the quarter, the 14% decline in fee-based assets during the current quarter will negatively impact asset management fees in our third fiscal quarter.
Brokerage revenues increased $46 million, or 14%, primarily due to strong client activity driven by market volatility toward the end of the quarter as a result of the COVID-19 pandemic.
Account and service fees decreased $9 million, or 4%, due to the decline in RJBDP fees from third-party banks, primarily driven by lower short-term interest rates compared with the prior-year quarter. Partially offsetting this decrease was an increase in RJBDP fees from RJ Bank, due to an increase in the number of accounts, and increases in mutual fund service fees and client account and other fees, primarily due to higher average assets and activity during the quarter.
Management’s Discussion and Analysis
Net interest income decreased $9 million, or 19%, driven by a decrease in interest income from client margin loans and assets segregated pursuant to regulations due to a decline in short-term interest rates. Partially offsetting the decrease in interest income, interest expense also decreased due to the impact of lower deposit rates paid on client cash balances in CIP.
Compensation-related expenses increased $176 million, or 18%, due to higher compensable net revenues, as well as increased staffing levels over the prior-year quarter to support our continued growth and regulatory compliance requirements.
Non-compensation expenses increased $10 million, or 6%, primarily due to increased costs to support our growth, as well as higher legal reserves.
Six months ended March 31, 2020 compared with the six months ended March 31, 2019
Net revenues of $2.91 billion increased $282 million, or 11%, and pre-tax income of $323 million increased $27 million, or 9%.
Asset management and related administrative fees increased $270 million, or 20%, primarily due to higher assets in fee-based accounts at the beginning of the current-year periods.
Brokerage revenues increased $29 million, or 8%4%, reflecting lower revenues related to mutual funds, largelyprimarily due to strong client activity driven by market volatility toward the end of our second fiscal quarter. Partially offsetting this increase was a decline in mutual fund trails, which were impacted by the conversion of client assets into mutual fund share classes which pay lower rates, and the continued shift to fee-based accounts.
Total accountAccount and service fees increased $19decreased $10 million, or 9%2%, driven by a decline in RJBDP fees from third-party banks, as a result of lower short-term interest rates. Partially offsetting this decrease was an increase in mutual fund service fees, primarily due to higher assets, and higher RJBDP fees from RJ Bank due to an increase in the per-account servicing fee and, to a lesser extent, an increase in the number of accounts partially due to the discontinuation of the money market funds as a sweep option discussed above.at RJ Bank.
Net interest income increased $4decreased $14 million, or 10%15%, driven by an increasea decrease in interest income from assets segregated pursuant to regulations, due a decline in short-term interest rates, and a decrease in interest income from client margin loans, due to the increasedecline in short-term interest rates. Offsettingrates and a decline in average balances. Partially offsetting the increasedecrease in interest income, interest expense also increaseddecreased due to the impact of higher interestlower deposit rates paid on client cash balances in CIP.
Non-interestCompensation-related expenses increased $64$248 million, or 6%12%, including an increase in compensation-related expenses due to higher compensable net revenues, as well as increased staffing levels in the current year to support our continued growth and regulatory compliance requirements.
Nine months ended June 30, 2019 compared with the nine months ended June 30, 2018
Net revenues of $3.98 billionNon-compensation expenses increased $194$7 million, or 5%, while pre-tax income of $436 million decreased $9 million, or 2%.
Management's Discussion and Analysis
Asset management and related administrative fees increased $220 million, or 12%, 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 $127 million, or 11%, 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 $88 million, or 15%, primarily due to higher RJBDP fees from RJ Bank due to an increase in the per-account servicing fee and, to a lesser extent, an increase in the number of accounts. RJBDP fees from third-party banks also increased, driven by higher short-term interest rates.
Net interest income increased $18 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 $203 million, or 6%, led by an increase in compensation-related expenses due to higher net revenues, as well as increased staffing levelscosts to support our continued growth and regulatory compliance requirements. Communications and information processing expense increased as a result of our continued investment in technology infrastructure to support our growth.
Occupancy and business development expenses also increased and were driven by branch expansion in our employee affiliation option as well as financial advisor growth.
Management'sManagement’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 20182019 Form 10-K.
Operating results
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change | | 2020 | | 2019 | | % change | | 2020 | | 2019 | | % change |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Brokerage revenues: | | |
| | |
| | | | | | | | | | |
| | |
| | | | | | | | |
Fixed income | | | $ | 90 |
| | $ | 71 |
| | 27 | % | | $ | 171 |
| | $ | 128 |
| | 34 | % |
Equity | | $ | 31 |
| | $ | 41 |
| | (24 | )% | | $ | 105 |
| | $ | 123 |
| | (15 | )% | | 40 |
| | 32 |
| | 25 | % | | 74 |
| | 74 |
| | — |
|
Fixed income | | 73 |
| | 53 |
| | 38 | % | | 201 |
| | 190 |
| | 6 | % | |
Total brokerage revenues | | 104 |
| | 94 |
| | 11 | % | | 306 |
| | 313 |
| | (2 | )% | | 130 |
| | 103 |
| | 26 | % | | 245 |
| | 202 |
| | 21 | % |
Investment banking: | | | | | | | | | | | | | | | | | |
|
| | | | | | |
Merger & acquisition and advisory | | | 72 |
| | 121 |
| | (40 | )% | | 132 |
| | 206 |
| | (36 | )% |
Equity underwriting | | 27 |
| | 30 |
| | (10 | )% | | 72 |
| | 66 |
| | 9 | % | | 43 |
| | 18 |
| | 139 | % | | 82 |
| | 45 |
| | 82 | % |
Merger & acquisition and advisory | | 78 |
| | 85 |
| | (8 | )% | | 279 |
| | 200 |
| | 40 | % | |
Fixed income investment banking | | 24 |
| | 21 |
| | 14 | % | | 63 |
| | 58 |
| | 9 | % | |
Debt underwriting | | | 22 |
| | 17 |
| | 29 | % | | 53 |
| | 34 |
| | 56 | % |
Total investment banking | | 129 |
| | 136 |
| | (5 | )% | | 414 |
| | 324 |
| | 28 | % | | 137 |
| | 156 |
| | (12 | )% | | 267 |
| | 285 |
| | (6 | )% |
Interest income | | 10 |
| | 9 |
| | 11 | % | | 29 |
| | 24 |
| | 21 | % | | 10 |
| | 9 |
| | 11 | % | | 18 |
| | 19 |
| | (5 | )% |
Tax credit fund revenues | | 16 |
| | 12 |
| | 33 | % | | 49 |
| | 40 |
| | 23 | % | | 12 |
| | 14 |
| | (14 | )% | | 30 |
| | 33 |
| | (9 | )% |
All other | | 2 |
| | 1 |
| | 100 | % | | 9 |
| | 10 |
| | (10 | )% | | 7 |
| | 3 |
| | 133 | % | | 10 |
| | 7 |
| | 43 | % |
Total revenues | | 261 |
| | 252 |
| | 4 | % | | 807 |
| | 711 |
| | 14 | % | | 296 |
| | 285 |
| | 4 | % | | 570 |
| | 546 |
| | 4 | % |
Interest expense | | (10 | ) | | (9 | ) | | 11 | % | | (26 | ) | | (21 | ) | | 24 | % | | (6 | ) | | (8 | ) | | (25 | )% | | (12 | ) | | (16 | ) | | (25 | )% |
Net revenues | | 251 |
| | 243 |
| | 3 | % | | 781 |
| | 690 |
| | 13 | % | | 290 |
| | 277 |
| | 5 | % | | 558 |
| | 530 |
| | 5 | % |
Non-interest expenses: | | |
| | |
| |
|
| | | | | |
|
| | |
| | |
| |
|
| | | | | |
|
|
Compensation, commissions and benefits | | 160 |
| | 161 |
| | (1 | )% | | 486 |
| | 471 |
| | 3 | % | | 184 |
| | 168 |
| | 10 | % | | 350 |
| | 326 |
| | 7 | % |
Non-compensation expenses: | | | | | | | | | | | | | |
Communications and information processing | | 18 |
| | 18 |
| | — |
| | 56 |
| | 55 |
| | 2 | % | | 20 |
| | 19 |
| | 5 | % | | 39 |
| | 38 |
| | 3 | % |
Occupancy and equipment costs | | 8 |
| | 8 |
| | — |
| | 26 |
| | 25 |
| | 4 | % | |
Occupancy and equipment | | | 9 |
| | 9 |
| | — |
| | 18 |
| | 18 |
| | — |
|
Business development | | 12 |
| | 13 |
| | (8 | )% | | 37 |
| | 35 |
| | 6 | % | | 15 |
| | 13 |
| | 15 | % | | 31 |
| | 25 |
| | 24 | % |
Professional fees | | 11 |
| | 3 |
| | 267 | % | | 31 |
| | 8 |
| | 288 | % | | 13 |
| | 10 |
| | 30 | % | | 23 |
| | 20 |
| | 15 | % |
Acquisition and disposition-related expenses | | — |
| | — |
| | — |
| | 15 |
| | — |
| | NM |
| | — |
| | — |
| | — |
| | — |
| | 15 |
| | (100 | )% |
All other | | 20 |
| | 22 |
| | (9 | )% | | 71 |
| | 62 |
| | 15 | % | | 21 |
| | 17 |
| | 24 | % | | 40 |
| | 35 |
| | 14 | % |
Total non-compensation expenses | | | 78 |
| | 68 |
| | 15 | % | | 151 |
| | 151 |
| | — |
|
Total non-interest expenses | | 229 |
| | 225 |
| | 2 | % | | 722 |
| | 656 |
| | 10 | % | | 262 |
| | 236 |
| | 11 | % | | 501 |
| | 477 |
| | 5 | % |
Income before taxes and including noncontrolling interests | | 22 |
| | 18 |
| | 22 | % | | 59 |
| | 34 |
| | 74 | % | |
Noncontrolling interests | | (2 | ) | | (4 | ) | | 50 | % | | (18 | ) | | (9 | ) | | (100 | )% | |
Pre-tax income excluding noncontrolling interests | | $ | 24 |
| | $ | 22 |
| | 9 | % | | $ | 77 |
| | $ | 43 |
| | 79 | % | |
Pre-tax margin on net revenues | | 9.6 | % | | 9.1 | % | | | | 9.9 | % | | 6.2 | % | | | |
Pre-tax income | | | $ | 28 |
| | $ | 41 |
| | (32 | )% | | $ | 57 |
| | $ | 53 |
| | 8 | % |
Quarter ended June 30, 2019March 31, 2020 compared with the quarter ended June 30, 2018March 31, 2019
Net revenues of $251$290 million increased $8$13 million, or 3%5%, and pre-tax income of $24$28 million increased $2decreased $13 million, or 9%32%.
Total brokerageBrokerage revenues increased $10$27 million, or 11%26%, due to an increase in both fixed income brokerage revenues, which were partially offset by a decline inand equity brokerage revenues. Fixed incomeThe increase in brokerage revenues improved due to increasedreflected an increase in client activity during the current year quarter. Equity brokerage revenues reflectedcurrent-year quarter resulting from market volatility, partially offset by losses of approximately $6 million on our trading inventory, both due to the impact of lower client activity duringCOVID-19 pandemic. We reduced our trading inventory toward the current year quarter and included the impactend of the sale ofquarter to reduce our operations related to research, sales and trading of European equities.risk.
Investment banking revenues decreased $7$19 million, or 5%12%, fromdue to a decrease in the number of completed merger & acquisition transactions compared with a strong prior yearprior-year quarter. The declinePartially offsetting the decrease in mergers & acquisitions was an increase in equity underwriting revenues wasprimarily due to decreasedan increase in activity compared with a difficult prior-year quarter, which was negatively impacted by the U.S. government shutdown during that period. While investment banking results during the second fiscal quarter were solid, merger & acquisition and advisory activity. Non-interestunderwriting activity may be negatively impacted in future quarters if market uncertainty continues.
Compensation-related expenses increased $4$16 million, or 2%10%, reflecting increases in professional fees. Professional fees increased largelyprimarily due to new accounting guidance we adopted effective October 1, 2018, which changed the presentationmix of certain costs related to investment banking transactions from a net presentation to a gross presentation. The current year quarter included this change,revenues, as revenues with approximately $6 million of these transaction-related expenses. See Notes 2 andhigher payout percentages increased, while revenues with lower payout percentages declined.
Management'sManagement’s Discussion and Analysis
16 ofNon-compensation expenses increased $10 million, or 15%, reflecting increases in professional fees and business development costs, primarily related to the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information on the adoption of this new accounting guidance.increase in underwriting revenues, as well as an increase in other expenses.
NineSix months ended June 30, 2019March 31, 2020 compared with the ninesix months ended June 30, 2018March 31, 2019
Net revenues of $781$558 million increased $91$28 million, or 13%5%, and pre-tax income of $77$57 million increased $34$4 million, or 79%8%.
Total brokerageBrokerage revenues decreased $7increased $43 million, or 2%21%, with a decline in equity brokerage revenues partially offset bydue to an increase in fixed income brokerage revenues. Equity brokerage revenues continue to be challenged by the industry trend toward the separate payment for research and execution services and the shift from high to low-touch execution services. The increase in fixed income brokerage revenues was primarily due to an increase in client activity during the current year period. Our Canadian Capital Markets business continues to becurrent-year period, largely a result of higher market volatility, particularly toward the end of our second fiscal quarter. Equity brokerage revenues were challenged by the difficult environmentearlier in the year, but increased during our second fiscal quarter due to strong client activity driven by market sectors in which we participate in Canada. volatility as a result of the COVID-19 pandemic.
Investment banking revenues increased $90decreased $18 million, or 28%, led by increased6% due to a significant decline in merger & acquisition activity compared with a strong first half of fiscal 2019. Offsetting the decrease was an increase in both equity underwriting and advisory activity.debt underwriting net revenues, with an increase in the number of deals, as well as larger individual transactions.
Non-interestCompensation-related expenses increased $66$24 million, or 10%7%, primarily due to the increase in revenues.
Non-compensation expenses were unchanged compared with the prior year period. The current yearprior-year period, was negatively impactedas increases in business development, professional fees and other expenses were offset by a loss in the prior-year period of $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 $23 million largely due to the aforementioned new accounting guidance we adopted effective October 1, 2018. The current year period included approximately $18 million of these transaction-related expenses. Other expenses increased $9 million primarily due to losses related to a consolidated tax credit fund, nearly all of which were offset in noncontrolling interests.
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 20182019 Form 10-K.
Operating results
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Nine months ended June 30, |
$ in millions | | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
Revenues: | | | | | | | | | | | | |
Asset management and related administrative fees: | | | | | | | | | | | | |
Managed programs | | $ | 120 |
| | $ | 118 |
| | 2 | % | | $ | 346 |
| | $ | 336 |
| | 3 | % |
Administration and other | | 45 |
| | 39 |
| | 15 | % | | 129 |
| | 114 |
| | 13 | % |
Total asset management and related administrative fees | | 165 |
| | 157 |
| | 5 | % | | 475 |
| | 450 |
| | 6 | % |
Account and service fees | | 8 |
| | 9 |
| | (11 | )% | | 27 |
| | 22 |
| | 23 | % |
All other | | 4 |
| | 2 |
| | 100 | % | | 11 |
| | 10 |
| | 10 | % |
Net revenues | | 177 |
| | 168 |
| | 5 | % | | 513 |
| | 482 |
| | 6 | % |
Non-interest expenses: | | |
| | |
| |
|
| | |
| | |
| |
|
|
Compensation and benefits | | 47 |
| | 45 |
| | 4 | % | | 135 |
| | 127 |
| | 6 | % |
Communications and information processing | | 12 |
| | 10 |
| | 20 | % | | 33 |
| | 29 |
| | 14 | % |
Investment sub-advisory fees | | 23 |
| | 22 |
| | 5 | % | | 68 |
| | 66 |
| | 3 | % |
All other | | 29 |
| | 31 |
| | (6 | )% | | 90 |
| | 82 |
| | 10 | % |
Total non-interest expenses | | 111 |
| | 108 |
| | 3 | % | | 326 |
| | 304 |
| | 7 | % |
Income before taxes and including noncontrolling interests | | 66 |
| | 60 |
| | 10 | % | | 187 |
| | 178 |
| | 5 | % |
Noncontrolling interests | | 1 |
| | 2 |
| | (50 | )% | | 3 |
| | 7 |
| | (57 | )% |
Pre-tax income excluding noncontrolling interests | | $ | 65 |
| | $ | 58 |
| | 12 | % | | $ | 184 |
| | $ | 171 |
| | 8 | % |
Pre-tax margin on net revenues | | 36.7 | % | | 34.5 | % | | | | 35.9 | % | | 35.5 | % | | |
Management's Discussion and Analysis
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2020 | | 2019 | | % change | | 2020 | | 2019 | | % change |
Revenues: | | | | | | | | | | | | |
Asset management and related administrative fees: | | | | | | | | | | | | |
Managed programs | | $ | 124 |
| | $ | 109 |
| | 14 | % | | $ | 249 |
| | $ | 226 |
| | 10 | % |
Administration and other | | 53 |
| | 40 |
| | 33 | % | | 104 |
| | 84 |
| | 24 | % |
Total asset management and related administrative fees | | 177 |
| | 149 |
| | 19 | % | | 353 |
| | 310 |
| | 14 | % |
Account and service fees | | 4 |
| | 10 |
| | (60 | )% | | 9 |
| | 19 |
| | (53 | )% |
All other | | 3 |
| | 3 |
| | — |
| | 6 |
| | 7 |
| | (14 | )% |
Net revenues | | 184 |
| | 162 |
| | 14 | % | | 368 |
| | 336 |
| | 10 | % |
Non-interest expenses: | | |
| | |
| |
|
| | |
| | |
| |
|
|
Compensation, commissions and benefits | | 45 |
| | 45 |
| | — |
| | 90 |
| | 88 |
| | 2 | % |
Non-compensation expenses: | | | | | | | | | | | | |
Communications and information processing | | 12 |
| | 10 |
| | 20 | % | | 23 |
| | 21 |
| | 10 | % |
Investment sub-advisory fees | | 26 |
| | 21 |
| | 24 | % | | 51 |
| | 45 |
| | 13 | % |
All other | | 28 |
| | 31 |
| | (10 | )% | | 58 |
| | 63 |
| | (8 | )% |
Total non-compensation expenses | | 66 |
| | 62 |
| | 6 | % | | 132 |
| | 129 |
| | 2 | % |
Total non-interest expenses | | 111 |
| | 107 |
| | 4 | % | | 222 |
| | 217 |
| | 2 | % |
Pre-tax income | | $ | 73 |
| | $ | 55 |
| | 33 | % | | $ | 146 |
| | $ | 119 |
| | 23 | % |
Selected key metrics
Managed programs
We earn asset management and administration fees for performing asset management, investment advisory and related administrative services for retail and institutional clients. Management fees recorded in our Asset Management segment are generally calculated as a percentage of the value of our fee-billable financial assets under management (“AUM”). These AUM include the portion of fee-based AUA in our PCG segment that areis invested in programs managedoverseen by our Asset Management segment (included in the AMS“AMS” line of the following table), as well as certain retail accounts
Management’s Discussion and Analysis
managed on behalf of third-party institutions, institutional accounts orand proprietary mutual funds that we manage (included(collectively included in the Carillon Tower Advisers and affiliates “Carillon Tower Advisers” line of the following table).
Revenues related to fee-based AUA in our PCG segment are shared by the PCG and Asset Management segments, the amount of which depends on whether clients are invested in assets that are in managed programs overseen by our Asset Management segment and the administrative services provided (see our “Management’s Discussion and Analysis - Results of Operations - Private Client Group” for more information). Our financial assets under managementAUM in AMS are impacted by market fluctuations and net inflows or outflows of assets, including transfers between fee-based accounts and traditional transaction-based accounts within our PCG segment.
Revenues earned by Carillon Tower Advisers for retail accounts managed on behalf of third-party institutions, institutional accounts orand our proprietary mutual funds are recorded entirely in the Asset Management segment. Our financial assets under managementAUM in Carillon Tower Advisers are impacted by market fluctuationsand investment performance and net inflows or outflows of assets.
Fees are generally collected quarterly andquarterly. Approximately 65% of these fees are based on balances as of the beginning of the quarter, approximately 10% are based on balances as of the end of the quarter, orand approximately 25% are based on average daily balances.balances throughout the quarter.
Financial assets under management:
| | $ in millions | | June 30, 2019 | | March 31, 2019 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 | | September 30, 2017 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 |
AMS (1) | | $ | 89,106 |
| | $ | 84,906 |
| | $ | 83,289 |
| | $ | 78,897 |
| | $ | 76,091 |
| | $ | 69,962 |
| | $ | 83,971 |
| | $ | 98,648 |
| | $ | 91,802 |
| | $ | 84,906 |
| | $ | 76,235 |
| | $ | 83,289 |
|
Carillon Tower Advisers | | 60,737 |
| | 59,852 |
| | 63,330 |
| | 62,210 |
| | 61,751 |
| | 31,831 |
| | 51,674 |
| | 60,637 |
| | 58,521 |
| | 59,852 |
| | 55,925 |
| | 63,330 |
|
Subtotal financial assets under management | | 149,843 |
| | 144,758 |
| | 146,619 |
| | 141,107 |
| | 137,842 |
| | 101,793 |
| | 135,645 |
| | 159,285 |
| | 150,323 |
| | 144,758 |
| | 132,160 |
| | 146,619 |
|
Less: Assets managed for affiliated entities | | (6,712 | ) | | (6,220 | ) | | (5,702 | ) | | (5,573 | ) | | (5,538 | ) | | (5,397 | ) | | (7,456 | ) | | (7,633 | ) | | (7,221 | ) | | (6,220 | ) | | (5,653 | ) | | (5,702 | ) |
Total financial assets under management | | $ | 143,131 |
| | $ | 138,538 |
| | $ | 140,917 |
| | $ | 135,534 |
| | $ | 132,304 |
| | $ | 96,396 |
| | $ | 128,189 |
| | $ | 151,652 |
| | $ | 143,102 |
| | $ | 138,538 |
| | $ | 126,507 |
| | $ | 140,917 |
|
| |
(1) | Represents the portion of our PCG segment fee-based AUA (as disclosed in “Assets in fee-based accounts” in the “Selected key metrics - PCG client asset balances” section of our “Management’s Discussion and Analysis - Results of Operations - Private Client Group”) that is invested in managed programs overseen by the Asset Management segment. |
Activity (including activity in assets managed for affiliated entities):
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
Financial assets under management at beginning of period | | $ | 144,758 |
| | $ | 137,842 |
| | $ | 146,619 |
| | $ | 101,793 |
| | $ | 159,285 |
| | $ | 132,160 |
| | $ | 150,323 |
| | $ | 146,619 |
|
Carillon Tower Advisers: | | | | | | | | | |
Scout Group acquisition | | — |
| | — |
| | — |
| | 27,087 |
| |
Other - net inflows/(outflows) | | (910 | ) | | (544 | ) | | (3,584 | ) | | 862 |
| |
Carillon Tower Advisers - net outflows | | | (2,016 | ) | | (1,094 | ) | | (2,388 | ) | | (2,674 | ) |
AMS - net inflows | | 1,751 |
| | 2,348 |
| | 4,138 |
| | 7,283 |
| | 1,189 |
| | 1,869 |
| | 3,272 |
| | 2,387 |
|
Net market appreciation/(depreciation) in asset values | | 4,244 |
| | 1,461 |
| | 2,670 |
| | 4,082 |
| | (22,813 | ) | | 11,823 |
| | (15,562 | ) | | (1,574 | ) |
Financial assets under management at end of period | | $ | 149,843 |
| | $ | 141,107 |
| | $ | 149,843 |
| | $ | 141,107 |
| | $ | 135,645 |
| | $ | 144,758 |
| | $ | 135,645 |
| | $ | 144,758 |
|
AMS division of RJ&A
See “Management’s Discussion and Analysis - Results of Operations - Private Client Group” for further information about our retail client assets, including those fee-based assets invested in programs managed by AMS.
Management's Discussion and Analysis
Carillon Tower Advisers
Assets managed by Carillon Tower Advisers include assets managed by its subsidiaries and affiliatesaffiliates: Eagle Asset Management, ClariVest Asset Management, Cougar Global Investments and the Scout Group. The following table presents Carillon Tower Advisers’ AUM by objective, excluding non-discretionary asset-based programs,assets for which it does not exercise discretion, as well as the approximate average client fee rate earned on such assets for the most recent fiscal year period.
| | $ in millions | | June 30, 2019 | | Average fee rate | | March 31, 2020 | | Average fee rate |
Equity | | $ | 29,874 |
| | 0.51% | | $ | 21,518 |
| | 0.54% |
Fixed income | | 26,335 |
| | 0.18% | | 25,641 |
| | 0.18% |
Balanced | | 4,528 |
| | 0.37% | | 4,515 |
| | 0.37% |
Total financial assets under management | | $ | 60,737 |
| | 0.36% | | $ | 51,674 |
| | 0.35% |
Management’s Discussion and Analysis
Non-discretionary asset-based programs
|
| | | | | | | | | | | | | | | | | | | | | | | | |
$ in billions | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 |
Total assets | | $ | 217.3 |
| | $ | 251.3 |
| | $ | 229.7 |
| | $ | 207.0 |
| | $ | 184.3 |
| | $ | 200.1 |
|
AssetsThe preceding table includes 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 $220.1 billion, $207.0 billion, $200.1 billion, $186.4 billion and $157.0 billion as of June 30, 2019, March 31, 2019, September 30, 2018, June 30, 2018, and September 30, 2017, respectively.. The increase in assets over the prior yearprior-year level was primarily due to clients moving to fee-based accounts from traditional transaction-based accounts and successful financial advisor recruiting and market appreciation. Administrativerecruiting. The decrease in assets during our second fiscal quarter was due to the decline in equity markets toward the end of our second fiscal quarter due to the COVID-19 pandemic. As administrative fees associated with these programs are predominantly calculated based on balances at the beginning of the quarter.quarter, the 14% decline in assets during the quarter will negatively impact our third fiscal quarter revenues.
RJ Trust
|
| | | | | | | | | | | | | | | | | | | | | | | | |
$ in billions | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 |
Total assets | | $ | 6.4 |
| | $ | 7.2 |
| | $ | 6.6 |
| | $ | 6.2 |
| | $ | 5.7 |
| | $ | 6.1 |
|
AssetsThe preceding table includes assets held in asset-based programs in RJ Trust (including those managed for affiliated entities) totaled $6.4 billion, $6.2 billion, $6.1 billion, $5.8 billion and $5.5 billion as of June 30, 2019, March 31, 2019, September 30, 2018, June 30, 2018 and September 30, 2017, respectively..
Quarter ended June 30, 2019March 31, 2020 compared with the quarter ended June 30, 2018March 31, 2019
Net revenues of $177$184 million increased $9$22 million, or 5%14%, and pre-tax income of $65$73 million increased $7$18 million, or 12%33%.
Total assetAsset management and related administrative fee revenues increased $8$28 million, or 5%19%, driven by an increase in administrative fees due to the aforementioned increase inhigher average financial assets heldunder management and higher beginning assets in non-discretionary asset-based programs. Although financial assets under management and assets in non-discretionary asset-based programs at the end of the quarter were lower than the end of the prior-year quarter, revenues increased as the majority of assets in these programs are billed based on balances as of the beginning of the quarter. The decline in these assets as of March 31, 2020, primarily due to the negative market impact of the COVID-19 pandemic toward the end of the quarter, will negatively affect our third fiscal quarter results.
Non-interestNon-compensation expenses increased $4 million, or 6%, due to an increase in investment sub-advisory fees resulting from an increase in assets under management in sub-advised programs.
Six months ended March 31, 2020 compared with the six months ended March 31, 2019
Net revenues of $368 million increased $32 million, or 10%, and pre-tax income of $146 million increased $27 million, or 23%.
Asset management and related administrative fees increased $43 million, or 14%, driven by higher average financial assets under management and higher beginning assets in non-discretionary asset-based programs. Although financial assets under management and assets in non-discretionary asset-based programs at the end of the period were lower than the end of the prior-year period, revenues increased as the majority of assets in these programs are billed based on balances as of the beginning of each quarter.
Non-compensation expenses increased $3 million, or 3%, as a result of an increase in compensation and benefits expense as well as communication and information processing expenses, primarily to support the growth of the business.
Nine months ended June 30, 2019 compared with the nine months ended June 30, 2018
Net revenues of $513 million increased $31 million, or 6%, and pre-tax income of $184 million increased $13 million, or 8%.
Total asset management and related administrative fee revenues increased $25 million, or 6%, driven by an increase in net revenues from both managed and non-discretionary asset-based accounts. 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.
Non-interest expenses increased $22 million, or 7%2%, 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 an increase in personnel over the prior year period to support the growth of the business. Theinvestment sub-advisory fees resulting from an 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.under management in sub-advised programs.
Management'sManagement’s Discussion and Analysis
Results of Operations – RJ Bank
For an overview of our RJ Bank segment operations, as well as a description of the key factors impacting our RJ Bank results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 20182019 Form 10-K.
Operating results
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change | | 2020 | | 2019 | | % change | | 2020 | | 2019 | | % change |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 246 |
| | $ | 205 |
| | 20 | % | | $ | 732 |
| | $ | 571 |
| | 28 | % | | $ | 223 |
| | $ | 247 |
| | (10 | )% | | $ | 454 |
| | $ | 486 |
| | (7 | )% |
Interest expense | | (38 | ) | | (25 | ) | | 52 | % | | (122 | ) | | (56 | ) | | 118 | % | | (18 | ) | | (42 | ) | | (57 | )% | | (39 | ) | | (84 | ) | | (54 | )% |
Net interest income | | 208 |
| | 180 |
| | 16 | % | | 610 |
| | 515 |
| | 18 | % | | 205 |
| | 205 |
| | — |
| | 415 |
| | 402 |
| | 3 | % |
All other | | 7 |
| | 8 |
| | (13 | )% | | 20 |
| | 17 |
| | 18 | % | | 5 |
| | 7 |
| | (29 | )% | | 11 |
| | 13 |
| | (15 | )% |
Net revenues | | 215 |
| | 188 |
| | 14 | % | | 630 |
| | 532 |
| | 18 | % | | 210 |
| | 212 |
| | (1 | )% | | 426 |
| | 415 |
| | 3 | % |
Non-interest expenses: | | |
| | |
| |
|
| | |
| | |
| |
|
| | |
| | |
| |
|
| | |
| | |
| |
|
|
Compensation and benefits | | 13 |
| | 12 |
| | 8 | % | | 36 |
| | 31 |
| | 16 | % | | 13 |
| | 12 |
| | 8 | % | | 25 |
| | 23 |
| | 9 | % |
Non-compensation expenses: | | | | | | |
|
| | | | | | |
Loan loss provision/(benefit) | | (5 | ) | | 5 |
| | (200 | )% | | 16 |
| | 14 |
| | 14 | % | | 109 |
| | 5 |
| | 2,080 | % | | 107 |
| | 21 |
| | 410 | % |
RJBDP fees to PCG | | 44 |
| | 24 |
| | 83 | % | | 127 |
| | 67 |
| | 90 | % | | 48 |
| | 42 |
| | 14 | % | | 95 |
| | 83 |
| | 14 | % |
All other | | 25 |
| | 17 |
| | 47 | % | | 67 |
| | 58 |
| | 16 | % | | 26 |
| | 17 |
| | 53 | % | | 50 |
| | 42 |
| | 19 | % |
Total non-compensation expenses | | | 183 |
| | 64 |
| | 186 | % | | 252 |
| | 146 |
| | 73 | % |
Total non-interest expenses | | 77 |
| | 58 |
| | 33 | % | | 246 |
| | 170 |
| | 45 | % | | 196 |
| | 76 |
| | 158 | % | | 277 |
| | 169 |
| | 64 | % |
Pre-tax income | | $ | 138 |
| | $ | 130 |
| | 6 | % | | $ | 384 |
| | $ | 362 |
| | 6 | % | | $ | 14 |
| | $ | 136 |
| | (90 | )% | | $ | 149 |
| | $ | 246 |
| | (39 | )% |
Pre-tax margin on net revenues | | 64.2 | % | | 69.1 | % | | | | 61.0 | % | | 68.0 | % | | | |
Quarter ended June 30, 2019March 31, 2020 compared with the quarter ended June 30, 2018March 31, 2019
Net revenues of $215$210 million increased $27decreased $2 million, or 14%1%, and pre-tax income of $138$14 million increased $8decreased $122 million, or 6%.90%, primarily due to a higher bank loan loss provision.
Net interest income increased $28 million, or 16%, due to a $2.64 billionwas flat as the impacts of higher interest-earning banking assets offset the negative impact from lower short-term interest rates. The increase in average interest-earning banking assets primarily reflecting a $1.90 billion increasewas driven by growth in average loans of $1.42 billion, average cash balances of $661 million, and an increase in net interest margin.average available-for-sale portfolio of $567 million. The net interest margin increaseddecreased to 3.37%3.02% from 3.30%3.35% due to an increasethe decline in average asset yields, as a result of both higher short-term interest rates. As the most recent rate cuts implemented by the Federal Reserve did not occur until late in our second fiscal quarter, we expect this decline to have a more significant impact on our net interest income and net interest margin in the third fiscal quarter. In addition, most of RJ Bank’s assets are priced based on LIBOR. Based on current LIBOR rates, and higher average balances, partially offset by an increase in total cost of funds. The increase in total cost of funds resulted from higher deposit costs primarily duewe expect our net interest margin to increased interest rates. Correspondingdecline to approximately 2.5% over the increase in average interest-earning banking assets, average interest-bearing banking liabilities increased $2.48 billion.next two quarters.
The loan loss benefit ofprovision was $109 million compared to $5 million in the current yearprior-year quarter. The increase in the provision in the current-year quarter was attributablein response to the substantial decreaserapid and widespread economic deterioration caused by COVID-19. Continued deterioration of macroeconomic conditions may require us to increase our allowance for loan losses in total criticized loansthe future or to experience loan losses in excess of current reserves.
Compensation and benefits expenses increased $1 million, or 8%, due increased staffing levels to several payoffs during the current year quarter.support our continued growth.
Non-interest
Non-compensation expenses (excluding the provision for loan losses) increased $29$15 million. The increase in non-compensation expenses included a $6 million, or 55%, including a $20 million, or 83%14%, increase in fees for RJBDP paid to PCG, primarily driven by an increase in the per-account servicing fee effective October 1, 2018number of accounts, and an increase in FDIC insurance premiums due to the increase in number of accounts. In addition, there were increasesdeposit balances. RJBDP fees paid to PCG are eliminated in the reserves on unfunded loan commitments compared with the prior year quarter. The current year quarter included an increase in losses associated with certain of RJ Bank’s LIHTC investments. These LIHTC investments produce certain operating losses that impact non-interest expenses, but create incremental benefits in excess of such losses in the form of tax credits which benefit our consolidated income tax expense and liabilities.
consolidation.
Management'sManagement’s Discussion and Analysis
The following table presents average balances, interest income and expense, the related yields and rates, and interest spreads and margins for RJ Bank.
| | | | Three months ended June 30, | | Three months ended March 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
$ in millions | | Average balance | | Interest inc./exp. | | Average yield/ cost | | Average balance | | Interest inc./exp. | | Average yield/ cost | | Average balance | | Interest inc./exp. | | Average yield/ cost | | Average balance | | Interest inc./exp. | | Average yield/ cost |
Interest-earning banking assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash | | $ | 998 |
| | $ | 5 |
| | 2.36 | % | | $ | 660 |
| | $ | 4 |
| | 1.79 | % | | $ | 2,052 |
| | $ | 5 |
| | 0.89 | % | | $ | 1,391 |
| | $ | 9 |
| | 2.40 | % |
Available-for-sale securities | | 2,901 |
| | 18 |
| | 2.41 | % | | 2,534 |
| | 14 |
| | 2.11 | % | | 3,443 |
| | 19 |
| | 2.28 | % | | 2,876 |
| | 17 |
| | 2.43 | % |
Bank loans, net of unearned income: | | | | | | | | | | | | | |
Bank loans, net of unearned income and deferred expenses: | | | | | | | | | | | | | |
Loans held for investment: | | | | | | | | | | | | | | | | | | | | | | | | |
C&I loans | | 8,278 |
| | 98 |
| | 4.68 | % | | 7,647 |
| | 85 |
| | 4.40 | % | | 8,043 |
| | 81 |
| | 3.99 | % | | 8,160 |
| | 97 |
| | 4.76 | % |
CRE construction loans | | 248 |
| | 4 |
| | 5.45 | % | | 182 |
| | 2 |
| | 5.23 | % | | 181 |
| | 2 |
| | 4.58 | % | | 197 |
| | 3 |
| | 5.70 | % |
CRE loans | | 3,359 |
| | 39 |
| | 4.53 | % | | 3,259 |
| | 34 |
| | 4.15 | % | | 3,735 |
| | 36 |
| | 3.81 | % | | 3,379 |
| | 40 |
| | 4.73 | % |
Tax-exempt loans | | 1,291 |
| | 9 |
| | 3.35 | % | | 1,191 |
| | 8 |
| | 3.41 | % | | 1,212 |
| | 8 |
| | 3.36 | % | | 1,280 |
| | 8 |
| | 3.34 | % |
Residential mortgage loans | | 4,127 |
| | 34 |
| | 3.32 | % | | 3,514 |
| | 27 |
| | 3.10 | % | | 4,847 |
| | 38 |
| | 3.13 | % | | 3,979 |
| | 34 |
| | 3.33 | % |
SBL and other | | 3,125 |
| | 36 |
| | 4.64 | % | | 2,741 |
| | 29 |
| | 4.26 | % | | 3,469 |
| | 31 |
| | 3.60 | % | | 3,066 |
| | 37 |
| | 4.71 | % |
Loans held for sale | | 118 |
| | 1 |
| | 4.78 | % | | 109 |
| | 1 |
| | 4.34 | % | | 142 |
| | 2 |
| | 3.85 | % | | 144 |
| | 1 |
| | 4.26 | % |
Total bank loans, net | | 20,546 |
| | 221 |
| | 4.30 | % | | 18,643 |
| | 186 |
| | 4.04 | % | | 21,629 |
| | 198 |
| | 3.67 | % | | 20,205 |
| | 220 |
| | 4.38 | % |
FHLB stock, Federal Reserve Bank stock and other | | 168 |
| | 2 |
| | 4.42 | % | | 133 |
| | 1 |
| | 4.53 | % | |
FHLB stock, FRB stock and other | | | 230 |
| | 1 |
| | 2.48 | % | | 153 |
| | 1 |
| | 4.44 | % |
Total interest-earning banking assets | | 24,613 |
| | $ | 246 |
| | 4.00 | % | | 21,970 |
|
| $ | 205 |
| | 3.75 | % | | 27,354 |
| | $ | 223 |
| | 3.28 | % | | 24,625 |
|
| $ | 247 |
| | 4.04 | % |
Non-interest-earning banking assets: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Unrealized loss on available-for-sale securities | | (6 | ) | | |
| | |
| | (57 | ) | | |
| | |
| |
Unrealized gain/(loss) on available-for-sale securities | | | 53 |
| | |
| | |
| | (33 | ) | | |
| | |
|
Allowance for loan losses | | (218 | ) | | |
| | |
| | (195 | ) | | | | | | (217 | ) | | |
| | |
| | (220 | ) | | | | |
Other assets | | 390 |
| | |
| | |
| | 367 |
| | |
| | |
| | 399 |
| | |
| | |
| | 400 |
| | |
| | |
|
Total non-interest-earning banking assets | | 166 |
| | |
| | |
| | 115 |
| | |
| | |
| | 235 |
| | |
| | |
| | 147 |
| | |
| | |
|
Total banking assets | | $ | 24,779 |
| | |
| | |
| | $ | 22,085 |
| | |
| | |
| | $ | 27,589 |
| | |
| | |
| | $ | 24,772 |
| | |
| | |
|
Interest-bearing banking liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Bank deposits: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Savings, money market and NOW accounts | | | $ | 23,045 |
| | $ | 7 |
| | 0.13 | % | | $ | 20,923 |
| | $ | 35 |
| | 0.66 | % |
Certificates of deposit | | $ | 561 |
| | $ | 4 |
| | 2.33 | % | | $ | 389 |
| | $ | 1 |
| | 1.64 | % | | 1,094 |
| | 6 |
| | 2.03 | % | | 560 |
| | 3 |
| | 2.26 | % |
Savings, money market and NOW accounts | | 20,989 |
| | 30 |
| | 0.59 | % | | 18,634 |
| | 18 |
| | 0.39 | % | |
FHLB advances and other | | 895 |
| | 4 |
| | 2.08 | % | | 939 |
| | 6 |
| | 2.09 | % | | 893 |
| | 5 |
| | 2.24 | % | | 914 |
| | 4 |
| | 2.17 | % |
Total interest-bearing banking liabilities | | 22,445 |
| | $ | 38 |
| | 0.69 | % | | 19,962 |
| | $ | 25 |
| | 0.49 | % | | 25,032 |
| | $ | 18 |
| | 0.29 | % | | 22,397 |
| | $ | 42 |
| | 0.77 | % |
Non-interest-bearing banking liabilities | | 156 |
| | |
| | |
| | 183 |
| | |
| | |
| | 242 |
| | |
| | |
| | 258 |
| | |
| | |
|
Total banking liabilities | | 22,601 |
| | |
| | |
| | 20,145 |
| | |
| | |
| | 25,274 |
| | |
| | |
| | 22,655 |
| | |
| | |
|
Total banking shareholder’s equity | | 2,178 |
| | |
| | |
| | 1,940 |
| | |
| | |
| | 2,315 |
| | |
| | |
| | 2,117 |
| | |
| | |
|
Total banking liabilities and shareholder’s equity | | $ | 24,779 |
| | |
| | |
| | $ | 22,085 |
| | |
| | |
| | $ | 27,589 |
| | |
| | |
| | $ | 24,772 |
| | |
| | |
|
Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income | | $ | 2,168 |
| | $ | 208 |
| | | | $ | 2,008 |
| | $ | 180 |
| | | | $ | 2,322 |
| | $ | 205 |
| | | | $ | 2,228 |
| | $ | 205 |
| | |
Bank net interest: | | |
| | |
| | | | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
Spread | | |
| | |
| | 3.31 | % | | |
| | |
| | 3.26 | % | | |
| | |
| | 2.99 | % | | |
| | |
| | 3.27 | % |
Margin (net yield on interest-earning banking assets) | | |
| | |
| | 3.37 | % | | |
| | |
| | 3.30 | % | | |
| | |
| | 3.02 | % | | |
| | |
| | 3.35 | % |
Ratio of interest-earning banking assets to interest-bearing banking liabilities | | |
| | |
| | 109.66 | % | | |
| | | | 110.06 | % | | |
| | |
| | 109.28 | % | | |
| | | | 109.95 | % |
Nonaccrual loans are included in the average loan balances in the preceding table. Payment or incomeAny payments received onfor corporate nonaccrual loans are applied entirely to principal. IncomeInterest income on residential mortgage nonaccrual loans is recognized on a cash basis.
Fee income on bank loans included in interest income for the three months ended June 30,March 31, 2020 and 2019 and 2018 was $3$5 million and $6 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 three months ended June 30, 2019March 31, 2020 and 2018.2019.
Management'sManagement’s Discussion and Analysis
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year’s volume. Changes attributable to both volume and rate have been allocated proportionately.
| | | | Three months ended June 30, | | Three months ended March 31, |
| | 2019 compared to 2018 | | 2020 compared to 2019 |
| | Increase/(decrease) due to | | Increase/(decrease) due to |
$ in millions | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest revenue: | | | | | | | |
Interest income: | | | | | | | |
Interest-earning banking assets: | | | | | | | | | | | | |
Cash | | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | 4 |
| | $ | (8 | ) | | $ | (4 | ) |
Available-for-sale securities | | 2 |
| | 2 |
| | 4 |
| | 3 |
| | (1 | ) | | 2 |
|
Bank loans, net of unearned income: | | | | | | | |
Bank loans, net of unearned income and deferred expenses: | | | | | | | |
Loans held for investment: | | | | | | |
| | | | | | |
|
C&I loans | | 7 |
| | 6 |
| | 13 |
| | (1 | ) | | (15 | ) | | (16 | ) |
CRE construction loans | | 2 |
| | — |
| | 2 |
| | — |
| | (1 | ) | | (1 | ) |
CRE loans | | 1 |
| | 4 |
| | 5 |
| | 4 |
| | (8 | ) | | (4 | ) |
Tax-exempt loans | | 1 |
| | — |
| | 1 |
| |
Residential mortgage loans | | 5 |
| | 2 |
| | 7 |
| | 6 |
| | (2 | ) | | 4 |
|
SBL and other | | 4 |
| | 3 |
| | 7 |
| | 6 |
| | (12 | ) | | (6 | ) |
Loans held for sale | | | 1 |
| | — |
| | 1 |
|
Total bank loans, net | | 20 |
|
| 15 |
| | 35 |
| | 16 |
|
| (38 | ) | | (22 | ) |
FHLB stock, Federal Reserve Bank stock, and other | | 1 |
| | — |
| | 1 |
| |
Total interest-earning banking assets | | 24 |
| | 17 |
| | 41 |
| | 23 |
| | (47 | ) | | (24 | ) |
Interest expense: | | |
| | |
| |
|
| | |
| | |
| |
|
|
Interest-bearing banking liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Bank deposits: | | |
| | |
| | |
| | |
| | |
| | |
|
Savings, money market, and NOW accounts | | | 4 |
| | (32 | ) | | (28 | ) |
Certificates of deposit | | 1 |
| | 2 |
| | 3 |
| | 4 |
| | (1 | ) | | 3 |
|
Savings, money market, and NOW accounts | | 2 |
| | 10 |
| | 12 |
| |
FHLB advances and other | | (2 | ) | | — |
| | (2 | ) | | (1 | ) | | 2 |
| | 1 |
|
Total interest-bearing banking liabilities | | 1 |
| | 12 |
| | 13 |
| | 7 |
| | (31 | ) | | (24 | ) |
Change in net interest income | | $ | 23 |
| | $ | 5 |
| | $ | 28 |
| | $ | 16 |
| | $ | (16 | ) | | $ | — |
|
NineSix months ended June 30, 2019March 31, 2020 compared with the ninesix months ended June 30, 2018March 31, 2019
Net revenues of $630$426 million increased $98$11 million, or 18%3%, and pre-tax income of $384$149 million increased $22decreased $97 million, or 6%39%.
Net interest income increased $95$13 million, or 18%3%, due to a $2.85 billion increase in averageas higher interest-earning banking assets as well as an increase in netoffset the negative impact from lower short-term interest margin.rates. The increase in average interest-earning banking assets was primarily driven by growth in average loans of $2.16$1.38 billion and a $473$469 million increase in our average available-for-sale securities portfolio. The net interest margin increaseddecreased to 3.32%3.12% from 3.20% due to an increase in asset yields, a result of higher short-term interest rates and average balances, partially offset by an increase in 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 $2.62 billion.3.30%.
The loan loss provision was $107 million, compared to $21 million in the prior-year period. The increase in the provision in the current-year period was primarily attributable to the economic impacts of $16 million wasCOVID-19 during the second fiscal quarter.
Compensation and benefits expenses increased $2 million higher than the prior year period and was largely attributabledue increased staffing levels to provisions related to certain credits downgraded during the current year period, partially offset by lower reserve rates on pass-rated loans.support our continued growth.
Non-interest
Non-compensation expenses (excluding the provision for loan losses) increased $74$20 million, including a $12 million, or 47%, including a $60 million, or 90%14%, increase in fees for RJBDP paid to PCG, primarily driven by an increase in the per-account servicing fee effective October 1, 2018 and the increase in the number of accounts. In addition, compensation and benefits expenses increased due increased staffing levels to support our continued growth. The current year period included an increaseThese fees are eliminated in losses associated with certain of RJ Bank’s LIHTC investments. These LIHTC investments produce certain operating losses that impact non-interest expenses, but create incremental benefits in excess of such losses in the form of tax credits which benefit our consolidated income tax expense and liabilities.
consolidation.
Management'sManagement’s Discussion and Analysis
The following table presents average balances, interest income and expense, the related yields and rates, and interest spreads and margins for RJ Bank.
| | | | Nine months ended June 30, | | Six months ended March 31, |
| | 2019 | | 2018 | | 2020 | | 2019 |
$ in millions | | Average balance | | Interest inc./exp. | | Average yield/ cost | | Average balance | | Interest inc./exp. | | Average yield/ cost | | Average balance | | Interest inc./exp. | | Average yield/ cost | | Average balance | | Interest inc./exp. | | Average yield/ cost |
Interest-earning banking assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash | | $ | 1,231 |
| | $ | 21 |
| | 2.33 | % | | $ | 1,040 |
| | $ | 12 |
| | 1.48 | % | | $ | 1,624 |
| | $ | 10 |
| | 1.17 | % | | $ | 1,347 |
| | $ | 16 |
| | 2.32 | % |
Available-for-sale securities | | 2,831 |
| | 51 |
| | 2.39 | % | | 2,358 |
| | 36 |
| | 2.00 | % | | 3,265 |
| | 37 |
| | 2.29 | % | | 2,796 |
| | 33 |
| | 2.38 | % |
Bank loans, net of unearned income: | | |
| | | | | | | | | | | |
Bank loans, net of unearned income and deferred expenses: | | | |
| | | | | | | | | | |
Loans held for investment: | | | | | | | | | | | | | | | | | | | | | | | | |
C&I loans | | 8,065 |
| | 286 |
| | 4.67 | % | | 7,538 |
| | 237 |
| | 4.15 | % | | 8,061 |
| | 167 |
| | 4.07 | % | | 7,959 |
| | 188 |
| | 4.67 | % |
CRE construction loans | | 205 |
| | 9 |
| | 5.58 | % | | 166 |
| | 6 |
| | 5.03 | % | | 207 |
| | 5 |
| | 4.75 | % | | 184 |
| | 5 |
| | 5.66 | % |
CRE loans | | 3,433 |
| | 120 |
| | 4.60 | % | | 3,160 |
| | 95 |
| | 3.97 | % | | 3,673 |
| | 73 |
| | 3.91 | % | | 3,469 |
| | 81 |
| | 4.64 | % |
Tax-exempt loans | | 1,285 |
| | 26 |
| | 3.34 | % | | 1,126 |
| | 22 |
| | 3.41 | % | | 1,218 |
| | 16 |
| | 3.36 | % | | 1,282 |
| | 17 |
| | 3.34 | % |
Residential mortgage loans | | 3,999 |
| | 100 |
| | 3.32 | % | | 3,363 |
| | 78 |
| | 3.08 | % | | 4,743 |
| | 75 |
| | 3.16 | % | | 3,934 |
| | 66 |
| | 3.32 | % |
SBL and other | | 3,098 |
| | 109 |
| | 4.64 | % | | 2,594 |
| | 78 |
| | 3.98 | % | | 3,403 |
| | 65 |
| | 3.78 | % | | 3,085 |
| | 73 |
| | 4.65 | % |
Loans held for sale | | 149 |
| | 5 |
| | 4.87 | % | | 123 |
| | 3 |
| | 3.83 | % | | 151 |
| | 3 |
| | 3.97 | % | | 165 |
| | 4 |
| | 4.90 | % |
Total bank loans, net | | 20,234 |
| | 655 |
| | 4.32 | % | | 18,070 |
| | 519 |
| | 3.85 | % | | 21,456 |
| | 404 |
| | 3.76 | % | | 20,078 |
| | 434 |
| | 4.32 | % |
FHLB stock, Federal Reserve Bank stock and other | | 163 |
| | 5 |
| | 4.27 | % | | 138 |
| | 4 |
| | 4.13 | % | |
FHLB stock, FRB stock and other | | | 222 |
| | 3 |
| | 2.74 | % | | 161 |
| | 3 |
| | 4.19 | % |
Total interest-earning banking assets | | 24,459 |
| | $ | 732 |
| | 3.99 | % | | 21,606 |
| | $ | 571 |
| | 3.54 | % | | 26,567 |
| | $ | 454 |
| | 3.41 | % | | 24,382 |
| | $ | 486 |
| | 3.99 | % |
Non-interest-earning banking assets: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Unrealized loss on available-for-sale securities | | (37 | ) | | |
| | |
| | (39 | ) | | |
| | |
| |
Unrealized gain/(loss) on available-for-sale securities | | | 41 |
| | |
| | |
| | (52 | ) | | |
| | |
|
Allowance for loan losses | | (214 | ) | | |
| | |
| | (192 | ) | | |
| | |
| | (218 | ) | | |
| | |
| | (212 | ) | | |
| | |
|
Other assets | | 404 |
| | |
| | |
| | 373 |
| | |
| | |
| | 379 |
| | |
| | |
| | 411 |
| | |
| | |
|
Total non-interest-earning banking assets | | 153 |
| | |
| | |
| | 142 |
| | |
| | |
| | 202 |
| | |
| | |
| | 147 |
| | |
| | |
|
Total banking assets | | $ | 24,612 |
| | |
| | |
| | $ | 21,748 |
| | |
| | |
| | $ | 26,769 |
| | |
| | |
| | $ | 24,529 |
| | |
| | |
|
Interest-bearing banking liabilities: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Bank deposits: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Savings, money market and NOW accounts | | | $ | 22,431 |
| | $ | 19 |
| | 0.17 | % | | $ | 20,798 |
| | $ | 69 |
| | 0.66 | % |
Certificates of deposit | | $ | 527 |
| | $ | 9 |
| | 2.20 | % | | $ | 353 |
| | $ | 4 |
| | 1.60 | % | | $ | 937 |
| | $ | 10 |
| | 2.10 | % | | $ | 510 |
| | $ | 5 |
| | 2.13 | % |
Savings, money market and NOW accounts | | 20,861 |
| | 99 |
| | 0.64 | % | | 18,426 |
| | 37 |
| | 0.27 | % | |
FHLB advances and other | | 919 |
| | 14 |
| | 2.13 | % | | 908 |
| | 15 |
| | 2.09 | % | | 890 |
| | 10 |
| | 2.23 | % | | 931 |
| | 10 |
| | 2.15 | % |
Total interest-bearing banking liabilities | | 22,307 |
| | $ | 122 |
| | 0.73 | % | | 19,687 |
| | $ | 56 |
| | 0.37 | % | | 24,258 |
| | $ | 39 |
| | 0.32 | % | | 22,239 |
| | $ | 84 |
| | 0.76 | % |
Non-interest-bearing banking liabilities | | 191 |
| | |
| | |
| | 176 |
| | |
| | |
| | 211 |
| | |
| | |
| | 208 |
| | |
| | |
|
Total banking liabilities | | 22,498 |
| | |
| | |
| | 19,863 |
| | |
| | |
| | 24,469 |
| | |
| | |
| | 22,447 |
| | |
| | |
|
Total banking shareholder’s equity | | 2,114 |
| | |
| | |
| | 1,885 |
| | |
| | |
| | 2,300 |
| | |
| | |
| | 2,082 |
| | |
| | |
|
Total banking liabilities and shareholder’s equity | | $ | 24,612 |
| | |
| | |
| | $ | 21,748 |
| | |
| | |
| | $ | 26,769 |
| | |
| | |
| | $ | 24,529 |
| | |
| | |
|
Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income | | $ | 2,152 |
| | $ | 610 |
| | | | $ | 1,919 |
| | $ | 515 |
| | | | $ | 2,309 |
| | $ | 415 |
| | | | $ | 2,143 |
| | $ | 402 |
| | |
Bank net interest: | | |
| | |
| | | | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
Spread | | |
| | |
| | 3.26 | % | | |
| | |
| | 3.17 | % | | |
| | |
| | 3.09 | % | | |
| | |
| | 3.23 | % |
Margin (net yield on interest-earning banking assets) | | |
| | |
| | 3.32 | % | | |
| | |
| | 3.20 | % | | |
| | |
| | 3.12 | % | | |
| | |
| | 3.30 | % |
Ratio of interest-earning banking assets to interest-bearing banking liabilities | | |
| | |
| | 109.65 | % | | |
| | | | 109.75 | % | | |
| | |
| | 109.52 | % | | |
| | | | 109.64 | % |
Nonaccrual loans are included in the average loan balances in the preceding table. Payment or incomeAny payments received onfor corporate nonaccrual loans are applied entirely to principal. IncomeInterest income on residential mortgage nonaccrual loans is recognized on a cash basis.
Fee income on bank loans included in interest income for the ninesix months ended June 30,March 31, 2020 and 2019 and 2018 was $14$9 million and $19$11 million, respectively.
The yield on tax-exempt loans in the preceding table is presented on a tax-equivalenttaxable-equivalent basis utilizing the applicable federal statutory tax rates for each of the ninesix months ended June 30, 2019March 31, 2020 and 2018.2019.
Management'sManagement’s Discussion and Analysis
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year’s volume. Changes attributable to both volume and rate have been allocated proportionately.
| | | | Nine months ended June 30, | | Six months ended March 31, |
| | 2019 compared to 2018 | | 2020 compared to 2019 |
| | Increase/(decrease) due to | | Increase/(decrease) due to |
$ in millions | | Volume | | Rate | | Total | | Volume | | Rate | | Total |
Interest revenue: | | | | | | | |
Interest income: | | | | | | | |
Interest-earning banking assets: | | | | | | | | | | | | |
Cash | | $ | 2 |
| | $ | 7 |
| | $ | 9 |
| | $ | 3 |
| | $ | (9 | ) | | $ | (6 | ) |
Available-for-sale securities | | 7 |
| | 8 |
| | 15 |
| | 5 |
| | (1 | ) | | 4 |
|
Bank loans, net of unearned income: | | | | | | | |
Bank loans, net of unearned income and deferred expenses: | | | | | | | |
Loans held for investment: | | | | | | |
| | | | | | |
|
C&I loans | | 17 |
| | 32 |
| | 49 |
| | 2 |
| | (23 | ) | | (21 | ) |
CRE construction loans | | 2 |
| | 1 |
| | 3 |
| | 1 |
| | (1 | ) | | — |
|
CRE loans | | 8 |
| | 17 |
| | 25 |
| | 5 |
| | (13 | ) | | (8 | ) |
Tax-exempt loans | | 3 |
| | 1 |
| | 4 |
| | (1 | ) | | — |
| | (1 | ) |
Residential mortgage loans | | 15 |
| | 7 |
| | 22 |
| | 13 |
| | (4 | ) | | 9 |
|
SBL and other | | 15 |
| | 16 |
| | 31 |
| | 8 |
| | (16 | ) | | (8 | ) |
Loans held for sale | | 1 |
| | 1 |
| | 2 |
| | — |
| | (1 | ) | | (1 | ) |
Total bank loans, net | | 61 |
| | 75 |
| | 136 |
| | 28 |
| | (58 | ) | | (30 | ) |
FHLB stock, Federal Reserve Bank stock, and other | | 1 |
| | — |
| | 1 |
| |
FHLB stock, FRB stock, and other | | | 1 |
| | (1 | ) | | — |
|
Total interest-earning banking assets | | 71 |
| | 90 |
| | 161 |
| | 37 |
| | (69 | ) | | (32 | ) |
Interest expense: | | |
| | |
| | |
| | |
| | |
| | |
|
Interest-bearing banking liabilities: | | |
| | |
| | |
| | |
| | |
| | |
|
Bank deposits: | | |
| | |
| | |
| | |
| | |
| | |
|
Savings, money market, and NOW accounts | | | 5 |
| | (55 | ) | | (50 | ) |
Certificates of deposit | | 2 |
| | 3 |
| | 5 |
| | 5 |
| | — |
| | 5 |
|
Savings, money market, and NOW accounts | | 5 |
| | 57 |
| | 62 |
| |
FHLB advances and other | | — |
| | (1 | ) | | (1 | ) | |
Total interest-bearing banking liabilities | | 7 |
| | 59 |
| | 66 |
| | 10 |
| | (55 | ) | | (45 | ) |
Change in net interest income | | $ | 64 |
| | $ | 31 |
| | $ | 95 |
| | $ | 27 |
| | $ | (14 | ) | | $ | 13 |
|
Management's Discussion and Analysis
Results of Operations – Other
This segment includes our private equity investments, as well asinterest income on certain corporate cash balances, and certain corporate overhead costs of RJF that are not allocated to other segments, including the interest costcosts on our public debt, and the acquisition and integration costs associated with certain acquisitions.debt. For an overview of our Other segment operations, refer to the information presented in “Item 1 - Business” of our 20182019 Form 10-K.
Operating results
| | | | Three months ended June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change | | 2020 | | 2019 | | % change | | 2020 | | 2019 | | % change |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 12 |
| | $ | 11 |
| | 9 | % | | $ | 42 |
| | $ | 28 |
| | 50 | % | | $ | 12 |
| | $ | 14 |
| | (14 | )% | | $ | 24 |
| | $ | 30 |
| | (20 | )% |
Gains on private equity investments | | 2 |
| | 3 |
| | (33 | )% | | 8 |
| | 21 |
| | (62 | )% | |
Gains/(losses) on private equity investments | | | (39 | ) | | 2 |
| | NM |
| | (41 | ) | | 6 |
| | NM |
|
All other | | 1 |
| | 2 |
| | (50 | )% | | 5 |
| | 4 |
| | 25 | % | | — |
| | 3 |
| | (100 | )% | | 2 |
| | 4 |
| | (50 | )% |
Total revenues | | 15 |
| | 16 |
| | (6 | )% | | 55 |
| | 53 |
| | 4 | % | | (27 | ) | | 19 |
| | NM |
| | (15 | ) | | 40 |
| | NM |
|
Interest expense | | (19 | ) | | (18 | ) | | 6 | % | | (57 | ) | | (56 | ) | | 2 | % | | (17 | ) | | (19 | ) | | (11 | )% | | (37 | ) | | (38 | ) | | (3 | )% |
Net revenues | | (4 | ) | | (2 | ) | | 100 | % | | (2 | ) | | (3 | ) | | (33 | )% | | (44 | ) | | — |
| | NM |
| | (52 | ) | | 2 |
| | NM |
|
Non-interest expenses: | | | | | |
|
| | | | | |
|
| |
Compensation and other | | 22 |
| | 20 |
| | 10 | % | | 59 |
| | 51 |
| | 16 | % | |
Acquisition-related expenses | | — |
| | — |
| | — |
| | — |
| | 4 |
| | (100 | )% | |
Total non-interest expenses | | 22 |
| | 20 |
| | 10 | % | | 59 |
| | 55 |
| | 7 | % | | 2 |
| | 17 |
| | (88 | )% | | 25 |
| | 37 |
| | (32 | )% |
Loss before taxes and including noncontrolling interests | | (26 | ) | | (22 | ) | | (18 | )% | | (61 | ) | | (58 | ) | | (5 | )% | |
Noncontrolling interests | | (1 | ) | | 2 |
| | NM |
| | (1 | ) | | 2 |
| | NM |
| |
Pre-tax loss excluding noncontrolling interests | | $ | (25 | ) | | $ | (24 | ) | | (4 | )% | | $ | (60 | ) | | $ | (60 | ) | | — |
| |
Pre-tax loss | | | $ | (46 | ) | | $ | (17 | ) | | (171 | )% | | $ | (77 | ) | | $ | (35 | ) | | (120 | )% |
Management’s Discussion and Analysis
Quarter ended June 30, 2019March 31, 2020 compared with the quarter ended June 30, 2018
The pre-tax loss was essentially unchanged from the loss generated in the prior year quarter.
Net revenues decreased $2 million primarily due to a decrease in gains on private equity investments, offset by an increase in interest income. Interest income increased primarily as a result of the increase in interest rates earned on higher corporate cash balances.
Non-interest expenses increased $2 million, or 10%, driven by higher advertising-related expenses.
Nine months ended June 30,March 31, 2019 compared with the nine months ended June 30, 2018
The pre-tax loss of $60$46 million was flat versus$29 million larger than the loss generated in the prior yearprior-year quarter.
Net revenues for the current quarter included $39 million of private equity valuation losses, compared with gains of $2 million in the prior-year quarter. During the current quarter, $22 million of the losses on private equity were attributable to noncontrolling interests, which were reflected as an offset within other expenses. These valuation losses were primarily the result of the negative impact of the COVID-19 pandemic on certain of our investments. Although net interest was flat compared with the prior-year quarter, we expect the impact of the decline in short-term interest rates implemented toward the end of the quarter, and the issuance of $500 million of senior notes payable at the end of the quarter to negatively affect our net interest in this segment in future quarters.
Non-interest expenses decreased $15 million, or 88%, primarily due to the aforementioned $22 million offset of private equity valuation losses related to noncontrolling interests in other expenses. Increases in compensation-related expenses and advertising expenses partially offset the decrease in other expenses.
Six months ended March 31, 2020 compared with the six months ended March 31, 2019
The pre-tax loss of $77 million was $42 million larger than the loss generated in the prior-year period.
Net revenues increased $1decreased $54 million from income of $2 million in the prior-year period to a loss of $52 million, primarily due to $41 million of private equity valuation losses, compared with gains of $6 million in the prior-year period. In the current-year period, $23 million of the losses on private equity investments were attributable to noncontrolling interests, which were reflected as an increase in interest income,offset within other expenses. These valuation losses were primarily as athe result of the increase in interest rates earned on higher corporate cash balances, partially offset by lower gains on private equity investments. The prior year period included gainsnegative impact of the COVID-19 pandemic on certain of our private equity investments that were sold during fiscal year 2018.investments. Interest earned on corporate cash balances also decreased due to lower short-term interest rates, partially offset by the impact of higher average balances.
Non-interest expenses increased $4decreased $12 million, or 7%32%, primarily driven by higherdue to the aforementioned $23 million offset of private equity valuation losses attributable to noncontrolling interests. Increases in compensation-related expenses. The prior year period included certain expenses incurredand advertising expenses partially offset the decrease in connection with our acquisition of the Scout Group, which closed in November 2017.other expenses.
Certain statistical disclosures by bank holding companies
We are required to provide certain statistical disclosures required foras a bank holding companiescompany under the SEC’s Industry Guide 3. The following table provides certain of those disclosures.
|
| | | | | | | |
| Three months ended June 30, | | Nine months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Return on assets | 2.7% | | 2.6% | | 2.7% | | 2.2% |
Annualized return on equity | 16.1% | | 15.4% | | 16.2% | | 13.6% |
Average equity to average assets | 16.7% | | 16.7% | | 16.6% | | 16.3% |
Dividend payout ratio | 18.9% | | 19.4% | | 19.2% | | 20.1% |
Management's Discussion and Analysis
|
| | | | | | | |
| Three months ended March 31, | | Six months ended March 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Return on assets | 1.5% | | 2.7% | | 2.0% | | 2.7% |
Return on equity | 9.9% | | 16.7% | | 13.0% | | 16.2% |
Average equity to average assets | 15.2% | | 16.3% | | 15.7% | | 16.5% |
Dividend payout ratio | 30.8% | | 18.8% | | 23.9% | | 19.4% |
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 dateyear-to-date period is computed by adding total assets as of each quarter-end date during the year-to-date period to the beginning of the year total, and dividing by four.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 dateyear-to-date period is computed by adding the total equity attributable to RJF as of each quarter-end date during the year-to-date period to the beginning of the year total, and dividing by four.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.share for the period.
Management’s Discussion and Analysis
Refer to the “Results of Operations - RJ Bank” and “Risk management - Credit risk” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations and to the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for the other required disclosures.
Liquidity and capital resources
Liquidity is essential to our business. The primary goal of our liquidity management activities is to ensure adequate funding to conduct our business over a range of economic and market environments.
Senior management establishes our liquidity and capital management framework. This framework includes senior management’s review of short- and long-term cash flow forecasts, review of monthly capital expenditures, monitoring of the availability of alternative sources of financing, and daily monitoring of liquidity in our significant subsidiaries. Our decisions on the allocation of capital to our business units consider, among other factors, projected profitability and cash flow, risk, and impact on future liquidity needs. Our treasury department assists in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure, and maintains our relationships with various lenders. The objective of this framework is to support the successful execution of our business strategies while ensuring ongoing and sufficient liquidity.
Liquidity is provided primarily through our business operations and financing activities. Financing activities could include bank borrowings, repurchase agreement transactions or additional capital raising activities under our “universal” shelf registration statement.
Cash and cash equivalents increased $96 million$6.69 billion to $3.60$10.65 billion during the ninesix months ended June 30, 2019,March 31, 2020, primarily due to $1.51$7.95 billion of cash provided by financing activities, partially offset by investing activities, which was primarily drivenused $2.09 billion. Cash provided by increasesfinancing activities mainly related to an increase in bank deposits, as client cash balances increased significantly due to the impact of COVID-19, and short-term borrowings,proceeds from our senior notes issuance during the current period, partially offset by our open-market share repurchases and dividends on our common stock during the period. Additionally, a decrease of $85 million in cash segregated pursuant to regulations was offset by $101 million of cash used in our operating activities during the current period.stock. Investing activities used $1.39 billion primarily duerelated 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.
Management's Discussion and Analysis
Sources of liquidity
Approximately $1.22Nearly $2 billion of our total June 30, 2019March 31, 2020 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 | | June 30, 2019 | | March 31, 2020 |
RJF | | $ | 448 |
| | $ | 445 |
|
RJ&A | | 949 |
| | 2,193 |
|
RJ Bank | | 1,419 |
| | 6,992 |
|
RJ Ltd. | | 382 |
| | 666 |
|
RJFS | | 131 |
| | 155 |
|
Carillon Tower Advisers | | 89 |
| | 52 |
|
Other subsidiaries | | 178 |
| | 145 |
|
Total cash and cash equivalents | | $ | 3,596 |
| | $ | 10,648 |
|
The significant increase in cash and cash equivalents as of March 31, 2020 was primarily due to an increase in client cash balances as a result of the market volatility toward the end of our second fiscal quarter. Subsequent to March 31, 2020, we utilized additional capacity with third-party banks in our RJBDP, which reduced cash and cash equivalents at RJ Bank by approximately $4 billion.
RJF maintained depository accounts at RJ Bank with a balance of $147$179 million as of June 30, 2019.March 31, 2020. The portion of this total that was available on demand without restrictions, which amounted to $107$108 million as of June 30, 2019,March 31, 2020, is reflected in the RJF total (and is excluded from the RJ Bank cash balance in the preceding table).
RJF had loaned $794 million$1.50 billion to RJ&A as of June 30, 2019March 31, 2020 (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 JulyApril 1, 2019,2020, we withdrewdeposited approximately $160$350 million of cash out ofinto RJ&A&A’s segregated reserve accounts as a result of the period-endour March 31, 2020 reserve calculation.
Management’s Discussion and Analysis
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 isCertain of our broker-dealer subsidiaries are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities and Exchange Act of 1934. As a member firm of the Financial Industry Regulatory Authority (“FINRA”),FINRA, RJ&A is subject to FINRA’s capital requirements, which are substantially the same as Rule 15c3-1. Rule 15c3-1 and is required to maintainprovides for an “alternative net capital requirement,” which RJ&A has elected. Regulations require that minimum net capital, as defined, be equal to the greater of $1.5 million or 2% of aggregate debit balancesitems arising from client transactions. In addition, covenants in RJ&A’s committed secured financing facilities require its net capital to be a minimum of 10% of aggregate debit items. At June 30, 2019,March 31, 2020, RJ&A significantly exceeded the minimum regulatory requirements, the covenants in its financing arrangements pertaining to net capital, as well as its internally-targeted net capital tolerances. There areFINRA may impose certain restrictions, such as restricting withdrawals of equity capital, if a member firm were to fall below a certain threshold or fail to meet minimum net capital requirements.
RJ&A, as a nonbank custodian of Individual Retirement Accounts (“IRAs”), must also limitations onsatisfy certain Internal Revenue Service (“IRS”) regulations in order to accept new IRA and plan accounts and retain the accounts for which it serves as nonbank custodian. To maintain adequate net worth under these regulations, RJ&A may have to limit dividends to RJF. We evaluate regulatory requirements, loan covenants and certain internal tolerances when determining the amount of dividends that may be declared by a broker-dealer without FINRA approval.liquidity available to RJF from RJ&A.
RJ Bank may pay dividends to RJF without the prior approval of its regulator as long as the dividend does not exceed the sum of RJ Bank’s current calendar year and the previous two calendar years’ retained net income, and RJ Bank maintains its targeted regulatory capital ratios. At June 30, 2019,March 31, 2020, RJ Bank had $271$253 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%105% to 125% of the amount financed.
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.
| | | | June 30, 2019 | | March 31, 2020 |
$ in millions | | RJ&A | | RJF | | Total | | Total number of arrangements | | RJ&A | | RJF | | Total | | Total number of arrangements |
Financing arrangement: | | | | | | | | | | | | | | | | |
Committed secured | | $ | 200 |
| | $ | — |
| | $ | 200 |
| | 2 |
| | $ | 100 |
| | $ | — |
| | $ | 100 |
| | 1 |
|
Committed unsecured (1) | | 200 |
| | 300 |
| | 500 |
| | 1 |
| | 200 |
| | 300 |
| | 500 |
| | 1 |
|
Total committed financing arrangements | | $ | 400 |
| | $ | 300 |
| | $ | 700 |
| | 3 |
| | $ | 300 |
| | $ | 300 |
| | $ | 600 |
| | 2 |
|
| | | | | | | | | | | | | | | | |
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. RJ&A may borrow up to $500 million under the Credit Facility, depending on the amount of outstanding borrowings by RJF. For additional details on our committed unsecured financing arrangement, see our discussion of the Credit Facility in Note 12 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. |
Management’s Discussion and Analysis
Uncommitted financing arrangements
Our uncommitted financing arrangements are in the form of secured lines of credit, secured bilateral or tri-party repurchase agreements, or unsecured lines of credit. Our arrangements with third-party lenders are generally utilized to finance a portion of our fixed income securities or for cash management purposes. Our uncommitted secured financing arrangements generally require us to post collateral in excess of the amount borrowed. As of June 30, 2019,March 31, 2020, we had outstanding borrowings under threetwo 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 | | June 30, 2019 | | March 31, 2020 |
Outstanding borrowing amount: | | | | |
Uncommitted secured | | $ | 215 |
| | $ | 215 |
|
Uncommitted unsecured | | — |
| | — |
|
Total outstanding borrowing amount | | $ | 215 |
| | $ | 215 |
|
Other financings
RJ Bank had $875 million in FHLB borrowings outstanding at June 30, 2019,March 31, 2020, comprised of floating-rate advances totaling $850 million and a $25 million fixed-rate advance, all of which were secured by a blanket lien on RJ Bank’s residential mortgage loan portfolio (see Note 12 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding these borrowings). RJ Bank had an additional $2.19$2.82 billion in immediate credit available from the FHLB as of June 30, 2019March 31, 2020 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 transactiontransactions 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 $429$28 million as of June 30, 2019. Such financings are generally collateralized by cash or other collateral.March 31, 2020. See Note 76 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for more information on our securities borrowed and securities loaned.
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 $165$215 million as of June 30, 2019 (whichMarch 31, 2020. These balances are reflected in the preceding table of uncommitted financing arrangements).arrangements. Such financings are generally collateralized by non-customer, RJ&A-owned securities or by securities that we have received as collateral under reverse repurchase agreements.
The average daily balance outstanding during the five most recent quarters, the maximum month-end balance outstanding during the quarter and the period-end balances for repurchase agreements and reverse repurchase agreements isare detailed in the following table.
| | | | Repurchase transactions | | Reverse repurchase transactions | | Repurchase transactions | | Reverse repurchase transactions |
For the quarter ended: ($ 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 | | 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, 2020 | | | $ | 218 |
| | $ | 238 |
| | $ | 215 |
| | $ | 283 |
| | $ | 388 |
| | $ | 130 |
|
December 31, 2019 | | | $ | 184 |
| | $ | 200 |
| | $ | 200 |
| | $ | 355 |
| | $ | 351 |
| | $ | 326 |
|
September 30, 2019 | | | $ | 170 |
| | $ | 158 |
| | $ | 150 |
| | $ | 334 |
| | $ | 343 |
| | $ | 343 |
|
June 30, 2019 | | $ | 211 |
| | $ | 212 |
| | $ | 165 |
| | $ | 442 |
| | $ | 479 |
| | $ | 411 |
| | $ | 211 |
| | $ | 212 |
| | $ | 165 |
| | $ | 442 |
| | $ | 479 |
| | $ | 411 |
|
March 31, 2019 | | $ | 172 |
| | $ | 210 |
| | $ | 210 |
| | $ | 358 |
| | $ | 447 |
| | $ | 447 |
| | $ | 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 |
| |
Management’s Discussion and Analysis
At June 30, 2019,March 31, 2020, in addition to the financing arrangements previously described, we had $20$16 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 June 30, 2019,March 31, 2020, we had aggregate outstanding senior notes payable of $1.55$2.04 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, $500 million par 4.65% senior notes due 2030, which were issued during our second fiscal quarter of 2020, and $800 million par 4.95% senior notes due 2046. See Note 1513 of our 2018the Notes to Condensed Consolidated Financial Statements of this Form 10-K10-Q 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 65 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 and/or clients’ perception of us, and cause a decline in our stock price and/or our clients’ perception of us.price. None of our borrowing arrangements containcontains 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.
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 $556$512 million as of June 30, 2019,March 31, 2020, comprised of $327$298 million related to employee-directed plans and $229$214 million related to company-directed plans, and we were able to borrow up to 90%, or $500$461 million, of the June 30, 2019March 31, 2020 total without restriction. To effect any such borrowing, the underlying investments would be converted to money market investments, therefore requiring us to take market risk related to the employee-directed plans. There were no borrowings outstanding against any of these policies as of June 30, 2019.
On JulyMarch 31, 2019, we received approximately $40 million as a result of the tender of certain of our auction rate preferred securities.2020.
On May 18, 2018, we filed a “universal” shelf registration statement with the SEC pursuant to be in a position to access thewhich we can issue debt, equity and other capital marketsinstruments if and when necessary or perceived by us to be opportune. Subject to certain conditions, this registration statement will be effective through May 18, 2021.
See the Contractual obligations section of this MD&A for information regarding our contractual obligations.
Statement of financial condition analysis
The assets on our condensed consolidated statementsCondensed Consolidated Statements of financial conditionFinancial 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.
Management’s Discussion and Analysis
Total assets of $38.68$49.81 billion as of June 30, 2019March 31, 2020 were $1.26$10.98 billion, or 3%28%, greater than our total assets as of September 30, 2018.2019. The increase in assets was primarily due to a $1.17$8.72 billion increase in netcash and cash and cash equivalents, including cash and cash equivalents segregated pursuant to regulations, primarily due to a significant increase in client cash balances due to the market volatility as a result of the COVID-19 pandemic, as well as proceeds from our $500 million senior notes issuance in March 2020. In addition, available-for-sale securities increased $1.17 billion, bank loans, net increased $897 million and other assets increased $321 million, primarily due to ROU assets recorded as a $264 million increase in our available-for-sale securities portfolio, in line with our growth planresult of the adoption of new guidance related to the accounting for such assets.leases. Offsetting these increases, brokerage client receivablessecurities purchased under agreements to resell and trading instruments decreased $730 million.$213 million and $263 million, respectively.
As of June 30, 2019,March 31, 2020, our total liabilities of $32.11$42.98 billion were $1.15$10.79 billion, or 4%34%, greater than our total liabilities as of September 30, 2018.2019. The increase in total liabilities reflectedwas primarily related to the significant increase in client cash balances and was comprised of a $2.22$7.74 billion increase in bank deposits, primarily due toreflecting higher RJBDP balances held at RJ Bank as well asand certificates of deposit issuances during the period, and a $46 million$2.72 billion increase in other borrowings related to secured lines of credit. Offsetting these increases were a decrease in brokerage client payables, of $1.28 billion,primarily due to a declinean increase in client cash held in our CIP as of June 30, 2019,March 31, 2020. In addition, other payables increased $516 million, primarily due to operating lease liabilities recorded as a result of the adoption of new guidance related to the accounting for leases, and senior notes payable increased $494 million due to the issuance of $500 million of 4.65% senior notes due April 2030. Offsetting these increases was a decrease in accrued compensation, commissions and benefits of $96$343 million, primarily due to the annual paymentspayment of certain incentive compensation made induring the ninesix months ended June 30, 2019.March 31, 2020.
See Notes 2 and 10 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information on our adoption of the new leasing guidance.
Contractual obligations
There were no significant changesIn March 2020, we sold in our contractual obligations presenteda registered underwritten public offering $500 million in our 2018 Form 10-K, other than in the ordinary courseaggregate principal amount of business, as of June 30, 2019. See4.65% senior notes due April 2030. Refer to Note 1413 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding our senior notes.
Other than the item previously described, there were no other changes to the contractual obligations presented in our 2019 Form 10-K, other than in the ordinary course of business. See Note 15 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding our commitments as of June 30, 2019.March 31, 2020.
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“Item 1 “Business- Business - Regulation” and Item“Item 7 “Management’s- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory” of our 20182019 Form 10-K.
In June 2019, the SEC adopted Regulation Best Interest and issued related interpretive guidance. Among other things, Regulation Best Interest requires a broker-dealer to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to such customer. Regulation Best Interest becomes effective June 30, 2020 and we anticipate the regulation will require us to review and modify our policies and procedures, as well as the associated supervisory and compliance controls, which may lead to additional costs. In July 2019, the Certified Financial Planner Board of Standards, Inc. announced that the compliance enforcement date for its expanded fiduciary standard would be June 30, 2020. Under this standard, all professionals using the “Certified Financial Planner” designation (including brokers) must act as a fiduciary when providing financial advice. In addition, various states have recently proposed legislation, which would impose (fiduciary) standards of conduct on broker-dealers. The adoption of such additional- and in many cases varying- standards could lead us to incur further additional costs.
Management's Discussion and Analysis
RJF and many of its subsidiaries are each subject to various regulatory capital requirements. As of June 30, 2019,March 31, 2020, 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”“well-capitalized” as of June 30, 2019.March 31, 2020. The maintenance of certain risk-based and other regulatory capital levels could impactinfluence 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.
Legislative and regulatory changes in connection with COVID-19
The COVID-19 pandemic has resulted in governments around the world implementing several measures to help control the spread of the virus, including, among others, quarantines, travel restrictions and business curtailments. In July 2019,addition, governments globally intervened with fiscal policy to mitigate the Fedimpact of the pandemic, including the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in the U.S., which aimed to provide economic relief to businesses and individuals.
The CARES Act includes a broad range of provisions intended to support the U.S. economy. Among its provisions, the act allocates funds for a new Paycheck Protection Program that expands an existing Small Business Administration (“SBA”) loan guarantee program for small businesses to keep their employees on payroll and make other eligible payments. Currently, the firm does not act as a lender under these programs and facilities, and has no plans to do so.
The CARES Act also provides certain temporary regulatory relief for financial institutions, including RJF and its subsidiaries. The act permits financial institutions to temporarily suspend requirements under GAAP for COVID-19-related loan modifications that
Management’s Discussion and Analysis
would otherwise be classified as TDRs and to suspend any determination of a loan modified as a result of the effects of COVID-19 as being a TDR, including impairment for accounting purposes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk” for further information on the impact of such loan modifications. The act also permits financial institutions to temporarily delay the implementation of CECL for estimating allowances for credit losses. Given our later adoption date of October 1, 2020, we do not anticipate delaying our adoption. In addition, the Federal Reserve, the FDIC and the OCC issued a final rulejoint statement providing banking organizations optional temporary relief by delaying the initial adoption impact of CECL on regulatory capital for two years, followed by a three-year transition period to simplifyphase out the aggregate amount of the capital benefit provided during 2020 and clarify2021 (i.e., a five-year transition period). As we do not adopt CECL until October 1, 2020, we are currently evaluating whether we intend to avail ourselves of such relief.
The CARES Act grants potential tax relief and liquidity to businesses, including corporate tax provisions that: temporarily allow for the carryback of net operating losses and remove limitations on the use of loss carryforwards, increase interest expense deduction limitations, and allow accelerated depreciation deductions on certain asset improvements. In addition, the CARES Act allows employers to defer the payment, including the deposit, of payroll taxes for the 2020 calendar year from March 27, 2020 until December 31, 2021 for 50 percent of such taxes and December 31, 2022 for the remaining 50 percent.
The CARES Act further provides a number of existing regulatory capital rules for certainconsumer finance protections. The act also provides a range of forbearance rights with respect to any federally backed residential or multi-family mortgage loan and generally limits the ability of a lender or servicer to institute foreclosure or similar proceedings. The act additionally imposes a moratorium on evictions from dwellings of many tenants. These provisions are consistent with supervisory guidance previously issued by federal banking organizations. Specifically, it simplifies the capital treatment for mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidatedagencies, which also stated that they would not criticize financial institutions for working with customers affected by the outbreak in a safe and minority interest. This rule wouldsound manner. We are modifying our processes to ensure full compliance and are working as appropriate to support affected businesses and individuals during this time.
In addition to guidance regarding supporting customers, federal banking agencies have also allow bank holding companiestaken a number of other actions. The Federal Reserve, for example, has taken active steps to repurchase common stock without prior approval frominject liquidity into the Fed unless otherwise required. Iteconomy. The Federal Reserve has reduced the benchmark interest rate in an attempt to stimulate the economy. As previously mentioned, this has and will be effective ascontinue to negatively impact our net interest earnings. In addition, the Federal Reserve has established a number of April 1, 2020,new facilities, including to provide liquidity for issuers of commercial paper, money market funds, new bond and loan issuances, outstanding corporate bonds, primary dealers, and small and medium-sized businesses, and has reduced the amendments to simplify capital rules,interest rates on borrowings under its discount window.
The Company’s legislative and as of October 1, 2019 for revisionsregulatory environment is continually changing in response to the pre-approval requirements for the repurchaseoutbreak of common stock. We are evaluating the impact of this rule on our regulatory capital requirements.COVID-19, and new or modified laws, regulations and guidance may be promulgated at very short notice.
See Note 1920 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information on regulatory capital requirements.
Critical accounting estimates
The condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during any reporting period in our condensed consolidated financial statements. Management has established detailed policies and control procedures intended to ensure the appropriateness of such estimates and assumptions and their consistent application from period to period. For a description of our significant accounting policies, see Note 2 of the Notes to Consolidated Financial Statements of our 20182019 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. Recent market disruptions as a result of the COVID-19 pandemic have made it more challenging for us to determine the amount of our allowance for loan losses and the fair value of certain of our assets, particularly our private equity investments. The current circumstances have required a greater reliance on judgment than in recent periods in determining these amounts as of March 31, 2020.
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
Management’s Discussion and Analysis
the Notes to Consolidated Financial Statements of our 20182019 Form 10-K for a discussion of our fair value accounting policies regarding financial instruments owned and financial instruments sold but not yet purchased. See Note 43 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“Item 7 “Management’s- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical accounting estimates - Loss provisions” of our 20182019 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 the Notes to Consolidated Financial Statements of our 20182019 Form 10-K. In addition, refer to Note 1415 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding legal and regulatory matter contingencies as of June 30, 2019.March 31, 2020.
Loan loss provisions forarising from operations of RJ Bank’s loan portfolioBank
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 the Notes to Consolidated Financial Statements of our 20182019 Form 10-K. See Note 87 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on our bank loans.
Management's Discussion and Analysis
At June 30, 2019March 31, 2020, the amortized cost of all RJ Bank loans was $20.91$22.11 billion and anthe allowance for loan losses of $215was $324 million, or 1.03%which was 1.47% of the held for investment loan portfolio, was recorded against that balance.portfolio.
Our process of evaluating probable loan losses includes a complex analysis of several quantitative and qualitative factors, requiring a substantial amount ofmanagement judgment. As a result, the allowance for loan losses could be insufficient to cover actual losses. In such an event, any losses in excess of our allowance would result in a decrease in our net income, as well as a decrease in the level of regulatory capital.
Recent accounting developments
For information regarding our recent accounting developments, see Note 2 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.
Off-balance sheet arrangements
For information regarding our off-balance sheet arrangements, see Note 2 of the Notes to Consolidated Financial Statements of our 20182019 Form 10-K and Note 1415 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.
Management’s Discussion and Analysis
Governance
Our Board of Directors oversees the firm’s management and mitigation of risk, setting a culture that encourages ethical conduct and risk management throughout the firm. Senior management communicates and reinforces this culture through three lines of risk management and a number of senior-level management committees. Our first line of risk management, which includes all of our businesses, owns its risks and is responsible for helping to identify, escalate, and mitigate risks arising from its day-to-day activities. The second line of risk management, which includes the Compliance, Legal, and Risk Management departments, supports and provides guidance, advice, and oversight to client-facing businesses and other first-line risk management functions in identifying and mitigating risk. The second line of risk management also tests and monitors the effectiveness of controls, escalates risks when appropriate, and reports on these risks. The third line of risk management, Internal Audit, independently reviews activities conducted by the previous lines of risk management to assess their management and mitigation of risk, providing additional assurance to the Board of Directors and senior management, with a view toward enhancing our oversight, management, and mitigation of risk.
Market risk
Market risk is our risk of loss resulting from the impact of changes in market prices on our trading inventory, derivativederivatives 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“Item 7 “Management’s- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Market risk” of our 20182019 Form 10-K for a discussion of our market risk, including how we manage such risk. See Notes 3, 4 5 and 65 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 inventoriesinventory (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. During our second fiscal quarter of 2020, in response to the significant market volatility as a result of the COVID-19 pandemic, we took steps to proactively manage our market risk exposures, including enhanced review and monitoring of exposures and risk mitigation efforts. As a result, we reduced our trading inventory during the quarter to reduce risk.
We monitor the Value-at-Risk (“VaR”) for all of our trading portfolios on a daily basis. VaR is an appropriate statistical technique for estimating potential losses in trading portfolios due to typical adverse market movements over a specified time horizon with a suitable confidence level. We apply the Fed’s Market Risk Rule (“MRR”) for the purpose of calculating our capital ratios. The MRR, also known as the “Risk-Based Capital Guidelines: Market Risk” rule released by the Fed, the Office of the Comptroller of the Currency
Management's Discussion and Analysis
(“OCC”) and FDIC, requires us to calculate VaR numbers for all of our trading portfolios, including fixed income, equity, foreign exchange and derivative instruments.derivatives.
To calculate VaR, we use historical simulation. This approach assumes that historical changes in market conditions, such as in interest rates and equity prices, are representative of future changes. Simulation is based on daily market data for the previous twelve months. VaR is reported at a 99% confidence level for a one-day time horizon. Assuming that future market conditions change as they have in the past twelve months, we would expect to incur losses greater than those predicted by our one-day VaR estimates about once every 100 trading days, or about three times per year on average. For regulatory capital calculation purposes, we also report VaR numbers for a ten-day time horizon.
The Fed’s MRR requires us to perform daily back-testing procedures of our VaR model, whereby we compare each day’s projected VaR to its regulatory-defined daily trading losses, which exclude fees, commissions, reserves, net interest income and intraday trading. Regulatory-defined daily trading losses are used to evaluate the performance of our VaR model and are not comparable to our actual daily net revenues. 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 ninethree and six months ended June 30, 2019,March 31, 2020, our regulatory-defined daily loss in our trading portfolios did not exceedexceeded our predicted VaR.VaR on eleven occasions due to higher levels of market volatility as a result of the COVID-19 pandemic.
Management’s Discussion and Analysis
The following table sets forth the high, low, period-end and daily average VaR for all of our trading portfolios, including fixed income, equity and derivative instruments, for the period and dates indicated.
| | | | Nine months ended June 30, 2019 | | Period-end VaR | | Three months ended June 30, | | Nine months ended June 30, | | Six months ended March 31, 2020 | | Period-end VaR | | Three months ended March 31, | | Six months ended March 31, |
$ in millions | | High | | Low | | June 30, 2019 | | September 30, 2018 | | $ in millions | | 2019 | | 2018 | | 2019 | | 2018 | | High | | Low | | March 31, 2020 | | September 30, 2019 | | $ in millions | | 2020 | | 2019 | | 2020 | | 2019 |
Daily VaR | | $ | 2 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | Daily average VaR | | $ | 1 |
| | $ | 2 |
| | $ | 1 |
| | $ | 1 |
| | $ | 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 https://www.raymondjames.com/investor-relations/financial-information/filings-and-reports under “Market Risk Rule Disclosure.within “Other Reports and Information.”
Should markets suddenly become more volatile, as they did in our second fiscal quarter of 2020, 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 partrisk, as we did during our second fiscal quarter 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 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding these activities.2020.
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, SBL and other loans, as well as MBS and CMOs (both of which are held(held in the available-for-sale securities portfolio), Small Business AdministrationSBA loan securitizations and a trading portfolio of corporate loans. ThoseThese earning assets are primarily funded by client deposits. Based on its current earning asset portfolio, RJ Bank is subject to interest rate risk. RJ Bank analyzes interest rate risk based on forecasted net interest income, which is the net amount of interest received and interest paid, and the net portfolio valuation, both in a range of interest rate scenarios.
Management's Discussion and Analysis
One of the objectives of RJ Bank’s Asset Liability Management Committee is to manage the sensitivity of net interest income to changes in market interest rates. The methods used to measure this sensitivity are described in Item“Item 7 “Management’s- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Market risk” of our 20182019 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, insee Note 2 of the Notes to Consolidated Financial Statements of our 20182019 Form 10-K and in Note 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q.10-K.
The following table is an analysis of RJ Bank’s estimated net interest income over a 12 month12-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 | | Net interest income ($ in millions) | | Projected change in net interest income |
+200 | | $880 | | (1.23)% | | $951 | | 30.27% |
+100 | | $887 | | (0.45)% | | $893 | | 22.33% |
0 | | $891 | | — | | $730 | | — |
-100 | | $827 | | (7.18)% | |
-25 | | | $683 | | (6.44)% |
Refer to “Net“Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net interest analysis” inof this MD&AForm 10-Q for a discussion of the impact changes in short-term interest rates could have on the firm’s operations.
Management’s Discussion and Analysis
The following table shows the contractual maturities of RJ Bank’s loan portfolio at June 30, 2019March 31, 2020, 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 | | Due in |
$ in millions | | One year or less | | > One year – five years | | > 5 years | | Total | | One year or less | | > One year – five years | | > five years | | Total |
Loans held for investment: | | |
| | |
| | | | |
| | |
| | |
| | | | |
|
C&I loans | | $ | 138 |
| | $ | 4,701 |
| | $ | 3,562 |
| | $ | 8,401 |
| | $ | 165 |
| | $ | 4,077 |
| | $ | 4,074 |
| | $ | 8,316 |
|
CRE construction loans | | 34 |
| | 214 |
| | — |
| | 248 |
| | 10 |
| | 128 |
| | 42 |
| | 180 |
|
CRE loans | | 413 |
| | 2,502 |
| | 553 |
| | 3,468 |
| | 627 |
| | 2,610 |
| | 593 |
| | 3,830 |
|
Tax-exempt loans | | — |
| | 31 |
| | 1,265 |
| | 1,296 |
| | — |
| | 76 |
| | 1,190 |
| | 1,266 |
|
Residential mortgage loans | | — |
| | 4 |
| | 4,194 |
| | 4,198 |
| | — |
| | 4 |
| | 4,860 |
| | 4,864 |
|
SBL and other | | 3,133 |
| | 44 |
| | — |
| | 3,177 |
| | 3,526 |
| | 20 |
| | — |
| | 3,546 |
|
Total loans held for investment | | 3,718 |
| | 7,496 |
| | 9,574 |
| | 20,788 |
| | 4,328 |
| | 6,915 |
| | 10,759 |
| | 22,002 |
|
Loans held for sale | | — |
| | — |
| | 125 |
| | 125 |
| | — |
| | — |
| | 115 |
| | 115 |
|
Total loans | | $ | 3,718 |
| | $ | 7,496 |
| | $ | 9,699 |
| | $ | 20,913 |
| | $ | 4,328 |
| | $ | 6,915 |
| | $ | 10,874 |
| | $ | 22,117 |
|
The following table shows the distribution of the recorded investment of those RJ Bank loans that mature in more than one year between fixed and adjustable interest rate loans at June 30, 2019.March 31, 2020. 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 | | $ | 96 |
| | $ | 8,167 |
| | $ | 8,263 |
|
CRE construction loans | | — |
| | 214 |
| | 214 |
|
CRE loans | | 79 |
| | 2,976 |
| | 3,055 |
|
Tax-exempt loans | | 1,264 |
| | 32 |
| | 1,296 |
|
Residential mortgage loans | | 239 |
| | 3,959 |
|
| 4,198 |
|
SBL and other | | 44 |
| | — |
| | 44 |
|
Total loans held for investment | | 1,722 |
| | 15,348 |
| | 17,070 |
|
Loans held for sale | | 125 |
| | — |
| | 125 |
|
Total loans | | $ | 1,847 |
| | $ | 15,348 |
| | $ | 17,195 |
|
Management's Discussion and Analysis
|
| | | | | | | | | | | | |
| | Interest rate type |
$ in millions | | Fixed | | Adjustable | | Total |
Loans held for investment: | | |
| | |
| | |
|
C&I loans | | $ | 140 |
| | $ | 8,011 |
| | $ | 8,151 |
|
CRE construction loans | | 2 |
| | 168 |
| | 170 |
|
CRE loans | | 70 |
| | 3,133 |
| | 3,203 |
|
Tax-exempt loans | | 1,266 |
| | — |
| | 1,266 |
|
Residential mortgage loans | | 222 |
| | 4,642 |
|
| 4,864 |
|
SBL and other | | — |
| | 20 |
| | 20 |
|
Total loans held for investment | | 1,700 |
| | 15,974 |
| | 17,674 |
|
Loans held for sale | | 2 |
| | 113 |
| | 115 |
|
Total loans | | $ | 1,702 |
| | $ | 16,087 |
| | $ | 17,789 |
|
Contractual loan terms for C&I, CRE, CRE construction and residential mortgage loans may include an interest rate floor, cap and/or fixed interest rates for a certain period of time, which would impact the timing of the interest rate reset for the respective loan. See the discussion within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk - Risk monitoring process” section of this Form 10-Q for additional information regarding RJ Bank’s interest-only residential mortgage loan portfolio.
In our RJ Bank available-for-sale securities portfolio, we hold primarily fixed-rate agency MBS and CMOs which were carried at fair value on our Condensed Consolidated Statements of Financial Condition at June 30, 2019,March 31, 2020, with changes in the fair value of the portfolio recorded through OCI in our Condensed Consolidated Statements of Income and Comprehensive Income. At June 30, 2019,March 31, 2020, our RJ Bank available-for-sale securities portfolio had a fair value of $2.96$4.27 billion with a weighted-average yield of 2.46%2.27% and an average expecteda duration of three years. See Note 54 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on the fair value of these securities.information.
Equity price risk
We are exposed to equity price risk as a consequenceresult 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.
Management’s Discussion and Analysis
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 $1.09$1.11 billion and $1.05$1.10 billion at June 30, 2019March 31, 2020 and September 30, 2018,2019, respectively. A portion of such loans are held by RJ Bank’s Canadian subsidiary, which is discussed in the following sections.
Investments in foreign subsidiaries
RJ Bank has an investment in a Canadian subsidiary, resulting in foreign exchange risk. To mitigate its foreign exchange risk, RJ Bank utilizes short-term, forward foreign exchange contracts. These derivative agreementsderivatives are primarily accounted for as net investment hedges in the condensed consolidated financial statements. See Note 65 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding these derivative contracts.derivatives.
We had foreign exchange risk in our investment in RJ Ltd. of CAD 368338 million at June 30, 2019,March 31, 2020, which was not hedged. Foreign exchange gains/losses related to this investment are primarily reflected in OCI inon our Condensed Consolidated Statements of Income and Comprehensive Income. See Note 1516 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 65 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding our derivative contracts.derivatives.
Credit risk
Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. The nature and amount of credit risk depends on the type of transaction, the structure and duration of that transaction, and the parties involved. Credit risk is an integral component of the profit assessment of lending and other
Management's Discussion and Analysis
financing activities. See further discussion of our credit risk, including how we manage such risk, in Item“Item 7 “Management’s- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk” of our 20182019 Form 10-K.
The sharp decline in economic activity as a result of COVID-19 has caused increased credit risk in general and particularly with regard to companies in sectors that have been most significantly impacted by the economic disruption, including oil and gas, airlines, entertainment and leisure, restaurants and gaming. Given the stresses on our clients’ liquidity, we have enhanced our credit monitoring activities, with an increased focus on monitoring our credit exposures and counterparty credit risk, including the risk that trades may not settle with a given counterparty. We have required collateral to be posted across our credit risk exposures in accordance with agreements with our borrowers and counterparties.
RJ Bank has a substantial loan portfolio. AWhile RJ Bank’s loan portfolio is diversified, a significant downturn in the overall economy, such as the downturn during our second fiscal quarter, deterioration in real estate values or a significant issue within any sector or sectors where RJ Bank has a concentration couldwill generally 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 RJ Bank determines the allowance for loan losses at June 30, 2019, including the risk profile of the portfolios, net charge-offs during the period, the level of nonperforming loans and delinquency ratios. RJ Bank also considered the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. Finally, RJ Bank considered current economic conditions and other factors that might impact the portfolio. RJ Bank determined the allowance that was required for specific loan grades based on relative risk characteristics of the loan portfolio. On an ongoing basis, RJ Bank evaluates its methods for determining the allowance for each class of loans and makes enhancements it considers appropriate. There was no material change
Our allowance for loan losses is regularly evaluated with adjustments made on a quarterly basis. Several factors were taken into consideration in RJ Bank’s methodology for determiningevaluating the allowance for loan losses at March 31, 2020, including the risk profile of the portfolios, net charge-offs during the nine months ended June 30, 2019.period, the level of nonperforming loans, delinquency ratios and the impact of the COVID-19 pandemic. RJ Bank also
Management’s Discussion and Analysis
considered the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. Finally, RJ Bank considered current economic conditions that might impact the portfolio. In response to the COVID-19 pandemic, we performed a portfolio-wide assessment on our loan portfolio. As a result, we downgraded loans in certain impacted industries, which gave rise to an increase in the loan loss provision during the current quarter. We will continue to assess the impact of COVID-19 and, as more information becomes available regarding the financial repercussions to our borrowers, the risk ratings for individual loans will be updated and the allowance will be adjusted accordingly.
RJ Bank’s allowance for loan losses as a percentage of bank loans outstanding was 1.03%1.47% and 1.04% at June 30, 2019March 31, 2020 and September 30, 2018,2019, respectively. See Note 87 in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for detail on the changes in RJ Bank’s allowance for loan losses.
The bank loan loss provision for the ninesix months ended June 30, 2019 increased to $16March 31, 2020 was $107 million compared to $14a loan loss provision of $21 million infor the prior yearprior-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 June 30, | | Nine months ended June 30, | | Three months ended March 31, | | Six months ended March 31, |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 |
$ 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 | | 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 | | $ | 1 |
| | 0.06 | % | | $ | (5 | ) | | 0.23 | % | | $ | (2 | ) | | 0.02 | % | | $ | (9 | ) | | 0.15 | % | | $ | — |
| | — |
| | $ | (3 | ) | | 0.06 | % | | $ | — |
| | — |
| | $ | (3 | ) | | 0.06 | % |
CRE loans | | — |
| | — |
| | — |
| | — |
| | (3 | ) | | 0.13 | % | | — |
| | — |
| | — |
| | — |
| | (3 | ) | | 0.20 | % | | — |
| | — |
| | (3 | ) | | 0.19 | % |
Residential mortgage loans | | — |
| | — |
| | 1 |
| | 0.08 | % | | 1 |
| | 0.02 | % | | 1 |
| | 0.05 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 0.04 | % |
Total | | $ | 1 |
| | 0.02 | % | | $ | (4 | ) | | 0.08 | % | | $ | (4 | ) | | 0.03 | % | | $ | (8 | ) | | 0.05 | % | | $ | — |
| | — |
| | $ | (6 | ) | | 0.06 | % | | $ | — |
| | — |
| | $ | (5 | ) | | 0.05 | % |
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.
| | | | June 30, 2019 | | September 30, 2018 | | March 31, 2020 | | September 30, 2019 |
$ in millions | | Nonperforming loan balance | | Allowance for loan losses balance | | Nonperforming loan balance | | Allowance for loan losses balance | | Nonperforming loan balance | | Allowance for loan losses balance | | Nonperforming loan balance | | Allowance for loan losses balance |
Loans held for investment: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
C&I loans | | $ | 22 |
| | $ | 134 |
| | $ | 2 |
| | $ | 123 |
| | $ | 4 |
| | $ | 197 |
| | $ | 19 |
| | $ | 139 |
|
CRE construction loans | | — |
| | 4 |
| | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | 3 |
|
CRE loans | | 10 |
| | 46 |
| | — |
| | 47 |
| | 6 |
| | 88 |
| | 8 |
| | 46 |
|
Tax-exempt loans | | — |
| | 9 |
| | — |
| | 9 |
| | — |
| | 11 |
| | — |
| | 9 |
|
Residential mortgage loans | | 21 |
| | 16 |
| | 23 |
| | 17 |
| | 14 |
| | 18 |
| | 16 |
| | 16 |
|
SBL and other | | — |
| | 6 |
| | — |
| | 4 |
| | — |
| | 7 |
| | — |
| | 5 |
|
Total | | $ | 53 |
| | $ | 215 |
| | $ | 25 |
| | $ | 203 |
| | $ | 24 |
| | $ | 324 |
| | $ | 43 |
| | $ | 218 |
|
Total nonperforming loans as a % of RJ Bank total loans | | 0.25 | % | | | | 0.12 | % | | | | 0.11 | % | | | | 0.21 | % | | |
Included in nonperforming residential mortgage loans in the preceding table were $10$7 million in loans for which $5$4 million in charge-offs were previously recorded, resulting in less exposure within the remaining balance. See Note 87 in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for loan categories as a percentage of total loans receivable.
Management's Discussion and Analysis
The nonperforming loan balances in the preceding table exclude $11 million and $12 million as of March 31, 2020 and September 30, 2019, respectively, of residential TDRs as of both June 30, 2019 and September 30, 2018, 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 $56$27 million and $28$46 million at June 30, 2019March 31, 2020 and September 30, 2018,2019, respectively. Total nonperforming assets as a percentage of RJ Bank total assets was 0.22%were 0.08% and 0.12%0.18% at June 30, 2019March 31, 2020 and September 30, 2018,2019, respectively. Although our nonperforming assets as a percentage of RJ Bank assets remained low as of March 31, 2020, and we had no charge-offs during our second fiscal quarter, prolonged or further market deterioration could result in an increase in our nonperforming assets, an increase in our allowance for loan losses and/or an increase
Management’s Discussion and Analysis
in net charge-offs in future periods, although the extent will depend on future developments that are highly uncertain and cannot be predicted.
We have received requests from certain clients for forbearance, or deferral of their loan payments to us, driven or exacerbated by the economic impacts of the COVID pandemic. Certain clients have also requested modifications of covenant terms. The CARES Act permits, among other things, financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and is intended to provide interpretive guidance as to conditions that would constitute a short-term modification that would not meet the definition of a TDR. We have made certain loan modifications that relate to short-term payment deferrals that are not considered TDRs. Based on the outstanding principal balance as of the end of April 2020, we have received payment deferral requests on approximately 3% and 2% of our corporate and residential loans, respectively.
Loan underwriting processpolicies
RJ Bank’s underwriting processespolicies for the major types of loans are described in Item“Item 7 “Management’s- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk” of our 20182019 Form 10-K. There were no material changes in RJ Bank’s underwriting processespolicies during the ninesix months ended June 30, 2019.March 31, 2020.
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 ninesix months ended June 30, 2019.March 31, 2020.
Residential mortgage and SBL and residential mortgage loansother loan portfolios
The marketable collateral securing RJ Bank’s SBL and other portfolio is monitored on a recurring basis, with marketable collateral monitored on a daily basis. Collateral adjustments are made by the borrower as necessary to ensure RJ Bank’s loans are adequately secured, resulting in minimizing its credit risk. Collateral calls have been minimal relative to our SBL and other portfolio with no losses incurred to date.
We track and review many factors to monitor credit risk in RJ Bank’s residential mortgage loan portfolio. The factors include, but are not limited to: loan performance trends, loan product parameters and qualification requirements, borrower credit scores, occupancy (i.e., owner occupied, second home or investment property), level of documentation, loan purpose, geographic concentrations, average loan size and loan policy exceptions.LTV ratios. These measures, while considered and reviewed in establishing the allowance for loan losses, have not resulted in any material adjustments to RJ Bank’s historical loss rates.
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 isare 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 |
June 30, 2019 | | $ | 1 |
| | $ | 15 |
| | $ | 16 |
| | 0.03 | % | | 0.36 | % | | 0.39 | % |
September 30, 2018 | | $ | 2 |
| | $ | 13 |
| | $ | 15 |
| | 0.06 | % | | 0.33 | % | | 0.39 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | 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, 2020 | | $ | 2 |
| | $ | 8 |
| | $ | 10 |
| | 0.04 | % | | 0.16 | % | | 0.20 | % |
September 30, 2019 | | $ | 2 |
| | $ | 10 |
| | $ | 12 |
| | 0.04 | % | | 0.22 | % | | 0.26 | % |
Our June 30, 2019March 31, 2020 percentage continues to compare favorably to the national average for over 30 day delinquencies of 2.99%2.54%, as most recently reported by the Fed.
Management’s Discussion and Analysis
Credit risk is also managed by diversifying the residential mortgage portfolio. Most of the loans in our residential loan portfolio are to Private Client Group clients across the country. The following table details the geographic concentrations (top five states) of RJ Bank’s one-to-four family residential mortgage loans.
| | | | June 30, 2019 | | March 31, 2020 |
| | Loans outstanding as a % of RJ Bank total residential mortgage loans | | Loans outstanding as a % of RJ Bank total loans | | Loans outstanding as a % of RJ Bank total residential mortgage loans | | Loans outstanding as a % of RJ Bank total loans |
CA | | 24.8% | | 5.0% | | 26.0% | | 5.7% |
FL | | 16.6% | | 3.4% | | 16.5% | | 3.6% |
TX | | | 8.1% | | 1.8% |
NY | | 8.3% | | 1.7% | | 7.2% | | 1.6% |
TX | | 8.1% | | 1.6% | |
CO | | 3.6% | | 0.7% | | 3.9% | | 0.9% |
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 June 30, 2019March 31, 2020 and September 30, 2018,2019, these loans totaled $1.20$1.51 billion and $992 million,$1.29 billion, respectively, or approximately
Management's Discussion and Analysis
30% and 25% of the residential mortgage portfolio respectively.as of each of these dates. The weighted average number of years before the remainder of the loans, which were still in their interest-only period at June 30, 2019March 31, 2020, begins amortizing is 6.35.9 years.
A component of credit risk management for the residential portfolio is the LTV ratio and borrower credit score at origination or purchase. The most recent weighted-average LTV ratios and FICO scores at origination of RJ Bank’s residential first mortgage loan portfolio were 64% and 761,762, respectively.
Corporate and tax-exempt loans
Credit risk in RJ Bank’s corporate and tax-exempt loan portfolios isare 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.
| | | | June 30, 2019 | | March 31, 2020 |
| | Loans outstanding as a % of RJ Bank total corporate loans | | Loans outstanding as a % of RJ Bank total loans | | Loans outstanding as a % of RJ Bank total corporate loans | | Loans outstanding as a % of RJ Bank total loans |
Automotive/transportation | | | 7.4% | | 4.1% |
Office real estate | | | 7.2% | | 3.9% |
Business systems and services | | 8.2% | | 4.7% | | 7.1% | | 3.9% |
Office real estate | | 7.6% | | 4.4% | |
Hospitality | | 5.3% | | 3.0% | | 6.9% | | 3.8% |
Automotive/transportation | | 5.2% | | 3.0% | |
Consumer products and services | | 4.5% | | 2.6% | |
Multifamily | | | 5.3% | | 2.9% |
RJ Bank’s exposure to the energy, airline, entertainment/leisure, restaurant and gaming sectors, those most affected by the economic disruption from the COVID-19 pandemic, were each less than 2% of the loan portfolio as of March 31, 2020.
Although we saw significant deterioration in oil prices during our second fiscal quarter, our energy portfolio primarily consists of loans to midstream distribution companies and convenience stores, with no loans to exploration and production enterprises. As a result, the portfolio has minimal direct commodity price exposure. However, if we continue to see a significant deterioration in oil prices, our clients, and as a result our loans to such clients, could be negatively impacted in the future.
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“Item 7 “Management’s- Management’s Discussion and
Management’s Discussion and Analysis
Analysis of Financial Condition and Results of Operations - Risk management - Operational risk” of our 20182019 Form 10-K for a discussion of our operational risk and certain of our risk mitigation processes. There
In response to the COVID-19 pandemic, we activated and successfully executed on our business continuity protocols and continue to monitor the COVID-19 crisis under such protocols. We have been noendeavored to safeguard our employees and to ensure continuity of business operations for our clients. As a result, nearly all of our employees are working remotely. Our systems and infrastructure have continued to support the increased volumes of activity, without any significant operational or technology disruptions. We did not incur any material changes in such processeslosses related to our operational risks during the ninesix months ended June 30, 2019.March 31, 2020.
As more fully described in the discussion of our business technology risks included in various risk factors presented in Item“Item 1A “Risk- Risk Factors” of our 20182019 Form 10-K and “Part II - Other Information - Item 1A - Risk Factors” of this Form 10-Q, 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, cyberattackscyber-attacks and other information security breaches, as well asand 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 cyberattackscyber-attacks 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“Item 7 “Management’s- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Model risk” of our 20182019 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 wethe firm may suffer from a failure to comply with applicable laws, external standards, or internal requirements. See Item“Item 7 “Management’s- Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Risk management - Compliance risk” of our 20182019 Form 10-K for information on our compliance risks, including how we manage such risks. There have been no material changes in our compliance risk mitigation processes during the ninesix months ended June 30, 2019.March 31, 2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item“Item 2 “Management’s- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management” of this Form 10-Q for our quantitative and qualitative disclosures about market risk.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls are procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this report, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Securities Exchange Act of 1934 Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 17, 2015, Jyll Brink (“Brink”) filed a putative class action complaint in the U.S. District Court for the Southern District of Florida (the “District Court”) under the caption Jyll Brink v. Raymond James & Associates, Inc. (the “Brink Complaint”). The Brink Complaint alleges that Brink, a former customer of RJ&A, was charged a fee in her Passport Investment Account, and that the fee included an unauthorized and undisclosed profit to RJ&A in violation of its customer agreement and applicable industry standards. The Passport Investment Account is a fee-based account in which clients pay asset-based advisory fees and certain processing fees for ongoing investment advice and monitoring of securities holdings. The Brink Complaint seeks, among other relief, damages in the amount of the difference between the actual cost of processing a trade, as alleged by Brink, and the fee charged by RJ&A. On October 19, 2018, the District Court certified a class of former and current customers of RJ&A who executed a Passport Agreement and were charged processing fees during the period between February 17, 2010 and February 17, 2015.
On February 11, 2016, Caleb Wistar (“Wistar”) and Ernest Mayeaux (“Mayeaux”) filed a putative class action complaint in the District Court under the caption Caleb Wistar and Ernest Mayeaux v. Raymond James Financial Services, Inc. and Raymond James Financial Services Advisors, Inc. (as subsequently amended, the “Wistar Complaint”). Similar to the Brink Complaint, the Wistar Complaint alleges that Wistar and Mayeaux, former customers of Raymond James Financial Services, Inc. (“RJFS”) and Raymond James Financial Services Advisors, Inc. (“RJFSA”), were charged a fee in RJFS and RJFSA’s Passport Investment Account and that the fee included an unauthorized and undisclosed profit to RJFS and RJFSA in violation of its customer agreement and applicable industry standards. The Wistar Complaint seeks, among other relief, damages in the amount of the difference between the actual cost of processing a trade, as alleged by Wistar and Mayeaux, and the fee charge by RJFS and RJFSA.
On April 5, 2019, the parties to the Brink Complaint and the Wistar Complaint agreed in principle to an aggregate settlement of $15 million. On June 11, 2019, the parties filed a Stipulation of Settlement and Joint Motion for Preliminary Approval of Class Action Settlement and Certification of the Settled Subclasses. On June 12, 2019, the District Court entered an order preliminarily approving the Class Action Settlement and set a hearing date of October 25, 2019 for final approval of the settlement. While the hearing for final approval has been set, the settlement remains subject to approval by the District Court. The settlement amounts for both complaints were included in “Other payables” in our Condensed Consolidated Statement of Financial Condition as of June 30, 2019.Not applicable.
ITEM 1A. RISK FACTORS
Not applicable.Our operations and financial results are subject to various risks and uncertainties which could adversely affect our business, financial condition, results of operations, liquidity and the trading price of our common stock. For information regarding these risks and uncertainties, see “Item 1A - Risk Factors” of our 2019 Form 10-K. The following represents material changes to our risk factors disclosed in our 2019 Form 10-K.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
The recent outbreak of COVID-19 has adversely affected, and will likely continue to adversely affect, our business, financial condition, liquidity and results of operations.
The worldwide COVID-19 pandemic has negatively affected our business and the entire financial services industry and is likely to continue to do so. Since the beginning of January 2020, the outbreak has caused significant volatility and disruption in the financial markets both globally and in the U.S., and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The pandemic has led governments and other authorities around the world, including federal, state and local authorities in the U.S., to impose measures intended to control its spread, including restrictions on travel and the conduct of business, such as stay-at-home orders, quarantines, travel bans, border closings, business closures and other similar measures. If COVID-19, or another highly infectious or contagious disease, continues to spread or the response to contain it is unsuccessful, we will likely experience further adverse effects on our business, financial condition, liquidity, and results of operations. A prolonged period of economic deterioration may also result in impairment of goodwill and identifiable intangible assets. The extent of such effects will depend on future developments which are highly uncertain and cannot be predicted, including the geographic spread of the virus, the overall severity of the disease, the duration of the outbreak, the measures taken by various governmental authorities in response to the outbreak and the possible further impacts on the global economy.
The continued spread of COVID-19, or another highly infectious or contagious disease, has caused and could continue to cause severe disruptions in our business. These effects have included restrictions on our employees’ ability to travel, as well as temporary closures of our facilities and the facilities of our customers, suppliers, or other vendors. We often recruit skilled professionals and new clients by visiting their offices or having them visit our offices. Consequently, any travel restrictions or other disruptions that prevent us from meeting with professional prospects or potential new clients may adversely impact our ability to recruit such professional prospects or engage potential new clients. Although we maintain contingency plans for events such as pandemic outbreaks, the further spread of COVID-19 or a similar contagious disease could also impair the availability of our executive officers who are necessary to conduct our business. In addition, any continued spread of COVID-19 or new outbreak could harm the operations of third-party service providers who perform critical services for our business.
The COVID-19 pandemic has caused, and is likely to continue to cause, severe economic, market and other disruptions worldwide. As a result of a shift to fee-based accounts over the past several years, a larger portion of our client assets is more directly affected by market movements. The significant decrease in the market value of our clients’ assets has had and will continue to have a negative impact on our financial results due to the fact that asset-based fees are earned on the market value of the underlying client assets, many of which are billed based on assets as of the beginning of a quarter. This market decline will likely have a greater negative affect on revenues and profitability than would have been experienced in prior years due to the increased proportion of our asset-based revenues. Market volatility could also cause clients to move their investments to lower margin products, or withdraw them, which could have an adverse impact on our profitability. We could also experience a material reduction in trading volume and lower securities prices in times of market volatility, which would result in lower brokerage revenues, including losses on firm inventory. The fair values of certain of our investments could also continue to be negatively impacted, resulting in additional unrealized or realized losses on such investments. In addition, the market volatility and uncertainty related to the COVID-19 pandemic may cause our institutional clients to abandon announced transactions and/or cease exploration of potential transactions which could negatively impact our Capital Markets revenues, including those derived from our investment banking business.
Moreover, certain actions taken by U.S. or other governmental authorities, including the Federal Reserve, that are intended to ameliorate the macroeconomic effects of COVID-19 have had, and will continue to have, a negative effect on our business. The Fed significantly lowered interest rates in response to COVID-19 pandemic concerns in March. These decreases in short-term interest rates, in addition
to those in late 2019, have had a negative impact on our results, as we have certain assets and liabilities, primarily held in our PCG, RJ Bank and Other segments, which are sensitive to changes in interest rates. Fees we earn from third-party banks on client cash balances swept to such banks as part of RJBDP are also sensitive to changes in interest rates. These market interest rate declines will continue to negatively impact results in future quarters.
In addition, we are generally exposed to the credit risk that third-parties that owe us money, securities or other assets will fail to meet their obligations to us due to numerous causes, and this risk has been and may further be exacerbated by the macroeconomic effects of COVID-19. We lend to businesses and individuals, including through offering C&I loans, commercial and residential mortgage loans, tax-exempt loans, home equity lines of credit, and other loans generally collateralized by securities. We also incur credit risk through our investments. Our credit risk has increased, and such risk and credit losses may continue to increase to the extent our loans or investments are to borrowers or issuers who as a group may be uniquely or disproportionately affected by declining economic or market conditions as a result of COVID-19 such as those operating in the airline, restaurant, gaming, entertainment/leisure and energy sectors. The deterioration of our credit exposure due to COVID-19 has led to additional loan loss provisions and could lead to further additional loan loss provisions and/or charges-offs, or credit impairment of our investments, and subsequently have a material impact on our net income, regulatory capital and liquidity.
We cannot assure you that conditions in financial markets will not continue to deteriorate as a result of the pandemic, or that our access to capital and other sources of funding will not become constrained, resulting in actions such as restructuring debt or obtaining additional financing on terms that may be onerous or highly dilutive.
Any cyber-attack or other security breach of our technology systems, or those of our clients or other third-party vendors we rely on, could subject us to significant liability and harm our reputation.
Our operations rely heavily on the secure processing, storage and transmission of sensitive and confidential financial, personal and other information in our computer systems and networks. There have been several highly publicized cases involving financial services companies reporting the unauthorized disclosure of client or other confidential information in recent years, as well as cyber-attacks involving the theft, dissemination and destruction of corporate information or other assets, in some cases as a result of failure to follow procedures by employees or contractors or as a result of actions by third parties. Like other financial services firms, we experience malicious cyber activity directed at our computer systems, software, networks and its users on a daily basis. This malicious activity includes attempts at unauthorized access, implantation of computer viruses or malware, and denial-of-service attacks. We also experience large volumes of phishing and other forms of social engineering attempted for the purpose of perpetrating fraud against the firm, our associates, our advisors or our clients. Additionally, like many large enterprises, since mid-March 2020, we have shifted the majority of our associates to remote work arrangements in response to the COVID-19 pandemic. This change in our operating model has enabled us to successfully continue business operations, but also introduces potential new vulnerabilities to cyber threats. We seek to continuously monitor for and nimbly react to any and all such activity, and we develop our systems to protect our technology infrastructure and data from misuse, misappropriation or corruption.
Cyber-attacks can originate from a variety of sources, including third parties affiliated with foreign governments, organized crime or terrorist organizations. Third parties may also attempt to place individuals within our firm or induce employees, clients or other users of our systems to disclose sensitive information or provide access to our data, and these types of risks may be difficult to detect or prevent. Although cybersecurity incidents among financial services firms are on the rise, we have not experienced any material losses relating to cyber-attacks or other information security breaches. However, the techniques used in these attacks are increasingly sophisticated, change frequently and are often not recognized until launched. Although we seek to maintain a robust suite of authentication and layered information security controls, including our cyber threat analytics, data encryption and tokenization technologies, anti-malware defenses and vulnerability management program, any one or combination of these controls could fail to detect, mitigate or remediate these risks in a timely manner. Despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, computer viruses and other malicious code, and other events that could result in significant liability and damage to our reputation, and have an ongoing impact on the security and stability of our operations.
We also rely on numerous third-party service providers to conduct other aspects of our business operations, and we face similar risks relating to them. While we regularly conduct security assessments on these third-party vendors, we cannot be certain that their information security protocols are sufficient to withstand a cyber-attack or other security breach. In addition, in order to access our products and services, our customers may use computers and other devices that are beyond our security control systems.
Notwithstanding the precautions we take, if a cyber-attack or other information security breach were to occur, this could jeopardize the information we confidentially maintain, or otherwise cause interruptions in our operations or those of our clients and counterparties,
exposing us to liability. As attempted attacks continue to evolve in scope and sophistication, we may be required to expend substantial additional resources to modify or enhance our protective measures, to investigate and remediate vulnerabilities or other exposures or to communicate about cyber-attacks to our customers. Though we have insurance against some cyber-risks and attacks, we may be subject to litigation and financial losses that exceed our policy limits or are not covered under any of our current insurance policies. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators. Additionally, the SEC issued guidance in February 2018 stating that, as a public company, we are expected to have controls and procedures that relate to cybersecurity disclosure, and are required to disclose information relating to certain cyber-attacks or other information security breaches in disclosures required to be made under the federal securities laws. Further, successful cyber-attacks at other large financial institutions or other market participants, whether or not we are affected, could lead to a general loss of customer confidence in financial institutions that could negatively affect us, including harming the market perception of the effectiveness of our security measures or the financial system in general, which could result in reduced use of our financial products and services.
Further, in light of the high volume of transactions we process, the large number of our clients, partners and counterparties, the increasing sophistication of malicious actors, and the COVID-19 pandemic response, a cyber-attack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber-attack would take substantial amounts of time, and that there may be extensive delays before we obtain full and reliable information. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, all of which would further increase the costs and consequences of such an attack.
We may also be subject to liability under various data protection laws. In providing services to clients, we manage, utilize and store sensitive or confidential client or employee data, including personal data. As a result, we are subject to numerous laws and regulations designed to protect this information, such as U.S. federal, state and international laws governing the protection of personally identifiable information. These laws and regulations are increasing in complexity and number. If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to client or employee data, or otherwise mismanages or misappropriates such data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. In addition, unauthorized disclosure of sensitive or confidential client or employee data, whether through system failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients and related revenue. Potential liability in the event of a security breach of client data could be significant. Depending on the circumstances giving rise to the breach, this liability may not be subject to a contractual limit or an exclusion of consequential or indirect damages.
See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Operational risk” of our 2019 Form 10-K and Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Operational risk” of this Form 10-Q for additional information regarding our exposure to and approaches for managing operational risks.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not have any sales of unregistered securities for the ninesix months ended June 30, 2019.March 31, 2020.
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 ninesix months ended June 30, 2019.March 31, 2020.
|
| | | | | | | | | | | |
| 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 |
| |
|
| | | | | | | |
April 1, 2019 – April 30, 2019 | 22,241 |
| | $ | 81.07 |
| | — |
| | $458 |
May 1, 2019 – May 31, 2019 | 302,699 |
| | $ | 83.53 |
| | 301,756 |
| | $433 |
June 1, 2019 – June 30, 2019 | 744,251 |
| | $ | 80.95 |
| | 742,076 |
| | $373 |
Third quarter | 1,069,191 |
| | $ | 81.68 |
| | 1,043,832 |
| | |
Fiscal year-to-date total | 8,029,504 |
| | $ | 76.74 |
| | 7,699,376 |
| |
|
During the nine months ended June 30, 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. Between July 1, 2019 and August 7, 2019, we repurchased 1.10 million shares of our common stock under this authorization at a weighted-average price of $76.60, for total consideration of $84 million. As of August 7, 2019, we had $289 million remaining under this authorization. |
| | | | | | | | | | | |
| Total number of shares purchased | | Average price per share | | Number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value (in millions) at each month-end, of securities that may yet be purchased under the plans or programs |
| | | | | | | |
October 1, 2019 – October 31, 2019 | 5,582 |
| | $ | 84.80 |
| | — |
| | $750 |
November 1, 2019 – November 30, 2019 | 86,720 |
| | $ | 89.35 |
| | — |
| | $750 |
December 1, 2019 – December 31, 2019 | 132,723 |
| | $ | 89.33 |
| | 125,567 |
| | $739 |
First quarter | 225,025 |
| | $ | 89.23 |
| | 125,567 |
| | |
| | | | | | | |
January 1, 2020 – January 31, 2020 | 40,106 |
| | $ | 89.74 |
| | 32,988 |
| | $736 |
February 1, 2020 – February 29, 2020 | 721,432 |
| | $ | 89.47 |
| | 719,250 |
| | $672 |
March 1, 2020 – March 31, 2020 | 1,800,682 |
| | $ | 74.94 |
| | 1,795,764 |
| | $537 |
Second quarter | 2,562,220 |
| | $ | 79.26 |
| | 2,548,002 |
| |
|
Fiscal year-to-date total | 2,787,245 |
| | $ | 80.06 |
| | 2,673,569 |
| |
|
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 20182019 Form 10-K and Note 98 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. These activities do not utilize the previously described repurchase authority.authorization presented in the preceding table.
The total number of shares purchased also includes shares repurchased as a result of employees surrendering shares as payment for option exercises or withholding taxes. These activities do not utilize the previously described repurchase authority.authorization presented in the preceding table.
In response to the heightened market volatility as a result of the COVID-19 pandemic, we have suspended our share repurchases since mid-March 2020.
| |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
| |
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
|
| | |
Exhibit Number |
| Description |
3.1 |
| |
3.2 |
| |
4.1 |
| Seventh Supplemental Indenture, dated as of March 31, 2020, for the 4.650% Senior Notes due 2030, between Raymond James Financial, Inc. and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 31, 2020. |
10.1 |
| First Amendment to Credit Agreement, dated as of May 23, 2019, among Raymond James Financial, Inc. Amended and Restated 2012 Stock Incentive Plan (as amended through February 20, 2020), Raymond James & Associates, Inc.,incorporated by reference to Exhibit 10.1 to the Lenders party theretoCompany’s Current Report on Form 8-K, filed with the Securities and Bank of America, N.A.Exchange Commission on February 24, 2020. |
31.1 |
| |
31.2 |
| |
32 |
| |
101.INS |
| XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.). |
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document. |
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 |
| Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | | RAYMOND JAMES FINANCIAL, INC. |
| | | (Registrant) |
| | | |
Date: | AugustMay 8, 20192020 | | /s/ Paul C. Reilly |
| | | Paul C. Reilly |
| | | Chairman and Chief Executive Officer |
| | | |
Date: | AugustMay 8, 20192020 | | /s/ Jeffrey P. JulienPaul M. Shoukry |
| | | Jeffrey P. JulienPaul M. Shoukry |
| | | Executive Vice President - Finance and Chief Financial Officer and Treasurer |