INDEX PAGE Introduction 37 Executive overview 37
Reconciliation of Non-GAAP financial measures to GAAP financial measures
40 Segments 42 Net interest analysis 43 Results of OperationsPrivate Client Group 45 Capital Markets 48 Asset Management 50RJ Bank 52 Other 56 Certain statistical disclosures by bank holding companies
56
Liquidity and capital resources
57
Statement of financial condition analysis 61 Contractual obligations 62 Regulatory 62 Critical accounting estimates
62
Recent accounting developments
64
Off-balance sheet arrangements 65 Effects of inflation 65 Risk management 65 36
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
INTRODUCTION
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand the results of our operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and accompanying notes to consolidated financial statements. Where "NM" is used in various percentage change computations, the computed percentage change has been determined to be not meaningful. We operate as a financial holding company and bank holding company. Results in the businesses in which we operate are highly correlated to general economic conditions and, more specifically, to the direction of theU.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, economic, political and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control. These factors affect the financial decisions made by market participants, including investors, borrowers, and competitors, impacting their level of participation in the financial markets. These factors also impact the level of investment banking activity and asset valuations, which ultimately affect our business results.
EXECUTIVE OVERVIEW
Year ended
Net revenues of$7.99 billion for our fiscal year endedSeptember 30, 2020 increased$250 million , or 3%. Pre-tax income of$1.05 billion decreased$323 million , or 23%, and our net income of$818 million decreased$216 million , or 21%. Our earnings per diluted share were$5.83 , reflecting a 19% decrease. Our return on equity ("ROE") was 11.9%, compared with 16.2% for the prior year, and return on tangible common equity ("ROTCE") was 13.0%(1), compared with 17.8%(1) for the prior year. Our financial results were significantly impacted by the direct and indirect impacts of the COVID-19 pandemic. The COVID-19 pandemic and related government-imposed and other 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, had a significant impact on global economic conditions and the environment in which we operated during our 2020 fiscal year. In response to the pandemic, inMarch 2020 we activated certain aspects of our business continuity plans endeavoring to protect our associates and our clients. As a result, nearly all of our associates transitioned to working remotely, while still maintaining our high standards of client service. Although economies began to reopen during the latter portion of our fiscal third quarter and continued to progress during our fourth quarter, a substantial portion of our associates continued to work remotely through the end of our fiscal year. The COVID-19 pandemic had varied impacts across our businesses. While certain of our businesses benefited from increased volatility and higher levels of client activity caused by the pandemic, our results were significantly and negatively affected by the significant reduction in interest rates implemented by TheFederal Reserve inMarch 2020 . The economic impact and uncertainty attributable to the pandemic also resulted in factors that contributed to an elevated bank loan loss provision. Uncertainty carries over into our 2021 fiscal year with regard to the extent and duration of the disruptions related to the pandemic, as well as its continuing impacts on the global economy. The extent of such effects will depend on future developments, which are highly uncertain. As a result of the economic environment, inSeptember 2020 we announced a reduction in workforce and as a result recognized$46 million of related expenses in our fiscal fourth quarter of 2020. Excluding these expenses and a$7 million loss related to the pending disposition of our interests in certain entities in our Capital Markets segment that operate predominately inFrance , adjusted net income was$858 million (1), a decrease of 20% compared with adjusted net income of$1.07 billion (1) for the prior year. The prior year included a$19 million goodwill impairment charge associated with ourCanadian Capital Markets business and a$15 million loss on the sale of our operations related to research, sales and trading of European equities, which did not recur in fiscal year 2020. Adjusted earnings per diluted share were$6.11 (1), a 17% decrease compared with adjusted earnings per diluted share of$7.40 (1) for the prior year. Our adjusted ROE was 12.5%(1), compared with 16.7%(1) for the prior year, and adjusted ROTCE was 13.6%(1), compared with 18.4%(1) for the prior year. (1) "ROTCE," "Adjusted net income," "adjusted earnings per diluted share," "adjusted ROE" and "adjusted ROTCE" are each non-GAAP financial measures. Please see the "Reconciliation of non-GAAP financial measures to GAAP financial 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. 37
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis A$250 million increase in net revenues compared with the prior year was driven by higher asset management and related administrative fees, primarily attributable to higher PCG assets in fee-based accounts, as well as strong fixed income brokerage revenues and investment banking revenues. Offsetting these increases were the negative impacts of lower short-term interest rates on our net interest income and RJBDP fees from third-party banks, and valuation losses on private equity investments, a portion of which was attributable to noncontrolling interests (reflected as an offset in other expenses). Compensation, commissions and benefits expense increased$378 million , or 7%, mostly due to an increase in revenues, which primarily include asset management and related administrative fees, brokerage revenues and investment banking revenues. Certain of our revenue streams, such as net interest income, do not have a direct associated payout; therefore, changes in these revenue streams do not directly impact our compensation-related expenses but do affect our ratio of compensation, commissions and benefits expense to net revenues ("compensation ratio"). Our compensation ratio increased to 68.4%, compared with 65.7% for the prior year, primarily due to the negative impact of lower interest rates on revenue streams that are not directly compensable, such as net interest income and RJBDP fees from third-party banks. Non-compensation expenses increased$195 million , or 15%, due to a$211 million increase in the bank loan loss provision, which was$233 million in the current year compared with$22 million in the prior year, and the aforementioned$46 million of reduction in workforce expenses. These increases were partially offset by a significant decline in business development expenses, due to lower travel and conference-related expenses during the second half of the fiscal year as a result of the COVID-19 pandemic.
Our effective income tax rate was 22.2% for fiscal 2020, a decrease compared with the 24.8% effective tax rate for fiscal year 2019, primarily due to non-taxable gains on our corporate-owned life insurance portfolio.
We ended fiscal 2020 with capital ratios well in excess of regulatory requirements and substantial liquidity, with over$2 billion (1) of cash at the parent company, which included the proceeds of a$500 million 10-year senior notes issuance at the end of our fiscal second quarter of 2020. Pursuant to our Board of Directors' share repurchase authorization, we repurchased approximately 3.4 million shares of common stock during fiscal year 2020 for$263 million at an average price of approximately$78.50 per share. Due to heightened market uncertainty as a result of the COVID-19 pandemic, share repurchases were suspended from mid-March through our fiscal third quarter but were resumed in our fiscal fourth quarter to offset dilution related to our share-based compensation. We expect to continue share repurchases in fiscal 2021 to offset dilution and may make additional share repurchases, as appropriate. As ofSeptember 30, 2020 , we had$487 million of availability remaining under the previously-announced authorization. Certain of the impacts of the COVID-19 pandemic are likely to continue to affect our results in fiscal 2021. Our net interest income and RJBDP fees from third-party banks will likely reflect the full-year impact of the 150 basis point reduction by theFederal Reserve of its benchmark short-term interest rate inMarch 2020 , as we do not anticipate short-term interest rates to recover to the beginning of the fiscal year 2020 level during fiscal 2021. InCapital Markets , market uncertainty during the pandemic may result in volatility of both brokerage revenues and investment banking revenues. While our results during fiscal 2020 were negatively impacted by elevated bank loan loss provisions, including losses on certain corporate loans that were sold during the year, further market deterioration could result in additional provisions in fiscal 2021. The timing and amount of the business development expenses we will incur in fiscal 2021 will be heavily influenced by the progression of the COVID-19 pandemic. We continue to pursue opportunities to reduce costs and invest in and implement efficiencies in our processes to remain well-positioned for future growth and success.
A summary of our financial results by segment compared to the prior year is as follows:
•PCG segment net revenues of$5.55 billion increased 4%, while pre-tax income of$539 million decreased 7%. The$193 million increase in net revenues was primarily attributable to an increase in asset management and related administrative fees due to higher average assets in fee-based accounts, partially offset by decreases in RJBDP fees from third-party banks and net interest income due to lower short-term interest rates. Non-interest expenses increased$233 million , or 5%, primarily resulting from an increase in compensation expenses largely due to the growth in compensable net revenues, primarily asset management and related administrative fees.
(1) For additional information, please see the "Liquidity and capital resources - Sources of liquidity" section in this MD&A.
38
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis •Capital Markets net revenues of$1.29 billion increased 19% and pre-tax income of$225 million increased 105%. The$208 million increase in net revenues was primarily due to an increase in fixed income brokerage revenues, due to higher client activity, as well as increases in equity and debt underwriting revenues. These increases were partially offset by a decline in merger & acquisition revenues. Non-interest expenses increased$93 million , or 10%, due to higher compensation expenses, primarily attributable to the increase in revenues. •Asset Management segment net revenues of$715 million increased 3% and pre-tax income of$284 million increased 12%. The increase in net revenues was driven by higher assets in fee-based programs offered to PCG clients and market appreciation, which offset net outflows at Carillon Town Advisers. •RJ Bank net revenues of$765 million decreased 10% and pre-tax income of$196 million decreased 62%. The$81 million decrease in net revenues reflected the negative impact of lower short-term interest rates, which more than offset the growth in interest-earning assets. Non-interest expenses increased$238 million , or 72%, primarily due to a$211 million increase in the loan loss provision. •Our Other segment reflected a pre-tax loss that was$110 million larger compared to the prior year, primarily due to the aforementioned$46 million in reduction in workforce expenses, private equity valuation losses, as compared to gains in the prior year, lower interest income on corporate cash balances due to lower short-term interest rates, and increased interest expense, due to the issuance of$500 million of senior notes at the end of the fiscal second quarter.
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Form 10-K for a discussion of our fiscal 2019 results compared to fiscal 2018. 39
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP FINANCIAL MEASURES
We utilize certain non-GAAP financial measures as additional measures to aid in, and enhance, the understanding of our financial results and related measures. These non-GAAP financial measures include adjusted net income, adjusted earnings per diluted share, adjusted return on equity, ROTCE, and adjusted ROTCE. We believe certain of these non-GAAP financial measures provides useful information to management and investors by excluding certain material items that may not be indicative of our core operating results. We utilize these non-GAAP financial measures in assessing the financial performance of the business, as they facilitate a meaningful comparison of current- and prior-period results. We believe that ROTCE is meaningful to investors as this measure facilitates comparison of our results to the results of other companies. In the following tables, the tax effect of non-GAAP adjustments reflects the statutory rate associated with each non-GAAP item. These non-GAAP financial measures should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP. In addition, our non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of other companies. The following tables provide a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures for those periods which include non-GAAP adjustments. Year endedSeptember 30 , $ in millions, except per share amounts 2020
2019
Net income$ 818 $ 1,034 Non-GAAP adjustments: Acquisition and disposition-related expenses 7
15
Reduction in workforce expenses 46
-
Goodwill impairment -
19
Pre-tax impact of non-GAAP adjustments 53
34
Tax effect of non-GAAP adjustments (13)
-
Total non-GAAP adjustments, net of tax 40 34 Adjusted net income$ 858 $ 1,068 Earnings per diluted share$ 5.83 $ 7.17 Non-GAAP adjustments: Acquisition and disposition-related expenses 0.05
0.10
Reduction in workforce expenses 0.32
-
Goodwill impairment -
0.13
Pre-tax impact of non-GAAP adjustments 0.37
0.23
Tax effect of non-GAAP adjustments (0.09)
-
Total non-GAAP adjustments, net of tax 0.28
0.23
Adjusted earnings per diluted share$ 6.11 $ 7.40 40
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Year ended September 30, $ in millions 2020 2019 Return on equity Average equity$ 6,860 $ 6,392 Impact on average equity of non-GAAP adjustments: Acquisition and disposition-related expenses 1 12 Reduction in workforce expenses 9 - Goodwill impairment - 4 Pre-tax impact of non-GAAP adjustments 10 16 Tax effect of non-GAAP adjustments (2) - Total non-GAAP adjustments, net of tax 8 16 Adjusted average equity$ 6,868 $ 6,408 Average equity$ 6,860 $ 6,392 Less: Average goodwill and identifiable intangible assets, net 605 630 Average deferred tax liabilities, net (31) (31) Average tangible common equity$ 6,286 $ 5,793
Impact on average tangible common equity of non-GAAP adjustments: Acquisition and disposition-related expenses
1 12 Reduction in workforce expenses 9 - Goodwill impairment - 4 Pre-tax impact of non-GAAP adjustments 10 16 Tax effect of non-GAAP adjustments (2) - Total non-GAAP adjustments, net of tax 8 16 Adjusted average tangible common equity$ 6,294 $ 5,809 Return on equity 11.9 % 16.2 % Adjusted return on equity 12.5 % 16.7 % Return on tangible common equity 13.0 % 17.8 % Adjusted return on tangible common equity 13.6 % 18.4 % Average equity is computed by adding the total equity attributable to RJF as of each quarter-end date during the indicated fiscal year to the beginning of the year total and dividing by five, or in the case of average tangible common equity, computed by adding tangible common equity as of each quarter-end date during the indicated fiscal year to the beginning of year total, and dividing by five. Adjusted average equity is computed by adjusting for the impact on average equity of the non-GAAP adjustments, as applicable for each respective period. Adjusted average tangible common equity is computed by adjusting for the impact on average tangible common equity of the non-GAAP adjustments, as applicable for each respective period. ROE is computed by dividing net income by average equity for each respective period or, in the case of ROTCE, computed by dividing net income by average tangible common equity for each respective period. Adjusted ROE is computed by dividing adjusted net income by adjusted average equity for each respective period, or in the case of adjusted ROTCE, computed by dividing adjusted net income by adjusted average tangible common equity for each respective period. 41
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
SEGMENTS
The following table presents our consolidated and segment net revenues and pre-tax income/(loss) for the years indicated.
Year ended September 30, % change $ in millions 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Total company Net revenues$ 7,990 $ 7,740 $ 7,274 3 % 6 % Pre-tax income$ 1,052 $ 1,375 $ 1,311 (23) % 5 %Private Client Group Net revenues$ 5,552 $ 5,359 $ 5,093 4 % 5 % Pre-tax income$ 539 $ 579 $ 576 (7) % 1 % Capital Markets Net revenues$ 1,291 $ 1,083 $ 964 19 % 12 % Pre-tax income$ 225 $ 110 $ 91 105 % 21 % Asset Management Net revenues$ 715 $ 691 $ 654 3 % 6 % Pre-tax income$ 284 $ 253 $ 235 12 % 8 % RJ Bank Net revenues$ 765 $ 846 $ 727 (10) % 16 % Pre-tax income$ 196 $ 515 $ 492 (62) % 5 % Other Net revenues$ (82) $ 5 $ (15) NM NM Pre-tax loss$ (192) $ (82) $ (83) (134) % 1 % Intersegment eliminations Net revenues$ (251) $ (244) $ (149) NM NM 42
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
NET INTEREST ANALYSIS
The following table presents the high, low and end of period target federal funds rates for our fiscal years endedSeptember 30, 2020 , 2019 and 2018, respectively. Target federal funds rate Twelve months ended: Low High End of period September 30, 2020 0.00 % 1.75 % 0% - 0.25% September 30, 2019 1.75 % 2.50 % 1.75% - 2.00% September 30, 2018 1.00 % 2.25 % 2.00% - 2.25% In response to macroeconomic concerns resulting from the COVID-19 pandemic, theFederal Reserve decreased its benchmark short-term interest rate inMarch 2020 to a range of 0-0.25%, a decrease of 150 basis points. This decrease, as well as the interest rate cuts implemented in calendar 2019 (225 basis points in total) have had a negative impact on our fiscal year 2020 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 the RJBDP are also sensitive to changes in interest rates. The negative impact of the decline in short-term interest rates outweighed the growth in interest-earning assets and RJBDP balances swept to third-party banks compared with the prior year. Although our results for fiscal 2020 were impacted by the March rate cuts for a portion of the year, if interest rates remain at theSeptember 2020 levels throughout fiscal 2021, we expect our financial results in fiscal 2021 will include a full twelve-month impact of the interest rate cuts. Given the relationship between our interest-sensitive assets and liabilities held in each of these segments and the nature of fees we earn from third-party banks on the RJBDP, decreases in short-term interest rates generally result in an overall decrease 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 increases in short-term interest rates and/or decreases in the deposit rates paid to clients generally have a positive impact on our earnings. Refer to the discussion of the specific components of our net interest income within the "Management's Discussion and Analysis - 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. 43
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis The following table presents our consolidated average interest-earning asset and interest-bearing liability 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. Year ended September 30, 2020 2019 2018 Average Interest Average Average Interest Average Average Interest Average $ in millions balance inc./exp. yield/cost balance inc./exp. yield/cost balance inc./exp.
yield/cost
Interest-earning assets: Assets segregated pursuant to regulations$ 3,040 $ 28 0.91 %$ 2,399 $ 59 2.47 %$ 3,011 $ 53 1.76 % Trading instruments 545 20 3.65 % 733 26 3.56 % 693 23 3.32 % Available-for-sale securities 4,250 83 1.94 % 2,872 69 2.39 % 2,531 52 2.07 % Margin loans 2,206 84 3.82 % 2,584 122 4.73 % 2,590 107 4.14 % Bank loans, net of unearned income and deferred expenses: Loans held for investment: C&I loans 7,885 275 3.43 % 8,070 378 4.62 % 7,619 326 4.22 % CRE construction loans 209 9 4.10 % 221 12 5.51 % 166 8 5.08 % CRE loans 3,688 120 3.21 % 3,451 159 4.53 % 3,231 133 4.06 % Tax-exempt loans 1,246 33 3.35 % 1,284 35 3.36 % 1,146 30 3.42 % Residential mortgage loans 4,874 148 3.04 % 4,091 135 3.30 % 3,448 109 3.16 % SBL and other 3,559 112 3.10 % 3,139 145 4.57 % 2,690 111 4.09 % Loans held for sale 130 5 3.70 % 151 7 4.73 % 126 5 4.01 % Total bank loans, net 21,591 702 3.25 % 20,407 871 4.26 % 18,426 722 3.93 % Loans to financial advisors, net 978 20 2.01 % 916 18 2.01 % 882 15 1.71 % Corporate cash and all other 6,077 63 1.05 % 4,658 116 2.48 % 4,007 72 1.79 % Total interest-earning assets$ 38,687 $ 1,000 3.45 %$ 34,569 $ 1,281 3.71 %$ 32,140 $ 1,044 3.25 % Interest-bearing liabilities: Bank deposits: Savings, money market and Negotiable Order of Withdrawal ("NOW") accounts$ 23,629 $ 21 0.09 %$ 20,889 $ 120 0.58 %$ 18,473 $ 60 0.32 % Certificates of deposit 1,006 20 2.03 % 536 12 2.24 % 372 6 1.67 % Trading instrument liabilities 192 3 1.58 % 292 7 2.50 % 278 7 2.64 % Brokerage client payables 3,922 11 0.29 % 3,326 21 0.62 % 4,147 15 0.37 % Other borrowings 891 20 2.25 % 926 21 2.30 % 914 22 2.41 % Senior notes payable 1,798 85 4.73 % 1,550 73 4.70 % 1,549 73 4.69 % Other 406 18 3.04 % 738 29 3.91 % 599 19 3.10 % Total interest-bearing liabilities$ 31,844 $ 178 0.54 %$ 28,257 $ 283 1.00 %$ 26,332 $ 202 0.77 % Net interest income$ 822 $ 998 $ 842 Nonaccrual loans are included in the average loan balances in the preceding table. Any payments received for corporate nonaccrual loans are applied entirely to principal. Income on residential mortgage nonaccrual loans is recognized on a cash basis.
Fee income on bank loans included in interest income for the years ended
The yield on tax-exempt loans in the preceding table is presented on a tax-equivalent basis utilizing the applicable federal statutory rates for each of the years presented.
44
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
RESULTS OF OPERATIONS - PRIVATE CLIENT GROUP
Through our PCG segment, we provide financial planning, investment advisory and securities transaction services for which we charge either asset-based fees (presented in "Asset management and related administrative fees") or sales commissions (presented in "Brokerage revenues"). We also earn revenues for distribution and related support services performed related primarily to mutual funds, fixed and variable annuities and insurance products. Revenues of this segment are typically correlated with the level of PCG client AUA, including fee-based accounts, as well as the overallU.S. equity markets. In periods where equity markets improve, AUA and client activity generally increase, thereby having a favorable impact on net revenues. We also earn certain servicing fees, such as omnibus and education and marketing support fees, from mutual fund and annuity companies whose products we distribute. Servicing fees earned from mutual fund and annuity companies are based on the level of assets, a flat fee or number of positions in such programs. We also earn fees from banks to which we sweep clients' cash in the RJBDP, including both third-party banks andRJ Bank . Such fees are included in "Account and service fees." See "Clients' domestic cash sweep balances" in the "Selected key metrics" section for further information about fees earned from the RJBDP. Net interest income in the PCG segment is primarily generated by interest earnings on margin loans provided to clients and on assets segregated pursuant to regulations, less interest paid on client cash balances in the Client Interest Program ("CIP"). Higher client cash balances generally lead to increased interest income, depending on spreads realized in the CIP. For more information on client cash balances, see "Clients' domestic cash sweep balances" in the "Selected key metrics" section.
For an overview of our PCG segment operations, refer to the information presented in "Item 1 - Business" of this Form 10-K.
45
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Operating results Year ended September 30, % change $ in millions 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Revenues:
Asset management and related administrative fees
$ 2,820 $ 2,517 12 % 12 % Brokerage revenues: Mutual and other fund products 567 599 703 (5) % (15) % Insurance and annuity products 397 412 414 (4) % - Equities, ETFs and fixed income products 419 378 432 11 % (13) % Total brokerage revenues 1,383 1,389 1,549 - (10) % Account and service fees: Mutual fund and annuity service fees 348 334 332 4 % 1 % RJBDP fees: Third-party banks 150 280 262 (46) % 7 % RJ Bank 180 173 92 4 % 88 % Client account and other fees 129 122 111 6 % 10 % Total account and service fees 807 909 797 (11) % 14 % Investment banking 41 32 35 28 % (9) % Interest income 155 225 193 (31) % 17 % All other 27 26 30 4 % (13) % Total revenues 5,575 5,401 5,121 3 % 5 % Interest expense (23) (42) (28) (45) % 50 % Net revenues 5,552 5,359 5,093 4 % 5 % Non-interest expenses: Financial advisor compensation and benefits 3,428 3,190 3,051 7 % 5 % Administrative compensation and benefits 971 933 835 4 % 12 % Total compensation, commissions and benefits 4,399 4,123 3,886 7 % 6 % Non-compensation expenses: Communications and information processing 251 235 220 7 % 7 % Occupancy and equipment 175 168 154 4 % 9 % Business development 79 124 115 (36) % 8 % Professional fees 33 33 46 - (28) % All other 76 97 96 (22) % 1 % Total non-compensation expenses 614 657 631 (7) % 4 % Total non-interest expenses 5,013 4,780 4,517 5 % 6 % Pre-tax income$ 539 $ 579 $ 576 (7) % 1 % Selected key metrics PCG client asset balances As of September 30, $ in billions 2020 2019 2018 AUA$ 883.3 $ 798.4 $ 755.7
Assets in fee-based accounts (1)
(1)A portion of our "Assets in fee-based accounts" is invested in "managed programs" overseen by our Asset Management segment, specifically AMS. These assets are included in our Financial assets under management as disclosed in the "Selected key metrics" section of our "Management's Discussion and Analysis - Results of Operations - Asset Management." 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. 46
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis We also offer our clients fee-based accounts that are invested in "managed programs" overseen by AMS, which is part of our Asset Management segment. Fee-billable assets invested in managed programs are included in both "Assets in fee-based accounts" in the preceding table and "Financial assets under management" in the Asset Management segment. Revenues related to managed programs are shared by our PCG and Asset Management segments.The Asset Management segment receives a higher portion of the revenues related to accounts invested in managed programs, as compared to the portion received for non-managed programs, as it is performing portfolio management services in addition to administrative services. The vast majority of the revenues we earn from fee-based accounts are recorded in "Asset management and related administrative fees" on our Consolidated Statements of Income and Comprehensive Income. Fees received from such accounts are based on the value of client assets in fee-based accounts and vary based on the specific account types in which the client participates and the level of assets in the client relationship. As fees for substantially all of such accounts are billed based on balances as of the beginning of the quarter, revenues from fee-based accounts may not be immediately affected by changes in asset values, but rather the impacts are seen in the following quarter. PCG assets under administration increased compared to the prior year due to equity market appreciation and the net addition of financial advisors. In addition, PCG assets in fee-based accounts continued to increase as a percentage of overall PCG assets under administration due to clients' increased preference for fee-based alternatives versus 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. Financial advisors September 30, 2020 2019 2018 Employees 3,404 3,301 3,167 Independent contractors 4,835 4,710 4,646 Total advisors 8,239 8,011 7,813 The number of financial advisors increased from prior years due to successful financial advisor recruiting (despite disruptions and delays in recruiting and transitions of financial advisors during the onset of the COVID-19 pandemic) and high levels of retention. While the financial advisor recruiting pipeline was strong as of the end of our fiscal year, the impact of the COVID-19 pandemic on future recruiting and the timing of transitions remains uncertain.
Clients' domestic cash sweep balances
As of September 30, $ in millions 2020 2019 2018 RJBDP RJ Bank$ 25,599 $ 21,649 $ 19,446 Third-party banks 25,998 14,043 15,564 Subtotal RJBDP 51,597 35,692 35,010 Money market funds (1) - - 3,240 CIP 3,999 2,022 2,807
Total clients' domestic cash sweep balances
(1) Money market funds were discontinued as a sweep option inJune 2019 . Balances in those funds were converted to the RJBDP or reinvested by the client. Year ended September 30, 2020 2019 2018 Average yield on RJBDP - third-party banks 0.77 % 1.88 % 1.41 % A significant portion of our clients' cash is included in the RJBDP, a multi-bank sweep program in which clients' cash deposits in their accounts are swept into interest-bearing deposit accounts atRJ 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 and 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 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 47
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis balance at third-party banks. The PCG segment also earns RJBDP servicing fees fromRJ Bank , which are based on the number of accounts that are swept toRJ Bank . The fees fromRJ Bank are eliminated in consolidation. RJBDP 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. TheFederal Reserve decreased its benchmark short-term interest rate twice toward the end of our fiscal second quarter, to a current range of 0-0.25%, a decrease of 150 basis points. These decreases were in addition to the three rate cuts implemented during calendar 2019 (225 basis points in total). We expect the average yield on RJBDP (third-party banks) to be approximately 0.30% in fiscal 2021, consistent with average yields for our fiscal third and fourth quarters of 2020. However, any additional decreases in short-term interest rates, lower spreads earned from third-party banks, increases in deposit rates paid to clients, and/or a significant decline in our clients' cash balances will have a negative impact on our earnings. Further, PCG segment results are impacted by changes in the allocation of client cash balances in the RJBDP betweenRJ Bank and third-party banks.
Client cash balances were elevated as of
Year ended
Net revenues of
Asset management and related administrative fees increased$342 million , or 12%, primarily due to higher assets in fee-based accounts at the beginning of each of the current-year quarterly billing periods compared with the prior-year quarterly billing periods. As assets in these accounts are billed primarily on balances as of the beginning of a quarter, the increase in fee-based accounts as ofSeptember 30, 2020 will positively impact asset management fees in our fiscal first quarter of 2021. Brokerage revenues were essentially flat as the impact of increased trading activity, resulting from higher levels of market volatility during the current year, was offset by a decrease in mutual fund trails and lower revenues from annuity products. Account and service fees decreased$102 million , or 11%, due to a decline in RJBDP fees from third-party banks, as a result of lower short-term interest rates, which more than offset the impact of the increase in cash balances swept to such banks. Partially offsetting this decrease was an increase in mutual fund service fees. Net interest income decreased$51 million , or 28%, primarily driven by a decline in short-term interest rates, reducing the interest income earned on assets segregated pursuant to regulations and client margin loans. Partially offsetting the decrease in interest income, interest expense also decreased, primarily due to the impact of lower deposit rates paid on client cash balances in CIP.
Compensation-related expenses increased
Non-compensation expenses decreased$43 million , or 7%, primarily due to decreases in conference and travel-related expenses, as a result of the COVID-19 pandemic, and lower legal reserves. Partially offsetting these decreases were increases in technology and occupancy costs to support our growth.
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Form 10-K for a discussion of our fiscal 2019 results compared to fiscal 2018.
RESULTS OF OPERATIONS - CAPITAL MARKETS
Our
We earn brokerage revenues for the sale of both equity and fixed income products to institutional clients. Client activity is influenced by a combination of general market activity and our Capital Markets group's ability to find attractive investment opportunities for clients. In certain cases, we transact on a principal basis, which involves the purchase of securities from, and the sale of securities to, our clients as well as other dealers who may be purchasing or selling securities for their own account or acting on behalf of their clients. Profits and losses related to this activity are primarily derived from the spreads between bid 48
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis and ask prices, as well as market trends for the individual securities during the period we hold them. To facilitate such transactions, we carry inventories of financial instruments. In our fixed income businesses, we also enter into interest rate swaps and futures contracts to facilitate client transactions or to actively manage risk exposures. We provide various investment banking services, including public and private equity and debt financing for corporate clients, public financing activities, merger & acquisition advisory, and other advisory services. Revenues from investment banking activities are driven principally by our role in the transaction and the number and sizes of the transactions with which we are involved.
For an overview of our Capital Markets segment operations, refer to the information presented in "Item 1 - Business" of this Form 10-K.
Operating results Year ended September 30, % change 2019 vs. $ in millions 2020 2019 2018 2020 vs. 2019 2018 Revenues: Brokerage revenues: Fixed income$ 421 $ 283 $ 245 49 % 16 % Equity 150 131 156 15 % (16) % Total brokerage revenues 571 414 401 38 % 3 % Investment banking: Merger & acquisition and advisory 290 379 312 (23) % 21 % Equity underwriting 185 100 93 85 % 8 % Debt underwriting 133 85 61 56 % 39 % Total investment banking 608 564 466 8 % 21 % Interest income 25 38 32 (34) % 19 % Tax credit fund revenues 83 86 79 (3) % 9 % All other 20 15 14 33 % 7 % Total revenues 1,307 1,117 992 17 % 13 % Interest expense (16) (34) (28) (53) % 21 % Net revenues 1,291 1,083 964 19 % 12 % Non-interest expenses: Compensation, commissions and benefits 774 665 635 16 % 5 % Non-compensation expenses: Communications and information processing 77 75 73 3 % 3 % Occupancy and equipment 36 35 34 3 % 3 % Business development 47 48 45 (2) % 7 % Professional fees 48 45 14 7 % 221 % Acquisition and disposition-related expenses 7 15 - (53) % NM Goodwill impairment - 19 - (100) % NM All other 77 71 72 8 % (1) % Total non-compensation expenses 292 308 238 (5) % 29 % Total non-interest expenses 1,066 973 873 10 % 11 % Pre-tax income$ 225 $ 110 $ 91 105 % 21 %
Year ended
Net revenues of
Brokerage revenues increased$157 million , or 38%, primarily due to a significant increase in fixed income brokerage revenues, as well as an increase in equity brokerage revenues. The increase in fixed income brokerage revenues was primarily due to a higher level of client activity during the current year, particularly with depository clients. The increase in equity brokerage revenues was primarily due to strong client activity during our fiscal second and third quarters, driven by market volatility resulting from the COVID-19 pandemic. 49
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Investment banking revenues increased$44 million , or 8%, due to a significant increase in both equity and debt underwriting revenues, resulting from an increase in the number of transactions, as well as larger individual transactions compared to the prior year. Merger & acquisition revenues decreased compared with a strong prior year, as activity during the current year was negatively impacted by uncertainty caused by the COVID-19 pandemic, although activity improved during our fiscal fourth quarter. While our investment banking pipelines are solid, closings may be negatively affected if economic conditions deteriorate.
Compensation-related expenses increased
Non-compensation expenses decreased$16 million , or 5%, compared with the prior year, as the prior year included a$19 million goodwill impairment charge associated with our Canadian Capital Market business that did not recur in the current year. The current year included a$7 million loss related to the pending disposition of our interests in certain entities that operate predominately inFrance , whereas the prior year included a$15 million loss associated with the sale of our operations related to research, sales and trading of European equities.
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Form 10-K for a discussion of our fiscal 2019 results compared to fiscal 2018.
RESULTS OF OPERATIONS - ASSET MANAGEMENT
Our Asset Management segment earns asset management and related administrative fees for providing asset management, portfolio management and related administrative services to retail and institutional clients. This segment oversees the portion of our fee-based AUA invested in "managed programs" for our PCG clients through AMS and throughRJ Trust . This segment also provides asset management services throughCarillon Tower Advisers for retail accounts managed on behalf of third-party institutions, institutional accounts or proprietary mutual funds that we manage, generally utilizing active portfolio management strategies. Asset management fees are based on fee-billable AUM, which are impacted by market fluctuations and net inflows or outflows of assets. Rising equity markets have historically had a positive impact on revenues as existing accounts increase in value. Our Asset Management segment also earns administrative fees on certain fee-based assets within PCG that are not overseen by our Asset Management segment, but for which the segment provides administrative support (e.g., record-keeping). These administrative fees are based on asset balances, which are impacted by market fluctuations and net inflows or outflows of assets. For an overview of our Asset Management segment operations, refer to the information presented in "Item 1 - Business" of this Form 10-K. Operating results Year ended September 30, % change 2020 vs. 2019 vs. $ in millions 2020 2019 2018 2019 2018 Revenues: Asset management and related administrative fees: Managed programs$ 481 $ 467 $ 454 3 % 3 % Administration and other 207 178 156 16 % 14 % Total asset management and related administrative fees 688 645 610 7 % 6 % Account and service fees 16 31 28 (48) % 11 % All other 11 15 16 (27) % (6) % Net revenues 715 691 654 3 % 6 % Non-interest expenses: Compensation, commissions and benefits 177 179 170 (1) % 5 % Non-compensation expenses: Communications and information processing 45 44 38 2 % 16 % Investment sub-advisory fees 99 93 90 6 % 3 % All other 110 122 121 (10) % 1 % Total non-compensation expenses 254 259 249 (2) % 4 % Total non-interest expenses 431 438 419 (2) % 5 % Pre-tax income$ 284 $ 253 $ 235 12 % 8 % 50
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Selected key metrics
Managed programs
Management fees recorded in our Asset Management segment are generally calculated as a percentage of the value of our fee-billable AUM. These AUM include the portion of fee-based AUA in our PCG segment that is invested in programs overseen by our Asset Management segment (included in the "AMS" line of the following table), as well as retail accounts managed on behalf of third-party institutions, institutional accounts and proprietary mutual funds that we manage (collectively included in the "Carillon Tower Advisers" line of the following table). Revenues related to fee-based AUA in our PCG segment are shared by the PCG and Asset Management segments, the amount of which depends on whether clients are invested in assets that are in managed programs overseen by our Asset Management segment and the administrative services provided (see our "Management's Discussion and Analysis - Results of Operations -Private Client Group " for more information). Our AUM in AMS are impacted by market fluctuations and net inflows or outflows of assets, including transfers between fee-based accounts and transaction-based accounts within our PCG segment. Revenues earned byCarillon Tower Advisers for retail accounts managed on behalf of third-party institutions, institutional accounts and our proprietary mutual funds are recorded entirely in the Asset Management segment. Our AUM inCarillon Tower Advisers are impacted by market and investment performance and net inflows or outflows of assets.
Fees for our managed programs are generally collected quarterly. 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, and approximately 25% are based on average daily balances throughout the quarter.
Financial assets under management
September 30, $ in billions 2020 2019 2018 AMS (1)$ 102.2 $ 91.8 $ 83.3 Carillon Tower Advisers 59.5 58.5 63.3
Subtotal financial assets under management 161.7 150.3
146.6
Less: Assets managed for affiliated entities (8.6) (7.2)
(5.7)
Total financial assets under management$ 153.1 $ 143.1
(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 -
Activity (including activity in assets managed for affiliated entities)
Year ended September 30, $ in billions 2020 2019 2018 Financial assets under management at beginning of year$ 150.3 $ 146.6 $ 101.8 Carillon Tower Advisers : Scout Group acquisition - - 27.1 Other - net outflows (5.4) (5.8) (0.1) AMS - net inflows 6.1 6.0 9.3 Net market appreciation in asset values 10.7 3.5 8.5
Financial assets under management at end of year
$ 150.3 $ 146.6 AMS division of RJ&A
See "Management's Discussion and Analysis - Results of Operations -
Assets managed by
51
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
$ in billions September 30, 2020 Average fee rate Equity $ 25.5 0.54% Fixed income 28.8 0.18% Balanced 5.2 0.37% Total financial assets under management $ 59.5
0.35%
Non-discretionary asset-based programs
The following 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). The vast majority of these assets are also included in 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 "). Year ended September 30, $ in billions 2020 2019 2018 Total assets$ 280.6 $ 229.7 $ 200.1 The increase in assets over the prior-year level was primarily due to clients moving to fee-based accounts from transaction-based accounts, equity market appreciation, and successful financial advisor recruiting and retention. Administrative fees associated with these programs are predominantly based on balances at the beginning of the quarter.
The following table includes assets held in asset-based programs in
Year ended September 30, $ in billions 2020 2019 2018 Total assets$ 7.1 $ 6.6 $ 6.1
Year ended
Net revenues of
Asset management and related administrative fees increased$43 million , or 7%, driven by higher assets in non-discretionary asset-based programs compared with the prior year, as well as higher average financial assets under management during the current year. The increase in average financial assets under management reflected equity market appreciation and net inflows at AMS, partially offset by net outflows atCarillon Tower Advisers . The net outflows atCarillon Tower Advisers were negatively impacted by the industry shift from actively managed investment strategies to passive investment strategies. If this trend continues, our AUM and asset management fees would continue to be negatively affected. Account and service fees declined$15 million , or 48%, primarily due to a decline in servicing fees related to the money market sweep program, which was discontinued inJune 2019 . A significant portion of these fees were paid to PCG, resulting in a corresponding decline in other expenses compared with the prior year. Non-compensation expenses decreased$5 million , or 2%, primarily due to the aforementioned decline in other expenses, partially offset by an increase in investment sub-advisory fees resulting from an increase in assets under management in sub-advised programs.
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Form 10-K for a discussion of our fiscal 2019 results compared to fiscal 2018.
RESULTS OF OPERATIONS - RJ BANK
RJ Bank provides various types of loans, including corporate loans, tax-exempt loans, residential loans, SBL and other loans.RJ Bank is active in corporate loan syndications and participations and also providesFDIC -insured deposit accounts, including 52
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis to clients of our broker-dealer subsidiaries.RJ Bank generates net interest income principally through the interest income earned on loans and an investment portfolio of securities, which is offset by the interest expense it pays on client deposits and on its borrowings.RJ Bank's net interest income is affected by the levels of interest rates, interest-earning assets and interest-bearing liabilities. Higher interest-earning asset balances and higher interest rates generally lead to increased net interest income, depending upon spreads realized on interest-bearing liabilities. For more information on average interest-earning asset and interest-bearing liability balances and the related interest income and expense, see the following discussion in this MD&A. For an overview of ourRJ Bank segment operations, refer to the information presented in "Item 1- Business" of this Form 10-K. Operating results Year ended September 30, % change 2020 vs. 2019 vs. $ in millions 2020 2019 2018 2019 2018 Revenues: Interest income$ 800 $ 975 $ 793 (18) % 23 % Interest expense (62) (155) (89) (60) % 74 % Net interest income 738 820 704 (10) % 16 % All other 27 26 23 4 % 13 % Net revenues 765 846 727 (10) % 16 % Non-interest expenses: Compensation and benefits 51 49 41 4 % 20 % Non-compensation expenses: Loan loss provision 233 22 20 959 % 10 % RJBDP fees to PCG 180 173 92 4 % 88 % All other 105 87 82 21 % 6 % Total non-compensation expenses 518 282 194 84 % 45 % Total non-interest expenses 569 331 235 72 % 41 % Pre-tax income$ 196 $ 515 $ 492 (62) % 5 %
Year ended
Net revenues of
Net interest income decreased$82 million , or 10%, as the negative impact from lower short-term interest rates more than offset the$3.36 billion increase in average interest-earning assets. The increase in average interest-earning assets was primarily driven by growth in average available-for-sale securities of$1.38 billion , average loans of$1.18 billion , and average cash balances of$742 million . The net interest margin for the current year decreased to 2.63% from 3.32% for the prior year, primarily due to the significant decline in short-term interest rates and the corresponding decline in LIBOR, as well as a higher concentration of agency-backed available-for-sale securities, which have a lower yield than loans, on average. Based on current rates, we expect our net interest margin to be approximately 2% in fiscal 2021. The loan loss provision was$233 million , compared to$22 million in the prior year. The increase in the provision in the current year was primarily attributable to the economic impacts of the COVID-19 pandemic during the current year and included charge-offs on certain corporate loans sold during the year.
Compensation and benefits expenses increased
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Form 10-K for a discussion of our fiscal 2019 results compared to fiscal 2018. 53
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
The following table presents average balances, interest income and expense, the
related yields and rates, and interest spreads and margins for
Year ended September 30, 2020 2019 2018 Average Average Average Average Interest yield/ Average Interest yield/ Average Interest yield/ $ in millions balance inc./exp. cost balance inc./exp. cost balance inc./exp. cost Interest-earning assets: Cash$ 1,981 $ 11 0.55 %$ 1,239 $ 28 2.29 %$ 957 $ 15 1.57 % Available-for-sale securities 4,250 83 1.94 % 2,872 69 2.39 % 2,430 50 2.04 % Bank, net of unearned income and deferred expenses: Loans held for investment: C&I loans 7,885 275 3.43 % 8,070 378 4.62 % 7,619 326 4.22 % CRE construction loans 209 9 4.10 % 221 12 5.51 % 166 8 5.08 % CRE loans 3,688 120 3.21 % 3,451 159 4.53 % 3,231 133 4.06 % Tax-exempt loans 1,246 33 3.35 % 1,284 35 3.36 % 1,146 30 3.42 % Residential mortgage loans 4,874 148 3.04 % 4,091 135 3.30 % 3,448 109 3.16 % SBL and other 3,559 112 3.10 % 3,139 145 4.57 % 2,690 111 4.09 % Loans held for sale 130 5 3.70 % 151 7 4.73 % 126 5 4.01 % Total loans, net 21,591 702 3.25 % 20,407 871 4.26 % 18,426 722 3.93 % FHLB stock,Federal Reserve Bank ("FRB") stock and other 223 4 2.04 % 172 7 4.01 % 138 6 4.33 % Total interest-earning assets 28,045$ 800 2.85 % 24,690$ 975 3.95 % 21,951$ 793 3.62 % Non-interest-earning assets: Unrealized gain/(loss) on available-for-sale securities 80 (22) (44) Allowance for loan losses (271) (214) (193) Other assets 392 394 379 Total non-interest-earning assets 201 158 142 Total assets$ 28,246 $ 24,848 $ 22,093 Interest-bearing liabilities: Bank deposits: Savings, money market and NOW accounts$ 23,806 $ 22 0.09 %$ 21,058 $ 124 0.59 %$ 18,694 $ 63 0.34 % Certificates of deposit 1,006 20 2.03 % 536 12 2.24 % 372 6 1.67 % FHLB advances and other 889 20 2.21 % 911 19 2.08 % 917 20 2.13 % Total interest-bearing liabilities 25,701$ 62 0.24 % 22,505$ 155 0.69 % 19,983$ 89 0.44 % Non-interest-bearing liabilities 246 200 195 Total liabilities 25,947 22,705 20,178 Total shareholder's equity 2,299 2,143 1,915 Total liabilities and shareholder's equity$ 28,246 $ 24,848 $ 22,093 Excess of interest-earning assets over interest-bearing liabilities/net interest income$ 2,344 $ 738 $ 2,185 $ 820 $ 1,968 $ 704 Bank net interest: Spread 2.61 % 3.26 % 3.18 % Margin (net yield on interest-earning assets) 2.63 % 3.32 % 3.22 % Ratio of interest-earning assets to interest-bearing liabilities 109.12 % 109.71 % 109.85 %
Nonaccrual loans are included in the average loan balances in the preceding table. Any payments received for corporate nonaccrual loans are applied to principal. Interest income on residential mortgage nonaccrual loans is recognized on a cash basis.
Fee income on bank loans included in interest income for the years ended
54
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
The yield on tax-exempt loans in the preceding table is presented on a tax-equivalent basis utilizing the applicable federal statutory rates for each of the years presented.
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year's volume. Changes attributable to both volume and rate have been allocated proportionately. Year ended September 30, 2020 compared to 2019 2019 compared to 2018 Increase/(decrease) due to Increase/(decrease) due to $ in millions Volume Rate Total Volume Rate Total Interest income: Interest-earning assets: Cash$ 17 $ (34) $ (17) $ 4 $ 9 $ 13 Available-for-sale securities 33 (19)$ 14 9 10
19
Bank loans, net of unearned income and deferred expenses: Loans held for investment: C&I loans (9) (94) (103) 19 33 52 CRE construction loans (1) (2) (3) 3 1 4 CRE loans 11 (50) (39) 9 17 26 Tax-exempt loans (2) - (2) 4 1 5 Residential mortgage loans 26 (13) 13 20 6 26 SBL and other 19 (52) (33) 19 15 34 Loans held for sale (1) (1) (2) 1 1 2 Total bank loans, net 43 (212) (169) 75 74 149 FHLB stock, FRB stock and other 3 (6) (3) 2 (1)
1
Total interest-earning assets$ 96 $ (271) $ (175) $ 90 $ 92 $ 182 Interest expense: Interest-bearing liabilities: Bank deposits: Savings, money market and NOW accounts$ 16 $ (118) $ (102) $ 8 $ 53 $ 61 Certificates of deposit 10 (2) 8 3 3 6 FHLB advances and other (1) 2 1 - (1) (1) Total interest-bearing liabilities 25 (118) (93) 11 55 66 Change in net interest income$ 71 $ (153) $ (82) $ 79 $ 37 $ 116 55
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
RESULTS OF OPERATIONS - OTHER
This segment includes our private equity investments, interest income on certain corporate cash balances, and certain corporate overhead costs of RJF that are not allocated to other segments, including the interest costs on our public debt. The Other segment also includes reduction in workforce expenses associated with certain position eliminations that occurred in our fiscal fourth quarter of 2020 in response to the economic environment. For an overview of our Other segment operations, refer to the information presented in "Item 1 - Business" of this Form 10-K. Operating results Year ended September 30, % change $ in millions 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Revenues: Interest income$ 30 $ 63 $ 42 (52) % 50 % Gains/(losses) on private equity investments (28) 14 9 NM 56 % All other 4 3 9 33 % (67) % Total revenues 6 80 60 (93) % 33 % Interest expense (88) (75) (75) 17 % - Net revenues (82) 5 (15) NM NM Non-interest expenses: Compensation and all other 64 87 64 (26) % 36 % Reduction in workforce expenses 46 - - NM - Acquisition-related expenses - - 4 - (100) % Total non-interest expenses 110 87 68 26 % 28 % Pre-tax loss$ (192) $ (82) $ (83) (134) % 1 %
Year ended
The pre-tax loss of
Net revenues decreased$87 million as income of$5 million in the prior year declined to a loss of$82 million . Interest income earned on corporate cash balances decreased due to lower short-term interest rates, partially offset by the impact of higher average balances, and interest expense increased as a result of the issuance of$500 million of senior notes. In addition, the current year included$28 million of private equity valuation losses, compared with gains of$14 million in the prior year. In the current year,$20 million of the losses on private equity investments were attributable to noncontrolling interests, which are 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.
Non-interest expenses increased
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 Form 10-K for a discussion of our fiscal 2019 results compared to fiscal 2018.
CERTAIN STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES
We are required to provide certain statistical disclosures as a bank holding company under theSEC's Industry Guide 3. The following table provides certain of those disclosures. Year ended September 30, 2020 2019 2018 Return on assets 1.9% 2.7% 2.4% Return on equity 11.9% 16.2% 14.4% Average equity to average assets 15.5% 16.7% 16.5% Dividend payout ratio 25.4% 19.0% 19.1% 56
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Return on assets is computed by dividing net income for the year indicated by average assets for each respective fiscal year. Average assets is computed by adding total assets as of each quarter-end date during the indicated fiscal year to the beginning of the year total and dividing by five. Return on equity is computed by dividing net income for the year indicated by average equity for each respective fiscal year. Average equity is computed by adding the total equity attributable to RJF as of each quarter-end date during the indicated fiscal year to the beginning of the year total and dividing by five.
Average equity to average assets is computed by dividing average equity by average assets as calculated in accordance with the previous explanations.
Dividend payout ratio is computed by dividing dividends declared per common share for the year indicated by earnings per diluted common share for the year indicated.
Refer to the "Results of Operations -
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, cash flow, risk, and 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, collateralized financing arrangements or additional capital raising activities under our "universal" shelf registration statement. Cash and cash equivalents increased$1.43 billion to$5.39 billion during the year endedSeptember 30, 2020 , primarily due to$4.59 billion of cash provided by financing activities and$4.05 billion of cash provided by operating activities, offset by cash used in investing activities of$4.99 billion and an increase in the amount of cash required to be segregated pursuant to regulations of$2.23 billion . Cash provided by financing activities primarily related to an increase in bank deposits, as client cash balances increased due to the market uncertainty resulting from the COVID-19 pandemic, and proceeds from our senior notes issuance inMarch 2020 , partially offset by our open-market share repurchases and dividends on our common stock. Cash used in investing activities primarily related to a net increase in our available-for-sale securities portfolio due to our growth strategy for this portfolio, and a net increase in bank loans.
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.
57
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Sources of liquidity
Over
The
following table presents our holdings of cash and cash equivalents. $ in millions September 30, 2020 RJF $ 478 RJ&A 2,748 RJ Bank 1,072 RJ Ltd. 705 RJFS 120 Carillon Tower Advisers 78 Other subsidiaries 189 Total cash and cash equivalents $ 5,390 RJF maintained depository accounts atRJ Bank with a balance of$185 million as ofSeptember 30, 2020 . The portion of this total that was available on demand without restrictions, which amounted to$108 million as ofSeptember 30, 2020 , is reflected in the RJF total (and is excluded from theRJ Bank cash balance in the preceding table). RJF had loaned$1.70 billion to RJ&A as ofSeptember 30, 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.
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
Certain of our broker-dealer subsidiaries are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities and Exchange Act of 1934. As a member firm ofFINRA , RJ&A is subject toFINRA's capital requirements, which are substantially the same as Rule 15c3-1. Rule 15c3-1 provides for an "alternative net capital requirement," which RJ&A has elected. Regulations require that minimum net capital, as defined, be equal to the greater of$1.5 million or 2% of aggregate debit items arising from client transactions. In addition, covenants in RJ&A's committed financing facilities require its net capital to be a minimum of 10% of aggregate debit items. AtSeptember 30, 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.FINRA may impose certain restrictions, such as restricting withdrawals of equity capital, if a member firm were to fall below a certain threshold or fail to meet minimum net capital requirements. RJ&A, as a nonbank custodian of IRAs, must also satisfy certainIRS regulations in order to accept new IRA and qualified plans and retain the accounts for which it serves as nonbank custodian. With growth in the value of client assets in such accounts, the capital of RJ&A may need to grow to continue to satisfy this requirement. As a result, RJ&A may limit dividends it would otherwise remit to RJF. We evaluate regulatory requirements, loan covenants and certain internal tolerances when determining the amount of liquidity available to RJF from RJ&A.RJ Bank may pay dividends to RJF without prior approval of its regulator as long as the dividend does not exceed the sum ofRJ Bank's current calendar year and the previous two calendar years' retained net income, andRJ Bank maintains its targeted regulatory capital ratios. Dividends fromRJ Bank may be limited to the extent that capital is needed to support its balance sheet growth.
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.
58
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
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 consist of a tri-party repurchase agreement (i.e., securities sold under agreements to repurchase) and, in the case of the Credit Facility, an unsecured line of credit. The required market value of the collateral associated with the tri-party repurchase agreement ranges from 105% to 125% of the amount financed. The following table presents our committed financing arrangements with third-party lenders, which we generally utilize to finance a portion of our fixed income trading instruments, and the outstanding balances related thereto. September 30, 2020 Total number of $ in millions RJ&A RJF Total arrangements
Financing arrangement: Committed secured$ 100 $ -$ 100 1 Committed unsecured (1) 200 300 500 1 Total committed financing arrangements$ 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 14 of the Notes to Consolidated Financial Statements of this Form 10-K.
Uncommitted financing arrangements
Our uncommitted financing arrangements are in the form of secured lines of credit, secured bilateral or tri-party repurchase agreements, or unsecured lines of credit. Our arrangements with third-party lenders are generally utilized to finance a portion of our fixed income securities or for cash management purposes. Our uncommitted secured financing arrangements generally require us to post collateral in excess of the amount borrowed and are generally collateralized by non-customer, RJ&A-owned securities or by securities that we have received as collateral under reverse repurchase agreements (i.e., securities purchased under agreements to resell). As ofSeptember 30, 2020 , we had outstanding borrowings under one uncommitted secured borrowing arrangement out of a total of 11 uncommitted financing arrangements (seven uncommitted secured and four 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 the form of repurchase agreements in RJ&A and were included in "Collateralized financings" on our Consolidated Statements of Financial Condition. $ in millions September 30, 2020 Outstanding borrowing amount: Uncommitted secured $ 165 Uncommitted unsecured - Total outstanding borrowing amount $ 165 59
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
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 are detailed in the following table.
Repurchase transactions Reverse repurchase transactions Maximum Maximum month-end month-end balance balance Average daily outstanding End of period Average daily outstanding End of period For the quarter ended: balance during the balance balance during the balance ($ in millions) outstanding quarter outstanding outstanding quarter outstanding September 30, 2020$ 140 $ 165 $ 165$ 199 $ 260 $ 207 June 30, 2020$ 222 $ 278 $ 228$ 168 $ 193 $ 193 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
Other borrowings and collateralized financings
RJ Bank had$875 million in FHLB borrowings outstanding atSeptember 30, 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 onRJ Bank's residential mortgage loan portfolio (see Note 14 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information regarding these borrowings).RJ Bank had an additional$3.04 billion in immediate credit available from the FHLB as ofSeptember 30, 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 transactions as collateralized agreements and financings, with the outstanding balance of$85 million as ofSeptember 30, 2020 related to the securities loaned included in "Collateralized financings" on our Consolidated Statements of Financial Condition of this Form 10-K. See Notes 2 and 6 of the Notes to Consolidated Financial Statements of this Form 10-K for more information on our collateralized agreements and financings.
At
Senior notes payable
AtSeptember 30, 2020 , we had aggregate outstanding senior notes payable of$2.05 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 fiscal second quarter of 2020, and$800 million par 4.95% senior notes due 2046. See Note 15 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information. Credit ratings Our issuer and senior long-term debt ratings as of the most current report are detailed in the following table. Rating Agency Rating Outlook
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 60
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis liquidity management, capital structure, overall risk management, business diversification and market share, and competitive position in the markets in which we operate. Deteriorations in any of these factors could impact our credit ratings. Any rating downgrades could increase our costs in the event we were to obtain additional financing. Should our credit rating be downgraded prior to a public debt offering, it is probable that we would have to offer a higher rate of interest to bond holders. A downgrade to below investment grade may make a public debt offering difficult to execute on terms we would consider to be favorable. A downgrade below investment grade could result in the termination of certain derivative contracts and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing overnight collateralization on our derivative instruments in liability positions (see Note 5 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information). A credit downgrade could damage our reputation and result in certain counterparties limiting their business with us, result in negative comments by analysts, potentially negatively impact investors' and/or clients' perception of us, and cause a decline in our stock price. None of our borrowing arrangements contains a condition or event of default related to our credit ratings. However, a credit downgrade would result in the firm incurring a higher facility fee on the$500 million Credit Facility, in addition to triggering a higher interest rate applicable to any borrowings outstanding on that line as of and subsequent to such downgrade. Conversely, an improvement in RJF's current credit rating could have a favorable impact on the facility fee, as well as the interest rate applicable to any borrowings on such line.
Other sources and uses of liquidity
We have company-owned life insurance policies which are utilized to fund certain non-qualified deferred compensation plans and other employee benefit plans. Certain of our non-qualified deferred compensation plans and other employee benefit plans are employee-directed while others are company-directed. Certain policies which we could readily borrow against had a cash surrender value of$657 million as ofSeptember 30, 2020 , comprised of$399 million related to employee-directed plans and$258 million related to company-directed plans, and we were able to borrow up to 90%, or$591 million , of theSeptember 30, 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 ofSeptember 30, 2020 . OnMay 18, 2018 , we filed a "universal" shelf registration statement with theSEC pursuant to which we can issue debt, equity and other capital instruments if and when necessary or perceived by us to be opportune. Subject to certain conditions, this registration statement will be effective throughMay 18, 2021 .
See the Contractual obligations section of this MD&A for information regarding our contractual obligations.
STATEMENT OF FINANCIAL CONDITION ANALYSIS
The assets on our Consolidated Statements of Financial Condition consisted primarily of cash and cash equivalents (a large portion of which is segregated for the benefit of clients), receivables including bank loans, financial instruments held either for trading purposes or as investments, and other assets. A significant portion of our assets were liquid in nature, providing us with flexibility in financing our business. Total assets of$47.48 billion as ofSeptember 30, 2020 were$8.65 billion , or 22%, greater than our total assets as ofSeptember 30, 2019 . The increase in assets was primarily due to a$4.56 billion increase in available-for-sale securities, in line with our growth strategy for this portfolio, and a$3.66 billion increase in cash and cash and cash equivalents (including amounts segregated pursuant to regulations). The increase in cash was primarily due to a significant increase in client cash balances as clients reacted to the market uncertainty resulting from the COVID-19 pandemic, as well as proceeds from our$500 million senior notes issuance inMarch 2020 . In addition, other assets increased$505 million , primarily due to right-of-use assets ("ROU assets") recorded as a result of the adoption of new guidance related to the accounting for leases. As ofSeptember 30, 2020 , our total liabilities of$40.31 billion were$8.12 billion , or 25%, greater than our total liabilities as ofSeptember 30, 2019 . The increase in total liabilities was primarily related to the significant increase in client cash balances and was comprised of a$4.52 billion increase in bank deposits, reflecting higher RJBDP balances held atRJ Bank and certificate of deposit issuances during the year, and a$2.43 billion increase in brokerage client payables, primarily due to an increase in client cash held in our CIP as ofSeptember 30, 2020 . In addition, other payables increased$766 million , primarily due to lease liabilities recorded as a result of the adoption of new guidance related to the accounting for leases and an increase in payables arising from our brokerage operations. In addition, senior notes payable increased due to the issuance of$500 million of 4.65% senior notes dueApril 2030 . 61
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
See Notes 2 and 12 of the Notes to Consolidated Financial Statements of this Form 10-K for further information on our adoption of the new leasing guidance.
CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations and payments due thereunder by fiscal year.
Year ended September 30, $ in millions Total 2021 2022 2023 2024 2025 Thereafter Long-term debt obligations: Senior notes payable - principal$ 2,050 $ - $ -
$ -
863 5 6 852 - - - Total long-term debt obligations 2,913 5 6 852 250 - 1,800 Contractual interest payments 1,452 114 100 96 95 81 966 Certificates of deposit (including interest) 1,060 241 262 246 206 105 - Lease obligations 583 101 98 85 68 54 177 Purchase obligations and other 428 200 101 57 37 15 18 Total contractual obligations$ 6,436 $ 661 $ 567 $ 1,336 $ 656 $ 255 $ 2,961 Contractual interest payments represent estimated future interest payments related to our senior notes, mortgage notes payable, FHLB advances, and unsecured borrowings with original maturities greater than one year based on applicable interest rates atSeptember 30, 2020 . Estimated future interest payments for FHLB advances include the effect of the related interest rate hedges, which swap variable interest rate payments to fixed interest payments. Lease obligations are comprised of minimum payments under lease obligations, as well as legally binding minimum lease payments for leases executed but not yet commenced. See Notes 12, 14 and 15 of the Notes to Consolidated Financial Statements of this Form 10-K for information regarding our leases, other borrowings and senior notes payable, respectively. In the normal course of our business, we enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. Purchase obligations for purposes of this table include amounts associated with agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms including: minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction. Our most significant purchase obligations are vendor contracts for data services, communication services, processing services, computer software contracts and our stadium naming rights contract which has a term through 2027. Most of our contracts have provisions for early termination. For purposes of this table, we have assumed we would not pursue early termination of such contracts. We have entered into investment commitments, lending commitments and other commitments to extend credit for which we are unable to reasonably predict the timing of future payments. See Note 17 of the Notes to Consolidated Financial Statements of this Form 10-K for further information.
REGULATORY
Refer to the discussion of the regulatory environment in which we operate and the impact on our operations of certain rules and regulations in "Item 1 - Business - Regulation" of this Form 10-K.
RJF and many of its subsidiaries are each subject to various regulatory capital requirements. As ofSeptember 30, 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" as ofSeptember 30, 2020 . The maintenance of certain risk-based and other regulatory capital levels could influence various capital allocation decisions impacting one or more of our businesses. However, due to the current capital position of RJF and its regulated subsidiaries, we do not anticipate these capital requirements will have a negative impact on our future business activities.
See Note 22 of the Notes to Consolidated Financial Statements of this Form 10-K for further information on regulatory capital requirements.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during
62
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
any reporting period in our consolidated financial statements. Management has established detailed policies and control procedures intended to ensure the appropriateness of such estimates and assumptions and their consistent application from period to period. For a description of our significant accounting policies, see Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K.
Due to their nature, estimates involve judgment based upon available information. Actual results or amounts could differ from estimates and the difference could have a material impact on the consolidated financial statements. Therefore, understanding these critical accounting estimates is important in understanding our reported results of operations and financial position. We believe that of our accounting estimates and assumptions, those described in the following sections involve a high degree of judgment and complexity. 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 ofSeptember 30, 2020 .
Valuation of financial instruments
The use of fair value to measure financial instruments, with related gains or losses recognized on our Consolidated Statements of Income and Comprehensive Income, is fundamental to our financial statements and our risk management processes. "Financial instruments owned" and "Financial instrument liabilities" are reflected on the Consolidated Statements of Financial Condition at fair value. Unrealized gains and losses related to these financial instruments are reflected in our net income or our other comprehensive income/(loss) ("OCI"), depending on the underlying purpose of the instrument. We measure the fair value of our financial instruments in accordance with GAAP, which defines fair value, establishes a framework that we use to measure fair value, and provides for certain disclosures in our financial statements. Fair value is defined by GAAP as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for the asset or liability. In determining the fair value of our financial instruments, we use various valuation approaches, including market and/or income approaches. Fair value is a market-based measurement considered from the perspective of a market participant. As such, our fair value measurements reflect assumptions that we believe market participants would use in pricing the asset or liability at the measurement date. A hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the relevant observable inputs be used when available. The hierarchy is broken down into three levels: Level 1 represents unadjusted quoted prices in active markets for identical instruments; Level 2 represents valuations based on inputs other than unadjusted quoted prices in active markets, but for which all significant inputs are observable; and Level 3 consists of valuation techniques that incorporate significant unobservable inputs and, therefore, requires the greatest use of judgment. The availability of observable inputs can vary from instrument to instrument and, in certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement of an instrument requires judgment and consideration of factors specific to the instrument. The fair values for certain of our financial instruments are derived using pricing models and other valuation techniques that involve management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of our financial instruments. Financial instruments which are actively traded will generally have a higher degree of price transparency than financial instruments that are less frequently traded. As a result, the valuation of certain financial instruments included management judgment in determining the relevance and reliability of market information available. These instruments are classified in Level 3 of the fair value hierarchy. See Notes 2 and 3 of the Notes to Consolidated Financial Statements of this Form 10-K for further information about the level within the fair value hierarchy, specific valuation techniques and inputs, and other significant accounting policies pertaining to financial instruments at fair value.
Loss provisions
Loss provisions for legal and regulatory matters
The recorded amount of liabilities related to legal and regulatory matters is subject to significant management judgment. For a description of the significant estimates and judgments associated with establishing such accruals, see the "Contingent 63
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis liabilities" section of Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K. In addition, refer to Note 17 of the Notes to the Consolidated Financial Statements of this Form 10-K for information regarding legal and regulatory matter contingencies as ofSeptember 30, 2020 .
Loan loss provisions arising from operations of
We provide an allowance for loan losses which reflects our ongoing evaluation of the probable losses inherent inRJ 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 this Form 10-K. See Note 7 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information on our bank loans.
At
Our process of evaluating probable loan losses includes a complex analysis of several quantitative and qualitative factors, requiring management judgment. As a result, the allowance for loan losses could be insufficient to cover actual losses. In such an event, any losses in excess of our allowance would result in a decrease in our net income, as well as a decrease in the level of regulatory capital.
RECENT ACCOUNTING DEVELOPMENTS
The FASB has issued certain accounting updates that apply to us. Accounting updates not listed in the following section were assessed and either determined to be not applicable or are not expected to have a significant impact on our financial statements.
Accounting guidance not yet adopted as of
Credit losses - InJune 2016 , the FASB issued new guidance related to the measurement of credit losses on financial instruments (ASU 2016-13), which replaces the existing incurred credit loss and other models with the Current Expected Credit Losses ("CECL") model. The 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 financial assets. The measurement of expected credit losses includes historical experience, current conditions and reasonable and supportable forecasts. The new guidance also expands the disclosure requirements regarding an entity's assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balances for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This new guidance was effective for our fiscal year beginning onOctober 1, 2020 and was adopted under a modified retrospective approach. We have determined that certain portfolios qualify under the practical expedient outlined in the accounting guidance based on collateral maintenance provisions (e.g., margin loans, securities-based loans and collateralized agreements) and therefore, our expected credit losses are not expected to be significant. In addition, we have a zero loss expectation for certain financial assets based on the credit quality of the borrower or issuer, such as government and agency loans and debt securities. The impact of adoption of this new standard resulted in an increase in our allowances for credit losses, including reserves for unfunded lending commitments, of approximately$40 to$50 million and a corresponding reduction in retained earnings of approximately$30 to$40 million , net of tax. The increases in our allowances for credit losses were primarily attributable to loans to financial advisors and, to a lesser extent, bank loans. Prior-period amounts will not be restated. Internal use software (cloud computing) - InAugust 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 that are service contracts to be deferred and recognized over the non-cancelable term of the service contract 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. We adopted this new guidance onOctober 1, 2020 using a prospective approach as of the adoption date. The impact of this amended guidance is dependent on implementation costs incurred subsequent to adoption. The adoption did not have an impact on our financial position, results of operations, or cash flows. Consolidation (decision making fees) - InOctober 2018 , the FASB issued guidance on how all entities evaluate decision-making fees under the VIE guidance (ASU 2018-17). Under the new guidance, to determine whether decision-making fees 64
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis 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. We adopted this new guidance onOctober 1, 2020 . The adoption of this new guidance did not have a material impact on our financial position, results of operations, or cash flows.
OFF-BALANCE SHEET ARRANGEMENTS
For information regarding our off-balance sheet arrangements, see Notes 2 and 17 of the Notes to Consolidated Financial Statements of this Form 10-K.
EFFECTS OF INFLATION
Our assets are primarily liquid in nature and are not significantly affected by inflation. However, the rate of inflation affects our expenses, including employee compensation, communications and information processing, and occupancy costs, which may not be readily recoverable through charges for services we provide to our clients.
RISK MANAGEMENT
Risks are an inherent part of our business and activities. Management of risk is critical to our fiscal soundness and profitability. Our risk management processes are multi-faceted and require communication, judgment and knowledge of financial products and markets. We have a formal Enterprise Risk Management ("ERM") program to assess and review aggregate risks across the firm. Our management takes an active role in the ERM process, which requires specific administrative and business functions to participate in the identification, assessment, monitoring and control of various risks.
The principal risks related to our business activities are market, credit, liquidity, operational, model, and compliance.
Governance
Our Board of Directors oversees the firm's management and mitigation of risk, reinforcing 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 and oversight to client-facing businesses and other first-line risk management functions in identifying and mitigating risk. The second line of risk management also tests and monitors the effectiveness of controls, escalates risks when appropriate, and reports on these risks. The third line of risk management, Internal Audit, independently reviews activities conducted by the previous lines of risk management to assess their management and mitigation of risk, providing additional assurance to the Board of Directors and senior management, with a view toward enhancing our oversight, management, and mitigation of risk.
Market risk
Market risk is our risk of loss resulting from the impact of changes in market prices on our trading inventory, derivatives and investment positions. We have exposure to market risk primarily through our broker-dealer trading operations and, to a lesser extent, through our banking operations. Our broker-dealer subsidiaries, primarily RJ&A, act as market makers in equity and debt securities and maintain inventories in order to ensure availability of securities and to facilitate client transactions. We also hold investments in agency MBS and agency CMOs withinRJ Bank's available-for-sale securities portfolio, and from time-to-time may hold SBA loan securitizations not yet transferred.
See Notes 2, 3, 4 and 5 of the Notes to Consolidated Financial Statements of this Form 10-K for fair value and other information regarding our trading inventories, available-for-sale securities and derivative instruments.
Changes in value of our trading inventory may result from fluctuations in interest rates, credit spreads, equity prices, macroeconomic factors and asset liquidity, as well as relationships among these factors. We manage our trading inventory by product type and have established trading desks with responsibility for particular product types. Our primary method of controlling risk in our trading inventory is through the establishment and monitoring of risk-based limits and limits on the dollar amount of positions held overnight in inventory. A hierarchy of limits exists at multiple levels including firm, division, trading desk (e.g., for over-the-counter ("OTC") equities, corporate bonds, municipal bonds), product sub-type (e.g., below-investment-grade positions) and individual trader. Position limits in trading inventory accounts are monitored on a daily basis. Consolidated position and exposure reports are prepared and distributed daily to senior management. Trading positions are 65
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis carefully monitored for potential limit violations. Management likewise monitors inventory levels and trading results, as well as inventory aging, pricing, concentration and securities ratings. For our derivatives positions, which are composed primarily of interest rate swaps, but also include futures contracts and forward foreign exchange contracts, we monitor daily exposure against established limits with respect to a number of factors, including interest rates, foreign exchange spot and forward rates, spread, ratio, basis and volatility risk, both for the total portfolio and by maturity period. In the normal course of business, we enter into underwriting commitments.RJ&A and RJ Ltd. , as a lead or co-lead manager or syndicate member in underwritings, may be subject to market risk on any unsold shares issued in offerings to which we are committed. Risk exposure is controlled by limiting participation, the deal size or through the syndication process.
Interest rate risk
Trading activities
We are exposed to interest rate risk as a result of our trading inventory (primarily comprised of fixed income instruments) in our Capital Markets segment. We actively manage the interest rate risk arising from our fixed income trading securities through the use of hedging strategies that involveU.S. Treasury securities, futures contracts, liquid spread products and derivatives. In response to the significant market uncertainty caused by the COVID-19 pandemic, we took steps to proactively manage our market risk exposures, including enhanced review and monitoring of exposures and risk mitigation initiatives. 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 OCC andFDIC , requires us to calculate VaR for all of our trading portfolios (including derivatives), including fixed income, equity, and foreign exchange instruments. To calculate VaR, we use historical simulation. This approach assumes that historical changes in market conditions, such as in interest rates and equity prices, are representative of future changes. Simulation is based on daily market data for the previous twelve months. VaR is reported at a 99% confidence level for a one-day time horizon. Assuming that future market conditions change as they have in the past twelve months, we would expect to incur losses greater than those predicted by our one-day VaR estimates about once every 100 trading days, or about three times per year on average. For regulatory capital calculation purposes, we also report VaR numbers for a ten-day time horizon.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 year endedSeptember 30, 2020 , our regulatory-defined daily loss in our trading portfolios exceeded our predicted VaR on 11 occasions due to significantly higher levels of market volatility during our fiscal second quarter as a result of the COVID-19 pandemic.
The following table sets forth the high, low, period-end and average daily one-day VaR for all of our trading portfolios, including fixed income, equity, and foreign exchange instruments, for the period and dates indicated.
Year endedSeptember 30, 2020 Period-end VaR
For the year ended
September 30, September 30, $ in millions High Low 2020 2019 $ in millions 2020 2019 Daily VaR $ 9$ 1 $ 8 $ 1 Average daily VaR $ 3$ 1 Our period-end VaR increased to$9 million as ofSeptember 2020 from$1 million as ofSeptember 2019 , primarily due to the impact of increased volatility from the COVID-19 pandemic on our VaR model. 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. 66
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Separately, RJF provides additional market risk disclosures to comply with the MRR which are available on our website under https://www.raymondjames.com/investor-relations/financial-information/filings-and-reports within "Other Reports and Information." Should markets suddenly become more volatile, as they did in our fiscal second 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 we did during our fiscal second quarter of 2020.
Banking operations
RJ Bank maintains an interest-earning asset portfolio that is comprised of cash, C&I loans, tax-exempt loans, commercial and residential real estate loans, SBL and other loans, as well as agency MBS and agency CMOs (held in the available-for-sale securities portfolio), SBA loan securitizations and a trading portfolio of corporate loans. These interest-earning assets are primarily funded by client deposits. Based on its current 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 across a range of interest rate scenarios.
One of the objectives of
RJ Bank uses simulation models and estimation techniques to assess the sensitivity of net interest income to movements in interest rates. To ensure thatRJ Bank remains within its tolerances established for net interest income, a sensitivity analysis of net interest income to interest rate conditions is estimated under a variety of scenarios. The model estimates the sensitivity by calculating interest income and interest expense in a dynamic balance sheet environment using current repricing, prepayment, and reinvestment of cash flow assumptions over a twelve month time horizon. Various interest rate scenarios are modeled in order to determine the effect those scenarios may have on net interest income. Scenarios presented include instantaneous interest rate shocks of up 100 and 200 basis points and down 100 basis points. While not presented, additional rate scenarios are performed, including interest rate ramps and yield curve shifts that may more realistically mimic the speed of potential interest rate movements.RJ Bank also performs simulations on time horizons of up to five years to assess longer term impacts to various interest rate scenarios. On a quarterly basis,RJ Bank tests expected model results to actual performance. Additionally, any changes made to key assumptions in the model are documented and approved byRJ Bank's Asset Liability Management Committee.
We utilize a hedging strategy using interest rate swaps as a result of
The following table is an analysis ofRJ Bank's estimated net interest income over a 12-month period based on instantaneous shifts in interest rates (expressed in basis points) usingRJ Bank's own asset/liability model, which assumes that interest rates do not decline below zero. Net interest income Projected
change in
Instantaneous changes in rate ($ in millions) net interest income +200$851 33.4% +100$804 26.0% 0$638 - -100$607 (4.9)%
Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Net interest analysis" of this Form 10-K for a discussion of the impact changes in short-term interest rates could have on the firm's operations.
67
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis The following table shows the contractual maturities ofRJ Bank's loan portfolio atSeptember 30, 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 > One year - One year or five $ in millions less years > 5 years Total Loans held for investment: C&I loans$ 117 $ 4,369 $ 2,964 $ 7,450 CRE construction loans 26 149 2 177 CRE loans 638 2,264 632 3,534 Tax-exempt loans 1 73 1,185 1,259 Residential mortgage loans - 5 4,942 4,947 SBL and other 4,050 35 - 4,085 Total loans held for investment 4,832 6,895 9,725 21,452 Loans held for sale - 1 101 102 Total loans$ 4,832 $ 6,896 $ 9,826 $ 21,554 The following table shows the distribution of the recorded investment of thoseRJ Bank loans that mature in more than one year between fixed and adjustable interest rate loans atSeptember 30, 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$ 226 $ 7,107 $ 7,333 CRE construction loans 2 149 151 CRE loans 104 2,792 2,896 Tax-exempt loans 1,258 - 1,258 Residential mortgage loans 197 4,750 4,947 SBL and other - 35 35 Total loans held for investment 1,787 14,833 16,620 Loans held for sale 4 98 102 Total loans$ 1,791 $ 14,931 $ 16,722 Contractual loan terms for C&I, CRE, CRE construction and residential mortgage loans may include an interest rate floor, cap and/or fixed interest rates for a certain period of time, which would impact the timing of the interest rate reset for the respective loan. See the discussion within the "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk - Risk monitoring process" section of this Form 10-K for additional information regardingRJ Bank's interest-only residential mortgage loan portfolio. In ourRJ Bank available-for-sale securities portfolio, we hold primarily fixed-rate agency MBS and agency CMOs which are carried at fair value on our Consolidated Statements of Financial Condition, with changes in the fair value of the portfolio recorded through OCI in our Consolidated Statements of Income and Comprehensive Income. AtSeptember 30, 2020 , ourRJ Bank available-for-sale securities portfolio had a fair value of$7.65 billion with a weighted-average yield of 1.51% and average expected duration of three years. See Note 4 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information.
Equity price risk
We are exposed to equity price risk as a result of our capital markets activities. Our broker-dealer activities are generally client-driven, and we carry equity securities as part of our trading inventory to facilitate such activities, although the amounts are not as significant as our fixed income trading 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. Equity securities held in our trading inventory are generally included in VaR. In addition, we have a private equity portfolio, included in "Other investments" on our Consolidated Statements of Financial Condition, which is comprised of various direct investments, as well as investments in third-party private equity funds and various legacy private equity funds which we sponsor. Of the total private equity investments atSeptember 30, 2020 of$116 68
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
million, the portion we owned was
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 theU.S. dollar. For example, a portion of our bank loan portfolio includes loans which are denominated in Canadian dollars, totaling$1.06 billion and$1.10 billion atSeptember 30, 2020 and 2019, respectively, when converted to theU.S. dollar. A portion of such loans are held byRJ Bank's Canadian subsidiary, which is discussed in the following sections.
Investments in foreign subsidiaries
RJ Bank has an investment in a Canadian subsidiary, resulting in foreign exchange risk. To mitigate its foreign exchange risk,RJ Bank utilizes short-term, forward foreign exchange contracts. These derivatives are primarily accounted for as net investment hedges in the consolidated financial statements. See Notes 2 and 5 of the Notes to Consolidated Financial Statements of this Form 10-K for further information regarding these derivatives. We had foreign exchange risk in our investment inRJ Ltd. ofCAD 353 million atSeptember 30, 2020 , which was not hedged. Foreign exchange gains/losses related to this investment are primarily reflected in OCI on our Consolidated Statements of Income and Comprehensive Income. See Note 18 of the Notes to Consolidated Financial Statements of this Form 10-K for further information regarding our components of OCI. We also have foreign exchange risk associated with our investments in subsidiaries located inEurope . 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
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 theU.S. dollar. Any currency-related gains/losses arising from these foreign currency denominated balances are reflected in "Other" revenues in our Consolidated Statements of Income and Comprehensive Income. The foreign exchange risk associated with a portion of such transactions and balances denominated in foreign currency are mitigated utilizing short-term, forward foreign exchange contracts. Such derivatives are not designated hedges and therefore, the related gains/losses associated with these contracts are included in "Other" revenues in our Consolidated Statements of Income and Comprehensive Income. See Note 5 of the Notes to Consolidated Financial Statements of this Form 10-K for information regarding our derivatives.
Credit risk
Credit risk is the risk of loss due to adverse changes in a borrower's, issuer's or counterparty's ability to meet its financial obligations under contractual or agreed-upon terms. The nature and amount of credit risk depends on the type of transaction, the structure and duration of that transaction, and the parties involved. Credit risk is an integral component of the profit assessment of lending and other financing activities. We are exposed to credit risk through our brokerage activities, as well as our lending activities, primarily inRJ Bank . The 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 energy, airlines, entertainment and leisure, restaurants and gaming. Given the stresses on certain of our clients' liquidity, we have enhanced our credit monitoring activities, with an increased focus on monitoring our credit exposures and counterparty credit risk. Since the onset of the pandemic,RJ Bank has enacted risk mitigation strategies including, but not limited to, the sale of loans in those sectors with a high likelihood of adverse impact arising from the pandemic. We have also required collateral to be posted across our credit risk exposures in accordance with agreements with our borrowers and counterparties. We are subject to concentration risk if we hold large positions, extend large loans to, or have large commitments with a single counterparty, borrower, or group of similar counterparties or borrowers (e.g., in the same industry). Repurchase agreements consist primarily of securities issued by theU.S. government or its agencies. Receivables from and payables to clients and securities borrowing and lending activities are conducted with a large number of clients and counterparties and potential concentration is carefully monitored. Inventory and investment positions taken and commitments made, including 69
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis underwritings, may involve exposure to individual issuers and businesses. We seek to mitigate this risk through careful review of the underlying business and the use of limits established by senior management, taking into consideration factors including the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment and other positions or commitments outstanding.
Brokerage activities
We are engaged in various trading and brokerage activities in which our counterparties primarily include broker-dealers, banks and other financial institutions. We are exposed to risk that these counterparties may not fulfill their obligations. The risk of default depends on the creditworthiness of the counterparty and/or the issuer of the instrument. We manage this risk by imposing and monitoring individual and aggregate position limits within each business segment for each counterparty, conducting regular credit reviews of financial counterparties, reviewing security and loan concentrations, holding and calculating the fair value of collateral on certain transactions and conducting business through clearing organizations, which may guarantee performance. Our client activities involve the execution, settlement, and financing of various transactions on behalf of our clients. Client activities are transacted on either a cash or margin basis. Credit exposure results from client margin loans, which are monitored daily and are collateralized by the securities in the clients' accounts. We monitor exposure to industry sectors and individual securities and perform analysis on a daily basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions. In addition, when clients execute a purchase, we are at some risk that the client will default on their financial obligation associated with the trade. If this occurs, we may have to liquidate the position at a loss. We offer loans to financial advisors and certain other key revenue producers primarily for recruiting, transitional cost assistance and retention purposes. We have credit risk and may incur a loss primarily in the event that such borrower is no longer affiliated with us.
Banking activities
RJ Bank has a substantial loan portfolio. WhileRJ Bank's loan portfolio is diversified, a significant downturn in the overall economy, such as that experienced in fiscal 2020 as a result of the COVID-19 pandemic, deterioration in real estate values or a significant issue within any sector or sectors whereRJ Bank has a concentration will generally result in large provisions for loan losses and/or charge-offs.RJ Bank determines the allowance that is 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.RJ Bank's strategy for credit risk management includes well-defined credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all corporate, tax-exempt, residential, SBL and other credit exposures. The strategy also includes diversification on a geographic, industry and customer level, regular credit examinations and management reviews of all corporate and tax-exempt loans as well as individual delinquent residential loans. The credit risk management process also includes an annual independent review of the credit risk monitoring process that performs assessments of compliance with credit policies, risk ratings, and other critical credit information.RJ Bank seeks to identify potential problem loans early, record any necessary risk rating changes and charge-offs promptly, and maintain appropriate reserve levels for probable inherent losses.RJ Bank utilizes a comprehensive credit risk rating system to measure the credit quality of individual corporate and tax-exempt loans and related unfunded lending commitments, including the probability of default and/or loss given default of each corporate and tax-exempt loan and commitment outstanding. For its SBL and residential mortgage loans,RJ Bank utilizes the credit risk rating system used by bank regulators in measuring the credit quality of each homogeneous class of loans.RJ Bank's allowance for loan losses methodology is described in Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K. AsRJ Bank's loan portfolio is segregated into six portfolio segments, likewise, the allowance for loan losses is segregated by these same segments. The risk characteristics relevant to each portfolio segment are as follows. C&I: Loans in this segment are made to businesses and are generally secured by all assets of the business. Repayment is expected from the cash flows of the respective business. Unfavorable economic and political conditions, including the resultant decrease in consumer or business spending, may have an adverse effect on the credit quality of loans in this segment.
CRE: Loans in this segment are primarily secured by income-producing properties. For owner-occupied properties, the cash flows are derived from the operations of the business, and the underlying cash flows may be adversely affected by the
70
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis deterioration in the financial condition of the operating business. The underlying cash flows generated by non-owner-occupied properties may be adversely affected by increased vacancy and rental rates, which are monitored on a quarterly basis. Adverse developments in either of these areas may have a negative effect on the credit quality of loans in this segment. CRE construction: Loans in this segment have similar risk characteristics of loans in the CRE segment as previously described. In addition, project budget overruns and performance variables related to the contractor and subcontractors may affect the credit quality of loans in this segment. With respect to commercial construction of residential developments, there is also the risk that the builder has a geographical concentration of developments. Adverse developments in all of these areas may significantly affect the credit quality of the loans in this segment. Tax-exempt: Loans in this segment are made to governmental and nonprofit entities and are generally secured by a pledge of revenue and, in some cases, by a security interest in or a mortgage on the asset being financed. For loans to governmental entities, repayment is expected from a pledge of certain revenues or taxes. For nonprofit entities, repayment is expected from revenues which may include fundraising proceeds. These loans are subject to demographic risk, therefore much of the credit assessment of tax-exempt loans is driven by the entity's revenue base and general economic environment. Adverse developments in either of these areas may have a negative effect on the credit quality of loans in this segment. Residential mortgage (includes home equity loans/lines): All ofRJ Bank's residential mortgage loans adhere to stringent underwriting parameters pertaining to credit score and credit history, debt-to-income ratio of borrower, loan-to-value ("LTV"), and combined LTV (including second mortgage/home equity loans).RJ Bank does not originate or purchase option adjustable rate mortgage ("ARM") loans with negative amortization, reverse mortgages, or loans to subprime borrowers. Loans with deeply discounted teaser rates are not originated or purchased. All loans in this segment are collateralized by residential real estate and repayment is primarily dependent on the credit quality of the individual borrower. A decline in the strength of the economy, particularly unemployment rates and housing prices, among other factors, could have a significant effect on the credit quality of loans in this segment. SBL and other: Loans in this segment are collateralized generally by the borrower's marketable securities at advance rates consistent with industry standards. These loans are monitored daily for adherence to LTV guidelines and when a loan exceeds the required LTV, a collateral call is issued. Past due loans are minimal as any past due amounts result in a notice to the client for payment or the potential sale of the collateral which will bring the loan to a current status. In evaluating credit risk,RJ Bank considers trends in loan performance, the level of allowance coverage relative to similar banking institutions, industry or customer concentrations, the loan portfolio composition and macroeconomic factors. These factors have a potentially negative impact on loan performance and net charge-offs. However, during fiscal year 2020, corporate borrowers have continued to access the markets for new equity and debt. Several factors were taken into consideration in evaluating the allowance for loan losses atSeptember 30, 2020 , including the risk profile of the portfolios, net charge-offs during the period, the level of nonperforming loans, delinquency ratios and the impact of the COVID-19 pandemic.RJ Bank also considered the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. Finally,RJ Bank considered current economic conditions that might impact the portfolio. In response to the COVID-19 pandemic, we performed a portfolio-wide assessment of our loan portfolio. As a result, we downgraded loans in certain impacted industries, which gave rise to elevated loan loss provisions during fiscal 2020. In addition, we sold approximately$695 million (before charge-offs and discounts or premiums) of corporate loans during the fiscal year in industries that we believe to be most vulnerable to the COVID-19 pandemic. 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. 71
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis The following table presentsRJ Bank's changes in the allowance for loan losses. Year ended September 30, $ in millions 2020 2019 2018 2017 2016
Allowance for loan losses beginning of year
233 22 20 13 28 Charge-offs: C&I loans (96) (2) (10) (26) (3) CRE loans (4) (5) - - - Residential mortgage loans - (1) - (1) (1) Total charge-offs (100) (8) (10) (27) (4) Recoveries: CRE loans - - - 5 - Residential mortgage loans 2 2 2 1 1 Total recoveries 2 2 2 6 1 Net charge-offs (98) (6) (8) (21) (3) Foreign exchange translation adjustment 1 (1) 1 1 - Allowance for loan losses end of year$ 354 $ 218 $ 203 $ 190 $ 197 Allowance for loan losses to loans held for investment 1.65 % 1.04 % 1.04 % 1.11 % 1.30 %
See further explanation of the loan loss provision in "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations -
The level of charge-off activity is a factor that is considered in evaluating the potential severity of future credit losses. The following tables present net loan (charge-offs)/recoveries and the percentage of net loan (charge-offs)/recoveries to the average outstanding loan balances by loan portfolio segment. Of the$98 million of charge-offs in fiscal 2020, the majority was associated with loans we sold as part of our risk mitigation strategies. Year ended September 30, 2020 2019 2018 Net loan % of avg. Net loan % of avg. Net loan % of avg. (charge-off)/recovery outstanding (charge-off)/recovery outstanding (charge-off)/recovery outstanding $ in millions amount (1) loans amount (1) loans amount (1) loans C&I loans $ (96) 1.22 % $ (2) 0.02 % $ (10) 0.13 % CRE loans (4) 0.11 % (5) 0.14 % - - Residential mortgage loans 2 0.04 % 1 0.02 % 2 0.06 % Total $ (98) 0.45 % $ (6) 0.04 % $ (8) 0.04 % Year ended September 30, 2017 2016 Net loan % of avg. Net loan % of avg. (charge-off)/recovery outstanding (charge-off)/recovery outstanding $ in millions amount (1) loans amount (1) loans C&I loans $ (26) 0.35 % $ (3) 0.04 % CRE loans 5 0.18 % - - Total $ (21) 0.13 % $ (3) 0.02 %
(1) Charge-offs related to loan sales amounted to
72
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis The level of nonperforming loans is another indicator of potential future credit losses. The following tables present the nonperforming loans balance and total allowance for loan losses balance for the periods presented. September 30, 2020 2019 2018 Nonperforming loan Allowance for loan Nonperforming loan Allowance for loan Nonperforming loan Allowance for loan $ in millions balance losses balance balance losses balance balance losses balance Loans held for investment: C&I loans $ 2 $ 200 $ 19 $ 139 $ 2 $ 123 CRE construction loans - 3 - 3 - 3 CRE loans 14 114 8 46 - 47 Tax-exempt loans - 14 - 9 - 9 Residential mortgage loans 14 18 16 16 23 17 SBL and other - 5 - 5 - 4 Total $ 30 $ 354 $ 43 $ 218 $ 25 $ 203 Total nonperforming loans as a % of RJ Bank total loans 0.14 % 0.21 % 0.12 % September 30, 2017 2016 Nonperforming
loan Allowance for loan Nonperforming loan Allowance for loan $ in millions
balance losses balance balance losses
balance
Loans held for investment: C&I loans $ 5 $ 120 $ 35 $
138
CRE construction loans - 1 - 1 CRE loans - 42 4 36 Tax-exempt loans - 6 - 4 Residential mortgage loans 34 17 42 13 SBL and other - 4 - 5 Total $ 39 $ 190 $ 81 $ 197 Total nonperforming loans as a % ofRJ Bank total loans 0.23 % 0.53 % Included in nonperforming residential mortgage loans as ofSeptember 30, 2020 , were$7 million in loans for which$3 million in charge-offs were previously recorded, resulting in less exposure within the remaining balance. See Note 7 in the Notes to the Consolidated Financial Statements of this Form 10-K for loan categories as a percentage of total loans receivable. The nonperforming loan balances in the preceding table exclude$10 million ,$12 million ,$12 million ,$14 million and$14 million as ofSeptember 30, 2020 , 2019, 2018, 2017, and 2016, respectively, of residential TDRs which were returned to accrual status in accordance with our policy. Total nonperforming assets, including the nonperforming loans in the preceding table and other real estate acquired in the settlement of residential mortgages, amounted to$32 million ,$46 million ,$28 million ,$44 million and$86 million as ofSeptember 30, 2020 , 2019, 2018, 2017, and 2016, respectively. Total nonperforming assets as a percentage ofRJ Bank total assets were 0.10%, 0.18%, 0.12%, 0.21% and 0.50% as ofSeptember 30, 2020 , 2019, 2018, 2017, and 2016 respectively. Although our nonperforming assets as a percentage ofRJ Bank assets remained low as ofSeptember 30, 2020 , 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 in net charge-offs in future periods, although the extent will depend on future developments that are highly uncertain. We have received requests from certain borrowers for forbearance, or deferral of their loan payments to us, driven or exacerbated by the economic impacts of the COVID-19 pandemic. Certain borrowers have also requested modifications of covenant terms. In accordance with the CARES Act, we have elected to not apply TDR classification to any COVID-19 related loan modifications that were performed afterMarch 1, 2020 to borrowers who were current as ofDecember 31, 2019 . Based on the outstanding principal balance as of the end ofSeptember 30, 2020 , we have active short-term payment deferrals on approximately$189 million and$77 million of our corporate and residential loans, respectively. Such deferrals could delay the recognition of net charge-offs, delinquencies, and nonaccrual status for those borrowers who would have otherwise moved into past due or nonaccrual status. 73
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Loan underwriting policies
A component of
Residential mortgage and SBL and other loan portfolios
RJ Bank's residential mortgage loan portfolio consists of first mortgage loans originated byRJ Bank via referrals from our PCG financial advisors and the general public, as well as first mortgage loans purchased byRJ Bank . All ofRJ Bank's residential mortgage loans adhere to strict underwriting parameters pertaining to credit score and credit history, debt-to-income ratio of the borrower, LTV and combined LTV (including second mortgage/home equity loans). As ofSeptember 30, 2020 , approximately 65% of the residential loans were fully documented loans to industry standards and 96% of the residential mortgage loan portfolio consisted of owner-occupant borrowers (77% for their primary residences and 19% for second home residences). Approximately 35% of the first lien residential mortgage loans were ARM loans, which receive interest-only payments based on a fixed rate for an initial period of the loan and then become fully amortizing, subject to annual and lifetime interest rate caps. A significant portion of our originated 15 or 30-year fixed-rate mortgage loans are sold in the secondary market.
WhileRJ Bank has chosen not to participate in any government-sponsored loan modification programs, its loan modification policy does take into consideration some of the programs' parameters and supports every effort to assist borrowers within the guidelines of safety and soundness. In general,RJ Bank considers the qualification terms outlined in the government-sponsored programs as well as the affordability test and other factors.RJ Bank retains flexibility to determine the appropriate modification structure and required documentation to support the borrower's current financial situation before approving a modification. Short sales are also used byRJ Bank to mitigate credit losses.
Corporate and tax-exempt loan portfolios
RJ Bank's corporate and tax-exempt loan portfolios were comprised of approximately 500 borrowers, the majority of which are underwritten, managed and reviewed at our corporate headquarters location, which facilitates close monitoring of the portfolio by credit risk personnel, relationship officers and seniorRJ Bank executives.RJ Bank's corporate loan portfolio is diversified among a number of industries in both theU.S. andCanada and is comprised of project finance real estate loans, commercial lines of credit and term loans, the majority of which are participations in Shared National Credit ("SNC") or other large syndicated loans, and tax-exempt loans.RJ Bank is sometimes involved in the syndication of the loan at inception and some of these loans have been purchased in the secondary trading markets. The remainder of the corporate loan portfolio is comprised of smaller participations and direct loans. There are no subordinated loans or mezzanine financings in the corporate loan portfolio.RJ Bank's tax-exempt loans are long-term loans to governmental and nonprofit entities. These loans generally have lower overall credit risk, but are subject to other risks that are not usually present with corporate clients, including the risk associated with the constituency served by a local government and the risk in ensuring an obligation has appropriate tax treatment. Regardless of the source, all corporate and tax-exempt loans are independently underwritten toRJ Bank credit policies and are subject to approval by a loan committee, and credit quality is monitored on an on-going basis byRJ Bank's lending staff.RJ Bank credit policies include criteria related to LTV limits based upon property type, single borrower loan limits, loan term and structure parameters (including guidance on leverage, debt service coverage ratios and debt repayment ability), industry concentration limits, secondary sources of repayment, municipality demographics, and other criteria. A large portion ofRJ Bank's corporate loans are to borrowers in industries in which we have expertise, through coverage provided by our Capital Markets research analysts. More than half ofRJ Bank's corporate borrowers are public companies.RJ Bank's corporate loans are generally secured by all assets of the borrower, in some instances are secured by mortgages on specific real estate, and with respect to tax-exempt loans, are generally secured by a pledge of revenue. In a limited number of transactions, loans in the portfolio are extended on an unsecured basis. In addition, all corporate and tax-exempt loans are subject toRJ Bank's regulatory review. 74
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Risk monitoring process
Another component of the credit risk strategy atRJ Bank is the ongoing risk monitoring and review processes for all residential, SBL, corporate and tax-exempt credit exposures, as well as our rigorous processes to manage and limit credit losses arising from loan delinquencies. There are various other factors included in these processes, depending on the loan portfolio.
Residential mortgage and SBL and other loan portfolios
The collateral securingRJ 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 ensureRJ 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 inRJ Bank's residential mortgage loan portfolio. The factors include, but are not limited to: loan performance trends, loan product parameters and qualification requirements, borrower credit scores, level of documentation, loan purpose, geographic concentrations, average loan size and LTV ratios. These measures, while considered and reviewed in establishing the allowance for loan losses, have not resulted in any material adjustments toRJ Bank's historical loss rates. The following table presents a summary of delinquent residential mortgage loans, the vast majority of which are first mortgage loans, which are comprised of loans which are two or more payments past due as well as loans in the process of foreclosure. Amounts in the following table do not include residential loans to borrowers who have been granted forbearance as a result of the COVID-19 pandemic and whose loans were not considered delinquent prior to the forbearance. Such loans may be considered delinquent after the forbearance period, depending on their payment status. As a result, the amount of residential loans considered delinquent may increase significantly in fiscal 2021 as the forbearance periods expire. Delinquent residential loans as a percentage of outstanding Amount of delinquent residential loans loan balances $ in millions 30-89 days 90 days or more Total 30-89 days 90 days or more Total September 30, 2020 $ 3 $ 7$ 10 0.06 % 0.14 % 0.20 % September 30, 2019 $ 2 $ 10$ 12 0.04 % 0.22 % 0.26 % OurSeptember 30, 2020 percentage continues to compare favorably to the national average for over 30 day delinquencies of 2.68%, as most recently reported by the Fed. To manage and limit credit losses, we maintain a rigorous process to manage our loan delinquencies. With all residential first mortgages serviced by a third party, the primary collection effort resides with the servicer.RJ Bank personnel direct and actively monitor the servicers' efforts through extensive communications regarding individual loan status changes and requirements of timely and appropriate collection or property management actions and reporting, including management of third parties used in the collection process (appraisers, attorneys, etc.). Additionally, every residential mortgage loan over 60 days past due is reviewed byRJ Bank personnel monthly and documented in a written report detailing delinquency information, balances, collection status, appraised value, and other data points.RJ Bank senior management meets quarterly to discuss the status, collection strategy and charge-off recommendations on every residential mortgage loan over 60 days past due. Updated collateral valuations are obtained for loans over 90 days past due and charge-offs are taken on individual loans based on these valuations. Credit risk is also managed by diversifying the residential mortgage portfolio. Most of the loans in our residential loan portfolio are toPrivate Client Group clients across the country. The following table details the geographic concentrations (top five states) ofRJ Bank's one-to-four family residential mortgage loans. September 30, 2020 Loans outstanding as a % of RJ Bank total Loans
outstanding as a % of
residential mortgage loans loans CA 25.1% 5.8% FL 16.5% 3.8% TX 8.8% 2.0% NY 6.9% 1.6% CO 4.2% 1.0% 75
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Loans where borrowers may be subject to payment increases include ARM 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. AtSeptember 30, 2020 and 2019, these loans totaled$1.67 billion and$1.29 billion , respectively, or approximately 34% and 30% of the residential mortgage portfolio, respectively. The weighted-average number of years before the remainder of the loans, which were still in their interest-only period atSeptember 30, 2020 , begins amortizing is 6 years. A component of credit risk management for the residential portfolio is the LTV ratio and borrower credit score at origination or purchase. The weighted-average LTV ratios and FICO scores at origination ofRJ Bank's residential first mortgage loan portfolio were 65% and 762, respectively.
Corporate and tax-exempt loans
Credit risk inRJ Bank's corporate and tax-exempt loan portfolios is monitored on an individual loan basis for trends in borrower operating performance, payment history, credit ratings, collateral performance, loan covenant compliance, semi-annual SNC exam results, municipality demographics and other factors including industry performance and concentrations. As part of the credit review process, the loan grade is reviewed at least quarterly to confirm the appropriate risk rating for each credit. The individual loan ratings resulting from the SNC exams are incorporated inRJ Bank's internal loan ratings when the ratings are received and if the SNC rating is lower on an individual loan thanRJ Bank's internal rating, the loan is downgraded. WhileRJ Bank considers historical SNC exam results in its loan ratings methodology, differences between the SNC exam and internal ratings on individual loans typically arise due to subjectivity of the loan classification process. These differences may result in additional provision for loan losses in periods when SNC exam results are received. The majority ofRJ Bank's tax-exempt loan portfolio is comprised of loans to investment-grade borrowers. See Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K, specifically the "Bank loans, net" section, for additional information onRJ Bank's allowance for loan loss policies. 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) ofRJ Bank's corporate loans.
Loans outstanding as a % of RJ Bank Loans outstanding as a % of RJ Bank total corporate loans total loans Office real estate 7.5% 3.9% Automotive/transportation 6.7% 3.5% Hospitality 6.5% 3.4% Business systems and services 6.3% 3.2% Multi-family 5.6% 2.9% The COVID-19 pandemic has negatively impacted our corporate loan portfolio and could continue to do so in the future. Although we have reduced our exposure to sectors that we believe to be most vulnerable to the COVID-19 pandemic, such as the energy, airlines, entertainment and leisure, restaurant and gaming sectors, we may experience further losses on our remaining loans to borrowers in these sectors, particularly if economic conditions deteriorate. In addition, we continue to monitor our exposure to office real estate, where trends are changing rapidly and possibly permanently as a result of the COVID-19 pandemic, and may experience additional losses on loans in this sector in the future. We may also experience further losses on corporate loans in other industries as a direct or indirect result of the pandemic, including on our CRE loans secured by retail and hospitality properties. Although we saw deterioration in oil prices during the current fiscal year, 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 borrowers, 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-K for information regarding our liquidity and how we manage liquidity risk. 76
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Operational risk
Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, business disruptions, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems and inadequacies or breaches in our control processes including cybersecurity incidents. See "Item 1A - Risk Factors" of this Form 10-K for a discussion of certain cybersecurity risks. We operate different businesses in diverse markets and are reliant on the ability of our employees and systems to process a large number of transactions. These risks are less direct than credit and market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes and complexity. In the event of a breakdown or improper operation of systems or improper action by employees, we could suffer financial loss, regulatory sanctions and damage to our reputation. In order to mitigate and control operational risk, we have developed and continue to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization and within such departments as Finance, Operations, Information Technology, Legal, Compliance, Risk Management and Internal Audit. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our various businesses are operating within established corporate policies and limits. Business continuity plans exist for critical systems, and redundancies are built into the systems as deemed appropriate. We have an Operational Risk Management Committee comprised of members of senior management, which reviews and addresses operational risks across our businesses. The committee establishes, and from time-to-time will reassess, risk appetite levels for major operational risks, monitors operating unit performance for adherence to defined risk tolerances, and establishes policies for risk management at the enterprise level. In response to the COVID-19 pandemic, we activated and successfully executed on our business continuity protocols and continue to monitor the COVID-19 pandemic under such protocols. We have endeavored to protect our associates and our clients and to ensure continuity of business operations for our clients. As a result, a substantial portion of our associates are working remotely. Periods of severe market volatility, such as those that arose in response to the COVID-19 pandemic, can result in a significantly higher level of transactions on specific days and other activity which may cause operational challenges from time to time that may result in losses. These losses can result from, but are not limited to, trade errors, failed transaction settlements, late collateral calls to borrowers and counterparties, or interruptions to our system processing. We did not incur any significant losses related to our operations during the year endedSeptember 30, 2020 . The firm continues to monitor conditions and has developed a phased approach to reopening our offices based on regional indicators of infection positivity rates, and has and will continue to operate in compliance with all applicable laws and regulations. As ofSeptember 30, 2020 , we have reopened certain of our offices in a limited capacity and are operating under strict public health and safety protocols in such locations. As more fully described in the discussion of our business technology risks included in various risk factors presented in "Item 1A - Risk Factors" of this Form 10-K, despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, cyber-attacks and other information security breaches, and other events that could have an impact on the security and stability of our operations.
Model risk
Model risk refers to the possibility of unintended business outcomes arising from the design, implementation or use of models. Models are used throughout the firm for a variety of purposes such as the valuation of financial instruments, assessing risk, stress testing, and to assist in the making of business decisions. Model risk includes the potential risk that management makes incorrect decisions based upon either incorrect model results or incorrect understanding and use of model results. Model risk may also occur when model outputs differ from the expected result. Model risk can result in significant financial loss, inaccurate financial or regulatory reporting, misaligned business strategies or damage to our reputation. Model Risk Management ("MRM") is a separate department within our Risk Management department and is independent of model owners, users, and developers. Our model risk management framework consists primarily of model governance, maintaining the firmwide model inventory, validating and approving models used across the firm, and ongoing monitoring. Results of validations and issues identified are reported to the Enterprise Risk Management Committee and theAudit and Risk Committee of the Board of Directors. MRM assumes responsibility for the independent and effective challenge of model completeness, integrity and design based on intended use. 77
--------------------------------------------------------------------------------
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Compliance risk
Compliance risk is the risk of legal or regulatory sanctions, financial loss, or reputational damage that the firm may suffer from a failure to comply with applicable laws, external standards, or internal requirements.
We have established a framework to oversee, manage, and mitigate compliance risk throughout the firm, both within and across businesses, functions, legal entities, and jurisdictions. The framework includes roles and responsibilities for the Board of Directors, senior management, and all three lines of risk management. This framework also includes programs and processes through which the firm identifies, assesses, controls, measures, monitors, and reports on compliance risk and provides compliance-related training throughout the firm. The Compliance department plays a key leadership role in the oversight, management, and mitigation of compliance risk throughout the firm. It does this by conducting an annual compliance risk assessment, carrying out compliance monitoring and testing activities, implementing compliance policies, training associates on compliance-related topics, and reporting compliance risk-related issues and metrics to the Board of Directors and senior management, among other activities. We continue to devote resources to support the firm's compliance risk management framework, including the enhancement of processes and controls to help the firm meet its obligations to oversee, manage, and mitigate compliance risk. We also continue to invest in technology to improve our associates' ability to monitor and detect compliance risk.
© Edgar Online, source