RAYMOND JAMES FINANCIAL, INC. 
INDEX
PAGE
Introduction 38
Executive overview 38Reconciliation of non-GAAP financial measures to GAAP financial measures
40 Segments 42 Net interest analysis 42 Results of OperationsPrivate Client Group 44 Capital Markets 48 Asset Management 50Raymond James Bank 53 Other 54 Certain statistical disclosures by bank holding companies
55
Statement of financial condition analysis
55
Liquidity and capital resources
56
Regulatory
61
Critical accounting estimates
61
Recent accounting developments 62
Risk management 62
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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 the U.S. equity and fixed
income markets, changes in interest rates, market volatility, corporate and
mortgage lending markets and commercial and residential credit trends. Overall
market conditions, 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
We generated strong results for fiscal 2021, with net revenues of$9.76 billion , an increase of 22% compared with the prior year, and pre-tax income of$1.79 billion , an increase of 70%. During fiscal 2021, pre-tax margin increased in all of our operating segments and we generated particularly strong results in our PCG, Capital Markets and Asset Management segments. Our net income of$1.40 billion was 72% higher than the prior year, and our earnings per diluted share of$6.63 (1), which reflected the impact of a 3-for-2 stock split inSeptember 2021 , increased 71%. Our return on equity ("ROE") was 18.4%, compared with 11.9% for the prior year, and return on tangible common equity ("ROTCE") was 20.4%(2), compared with 13.0%(2) for the prior year. During fiscal 2021, we completed a$750 million , 30-year senior notes offering at 3.75%, utilizing the proceeds from the offering and cash on hand to early-redeem our$250 million of 5.625% senior notes due 2024 and our$500 million of 3.625% senior notes due 2026. We recognized losses on the extinguishment of such notes of$98 million . Excluding these losses and acquisition-related expenses of$19 million , our adjusted net income was$1.49 billion (2), an increase of 74% compared with adjusted net income for the prior year. Adjusted earnings per diluted share were$7.05 (1)(2), a 73% increase compared with adjusted earnings per diluted share of$4.08 (1)(2) for the prior year. Our adjusted ROE was 19.5%(2), compared with 12.5%(2) for the prior year, and adjusted ROTCE was 21.6%(2), compared with 13.6%(2) for the prior year. The significant increase in net revenues compared with the prior year was driven by higher asset management and related administrative fees, largely attributable to higher PCG assets in fee-based accounts, as well as strong investment banking revenues and brokerage revenues. Revenues in the current year also included$74 million of private equity valuation gains, of which$25 million were attributable to noncontrolling interests and were offset in other expenses, compared with$28 million of losses in the prior year, of which$20 million were attributable to noncontrolling interests. Offsetting these increases was the negative impact of lower short-term interest rates on our net interest income and RJBDP fees from third-party banks. Compensation, commissions and benefits expense increased$1.12 billion , or 20%, primarily resulting from the growth in revenues and pre-tax income compared with the prior year. Our compensation ratio, or the ratio of compensation, commissions and benefits expense to net revenues, decreased to 67.4% compared with 68.4% for the prior year. The decrease in our compensation ratio primarily resulted from higher revenues and changes in our revenue mix due to strong net revenues in our Capital Markets segment, which had a lower compensation ratio at 56% than our PCG segment, and the private equity valuation gains which have no associated direct compensation. Our compensation ratio also benefited from expense management initiatives. (1) During our fiscal fourth quarter of 2021 the Board of Directors approved a 3-for-2 stock split, effected in the form of a 50% stock dividend, paid onSeptember 21, 2021 . All share and per share information has been retroactively adjusted to reflect this stock split. (2) "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. 38
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Non-compensation expenses decreased$87 million , or 6%, primarily due to a$265 million decrease in the bank loan provision for credit losses, which was a benefit of$32 million in the current year computed under the current expected credit loss ("CECL") methodology compared with a provision of$233 million in the prior year computed under the incurred loss methodology. Non-compensation expenses also decreased as a result of$46 million of expenses in the prior year related to a reduction in workforce, which did not recur in the current year, as well as a decrease in business development expenses due to lower travel and event-related expenses as a result of the COVID-19 pandemic. These decreases were partially offset by the aforementioned losses on extinguishment of debt of$98 million in the current year, and an increase in other expenses, primarily due to the change in private equity valuations attributable to noncontrolling interests compared with the prior year. Our effective income tax rate was 21.7% for fiscal 2021, a decrease compared with the 22.2% effective tax rate for fiscal 2020, primarily due to an increase in non-taxable gains on our corporate-owned life insurance portfolio. Liquidity and capital remained strong. As ofSeptember 30, 2021 , our total capital ratio of 26.2% and tier 1 leverage ratio of 12.6% were each more than double the regulatory requirements to be considered well-capitalized. We also continued to have substantial liquidity, with$1.16 billion (1) of cash at the parent company, which includes parent cash loaned to RJ&A. We expect to continue to be opportunistic in deploying our capital in fiscal 2022, through a combination of organic growth and acquisitions, as evidenced by our fiscal 2021 acquisitions ofNWPS Holdings, Inc. ,Financo, LLC , andCebile Capital , and the announced acquisitions of Charles Stanley Group PLC and TriState Capital Holdings, Inc. which we expect to close in fiscal 2022. Pursuant to our Board of Directors' share repurchase authorization, we repurchased 1.5 million(2) shares of common stock during fiscal 2021 for$118 million , leaving$632 million of availability remaining under the authorization as ofSeptember 30, 2021 . However, due to regulatory restrictions following our announced acquisition of TriState Capital Holdings, we do not expect to repurchase shares until after closing. We remain well-positioned entering fiscal 2022, with nearly$1.2 trillion of client assets under administration, strong activity levels for financial advisory recruiting, and a strong investment banking pipeline. However, we expect to continue to face headwinds from near-zero short-term interest rates and economic uncertainty, including that arising from inflation, supply chain complications and uncertainty aroundU.S. economic policy. In addition, although the economy has improved since the beginning of the COVID-19 pandemic, the pace of recovery in the future is uncertain due to concerns related to the pandemic, including the spread of the Delta variant and other variants, vaccine distribution, and vaccine rates. As a result, we may experience volatility in brokerage and investment banking revenues, which may negatively impact our ability to sustain the level of revenues in future periods which were achieved in fiscal 2021. Although our results during the year were positively impacted by a benefit for credit losses related to our bank loan portfolio, net loan growth and/or future market deterioration could result in increased provisions in future periods. In addition, we expect that expenses will continue to increase in fiscal 2022, as business and event-related travel increase and as we continue to make investments in our people and technology to support our growth.
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K for a discussion of our fiscal 2020 results compared to fiscal 2019.
(1) For additional information, please see the "Liquidity and capital resources - Sources of liquidity" section in this MD&A.
(2) During our fiscal fourth quarter of 2021 the Board of Directors approved a 3-for-2 stock split, effected in the form of a 50% stock dividend, paid onSeptember 21, 2021 . All share and per share information has been retroactively adjusted to reflect this stock split. 39
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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 ROE, 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 financial measures for the periods
indicated.
Year ended September 30 ,
$ in millions, except per share amounts 2021 2020
Net income$ 1,403 $ 818 Non-GAAP adjustments: Losses on extinguishment of debt 98 - Acquisition and disposition-related expenses 19 7 Reduction in workforce expenses -
46
Pre-tax impact of non-GAAP adjustments 117
53
Tax effect of non-GAAP adjustments (28)
(13)
Total non-GAAP adjustments, net of tax 89 40 Adjusted net income$ 1,492 $ 858 Earnings per diluted share $ 6.63$ 3.88 Non-GAAP adjustments: Losses on extinguishment of debt 0.46 - Acquisition and disposition-related expenses 0.09
0.03
Reduction in workforce expenses -
0.22
Pre-tax impact of non-GAAP adjustments 0.55
0.25
Tax effect of non-GAAP adjustments (0.13)
(0.05)
Total non-GAAP adjustments, net of tax 0.42
0.20
Adjusted earnings per diluted share $ 7.05$ 4.08 40
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Year ended September 30, $ in millions 2021 2020 Return on equity Average equity$ 7,635 $ 6,860 Impact on average equity of non-GAAP adjustments: Losses on extinguishment of debt 39 - Acquisition and disposition-related expenses 6 1 Reduction in workforce expenses - 9 Pre-tax impact of non-GAAP adjustments 45 10 Tax effect of non-GAAP adjustments (11) (2) Total non-GAAP adjustments, net of tax 34 8 Adjusted average equity$ 7,669 $ 6,868 Average equity$ 7,635 $ 6,860 Less: Average goodwill and identifiable intangible assets, net 809 605 Average deferred tax liabilities, net (53) (31) Average tangible common equity$ 6,879 $ 6,286
Impact on average tangible common equity of non-GAAP adjustments: Losses on extinguishment of debt
39 -
Acquisition and disposition-related expenses 6 1
Reduction in workforce expenses - 9
Pre-tax impact of non-GAAP adjustments 45 10
Tax effect of non-GAAP adjustments (11) (2)
Total non-GAAP adjustments, net of tax 34 8
Adjusted average tangible common equity $ 6,913 $ 6,294
Return on equity 18.4 % 11.9 %
Adjusted return on equity 19.5 % 12.5 %
Return on tangible common equity 20.4 % 13.0 %
Adjusted return on tangible common equity 21.6 % 13.6 %
Tangible common equity is computed by subtracting goodwill and identifiable
intangible assets, net, along with the associated deferred tax liabilities, from
total equity attributable to RJF. 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.
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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 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Total company
Net revenues $ 9,760 $ 7,990 $ 7,740 22 % 3 %
Pre-tax income $ 1,791 $ 1,052 $ 1,375 70 % (23) %
Private Client Group
Net revenues $ 6,611 $ 5,552 $ 5,359 19 % 4 %
Pre-tax income $ 749 $ 539 $ 579 39 % (7) %
Capital Markets
Net revenues $ 1,885 $ 1,291 $ 1,083 46 % 19 %
Pre-tax income $ 532 $ 225 $ 110 136 % 105 %
Asset Management
Net revenues $ 867 $ 715 $ 691 21 % 3 %
Pre-tax income $ 389 $ 284 $ 253 37 % 12 %
Raymond James Bank
Net revenues $ 672 $ 765 $ 846 (12) % (10) %
Pre-tax income $ 367 $ 196 $ 515 87 % (62) %
Other
Net revenues $ (8) $ (82) $ 5 90 % NM
Pre-tax loss $ (246) $ (192) $ (82) (28) % (134) %
Intersegment eliminations
Net revenues$ (267) $ (251) $ (244) (6) % (3) % NET INTEREST ANALYSIS The following table presents the high, low and end of period target federal funds rates for our fiscal years endedSeptember 30, 2021 , 2020 and 2019, respectively. Target federal funds rate Twelve months ended: Low High End of period September 30, 2021 0.00 % 0.25 % 0% - 0.25% September 30, 2020 0.00 % 2.00 % 0% - 0.25% September 30, 2019 1.75 % 2.50 % 1.75% - 2.00% 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. These decreases, as well as the interest rate cuts implemented in calendar 2019 (225 basis points in total) have negatively impacted our net interest income, as well as the fees we earn from third-party banks on client cash balances swept to such banks as part of the RJBDP which are also sensitive to changes in interest rates. The negative impact of the decline in short-term interest rates has outweighed the growth in average interest-earning assets and average RJBDP balances swept to third-party banks compared with the prior year. We expect the current near-zero interest rate environment to continue into fiscal 2022. Given the relationship between our interest-sensitive assets and liabilities (primarily held in our PCG,Raymond James Bank and Other 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. 42
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis 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,Raymond James 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. 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. Year ended September 30, 2021 2020 2019 Average Average Average $ in millions balance Interest Average rate balance Interest Average rate balance Interest Average rate Interest-earning assets: Cash and cash equivalents$ 5,561 $ 12 0.21 %$ 5,173 $ 41 0.79 %$ 3,340 $ 83 2.49 % Assets segregated for regulatory purposes and restricted cash 8,735 15 0.17 % 3,042 28 0.94 % 2,399 59 2.47 % Available-for-sale securities 7,950 85 1.07 % 4,250 83 1.94 % 2,872 69 2.39 % Brokerage client receivables 2,280 77 3.37 % 2,232 84 3.77 % 2,584 122 4.73 % Bank loans, net of unearned income and deferred expenses: Loans held for investment: C&I loans 7,828 201 2.54 % 7,860 274 3.43 % 8,050 377 4.62 % CRE loans 2,703 70 2.56 % 2,589 88 3.34 % 2,311 110 4.68 % REIT loans 1,273 32 2.48 % 1,333 42 3.09 % 1,381 62 4.43 % Tax-exempt loans 1,270 34 3.31 % 1,246 33 3.35 % 1,284 35 3.36 % Residential mortgage loans 5,110 140 2.72 % 4,874 148 3.04 % 4,091 135 3.30 % SBL and other 4,989 112 2.22 % 3,559 112 3.10 % 3,139 145 4.57 % Loans held for sale 163 4 2.55 % 130 5 3.70 % 151 7 4.73 % Total bank loans, net 23,336 593 2.55 % 21,591 702 3.25 % 20,407 871 4.26 % All other interest-earning assets 2,251 41 1.77 % 2,289 62 2.70 % 2,967 77 2.60 % Total interest-earning assets$ 50,113 $ 823 1.64 %$ 38,577 $ 1,000 2.59 %$ 34,569 $ 1,281 3.71 % Interest-bearing liabilities: Bank deposits: Savings, money market and Negotiable Order of Withdrawal ("NOW") accounts$ 28,359 $ 6 0.02 %$ 23,629 $ 21 0.09 %$ 20,889 $ 120 0.58 % Certificates of deposit 904 17 1.90 % 1,006 20 2.03 % 536 12 2.24 % Total bank deposits 29,263 23 0.08 % 24,635 41 0.17 % 21,425 132 0.62 % Brokerage client payables 10,180 3 0.03 % 4,179 11 0.28 % 3,326 21 0.62 % Other borrowings 862 19 2.20 % 892 20 2.24 % 926 21 2.30 % Senior notes payable 2,078 96 4.58 % 1,800 85 4.72 % 1,550 73 4.70 % All other interest-bearing liabilities 585 9 0.82 % 795 21 1.99 % 1,030 36 3.13 % Total interest-bearing liabilities$ 42,968 $ 150 0.34 %$ 32,301 $ 178 0.54 %$ 28,257 $ 283 1.00 % Net interest income$ 673 $ 822 $ 998 Firmwide net interest margin (net yield on interest-earning assets) 1.35 % 2.14 % 2.89 %Raymond James Bank net interest margin 1.95 % 2.63 % 3.32 %
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. Interest income on residential mortgage nonaccrual loans is recognized on a cash basis.
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.
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period's average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous period's volume. Changes attributable to both volume and rate have been allocated proportionately. Year ended September 30, 2021 compared to 2020 2020 compared to 2019 Increase/(decrease) due to Increase/(decrease) due to $ in millions Volume Rate Total Volume Rate Total Interest income: Interest-earning assets: Cash and cash equivalents$ 3 $ (32) $ (29) $ 46 $ (88) $ (42) Assets segregated for regulatory purposes and restricted cash 54 (67) (13) 16 (47) (31) Available-for-sale securities 71 (69) 2 33 (19) 14 Brokerage client receivables 2 (9) (7) (16) (22) (38) Bank loans, net of unearned income and deferred expenses: Loans held for investment: C&I loans (1) (72) (73) (9) (94) (103) CRE loans 4 (22) (18) 13 (34) (21) REIT loans (2) (8) (10) (3) (18) (21) Tax-exempt loans 2 (1) 1 (2) - (2) Residential mortgage loans 8 (16) (8) 26 (13) 13 SBL and other 45 (45) - 19 (52) (33) Loans held for sale 1 (2) (1) (1) (1) (2) Total bank loans, net 57 (166) (109) 43 (212) (169) All other interest-earning assets (1) (20) (21) (18) 3
(15)
Total interest-earning assets 186 (363) (177) 104 (385)
(281)
Interest expense: Interest-bearing liabilities: Bank deposits: Savings, money market and NOW accounts 4 (19) (15) 17 (116) (99) Certificates of deposit (2) (1) (3) 10 (2) 8 Total bank deposits 2 (20) (18) 27 (118) (91) Brokerage client payables 17 (25) (8) 5 (15) (10) Other borrowings (1) - (1) (1) - (1) Senior notes payable 13 (2) 11 12 - 12 All other interest-bearing liabilities (9) (3) (12) (8) (7)
(15)
Total interest-bearing liabilities 22 (50) (28) 35 (140) (105) Change in net interest income$ 164 $ (313) $ (149) $ 69 $ (245) $ (176)
RESULTS OF OPERATIONS - PRIVATE CLIENT GROUP
Through our PCG segment, we provide financial planning, investment advisory and securities transaction services for which we generally 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 primarily related 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 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. Our PCG segment also earns fees from banks to which we sweep clients' cash in the RJBDP, including both third-party banks andRaymond James Bank . Such fees are included in "Account 44
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
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 for regulatory purposes, less interest paid on client cash balances in the 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.
Operating results
Year ended September 30, % change
$ in millions 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Revenues:
Asset management and related administrative fees
$ 3,162 $ 2,820 28 % 12 % Brokerage revenues: Mutual and other fund products 670 567 599 18 % (5) % Insurance and annuity products 438 397 412 10 % (4) % Equities, ETFs and fixed income products 438 419 378 5 % 11 % Total brokerage revenues 1,546 1,383 1,389 12 % - Account and service fees: Mutual fund and annuity service fees 408 348 334 17 % 4 % RJBDP fees: Third-party banks 76 150 280 (49) % (46) % Raymond James Bank 183 180 173 2 % 4 % Client account and other fees 157 129 122 22 % 6 % Total account and service fees 824 807 909 2 % (11) % Investment banking 47 41 32 15 % 28 % Interest income 123 155 225 (21) % (31) % All other 25 27 26 (7) % 4 % Total revenues 6,621 5,575 5,401 19 % 3 % Interest expense (10) (23) (42) (57) % (45) % Net revenues 6,611 5,552 5,359 19 % 4 % Non-interest expenses: Financial advisor compensation and benefits 4,204 3,428 3,190 23 % 7 % Administrative compensation and benefits 1,015 971 933 5 % 4 % Total compensation, commissions and benefits 5,219 4,399 4,123 19 % 7 % Non-compensation expenses: Communications and information processing 275 251 235 10 % 7 % Occupancy and equipment 179 175 168 2 % 4 % Business development 71 79 124 (10) % (36) % Professional fees 46 33 33 39 % - All other 72 76 97 (5) % (22) % Total non-compensation expenses 643 614 657 5 % (7) % Total non-interest expenses 5,862 5,013 4,780 17 % 5 % Pre-tax income$ 749 $ 539 $ 579 39 % (7) % 45
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Selected key metrics PCG client asset balances As of September 30, $ in billions 2021 2020 2019 AUA$ 1,115.4 $ 883.3 $ 798.4
Assets in fee-based accounts (1)
56.2 % 53.8 % 51.2 %
(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 revenue is shared with the Asset Management segment. We also offer our clients fee-based accounts that are invested in "managed programs" overseen by AMS, which is part of our Asset Management segment. Fee-billable assets invested in managed programs are included in both "Assets in fee-based accounts" in the preceding table and "Financial assets under management" in the Asset Management segment. Revenues related to managed programs are shared by our PCG and Asset Management segments.The Asset Management segment receives a higher portion of the revenues related to accounts invested in managed programs, as compared to the portion received for non-managed programs, as it is performing 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 invests 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. Assets in fee-based accounts in this segment increased 2% as ofSeptember 30, 2021 compared withJune 30, 2021 , which we expect will have a favorable impact on our related revenues in our fiscal first quarter of 2022. PCG AUA increased compared to the prior year due to equity market appreciation, the net addition of financial advisors, as well as net inflows of client assets. In addition, PCG assets in fee-based accounts continued to increase as a percentage of overall PCG AUA 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, 2021 2020 2019 Employees 3,461 3,404 3,301 Independent contractors 5,021 4,835 4,710 Total advisors 8,482 8,239 8,011 The number of financial advisors increased from prior years due to a combination of strong retention and recruiting of financial advisors, as well as new trainees that were moved into production roles, partially offset by the impact of advisors who left the firm, including planned retirements, where assets are generally retained at the firm. The growth in the number of financial advisors has been negatively impacted by the transfer of advisors who were previously affiliated with the firm as independent contractors or employees to our RCS division. Advisors in RCS are not included in the financial advisor count, although their assets of$92.7 billion are included in client AUA. The recruiting pipeline remains robust across our affiliation options despite an increasingly competitive recruiting environment. 46
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Clients' domestic cash sweep balances
As of September 30,
$ in millions 2021 2020 2019
RJBDP
Raymond James Bank $ 31,410 $ 25,599 $ 21,649
Third-party banks 24,496 25,998 14,043
Subtotal RJBDP 55,906 51,597 35,692
CIP 10,762 3,999 2,022
Total clients' domestic cash sweep balances
$ 37,714 Year ended September 30, 2021 2020 2019 Average yield on RJBDP - third-party banks 0.30 % 0.77 % 1.88 % 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 atRaymond James 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 balance at third-party banks. The average yield on RJBDP - third-party banks decreased compared with the prior year to 0.30%, as the current year reflected a full year of near-zero short-term interest rates. If demand for deposits from third-party banks does not improve from current levels, this yield could further decline, particularly in the second half of fiscal 2022. The PCG segment also earns RJBDP servicing fees from theRaymond James Bank segment, which are based on the number of accounts that are swept toRaymond James Bank . The fees from theRaymond James Bank segment are eliminated in consolidation. PCG segment results are impacted by changes in the allocation of client cash balances in RJBDP betweenRaymond James Bank and third-party banks. PCG segment results are also impacted by changes in the allocation of cash balances between RJBDP and CIP, as the net yield to the firm on cash balances in CIP (i.e., the spread between amounts earned on assets segregated for regulatory purposes and the interest paid to clients on CIP balances) is lower than the yield to the firm on RJBDP balances, on average. Client cash balances remained elevated as ofSeptember 30, 2021 , as a result of a number of factors, including the continuing economic uncertainty caused, in part, by the effects of the COVID-19 pandemic, as well as uncertainty related to the nature and timing of policy changes that may be put forth by the federal government administration. As we continued to experience growing cash balances and less demand from third-party banks in the RJBDP during fiscal 2021, cash held in CIP increased significantly, also driving an increase in our segregated asset balances.
Year ended
Net revenues of
Asset management and related administrative fees increased$894 million , or 28%, 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.
Brokerage revenues increased
Account and service fees increased$17 million , or 2%, primarily due to an increase in mutual fund service fees, primarily resulting from higher average mutual fund assets, as well as incremental client account and other fees resulting from our acquisition of NWPS at the end of our fiscal first quarter of 2021. Partially offsetting these increases was a decline in RJBDP fees from third-party banks as a result of lower short-term interest rates. 47
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Net interest income decreased$19 million , or 14%, driven by a decline in interest income due to lower short-term interest rates, which more than offset the impact of higher average asset balances. In addition, our CIP balances increased significantly compared with the prior year resulting in an increase in segregated assets, and a significant portion of the increase was held in segregated short-termU.S. Treasury securities at very low interest rates. Partially offsetting the impact of the decrease in interest income, interest expense also decreased, despite the significant increase in client cash balances in our CIP, due to the impact of lower deposit rates paid on these balances.
Compensation-related expenses increased
Non-compensation expenses increased$29 million , or 5%, largely due to higher communications and information processing expenses primarily due to ongoing upgrades to our technology platforms, as well as higher professional fees largely due to an increase in external legal fees and consulting expenses. Partially offsetting these increases was a decline in business development expenses due to limited travel and event-related expenses during the COVID-19 pandemic.
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K for a discussion of our fiscal 2020 results compared to fiscal 2019.
RESULTS OF OPERATIONS - CAPITAL MARKETS
OurCapital Markets segment conducts investment banking, institutional sales, securities trading, the syndication and management of investments in low-income housing funds, the majority of which qualify for tax credits, and equity research. We provide various investment banking services, including underwriting or advisory services on 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. 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 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.
For an overview of our Capital Markets segment operations, refer to the information presented in "Item 1 - Business" of this Form 10-K.
48
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Operating results Year ended September 30, % change 2021 vs. $ in millions 2021 2020 2019 2020 2020 vs. 2019 Revenues: Brokerage revenues: Fixed income$ 515 $ 421 $ 283 22 % 49 % Equity 145 150 131 (3) % 15 % Total brokerage revenues 660 571 414 16 % 38 % Investment banking: Merger & acquisition and advisory 639 290 379 120 % (23) % Equity underwriting 285 185 100 54 % 85 % Debt underwriting 172 133 85 29 % 56 % Total investment banking 1,096 608 564 80 % 8 % Interest income 16 25 38 (36) % (34) % Tax credit fund revenues 105 83 86 27 % (3) % All other 18 20 15 (10) % 33 % Total revenues 1,895 1,307 1,117 45 % 17 % Interest expense (10) (16) (34) (38) % (53) % Net revenues 1,885 1,291 1,083 46 % 19 % Non-interest expenses: Compensation, commissions and benefits 1,055 774 665 36 % 16 % Non-compensation expenses: Communications and information processing 83 77 75 8 % 3 % Occupancy and equipment 37 36 35 3 % 3 % Business development 34 47 48 (28) % (2) % Professional fees 54 48 45 13 % 7 % Acquisition and disposition-related expenses 6 7 15 (14) % (53) % Goodwill impairment - - 19 - % (100) % All other 84 77 71 9 % 8 % Total non-compensation expenses 298 292 308 2 % (5) % Total non-interest expenses 1,353 1,066 973 27 % 10 % Pre-tax income$ 532 $ 225 $ 110 136 % 105 %
Year ended
Net revenues of
Investment banking revenues increased$488 million , or 80%, due to a significant increase in merger & acquisition and advisory revenues and, to a lesser extent, underwriting revenues. The significant increase in merger & acquisition and advisory revenues reflected larger individual transactions and an increase in the number of transactions, as the current year reflected high levels of client activity throughout the year, while the prior year was impacted by lower levels of client activity during the onset of the COVID-19 pandemic. Equity underwriting revenues also increased significantly, primarily due to an increase in market activity in both theU.S. andCanada . An increase in debt underwriting primarily resulted from higher revenues from corporate underwritings. In addition to the strong results during the current year, our investment banking pipelines remain strong at the beginning of fiscal 2022 and, in part, reflect the results of investments we have made over the past several years, which have positioned us to enhance our services to our clients. The most recent examples of such investments are our acquisitions ofFinanco and Cebile, which closed during fiscal 2021. Brokerage revenues increased$89 million , or 16%, due to a significant increase in fixed income brokerage revenues as a result of higher levels of client activity throughout the current year. The significant increase in client activity levels, particularly with depository institution clients, began toward the end of our fiscal second quarter of fiscal 2020, but were more sustained throughout fiscal 2021. We expect fixed income brokerage revenues to remain solid in fiscal 2022 driven in large part by anticipated continued demand from depository clients.
Compensation-related expenses increased
49
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Non-compensation expenses increased$6 million , or 2%, primarily due to an increase in various expense categories as a result of growth in the business. These increases were partially offset by lower travel and event-related expenses as a result of the COVID-19 pandemic. Acquisition and disposition-related expenses were flat year-over-year, as the current year included$6 million of amortization expense related to intangible assets with short useful lives associated with ourFinanco and Cebile acquisitions, while the prior year included a$7 million loss related to the disposition of our interests in certain entities that operated predominantly inFrance .
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K for a discussion of our fiscal 2020 results compared to fiscal 2019.
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 2021 vs. 2020 vs. $ in millions 2021 2020 2019 2020 2019 Revenues: Asset management and related administrative fees: Managed programs$ 570 $ 481 $ 467 19 % 3 % Administration and other 267 207 178 29 % 16 % Total asset management and related administrative fees 837 688 645 22 % 7 % Account and service fees 18 16 31 13 % (48) % All other 12 11 15 9 % (27) % Net revenues 867 715 691 21 % 3 % Non-interest expenses: Compensation, commissions and benefits 182 177 179 3 % (1) % Non-compensation expenses: Communications and information processing 47 45 44 4 % 2 % Investment sub-advisory fees 127 99 93 28 % 6 % All other 122 110 122 11 % (10) % Total non-compensation expenses 296 254 259 17 % (2) % Total non-interest expenses 478 431 438 11 % (2) % Pre-tax income$ 389 $ 284 $ 253 37 % 12 % 50
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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 2021 2020 2019
AMS (1) $ 134.4 $ 102.2 $ 91.8
Carillon Tower Advisers 67.8 59.5 58.5Subtotal financial assets under management 202.2 161.7
150.3
Less: Assets managed for affiliated entities (10.3) (8.6)
(7.2)
Total financial assets under management$ 191.9 $ 153.1
(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 2021 2020 2019
Financial assets under management at beginning of
year $ 161.7 $ 150.3 $ 146.6
Carillon Tower Advisers - net outflows (0.5) (5.4) (5.8)
AMS - net inflows 13.5 6.1 6.0
Net market appreciation in asset values 27.5 10.7 3.5
Financial assets under management at end of year
$ 161.7 $ 150.3 AMS
See "Management's Discussion and Analysis - Results of Operations -
51
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Assets managed byCarillon Tower Advisers include assets managed by its subsidiaries and affiliates:Eagle Asset Management , Scout Investments, Reams Asset Management (a division of Scout Investments), ClariVest Asset Management and Cougar Global Investments. The following table presentsCarillon Tower Advisers' AUM by objective, excluding assets for which it does not exercise discretion, as well as the approximate average client fee rate earned on such assets. $ in billions September 30, 2021 Average fee rate Equity $ 30.1 0.52% Fixed income 31.6 0.18% Balanced 6.1 0.35% Total financial assets under management $ 67.8
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 2021 2020 2019 Total assets$ 365.3 $ 280.6 $ 229.7 The increase in assets over the prior year was primarily due to equity market appreciation, successful financial advisor recruiting and retention, and the continued trend of clients moving to fee-based accounts from transaction-based accounts. 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 2021 2020 2019
Total assets $ 8.1 $ 7.1 $ 6.6 Year ended
Net revenues of
Asset management and related administrative fees increased$149 million , or 22%, driven by higher average AUM and higher assets in non-discretionary asset-based programs compared with the prior year, resulting from equity market appreciation and net inflows at AMS. WhileCarillon Tower Advisers continued to be negatively impacted by the industry shift from actively managed investment strategies to passive investment strategies, its net outflows for the year were much lower than in prior years. BeginningOctober 1, 2021 , AMS will receive a lower portion of the client fee on certain managed fee-based products offered to PCG clients through AMS. Based on balances as ofSeptember 30, 2021 , these changes are expected to result in an approximately$35 million annual reduction in asset management and related administrative fees in the Asset Management segment and an approximately$25 million reduction in firmwide pre-tax income. Compensation expenses increased$5 million , or 3%, and included the impact of higher net revenues. Non-compensation expenses increased$42 million , or 17%, primarily due to increases in investment sub-advisory fees, resulting from an increase in AUM in sub-advised programs, and an increase in platform fees. 52
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K for a discussion of our fiscal 2020 results compared to fiscal 2019.
RESULTS OF OPERATIONS - RAYMOND JAMES BANK
Raymond James Bank provides various types of loans, including corporate loans, tax-exempt loans, residential loans, SBL and other loans.Raymond James Bank is active in corporate loan syndications and participations and also providesFDIC -insured deposit accounts, including to clients of our broker-dealer subsidiaries.Raymond James Bank generates net interest income principally through the interest income earned on loans and an investment portfolio of available-for-sale securities, which is offset by the interest expense it pays on client deposits and on its borrowings.Raymond James 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 ourRaymond James Bank segment operations, refer to the information presented in "Item 1- Business" of this Form 10-K. Operating results Year ended September 30, % change 2021 vs. 2020 vs. $ in millions 2021 2020 2019 2020 2019 Revenues: Interest income$ 684 $ 800 $ 975 (15) % (18) % Interest expense (42) (62) (155) (32) % (60) % Net interest income 642 738 820 (13) % (10) % All other 30 27 26 11 % 4 % Net revenues 672 765 846 (12) % (10) % Non-interest expenses: Compensation and benefits 51 51 49 - % 4 % Non-compensation expenses: Bank loan provision/(benefit) for credit losses (32) 233 22 NM 959 % RJBDP fees to PCG 183 180 173 2 % 4 % All other 103 105 87 (2) % 21 % Total non-compensation expenses 254 518 282 (51) % 84 % Total non-interest expenses 305 569 331 (46) % 72 % Pre-tax income$ 367 $ 196 $ 515 87 % (62) %
Year ended
Net revenues of
Net interest income decreased$96 million , or 13%, as the negative impact from lower short-term interest rates more than offset the impact of higher average interest-earning assets. The increase in average interest-earning assets was primarily driven by growth in the available-for-sale securities portfolio and securities-based loans to PCG clients. The net interest margin decreased to 1.95% from 2.63% for the prior year, primarily due to the relatively low short-term interest rates throughout fiscal 2021 compared to only a partial year of such low rates in fiscal 2020, as well as a higher concentration of agency-backed available-for-sale securities, which have a lower yield on average than loans. Based on current interest rates and our current asset mix, we expect our net interest margin to approximate 1.90% for the first half of fiscal 2022. The bank loan benefit for credit losses was$32 million in the current year, which was calculated under the CECL model, compared with a provision for credit losses of$233 million in the prior year, which was calculated under the incurred loss model. The current year benefit reflected improved economic forecasts used in our CECL model since our adoption of CECL onOctober 1, 2020 , including improved outlooks on unemployment, gross domestic product and property price indices, as well as improved credit ratings within our corporate loan portfolio, partially offset by provisions for credit losses related to loan growth. We plan to continue to grow our bank loan portfolio in fiscal 2022, which we expect will result in an increased 53
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis provision for credit losses in future periods, absent further improvement in our economic forecasts. The provision for credit losses in the prior year was significant due to the rapid and widespread economic deterioration and uncertainty caused by the onset of the COVID-19 pandemic, as well as charge-offs on certain corporate loans sold during the prior year primarily driven by our credit risk mitigation activities.
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K for a discussion of our fiscal 2020 results compared to fiscal 2019.
RESULTS OF OPERATIONS - OTHER
This segment includes our private equity investments, interest income on certain
corporate cash balances, certain acquisition-related expenses, and certain
corporate overhead costs of RJF, including the interest costs on our public debt
and any losses on extinguishment of such debt. The Other segment also includes
the reduction in workforce expenses, primarily the result of the elimination of
certain positions, that occurred in our fiscal fourth quarter of 2020 in
response to the economic environment at that time. 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 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Revenues:
Interest income $ 8 $ 30 $ 63 (73) % (52) %
Gains/(losses) on private equity investments 74 (28) 14 NM NM
All other 6 4 3 50 % 33 %
Total revenues 88 6 80 1,367 % (93) %
Interest expense (96) (88) (75) 9 % 17 %
Net revenues (8) (82) 5 90 % NM
Non-interest expenses:
Compensation and all other 127 64 87 98 % (26) %
Losses on extinguishment of debt 98 - - NM - %
Acquisition and disposition-related expenses 13 - - NM - %
Reduction in workforce expenses - 46 - (100) % NM
Total non-interest expenses 238 110 87 116 % 26 %
Pre-tax loss $ (246) $ (192) $ (82) (28) % (134) %
Year ended
The pre-tax loss of
Net revenues increased$74 million , primarily due to private equity valuation gains in the current year, compared with valuation losses in the prior year, which reflected the impact of challenging market conditions at the onset of the COVID-19 pandemic. The current year included$74 million of private equity valuation gains, of which$25 million were attributable to noncontrolling interests and were offset within "Other" expenses. These valuation gains were primarily the result of an improvement in market conditions and an improved outlook for certain of our investments. The prior year included$28 million of private equity valuation losses, of which$20 million were attributable to noncontrolling interests and were offset within "Other" expenses. Interest income earned on corporate cash balances decreased compared with the prior year due to lower short-term interest rates, and interest expense increased primarily as a result of an increase in corporate debt arising from the issuance of$500 million of senior notes inMarch 2020 . Non-interest expenses increased$128 million , or 116%, primarily due to losses on extinguishment of debt of$98 million in the current year (refer to the "Executive overview" section of this MD&A), the aforementioned$25 million of gains attributable to noncontrolling interests compared with$20 million of losses in the prior year, and acquisition-related expenses of$13 million in the current year, which primarily included professional and integration expenses associated with our acquisitions of NWPS,Financo and Cebile during fiscal 2021 and our announced acquisitions of Charles Stanley and TriState Capital. These increases 54
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
were partially offset by the impact of
Year ended
Refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2020 Form 10-K for a discussion of our fiscal 2020 results compared to fiscal 2019.
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, 2021 2020 2019 Return on assets 2.5% 1.9% 2.7% Return on equity 18.4% 11.9% 16.2% Average equity to average assets 13.8% 15.5% 16.7% Dividend payout ratio 15.7% 25.4% 19.0% Return on assets is computed by dividing net income by average assets for each indicated 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 by average equity for each indicated 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 for each indicated fiscal year, as calculated in accordance with the previous explanations.
Dividend payout ratio is computed by dividing dividends declared per common share by earnings per diluted common share for each indicated fiscal year.
Refer to the "Net interest analysis" and "Risk management - Credit risk" sections of this MD&A and to the Notes to Consolidated Financial Statements of this Form 10-K for the other required disclosures.
STATEMENT OF FINANCIAL CONDITION ANALYSIS
The assets on our Consolidated Statements of Financial Condition consisted primarily of cash and cash equivalents, assets segregated for regulatory purposes and restricted cash (primarily 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$61.89 billion as ofSeptember 30, 2021 were$14.41 billion , or 30%, greater than our total assets as ofSeptember 30, 2020 . The increase in assets was primarily due to a$7.10 billion increase in assets segregated for regulatory purposes and restricted cash, primarily due to a significant increase in client cash balances. Bank loans, net increased by$3.80 billion , primarily due to an increase in securities-based loans to PCG clients and an increase in corporate loans. In addition, cash and cash equivalents increased$1.81 billion , available-for-sale securities increased$665 million , and brokerage client receivables, net increased$396 million .Goodwill and identifiable intangible assets, net increased$282 million due to the acquisitions of NWPS,Financo , and Cebile during fiscal 2021. As ofSeptember 30, 2021 , our total liabilities of$53.59 billion were$13.28 billion , or 33%, greater than our total liabilities as ofSeptember 30, 2020 . The increase in total liabilities was primarily related to the significant increase in client cash balances as ofSeptember 30, 2021 , resulting in a$7.20 billion increase in brokerage client payables, primarily due to an increase in client cash held in our CIP, and a$5.69 billion increase in bank deposits, reflecting higher RJBDP balances held atRaymond James Bank . Our accrued compensation, commissions and benefits increased$441 million , primarily due to an increase in accrued bonuses and benefits resulting from higher net revenues and pre-tax earnings compared with the prior year. 55
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital are 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. We seek to manage capital levels to support execution of our business strategy, provide financial strength to our subsidiaries, and maintain sustained access to the capital markets, while at the same time meeting our regulatory capital requirements and conservative internal management targets. Liquidity and capital resources are 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. 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 in the short-term. We also believe that we will be able to continue to meet our long-term cash requirements due to our strong financial position and ability to access capital from financial markets.
Liquidity and capital management
Senior management establishes our liquidity and capital management frameworks. Our liquidity and capital management frameworks are overseen by theRJF Asset and Liability Committee , a senior management committee that develops and executes strategies and policies to manage our liquidity risk and interest rate risk, as well as provides oversight over the firm's investments. The liquidity management framework includes senior management's review of short- and long-term cash flow forecasts, review of 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 resources 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 and liquidity, and also maintains our relationships with various lenders. The objective of our liquidity management framework is to support the successful execution of our business strategies while ensuring ongoing and sufficient liquidity. Our capital planning and capital risk management processes are governed by the Capital Planning Committee ("CPC"), a senior management committee that provides oversight on our capital planning and ensures that our strategic planning and risk management processes are integrated into the capital planning process. The CPC meets at least quarterly to review key metrics related to the firm's capital, such as debt structure and capital ratios; to analyze potential and emerging risks to capital; to oversee our annual firmwide capital stress test; and to propose capital actions to the Board of Directors, such as declaring dividends, repurchasing securities, and raising capital. To ensure that we have sufficient capital to absorb unanticipated losses, the firm adheres to capital risk appetite statements and tolerances set in excess of regulatory minimums, which are established by the CPC and approved by the Board of Directors. We conduct enterprise-wide capital stress testing to ensure that we maintain adequate capital to adhere to our established tolerances under multiple scenarios, including stressed scenarios.
Cash flows
Cash and cash equivalents increased$1.81 billion to$7.20 billion during the year endedSeptember 30, 2021 . During the year endedSeptember 30, 2021 , cash provided by our operations (including significant net income) and proceeds from our$750 million of 3.75% senior notes offering (net of debt issuance costs), were offset by cash used for the early-redemption of$750 million of our pre-existing senior notes and the related make-whole premiums, dividend payments, share repurchases, and investments in future growth with our acquisitions of NWPS,Financo , and Cebile. We also had significant increases in client cash balances, which increased both our brokerage client payables and our bank deposits. However, this cash was largely used to increase our assets segregated for regulatory purposes, including through the purchase ofU.S. Treasuries, as part of our brokerage activities, and to increase our bank loan portfolio and available-for-sale securities as part of our banking activities.
Sources of liquidity
Approximately$1.16 billion of our totalSeptember 30, 2021 cash and cash equivalents included cash held directly at the parent, or parent cash loaned to RJ&A. This parent cash balance does not include$400 million of cash set aside by RJF in a restricted account during the fiscal fourth quarter of 2021 to be used to fund our closing obligations associated with the pending acquisition of Charles Stanley. As ofSeptember 30, 2021 , this restricted cash was included in "Assets segregated for regulatory purposes and restricted cash" on our Consolidated Statements of Financial Condition and is not included in the amounts presented in the following table. As ofSeptember 30, 2021 , RJF had loaned$649 million to RJ&A (such amount is included in the RJ&A cash balance in the following table), which RJ&A has invested on behalf of RJF in cash and cash equivalents or 56
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis otherwise deployed in its normal business activities. The following table presents our holdings of cash and cash equivalents. $ in millions September 30, 2021 RJF $ 527 RJ&A 2,799 Raymond James Bank 2,359 RJ Ltd. 853 RJFS 142 Carillon Tower Advisers 98 Other subsidiaries 423 Total cash and cash equivalents $ 7,201 RJF maintained depository accounts atRaymond James Bank with a balance of$229 million as ofSeptember 30, 2021 . The portion of this total that was available on demand without restrictions, which amounted to$152 million as ofSeptember 30, 2021 , is reflected in the RJF total (and is excluded from theRaymond James Bank cash balance in the preceding table).
A large portion of the
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, 2021 , 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 and intends to use a portion of its excess net capital to remit dividends to RJF in fiscal 2022, in conformity with all required regulatory rules or approvals.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 which may result in RJ&A limiting 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.Raymond James Bank may pay dividends to RJF without prior approval of its regulator as long as the dividends do not exceed the sum ofRaymond James Bank's current calendar year and the previous two calendar years' retained net income, andRaymond James Bank maintains its targeted regulatory capital ratios. Dividends fromRaymond James 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.
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 our$500 million revolving credit facility agreement (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. 57
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis The following table presents our committed financing arrangements with third-party lenders, which we generally utilize to finance a portion of our fixed income trading instruments, and the outstanding balances related thereto. September 30, 2021 Total number of $ in millions RJ&A RJF Total arrangements
Financing arrangement: Committed secured$ 100 $ -$ 100 1 Committed unsecured 200 300 500 1 Total committed financing arrangements$ 300 $ 300 $ 600 2 Outstanding borrowing amount: Committed secured $ - $ - $ - Committed unsecured - - - Total outstanding borrowing amount $ -
$ - $ -
Our committed unsecured financing arrangement in the preceding table represents our Credit Facility, which 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 16 of the Notes to Consolidated Financial Statements of this Form 10-K. InApril 2021 , we amended our Credit Facility, maintaining the$500 million maximum borrowing amount, but extending the term throughApril 2026 and incorporating a lower cost of borrowing under the facility and certain favorable covenant modifications.
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 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, 2021 , we had outstanding borrowings under two uncommitted secured borrowing arrangements 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, 2021 Outstanding borrowing amount: Uncommitted secured $ 205 Uncommitted unsecured - Total outstanding borrowing amount $ 205
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, 2021 $ 220 $ 234 $ 205 $ 269 $ 286 $ 279
June 30, 2021 $ 194 $ 185 $ 185 $ 283 $ 339 $ 289
March 31, 2021 $ 226 $ 260 $ 222 $ 242 $ 280 $ 224
December 31, 2020 $ 211 $ 236 $ 233 $ 204 $ 259 $ 162
September 30, 2020 $ 140 $ 165 $ 165 $ 199 $ 260 $ 207
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Other borrowings and collateralized financings
We had$850 million inFederal Home Loan Bank ("FHLB") borrowings outstanding atSeptember 30, 2021 , comprised of floating-rate advances. The interest rates on the floating-rate advances, which mature inDecember 2022 , reset quarterly and are generally based on LIBOR. We use interest rate swaps to manage the risk of increases in interest rates associated with these floating-rate advances by converting the balances subject to variable interest rates to a fixed interest rate. The interest rates on the FHLB borrowings will transition to a SOFR-based rate inDecember 2021 . These FHLB borrowings were secured by a blanket lien onRaymond James Bank's residential mortgage loan portfolio.Raymond James Bank had an additional$3.31 billion in immediate credit available from the FHLB as ofSeptember 30, 2021 and, with the pledge of additional eligible collateral to the FHLB, total available credit of 30% of total assets. See Note 16 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information regarding these borrowings.Raymond James Bank is eligible to participate in theFederal Reserve's discount window program; however, we do not view borrowings from theFederal Reserve 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 theFederal Reserve , 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$72 million as ofSeptember 30, 2021 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 7 of the Notes to Consolidated Financial Statements of this Form 10-K for more information on our collateralized agreements and financings.
Senior notes payable
InApril 2021 , we sold$750 million in aggregate principal amount of 3.75% senior notes dueApril 2051 in a registered underwritten public offering. We utilized the proceeds from the offering and cash on hand to early-redeem our$250 million par 5.625% senior notes due 2024 and our$500 million par 3.625% senior notes due 2026. See Note 17 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information. After the issuance of the 3.75% senior notes dueApril 2051 and repurchase and redemption of the 5.625% senior notes due 2024 and 3.625% senior notes due 2026, atSeptember 30, 2021 , we had aggregate outstanding senior notes payable of$2.04 billion , which, exclusive of any unaccreted premiums or discounts and debt issuance costs, was comprised of$500 million par 4.65% senior notes due 2030,$800 million par 4.95% senior notes due 2046, and$750 million par 3.75% senior notes due 2051. AtSeptember 30, 2021 , estimated future contractual interest payments on our senior notes were approximately$2 billion , of which$91 million is payable in fiscal 2022, with the remainder extending through 2051.
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 Fitch Ratings, Inc.(1) A- Stable Moody's Investors Services (2) Baa1 Review for Upgrade Standard & Poor's Ratings Services BBB+ Stable
(1) In
Our current long-term debt ratings depend upon a number of factors, including
industry dynamics, operating and economic environment, operating results,
operating margins, earnings trends and volatility, balance sheet composition,
liquidity and liquidity management, capital structure, overall risk management,
business diversification and market share, and competitive position in the
markets in which we operate. Deterioration 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
59
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis 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. 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 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. Of the company-owned life insurance policies which fund these plans, certain policies could be used as a source of liquidity for the firm. Those policies against which we could readily borrow had a cash surrender value of$835 million as ofSeptember 30, 2021 , comprised of$520 million related to employee-directed plans and$315 million related to company-directed plans, and we were able to borrow up to 90%, or$751 million , of theSeptember 30, 2021 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, 2021 . OnMay 12, 2021 , 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 12, 2024 . OnJuly 29, 2021 , we announced our firm intention to make an offer for the entire issued and to be issued share capital ofU.K. -based Charles Stanley Group PLC ("Charles Stanley") at a price of £5.15 per share, or approximately £279 million ($387 million as ofJuly 28, 2021 ). Under the terms of the intended offer, a loan note alternative will be available to Charles Stanley shareholders which will enable eligible Charles Stanley shareholders to elect to receive a loan note in lieu of part or all of the cash consideration to which they would otherwise be entitled under the terms of the offer. The initial interest rate for the loan note alternative for the first year is 0.1%. The note bears interest at a variable rate which resets annually, calculated as theBank of England's base rate plus a differential defined in the loan note, with the interest rate not to exceed 1.5% in any period. The transaction, which is subject toFCA approval, is expected to close in the first half of fiscal 2022. We have segregated$400 million in cash to fund the acquisition on the closing date, which is included in "Assets segregated for regulatory purposes and restricted cash" on our Consolidated Statements of Financial Condition as ofSeptember 30, 2021 . See Note 3 of the Notes to Consolidated Financial Statements of this Form 10K for additional information. OnOctober 20, 2021 , we announced we had entered into a definitive agreement to acquire TriState Capital Holdings, Inc. ("TriState Capital ") in a combination cash and stock transaction, valued at approximately$1.1 billion . Under the terms of the agreement, TriState Capital common stockholders will receive$6.00 cash and 0.25 RJF shares for each share of TriState Capital common stock, which represents per share consideration of$31.09 based on the closing price of RJF common stock onOctober 19, 2021 . We have entered into an agreement with the sole holder of the TriState Capital Series C Perpetual Non-Cumulative Convertible Non-Voting Preferred Stock ("Series C Convertible Preferred") pursuant to which the Series C Convertible Preferred will be converted to common shares at the prescribed exchange ratio and cashed out at$30 per share. The TriState Capital Series A Non-Cumulative Perpetual Preferred Stock and Series B Non-Cumulative Perpetual Preferred Stock will remain outstanding and will be converted into equivalent preferred stock of RJF. The transaction, which is subject to customary closing conditions, including regulatory approvals and approval by TriState Capital shareholders, is expected to close in fiscal 2022. We currently have the ability to utilize our cash on hand to fund the acquisition. See Note 3 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information. As part of our ongoing operations, we also enter into contractual arrangements that may require future cash payments, including certificates of deposit, lease obligations and other contractual arrangements, such as for software and various services. See Notes 14 and 15 of the Notes to the Consolidated Financial Statements of this Form 10-K for information regarding our lease obligations and certificates of deposit, respectively. 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 19 of the Notes to Consolidated Financial Statements of this Form 10-K for further information. 60
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
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, 2021 , all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. In addition,RJF and Raymond James Bank were categorized as "well-capitalized" as ofSeptember 30, 2021 . 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 24 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 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.
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" 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 one or more 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
61
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis 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 which are less frequently traded included management judgment in determining the relevance and reliability of market information available and are generally classified in Level 3 of the fair value hierarchy. See Notes 2 and 4 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 liabilities" section of Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K. In addition, refer to Note 19 of the Notes to Consolidated Financial Statements of this Form 10-K for information regarding legal and regulatory matter contingencies as ofSeptember 30, 2021 .
Allowance for credit losses
We evaluate certain of our financial assets, including bank loans, to estimate an allowance for credit losses. EffectiveOctober 1, 2020 , we adopted the CECL accounting guidance which changed the methodology used to measure the allowance for credit losses from an allowance based on incurred losses to an allowance based on expected credit losses over a financial asset's lifetime. The remaining life of our financial assets is determined by considering contractual terms and expected prepayments, among other factors. We employ multiple methodologies in estimating an allowance for credit losses and our approaches differ by type of financial asset and the risk characteristics within each financial asset type. Our estimates are based on ongoing evaluations of the portfolio, the related credit risk characteristics, and the overall economic and environmental conditions affecting the financial assets. Our process for determining the allowance for credit losses includes a complex analysis of several quantitative and qualitative factors requiring significant management judgment due to matters that are inherently uncertain. This uncertainty can produce volatility in our allowance for credit losses. In addition, the allowance for credit 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. See the discussion regarding our methodology in estimating the allowance for credit losses in Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K.
RECENT ACCOUNTING DEVELOPMENTS
The FASB has issued certain accounting updates which were assessed and either determined to be not applicable or are not expected to have a significant impact on our financial statements.
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, including itsAudit and Risk Committee , 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 62
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis 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 our banking operations. Our broker-dealer subsidiaries, primarily RJ&A, act as market makers and trade debt obligations and equity securities and maintain inventories to ensure availability of securities and to facilitate client transactions. Inventory levels may fluctuate daily as a result of client demand. We also hold investments in agency-backed MBS and agency-backed CMOs withinRaymond James Bank's available-for-sale securities portfolio, and from time-to-time may hold SBA loan securitizations not yet transferred. Our primary market risks relate to interest rates, equity prices, and foreign exchange rates. Interest rate risk results from changes in levels of interest rates, the volatilities of interest rates, mortgage prepayment speeds and credit spreads. Equity risk results from changes in prices of equity securities. Foreign exchange risk results from changes in spot prices, forward prices and volatilities of foreign exchange rates.
See Notes 2, 4, 5 and 6 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.
We regularly enter into underwriting commitments and, as a result, we may be subject to market risk on any unsold shares issued in the offerings to which we are committed. Risk exposure is controlled by limiting our participation, the transaction size or through the syndication process. The Market Risk Management department is responsible for measuring, monitoring, and reporting market risks associated with the firm's trading and derivative portfolios. While Market Risk Management maintains ongoing communication with the revenue-generating business units, it is independent of such units.
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. Changes in value of our trading inventory may result from fluctuations in interest rates, credit spreads, equity prices, macroeconomic factors, investor expectations or risk appetites, liquidity, as well as dynamic relationships among these factors. We actively manage interest rate risk arising from our fixed income trading securities through the use of hedging strategies utilizingU.S. Treasury securities, futures contracts, liquid spread products and derivatives. Our primary method for controlling risks within trading inventories is through the use of dollar-based and exposure-based limits. A hierarchy of limits exists at multiple levels, including firm, business unit, desk (e.g., for equities, corporate bonds, municipal bonds), product sub-type (e.g., below-investment-grade positions) and, at times, at the individual position. For derivative positions, which are primarily comprised of interest rate swaps, we have established limits based on a number of factors, including interest rate, foreign exchange spot and forward rates, spread, ratio, basis, and volatility risk. Derivative exposures are also monitored both for the total portfolio and by maturity periods. Trading positions and derivatives are monitored against these limits through daily reports that are distributed to senior management. During volatile markets, we may temporarily reduce limits and/or choose to pare our trading inventories to reduce risk. We monitor Value-at-Risk ("VaR") for all of our trading portfolios on a daily basis for risk management purposes and as a result of applying 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 and theFDIC , requires us to calculate VaR for all of our trading portfolios, including fixed income, equity, derivatives, and foreign exchange instruments. 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. However, there are inherent limitations of utilizing VaR including: historical movements in markets may not accurately predict future market movements; VaR does not take into account the liquidity of individual positions; VaR does not estimate losses over longer time horizons; and extended periods of one-directional markets potentially distort risks within the portfolio. In addition, should markets become more volatile, actual trading losses may exceed VaR results presented on a single day and might accumulate over a longer time horizon. As a result, management complements VaR with sensitivity analysis and stress testing and employs additional controls such as a daily 63
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
review of trading results, review of aged inventory, independent review of pricing, monitoring of concentrations and review of issuer ratings.
To calculate VaR, we use models which incorporate 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 and Stressed VaR numbers for a ten-day time horizon. The VaR model is independently reviewed by our Model Risk Management function. See the "Model risk" section that follows for further information. The modeling of the risk characteristics of trading positions involves a number of assumptions and approximations that management believes to be reasonable. However, there is no uniform industry methodology for estimating VaR, and different assumptions or approximations could produce materially different VaR estimates. As a result, VaR results 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.
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 and equity instruments, and for our derivatives for the periods and dates indicated.
Year ended September 30, 2021 Period-end VaR
For the year ended
September 30, September 30,
$ in millions High Low 2021 2020 $ in millions 2021 2020
Daily VaR $ 11 $ 1 $ 1 $ 8 Average daily VaR $ 4 $ 3
Average daily VaR was higher during fiscal 2021 compared to the prior year due
to the impact of scenarios of elevated volatility as a result of the COVID-19
pandemic (which commenced in March 2020 ) on our VaR model during the first half
of the year. However, during our fiscal third quarter of 2021, the remaining
COVID-19 pandemic-related scenarios fell outside of the VaR model's 12-month
historical simulation period, resulting in period-end VaR decreasing to $1
million as of September 30, 2021 from $8 million as of September 30, 2020 .
The Fed's MRR requires us to perform daily back-testing procedures for 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 ended September 30, 2021 , our regulatory-defined daily losses in
our trading portfolios did not exceed our predicted VaR.
Separately, RJF provides additional market risk disclosures to comply with the
MRR, including 10-day VaR and 10-day Stressed VaR, which are available on our
website at
https://www.raymondjames.com/investor-relations/financial-information/filings-and-reports
within "Other Reports and Information."
Banking operations
Raymond James Bank maintains an interest-earning asset portfolio that is comprised of cash, C&I loans, commercial and residential real estate loans, REIT loans, tax-exempt loans and SBL and other loans, as well as agency-backed MBS and agency-backed CMOs (held in the available-for-sale securities portfolio), and SBA loan securitizations. These interest-earning assets are primarily funded by client deposits. Based on its current asset portfolio,Raymond James Bank is subject to interest rate risk.Raymond James 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 ofRaymond James Bank's Asset and Liability Committee is to manage the sensitivity of net interest income to changes in market interest rates. This committee uses several measures to monitor and limitRaymond James Bank's interest rate risk, including scenario analysis and economic value of equity. To ensure thatRaymond James 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. We use simulation models and 64
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis estimation techniques to assess the sensitivity of net interest income to movements in interest rates. 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 12-month time horizon. Assumptions used in the model include interest rate movement, the slope of the yield curve, and balance sheet composition and growth. The model also considers interest rate-related risks such as pricing spreads, pricing of client cash accounts, and prepayments. Various interest rate scenarios are modeled in order to determine the effect those scenarios may have on net interest income. The following table is an analysis ofRaymond James Bank's estimated net interest income over a 12-month period based on instantaneous shifts in interest rates (expressed in basis points) using our asset/liability model, which assumes that interest rates do not decline below zero. 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. We also perform simulations on time horizons of up to five years to assess longer-term impacts to various interest rate scenarios. On a quarterly basis, we test expected model results to actual performance. Additionally, any changes made to key assumptions in the model are documented and approved byRaymond James Bank's Asset and Liability Committee . Net interest income Projected
change in
Instantaneous changes in rate ($ in millions) net interest income
+200 $974 35%
+100 $918 28%
0 $720 -
-25 $693 (4)%
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. In addition, we utilize a hedging strategy using interest
rate swaps as a result of Raymond James Bank's asset and liability management
process. For further information regarding this hedging strategy, see Note 2 of
the Notes to Consolidated Financial Statements of this Form 10-K.
The following table shows the contractual maturities of our bank loan portfolio
at September 30, 2021 , 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.
Due in
> One year -
One year or five
$ in millions less years > Five years Total
C&I loans $ 257 $ 4,663 $ 3,520 $ 8,440
CRE loans 727 1,637 508 2,872
REIT loans 168 924 20 1,112
Tax-exempt loans - 59 1,262 1,321
Residential mortgage loans - 6 5,312 5,318
SBL and other 6,067 39 - 6,106
Total loans held for investment 7,219 7,328 10,622 25,169
Held for sale loans - 14 131 145
Total loans $ 7,219 $ 7,342 $ 10,753 $ 25,314
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
The following table shows the distribution of the recorded investment of those
bank loans that mature in more than one year between fixed and adjustable
interest rate loans at
Interest rate type
$ in millions Fixed Adjustable Total
C&I loans $ 303 $ 7,880 $ 8,183
CRE loans 90 2,055 2,145
REIT loans - 944 944
Tax-exempt loans 1,321 - 1,321
Residential mortgage loans 198 5,120 5,318
SBL and other - 39 39
Total loans held for investment 1,912 16,038 17,950
Held for sale loans 1 144 145
Total loans $ 1,913 $ 16,182 $ 18,095
Contractual loan terms for C&I, CRE, REIT 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 regarding Raymond James Bank's interest-only residential mortgage
loan portfolio.
In our available-for-sale securities portfolio, we hold primarily fixed-rate
agency-backed MBS and agency-backed 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 on our Consolidated Statements of Income
and Comprehensive Income. At September 30, 2021 , our available-for-sale
securities portfolio had a fair value of $8.32 billion with a weighted-average
yield of 1.14% and a weighted-average life of approximately four years. See Note
5 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 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, 2021 of$169 million , the portion we owned was$120 million . See Note 4 of the Notes to Consolidated Financial Statements of this Form 10-K for additional information on this portfolio.
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, our bank loan portfolio includes loans which are denominated in Canadian dollars, totaling$1.29 billion and$1.05 billion atSeptember 30, 2021 and 2020, respectively, when converted to theU.S. dollar. A majority of such loans are held byRaymond James Bank's Canadian subsidiary, which is discussed in the following sections.
Investments in foreign subsidiaries
Raymond James Bank has an investment in a Canadian subsidiary, resulting in foreign exchange risk. To mitigate its foreign exchange risk,Raymond James 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 6 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 346 million atSeptember 30, 2021 , which was not hedged. Foreign exchange gains/losses related to this investment are primarily reflected in OCI on our Consolidated Statements of 66
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
Income and Comprehensive Income. See Note 20 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 had material foreign exchange risk either individually, or in the aggregate, pertaining to these subsidiaries as ofSeptember 30, 2021 . As previously noted, onJuly 29, 2021 we announced our intention to make an offer for the entire issued and to be issued share capital ofU.K. -based Charles Stanley at a price of £5.15 per share, or approximately £279 million. Prior to closing, we will useU.S. dollars to purchase the required British pounds sterling ("GBP") to be used at closing. Upon closing, this transaction will increase our foreign exchange exposure associated with investments in subsidiaries located inEurope .
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 are included in "Other" revenues in our Consolidated Statements of Income and Comprehensive Income. See Note 6 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. The initial decline in economic activity as a result of the COVID-19 pandemic caused increased credit risk particularly with regard to companies in sectors that were most significantly impacted by the economic disruption. The speed and magnitude in which various sectors have recovered since the onset of the pandemic has been continually evolving. Given the stresses on certain of our clients' liquidity, we enhanced our credit monitoring activities, with an increased focus on monitoring our credit exposures and counterparty credit risk. In addition, since the onset of the COVID-19 pandemic,Raymond James 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. Although economic conditions have generally improved, we have maintained our increased focus on monitoring our credit exposures and counterparty credit risk.
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. In addition, certain commitments, including underwritings,
may create exposure to individual issuers and businesses. The risk of default
depends on the creditworthiness of the counterparty and/or the issuer of the
instrument. In addition, we may be subject to concentration risk if we hold
large positions in or have large commitments to a single counterparty, borrower,
or group of similar counterparties or borrowers (e.g., in the same industry). We
seek to mitigate these risks 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. See Notes 2, 6 and 7 of the Notes to Consolidated
Financial Statements of this Form 10-K for further information about our credit
risk mitigation related to derivatives and collateralized agreements.
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
67
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis 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 for recruiting 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. See Notes 2 and 9 of the Notes to Consolidated Financial Statements of this Form 10-K for further information about our loans to financial advisors. Banking activitiesRaymond James Bank has a substantial loan portfolio. While our bank loan portfolio is diversified, a significant downturn in the overall economy, such as that experienced in our fiscal year 2020 as a result of the COVID-19 pandemic, deterioration in real estate values or a significant issue within any sector or sectors where we have a concentration will generally result in large provisions for credit losses and/or charge-offs. Conversely, should the economy recover at a faster pace than initially forecasted, or the negative impact of the significant downturn event be less than originally projected, we may experience a benefit for credit losses and/or recovery of amounts previously charged off, the timing and magnitude of which can be uncertain. We determine the allowance required for specific loan grades based on relative risk characteristics of the loan portfolio. On an ongoing basis, we evaluate our methods for determining the allowance for each class of loans and make enhancements we consider appropriate. Our strategy for credit risk management related to bank loans 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 client 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. We seek to identify potential problem loans early, record any necessary risk rating changes and charge-offs promptly, and maintain appropriate reserve levels for expected losses. We utilize 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 our SBL and residential mortgage loans, we utilize the credit risk rating system used by bank regulators in measuring the credit quality of each homogeneous class of loans. Our allowance for credit losses methodology is described in Note 2 of the Notes to Consolidated Financial Statements of this Form 10-K. As our bank loan portfolio is segregated into six portfolio segments, likewise, the allowance for credit 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 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. This portfolio segment includes CRE construction loans which also look at other risks such as project budget overruns and performance variables related to the contractor and subcontractors. With respect to commercial construction of residential developments, there is also the risk that the builder has a geographical concentration of developments. Adverse information arising from any of these factors may have a negative effect on the credit quality of loans in this segment. REIT: Loans in this segment are made to businesses that own or finance income-producing real estate across various property sectors. This portfolio segment may include extensions of credit to companies that engage in real estate development. Repayment of these loans is dependent on income generated from real estate properties or the sale of real estate. A portion of this segment may consist of loans secured by residential product types (single-family residential, including condominiums and land held for residential development) within a range of markets. Deterioration in the financial condition of the operating business, reductions in the value of real estate, as well as increased vacancy and rental rates may all adversely affect the loans in this segment. 68
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis 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 the 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 of our 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). We do not originate or purchase adjustable rate mortgage ("ARM") loans with negative amortization, reverse mortgages, or loans to subprime borrowers. Loans with deeply discounted teaser rates are also 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, we consider trends in loan performance, the level of allowance coverage relative to similar banking institutions, industry or client concentrations, the loan portfolio composition and macroeconomic factors (both current and forecasted). These factors have a potentially negative impact on loan performance and net charge-offs. Our allowance for credit losses as ofSeptember 30, 2021 was determined under the CECL model due to ourOctober 1, 2020 adoption of the standard. See Notes 2 and 8 of the Notes to Consolidated Financial Statements of this Form 10-K for further information. Our allowance for credit losses, as well as our methodologies and assumptions used in estimating the allowance, are regularly evaluated to determine if our methods and estimates continue to be appropriate for each class of loans, with adjustments made on a quarterly basis. Several factors were taken into consideration in evaluating the allowance for credit losses atSeptember 30, 2021 , including loan and borrower characteristics, such as internal risk ratings, delinquency status, collateral type and the remaining term of the loan adjusted for expected prepayments. In addition, the estimate of credit losses considered the relatively small amount of net charge-offs during the period, the level of nonperforming loans, and the impact of the COVID-19 pandemic. We also considered the uncertainty related to certain industry sectors, including commercial real estate, and the extent of credit exposure to specific borrowers within the portfolio. Finally, we considered current economic conditions that might impact the portfolio. We continue to assess the impact of both the COVID-19 pandemic and the economic recovery therefrom, as new 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. 69
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
The following table presents our changes in the allowance for credit losses related to our bank loan portfolio.
Year ended September 30,
$ in millions 2021 2020 2019 2018 2017
Allowance for credit losses beginning of year $ 354
9 - - - -
Provision/(benefit) for credit losses (32) 233 22 20 13
Charge-offs:
C&I loans (4) (96) (2) (10) (26)
CRE loans (10) (2) (5) - -
REIT loans - (2) - - -
Residential mortgage loans - - (1) - (1)
Total charge-offs (14) (100) (8) (10) (27)
Recoveries:
CRE loans - - - - 5
Residential mortgage loans 1 2 2 2 1
Total recoveries 1 2 2 2 6
Net charge-offs (13) (98) (6) (8) (21)
Foreign exchange translation adjustment 2 1 (1) 1 1
Allowance for credit losses end of year (1) $ 320
1.27 % 1.65 % 1.04 % 1.04 % 1.11 %
(1) The allowance for credit losses atSeptember 30, 2021 was computed under the CECL methodology, while the prior years were computed under the incurred loss methodology. See further explanation of the current year benefit for credit losses in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations -Raymond James Bank " of this Form 10-K. 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. Year ended September 30, 2021 2020 2019 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 $ (4) 0.05 % $ (96) 1.22 % $ (2) 0.02 % CRE loans (10) 0.37 % (2) 0.08 % (5) 0.22 % REIT loans - - % (2) 0.15 % - - % Residential mortgage loans 1 0.02 % 2 0.04 % 1 0.02 % Total $ (13) 0.06 % $ (98) 0.45 % $ (6) 0.03 % Year ended September 30, 2018 2017 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 $ (10) 0.13 % $ (26) 0.36 % CRE loans - - % 5 0.30 % Residential mortgage loans 2 0.06 % - - % Total $ (8) 0.04 % $ (21) 0.13 %
(1) Charge-offs related to loan sales amounted to
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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 credit losses for the periods presented. September 30, 2021 2020 2019 Allowance for Allowance for Allowance for Nonperforming loan credit losses Nonperforming loan credit losses Nonperforming loan credit losses $ in millions balance balance (1) balance balance (1) balance balance (1) C&I loans $ 39$ 191 $ 2$ 200 $ 19$ 139 CRE loans 20 66 14 81 8 34 REIT loans - 22 - 36 - 15 Tax-exempt loans - 2 - 14 - 9 Residential mortgage loans 15 35 14 18 16 16 SBL and other - 4 - 5 - 5 Total nonperforming loans held for investment (2) $ 74$ 320 $ 30$ 354 $ 43$ 218 Total nonperforming loans as a % of total bank loans 0.29 % 0.14 %
0.21 %
(1) The allowance for credit losses atSeptember 30, 2021 was computed under the CECL methodology, while the prior years were computed under the incurred loss methodology. (2) Total nonperforming loans held for investment at September 30, 2021 included$61 million of nonperforming loans which were current pursuant to their contractual terms, including a$39 million C&I loan. September 30, 2018 2017 Allowance for Allowance for Nonperforming loan credit losses Nonperforming loan credit losses $ in millions balance balance (1) balance balance (1) C&I loans $ 2$ 123 $ 5$ 120 CRE loans - 33 - 28 REIT loans - 17 - 15 Tax-exempt loans - 9 - 6 Residential mortgage loans 23 17 34 17 SBL and other - 4 - 4 Total nonperforming loans held for investment $ 25$ 203 $ 39$ 190 Total nonperforming loans as a % of total bank loans 0.12 % 0.23 % (1) The allowance for credit losses atSeptember 30, 2021 was computed under the CECL methodology, while the prior years were computed under the incurred loss methodology.
The nonperforming loan balances in the preceding table exclude
The following table presents total nonperforming assets, including the nonperforming loans in the preceding table and other real estate acquired in the settlement of residential mortgages, as a percentage ofRaymond James Bank's total assets. Year ended September 30, $ in millions 2021 2020 2019 2018 2017 Total nonperforming assets (1)$ 74
0.20 % 0.10 % 0.18 % 0.12 % 0.21 %
(1) Total nonperforming assets at
Although our nonperforming assets as a percentage ofRaymond James Bank's assets remained low as ofSeptember 30, 2021 , prolonged market deterioration could result in an increase in our nonperforming assets, an increase in our allowance for credit losses and/or an increase in net charge-offs in future periods, although the extent will depend on future developments that are highly uncertain.
See Note 8 in the Notes to the Consolidated Financial Statements of this Form 10-K for loan categories as a percentage of total bank loans.
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis We have received requests from certain borrowers for forbearance, which is generally a short-term deferral of their loan payments or modification of certain covenant terms driven or exacerbated by the economic impacts of the COVID-19 pandemic. Based on the amortized costs, approximately$13 million and$3 million of our corporate and residential loans, respectively, were in active forbearance as ofSeptember 30, 2021 . As certain borrowers exit forbearance, we have received requests for loan modifications, including repayment plans. In accordance with the CARES Act and the Consolidated Appropriations Act, 2021, we are not applying TDR classification to any COVID-19 related loan modifications performed fromMarch 1, 2020 throughDecember 31, 2021 , to borrowers who were current as ofDecember 31, 2019 . As ofSeptember 30, 2021 , we had residential loans of$10 million for which the borrower had requested a loan modification, where the request had been initiated but not completed or approved. As the delinquency status is not affected for loans that are in active forbearance or for loan modifications that have not yet been approved, the recognition of charge-offs, delinquencies, and nonaccrual status could be delayed for those borrowers who would have otherwise moved into past due or nonaccrual status. Forbearance and modification requests have continued to decline and the majority of the borrowers that have exited forbearance but have not requested loan modifications, have become current on their principal and interest payments.
Loan underwriting policies
A component of
Residential mortgage and SBL and other loan portfolios
Our residential mortgage loan portfolio consists of first mortgage loans originated by us via referrals from our PCG financial advisors and the general public, as well as first mortgage loans purchased by us. All of our 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, 2021 , 96% of the residential mortgage loan portfolio consisted of owner-occupant borrowers (75% for their primary residences and 21% for second home residences). Approximately 37% 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. Our SBL and other portfolio is primarily comprised of loans fully collateralized by client's marketable securities and represented 24% of our total loan portfolio as ofSeptember 30, 2021 . The underwriting policy for the SBL and other portfolio primarily includes a review of collateral, including LTV, and a review of repayment history. While we have chosen not to participate in any government-sponsored loan modification programs, our loan modification policy takes into consideration some of the programs' parameters and supports every effort to assist borrowers within the guidelines of safety and soundness. In general, we consider the qualification terms outlined in the government-sponsored programs as well as the affordability test and other factors. We retain 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 by us to mitigate credit losses.
Corporate and tax-exempt loan portfolios
Our 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 senior bank executives. Our 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. We are sometimes involved in the syndication of the loan at inception and some of these loans have been purchased in 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. Our 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 to our credit policies and are subject to approval by a loan committee, and credit quality is monitored on an ongoing basis by our lending staff. Our 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 72
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis limits, secondary sources of repayment, municipality demographics, and other criteria. A large portion of our corporate loans are to borrowers in industries in which we have expertise through coverage provided by our Capital Markets research analysts. Approximately half of our corporate borrowers are public companies. Our 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, corporate and tax-exempt loans are subject to regulatory review. Risk monitoring process Another component of credit risk strategy for our bank loan portfolio is the ongoing risk monitoring and review processes, including our internal loan review process, 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 securing our SBL and other portfolio is monitored on a recurring basis, with marketable collateral monitored on a daily basis. Collateral adjustments, as triggered by our monitoring procedures, are made by the borrower as necessary to ensure our loans are adequately secured, resulting in minimizing our credit risk. Collateral calls have been minimal relative to our SBL and other portfolio with no losses incurred to date.
We track and review many factors to monitor credit risk in our 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, risk rating and LTV ratios. See Note 8 in the Notes to Consolidated Financial Statements of this Form 10-K for additional information.
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 were 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 or completion of loss
mitigation efforts, depending on their payment status. As a result, the amount
of residential loans considered delinquent may increase significantly in the
future.
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, 2021 $ 4 $ 6 $ 10 0.08 % 0.11 % 0.19 %
September 30, 2020 $ 3 $ 7 $ 10 0.06 % 0.14 % 0.20 %
Our
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. Our 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 (e.g.,
appraisers, attorneys, etc.). Additionally, every residential mortgage loan over
60 days past due is reviewed by our personnel monthly and documented in a
written report detailing delinquency information, balances, collection status,
appraised value, and other data points. Our 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.
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis Credit risk is also managed by diversifying the residential mortgage portfolio. Most of the loans in our residential loan portfolio are to PCG clients across theU.S. The following table details the geographic concentrations (top five states) of our one-to-four family residential mortgage loans.September 30, 2021 Loans outstanding as a % of total Loans
outstanding as a % of total bank
residential mortgage loans loans
CA 25.6% 5.4%
FL 17.6% 3.7%
TX 8.8% 1.9%
NY 7.9% 1.7%
CO 4.0% 0.8%
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. At September 30, 2021 and 2020, these loans totaled $1.97 billion
and $1.67 billion , respectively, or approximately 37% and 34% of the residential
mortgage portfolio, respectively. The weighted-average number of years before
the remainder of the loans, which were still in their interest-only period at
September 30, 2021 , begins amortizing is 6 years.
Corporate and tax-exempt loans
Credit risk in our 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 in our internal loan ratings when the
ratings are received. If the SNC rating is lower on an individual loan than our
internal rating, the loan is downgraded. While we consider historical SNC exam
results in our loan ratings methodology, differences between the SNC exam and
internal ratings on individual loans typically arise due to subjectivity of the
loan classification process. Downgrades resulting from these differences may
result in additional provisions for credit losses in periods when SNC exam
results are received. The majority of our 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 for additional information on our
allowance for credit losses policies.
Credit risk is managed by diversifying the corporate bank loan portfolio. Our
corporate bank loan portfolio does not contain a significant concentration in
any single industry. The following table details the industry concentrations
(top five categories) of our corporate bank loans.
Loans outstanding as a % of total Loans outstanding as a % of total
corporate bank loans bank loans
Office real estate 7.4% 3.6%
Consumer products and services 6.8% 3.4%
Business systems and services 6.7% 3.3%
Automotive/transportation 6.3% 3.1%
Multi-family 5.9% 2.9%
The COVID-19 pandemic negatively impacted our corporate loan portfolio in fiscal
2020. Although economic conditions have improved and we reduced our exposure and
revised our credit limits related 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 do not continue to improve in the future. In addition, we continue to
monitor our exposure to office real estate, where trends have changed 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.
Liquidity risk
See "Item 7 - 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.
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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). 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. 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. 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. In addition, we have created business continuity plans 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 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 the health and well-being of our associates and our clients while ensuring the continuity of business operations for our clients. As a result, a substantial portion of our associates continue to work remotely. The firm continues to monitor conditions and has developed and is implementing a phased approach to reopening our offices which complies with all applicable laws, regulations, and CDC guidelines. As ofSeptember 30, 2021 , we had reopened most of our offices in a limited capacity and have been operating under strict public health and safety protocols in such locations. We are planning for a full return to office in the second quarter of our fiscal 2022, which will include more work location flexibility for our associates; however, disruptions caused by variants may impact the timing of the implementation of these plans. Periods of severe market volatility, such as those that arose most notably in fiscal 2020 in response to the onset of the COVID-19 pandemic, can result in a significantly higher level of transactions on specific days and other activity which may present 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 such operational challenges during the year endedSeptember 30, 2021 . 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,
the calculation of our allowance for credit losses, assessing risk, stress
testing, and to assist in making certain 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 errors or misuse could 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 the
Audit and Risk
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RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management's Discussion and Analysis
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.
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.
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