RJF 10-Q Quarterly Report Dec. 31, 2016 | Alphaminr
RAYMOND JAMES FINANCIAL INC
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RJF 10-Q Quarter ended Dec. 31, 2016

Balance Sheet
Cash Flow
Income Statement
RAYMOND JAMES FINANCIAL INC
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10-Q 1 rjf-2016123110q.htm 10-Q Document

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

FORM 10-Q
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to

Commission File Number: 1-9109

RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Florida
No. 59-1517485
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
880 Carillon Parkway, St. Petersburg, Florida 33716
(Address of principal executive offices)    (Zip Code)
(727) 567-1000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

143,686,015 shares of common stock as of February 3, 2017



RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

Form 10-Q for the quarter ended December 31, 2016

INDEX

PAGE
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 5.
Item 6.

2

PART I FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS


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

December 31, 2016
September 30, 2016
(in thousands)
Assets:
Cash and cash equivalents
$
2,528,275

$
1,650,452

Assets segregated pursuant to regulations and other segregated assets
3,867,999

4,884,487

Securities purchased under agreements to resell and other collateralized financings
358,493

470,222

Financial instruments, at fair value:


Trading instruments
517,792

766,805

Available for sale securities
1,163,524

859,398

Private equity investments
199,438

194,634

Other investments
252,731

296,844

Derivative instruments associated with offsetting matched book positions
299,393

422,196

Receivables:


Brokerage clients, net
2,601,869

2,714,782

Stock borrowed
154,718

170,860

Bank loans, net
15,828,752

15,210,735

Brokers-dealers and clearing organizations
170,768

164,908

Loans to financial advisors, net
845,783

838,721

Other
619,874

610,417

Deposits with clearing organizations
198,856

245,364

Prepaid expenses and other assets
796,166

777,224

Investments in real estate partnerships held by consolidated variable interest entities
65,306

61,004

Property and equipment, net
382,298

321,457

Deferred income taxes, net
318,160

322,024

Goodwill and identifiable intangible assets, net
499,195

504,442

Total assets
$
31,669,390

$
31,486,976



(continued on next page)













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

3


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(continued from previous page)
December 31, 2016
September 30, 2016
($ in thousands)
Liabilities and equity:


Trading instruments sold but not yet purchased, at fair value
$
260,543

$
328,938

Securities sold under agreements to repurchase
203,378

193,229

Derivative instruments associated with offsetting matched book positions, at fair value
299,393

422,196

Payables:
Brokerage clients
6,027,519

6,444,671

Stock loaned
428,600

677,761

Bank deposits
15,189,790

14,262,547

Brokers-dealers and clearing organizations
158,320

306,119

Trade and other
599,067

583,340

Other borrowings
915,921

608,658

Accrued compensation, commissions and benefits
701,301

915,954

Senior notes payable
1,680,957

1,680,587

Total liabilities
26,464,789

26,424,000

Commitments and contingencies (see Note 15)




Equity


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

—

Common stock; $.01 par value; 350,000,000 shares authorized; 153,122,715 and 151,424,947 shares issued as of December 31, 2016 and September 30, 2016, respectively, and 142,930,077 and 141,544,511 shares outstanding as of December 31, 2016 and September 30, 2016, respectively
1,530

1,513

Additional paid-in capital
1,553,282

1,498,921

Retained earnings
3,947,074

3,834,781

Treasury stock, at cost; 10,096,174 and 9,766,846 common shares as of December 31, 2016 and September 30, 2016, respectively
(387,869
)
(362,937
)
Accumulated other comprehensive loss
(33,140
)
(55,733
)
Total equity attributable to Raymond James Financial, Inc.
5,080,877

4,916,545

Noncontrolling interests
123,724

146,431

Total equity
5,204,601

5,062,976

Total liabilities and equity
$
31,669,390

$
31,486,976


















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

4

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three months ended December 31,
2016
2015
(in thousands, except per share amounts)
Revenues:
Securities commissions and fees
$
984,385

$
849,662

Investment banking
61,425

57,553

Investment advisory and related administrative fees
108,243

98,602

Interest
182,782

142,472

Account and service fees
148,791

116,823

Net trading profit
20,555

22,169

Other
22,587

13,576

Total revenues
1,528,768

1,300,857

Interest expense
(35,966
)
(26,699
)
Net revenues
1,492,802

1,274,158

Non-interest expenses:


Compensation, commissions and benefits
1,006,467

866,398

Communications and information processing
72,161

72,138

Occupancy and equipment costs
46,052

41,789

Clearance and floor brokerage
12,350

9,996

Business development
35,362

40,624

Investment sub-advisory fees
19,295

14,554

Bank loan loss (benefit) provision
(1,040
)
13,910

Acquisition-related expenses
12,666

1,872

Other
81,974

42,804

Total non-interest expenses
1,285,287

1,104,085

Income including noncontrolling interests and before provision for income taxes
207,515

170,073

Provision for income taxes
59,812

62,009

Net income including noncontrolling interests
147,703

108,064

Net income attributable to noncontrolling interests
1,136

1,735

Net income attributable to Raymond James Financial, Inc.
$
146,567

$
106,329

Net income per common share – basic
$
1.03

$
0.74

Net income per common share – diluted
$
1.00

$
0.73

Weighted-average common shares outstanding – basic
142,110

143,058

Weighted-average common and common equivalent shares outstanding – diluted
145,675

146,141

Net income attributable to Raymond James Financial, Inc.
$
146,567

$
106,329

Other comprehensive income (loss), net of tax: (1)


Unrealized loss on available for sale securities and non-credit portion of other-than-temporary impairment losses
(4,146
)
(6,791
)
Unrealized gain (loss) on currency translations, net of the impact of net investment hedges
1,001

(6,615
)
Unrealized gain on cash flow hedges
25,738

3,265

Total comprehensive income
$
169,160

$
96,188

Other-than-temporary impairment:


Total other-than-temporary impairment, net
$
860

$
374

Portion of recoveries recognized in other comprehensive income
(860
)
(374
)
Net impairment losses recognized in other revenue
$
—

$
—


(1)
All components of other comprehensive income (loss), net of tax, are attributable to Raymond James Financial, Inc.

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

5

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

Three months ended December 31,
2016
2015
(in thousands, except per share amounts)
Common stock, par value $.01 per share:
Balance, beginning of year
$
1,513

$
1,491

Share issuances
17

10

Balance, end of period
1,530

1,501

Additional paid-in capital:


Balance, beginning of year
1,498,921

1,344,779

Employee stock purchases
4,743

5,054

Exercise of stock options and vesting of restricted stock units, net of forfeitures
18,969

8,996

Restricted stock, stock option and restricted stock unit expense
30,971

21,104

Excess tax benefit from share-based payments
—

(1)
34,791

Other
(322
)
229

Balance, end of period
1,553,282

1,414,953

Retained earnings:


Balance, beginning of year (2)
3,834,781

3,422,169

Net income attributable to Raymond James Financial, Inc.
146,567

106,329

Cash dividends declared
(34,274
)
(30,535
)
Balance, end of period
3,947,074

3,497,963

Treasury stock:


Balance, beginning of year
(362,937
)
(203,455
)
Purchases/surrenders
(8,474
)
(6,009
)
Exercise of stock options and vesting of restricted stock units, net of forfeitures
(16,458
)
(5,045
)
Balance, end of period
(387,869
)
(214,509
)
Accumulated other comprehensive loss: (3)


Balance, beginning of year
(55,733
)
(40,503
)
Net change in unrealized gain/loss on available for sale securities and non-credit portion of other-than-temporary impairment losses, net of tax
(4,146
)
(6,791
)
Net change in currency translations and net investment hedges, net of tax
1,001

(6,615
)
Net change in cash flow hedges, net of tax
25,738

3,265

Balance, end of period
(33,140
)
(50,644
)
Total equity attributable to Raymond James Financial, Inc.
$
5,080,877

$
4,649,264

Noncontrolling interests:


Balance, beginning of year (2)
$
146,431

$
154,454

Net income attributable to noncontrolling interests
1,136

1,735

Capital contributions
4,998

8,064

Distributions
(26,557
)
(3,396
)
Other
(2,284
)
(1,035
)
Balance, end of period
123,724

159,822

Total equity
$
5,204,601

$
4,809,086


(1)
During the current period, we adopted new stock compensation simplification guidance. See Notes 1 and 14 for additional information.

(2)
Each respective prior period balance has been restated to reflect the impact of the deconsolidation of certain VIEs, see Note 1 for additional information.

(3)
All components of other comprehensive (loss) income, net of tax, are attributable to Raymond James Financial, Inc.



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

6

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

Three months ended December 31,
2016
2015
(in thousands)
Cash flows from operating activities:
Net income attributable to Raymond James Financial, Inc.
$
146,567

$
106,329

Net income attributable to noncontrolling interests
1,136

1,735

Net income including noncontrolling interests
147,703

108,064

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


Depreciation and amortization
19,941

17,909

Deferred income taxes
10,928

6,631

Premium and discount amortization on available for sale securities and unrealized/realized gain on other investments
(10,185
)
2,587

Provisions for loan losses, legal proceedings, bad debts and other accruals
33,017

22,588

Share-based compensation expense
40,545

22,400

Other
(5,490
)
(3,684
)
Net change in:


Assets segregated pursuant to regulations and other segregated assets
1,016,538

(171,359
)
Securities purchased under agreements to resell and other collateralized financings, net of securities sold under agreements to repurchase
121,878

(18,345
)
Stock loaned, net of stock borrowed
(233,019
)
65,959

Loans provided to financial advisors, net of repayments
(13,513
)
(38,500
)
Brokerage client receivables and other accounts receivable, net
91,410

246,998

Trading instruments, net
192,716

162,685

Prepaid expenses and other assets
85,740

82,542

Brokerage client payables and other accounts payable
(507,562
)
58,391

Accrued compensation, commissions and benefits
(218,034
)
(242,815
)
Proceeds from sales of securitizations and loans held for sale, net of purchases and originations of loans held for sale
35,162

(74,078
)
Net cash provided by operating activities
807,775

247,973

Cash flows from investing activities:


Additions to property and equipment
(78,659
)
(32,581
)
Increase in bank loans, net
(782,388
)
(770,371
)
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock
(4,250
)
(1,063
)
Proceeds from sales of loans held for investment
54,163

35,375

Purchases, or contributions, to private equity or other investments, net of proceeds from sales of, or distributions received from, private equity and other investments
16,924

(25,128
)
Purchases of available for sale securities
(377,235
)
(77,223
)
Available for sale securities maturations, repayments and redemptions
56,647

21,627

Proceeds from sales of available for sale securities
7,308

—

Other investing activities, net of proceeds received
2,341

(281
)
Net cash used in investing activities
$
(1,105,149
)
$
(849,645
)
(continued on next page)
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

7

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued from previous page)
Three months ended December 31,
2016
2015
(in thousands)
Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings, net
$
208,400

$
(115,000
)
Proceeds from Federal Home Loan Bank advances
100,000

25,000

Repayments of Federal Home Loan Bank advances and other borrowed funds
(1,138
)
(1,091
)
Exercise of stock options and employee stock purchases
24,143

14,386

Increase in bank deposits
927,243

737,728

Purchases of treasury stock
(26,058
)
(12,139
)
Dividends on common stock
(31,255
)
(27,106
)
Net cash provided by financing activities
1,201,335

621,778

Currency adjustment:


Effect of exchange rate changes on cash
(26,138
)
(24,724
)
Net increase (decrease) in cash and cash equivalents
877,823

(4,618
)
Cash and cash equivalents at beginning of year
1,650,452

2,601,006

Cash and cash equivalents at end of period
$
2,528,275

$
2,596,388

Supplemental disclosures of cash flow information:


Cash paid for interest
$
32,442

$
26,700

Cash paid for income taxes
$
13,710

$
33,917

Non-cash transfers of loans to other real estate owned
$
1,191

$
608

































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

8

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2016

NOTE 1 – INTRODUCTION AND BASIS OF PRESENTATION

Description of business

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

Basis of presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of RJF and its consolidated subsidiaries that are generally controlled through a majority voting interest. We consolidate all of our 100% owned subsidiaries. In addition we consolidate any variable interest entity (“VIE”) in which we are the primary beneficiary. Additional information on these VIEs is provided in Note 2 on pages 125 - 127 in the section titled, “Evaluation of VIEs to determine whether consolidation is required” as presented in our Annual Report on Form 10-K for the year ended September 30, 2016 , as filed with the United States (“U.S.”) Securities and Exchange Commission (the “2016 Form 10-K”) and in Notes 2 and 9 herein. When we do not have a controlling interest in an entity, but we exert significant influence over the entity, we apply the equity method of accounting. All material intercompany balances and transactions have been eliminated in consolidation.

Accounting estimates and assumptions

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

The nature of our business is such that the results of any interim period are not necessarily indicative of results for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis and the consolidated financial statements and notes thereto included in our 2016 Form 10-K. To prepare condensed consolidated financial statements in conformity with GAAP, we must make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and could have a material impact on the condensed consolidated financial statements.

Principal subsidiaries

As of December 31, 2016 , our principal subsidiaries, all wholly owned, include: Raymond James & Associates, Inc. (“RJ&A”) a domestic broker-dealer carrying client accounts, Raymond James Financial Services, Inc. (“RJFS”) an introducing domestic broker-dealer, Raymond James Financial Services Advisors, Inc. (“RJFSA”) a registered investment advisor, Raymond James Ltd. (“RJ Ltd.”) a broker-dealer headquartered in Canada, Eagle Asset Management, Inc. (“Eagle”) a registered investment advisor, and Raymond James Bank, N.A. (“RJ Bank”) a national bank.

Adoption of new accounting guidance

Effective October 1, 2016, we adopted new accounting guidance related to consolidation of legal entities, as well as new guidance simplifying certain aspects of accounting for stock compensation.

As a result of our October 1, 2016 adoption of the new consolidation guidance, we deconsolidated a number of tax credit fund VIEs that had been previously consolidated. We determined that under the new guidance, we are no longer deemed to be the primary beneficiary of these VIEs. We applied the new consolidation guidance on the full retrospective basis, meaning that we have reflected the adjustments arising from this adoption as of the beginning of our earliest comparative period presented. Accordingly, we deconsolidated $107 million in assets, $20 million in liabilities, $89 million in noncontrolling equity interests,

9

and increased retained earnings by $2 million , each computed as of September 30, 2016. There was no net impact on our Condensed Consolidated Statements of Income and Comprehensive Income for the prior year period as the net change in revenues, interest and other expenses were offset by the impact of the deconsolidation on the net loss attributable to noncontrolling interests. See Notes 2 and 9 for additional information.

Our adoption of the new stock compensation simplification guidance impacts our determination of income tax expense. Generally, the amount of compensation cost recognized for financial reporting purposes varies from the amount that can ultimately be deducted on the tax return for share-based payment awards. Under the prior guidance, the tax effects of deductions in excess of compensation expense (“windfalls”), as well as the tax effect of any deficiencies (“shortfalls”) were recorded in equity to the extent of previously recognized windfalls, with any remaining shortfall recorded in income tax expense. Under the new guidance, all tax effects related to share-based payments are recorded through tax expense in the periods during which the awards are exercised or vest, as applicable. Under the transition provisions of the new guidance, we have applied this new guidance prospectively to excess tax benefits arising from vesting after the October 1, 2016 adoption date. Under the new guidance, excess tax benefits are included along with other income tax cash flows as an operating activity in the Condensed Consolidated Statements of Cash Flows. Prior period cash flows have been adjusted to conform to the new presentation. See Note 14 for additional information.

Reclassifications

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

NOTE 2 – UPDATE OF SIGNIFICANT ACCOUNTING POLICIES

A summary of our significant accounting policies is included in Note 2 on pages 108 - 127 of our 2016 Form 10-K. Other than the October 1, 2016 adoption of new consolidation guidance which is described in Note 1 and below, and new guidance on stock compensation which is discussed in Notes 1 , 14 and 18 , there have been no other significant changes in our significant accounting policies since September 30, 2016 .

Evaluation of VIEs to determine whether consolidation is required

Our significant accounting policies applicable to the evaluation of legal entities to determine whether consolidation is required are discussed on pages 125 - 127 of our 2016 Form 10-K. As of December 31, 2016 , the nature of our involvement in legal entities as described therein is unchanged. However, our assessments of whether our involvement in such legal entities constitutes a VIE, and if so, whether we are deemed to be the primary beneficiary of such VIE, are now governed under new accounting guidance.

Other than as described below, our application of the new consolidation accounting guidance to our determinations of whether legal entities with which we are involved constitute VIEs, and if so our primary beneficiary determination of such entities, is unchanged from that described in our 2016 Form 10-K.

EIF Funds

The employee investment funds (“EIF Funds”) were formed many years ago as a compensation and retention mechanism offered to certain of our key employees. After application of the new consolidation guidance, we no longer consider the EIF Funds to be VIEs. Our consolidation conclusion regarding the EIF Funds is unchanged after application of the new consolidation guidance, and we continue to consolidate the EIF Funds after October 1, 2016 through the application of the voting interest model.

Non-guaranteed low-income housing tax credit funds

Raymond James Tax Credit Funds, Inc., a wholly owned subsidiary of RJF (“RJTCF”) is a managing member or general partner of low-income housing tax credit (“LIHTC”) funds (the “LIHTC Funds”). Under the new consolidation guidance, the fees earned by RJTCF from the LIHTC Funds are excluded from the determination of whether RJTCF has an obligation to absorb losses of, or the right to receive benefits from, the LIHTC Fund VIE which could be potentially significant to the LIHTC Fund. As a result of this change in the primary beneficiary determination criteria, we conclude that we are not the primary beneficiary of any of the non-guaranteed LIHTC Funds, since we no longer meet the potentially significant benefits criteria as determined under the new guidance. Accordingly, we deconsolidated such previously consolidated funds as of our adoption of this new guidance.

Our conclusions regarding whether the LIHTC Funds are VIEs are unchanged under the new guidance.



10

Other real estate limited partnerships and LLCs

We have interests in several limited partnerships involved in various real estate activities in which a subsidiary is either the general partner or a limited partner. After application of the new consolidation guidance, we no longer consider these entities to be VIEs, and we do not consolidate these partnerships or limited liability companies (“LLCs”). Our consolidation conclusions regarding these interests are unchanged after application of the new consolidation guidance, as we did not consolidate these entities under the prior consolidation guidance.

Managed Funds

We have certain interests in legal entities formed for the purpose of making and managing investments in securities of other entities (“Managed Funds”). The new consolidation guidance eliminated the deferral of the determination of who is the primary beneficiary based on a power and benefits analysis. Under the prior consolidation guidance, the primary beneficiary determination was based upon an assessment of who would absorb a majority of the entity’s expected losses, receive a majority of the entity’s residual returns, or both.

We applied the new consolidation guidance to the Managed Funds and determined that they are not VIEs. Our conclusion that no consolidation of the Managed Funds is required is unchanged under the new consolidation guidance.

Private Equity Interests

We participate in principal capital and private equity activities and as a result, hold interests in a number of limited partnerships (our “Private Equity Interests”). Under the prior consolidation guidance, we concluded our Private Equity Interests were not VIEs, and our consolidation conclusions were based upon the application of the voting interest model. However, under the new consolidation guidance, we have concluded that the Private Equity Interests are VIEs, primarily as a result of how the new consolidation model applies to the evaluation of limited partner kick-out and participation rights. In most of our Private Equity Interests, a simple majority of the limited partners cannot initiate an action to kick-out the general partner without cause and the limited partners with equity at-risk lack substantive participating rights, and thus the Private Equity Interests are deemed to be VIEs.

In our analysis of the criteria to determine whether we are the primary beneficiary of the Private Equity Interests VIEs, we analyze the power and benefits criterion. In a number of these entities, we are a passive limited partner investor, and thus we do not have the power to make decisions that most significantly affect the economic performance of such VIEs. Accordingly, in such circumstances we have determined we are not the primary beneficiary and therefore we do not consolidate the VIE. However, in certain of these entities, we have concluded that we are the primary beneficiary as we meet the power and benefits criteria. In such instances, we consolidate the Private Equity Interests VIE.

The outcome of the application of the new consolidation guidance did not change the determination of which Private Equity Interests required consolidation under application of the prior guidance. Those Private Equity Interests deemed to be VIEs under the new consolidation guidance and for which we concluded we are the primary beneficiary, were previously consolidated through application of the voting interest model under the prior consolidation guidance.

Brokerage client receivables, loans to financial advisors and allowance for doubtful accounts

As more fully described in Note 2 on page 116 - 117 of our 2016 Form 10-K, we have certain financing receivables that arise from businesses other than our banking business. Specifically, we offer loans to financial advisors and certain key revenue producers, primarily for recruiting, transitional cost assistance, and retention purposes. We present the outstanding balance of loans to financial advisors on our Condensed Consolidated Statements of Financial Condition, net of the allowance for doubtful accounts. Of the gross balance outstanding, the portion associated with financial advisors who are no longer affiliated with us is $19 million and $13 million at December 31, 2016 and September 30, 2016 , respectively. Our allowance for doubtful accounts is $6 million and $5 million at December 31, 2016 and September 30, 2016 , respectively.


11

NOTE 3 – ACQUISITIONS

Acquisitions completed in the prior fiscal year

Mummert & Company Corporate Finance GmbH

On June 1, 2016, we acquired Mummert & Company Corporate Finance GmbH (“Mummert”), a middle market M&A advisory firm, headquartered in Munich, Germany, that is focused primarily on the technology, industrial, healthcare, consumer and business services sectors. Mummert’s results of operations have been included in our results prospectively from June 1, 2016. See Note 3 on pages 127 - 129 of our 2016 Form 10-K for additional information regarding the Mummert acquisition.

MacDougall, MacDougall & MacTier Inc.

On August 31, 2016, we completed our acquisition of all of the outstanding shares of MacDougall, MacDougall & MacTier Inc. (“3Macs”), an independent investment firm founded in 1849 and headquartered in Montreal, Quebec, Canada. 3Macs results of operations have been included in our results prospectively from August 31, 2016. See Note 3 on pages 127 - 129 of our 2016 Form 10-K for additional information regarding the 3Macs acquisition.

U.S. Private Client Services unit of Deutsche Bank Wealth Management

On September 6, 2016, RJ&A completed an acquisition of certain specified assets and the assumption of certain specified liabilities of the U. S. Private Client Services unit of Deutsche Bank Wealth Management (“Alex. Brown”) from Deutsche Bank Securities, Inc. (“Deutsche WM”). Alex. Brown’s results of operations have been included in our results prospectively from September 6, 2016. See Note 3 on pages 127 - 129 of our 2016 Form 10-K for additional information regarding the Alex. Brown acquisition.

The acquisition-related expenses presented on our Condensed Consolidated Statements of Income and Comprehensive income for the three months ended December 31, 2016 pertain to certain incremental expenses incurred in connection with the acquisitions described above. The expenses incurred during the three months ended December 31, 2015 were associated with the acquisition of Alex. Brown (which was subsequently completed in September 2016 as described above). The table below provides a summary of acquisition-related expenses incurred in each respective period:
For the three months ended December 31,
2016
2015
(in thousands)
Acquisition and integration related incentive compensation costs (1)
$
5,474

$
—

Severance (2)
4,803

—

Early termination costs of assumed contracts
1,324

—

Information systems integration costs
1,205

—

Legal and regulatory
553

1,501

Post-closing purchase price contingency (favorable) interim determination computed as of the end of the period
(2,251
)
—

Pre-Alex. Brown closing date unrealized loss in the fair value of DB shares purchased to satisfy the DBRSU liability (3)
—

154

Travel and all other
1,558

217

Total acquisition-related expenses
$
12,666

$
1,872


(1)
Primarily comprised of non-recurring RSU grants authorized by the Board of Directors in their November 2016 meeting, made to certain employees and consultants for acquisition-related purposes. See Note 18 for discussion of share-based compensation.

(2)
Represents all costs associated with positions eliminated during the period, primarily arising from the 3Macs acquisition, such costs include any forgiven employee loan balances and any unamortized balance of the prepaid compensation asset associated with such persons which will not be collected (refer to the discussion of this prepaid asset in Note 3 on page 128, and Note 10 on page 157, each in our 2016 Form 10-K).

(3)
Refer to the discussion of Deutsche Bank AG (“DB”) common shares to be used to settle certain Deutsche Bank restricted stock unit (“DBRSU”) awards assumed by RJ&A in the Alex. Brown acquisition, in Note 3 on page 129 of our 2016 Form 10-K, as well as in Notes 12 and 18 herein.

12

NOTE 4 – CASH AND CASH EQUIVALENTS, ASSETS SEGREGATED PURSUANT TO REGULATIONS, AND DEPOSITS WITH CLEARING ORGANIZATIONS

Our cash equivalents include money market funds or highly liquid investments with original maturities of 90 days or less, other than those used for trading purposes.  For discussion of our accounting policies regarding assets segregated pursuant to regulations and other segregated assets, see Note 2 on page 110 of our 2016 Form 10-K.

Our cash and cash equivalents, assets segregated pursuant to regulations and other segregated assets, and deposits with clearing organization balances are as follows:
December 31,
2016
September 30,
2016
(in thousands)
Cash and cash equivalents:
Cash in banks
$
2,527,731

$
1,649,593

Money market fund investments
544

859

Total cash and cash equivalents (1)
$
2,528,275

$
1,650,452

Assets segregated pursuant to federal regulations and other segregated assets (2)
$
3,867,999

$
4,884,487

Deposits with clearing organizations:
Cash and cash equivalents
$
145,629

$
215,856

Government and agency obligations
53,227

29,508

Total deposits with clearing organizations
$
198,856

$
245,364


(1)
The total amounts presented include cash and cash equivalents of $1.16 billion and $810 million as of December 31, 2016 and September 30, 2016 , respectively, which are either held directly by RJF in depository accounts at third party financial institutions, held in a depository account at RJ Bank (computed as the lesser of RJ Bank’s cash balance or the amount of RJF’s depository account balance), or are otherwise invested by one of our subsidiaries on behalf of RJF, all of which are available without restrictions.

(2)
Consists of cash maintained in accordance with Rule 15c3-3 under the Securities Exchange Act of 1934. RJ&A, as a broker-dealer carrying client accounts, is subject to requirements related to maintaining cash or qualified securities in segregated reserve accounts for the exclusive benefit of its’ clients. Additionally, RJ Ltd. is required to hold client Registered Retirement Savings Plan funds in trust.



13

NOTE 5 – FAIR VALUE

For a discussion of our valuation methodologies for assets, liabilities measured at fair value, and the fair value hierarchy, see Note 2 on pages 110 - 116 of our 2016 Form 10-K. There have been no material changes to our valuation methodologies since our year ended September 30, 2016 .

Assets and liabilities measured at fair value on a recurring and nonrecurring basis are presented below:
December 31, 2016
Quoted prices
in active
markets for
identical
assets
(Level 1) (1)
Significant
other
observable
inputs
(Level 2) (1)
Significant
unobservable
inputs
(Level 3)
Netting
adjustments (2)
Balance as of
December 31,
2016
(in thousands)
Assets at fair value on a recurring basis:
Trading instruments:
Municipal and provincial obligations
$
87

$
116,143

$
—

$
—

$
116,230

Corporate obligations
6,301

58,591

—

—

64,892

Government and agency obligations
6,412

42,176

—

—

48,588

Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)
9,477

116,187

—

—

125,664

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

43,237

7

—

43,244

Total debt securities
22,277

376,334

7

—

398,618

Derivative contracts
—

114,930

—

(59,010
)
55,920

Equity securities
15,879

1,938

—

—

17,817

Brokered certificates of deposit
—

34,349

—

—

34,349

Other
36

—

11,052

—

11,088

Total trading instruments
38,192

527,551

11,059

(59,010
)
517,792

Available for sale securities:





Agency MBS and CMOs
—

992,994

—

—

992,994

Non-agency CMOs
—

39,915

—

—

39,915

Other securities
1,398

—

—

—

1,398

Auction rate securities (“ARS”):


Municipals
—

—

25,364

—

25,364

Preferred securities
—

—

103,853

—

103,853

Total available for sale securities
1,398

1,032,909

129,217

—

1,163,524

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

—

83,466

(3)
—

83,466

Other investments (4)
252,188

320

223

—

252,731

Derivative instruments associated with offsetting matched book positions
—

299,393

—

—

299,393

Deposits with clearing organizations:
Government and agency obligations
53,227

—

—

—

53,227

Other assets:
Derivative contracts (5)
—

14,844

—

—

14,844

Total assets at fair value on a recurring basis
$
345,005

$
1,875,017

$
223,965

$
(59,010
)
$
2,384,977

Assets at fair value on a nonrecurring basis:




Bank loans, net:





Impaired loans
$
—

$
21,044

$
40,450

$
—

$
61,494

Loans held for sale (6)
—

21,405

—

—

21,405

Total bank loans, net
—

42,449

40,450

—

82,899

Other real estate owned (“OREO”) (7)
—

1,118

—

—

1,118

Total assets at fair value on a nonrecurring basis
$
—

$
43,567

$
40,450

$
—

$
84,017

(continued on next page)

14

December 31, 2016
Quoted prices
in active
markets for
identical
assets
(Level 1) (1)
Significant
other
observable
inputs
(Level 2) (1)
Significant
unobservable
inputs
(Level 3)
Netting
adjustments (2)
Balance as of
December 31,
2016
(in thousands)
(continued from previous page)
Liabilities at fair value on a recurring basis:
Trading instruments sold but not yet purchased:
Municipal and provincial obligations
$
287

$
311

$
—

$
—

$
598

Corporate obligations
1,577

17,993

—

—

19,570

Government obligations
177,323

—

—

—

177,323

Agency MBS and CMOs
1,144

—

—

—

1,144

Non-agency MBS & CMOs
—

5,269

—

—

5,269

Total debt securities
180,331

23,573

—

—

203,904

Derivative contracts
—

103,424

—

(50,358
)
53,066

Equity securities
3,363

10

—

—

3,373

Other securities
—

200

—

—

200

Total trading instruments sold but not yet purchased
183,694

127,207

—

(50,358
)
260,543

Derivative instruments associated with offsetting matched book positions
—

299,393

—

—

299,393

Trade and other payables:


Derivative contracts (5)
—

8,452

—

—

8,452

Other liabilities
—

—

1,856

(8)
—

1,856

Total trade and other payables
—

8,452

1,856

—

10,308

Accrued compensation, commissions and benefits:
Derivative contracts (9)
—

24,144

—

—

24,144

Total liabilities at fair value on a recurring basis
$
183,694

$
459,196

$
1,856

$
(50,358
)
$
594,388


(1)
We had $1 million in transfers of financial instruments from Level 1 to Level 2 during the three months ended December 31, 2016 .  These transfers were a result of a decrease in the availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement. We had $1 million in transfers of financial instruments from Level 2 to Level 1 during the three months ended December 31, 2016 .  These transfers were a result of an increase in the availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement.  Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized.

(2)
For derivative transactions not cleared through exchanges, and where permitted, we have elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists (see Note 13 for additional information regarding offsetting financial instruments). Deposits associated with derivative transactions cleared through exchanges are included in deposits with clearing organizations on our Condensed Consolidated Statements of Financial Condition.

(3)
The portions of these investments we do not own are approximately $26 million as of December 31, 2016 and are included as a component of noncontrolling interest in our Condensed Consolidated Statements of Financial Condition. The weighted average portion we own is approximately $57 million or 68% of the total private equity investments of $83 million included in our Condensed Consolidated Statements of Financial Condition.

(4)
Other investments include $80 million of financial instruments that are related to obligations to perform under certain deferred compensation plans (see Note 2 on page 116, and Note 24 on pages 186 - 191, of our 2016 Form 10-K, for further information regarding these plans), and DB shares with a fair value of $16 million as of December 31, 2016 which we hold as an economic hedge against the DBRSU obligation (see Note 18 for additional information).

(5)
Consists of derivatives arising from RJ Bank’s business operations, see Note 12 for additional information.

(6)
Includes individual loans classified as held for sale, which were recorded at a fair value lower than cost.

(7)
Represents the fair value of foreclosed properties which were measured at a fair value subsequent to their initial classification as OREO. The recorded value in the Condensed Consolidated Statements of Financial Condition is net of the estimated selling costs.

(8)
Includes the fair value of forward commitments to purchase GNMA or FNMA (as hereinafter defined) MBS arising from our fixed income public finance operations. See Note 2 and Note 21 of our 2016 Form 10-K for additional information.

(9)
The balance reflects the DBRSUs from our acquisition of Alex. Brown. See Note 12 for additional information.

15


September 30, 2016
Quoted prices
in active
markets for
identical
assets
(Level 1) (1)
Significant
other
observable
inputs
(Level 2) (1)
Significant
unobservable
inputs
(Level 3)
Netting
adjustments (2)
Balance as of
September 30,
2016
(in thousands)
Assets at fair value on a recurring basis:
Trading instruments:
Municipal and provincial obligations
$
480

$
273,683

$
—

$
—

$
274,163

Corporate obligations
10,000

122,885

—

—

132,885

Government and agency obligations
6,412

43,186

—

—

49,598

Agency MBS and CMOs
413

164,250

—

—

164,663

Non-agency CMOs and ABS
—

34,421

7

—

34,428

Total debt securities
17,305

638,425

7

—

655,737

Derivative contracts
—

163,242

—

(107,539
)
55,703

Equity securities
14,529

1,500

—

—

16,029

Brokered certificates of deposit
—

35,206

—

—

35,206

Other
555

3

3,572

—

4,130

Total trading instruments
32,389

838,376

3,579

(107,539
)
766,805

Available for sale securities:





Agency MBS and CMOs
—

682,297

—

—

682,297

Non-agency CMOs
—

50,519

—

—

50,519

Other securities
1,417

—

—

—

1,417

ARS:






Municipals
—

—

25,147

—

25,147

Preferred securities
—

—

100,018

—

100,018

Total available for sale securities
1,417

732,816

125,165

—

859,398

Private equity investments not measured at NAV (3)
—

—

83,165

(4)
—

83,165

Other investments (5)
296,146

257

441

—

296,844

Derivative instruments associated with offsetting matched book positions
—

422,196

—

—

422,196

Deposits with clearing organizations:
Government and agency obligations
29,508

—

—

—

29,508

Other assets:
Derivative contracts (6)
—

2,016

—

—

2,016

Other assets
—

—

2,448

(7)
—

2,448

Total other assets
—

2,016

2,448

—

4,464

Total assets at fair value on a recurring basis
$
359,460

$
1,995,661

$
214,798

$
(107,539
)
$
2,462,380

Assets at fair value on a nonrecurring basis:




Bank loans, net:
Impaired loans
$
—

$
23,146

$
47,982

$
—

$
71,128

Loans held for sale (8)
—

18,177

—

—

18,177

Total bank loans, net
—

41,323

47,982

—

89,305

OREO (9)
—

679

—

—

679

Total assets at fair value on a nonrecurring basis
$
—

$
42,002

$
47,982

$
—

$
89,984

(continued on next page)

16

September 30, 2016
Quoted prices
in active
markets for
identical
assets
(Level 1) (1)
Significant
other
observable
inputs
(Level 2) (1)
Significant
unobservable
inputs
(Level 3)
Netting
adjustments (2)
Balance as of
September 30,
2016
(in thousands)
(continued from previous page)
Liabilities at fair value on a recurring basis:




Trading instruments sold but not yet purchased:




Municipal and provincial obligations
$
1,161

$
—

$
—

$
—

$
1,161

Corporate obligations
1,283

29,791

—

—

31,074

Government obligations
266,682

—

—

—

266,682

Agency MBS and CMOs
2,804

—

—

—

2,804

Total debt securities
271,930

29,791

—

—

301,721

Derivative contracts
—

151,694

—

(142,859
)
8,835

Equity securities
18,382

—

—

—

18,382

Total trading instruments sold but not yet purchased
290,312

181,485

—

(142,859
)
328,938

Derivative instruments associated with offsetting matched book positions
—

422,196

—

—

422,196

Trade and other payables:
Derivative contracts (6)
—

26,671

—

—

26,671

Other liabilities
—

—

67

—

67

Total trade and other payables
—

26,671

67

—

26,738

Accrued compensation, commissions and benefits:
Derivative contracts (10)
—

17,769

—

—

17,769

Total liabilities at fair value on a recurring basis
$
290,312

$
648,121

$
67

$
(142,859
)
$
795,641


The text of the footnotes to the table on the previous page are as follows:

(1)
We had $3 million in transfers of financial instruments from Level 1 to Level 2 during the year ended September 30, 2016 .  These transfers were a result of a decrease in the availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement. We had $1 million in transfers of financial instruments from Level 2 to Level 1 during the year ended September 30, 2016 .  These transfers were a result of an increase in the availability and reliability of the observable inputs utilized in the respective instruments’ fair value measurement.  Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized.

(2)
For derivative transactions not cleared through an exchange, and where permitted, we have elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists (see Note 13 for additional information regarding offsetting financial instruments). Deposits associated with derivative transactions cleared through an exchange are included in deposits with clearing organizations on our Condensed Consolidated Statements of Financial Condition.

(3)
Effective September 30, 2016 we adopted new accounting guidance related to the classification and disclosure of certain investments using the NAV as a practical expedient to measure the fair value of the investment. The amounts presented above do not include our investments measured at NAV, see the “investments in private equity measured at net asset value per share” section within this footnote, for additional information.

(4)
The portions of these investments we do not own are approximately $26 million as of September 30, 2016 and are included as a component of noncontrolling interest in our Condensed Consolidated Statements of Financial Condition. The weighted average portion we own is approximately $57 million or 68% of the total private equity investments of $83 million included in our Condensed Consolidated Statements of Financial Condition.

(5)
Other investments include $77 million of financial instruments that are related to obligations to perform under certain deferred compensation plans (see Note 2 and Note 24, of our 2016 Form 10-K for further information regarding these plans), and DB shares with a fair value of $12 million as of September 30, 2016 which we hold as an economic hedge against the DBRSU obligation (see Notes 2, 18, and 24 of our 2016 Form 10-K for additional information).

(6)
Consists of derivatives arising from RJ Bank’s business operations, see Note 12 for additional information.

(7)
Includes the fair value of forward commitments to purchase GNMA or FNMA (as hereinafter defined) MBS arising from our fixed income public finance operations. See Note 2 and Note 21 of our 2016 Form 10-K for additional information.

(8)
Includes individual loans classified as held for sale, which were recorded at a fair value lower than cost.

(9)
Represents the fair value of foreclosed properties which were measured at a fair value subsequent to their initial classification as OREO. The recorded value in the Consolidated Statements of Financial Condition is net of the estimated selling costs.

(10)
The balance reflects the DBRSUs which arose from our acquisition of Alex. Brown, see a discussion of the circumstances giving rise to this derivative in Note 3 on pages 127 - 129 of our 2016 Form 10-K.


17

The adjustment to fair value of the nonrecurring fair value measures for the three months ended December 31, 2016 resulted in a $1 million additional provision for loan losses relating to impaired loans and an insignificant amount of other losses relating to loans held for sale and OREO. The adjustment to fair value of the nonrecurring fair value measures for the three months ended December 31, 2015 resulted in an insignificant additional provision for loan losses relating to impaired loans and an insignificant amount of other losses relating to loans held for sale and OREO.

Changes in Level 3 recurring fair value measurements

The realized and unrealized gains and losses for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.

Additional information about Level 3 assets and liabilities measured at fair value on a recurring basis is presented below:
Three months ended December 31, 2016 Level 3 assets at fair value
(in thousands)
Financial assets
Financial
liabilities
Trading instruments
Available for sale securities
Private equity, other investments and other assets
Payables-
trade and
other
Non-
agency
CMOs &
ABS
Other
ARS –
municipals
ARS -
preferred
securities
Private
equity
investments
Other
investments
Other
assets
Other
liabilities
Fair value September 30, 2016
$
7

$
3,572

$
25,147

$
100,018

$
83,165

$
441

$
2,448

$
(67
)
Total gains (losses) for the period:






Included in earnings
—

(141
)
—

1

301

(8
)
(2,448
)
(1,789
)
Included in other comprehensive income
—

—

217

3,857

—

—

—

—

Purchases and contributions
—

18,683

—

—

—

—

—

—

Sales
—

(11,062
)
—

(23
)
—

—

—

—

Redemptions by issuer
—

—

—

—

—

(15
)
—

—

Distributions
—

—

—

—

—

—

—

—

Transfers: (1)







Into Level 3
—

—

—

—

—

—

—

—

Out of Level 3
—

—

—

—

—

(195
)
—

—

Fair value December 31, 2016
$
7

$
11,052

$
25,364

$
103,853

$
83,466

$
223

$
—

$
(1,856
)
Change in unrealized gains (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period
$
—

$
(124
)
$
217

$
3,856

$
301

$
—

$
—

$
(4,240
)

(1)
Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized.





18

Three months ended December 31, 2015 Level 3 assets at fair value
(in thousands)
Financial assets
Financial
liabilities
Trading instruments
Available for sale securities
Private equity, other investments and other assets
Payables-
trade and
other
Corporate Obligations
Non-
agency
CMOs &
ABS
Other
ARS –
municipals
ARS -
preferred
securities
Private
equity
investments (1)
Other
investments
Other
assets
Other
liabilities
Fair value September 30, 2015
$
156

$
9

$
1,986

$
28,015

$
110,749

$
77,435

$
565

$
4,975

$
(58
)
Total gains (losses) for the period:



Included in earnings
(40
)
—

(249
)
—

—

—

(7
)
(3,449
)
(9
)
Included in other comprehensive income
—

—

—

(535
)
(7,850
)
—

—

—

—

Purchases and contributions
73

—

19,017

—

—

915

—

—

—

Sales
—

—

(18,790
)
—

—

(18
)
—

—

—

Redemptions by issuer
—

—

—

—

—

—

—

—

—

Distributions
—

—

—

—

—

(18
)
(65
)
—

—

Transfers: (2)

Into Level 3
—

—

—

—

—

—

—

—

—

Out of Level 3
—

—

—

—

—

—


—

—

—

Fair value December 31, 2015
$
189

$
9

$
1,964

$
27,480

$
102,899

$
78,314

$
493

$
1,526

$
(67
)
Change in unrealized gains (losses) for the period included in earnings (or changes in net assets) for assets held at the end of the reporting period
$
(40
)
$
—

$
(11
)
$
—

$
—

$
—

$
(7
)
$
(3,449
)
$
—


(1)
Effective September 30, 2016, we adopted new accounting guidance related to the classification and disclosure of certain investments using NAV as a practical expedient to measure the fair value of the investment. The prior year amounts reflect the effect of reclassifications to conform the prior year period to current period presentation.

(2)
Our policy is that the end of each respective quarterly reporting period determines when transfers of financial instruments between levels are recognized.

As of December 31, 2016 , 8% of our assets and 2% of our liabilities are instruments measured at fair value on a recurring basis.  Instruments measured at fair value on a recurring basis categorized as Level 3 as of December 31, 2016 represent 9% of our assets measured at fair value. In comparison, as of December 31, 2015 , 7% and 3% of our assets and liabilities, respectively, represented instruments measured at fair value on a recurring basis.  Instruments measured at fair value on a recurring basis categorized as Level 3 as of December 31, 2015 represented 12% of our assets measured at fair value. Level 3 instruments as a percentage of total financial instruments decreased by 3% as compared to December 31, 2015 , primarily as a result of the increase in total assets measured at fair value since December 31, 2015 .

Gains and losses related to Level 3 recurring fair value measurements included in earnings are presented in net trading profit, other revenues and other comprehensive income in our Condensed Consolidated Statements of Income and Comprehensive Income as follows:
Net trading profit
Other revenues
Other comprehensive income
(in thousands)
For the three months ended December 31, 2016
Total (losses) gains included in earnings
$
(141
)
$
(3,943
)
$
4,074

Change in unrealized (losses) gains for assets held at the end of the reporting period
$
(124
)
$
(3,939
)
$
4,073

For the three months ended December 31, 2015
Total losses included in earnings
$
(289
)
$
(3,465
)
$
(8,385
)
Change in unrealized losses for assets held at the end of the reporting period
$
(51
)
$
(3,456
)
$
—


19

Quantitative information about level 3 fair value measurements

The significant assumptions used in the valuation of level 3 financial instruments are as follows (the table that follows includes the significant majority of the financial instruments we hold that are classified as level 3 measures):
Level 3 financial instrument
Fair value at
December 31,
2016
(in thousands)
Valuation technique(s)
Unobservable input
Range (weighted-average)
Recurring measurements:
Available for sale securities:
ARS:
Municipals - issuer is a municipality
$
10,593

Discounted cash flow
Average discount rate (a)
6.71% - 7.90% (7.31%)
Average interest rates applicable to future interest income on the securities (b)
2.40% - 3.67% (3.04%)
Prepayment year (c)
2019 - 2026 (2022)
Municipals - tax-exempt preferred securities
$
14,771

Discounted cash flow
Average discount rate (a)
5.80% - 6.80% (6.30%)

Average interest rates applicable to future interest income on the securities (b)
1.89% - 1.89% (1.89%)

Prepayment year (c)
2016 - 2021 (2021)
Preferred securities - taxable
$
103,853

Discounted cash flow
Average discount rate (a)
5.74% - 7.18% (6.34%)

Average interest rates applicable to future interest income on the securities (b)
2.57% - 3.43% (2.71%)

Prepayment year (c)
2016 - 2021 (2021)
Private equity investments (not measured at NAV):
$
57,047

Income or market approach:
Scenario 1 - income approach - discounted cash flow
Discount rate (a)
13% - 20% (17.9%)
Terminal growth rate of cash flows
3% - 3% (3%)
Terminal year
2019 - 2021 (2020)
Scenario 2 - market approach - market multiple method
EBITDA Multiple (d)
5.25 - 7.5 (6.2)
Weighting assigned to outcome of scenario 1/scenario 2
81%/19%
$
26,419

Transaction price or other investment-specific events (e)
Not meaningful (e)
Not meaningful (e)
Nonrecurring measurements:
Impaired loans: residential
$
22,178

Discounted cash flow
Prepayment rate
7 yrs. - 12 yrs. (10.3 yrs.)
Impaired loans: corporate
$
18,272

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

(a)
Represents discount rates used when we have determined that market participants would take these discounts into account when pricing the investments.

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

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

(d)
Represents amounts used when we have determined that market participants would use such multiples when pricing the investments.

(e)
Certain private equity investments are valued initially at the transaction price until either our annual review, significant transactions occur, new developments become known, or we receive information from the fund manager that allows us to update our proportionate share of net assets, when any of which indicate that a change in the carrying values of these investments is appropriate.

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



20

Qualitative disclosure about unobservable inputs

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

Auction rate securities:

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

The future interest rate and maturity assumptions impacting the valuation of the auction rate securities are directly related.  As short-term interest rates rise, due to the variable nature of the penalty interest rate provisions embedded in most of these securities in the event auctions fail to set the security’s interest rate, then a penalty rate that is specified in the security increases.  These penalty rates are based upon a stated interest rate spread over what is typically a short-term base interest rate index.  Management estimates that at some level of increase in short-term interest rates, issuers of the securities will have the economic incentive to refinance (and thus prepay) the securities.  Therefore, the short-term interest rate assumption directly impacts the input related to the timing of any projected prepayment.  The faster and steeper short-term interest rates rise, the earlier prepayments will likely occur and the higher the fair value of the security.

Private equity investments:

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

Investments in private equity measured at net asset value per share

As more fully described in Note 2 on pages 115 - 116 of our 2016 Form 10-K, as a practical expedient, we utilize NAV or its equivalent to determine the recorded value of a portion of our private equity portfolio.

Our private equity portfolio includes various direct and third party private equity investments, employee investment funds, and various private equity funds which we sponsor. The portfolio is primarily invested in a broad range of industries including leveraged buyouts, growth capital, distressed capital, venture capital and mezzanine capital.
Due to the closed-end nature of certain of our fund investments, such investments cannot be redeemed directly with the funds; our investment is monetized through distributions received through the liquidation of the underlying assets of those funds.


21

The recorded value and unfunded commitments related to our private equity portfolio is as follows:
Unfunded Commitment
Recorded Value
RJF (1)
Noncontrolling Interest (2)
Total
(in thousands)
December 31, 2016
Private equity investments at NAV
$
115,972

(3)
$
24,249

$
2,299

$
26,548

Private equity investments at fair value
83,466

Total private equity investments
$
199,438

(4)
September 30, 2016
Private equity investments at NAV
$
111,469

(3)
$
27,542

$
3,001

$
30,543

Private equity investments at fair value
83,165

Total private equity investments
$
194,634

(5)

(1)
Represents RJF’s portion of unfunded commitments related to our private equity portfolio.

(2)
Unfunded commitments related to the portion of our private equity portfolio owned by others. Such commitments are required to be funded by the holders of the noncontrolling interests.

(3)
We anticipate 90% of these funds will be liquidated over a period of five years or less. The remaining 10% of these funds we anticipate to be liquidated over a period of five to nine years .

(4)
The portions of these investments we do not own are approximately $51 million as of December 31, 2016 and are included as a component of noncontrolling interest in our Condensed Consolidated Statements of Financial Condition. The weighted average portion we own is approximately $148 million or 74% of the total private equity investments of $199 million included in our Condensed Consolidated Statements of Financial Condition.

(5)
The portions of these investments we do not own are approximately $51 million as of September 30, 2016 and are included as a component of noncontrolling interest in our Condensed Consolidated Statements of Financial Condition. The weighted average portion we own is approximately $144 million or 74% of the total private equity investments of $195 million included in our Condensed Consolidated Statements of Financial Condition.

Many of these fund investments meet the definition of prohibited “covered funds” as defined by the Volcker Rule of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  In order to be compliant with the Volcker Rule by its’ July 2017 conformance period, it is possible that we may be required to sell our interests in such funds.  If that occurs, we would likely receive a value for our interests that is less than the carrying value as there is a limited secondary market for these investments and we may be unable to sell them in orderly transactions.

Fair value option

The fair value option is an accounting election that allows the reporting entity to apply fair value accounting for certain financial assets and liabilities on an instrument by instrument basis.  As of December 31, 2016 , we have elected not to choose the fair value option for any of our financial assets or liabilities not already recorded at fair value.

Other fair value disclosures

Many, but not all, of the financial instruments we hold are recorded at fair value in the Condensed Consolidated Statements of Financial Condition. Refer to Note 5 on pages 140 - 142 of our 2016 Form 10-K for discussion of the methods and assumptions we apply to the determination of fair value of our financial instruments that are not otherwise recorded at fair value.


22

The estimated fair values by level within the fair value hierarchy and the carrying amounts of our financial instruments that are not carried at fair value are as follows:
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Total estimated fair value
Carrying amount
(in thousands)
December 31, 2016
Financial assets:
Bank loans, net (1)
$
—

$
160,811

$
15,417,900

$
15,578,711

$
15,745,853

Loans to Financial advisors, net
$
—

$
—

$
709,145

$
709,145

$
845,783

Financial liabilities:

Bank deposits
$
—

$
14,901,554

$
286,736

$
15,188,290

$
15,189,790

Other borrowings (2)
$
—

$
32,665

$
—

$
32,665

$
32,271

Senior notes payable
$
355,460

$
1,386,734

$
—

$
1,742,194

$
1,680,957

September 30, 2016
Financial assets:
Bank loans, net (1)
$
—

$
196,109

$
14,925,802

$
15,121,911

$
15,121,430

Loans to financial advisors, net
$
—

$
—

$
706,717

$
706,717

$
838,721

Financial liabilities:

Bank deposits
$
—

$
13,947,310

$
318,228

$
14,265,538

$
14,262,547

Other borrowings (2)
$
—

$
34,520

$
—

$
34,520

$
33,391

Senior notes payable
$
362,180

$
1,452,071

$
—

$
1,814,251

$
1,680,587


(1)
Excludes all impaired loans and loans held for sale which have been recorded at fair value in the Condensed Consolidated Statements of Financial Condition at December 31, 2016 and September 30, 2016 .

(2)
Excludes the components of other borrowings that are recorded at amounts that approximate their fair value in the Condensed Consolidated Statements of Financial Condition at December 31, 2016 and September 30, 2016 .

NOTE 6 – TRADING INSTRUMENTS AND TRADING INSTRUMENTS SOLD BUT NOT YET PURCHASED

December 31, 2016
September 30, 2016
Trading
instruments
Instruments
sold but not
yet purchased
Trading
instruments
Instruments
sold but not
yet purchased
(in thousands)
Municipal and provincial obligations
$
116,230

$
598

$
274,163

$
1,161

Corporate obligations
64,892

19,570

132,885

31,074

Government and agency obligations
48,588

177,323

49,598

266,682

Agency MBS and CMOs
125,664

1,144

164,663

2,804

Non-agency CMOs and ABS
43,244

5,269

34,428

—

Total debt securities
398,618

203,904

655,737

301,721

Derivative contracts (1)
55,920

53,066

55,703

8,835

Equity securities
17,817

3,373

16,029

18,382

Brokered certificates of deposit
34,349

—

35,206

—

Other
11,088

200

4,130

—

Total
$
517,792

$
260,543

$
766,805

$
328,938


(1)
Represents the derivative contracts held for trading purposes. These balances do not include all derivative instruments. See Note 12 for further information regarding all of our derivative transactions, and see Note 13 for additional information regarding offsetting financial instruments.

See Note 5 for additional information regarding the fair value of trading instruments and trading instruments sold but not yet purchased.

23

NOTE 7 – AVAILABLE FOR SALE SECURITIES

Available for sale securities are comprised of MBS and CMOs owned by RJ Bank and ARS owned by one of our non-broker-dealer subsidiaries. Refer to the discussion of our available for sale securities accounting policies, including the fair value determination process, in Note 2 on pages 113 - 114 of our 2016 Form 10-K.

There were $7 million of proceeds, and an insignificant loss which is included in other revenues in our Condensed Consolidated Statements of Income and Comprehensive Income, from the sale of available for sale securities held by RJ Bank during the three months ended December 31, 2016 . There were no proceeds from the sale of available for sale securities held by RJ Bank during the three months ended December 31, 2015 .

There was an insignificant amount of proceeds and related gains which are included in other revenues on our Condensed Consolidated Statements of Income and Comprehensive Income, respectively, from the sale of ARS during the three months ended December 31, 2016 . There were no proceeds from the sale or redemption of ARS during the three months ended December 31, 2015 .

The amortized cost and fair values of available for sale securities are as follows:
Cost basis
Gross
unrealized gains
Gross
unrealized losses
Fair value
(in thousands)
December 31, 2016
Available for sale securities:
Agency MBS and CMOs
$
1,002,868

$
458

$
(10,332
)
$
992,994

Non-agency CMOs (1)
41,918

4

(2,007
)
39,915

Other securities
1,575

—

(177
)
1,398

Total RJ Bank available for sale securities
1,046,361

462

(12,516
)
1,034,307

Auction rate securities:




Municipal obligations
27,491

14

(2,141
)
25,364

Preferred securities
103,204

809

(160
)
103,853

Total auction rate securities
130,695

823

(2,301
)
129,217

Total available for sale securities
$
1,177,056

$
1,285

$
(14,817
)
$
1,163,524

September 30, 2016




Available for sale securities:




Agency MBS and CMOs
$
680,341

$
2,512

$
(556
)
$
682,297

Non-agency CMOs (2)
53,427

9

(2,917
)
50,519

Other securities
1,575

—

(158
)
1,417

Total RJ Bank available for sale securities
735,343

2,521

(3,631
)
734,233

Auction rate securities:




Municipal obligations
27,491

14

(2,358
)
25,147

Preferred securities
103,226

—

(3,208
)
100,018

Total auction rate securities
130,717

14

(5,566
)
125,165

Total available for sale securities
$
866,060

$
2,535

$
(9,197
)
$
859,398


(1)
As of December 31, 2016 , the non-credit portion of unrealized losses related to non-agency CMOs with previously recorded other-than-temporary impairment (“OTTI”) was $1 million (before taxes) recorded in accumulated other comprehensive income (loss) (“AOCI”). See Note 16 for additional information.

(2)
As of September 30, 2016 , the non-credit portion of unrealized losses related to non-agency CMOs with previously recorded OTTI was $2 million (before taxes) recorded in AOCI.

See Note 5 for additional information regarding the fair value of available for sale securities.


24

The contractual maturities, amortized cost, carrying values and current yields for our available for sale securities are as presented below.  Since RJ Bank’s available for sale securities (MBS & CMOs) are backed by mortgages, actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.  Expected maturities of ARS may differ significantly from contractual maturities, as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

December 31, 2016
Within one year
After one but
within five
years
After five but
within ten
years
After ten years
Total
($ in thousands)
Agency MBS & CMOs:
Amortized cost
$
175

$
53,772

$
254,570

$
694,351

$
1,002,868

Carrying value
176

53,225

252,700

686,893

992,994

Weighted-average yield
1.02
%
1.72
%
1.61
%
1.61
%
1.62
%
Non-agency CMOs:





Amortized cost
$
—

$
—

$
—

$
41,918

$
41,918

Carrying value
—

—

—

39,915

39,915

Weighted-average yield
—

—

—

2.71
%
2.71
%
Other securities:
Amortized cost
$
—

$
—

$
—

$
1,575

$
1,575

Carrying value
—

—

—

1,398

1,398

Weighted-average yield
—

—

—

—

—

Sub-total agency MBS & CMOs, non-agency CMOs, and other securities:


Amortized cost
$
175

$
53,772

$
254,570

$
737,844

$
1,046,361

Carrying value
176

53,225

252,700

728,206

1,034,307

Weighted-average yield
1.02
%
1.72
%
1.61
%
1.67
%
1.66
%
Auction rate securities:





Municipal obligations





Amortized cost
$
—

$
—

$
—

$
27,491

$
27,491

Carrying value
—

—

—

25,364

25,364

Weighted-average yield
—

—

—

1.66
%
1.66
%
Preferred securities:





Amortized cost
$
—

$
—

$
—

$
103,204

$
103,204

Carrying value
—

—

—

103,853

103,853

Weighted-average yield
—

—

—

1.17
%
1.17
%
Sub-total auction rate securities:





Amortized cost
$
—

$
—

$
—

$
130,695

$
130,695

Carrying value
—

—

—

129,217

129,217

Weighted-average yield
—

—

—

1.27
%
1.27
%
Total available for sale securities:





Amortized cost
$
175

$
53,772

$
254,570

$
868,539

$
1,177,056

Carrying value
176

53,225

252,700

857,423

1,163,524

Weighted-average yield
1.02
%
1.72
%
1.61
%
1.61
%
1.62
%


25

The gross unrealized losses and fair value, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:
December 31, 2016
Less than 12 months
12 months or more
Total
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
(in thousands)
Agency MBS and CMOs
$
844,440

$
(9,864
)
$
26,332

$
(468
)
$
870,772

$
(10,332
)
Non-agency CMOs
1,496

(36
)
37,868

(1,971
)
39,364

(2,007
)
Other securities
1,575

(177
)
—

—

1,575

(177
)
ARS municipal obligations
—

—

25,116

(2,141
)
25,116

(2,141
)
ARS preferred securities
1,488

(42
)
32,945

(118
)
34,433

(160
)
Total
$
848,999

$
(10,119
)
$
122,261

$
(4,698
)
$
971,260

$
(14,817
)
September 30, 2016
Less than 12 months
12 months or more
Total
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
(in thousands)
Agency MBS and CMOs
$
208,880

$
(361
)
$
28,893

$
(195
)
$
237,773

$
(556
)
Non-agency CMOs
4,256

(21
)
44,137

(2,896
)
48,393

(2,917
)
Other securities
1,417

(158
)
—

—

1,417

(158
)
ARS municipal obligations
13,204

(697
)
11,695

(1,661
)
24,899

(2,358
)
ARS preferred securities
98,489

(3,208
)
—

—

98,489

(3,208
)
Total
$
326,246

$
(4,445
)
$
84,725

$
(4,752
)
$
410,971

$
(9,197
)

The reference point for determining when securities are in a loss position is the reporting period end. As such, it is possible that a security had a fair value that exceeded its amortized cost on other days during the period.

Agency MBS and CMOs

The Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”), as well as the Government National Mortgage Association (“GNMA”), guarantee the contractual cash flows of the agency MBS and CMOs. At December 31, 2016 of the 106 U.S. government-sponsored enterprise MBS and CMOs in an unrealized loss position, 99 were in a continuous unrealized loss position for less than 12 months and seven were for 12 months or more. We do not consider these securities other-than-temporarily impaired due to the guarantee provided by FNMA, FHLMC, and GNMA as to the full payment of principal and interest, and the fact that we have the ability and intent to hold these securities to maturity.

Non-agency CMOs

All individual non-agency securities are evaluated for OTTI on a quarterly basis.  Only those non-agency CMOs whose amortized cost basis we do not expect to recover in full are considered to be other than temporarily impaired, as we have the ability and intent to hold these securities to maturity.  To assess whether the amortized cost basis of non-agency CMOs will be recovered, RJ Bank performs a cash flow analysis for each security.  This comprehensive process considers borrower characteristics and the particular attributes of the loans underlying each security.  Loan level analysis includes a review of historical default rates, loss severities, liquidations, prepayment speeds and delinquency trends.  In addition to historical details, home prices and the economic outlook are considered to derive the assumptions utilized in the discounted cash flow model to project security-specific cash flows, which factors in the amount of credit enhancement specific to the security.  The difference between the present value of the cash flows expected and the amortized cost basis is the credit loss, and it is recorded as OTTI.

The significant assumptions used in the cash flow analysis of non-agency CMOs are as follows:
December 31, 2016
Range
Weighted-
average (1)
Default rate
0% - 7.9%
3.45%
Loss severity
0% - 51.9%
30.44%
Prepayment rate
7.9% - 32.7%
15.67%
(1)
Represents the expected activity for the next twelve months.

26

At December 31, 2016 , 11 of the 12 non-agency CMOs were in a continuous unrealized loss position. Ten of these securities were in that position for 12 months or more and one was in a continuous unrealized loss position for less than 12 months. Based on the expected cash flows derived from the model utilized in our analysis, we expect to recover all unrealized losses not already recorded in earnings on our non-agency CMOs. However, it is possible that the underlying loan collateral of these securities will perform worse than current expectations, which may lead to adverse changes in the cash flows expected to be collected on these securities and potential future OTTI losses. As residential mortgage loans are the underlying collateral of these securities, the unrealized losses at December 31, 2016 reflect the uncertainty in the markets for these instruments.

ARS

Our cost basis in the ARS we hold is the fair value of the securities in the period in which we acquired them. The par value of the ARS we hold as of December 31, 2016 is $152.9 million . Only those ARS whose amortized cost basis we do not expect to recover in full are considered to be other-than-temporarily impaired, as we have the ability and intent to hold these securities to maturity. All of our ARS securities are evaluated for OTTI on a quarterly basis.

As of December 31, 2016 , there were 15 ARS preferred securities with a fair value less than their cost basis, indicating potential impairment. We analyzed the credit ratings associated with each of these securities as an indicator of potential credit impairment, and including subsequent ratings changes, determined that all of these securities maintained investment grade ratings by at least one rating agency. We have the ability and intent to hold these securities to maturity and expect to recover their entire cost basis and therefore concluded that none of the potential impairment within our ARS preferred securities portfolio is related to potential credit loss.

Within our municipal ARS holdings as of December 31, 2016 , there were nine municipal ARS with a fair value less than their cost basis, indicating potential impairment. We analyzed the credit ratings associated with these securities as an indicator of potential credit impairment, and including subsequent ratings changes, determined that all of these securities maintained investment grade ratings by at least one rating agency. We have the ability and intent to hold these securities to maturity and expect to recover their entire cost basis and therefore concluded that none of the potential impairment within our municipal ARS portfolio is related to potential credit loss.

Other-than-temporarily impaired securities

Although there is no intent to sell either our ARS or our non-agency CMOs, and it is not more likely than not that we will be required to sell these securities, as of December 31, 2016 we do not expect to recover the entire amortized cost basis of certain securities within the non-agency CMO available for sale security portfolio.

Changes in the amount of OTTI related to credit losses recognized in other revenues on available for sale securities are as follows:
Three months ended December 31,
2016
2015
(in thousands)
Amount related to credit losses on securities we held at the beginning of the period
$
8,107

$
11,847

Decreases to the amount related to credit loss for securities sold during the period
(2,353
)
—

Amount related to credit losses on securities we held at the end of the period
$
5,754

$
11,847


NOTE 8 – BANK LOANS, NET

Bank client receivables are comprised of loans originated or purchased by RJ Bank, and include commercial and industrial (“C&I”) loans, tax-exempt loans, securities based loans (“SBL”), as well as commercial and residential real estate loans. These receivables are collateralized by first or second mortgages on residential or other real property, other assets of the borrower, a pledge of revenue, or are unsecured.

For a discussion of our accounting policies regarding bank loans and allowances for losses, including the policies regarding loans held for investment, loans held for sale, off-balance sheet loan commitments, nonperforming assets, troubled debt restructurings (“TDRs”), impaired loans, the allowance for loan losses and reserve for unfunded lending commitments, and loan charge-off policies, see Note 2 on pages 117 – 121 of our 2016 Form 10-K.


27

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

The following table presents the balances for both the held for sale and held for investment loan portfolios, as well as the associated percentage of each portfolio segment in RJ Bank’s total loan portfolio:
December 31, 2016
September 30, 2016
Balance
%
Balance
%
($ in thousands)
Loans held for sale, net (1)
$
202,201

1
%
$
214,286

1
%
Loans held for investment:




Domestic:
C&I loans
6,386,069

40
%
6,402,675

42
%
CRE construction loans
132,560

1
%
107,437

1
%
CRE loans
2,290,245

14
%
2,188,652

14
%
Tax-exempt loans
859,038

5
%
740,944

5
%
Residential mortgage loans
2,651,289

17
%
2,439,286

16
%
SBL
2,000,702

13
%
1,903,930

12
%
Foreign:
C&I loans
1,165,771

7
%
1,067,698

7
%
CRE construction loans
—

—

15,281

—

CRE loans
376,273

2
%
365,419

2
%
Residential mortgage loans
2,248

—

2,283

—

SBL
893

—

897

—

Total loans held for investment
15,865,088


15,234,502


Net unearned income and deferred expenses
(40,857
)

(40,675
)

Total loans held for investment, net (1)
15,824,231


15,193,827


Total loans held for sale and investment
16,026,432

100
%
15,408,113

100
%
Allowance for loan losses
(197,680
)

(197,378
)

Bank loans, net
$
15,828,752


$
15,210,735



(1)
Net of unearned income and deferred expenses, which includes purchase premiums, purchase discounts, and net deferred origination fees and costs.

At December 31, 2016 , the Federal Home Loan Bank of Atlanta (“FHLB”) had a blanket lien on RJ Bank’s residential mortgage loan portfolio as security for the repayment of certain borrowings. See Note 11 for more information regarding borrowings from the FHLB.

Loans held for sale

RJ Bank originated or purchased $522 million of loans held for sale during the three months ended December 31, 2016 , and $623 million during the three months ended December 31, 2015 . Proceeds from the sale of these held for sale loans amounted to $150 million during the three months ended December 31, 2016 , and $86 million during the three months ended December 31, 2015 . Net gains resulting from such sales amounted to $700 thousand during the three months ended December 31, 2016 , and $300 thousand during the three months ended December 31, 2015 . Unrealized losses recorded in the Condensed Consolidated Statements of Income and Comprehensive Income to reflect the loans held for sale at the lower of cost or market value were insignificant in both the three months ended December 31, 2016 and 2015 .

Purchases and sales of loans held for investment

As more fully described in Note 2 of our 2016 Form 10-K, corporate loan sales generally occur as part of a loan workout situation.


28

The following table presents purchases and sales of any loans held for investment by portfolio segment:
C&I
CRE
Residential mortgage
Total
(in thousands)
Three months ended December 31, 2016
Purchases
$
114,649

$
38,980

$
81,662

$
235,291

Sales (1)
$
81,579

$
—

$
—

$
81,579

Three months ended December 31, 2015
Purchases
$
57,851

$
—

$
79,035

$
136,886

Sales (1)
$
35,246

$
—

$
—

$
35,246


(1)
Represents the recorded investment of loans held for investment that were transferred to loans held for sale and subsequently sold to a third party during the respective period. Corporate loan sales generally occur as part of a loan workout situation.

Aging analysis of loans held for investment

The following table presents an analysis of the payment status of loans held for investment:
30-89
days and accruing
90 days or more
and accruing
Total past due and accruing
Nonaccrual (1)
Current and accruing
Total loans held for
investment (2)
(in thousands)
As of December 31, 2016:
C&I loans
$
—

$
—

$
—

$
24,762

$
7,527,078

$
7,551,840

CRE construction loans
—

—

—

—

132,560

132,560

CRE loans
—

—

—

—

2,666,518

2,666,518

Tax-exempt loans
—

—

—

—

859,038

859,038

Residential mortgage loans:




First mortgage loans
2,206

—

2,206

39,672

2,589,192

2,631,070

Home equity loans/lines
10

—

10

36

22,421

22,467

SBL
—

—

—

—

2,001,595

2,001,595

Total loans held for investment, net
$
2,216

$
—

$
2,216

$
64,470

$
15,798,402

$
15,865,088

As of September 30, 2016:
C&I loans
$
—

$
—

$
—

$
35,194

$
7,435,179

$
7,470,373

CRE construction loans
—

—

—

—

122,718

122,718

CRE loans
—

—

—

4,230

2,549,841

2,554,071

Tax-exempt
—

—

—

—

740,944

740,944

Residential mortgage loans:

First mortgage loans
1,766

—

1,766

41,746

2,377,357

2,420,869

Home equity loans/lines
—

—

—

37

20,663

20,700

SBL
—

—

—

—

1,904,827

1,904,827

Total loans held for investment, net
$
1,766

$
—

$
1,766

$
81,207

$
15,151,529

$
15,234,502


(1)
Includes $37 million and $54 million of nonaccrual loans at December 31, 2016 and September 30, 2016 , respectively, which are performing pursuant to their contractual terms.

(2)
Excludes any net unearned income and deferred expenses.

Nonperforming loans represent those loans on nonaccrual status, troubled debt restructurings, and accruing loans which are 90 days or more past due and in the process of collection. The gross interest income related to the nonperforming loans reflected in the previous table, which would have been recorded had these loans been current in accordance with their original terms, totaled $600 thousand and $400 thousand for the three months ended December 31, 2016 and 2015, respectively. The interest income recognized on nonperforming loans was $400 thousand and $300 thousand for the three months ended December 31, 2016 and 2015, respectively.

Other real estate owned, included in other assets on our Condensed Consolidated Statements of Financial Condition, was $5 million at both December 31, 2016 and September 30, 2016 . The recorded investment of mortgage loans secured by one-to-four

29

family residential properties for which formal foreclosure proceedings are in process was $21 million at both December 31, 2016 and September 30, 2016 .

Impaired loans and troubled debt restructurings

The following table provides a summary of RJ Bank’s impaired loans:
December 31, 2016
September 30, 2016
Gross
recorded
investment
Unpaid
principal
balance
Allowance
for losses
Gross
recorded
investment
Unpaid
principal
balance
Allowance
for losses
(in thousands)
Impaired loans with allowance for loan losses: (1)
C&I loans
$
28,143

$
35,799

$
9,870

$
35,194

$
35,872

$
13,351

Residential - first mortgage loans
28,718

38,922

3,004

30,393

41,337

3,147

Total
56,861

74,721

12,874

65,587

77,209

16,498

Impaired loans without allowance for loan losses: (2)





CRE loans
—

—

—

4,230

11,611

—

Residential - first mortgage loans
17,507

26,534

—

17,809

26,486

—

Total
17,507

26,534

—

22,039

38,097

—

Total impaired loans
$
74,368

$
101,255

$
12,874

$
87,626

$
115,306

$
16,498


(1)
Impaired loan balances have had reserves established based upon management’s analysis.

(2)
When the discounted cash flow, collateral value or market value equals or exceeds the carrying value of the loan, then the loan does not require an allowance.  These are generally loans in process of foreclosure that have already been adjusted to fair value.

The preceding table includes $28 million residential first mortgage TDR’s at December 31, 2016 , and $4 million CRE and $28 million residential first mortgage TDR’s at September 30, 2016 .

The average balance of the total impaired loans and the related interest income recognized in the Condensed Consolidated Statements of Income and Comprehensive Income are as follows:
Three months ended December 31,
2016
2015
(in thousands)
Average impaired loan balance:
C&I loans
$
32,808

$
10,506

CRE loans
2,776

4,672

Residential mortgage loans:
First mortgage loans
46,533

53,732

Total
$
82,117

$
68,910

Interest income recognized:
Residential mortgage loans:
First mortgage loans
$
333

$
380

Total
$
333

$
380


During the three months ended December 31, 2016 , RJ Bank granted concessions to borrowers having financial difficulties, for which the resulting modification was deemed a TDR.  These concessions granted for the respective first mortgage residential loans were interest rate reductions, amortization and maturity date extensions, capitalization of past due payments, or principal forgiveness. During the three months ended December 31, 2015 , there were no concessions granted to borrowers having financial difficulties, for which the resulting modification was deemed a TDR.



30

The table below presents the TDRs that occurred during the period presented:
Number of
contracts
Pre-modification
outstanding
recorded
investment
Post-modification
outstanding
recorded
investment
($ in thousands)
Three months ended December 31, 2016



Residential – first mortgage loans
5

$
1,198

$
1,147


There were no TDRs that occurred during the three months ended December 31, 2015 .

There were no TDRs for which there was a payment default and for which the respective loan was modified as a TDR within the 12 months prior to the default during the three months ended December 31, 2016 . There was one residential first mortgage TDR with a recorded investment of $100 thousand for which there was a payment default within the 12 months prior to the default during the three months ended December 31, 2015 . As of December 31, 2016 and September 30, 2016 , RJ Bank had no outstanding commitments on TDRs.

Credit quality indicators

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

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

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

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

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

Loss – Loans which are considered by management to be uncollectible and of such little value that their continuance on RJ Bank’s books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted.  RJ Bank does not have any loan balances within this classification because, in accordance with its accounting policy, loans, or a portion thereof considered to be uncollectible, are charged-off prior to the assignment of this classification.









31

The credit quality of RJ Bank’s held for investment loan portfolio is as follows:
Pass
Special mention (1)
Substandard (1)
Doubtful (1)
Total
(in thousands)
December 31, 2016
C&I
$
7,391,029

$
64,766

$
96,045

$
—

$
7,551,840

CRE construction
132,560

—

—

—

132,560

CRE
2,666,349

—

169

—

2,666,518

Tax-exempt
859,038

—

—

—

859,038

Residential mortgage:
First mortgage
2,569,503

9,911

51,656

—

2,631,070

Home equity
22,248

182

37

—

22,467

SBL
2,001,595

—

—

—

2,001,595

Total
$
15,642,322

$
74,859

$
147,907

$
—

$
15,865,088

September 30, 2016
C&I
$
7,241,055

$
117,046

$
112,272

$
—

$
7,470,373

CRE construction
122,718

—

—

—

122,718

CRE
2,549,672

—

4,399

—

2,554,071

Tax-exempt
740,944

—

—

—

740,944

Residential mortgage:
First mortgage
2,355,393

11,349

54,127

—

2,420,869

Home equity
20,413

182

105

—

20,700

SBL
1,904,827

—

—

—

1,904,827

Total
$
14,935,022

$
128,577

$
170,903

$
—

$
15,234,502


(1)
Loans classified as special mention, substandard or doubtful are all considered to be “criticized” loans.

The credit quality of RJ Bank’s performing residential first mortgage loan portfolio is additionally assessed utilizing updated loan-to-value (“LTV”) ratios.  Current LTVs are updated using the most recently available information (generally updated every six months) and are estimated based on the initial appraisal obtained at the time of origination, adjusted using relevant market indices for housing price changes that have occurred since origination.  The value of the homes could vary from actual market values due to changes in the condition of the underlying property, variations in housing price changes within current valuation indices, and other factors. Residential mortgage loans with estimated LTVs in excess of 100% represent less than 1% of the residential mortgage loan portfolio.








32

Allowance for loan losses and reserve for unfunded lending commitments

Changes in the allowance for loan losses of RJ Bank by portfolio segment are as follows:
Loans held for investment
C&I
CRE
construction
CRE
Tax-exempt
Residential mortgage
SBL
Total
(in thousands)
Three months ended December 31, 2016





Balance at beginning of period
$
137,701

$
1,614

$
36,533

$
4,100

$
12,664

$
4,766

$
197,378

(Benefit) provision for loan losses
(1,243
)
581

(2,010
)
393

997

242

(1,040
)
Net (charge-offs)/recoveries:





Charge-offs
(3,389
)
—

—

—

(87
)
—

(3,476
)
Recoveries
—

—

5,013

—

65

—

5,078

Net (charge-offs)/recoveries
(3,389
)
—

5,013

—

(22
)
—

1,602

Foreign exchange translation adjustment
(164
)
(92
)
(4
)
—

—

—

(260
)
Balance at December 31, 2016
$
132,905

$
2,103

$
39,532

$
4,493

$
13,639

$
5,008

$
197,680

Three months ended December 31, 2015
Balance at beginning of period
$
117,623

$
2,707

$
30,486

$
5,949

$
12,526

$
2,966

$
172,257

Provision (benefit) for loan losses
11,585

(52
)
963

1,170

(204
)
448

13,910

Net (charge-offs)/recoveries:



Charge-offs
(267
)
—

—

—

(547
)
—

(814
)
Recoveries
—

—

—

—

490

1

491

Net (charge-offs)/recoveries
(267
)
—

—

—

(57
)
1

(323
)
Foreign exchange translation adjustment
(220
)
(20
)
(145
)
—

—

—

(385
)
Balance at December 31, 2015
$
128,721

$
2,635

$
31,304

$
7,119

$
12,265

$
3,415

$
185,459


The following table presents, by loan portfolio segment, RJ Bank’s recorded investment and related allowance for loan losses:
Loans held for investment
Allowance for loan losses
Recorded investment (1)
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Individually evaluated for impairment
Collectively evaluated for impairment
Total
(in thousands)
December 31, 2016
C&I
$
9,870

$
123,035

$
132,905

$
24,762

$
7,527,078

$
7,551,840

CRE construction
—

2,103

2,103

—

132,560

132,560

CRE
—

39,532

39,532

—

2,666,518

2,666,518

Tax-exempt
—

4,493

4,493

—

859,038

859,038

Residential mortgage
3,007

10,632

13,639

54,736

2,598,801

2,653,537

SBL
—

5,008

5,008

—

2,001,595

2,001,595

Total
$
12,877

$
184,803

$
197,680

$
79,498

$
15,785,590

$
15,865,088

September 30, 2016
C&I
$
13,351

$
124,350

$
137,701

$
35,194

$
7,435,179

$
7,470,373

CRE construction
—

1,614

1,614

—

122,718

122,718

CRE
—

36,533

36,533

4,230

2,549,841

2,554,071

Tax-exempt
—

4,100

4,100

—

740,944

740,944

Residential mortgage
3,156

9,508

12,664

56,735

2,384,834

2,441,569

SBL
—

4,766

4,766

—

1,904,827

1,904,827

Total
$
16,507

$
180,871

$
197,378

$
96,159

$
15,138,343

$
15,234,502


(1)
Excludes any net unearned income and deferred expenses.

The reserve for unfunded lending commitments, included in trade and other payables on our Condensed Consolidated Statements of Financial Condition was $9 million at December 31, 2016 , and $11 million at September 30, 2016 .


33

NOTE 9 – VARIABLE INTEREST ENTITIES

A VIE requires consolidation by the entity’s primary beneficiary.  We evaluate all of the entities in which we are involved to determine if the entity is a VIE and, if so, whether we hold a variable interest and are the primary beneficiary.

Refer to Note 2 on pages 125 - 127 of our 2016 Form 10-K for a description of our principal involvement with VIEs and the accounting policies regarding determination of whether we are deemed to be the primary beneficiary of any VIEs.  In addition, refer to Note 2 for the discussion of the changes in our significant accounting policies since September 30, 2016, governing our VIE determinations and consolidation conclusions resulting from our October 1, 2016 adoption of new consolidation accounting guidance.

VIEs where we are the primary beneficiary

Of the VIEs in which we hold an interest, we have determined that certain Private Equity Interests, any LIHTC Funds where RJTCF provides an investor member with a guaranteed return on their investment, and the trust we utilize in connection with restricted stock unit awards granted to certain employees of our Canadian subsidiary (the “Restricted Stock Trust Fund”) require consolidation in our financial statements, as we are deemed the primary beneficiary of such VIEs.  The aggregate assets and liabilities of the VIEs we consolidate are provided in the table below.

Aggregate
assets (1)
Aggregate
liabilities (1)
(in thousands)
December 31, 2016
Private Equity Interests
$
112,674

$
5,302

Guaranteed LIHTC Fund (2)
62,796

2,644

Restricted Stock Trust Fund
14,956

14,956

Total
$
190,426

$
22,902

September 30, 2016


Private Equity Interests
$
140,870

$
4,888

Guaranteed LIHTC Fund (2)
63,415

2,556

Restricted Stock Trust Fund
9,949

9,949

Total
$
214,234

$
17,393


(1)
Aggregate assets and aggregate liabilities differ from the consolidated carrying value of assets and liabilities due to the elimination of intercompany assets and liabilities held by the consolidated VIE.

(2)
In connection with one of the multi-investor tax credit funds in which RJTCF is the managing member, RJTCF has provided one investor member with a guaranteed return on their investment in the fund (the “Guaranteed LIHTC Fund”). See Note 15 for additional information regarding this commitment.


34

The following table presents information about the carrying value of the assets, liabilities and equity of the VIEs which we consolidate and which are included within our Condensed Consolidated Statements of Financial Condition. The noncontrolling interests presented in this table represent the portion of these net assets which are not ours.
December 31, 2016
September 30, 2016
(in thousands)
Assets:
Cash and cash equivalents
$
5,827

$
8,302

Assets segregated pursuant to regulations and other segregated assets
2,436

2,412

Receivables, other
1,638

28,463

Other investments
104,730

103,632

Investments in real estate partnerships held by consolidated variable interest entities
65,306

61,004

Trust fund investment in RJF common stock (1)
14,954

9,948

Prepaid expenses and other assets
6

—

Total assets
$
194,897

$
213,761

Liabilities and equity:


Trade and other payables
$
7,609

$
3,617

Intercompany payables
18,237

15,703

Total liabilities
25,846

19,320

RJF equity
41,219

40,729

Noncontrolling interests
127,832

153,712

Total equity
169,051

194,441

Total liabilities and equity
$
194,897

$
213,761


(1)
Included in treasury stock in our Condensed Consolidated Statements of Financial Condition.

The following table presents information about the net income (loss) of the VIEs which we consolidate, and is included within our Condensed Consolidated Statements of Income and Comprehensive Income. The noncontrolling interests presented in this table represent the portion of the net income (loss) from these VIEs which are not ours.
Three months ended December 31,
2016
2015
(in thousands)
Revenues:
Interest
$
416

$
302

Other
2,242

489

Total revenues
2,658

791

Non-interest expenses (1)
2,029

1,275

Net income (loss) including noncontrolling interests
629

(484
)
Net income attributable to noncontrolling interests
139

181

Net income (loss) attributable to RJF
$
490

$
(665
)

(1)
Primarily comprised of items reported in other expense on our Condensed Consolidated Statements of Income and Comprehensive Income.

Low-income housing tax credit funds

RJTCF is the managing member or general partner in over 100 separate low-income housing tax credit funds having one or more investor members or limited partners, nearly all of these funds are determined to be VIEs. RJTCF has concluded that it is not the primary beneficiary of non-guaranteed LIHTC Fund VIEs and, accordingly, does not consolidate these funds. RJTCF consolidates the one Guaranteed LIHTC Fund VIE it sponsors (see Note 15 for further discussion of the guarantee obligation as well as other RJTCF commitments).  RJTCF holds an interest in a limited number of LIHTC Funds it determines not to be VIEs, and through the application of the voting interest model, consolidates a number of such LIHTC Funds.


35

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

Low-income housing tax credit funds

RJTCF does not consolidate the LIHTC Fund VIEs that it determines it is not the primary beneficiary of. Our risk of loss is limited to our investments in, advances to, and receivables due from these funds.

New market tax credit funds

One of our affiliates is the managing member of fewer than ten New Market Tax Credit Funds (“NMTC Funds”), and, as discussed in Note 2 on page 127 of our 2016 Form 10-K, this affiliate is not deemed to be the primary beneficiary of these NMTC Funds. These NMTC Funds are therefore not consolidated. Our risk of loss is limited to our receivables due from these funds.

Private Equity Interests VIEs which we are not the primary beneficiary

As discussed in Note 2, we have an interest in a number of limited partnerships held as a part of our principal capital and private equity activities. We have determined that such entities are VIEs, however, we have concluded we are not the primary beneficiary of all of the Private Equity Interest VIEs. Accordingly, we do not consolidate certain Private Equity Interests, specifically the ones in which we are not the primary beneficiary. The carrying value of our investment in the Private Equity Interests VIEs we do not consolidate represents our risk of loss related to such unconsolidated VIEs.

Aggregate assets, liabilities and risk of loss

The aggregate assets, liabilities, and our exposure to loss from those VIEs in which we hold a variable interest, but as to which we have concluded we are not the primary beneficiary, are provided in the table below.
December 31, 2016
September 30, 2016
Aggregate
assets
Aggregate
liabilities
Our risk
of loss
Aggregate
assets
Aggregate
liabilities
Our risk
of loss
(in thousands)
LIHTC Funds
$
4,394,733

$
1,446,968

$
131,134

$
4,217,812

$
1,429,085

$
83,562

NMTC Funds
30,230

77

9

65,338

68

12

Private Equity Interests
15,895,112

136,813

74,336

14,286,950

132,334

70,336

Other
2,459

—

2,459

2,240

—

2,240

Total
$
20,322,534

$
1,583,858

$
207,938

$
18,572,340

$
1,561,487

$
156,150


NOTE 10 – BANK DEPOSITS

Bank deposits include Negotiable Order of Withdrawal (“NOW”) accounts, demand deposits, savings and money market accounts and certificates of deposit of RJ Bank. The following table presents a summary of bank deposits including the weighted-average rate:
December 31, 2016
September 30, 2016
Balance
Weighted-average rate (1)
Balance
Weighted-average rate (1)
($ in thousands)
Bank deposits:
NOW accounts
$
6,090

0.01
%
$
4,958

0.01
%
Demand deposits (non-interest-bearing)
3,593

—

7,264

—

Savings and money market accounts
14,891,871

0.07
%
13,935,089

0.05
%
Certificates of deposit
288,236

1.50
%
315,236

1.55
%
Total bank deposits (2)
$
15,189,790

0.10
%
$
14,262,547

0.08
%

(1)
Weighted-average rate calculation is based on the actual deposit balances at December 31, 2016 and September 30, 2016 , respectively.

(2)
Bank deposits exclude affiliate deposits of approximately $404 million at December 31, 2016 , and $353 million at September 30, 2016 . These affiliate deposits include $398 million as of December 31, 2016 , and $350 million at September 30, 2016 , held in a deposit account at RJ Bank on behalf of RJF.


36

RJ Bank’s savings and money market accounts in the table above consist primarily of deposits that are cash balances swept from the investment accounts maintained at RJ&A. These balances are held in Federal Deposit Insurance Corporation (“FDIC”) insured bank accounts through the Raymond James Bank Deposit Program (“RJBDP”) administered by RJ&A. The aggregate amount of time deposit account balances that exceed the FDIC insurance limit at December 31, 2016 is $19 million .

Scheduled maturities of certificates of deposit are as follows:
December 31, 2016
September 30, 2016
Denominations
greater than or
equal to $100,000
Denominations
less than $100,000
Denominations
greater than or
equal to $100,000
Denominations
less than $100,000
(in thousands)
Three months or less
$
14,311

$
9,918

$
14,252

$
12,663

Over three through six months
8,474

7,717

14,191

9,750

Over six through twelve months
9,094

6,696

15,452

12,321

Over one through two years
43,209

15,269

32,816

11,060

Over two through three years
42,876

21,706

43,730

22,148

Over three through four years
56,486

28,890

58,425

28,863

Over four through five years
15,220

8,370

26,173

13,392

Total
$
189,670

$
98,566

$
205,039

$
110,197


Interest expense on deposits is summarized as follows:
Three months ended December 31,
2016
2015
(in thousands)
Certificates of deposit
$
1,135

$
1,448

Money market, savings and NOW accounts (1)
1,648

571

Total interest expense on deposits
$
2,783

$
2,019


(1)
Excludes interest expense associated with affiliate deposits.

37

NOTE 11 – OTHER BORROWINGS
The following table details the components of other borrowings:
December 31, 2016
September 30, 2016
(in thousands)
Other borrowings:
FHLB advances
$
675,000

(1)
$
575,000

(2)
Borrowings on secured lines of credit (3)
208,400

—

Mortgage notes payable (4)
32,271

33,391

Borrowings on ClariVest revolving credit facility (5)
250

267

Borrowings on unsecured lines of credit (6) (7)
—

—

Total other borrowings
$
915,921

$
608,658


(1)
Borrowings from the FHLB as of December 31, 2016 are comprised of both floating and fixed-rate advances. As of December 31, 2016 the floating-rate FHLB advances have interest rates which reset quarterly and total $650 million with $100 million maturing in June 2018 and $550 million maturing in September 2018 . We use interest rate swaps to manage the risk of increases in interest rates associated with these floating-rate advances by converting all of these balances subject to variable interest rates to a fixed interest rate. Refer to Note 12 for information regarding these interest rate swaps which are accounted for as hedging instruments. The fixed-rate FHLB advance, in the amount of $25 million , matures in October 2020 and bears interest at a rate of 3.4% . All of the FHLB advances are secured by a blanket lien granted to the FHLB on RJ Bank’s residential mortgage loan portfolio. The weighted average interest rate on these advances as of December 31, 2016 is 1.1% .

(2)
Borrowings from the FHLB as of September 30, 2016 are comprised of floating-rate advances which have rates that reset quarterly and total $550 million maturing in September 2018 , and a fixed-rate advance in the amount of $25 million , which matures in October 2020 and bears interest at a rate of 3.4% .

(3)
Borrowings on secured lines of credit are day-to-day and are generally utilized to finance certain fixed income securities.

(4)
Mortgage notes payable pertain to mortgage loans on our corporate headquarters offices located in St. Petersburg, Florida. These mortgage loans are secured by land, buildings, and improvements with a net book value of $44 million at December 31, 2016 .  These mortgage loans bear interest at 5.7% with repayment terms of monthly interest and principal debt service and have a January 2023 maturity.

(5)
ClariVest Asset Management, LLC (“ClariVest”), a subsidiary of Eagle, is a party to a revolving line of credit provided by a third party lender (the “ClariVest Facility”). The maximum amount available to borrow under the ClariVest Facility is $500 thousand , bearing interest at a variable rate which is 1% over the lenders prime rate. The ClariVest Facility expires in September 2018 .

(6)
In August 2015, RJF entered into a revolving credit facility agreement in which the lenders are a number of financial institutions (the “RJF Credit Facility”). This committed unsecured borrowing facility provides for maximum borrowings of up to $300 million , at variable rates of interest, with a facility maturity date in August 2020. There are no borrowings outstanding on the RJF Credit Facility as of either December 31, 2016 or September 30, 2016 .

(7)
Borrowings on unsecured lines of credit, with the exception of the RJF Credit Facility, are day-to-day and are generally utilized for cash management purposes.

There were other collateralized financings outstanding in the amount of $203 million and $193 million as of December 31, 2016 and September 30, 2016 , respectively. These other collateralized financings are included in securities sold under agreements to repurchase on the Condensed Consolidated Statements of Financial Condition. These financings are collateralized by non-customer, RJ&A-owned securities. See Note 13 for additional information regarding offsetting asset and liability balances as well as additional information regarding the collateral.

NOTE 12 – DERIVATIVE FINANCIAL INSTRUMENTS

The significant accounting policies governing our derivative financial instruments, including our methodologies for determining fair value, are described in Note 2 on pages 114 - 115 of our 2016 Form 10-K.

38


Derivatives arising from our fixed income business operations

We enter into derivatives contracts as part of our fixed income operations in either over-the-counter market activities, or through “matched book” activities. Each of these activities are described further below.

In our over-the-counter market activities, we enter into interest rate swaps and futures contracts either as part of our fixed income business to facilitate client transactions, to hedge a portion of our trading inventory, or to a limited extent for our own account. The majority of these derivative positions are executed in the over-the-counter market either directly with financial institutions or trades cleared through an exchange (together referred to as the “OTC Derivatives Operations”). Cash flows related to the interest rate contracts arising from the OTC Derivative Operations are included as operating activities (the “trading instruments, net” line) on the Condensed Consolidated Statements of Cash Flows.

In our “matched book” activities, Raymond James Financial Products, Inc. (“RJFP”), a wholly owned subsidiary, enters into derivative transactions (primarily interest rate swaps) with clients. For every derivative transaction RJFP enters into with a customer, RJFP enters into an offsetting transaction, on terms that mirror the customer transaction, with a credit support provider which is a third party financial institution. Due to this “pass-through” transaction structure, RJFP has completely mitigated the market and credit risk related to these derivative contracts. Therefore, the ultimate credit and market risk resides with the third party financial institution. RJFP only has credit risk related to its uncollected derivative transaction fee revenues. In these activities, we do not use derivative instruments for trading or hedging purposes. As a result of the structure of these transactions, we refer to the derivative contracts we enter into as a result of these operations as our offsetting “matched book” derivative operations (the “Offsetting Matched Book Derivatives Operations”).

Any collateral required to be exchanged under the contracts arising from the Offsetting Matched Book Derivatives Operations is administered directly by the client and the third party financial institution. RJFP does not hold any collateral, or administer any collateral transactions, related to these instruments. We record the value of each derivative position arising from the Offsetting Matched Book Derivatives Operations at fair value, as either an asset or offsetting liability, presented as “derivative instruments associated with offsetting matched book positions,” as applicable, on our Condensed Consolidated Statements of Financial Condition.

The receivable for uncollected derivative transaction fee revenues of RJFP is $6 million and $7 million at December 31, 2016 and September 30, 2016 , respectively, and is included in other receivables on our Condensed Consolidated Statements of Financial Condition.

None of the derivatives described above arising from either our OTC Derivatives Operations or our Offsetting Matched Book Derivatives Operations are designated as fair value or cash flow hedges.

Derivatives arising from RJ Bank’s business operations
We enter into derivatives contracts as part of RJ Bank’s business operations through its hedging activities, which include forward foreign exchange contracts and interest rate swaps (see Note 2 on pages 114 - 115 of the 2016 Form 10-K for the accounting policies associated with these transactions). Each of these activities is described further below.

A Canadian subsidiary of RJ Bank conducts operations directly related to RJ Bank’s Canadian dollar-denominated corporate loan portfolio. U.S. subsidiaries of RJ Bank utilize forward foreign exchange contracts to hedge RJ Bank’s foreign currency exposure due to its non-U.S. dollar net investment.  Cash flows related to these derivative contracts are classified within operating activities in the Condensed Consolidated Statements of Cash Flows.

The cash flows associated with certain assets held by RJ Bank provide interest income at fixed interest rates. Therefore, the value of these assets, absent any risk mitigation, is subject to fluctuation based upon changes in market rates of interest over time. We have executed certain interest rate swap contracts (the “RJ Bank Interest Hedges”) which swap variable interest payments on certain debt for fixed interest payments. Through the RJ Bank Interest Hedges, we mitigate a portion of the market risk associated with certain fixed interest earning assets held by RJ Bank.

Description of the collateral we hold related to derivative contracts

Where permitted, we elect to net-by-counterparty certain derivative contracts entered into in our OTC Derivatives Operations. Certain of these contracts contain a legally enforceable master netting arrangement that allows for netting of all derivative transactions with each counterparty and, therefore, the fair value of those derivative contracts are netted by counterparty in the

39

Condensed Consolidated Statements of Financial Condition.  The credit support annex related to the interest rate swaps and certain forward foreign exchange contracts allows parties to the master agreement to mitigate their credit risk by requiring the party which is out of the money to post collateral.  We accept collateral in the form of cash or other marketable securities.  As we elect to net-by-counterparty the fair value of derivative contracts arising from our OTC Derivatives Operations, we also net-by-counterparty any cash collateral exchanged as part of those derivative agreements. Refer to Note 13 for additional information regarding offsetting asset and liability balances.

This cash collateral is recorded net-by-counterparty at the related fair value.  The cash collateral included in the net fair value of all open derivative asset positions arising from our OTC Derivatives Operations aggregates to a net liability of $5 million as of December 31, 2016 and a net asset of $33 million as of September 30, 2016 .  The cash collateral included in the net fair value of all open derivative liability positions from our OTC Derivatives Operations aggregates to a net liability of $3 million at December 31, 2016 and a net asset of $3 million at September 30, 2016 .  Our maximum loss exposure under the interest rate swap contracts arising from our OTC Derivatives Operations at December 31, 2016 is $24 million .

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

Derivative balances included in our financial statements

See the table below for the notional and fair value amounts of both the asset and liability derivatives.
December 31, 2016
September 30, 2016
Asset derivatives
Balance sheet
location
Notional
amount
Fair
value (1)
Balance sheet
location
Notional
amount
Fair
value (1)
(in thousands)
Derivatives designated as hedging instruments:
Forward foreign exchange contracts (2)
Prepaid expenses and other assets
$
—

$
—

Prepaid expenses and other assets
$
988,200

(3)
$
1,396

Interest rate contracts (4)
Prepaid expenses and other assets
$
650,000

$
14,844

Prepaid expenses and other assets
$
—

$
—

Derivatives not designated as hedging instruments:



Interest rate contracts (5)
Trading instruments
$
2,622,124

$
110,363

Trading instruments
$
2,036,233

$
153,482

Interest rate contracts (5)
Trading instruments
$
135,791

(3)
$
4,567

Trading instruments
$
121,715

(3)
$
9,760

Interest rate contracts (6)
Derivative instruments associated with offsetting matched book positions
$
1,462,595

$
299,393

Derivative instruments associated with offsetting matched book positions
$
1,469,295

$
422,196

Forward foreign exchange contracts (2)
Prepaid expenses and other assets
$
—

$
—

Prepaid expenses and other assets
$
411,300

(3)
$
620

Liability derivatives
Derivatives designated as hedging instruments:
Interest rate contracts (4)
Trade and other payables
$
—

$
—

Trade and other payables
$
550,000

$
26,671

Forward foreign exchange contracts (2)
Trade and other payables
$
997,900

(3)
$
5,680

Trade and other payables
$
—

$
—

Derivatives not designated as hedging instruments:



Interest rate contracts (5)
Trading instruments sold
$
2,482,299

$
100,691

Trading instruments sold
$
1,997,100

$
145,296

Interest rate contracts (5)
Trading instruments sold
$
150,576

(3)
$
2,733

Trading instruments sold
$
133,108

(3)
$
6,398

Interest rate contracts (6)
Derivative instruments associated with offsetting matched book positions
$
1,462,595

$
299,393

Derivative instruments associated with offsetting matched book positions
$
1,469,295

$
422,196

Forward foreign exchange contracts (2)
Trade and other payables
$
436,300

(3)
$
2,487

Trade and other payables
$
—

$
—

Forward foreign exchange contracts (2)
Trade and other payables
$
29,200

(7)
$
285

Trade and other payables
$
—

$
—

DBRSUs (8)
Accrued compensation, commissions and benefits
$
24,144

(9)
$
24,144

(10)
Accrued compensation, commissions and benefits
$
17,769

$
17,769


The text of the footnotes in the above table are on the following page.

40

The text of the footnotes to the table on the previous page are as follows:

(1)
The fair value in this table is presented on a gross basis before netting of cash collateral and before any netting by counterparty according to our legally enforceable master netting arrangements. The fair value in the Condensed Consolidated Statements of Financial Condition is presented net. See Note 13 for additional information regarding offsetting asset and liability balances.

(2)
These contracts are associated with RJ Bank’s activities to hedge its foreign currency exposure.

(3)
The notional amount presented is denominated in Canadian currency.

(4)
These contracts are associated with our RJ Bank Interest Hedges activities.

(5)
These contracts arise from our OTC Derivatives Operations.

(6)
These contracts arise from our Offsetting Matched Book Derivatives Operations.

(7)
The notional amount presented is denominated in Euro currency.

(8)
This derivative liability arose from our fiscal year 2016 acquisition of Alex. Brown (see Note 3 for information regarding this acquisition), whereby RJ&A assumed certain DBRSU awards.

(9)
The notional amount for the DBRSU derivative is the number of outstanding (as of the reporting date) DBRSU awards to be settled in DB common shares multiplied by the end of reporting period DB share price, as traded on the New York Stock Exchange.

(10)
The fair value of the DBRSU derivative includes both the pre-combination and the post-combination share obligation.

Gains recognized in AOCI, net of income taxes on derivatives are as follows (see Note 16 for additional information):
Three months ended December 31,
2016
2015
(in thousands)
Forward foreign exchange contracts
$
11,326

$
12,237

RJ Bank Interest Hedges
25,738

3,265

Total gains recognized in AOCI, net of taxes
$
37,064

$
15,502


There was no hedge ineffectiveness and no components of derivative gains or losses were excluded from the assessment of hedge effectiveness for each of the three months ended December 31, 2016 and 2015 . We expect to reclassify an estimated $5 million as additional interest expense out of AOCI and into earnings within the next 12 months . The maximum length of time over which forecasted transactions are or will be hedged is 10 years .

The table below sets forth the impact of the derivatives not designated as hedging instruments on the Condensed Consolidated Statements of Income and Comprehensive Income:
Location of the impact
recognized on derivatives in the
Condensed Consolidated Statements of
Income and Comprehensive Income
Amount recognized during the three months ended December 31,
2016
2015
(in thousands)
Derivatives not designated as hedging instruments:
Interest rate contracts (1)
Net trading profit
$
2,229

$
408

Interest rate contracts (2)
Other (loss) revenues
$
(26
)
$
23

Forward foreign exchange contracts (3)
Other revenues
$
7,914

$
5,558

DBRSUs (4)
Compensation, commissions and benefits expense
$
6,725

$
—

DBRSUs (5)
Acquisition-related expenses
$
(350
)
$
—


The text of the footnotes in the above table are on the following page.

41

The text of the footnotes to the table on the previous page are as follows:

(1)
These contracts arise from our OTC Derivatives Operations.

(2)
These contracts arise from our Offsetting Matched Book Derivatives Operations.

(3)
These contracts are associated with RJ Bank’s activities to hedge its foreign currency exposure.

(4)
The derivative arose from our fiscal year 2016 acquisition of Alex. Brown, see the discussion of the circumstances giving rise to this derivative in Note 3 on pages 127 - 129 of our 2016 Form 10-K. The impact of the change in value of the derivative in the current period is a loss , as the DB share price increased. We also hold 900,000 shares of DB as of December 31, 2016 as an economic hedge against this obligation. The increase in value of such DB shares since September 30, 2016 is recorded as a component of compensation, commissions and benefits expense on our Condensed Consolidated Statements of Income and Comprehensive Income, and partially offsets a portion of this loss .

(5)
Reduction of the DBRSU obligation resulting from forfeitures which occurred during the period.

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

We are exposed to credit losses in the event of nonperformance by the counterparties to forward foreign exchange derivative agreements, futures contracts and the interest rate contracts associated with our OTC Derivatives Operations that are not cleared through an exchange. Where we are subject to credit exposure, we perform a credit evaluation of counterparties prior to entering into derivative transactions and we monitor their credit standings.  Currently, we anticipate that all of the counterparties will be able to fully satisfy their obligations under those agreements.  For our OTC Derivatives Operations that are not cleared through an exchange, we may require collateral from counterparties in the form of cash deposits or other marketable securities to support certain of these obligations as established by the credit threshold specified by the agreement and/or as a result of monitoring the credit standing of the counterparties.  We are required to maintain cash or marketable security deposits with the exchanges we utilize to clear our OTC Derivatives transactions that are cleared through such exchanges. These deposits are a component of deposits with clearing organizations on our Condensed Consolidated Statements of Financial Condition.

We are exposed to interest rate risk related to the interest rate derivative agreements arising from certain of our OTC Derivatives Operations and RJ Bank Interest Hedges.  We are also exposed to foreign exchange risk related to our futures contracts and forward foreign exchange derivative agreements.  We monitor exposure in our derivative agreements which we have risk daily based on established limits with respect to a number of factors, including interest rate, foreign exchange spot and forward rates, spread, ratio, basis and volatility risks.  These exposures are monitored both on a total portfolio basis and separately for each agreement for selected maturity periods.

Certain of the derivative instruments arising from our OTC Derivatives Operations and from RJ Bank’s forward foreign exchange contracts contain provisions that require our debt to maintain an investment grade rating from one or more of the major credit rating agencies. If our debt were to fall below investment grade, the counterparties to the derivative instruments could terminate and request immediate payment or demand immediate and ongoing overnight collateralization on our derivative instruments in liability positions. The aggregate fair value of all derivative instruments with such credit-risk-related contingent features that are in a liability position at December 31, 2016 is $7 million , for which we have posted collateral of $1 million in the ordinary course of business. If the credit-risk-related contingent features underlying these agreements were triggered on December 31, 2016 , we would have been required to post an additional $6 million of collateral to our counterparties.

Our only exposure to credit risk in the Offsetting Matched Book Derivatives Operations is related to our uncollected derivative transaction fee revenues. We are not exposed to market risk as it relates to these derivative contracts due to the “pass-through” transaction structure previously described.

42

NOTE 13 – DISCLOSURE OF OFFSETTING ASSETS AND LIABILITIES, COLLATERAL, ENCUMBERED ASSETS AND REPURCHASE AGREEMENTS

Offsetting assets and liabilities

The following table presents information about the financial and derivative instruments that are offset or subject to an enforceable master netting arrangement or other similar agreement as of the dates indicated:
Gross amounts not offset in the Statements of Financial Condition
Gross amounts of recognized assets (liabilities)
Gross amounts offset in the Statements of Financial Condition
Net amounts presented in the Statements of Financial Condition
Financial instruments
Cash (received) paid
Net amount
(in thousands)
As of December 31, 2016:
Assets
Securities purchased under agreements to resell and other collateralized financings
$
358,493

$
—

$
358,493

$
(358,493
)
(1)
$
—

$
—

Derivatives - interest rate contracts (2)
110,363

(59,010
)
51,353

(12,687
)
(15,625
)
23,041

Derivatives - interest rate contracts (3)
4,567

—

4,567

—

—

4,567

Derivative instruments associated with offsetting matched book positions
299,393

—

299,393

(299,393
)
(4)
—

—

Derivatives - RJ Bank Interest Hedges (5)
14,844

—

14,844

—

—

14,844

Stock borrowed
154,718

—

154,718

(151,060
)
—

3,658

Total assets
$
942,378

$
(59,010
)
$
883,368

$
(821,633
)
$
(15,625
)
$
46,110

Liabilities
Securities sold under agreements to repurchase
$
(203,378
)
$
—

$
(203,378
)
$
203,378

(6)
$
—

$
—

Derivatives - interest rate contracts (2)
(100,691
)
50,358

(50,333
)
2,858

—

(47,475
)
Derivatives - interest rate contracts (3)
(2,733
)
—

(2,733
)
—

—

(2,733
)
Derivatives - forward foreign exchange contracts (7)
(8,452
)
—

(8,452
)
—

—

(8,452
)
DBRSUs (8)
(24,144
)
—

(24,144
)
—

—

(24,144
)
Derivative instruments associated with offsetting matched book positions
(299,393
)
—

(299,393
)
299,393

(4)
—

—

Stock loaned
(428,600
)
—

(428,600
)
412,803

—

(15,797
)
Total liabilities
$
(1,067,391
)
$
50,358

$
(1,017,033
)
$
918,432

$
—

$
(98,601
)
As of September 30, 2016:
Assets
Securities purchased under agreements to resell and other collateralized financings
$
470,222

$
—

$
470,222

$
(470,222
)
(1)
$
—

$
—

Derivatives - interest rate contracts (2)
153,482

(107,539
)
45,943

(29,028
)
—

16,915

Derivatives - interest rate contracts (3)
9,760

—

9,760

—

—

9,760

Derivatives - forward foreign exchange contracts (7)
2,016

—

2,016

—

—

2,016

Derivative instruments associated with offsetting matched book positions
422,196

—

422,196

(422,196
)
(4)
—

—

Stock borrowed
170,860

—

170,860

(167,169
)
—

3,691

Total assets
$
1,228,536

$
(107,539
)
$
1,120,997

$
(1,088,615
)
$
—

$
32,382

Liabilities
Securities sold under agreements to repurchase
$
(193,229
)
$
—

$
(193,229
)
$
193,229

(6)
$
—

$
—

Derivatives - interest rate contracts (2)
(145,296
)
142,859

(2,437
)
2,437

(9)
—

(9)
—

Derivatives - interest rate contracts (3)
(6,398
)
—

(6,398
)
—

—

(6,398
)
Derivatives - RJ Bank Interest Hedges
(26,671
)
—

(26,671
)
—

26,671

(10)
—

DBRSUs (8)
(17,769
)
—

(17,769
)
—

—

(17,769
)
Derivative instruments associated with offsetting matched book positions
(422,196
)
—

(422,196
)
422,196

(4)
—

—

Stock loaned
(677,761
)
—

(677,761
)
664,870

—

(12,891
)
Total liabilities
$
(1,489,320
)
$
142,859

$
(1,346,461
)
$
1,282,732

$
26,671

$
(37,058
)

The text of the footnotes in the above table are on the following page.

43

The text of the footnotes to the table on the previous page are as follows:

(1)
We are over-collateralized since the actual amount of financial instruments pledged as collateral for securities purchased under agreements to resell and other collateralized financings amounts to $373 million and $486 million as of December 31, 2016 and September 30, 2016 , respectively.

(2)
Derivatives - interest rate contracts are included in trading instruments on our Condensed Consolidated Statements of Financial Condition. See Note 12 for additional information.

(3)
Derivatives - interest rate contracts (in which the notional amount is denominated in Canadian currency) are included in trading instruments on our Condensed Consolidated Statements of Financial Condition. See Note 12 for additional information.

(4)
Although these derivative arrangements do not meet the definition of a master netting arrangement as specified by GAAP, the nature of the agreement with the third party intermediary include terms that are similar to a master netting agreement, thus we present the offsetting amounts net in this table. See Note 12 for further discussion of the “pass through” structure of the derivative instruments associated with Offsetting Matched Book Derivatives Operations.

(5)
Derivatives - As of December 31, 2016 , the fair value of the RJ Bank Interest Hedges are in an asset position and are included in prepaid expenses and other assets on our Condensed Consolidated Statements of Financial Condition.  See Note 12 for additional information.

(6)
We are over-collateralized since the actual amount of financial instruments pledged as collateral for securities sold under agreements to repurchase amounts to $210 million and $200 million as of December 31, 2016 and September 30, 2016 , respectively.

(7)
These contracts are associated with RJ Bank’s activities to hedge its foreign currency exposure. As of December 31, 2016 , the fair values of the forward foreign exchange contract derivatives are in a liability position and are included in trade and other payables on our Condensed Consolidated Statements of Financial Condition. As of September 30, 2016 , the fair value of the forward foreign exchange contract derivatives are in an asset position and are included in prepaid expenses and other assets on our Condensed Consolidated Statements of Financial Condition. See Note 12 for additional information.

(8)
The derivative arose from our fiscal year 2016 acquisition of Alex. Brown, see the discussion of the circumstances giving rise to this derivative in Note 3 on pages 127 - 129 of our 2016 Form 10-K. As of December 31, 2016 , we hold 900,000 shares of DB with a fair value of $16 million as an economic hedge against the DBRSU obligation. As of September 30, 2016 , such holdings amounted to 900,000 shares of DB with a fair value of $12 million . See additional discussion of the DBRSUs in Note 18 .

(9)
For the portion of these derivative contracts that are transacted through an exchange, the nature of the agreement with the clearing member exchange include terms that are similar to a master netting agreement, thus we are over-collateralized as of September 30, 2016 since the actual amount of cash and securities deposited with the exchange for these derivative contracts is $8 million . These deposits are a component of deposits with clearing organizations on our Condensed Consolidated Statements of Financial Condition. See Note 12 for additional information.

(10)
Derivatives - As of September 30, 2016 , the fair value of the RJ Bank Interest Hedges are in a liability position and are included in trade and other payables on our Condensed Consolidated Statements of Financial Condition.  See Note 12 for additional information.  The RJ Bank Interest Hedges are transacted through an exchange.  The nature of the agreement with the clearing member exchange includes terms that are similar to a master netting agreement.  As of September 30, 2016 , we are over-collateralized on the RJ Bank Interest Hedges since the actual amount of cash and securities deposited with the exchange for these derivative contracts is $42 million .  These deposits are included in deposits with clearing organizations on our Condensed Consolidated Statements of Financial Condition.

For financial statement purposes, we do not offset our repurchase agreements or securities borrowing, securities lending transactions and certain of our derivative instruments including those transacted through an exchange because the conditions for netting as specified by GAAP are not met. Our repurchase agreements, securities borrowing and securities lending transactions, and certain of our derivative instruments transacted through an exchange, are governed by master agreements that are widely used by counterparties and that may allow for net settlements of payments in the normal course as well as offsetting of all contracts with a given counterparty in the event of bankruptcy or default of one of the two parties to the transaction. Although not offset on the Condensed Consolidated Statements of Financial Condition, these transactions are included in the preceding table.

Collateral and deposits with clearing organizations

We receive cash and securities as collateral, primarily in connection with Reverse Repurchase Agreements, securities borrowed, derivative transactions not transacted through an exchange, and client margin loans arising from our domestic operations. The cash collateral we receive is primarily associated with our OTC Derivative Operations (see Note 12 for additional information). The collateral we receive reduces our credit exposure to individual counterparties.


44

We also pay cash to exchanges, or receive cash from exchanges, related to derivative contracts transacted through an exchange. We account for such cash as a component of deposits with clearing organizations when such balances are in an asset position, or trade and other payables when such balances are in a liability position, on our Condensed Consolidated Statements of Financial Condition.

In many cases, we are permitted to deliver or repledge financial instruments we have received as collateral, for our own use in our repurchase agreements, securities lending agreements, other secured borrowings, satisfaction of deposit requirements with clearing organizations, or otherwise meeting either our, or our clients, settlement requirements.

The table below presents financial instruments at fair value, that we received as collateral, are not included on our Condensed Consolidated Statements of Financial Condition, and that were available to be delivered or repledged, along with the balances of such instruments that were used to deliver or repledge, to satisfy one of our purposes described above:
December 31, 2016
September 30, 2016
(in thousands)
Collateral we received that is available to be delivered or repledged
$
2,834,781

$
2,925,335

Collateral that we delivered or repledged
$
1,153,579

(1)
$
1,536,393

(2)

(1)
The collateral delivered or repledged as of December 31, 2016 , includes client margin securities which we pledged with a clearing organization in the amount of $370 million which were applied against our requirement of $220 million .

(2)
The collateral delivered or repledged as of September 30, 2016 , includes client margin securities which we pledged with a clearing organization in the amount of $389 million which were applied against our requirement of $203 million .

Encumbered assets

We pledge certain of our trading instrument assets to collateralize either Repurchase Agreements, other secured borrowings, or to satisfy our settlement requirements, with counterparties who may or may not have the right to deliver or repledge such securities.

The table below presents information about the fair value of our assets that have been pledged for one of the purposes described above:
December 31, 2016
September 30, 2016
(in thousands)
Financial instruments owned, at fair value, pledged to counterparties that:
Had the right to deliver or repledge
$
394,240

$
587,369

Did not have the right to deliver or repledge
$
81,632

(1)
$
25,200

(2)

(1)
Assets delivered or repledged as of December 31, 2016 , includes securities which we pledged with a clearing organization in the amount of $44 million which were applied against our requirement of $220 million (client margin securities we pledged which are described in the preceding table constitute the remainder of the assets pledged to meet the requirement).

(2)
Assets delivered or repledged as of September 30, 2016 , includes securities which we pledged with a clearing organization in the amount of $19 million which were applied against our requirement of $203 million (client margin securities we pledged which are described in the preceding table constitute the remainder of the assets pledged to meet the requirement).

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

We enter into repurchase agreements where we sell securities under agreements to repurchase (“Repurchase Agreements”) and also engage in securities lending transactions. These activities are accounted for as collateralized financings. Our Repurchase Agreements would include “repurchase-to-maturity” agreements, which are repurchase agreements where a security is transferred under an agreement to repurchase and the maturity date of the repurchase agreement matches the maturity date of the underlying security, if any, that we are a party to as of period-end. As of both December 31, 2016 and September 30, 2016 , we did not have any “repurchase-to-maturity” agreements. See Note 2 on pages 110 and 117, respectively, of our 2016 Form 10-K for a discussion of our respective Repurchase Agreement and securities borrowed and securities loaned accounting policies.

45


The following table presents the remaining contractual maturity of securities under agreements to repurchase and securities lending transactions accounted for as secured borrowings:
Overnight and continuous
Up to 30 days
30-90 days
Greater than 90 days
Total
(in thousands)
As of December 31, 2016:
Repurchase agreements
Government and agency obligations
$
95,783

$
—

$
—

$
—

$
95,783

Agency MBS and CMOs
107,595

—

—

—

107,595

Total Repurchase Agreements
203,378

—

—

—

203,378

Securities lending
Equity securities
428,600

—

—

—

428,600

Total
$
631,978

$
—

$
—

$
—

$
631,978

Gross amounts of recognized liabilities for repurchase agreements and securities lending transactions included in the Offsetting Assets and Liabilities table included within this footnote
$
631,978

Amounts related to repurchase agreements and securities lending transactions not included in the Offsetting Assets and Liabilities table included within this footnote
$
—


As of September 30, 2016:
Repurchase agreements
Government and agency obligations
$
92,804

$
6,252

$
—

$
—

$
99,056

Agency MBS and CMOs
92,422

1,751

—

—

94,173

Total Repurchase Agreements
185,226

8,003

—

—

193,229

Securities lending
Equity securities
677,761

—

—

—

677,761

Total
$
862,987

$
8,003

$
—

$
—

$
870,990

Gross amounts of recognized liabilities for repurchase agreements and securities lending transactions included in the Offsetting Assets and Liabilities table included within this footnote
$
870,990

Amounts related to repurchase agreements and securities lending transactions not included in the Offsetting Assets and Liabilities table included within this footnote
$
—


We enter into Repurchase Agreements and conduct securities lending activities as components of the financing of certain of our operating activities. In the event the market value of the securities we pledge as collateral in these activities declines, we may have to post additional collateral or reduce the borrowing amounts. We monitor such levels daily.

NOTE 14 – INCOME TAXES

For discussion of income tax accounting policies and other income tax related information, see Note 2 on pages 124 - 125, and Note 20 on pages 176 - 179, of our 2016 Form 10-K.

Effective October 1, 2016, we adopted new accounting guidance related to stock compensation. The amended guidance involves several aspects of the accounting for share-based payment transactions, including the income tax consequences. Generally, the amount of compensation cost recognized for financial reporting purposes varies from the amount that can ultimately be deducted on the tax return for share-based payment awards. Under the prior guidance, the tax effects of deductions in excess of compensation expense (“windfalls”), as well as the tax effect of any deficiencies (“shortfalls”) were recorded in equity to the extent of previously recognized windfalls, with any remaining shortfall recorded in income tax expense. Under the new guidance, all tax effects related to share-based payments are recorded through tax expense in the periods during which the awards are exercised or vest, as applicable. While this simplification eliminates administrative complexities that existed under the prior guidance, it increases the volatility of income tax expense.

For the three months ended December 31, 2016 , our effective income tax rate is 29.0% , which is lower than the 33.9% effective tax rate for fiscal year 2016. The primary factor for the decrease in the current period effective tax rate compared to the fiscal year 2016 effective tax rate results from the favorable impact of the adoption of the new share-based payment accounting guidance described in the preceding paragraph, which had a favorable impact of 9% on our effective rate. To a much lesser extent, other

46

factors, such as valuation gains associated with our company-owned life insurance which are not subject to tax, and tax-exempt interest, also favorably impact our effective tax rate in the current period. The fiscal year 2016 effective tax rate was favorably impacted by a number of factors or events which have not recurred in the current period.

We anticipate that the uncertain tax position liability balance may decrease by $2 million over the next twelve months as a result of the resolution of additional state tax audits.

NOTE 15 – COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments and contingencies

In the normal course of business we enter into commitments for either fixed income or equity underwritings. As of December 31, 2016 , RJ&A had no open underwriting commitments. As of December 31, 2016 , RJ Ltd. had five equity underwriting commitments, all of which are recorded in our Condensed Consolidated Statements of Financial Condition as of December 31, 2016 , and which aggregate to approximately $6 million in Canadian currency (“CDN”).

As part of our recruiting efforts, we offer loans to prospective financial advisors and certain key revenue producers, primarily for recruiting, transitional cost assistance, and retention purposes (see Note 2 on pages 116 - 117 of our 2016 Form 10-K for a discussion of our accounting policies governing these transactions). These commitments are contingent upon certain events occurring including, but not limited to, the individual joining us.  As of December 31, 2016 , we had made commitments through the extension of formal offers totaling $104 million that had not yet been funded, however, it is possible that not all of our offers will be accepted and therefore we would not fund the total amount of the offers extended. As of December 31, 2016 , $70 million of the total amount extended are unfunded commitments to prospects that had accepted our offer, or recently hired producers.

As of December 31, 2016 , RJ Bank had not settled purchases of $79 million in syndicated loans.  These loan purchases are expected to be settled within 90 days .

A subsidiary of RJ Bank has committed $62 million as an investor member in a low-income housing tax credit fund in which a subsidiary of RJTCF is the managing member (see the discussion of “direct investments in LIHTC project partnerships” in Note 2 on page 126 of our 2016 Form 10-K for information regarding the accounting policies governing these investments). As of December 31, 2016 , the RJ Bank subsidiary has invested $58 million of the committed amount.

See Note 20 for additional information regarding RJ Bank’s commitments to extend credit and other credit-related off-balance sheet financial instruments, such as standby letters of credit and loan purchases.

We have unfunded commitments to various venture capital or private equity partnerships, which aggregate to approximately $39 million as of December 31, 2016 . Of the total, we have unfunded commitments to internally-sponsored private equity limited partnerships in which we control the general partner of approximately $18 million .

As part of the terms governing our fiscal year 2015 acquisition of The Producers Choice LLC (“TPC”) (see Note 3 on page 129 of our 2016 Form 10-K, for additional information regarding this acquisition), on certain dates specified in the TPC purchase agreement, there are a number of “earn-out” computations to be performed. The result of these computations could result in additional cash paid to the sellers of TPC in the future. These elements of contingent consideration will be finally determined in the future based upon the outcome of either specific performance of defined tasks, or the achievement of specified revenue growth hurdles, over a measurement period ranging from 18 months to 3 years after the TPC closing date. Our initial estimate of the fair value of these elements of contingent consideration as of the TPC closing date was included in our determination of the goodwill arising from this acquisition. As of December 31, 2016 , we computed an estimate of the fair value of this contingent consideration based upon the latest information available to us, and the excess of this fair value determination over the initial estimate is included in other expense on our Condensed Consolidated Statements of Income and Comprehensive Income.

As a part of the terms governing the fiscal year 2016 Mummert acquisition (see Note 3 for additional information), on certain dates specified in the Mummert purchase agreement, there are earn-out computations to be performed or contingent consideration provisions that may apply. These elements of contingent consideration will be finally determined in the future based upon the achievement of specified revenue amounts and the continued employment of specified associates. Since the ultimate payment of these elements of contingent consideration are conditioned upon continued employment as of the measurement dates which are three and five years from the Mummert acquisition date, these obligations are being recognized as a component of our compensation expense over such periods.


47

All of the elements of contingent consideration arising from the fiscal year 2016 Alex. Brown and 3Macs acquisitions, in both cases, could only result in a return of a portion of our purchase price paid at closing. In addition, the terms of both of these acquisitions also included a post-closing date review process to potentially adjust the cash consideration paid to the respective sellers at closing, based upon the actual values of certain net assets delivered to the purchaser as of the closing date. As of December 31, 2016 , all of these determinations have yet to be finalized.

RJF has committed an amount of up to $225 million , subject to certain limitations and to annual review and renewal by the RJF Board of Directors, to either lend to RJTCF or to guarantee RJTCF’s obligations, in connection with RJTCF’s low-income housing development/rehabilitation and syndication activities. At December 31, 2016 , RJTCF has $148 million outstanding against this commitment. RJTCF may borrow from RJF in order to make investments in, or fund loans or advances to, either partnerships that purchase and develop properties qualifying for tax credits (“Project Partnerships”) or LIHTC Funds. Investments in Project Partnerships are sold to various LIHTC Funds, which have third party investors, and for which RJTCF serves as the managing member or general partner. RJTCF typically sells investments in Project Partnerships to LIHTC Funds within 90 days of their acquisition, and the proceeds from the sales are used to repay RJTCF’s borrowings from RJF. RJTCF may also make short-term loans or advances to Project Partnerships, and LIHTC Funds.

As a part of our fixed income public finance operations, RJ&A enters into forward commitments to purchase GNMA or FNMA MBS (see the discussion of these activities within “financial instruments owned, financial instruments sold but not purchased and fair value” in Note 2 on page 112 of our 2016 Form 10-K).  At December 31, 2016 , RJ&A had approximately $751 million principal amount of outstanding forward MBS purchase commitments which are expected to be purchased over the following 90 days .  In order to hedge the market interest rate risk to which RJ&A would otherwise be exposed between the date of the commitment and the date of sale of the MBS, RJ&A enters into to be announced (“TBA”) security contracts with investors for generic MBS securities at specific rates and prices to be delivered on settlement dates in the future.  These TBA securities are accounted for at fair value and are included in Agency MBS securities in the table of assets and liabilities measured at fair value included in Note 5 , and at December 31, 2016 aggregate to a net asset having a fair value of $6 million .  The estimated fair value of the purchase commitment is a $2 million liability balance as of December 31, 2016 .

As a result of extensive regulation of financial holding companies, banks, broker-dealers and investment advisory entities, RJF and certain of its subsidiaries are subject to regular reviews and inspections by regulatory authorities and self-regulatory organizations. The reviews can result in the imposition of sanctions for regulatory violations, ranging from non-monetary censure to fines and, in serious cases, temporary or permanent suspension from conducting business, or limitations on certain business activities. In addition, regulatory agencies and self-regulatory organizations institute investigations from time to time into industry practices, which can also result in the imposition of such sanctions. Refer to the “legal and regulatory matter contingencies” discussion within this footnote for information about related loss contingency reserves. See Note 19 for additional information regarding regulatory capital requirements applicable to RJF and certain of its subsidiaries.

Guarantees

RJ Bank provides to an affiliate, RJ Capital Services, Inc. (“RJ Cap Services”), on behalf of certain corporate borrowers, a guarantee of payment in the event of the borrower’s default for exposure under interest rate swaps entered into with RJ Cap Services. At December 31, 2016 , the exposure under these guarantees is $6 million , which was underwritten as part of RJ Bank’s corporate credit relationship with such borrowers.  The outstanding interest rate swaps at December 31, 2016 have maturities ranging from July 2017 through June 2039 .  RJ Bank records an estimated reserve for its credit risk associated with the guarantee of these client swaps, which was insignificant as of December 31, 2016 .  The estimated total potential exposure under these guarantees is $43 million at December 31, 2016 .

RJ Bank guarantees the forward foreign exchange contract obligations of its U.S. subsidiaries.  See Note 12 for additional information regarding these derivatives.

RJF guarantees interest rate swap obligations of RJ Cap Services. See Note 12 for additional information regarding interest rate swaps.

RJF guarantees the existing mortgage debt of RJ&A of approximately $32 million , see Note 11 for information regarding this borrowing.

Our U.S. broker-dealer subsidiaries are required by federal law to be members of the Securities Investors Protection Corporation (“SIPC”). The SIPC fund provides protection for securities held in client accounts up to $500 thousand per client, with a limitation of $250 thousand on claims for cash balances. We have purchased excess SIPC coverage through various syndicates of Lloyd’s (the “Excess SIPC Insurer”). For RJ&A, our clearing broker-dealer, the additional protection currently provided has an aggregate

48

firm limit of $750 million for cash and securities, including a sub-limit of $1.9 million per client for cash above basic SIPC. Account protection applies when a SIPC member fails financially and is unable to meet obligations to clients. This coverage does not protect against market fluctuations. RJF has provided an indemnity to the Excess SIPC Insurer against any and all losses they may incur associated with the excess SIPC policies.

RJTCF issues certain guarantees to various third parties related to Project Partnerships whose interests have been sold to one or more of the funds in which RJTCF is the managing member or general partner. In some instances, RJTCF is not the primary guarantor of these obligations, which aggregate to approximately $2 million as of December 31, 2016 .

RJTCF has provided a guaranteed return on investment to a third party investor in one of its fund offerings (“Fund 34”), and RJF has guaranteed RJTCF’s performance under the arrangement.  Under the terms of the performance guarantee, should the underlying LIHTC project partnerships held by Fund 34 fail to deliver a certain amount of tax credits and other tax benefits to this investor over the next five years , RJTCF is obligated to pay the investor an amount that results in the investor achieving a minimum specified return on their investment.  A $21 million financing asset is included in prepaid expenses and other assets, and a related $21 million liability is included in trade and other payables on our Condensed Consolidated Statements of Financial Condition as of December 31, 2016 related to this obligation. The maximum exposure to loss under this guarantee is approximately $23 million at December 31, 2016 , which represents the undiscounted future payments due the investor.

Legal and regulatory matter contingencies

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

We are also subject, from time to time, to other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business. Such proceedings may involve, among other things, our sales and trading activities, financial products or offerings we sponsored, underwrote or sold, and operational matters. Some of these proceedings have resulted, and may in the future result, in adverse judgments, settlements, fines, penalties, injunctions or other relief and/or require us to undertake remedial actions.

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

We contest liability and/or the amount of damages as appropriate in each pending matter. Over the last several years, the level of litigation and investigatory activity (both formal and informal) by government and self-regulatory agencies has increased significantly in the financial services industry. While we have identified below certain proceedings that we believe could be material, individually or collectively, there can be no assurance that material losses will not be incurred from claims that have not yet been asserted or are not yet determined to be material.

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

Subject to the foregoing, we believe, after consultation with counsel and consideration of the accrued liability amounts included in the accompanying condensed consolidated financial statements, that the outcome of such litigation and regulatory proceedings will not have a material adverse effect on our consolidated financial condition. However, the outcome of such litigation and proceedings could be material to our operating results and cash flows for a particular future period, depending on, among other things, our revenues or income for such period.

With respect to matters described herein for which management has been able to estimate a range of reasonably possible loss (and excluding amounts subject to the below-described indemnification from Regions), as of December 31, 2016 , we estimate the upper end of the range of reasonably possible aggregate loss to be approximately $55 million in excess of the aggregate reserves

49

for such matters.  Refer to Note 2 on page 123 of our 2016 Form 10-K for a discussion of our criteria for recognizing liabilities for contingencies.

We and one of our financial advisors are named defendants in various lawsuits related to an alleged fraudulent scheme conducted by Ariel Quiros (“Quiros”) and William Stenger (“Stenger”) involving the misuse of EB-5 investor funds in connection with the Jay Peak ski resort in Vermont (“Jay Peak”) and associated limited partnerships. Plaintiffs in the lawsuits allege that Quiros misused $200 million of the amounts raised by the limited partnerships and misappropriated $50 million for his personal benefit. There are six civil court actions pending in which we or one of our subsidiaries are named. The plaintiffs variously demand, among other things, compensatory damages, treble damages under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and punitive damages.
Morgan Keegan Litigation

Indemnification from Regions

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

The Morgan Keegan matter described below is subject to such indemnification provisions. As of December 31, 2016 , management estimates the range of potential liability of all Morgan Keegan matters subject to indemnification, including the cost of defense, to be from $14 million to $48 million . Any loss arising from such matters, after application of any contractual thresholds and other reductions, as set forth in the agreement, will be borne by Regions. As of December 31, 2016 our Condensed Consolidated Statements of Financial Condition include an indemnification asset of approximately $34 million which is included in other assets, and a liability for potential losses of approximately $34 million which is included within trade and other payables, pertaining to the Morgan Keegan matters subject to indemnification. The amount included within trade and other payables is the amount within the range of potential liability related to such matters which management estimates is more likely than any other amount within such range.

Morgan Keegan matter (subject to indemnification)

In July 2006, Morgan Keegan & Company, Inc., a Morgan Keegan affiliate, and one of its former analysts were named as defendants in a lawsuit filed by Fairfax Financial Holdings and affiliates in the Circuit Court of Morris County, New Jersey. Plaintiffs made claims under a civil RICO statute, for commercial disparagement, tortious interference with contractual relationships, tortious interference with prospective economic advantage and common law conspiracy. Plaintiffs alleged that defendants engaged in a multi-year conspiracy to publish and disseminate false and defamatory information about plaintiffs in order to improperly drive down plaintiff’s stock price, so that others could profit from short positions. Plaintiffs alleged that the defendants’ actions damaged their reputations and harmed their business relationships. Plaintiffs alleged various categories of damages, including lost insurance business, lost financings and increased financing costs, increased audit fees and directors and officers insurance premiums and lost acquisitions, and have requested monetary damages. On May 11, 2012, the trial court ruled that New York law applied to plaintiff’s RICO claims, and that the claims were therefore not subject to treble damages. On June 27, 2012, the trial court dismissed plaintiffs’ tortious interference with prospective relations claim, but allowed the other claims to go forward. Prior to commencement of a jury trial, the court dismissed the remaining claims with prejudice. A hearing on plaintiffs’ appeal of the court’s rulings was held on October 17, 2016.


50

NOTE 16 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Other comprehensive income (loss)

The activity in other comprehensive income (loss), net of the respective tax effect, is as follows:
Three months ended December 31,
2016
2015
(in thousands)
Unrealized loss on available for sale securities (net of tax)
$
(4,146
)
$
(6,791
)
Unrealized gain (loss) on currency translations, net of the impact of net investment hedges (net of tax)
1,001

(6,615
)
Unrealized gain on cash flow hedges (net of tax)
25,738

3,265

Net other comprehensive income (loss)
$
22,593

$
(10,141
)

Accumulated other comprehensive income (loss)

The following table presents the changes, and the related tax effects, of each component of accumulated other comprehensive income (loss) for the three months ended December 31, 2016 and 2015 (in thousands):
Net investment hedges (1)
Currency translations
Sub-total: net investment hedges and currency translations
Available for sale securities
Cash flow hedges (2)
Total
Three months ended December 31, 2016
Accumulated other comprehensive income (loss) as of the beginning of the period
$
86,482

$
(121,576
)
$
(35,094
)
$
(4,156
)
$
(16,483
)
$
(55,733
)
Other comprehensive income (loss) before reclassifications and taxes
18,098

(17,756
)
342

(6,858
)
39,941

33,425

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

6,537

6,537

(12
)
1,572

8,097

Pre-tax net other comprehensive income (loss)
18,098

(11,219
)
6,879

(6,870
)
41,513

41,522

Income tax effect
(6,772
)
894

(5,878
)
2,724

(15,775
)
(18,929
)
Net other comprehensive income (loss) for the period, net of tax
11,326

(10,325
)
1,001

(4,146
)
25,738

22,593

Accumulated other comprehensive income (loss) as of December 31, 2016
$
97,808

$
(131,901
)
$
(34,093
)
$
(8,302
)
$
9,255

$
(33,140
)
Three months ended December 31, 2015
Accumulated other comprehensive income (loss) as of the beginning of the period
$
93,203

$
(130,476
)
$
(37,273
)
$
1,420

$
(4,650
)
$
(40,503
)
Other comprehensive income (loss) before reclassifications and taxes
19,556

(19,877
)
(321
)
(10,852
)
3,858

(7,315
)
Amounts reclassified from accumulated other comprehensive income (loss), before tax
—

—

—

—

1,408

1,408

Pre-tax net other comprehensive income (loss)
19,556

(19,877
)
(321
)
(10,852
)
5,266

(5,907
)
Income tax effect
(7,319
)
1,025

(6,294
)
4,061

(2,001
)
(4,234
)
Net other comprehensive income (loss) for the period, net of tax
12,237

(18,852
)
(6,615
)
(6,791
)
3,265

(10,141
)
Accumulated other comprehensive income (loss) as of December 31, 2015
$
105,440

$
(149,328
)
$
(43,888
)
$
(5,371
)
$
(1,385
)
$
(50,644
)

(1)
Comprised of forward foreign exchange derivatives associated with hedges of RJ Bank’s foreign currency exposure due to its non-U.S. dollar net investments (see Note 12 for additional information on these derivatives).

(2)
Represents RJ Bank Interest Hedges (see Note 12 for additional information on these derivatives).


51

Reclassifications out of accumulated other comprehensive income (loss)

The following table presents the income statement line items impacted by reclassifications out of accumulated other comprehensive income (loss), and the related tax effects, for the three months ended December 31, 2016 and 2015 :
Accumulated other comprehensive income (loss) components:
Increase (decrease) in amounts reclassified from accumulated other comprehensive income (loss)
Affected line items in income statement
(in thousands)
Three months ended December 31, 2016
RJ Bank available for sale securities
$
(12
)
Other revenue
RJ Bank Interest Hedges (1)
1,572

Interest expense
Currency translations (2)
6,537

Other expense
8,097

Total before tax
Income tax effect
(3,076
)
Provision for income taxes
Total reclassifications for the period
$
5,021

Net of tax
Three months ended December 31, 2015
RJ Bank Interest Hedges (1)
$
1,408

Interest expense
1,408

Total before tax
Income tax effect
(535
)
Provision for income taxes
Total reclassifications for the period
$
873

Net of tax

(1)
See Note 12 for additional information regarding the RJ Bank Interest Hedges, and Note 5 for additional fair value information regarding these derivatives.

(2)
During the period, we sold our interests in a number of Latin American joint ventures which had operations in Uruguay and Argentina. As a component of our computation of the gain or loss resulting from such sales, we recognized the sold entities’ cumulative currency translation balances which, prior to such reclassification, had been a component of the accumulated other comprehensive loss.

All of the components of other comprehensive income (loss) described above, net of tax, are attributable to RJF.


52

NOTE 17 – INTEREST INCOME AND INTEREST EXPENSE

The components of interest income and interest expense are as follows:
Three months ended December 31,
2016
2015
(in thousands)
Interest income:
Margin balances
$
19,981

$
17,434

Assets segregated pursuant to regulations and other segregated assets
8,129

3,972

Bank loans, net of unearned income
135,525

107,601

Available for sale securities
3,400

1,651

Trading instruments
5,006

4,281

Stock loan
2,732

1,915

Loans to financial advisors
3,308

1,899

Corporate cash and all other
4,701

3,719

Total interest income
$
182,782

$
142,472

Interest expense:


Brokerage client liabilities
$
676

$
227

Retail bank deposits (1)
2,783

2,019

Trading instruments sold but not yet purchased
1,328

1,191

Stock borrow
1,228

623

Borrowed funds
3,719

2,765

Senior notes
24,699

19,091

Other
1,533

783

Total interest expense
35,966

26,699

Net interest income
146,816

115,773

Add (subtract): benefit (provision) for loan losses
1,040

(13,910
)
Net interest income after benefit (provision) for loan losses
$
147,856

$
101,863


(1)
Excludes interest expense associated with affiliate deposits.


NOTE 18 – SHARE-BASED COMPENSATION

We maintain one share-based compensation plan for our employees, Board of Directors and non-employees (comprised of independent contractor financial advisors). The Amended and Restated 2012 Stock Incentive Plan (the “2012 Plan”) permits us to grant share-based and cash-based awards designed to be exempt from the limitation on deductible compensation under Section 162(m) of the Internal Revenue Code. Our share-based compensation accounting policies are described in Note 2 on pages 123 - 124 of our 2016 Form 10-K.  Other information relating to our share-based awards are presented in Note 24 on pages 186 – 191 of our 2016 Form 10-K.

Stock option awards

Expense and income tax benefits related to our stock options awards granted to employees is presented below:
Three months ended December 31,
2016
2015
(in thousands)
Total share-based expense
$
2,287

$
2,565

Income tax benefit related to share-based expense
165

204


For the three months ended December 31, 2016 , we realized $2 million of excess tax benefits related to our stock option awards which favorably impacted income tax expense in our Condensed Consolidated Statements of Income and Comprehensive Income as a result of our adoption of stock compensation simplification guidance (see Note 1 for additional information on our adoption of this new accounting guidance during the period).


53

During the three months ended December 31, 2016 , we granted 219,800 stock options to employees with a weighted-average grant-date fair value of $19.92 .
As of December 31, 2016 , there was $21 million of total unrecognized pre-tax compensation cost, net of estimated forfeitures, related to stock option awards. These costs are expected to be recognized over a weighted-average period of 2.98 years .

The stock option awards granted to our independent contractor financial advisors are not material as of December 31, 2016 .
Restricted stock and restricted stock unit awards

Expense and income tax benefits related to our restricted equity awards (which include restricted stock and restricted stock units) granted to employees and members of our Board of Directors are presented below:
Three months ended December 31,
2016
2015
(in thousands)
Total share-based expense
$
27,650

(1)
$
17,904

Income tax benefit related to share-based expense
10,035

6,360


(1)
The total share-based expense in the three months ended December 31, 2016 includes $5 million which is included as a component of acquisition-related expenses on our Condensed Consolidated Statements of Income and Comprehensive Income, see Note 3 for additional information regarding such expense.

For the three months ended December 31, 2016 , we realized $17 million of excess tax benefits related to our restricted equity awards which favorably impacted income tax expense in our Condensed Consolidated Statements of Income and Comprehensive Income as a result of our adoption of stock compensation simplification guidance (see Note 1 for additional information on our adoption of this new accounting guidance during the period).

During the three months ended December 31, 2016 , we granted 1,475,479 restricted stock units to employees with a weighted-average grant-date fair value of $71.88 . During the three months ended December 31, 2016 we did not grant any restricted stock units to outside members of our Board of Directors.

As of December 31, 2016 , there was $163 million of total unrecognized pre-tax compensation cost, net of estimated forfeitures, related to restricted equity awards granted to employees and members of our Board of Directors. These costs are expected to be recognized over a weighted-average period of 3.50 years.

There are no outstanding restricted stock units related to our independent contractor financial advisors as of December 31, 2016 .
Restricted stock awards associated with Alex. Brown

As part of our acquisition of Alex. Brown, RJ&A assumed certain DBRSU awards, including the associated plan terms and conditions. Refer to Note 24 on page 190 of our 2016 Form 10-K for additional information regarding these awards. The DBRSUs are accounted for as a derivative, see Note 12 for additional information regarding this derivative.

The net impact of the DBRSUs in our Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended December 31, 2016 , including the related income tax effects, is presented below:
Three months ended December 31, 2016
(in thousands)
Amortization of DBRSU prepaid compensation asset
$
1,542

Change in fair value of derivative liability (1)
6,375

Net loss before tax
$
7,917

Income tax expense
$
2,920


(1)
Includes the impact of DBRSUs forfeited during three months ended December 31, 2016 .

As of December 31, 2016 , there was a $14 million prepaid compensation asset included in prepaid expenses and other assets in our Condensed Consolidated Statements of Financial Condition related to these DBRSUs. This asset is expected to be amortized

54

over a weighted-average period of approximately three years . As of December 31, 2016 , there was a $24 million derivative liability included in accrued compensation, commissions and benefits in our Condensed Consolidated Statements of Financial Condition based on the December 31, 2016 fair value of DB shares of $18.10 .
We hold 900,000 shares of DB as of December 31, 2016 as an economic hedge against this obligation, such shares are included in other assets on our Condensed Consolidated Statements of Financial Condition. During the three months ended December 31, 2016 , the fair value of these holdings increased $4 million , this unrealized gain is included as a component of compensation, commissions and benefits expense, and offsets a portion of the loss on the DBRSUs incurred during the period discussed above.

NOTE 19 – REGULATORY CAPITAL REQUIREMENTS

RJF, as a financial holding company, RJ Bank, and our broker-dealer subsidiaries are subject to capital requirements by various regulatory authorities. Capital levels of each entity are monitored to assess the capital positions to ensure compliance with our various regulatory capital requirements.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial results.

Under capital adequacy guidelines, RJF and RJ Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. RJF’s and RJ Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

RJF and RJ Bank report regulatory capital under Basel III under the standardized approach. Various aspects of the Basel III rules are subject to multi-year transition periods through December 31, 2018.

RJF and RJ Bank are required to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), Tier 1 capital to average assets (as defined), and under rules defined in Basel III, Common equity Tier 1 capital (“CET1”) to risk-weighted assets. RJF and RJ Bank each calculate these ratios in order to assess compliance with both regulatory requirements and their internal capital policies.  Effective January 1, 2016, the minimum CET1, Tier 1 Capital, and Total Capital ratios of RJF and RJ Bank are supplemented by an incremental capital conservation buffer, consisting entirely of capital that qualifies as CET1, that phases in beginning on January 1, 2016 in increments of 0.625% per year until it reaches 2.5% of risk weighted assets on January 1, 2019. The capital conservation buffer is intended to be used to absorb potential losses in times of financial or economic stress. If not maintained, we could be limited in the amount of certain discretionary bonuses that may be paid and the amount of capital that may be distributed, including dividends and common equity repurchases.  As of December 31, 2016 , RJF’s and RJ Bank’s capital conservation buffers were 14.2% and 5.7% , respectively. The applicable required capital conservation buffer for each as of December 31, 2016 was 0.625% .

At current capital levels, RJF and RJ Bank are each categorized as “well capitalized.”

For further discussion of regulatory capital requirements applicable to certain of our businesses and subsidiaries, see Note 25 on pages 191 - 194 of our 2016 Form 10-K.


55

To meet requirements for capital adequacy purposes or to be categorized as “well capitalized,” RJF must maintain minimum Common equity Tier 1, Tier 1 risk-based, Total risk-based, and Tier 1 leverage amounts and ratios as set forth in the table below.

Actual
Requirement for capital
adequacy purposes
To be well capitalized under regulatory provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
($ in thousands)
RJF as of December 31, 2016:
Common equity Tier 1 capital
$
4,579,075

21.2
%
$
973,639

4.5
%
$
1,406,368

6.5
%
Tier 1 capital
$
4,579,075

21.2
%
$
1,298,186

6.0
%
$
1,730,914

8.0
%
Total capital
$
4,793,062

22.2
%
$
1,730,914

8.0
%
$
2,163,643

10.0
%
Tier 1 leverage
$
4,579,075

14.5
%
$
1,262,106

4.0
%
$
1,577,632

5.0
%
RJF as of September 30, 2016:
Common equity Tier 1 capital
$
4,421,956

20.6
%
$
966,341

4.5
%
$
1,395,825

6.5
%
Tier 1 capital
$
4,421,956

20.6
%
$
1,288,454

6.0
%
$
1,717,939

8.0
%
Total capital
$
4,636,009

21.6
%
$
1,717,939

8.0
%
$
2,147,424

10.0
%
Tier 1 leverage
$
4,421,956

15.0
%
$
1,177,840

4.0
%
$
1,472,300

5.0
%

The increase in RJF’s Total capital and Tier 1 capital ratios at December 31, 2016 compared to September 30, 2016 was primarily the result of positive earnings during the three months ended December 31, 2016 , offset by the growth of RJ Bank’s corporate loan portfolio.

To meet the requirements for capital adequacy or to be categorized as “well capitalized,” RJ Bank must maintain Common equity Tier 1, Tier 1 risk-based, Total risk-based, and Tier 1 leverage amounts and ratios as set forth in the table below.
Actual
Requirement for capital
adequacy purposes
To be well capitalized under regulatory provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
($ in thousands)
RJ Bank as of December 31, 2016:
Common equity Tier 1 capital
$
1,719,444

12.5
%
$
620,242

4.5
%
$
895,906

6.5
%
Tier 1 capital
$
1,719,444

12.5
%
$
826,990

6.0
%
$
1,102,653

8.0
%
Total capital
$
1,892,158

13.7
%
$
1,102,653

8.0
%
$
1,378,317

10.0
%
Tier 1 leverage
$
1,719,444

9.7
%
$
710,762

4.0
%
$
888,453

5.0
%
RJ Bank as of September 30, 2016:






Common equity Tier 1 capital
$
1,675,890

12.7
%
$
592,864

4.5
%
$
856,360

6.5
%
Tier 1 capital
$
1,675,890

12.7
%
$
790,486

6.0
%
$
1,053,981

8.0
%
Total capital
$
1,841,112

14.0
%
$
1,053,981

8.0
%
$
1,317,476

10.0
%
Tier 1 leverage
$
1,675,890

9.9
%
$
675,939

4.0
%
$
844,924

5.0
%

The decrease in RJ Bank’s Total and Tier 1 capital ratios at December 31, 2016 compared to September 30, 2016 was primarily due to growth in corporate loans.

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


56

The net capital position of our wholly owned broker-dealer subsidiary RJ&A is as follows:
As of
December 31, 2016
September 30, 2016
($ in thousands)
Raymond James & Associates, Inc.:
(Alternative Method elected)
Net capital as a percent of aggregate debit items
21.80
%
19.61
%
Net capital
$
560,866

$
512,594

Less: required net capital
(51,454
)
(52,287
)
Excess net capital
$
509,412

$
460,307


The net capital position of our wholly owned broker-dealer subsidiary RJFS is as follows:
As of
December 31, 2016
September 30, 2016
(in thousands)
Raymond James Financial Services, Inc.:
(Alternative Method elected)
Net capital
$
26,879

$
27,013

Less: required net capital
(250
)
(250
)
Excess net capital
$
26,629

$
26,763


The risk adjusted capital of RJ Ltd. is as follows (in Canadian dollars):
As of
December 31, 2016
September 30, 2016
(in thousands)
Raymond James Ltd.:
Risk adjusted capital before minimum
$
70,923

$
77,110

Less: required minimum capital
(250
)
(250
)
Risk adjusted capital
$
70,673

$
76,860


At December 31, 2016 , all of our other active regulated domestic and international subsidiaries are in compliance with and met all capital requirements.


NOTE 20 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

For a discussion of our financial instruments with off-balance-sheet risk, see Note 26 on pages 194 - 195 of our 2016 Form 10-K.

As a part of our fixed income public finance operations, RJ&A enters into forward commitments to purchase GNMA or FNMA MBS. See Note 15 for information on these commitments. We utilize TBA security contracts to hedge our interest rate risk associated with these commitments. We are subject to loss if the timing of, or the actual amount of, the MBS securities differs significantly from the term and notional amount of the TBA security contracts we enter into.

RJ Ltd. is subject to foreign exchange risk primarily due to financial instruments denominated in U.S. dollars that may be impacted by fluctuation in foreign exchange rates. In order to mitigate this risk, RJ Ltd. enters into forward foreign exchange contracts. The fair value of these contracts is not significant. As of December 31, 2016 , forward contracts outstanding to buy and sell U.S. dollars totaled CDN $7 million and CDN $6 million , respectively. RJ Bank is also subject to foreign exchange risk related to its net investment in a Canadian subsidiary. See Note 12 for information regarding how RJ Bank utilizes net investment hedges to mitigate a significant portion of this risk.

RJ Bank has outstanding at any time a significant number of commitments to extend credit and other credit-related off-balance sheet financial instruments such as standby letters of credit and loan purchases, which then extend over varying periods of time. These arrangements are subject to strict credit control assessments and each customer’s credit worthiness is evaluated on a case-

57

by-case basis. Fixed-rate commitments are also subject to market risk resulting from fluctuations in interest rates and RJ Bank’s exposure is limited to the replacement value of those commitments.

RJ Bank’s commitments to extend credit and other credit-related off-balance sheet financial instruments outstanding are as follows:
December 31, 2016
(in thousands)
Standby letters of credit
$
34,164

Open-end consumer lines of credit (primarily SBL)
3,937,479

Commercial lines of credit
1,589,736

Unfunded loan commitments
430,707


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

NOTE 21 – EARNINGS PER SHARE

The following table presents the computation of basic and diluted earnings per share:
Three months ended December 31,
2016
2015
(in thousands, except per share amounts)
Income for basic earnings per common share:
Net income attributable to RJF
$
146,567

$
106,329

Less allocation of earnings and dividends to participating securities (1)
(310
)
(238
)
Net income attributable to RJF common shareholders
$
146,257

$
106,091

Income for diluted earnings per common share:


Net income attributable to RJF
$
146,567

$
106,329

Less allocation of earnings and dividends to participating securities (1)
(303
)
(234
)
Net income attributable to RJF common shareholders
$
146,264

$
106,095

Common shares:


Average common shares in basic computation
142,110

143,058

Dilutive effect of outstanding stock options and certain restricted stock units
3,565

3,083

Average common shares used in diluted computation
145,675

146,141

Earnings per common share:


Basic
$
1.03

$
0.74

Diluted
$
1.00

$
0.73

Stock options and certain restricted stock units excluded from weighted-average diluted common shares because their effect would be antidilutive
2,127

3,170


(1)
Represents dividends paid during the period to participating securities plus an allocation of undistributed earnings to participating securities.  Participating securities represent unvested restricted stock and certain restricted stock units and amounted to weighted-average shares of 310 thousand and 337 thousand for the three months ended December 31, 2016 and 2015 , respectively. Dividends paid to participating securities were insignificant in the three months ended December 31, 2016 and 2015 .  Undistributed earnings are allocated to participating securities based upon their right to share in earnings if all earnings for the period had been distributed.

Dividends per common share declared and paid are as follows:
Three months ended December 31,
2016
2015
Dividends per common share - declared
$
0.22

$
0.20

Dividends per common share - paid
$
0.20

$
0.18



58

NOTE 22 – SEGMENT INFORMATION

We currently operate through the following five business segments: “Private Client Group;” “Capital Markets;” “Asset Management;” RJ Bank; and our “Other” segment. The business segments are determined based upon factors such as the services provided and the distribution channels served and are consistent with how we assess performance and determine how to allocate our resources throughout our subsidiaries. For a further discussion of our business segments, see Note 28 on pages 196 - 198 of our 2016 Form 10-K.

Information concerning operations in these segments of business is as follows:
Three months ended December 31,
2016
2015
(in thousands)
Revenues:
Private Client Group
$
1,043,316

$
874,445

Capital Markets
236,982

228,978

Asset Management
114,096

100,238

RJ Bank
144,517

112,726

Other
15,459

4,400

Intersegment eliminations
(25,602
)
(19,930
)
Total revenues (1)
$
1,528,768

$
1,300,857

Income (loss) excluding noncontrolling interests and before provision for income taxes:
Private Client Group
$
73,358

$
69,140

Capital Markets
21,444

25,168

Asset Management
41,909

33,366

RJ Bank
104,121

65,865

Other
(34,453
)
(25,201
)
Pre-tax income excluding noncontrolling interests
206,379

168,338

Add: net income attributable to noncontrolling interests
1,136

1,735

Income including noncontrolling interests and before provision for income taxes
$
207,515

$
170,073


(1)
No individual client accounted for more than ten percent of total revenues in any of the periods presented.
Three months ended December 31,
2016
2015
(in thousands)
Net interest income (expense):
Private Client Group
$
30,387

$
22,926

Capital Markets
2,508

2,976

Asset Management
63

100

RJ Bank
134,272

106,188

Other
(20,414
)
(16,417
)
Net interest income
$
146,816

$
115,773


The following table presents our total assets on a segment basis:
December 31, 2016
September 30, 2016
(in thousands)
Total assets:
Private Client Group (1)
$
9,740,145

$
10,317,681

Capital Markets (2)
2,525,142

2,957,319

Asset Management
135,381

133,190

RJ Bank
17,732,326

16,613,391

Other
1,536,396

1,465,395

Total
$
31,669,390

$
31,486,976


(1)
Includes $275 million and $276 million of goodwill at December 31, 2016 and September 30, 2016 , respectively.

(2)
Includes $132 million and $133 million of goodwill at December 31, 2016 and September 30, 2016 , respectively.

59


We have operations in the United States, Canada and Europe. Substantially all long-lived assets are located in the United States.  Revenues and income before provision for income taxes and excluding noncontrolling interests, classified by major geographic areas in which they are earned, are as follows:
Three months ended December 31,
2016
2015
(in thousands)
Revenues:
United States
$
1,416,281

$
1,204,250

Canada
84,845

61,849

Europe
22,970

23,533

Other
4,672

11,225

Total
$
1,528,768

$
1,300,857

Pre-tax income (loss) excluding noncontrolling interests:

United States
$
214,205

$
161,859

Canada
(1,537
)
5,070

Europe
(2,688
)
(446
)
Other
(3,601
)
1,855

Total
$
206,379

$
168,338


Our total assets, classified by major geographic area in which they are held, are presented below:
December 31, 2016
September 30, 2016
(in thousands)
Total assets:
United States (1)
$
29,323,951

$
29,112,182

Canada (2)
2,261,577

2,275,056

Europe (3)
59,251

61,067

Other
24,611

38,671

Total
$
31,669,390

$
31,486,976


(1)    Includes $356 million of goodwill at December 31, 2016 and September 30, 2016 .

(2)    Includes $42 million and $43 million of goodwill at December 31, 2016 and September 30, 2016 , respectively.

(3)    Includes $9 million of goodwill at both December 31, 2016 and September 30, 2016 .

60

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

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

Factors Affecting “Forward-Looking Statements”

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

Executive overview

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

Quarter ended December 31, 2016 compared with the quarter ended December 31, 2015

We achieved net revenues of $1.49 billion for the quarter, a $219 million , or 17% , increase. Our pre-tax income amounted to $206 million , an increase of $38 million , or 23% . Our net income of $147 million reflects an increase of $40 million , or 38% , and our diluted earnings per share amounted to $1.00 , a 37% increase.

After excluding the $13 million of acquisition-related expenses we incurred during the current quarter, our adjusted pre-tax income amounted to $219 million , (1) an increase of 29%, and adjusted net income of $156 million (1) reflects an increase of 45%. Adjusted earnings per diluted share (a non-GAAP measure) amounted to $1.07, (1) a 47% increase.

Net revenues increased in each of our four operating segments. Total client assets under administration reached $616.9 billion at December 31, 2016 , a 23% increase over the prior year level. The increase in assets under administration is attributable to our acquisitions of Alex. Brown and 3Macs, strong financial advisor recruiting results and a high level of retention of our existing advisors, as well as an increase in equity markets. Non-interest expenses increased $181 million , or 16% . The increase primarily results from increased sales commission expense associated with increased securities commissions and fees revenues, administrative and incentive compensation expense, acquisition-related expenses, an increase in certain reserves for legal matters in the PCG segment, offset by the decrease in the loan loss provision resulting primarily from a net benefit from net recoveries

(1)
“Adjusted pre-tax income,” “adjusted net income,” and “adjusted earnings per diluted share” are each non-GAAP financial measures. Please see the “reconciliation of the GAAP measures to the non-GAAP measures” in this Item 2, for a reconciliation of our non-GAAP measures to the most directly comparable GAAP measures, and for other important disclosures.

61

and the reduction of corporate criticized loans. In addition, we benefited from an $18 million favorable impact to income tax expense related to the adoption of new accounting guidance associated with stock compensation (See Note 1 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information on the adoption of new accounting guidance).

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

•
Our Private Client Group segment generated net revenues of $1.04 billion , a 19% increase, while pre-tax income increased 6% to $73 million .  The increase in revenues is primarily attributable to an increase in securities commissions and fees, notably related to fee-based accounts. Client assets under administration of the Private Client Group increased 24% over the prior year, to $585.6 billion at December 31, 2016 . Client assets have been positively impacted by the acquisitions of Alex. Brown and 3Macs and an increase in the equity markets, as well as successful retention and recruiting of financial advisors. Non-interest expenses increased $164 million , or 20% , compared to the prior year quarter, primarily resulting from an increase in sales commission expense, administrative and incentive compensation and benefits expense as well as an increase in legal expenses, the majority of which is related to a single matter. The segment’s margin on net revenues decreased to 7.1% from 7.9% in the comparable prior year quarter.

•
The Capital Markets segment generated net revenues of $233 million , a 3% increase, while pre-tax income decreased $4 million , or 15% , to $21 million . Institutional commissions increased $9 million , or 7% . Equity underwriting fees increased $5 million , or 51% , offset by a decrease in merger and acquisition and advisory fee revenues of $4 million , or 12% . Trading profits approximated the prior year level. Non-interest expenses increased $12 million , or 6% , compared to the prior year quarter level, primarily resulting from an increase in administrative and incentive compensation and benefits expense.

•
Our Asset Management segment benefited from increased client assets, generating a 14% increase in net revenues to $114 million , while pre-tax income increased $9 million , or 26% , to $42 million . Advisory fee revenues from managed programs increased by $8 million , or 11% , compared to the prior year quarter as financial assets under management in managed programs increased 18% to $84.5 billion as of December 31, 2016 . Non-discretionary asset-based administration fee revenues increased by $4 million , or 21% , driven by an increase in assets held in such programs over the prior year level to $123.9 billion as of December 31, 2016 . Non-interest expenses increased $5 million , or 8% , compared to the prior year quarter primarily resulting from increased investment sub-advisory expense.

•
RJ Bank generated a 27% increase in net revenues to $138 million , while pre-tax income increased $38 million , or 58% , to $104 million . The increase in pre-tax income resulted primarily from an increase in net interest income and a decrease in the provision for loan losses. Net interest income increased due to growth in the average loans outstanding as well as an increase in the net interest margin. The decrease in the provision for loan losses as compared to the prior year quarter was primarily due to the current period reflecting a net benefit from sales, repayments and related recoveries of certain corporate criticized loans.

•
Activities in our Other segment reflect a pre-tax loss that is $9 million , or 37% , more than the prior year period. Total revenues in the segment increased $11 million , or 251% , due primarily to private equity valuation gains. Interest expense increased $6 million , or 31% , due to an increase in senior notes payable compared to the prior year period. Acquisition-related expenses of $13 million are reflected in this segment, a significant increase compared to the prior year period.

•
Our effective tax rate was 29.0% in the current quarter, down significantly from the 36.8% in the prior year quarter. The reduction in our effective tax rate compared to the prior year period was due to the favorable impact resulting from the adoption of new accounting guidance regarding the stock compensation, which decreased our effective tax rate by 9%. Under this new guidance, all tax effects related to share-based payments are recorded through tax expense in the periods during which the awards are exercised or vest, as applicable, instead of being recorded directly to equity.

The number and significance of possible regulatory changes that impact the businesses in which we operate continues to grow and evolve. In April 2016, the DOL issued its final regulation expanding the definition of who is deemed an “investment advice fiduciary” under ERISA as a result of giving investment advice to a plan, plan participant or beneficiary, as well as under the Internal Revenue Code for individual retirement accounts and non-ERISA plans. While the impact of these regulatory changes is more uncertain under the new administration, we continue to prepare for such changes in their current form. Refer to the “Fiduciary Duty Standard” section of Item 1 “Regulation” in our 2016 Form 10-K for further discussion of the regulation, its effective dates, and its potential impact.

62

Segments

We currently operate through four operating segments and our “Other” segment. The four operating segments are: Private Client Group (or “PCG”); Capital Markets; Asset Management; and RJ Bank. The Other segment captures principal capital and private equity activities as well as certain corporate overhead costs of RJF that are not allocated to operating segments, including the interest cost on our public debt and the acquisition and integration costs associated with our acquisitions including costs associated with our fiscal year 2016 acquisitions of Mummert, Alex. Brown, and 3Macs (see Note 3 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information).

The following table presents our consolidated and segment gross revenues, net revenues, and pre-tax income (loss), the latter excluding noncontrolling interests, for the periods indicated :
Three months ended December 31,
2016
2015
% change
($ in thousands)
Total company
Revenues
$
1,528,768

$
1,300,857

18
%
Net revenues
$
1,492,802

$
1,274,158

17
%
Pre-tax income excluding noncontrolling interests
$
206,379

$
168,338

23
%
Private Client Group


Revenues
$
1,043,316

$
874,445

19
%
Net revenues
$
1,040,089

$
872,346

19
%
Pre-tax income
$
73,358

$
69,140

6
%
Capital Markets


Revenues
$
236,982

$
228,978

3
%
Net revenues
$
233,016

$
226,167

3
%
Pre-tax income
$
21,444

$
25,168

(15
)%
Asset Management


Revenues
$
114,096

$
100,238

14
%
Net revenues
$
114,082

$
100,214

14
%
Pre-tax income
$
41,909

$
33,366

26
%
RJ Bank


Revenues
$
144,517

$
112,726

28
%
Net revenues
$
138,015

$
108,396

27
%
Pre-tax income
$
104,121

$
65,865

58
%
Other


Revenues
$
15,459

$
4,400

251
%
Net revenues
$
(9,643
)
$
(14,778
)
35
%
Pre-tax loss
$
(34,453
)
$
(25,201
)
(37
)%
Intersegment eliminations


Revenues
$
(25,602
)
$
(19,930
)
(28
)%
Net revenues
$
(22,757
)
$
(18,187
)
(25
)%


63

Reconciliation of the GAAP measures to the non-GAAP measures

We utilize certain non-GAAP calculations as additional measures to aid in, and enhance, the understanding of our financial results. We believe that the non-GAAP measures provide useful information by excluding certain material items that may not be indicative of our core operating results. We believe that these non-GAAP measures will allow for better evaluation of the operating performance of the business and facilitate a meaningful comparison of our results in the current period to those in prior and future periods. The non-GAAP financial information should be considered in addition to, not as a substitute for, measures of financial performance prepared in accordance with GAAP. In addition, our non-GAAP measures may not be comparable to similarly titled non-GAAP measures of other companies.

The non-GAAP adjustments are comprised entirely of acquisition-related expenses (associated with our acquisitions of Alex. Brown, 3Macs and Mummert) net of applicable taxes. Our acquisition-related expenses are incremental expenses arising solely as a result of the acquisition, which do not represent recurring costs within the fully integrated combined organization. See the footnotes below for further explanation of each item.

The following table provides a reconciliation of the GAAP measures to the non-GAAP measures for the period which includes non-GAAP adjustments:
Three months ended December 31,
2016
2015
($ in thousands, except per share amounts)
Net income attributable to RJF, Inc. - GAAP
$
146,567

$
106,329

Non-GAAP adjustments :
Acquisition-related expenses (1)
12,666

1,872

Tax effect of non-GAAP adjustments (2)
(3,671
)
(690
)
Non-GAAP adjustments, net of tax
8,995

1,182

Adjusted net income attributable to RJF, Inc. - non-GAAP basis
$
155,562

$
107,511

GAAP earnings per common share :
Basic
$
1.03

$
0.74

Diluted
$
1.00

$
0.73

Non-GAAP earnings per common share :
Adjusted basic (3)
$
1.09

$
0.75

Adjusted diluted (3)
$
1.07

$
0.73

Average equity - GAAP (4)
$
4,998,712

$
4,586,872

Average equity - non-GAAP (4) (5)
$
5,016,667

$
4,587,463

Return on equity for the quarter - GAAP (annualized)
11.7
%
9.3
%
Adjusted return on equity for the quarter - non-GAAP (annualized) (6)
12.4
%
9.4
%
Pre-tax income attributable to RJF, Inc. - GAAP
$
206,379

$
168,338

Total pre-tax non-GAAP adjustments (as detailed above)
12,666

1,872

Adjusted pre-tax income attributable to RJF, Inc. - non-GAAP
$
219,045

$
170,210

Pre-tax margin on net revenues - GAAP
13.8
%
13.2
%
Pre-tax margin on net revenues - non-GAAP (7)
14.7
%
13.4
%

(1)
The non-GAAP adjustment adds back to pre-tax income acquisition-related expenses incurred during each respective period associated with our acquisitions described above.
(2)
The non-GAAP adjustment reduces net income for the income tax effect of all the pre-tax non-GAAP adjustments, utilizing the year-to-date effective tax rate in such period to determine the current tax expense.
(3)
The non-GAAP earnings per share computations utilize the adjusted net income attributable to RJF, Inc. - non-GAAP basis as described in the table above, and the weighted-average common shares outstanding - basic, and diluted, as applicable, as presented in Note 21 of our Notes to Condensed Consolidated Financial Statements in this Form 10-Q.
(4)
For the quarter, computed by adding the total equity attributable to RJF as of the date indicated plus the prior quarter-end total, divided by two.
(5)
The calculation of non-GAAP average equity includes the impact on equity of the non-GAAP adjustments described in the table above, as applicable for each respective period.
(6)
Computed by utilizing the adjusted net income attributable to RJF non-GAAP and the average equity non-GAAP, for each respective period. See footnotes (3) and (4) above for the calculation of average equity non-GAAP.
(7)
Computed by dividing the adjusted pre-tax income attributable to RJF by net revenues (GAAP basis), for each respective period.

64

Net interest analysis

In both December 2016 and 2015, the Federal Reserve Bank announced increases in its benchmark short-term interest rate of 25 basis points. At the current low level of short-term rates, changes in short-term interest rates are likely to have a meaningful impact on our overall financial performance, as we have certain assets and liabilities, primarily held in our PCG and RJ Bank segments, which are subject to changes in interest rates. Given the relationship of our interest sensitive assets to liabilities held in each of these segments, increases in short-term interest rates, including the mid-December 2016 rate increase, result in an overall increase in our net earnings.  Gradual increases in short-term interest rates would have the most significant favorable impact on our PCG and RJ Bank segments (refer to the table in Item 3 - Interest Rate Risk in this Form 10-Q, which presents an analysis of RJ Bank’s estimated net interest income over a twelve month period based on instantaneous shifts in interest rates using the asset/liability model applied by RJ Bank).

Domestic client cash sweep balances of $46 billion increased $9 billion, or 24%, from the December 2015 balances of $37 billion. Our client cash sweep balances are deposited or invested in the RJBDP, client interest program and or money market funds, depending on the clients’ elections. We estimate that the mid-December 2016 short-term interest rate increase of 25 basis points had a favorable impact on this quarter’s results of $3 million and will have a favorable impact on our pre-tax income of an incremental $15 million to $20 million on a quarterly basis. This estimate is based on several assumptions. Such assumptions include: the amount and timing of increases in the earning/deposit rates on our clients’ cash balances, which is dependent on several factors including, but not limited to the competitive environment; client cash balance levels; the level of earning assets; and RJ Bank’s net interest margin.

If the Federal Reserve Bank was to reverse its December 2016 action and decrease the benchmark short-term interest rate, the impact on our net interest income would be an unfavorable reversal of the positive impact described above.


65

Quarter ended December 31, 2016 compared with the quarter ended December 31, 2015 – Net interest

The following table presents our consolidated average interest-earning asset and liability balances, interest income and expense balances, and the average yield/cost, for the periods indicated:
Three months ended December 31,
2016
2015
Average
balance (1)
Interest
inc./exp.
Average
yield/cost
Average
balance (1)
Interest
inc./exp.
Average
yield/cost
($ in thousands)
Interest-earning assets:
Margin balances
$
2,427,230

$
19,981

3.29
%
$
1,846,026

$
17,434

3.78
%
Assets segregated pursuant to regulations and other segregated assets
4,223,179

8,129

0.77
%
3,033,275

3,972

0.52
%
Bank loans, net of unearned income (2)
15,658,827

135,525

3.47
%
13,560,477

107,601

3.17
%
Available for sale securities
999,359

3,400

1.36
%
550,881

1,651

1.20
%
Trading instruments (3)
655,674

5,006

3.05
%
629,772

4,281

2.72
%
Stock loan
554,688

2,732

1.97
%
559,061

1,915

1.37
%
Loans to financial advisors (3)
833,760

3,308

1.59
%
507,016

1,899

1.50
%
Corporate cash and all other (3)
3,215,887

4,701

0.58
%
2,908,600

3,719

0.51
%
Total
$
28,568,604

$
182,782

2.56
%
$
23,595,108

$
142,472

2.42
%
Interest-bearing liabilities:






Brokerage client liabilities
$
4,919,792

$
676

0.05
%
$
3,980,712

$
227

0.02
%
Bank deposits (2)(4)
14,714,365

2,783

0.08
%
12,342,929

2,019

0.07
%
Trading instruments sold but not yet purchased (3)
291,616

1,328

1.82
%
265,875

1,191

1.79
%
Stock borrow
104,559

1,228

4.70
%
96,464

623

2.58
%
Other borrowings
768,178

3,719

1.94
%
744,591

2,765

1.49
%
Senior notes
1,680,417

24,699

5.88
%
1,149,253

19,091

6.64
%
Other (3)
219,954

1,533

2.79
%
240,454

783

1.30
%
Total
$
22,698,881

$
35,966

0.63
%
$
18,820,278

$
26,699

0.57
%
Net interest income

$
146,816



$
115,773



(1)
Represents average daily balance, unless otherwise noted.

(2)
See Results of Operations – RJ Bank in this MD&A for further information.

(3)
Average balance is calculated based on the average of the end of month balances for each month within the period.

(4)
Net of affiliate deposit balances and interest expense associated with affiliate deposits.

Net interest income increased $31 million , or 27% . Net interest income is earned primarily by our RJ Bank and PCG segments, which are discussed separately below.

The RJ Bank segment’s net interest income increased $28 million , or 26% , resulting from an increase in average loans outstanding and net interest margin as compared to the prior year quarter. Refer to the discussion of the specific components of RJ Bank’s net interest income in the RJ Bank section of this MD&A.

Net interest income in the PCG segment increased $7 million , or 33% . Average customer cash balances and the related segregated asset balances increased compared to the prior year quarter. In addition, as a result of the December 2016 Federal Reserve Bank increase in short-term interest rates, the net interest earned on these segregated asset balances increased. Average client margin balances outstanding increased compared to the prior year quarter but the favorable impact on net interest was partially offset by a decrease in client margin interest rates driven by increased average loan balances.

Interest income earned on the available for sale securities portfolio increased $2 million , or 106% , due to increased balances and yields. See Note 7 of our Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information on our available for sale securities.



66

Interest expense incurred on our senior notes increased by $6 million , or 29% , as the average outstanding balance of senior notes increased compared to the prior year quarter due to our July 2016 issuance of $800 million in senior notes, offset by the April 2016 maturity and repayment of $250 million of senior notes.

Results of Operations – Private Client Group

The following table presents consolidated financial information for our PCG segment for the periods indicated:
Three months ended December 31,
2016
% change
2015
($ in thousands)
Revenues:
Securities commissions and fees:
Equities
$
79,436

29
%
$
61,750

Fixed income products
28,952

25
%
23,103

Mutual funds
158,590

(2
)%
161,260

Fee-based accounts
472,899

27
%
372,176

Insurance and annuity products
95,351

—

95,669

New issue sales credits
17,991

71
%
10,524

Sub-total securities commissions and fees
853,219

18
%
724,482

Interest
33,614

34
%
25,025

Account and service fees:

Client account and service fees
72,914

53
%
47,778

Mutual fund and annuity service fees
68,726

11
%
62,028

Client transaction fees
6,009

19
%
5,070

Correspondent clearing fees
638

—

638

Account and service fees – all other
139

90
%
73

Sub-total account and service fees
148,426

28
%
115,587

Other
8,057

(14
)%
9,351

Total revenues
1,043,316

19
%
874,445

Interest expense
(3,227
)
54
%
(2,099
)
Net revenues
1,040,089

19
%
872,346

Non-interest expenses:



Sales commissions
634,512

19
%
531,925

Admin & incentive compensation and benefit costs
171,889

19
%
143,988

Communications and information processing
44,017

(1
)%
44,647

Occupancy and equipment
35,488

13
%
31,425

Business development
23,450

(10
)%
26,170

Clearance and other
57,375

129
%
25,051

Total non-interest expenses
966,731

20
%
803,206

Pre-tax income
$
73,358

6
%
$
69,140

Margin on net revenues
7.1
%

7.9
%

For an overview of our PCG segment operations, refer to the information presented in Item 1, Business, on pages 4 - 5 of our 2016 Form 10-K, as well as the description of the key factors impacting our PCG results of operations discussed on pages 44 - 47 of our 2016 Form 10-K.


67

PCG client asset balances are as follows as of the dates indicated:
December 31,
2016
September 30,
2016
December 31,
2015
September 30,
2015
% Change Dec. 2016 vs. Sept. 2016
% Change Dec. 2016 vs. Dec. 2015
(in billions)
Total PCG assets under administration
$
585.6

$
574.1

$
473.1

$
453.3

2
%
24
%
PCG assets in fee-based accounts
$
240.2

$
231.0

$
190.0

$
179.4

4
%
26
%

Total PCG assets under administration increased 24% over December 31, 2015 , resulting from our third quarter 2016 acquisitions of Alex. Brown and 3Macs, which resulted in a combined $50 billion of client asset inflows as of their respective acquisition closing dates, net client inflows attributable to strong financial advisor recruiting results and high levels of retention of our existing financial advisors as well as market appreciation. Total PCG assets in fee-based accounts increased 26% compared to December 31, 2015 . Increased client assets under administration typically result in higher fee-based account revenues and mutual fund and annuity service fees. In periods where equity markets improve, assets under administration and client activity generally increase, thereby having a favorable impact on financial advisor productivity. Generally, assets under administration, client activity, and financial advisor productivity decline in periods where equity markets reflect downward trends. Higher client cash balances generally lead to increased interest income and account fee revenues, depending upon spreads realized in our client interest program and RJBDP.

The following table presents a summary of PCG financial advisors as of the dates indicated:
December 31, 2016 (1)
September 30, 2016
December 31, 2015
Employees
2,985

3,098

2,771

Independent Contractors
4,143

4,048

3,916

Total advisors
7,128

7,146

6,687


(1)
During the period ended December 31, 2016 , we refined the criteria to determine our financial advisor population, which resulted in a decrease in our previously reported counts of approximately 100 advisors as of our date of adoption. The impact of the change in our methodology did not have a significant impact on the prior periods, and thus we have not revised the number of financial advisors reported in prior periods.

Quarter ended December 31, 2016 compared with the quarter ended December 31, 2015 – Private Client Group

Net revenues increased $168 million , or 19% , to $1.04 billion . Pre-tax income increased $4 million , or 6% , to $73 million . PCG’s pre-tax margin on net revenues decreased to 7.1% as compared to the prior year quarter’s 7.9% .

Securities commissions and fees increased $129 million , or 18% .  A significant portion of this increase results from the Alex. Brown and 3Macs acquisitions completed late in fiscal year 2016. Revenues earned on fee-based accounts increased $101 million , or 27% , commissions on equity products increased $18 million , or 29% , new issue sales credits increased $7 million , or 71% , and commissions on fixed income products increased $6 million , or 25% . Offsetting these increases, commissions on mutual funds decreased $3 million , or 2% . Client assets under administration increased to $585.6 billion , an increase of $112.5 billion , or 24% , compared to December 31, 2015 . The year over year increase in client assets was driven not only by the Alex. Brown and 3Macs acquisitions but also by positive net inflows generated by financial advisor retention and successful recruiting results as well as market appreciation.

Total account and service fees increased $33 million , or 28% . The majority of this increase was due to client account and service fees, which increased $25 million , or 53% , primarily due to an increase in RJBDP fees resulting from increased average balances in the program in addition to a full quarter’s impact of the December 2015 interest rate increase of 25 basis points and, to a lesser extent, the mid-December 2016 interest rate increase of 25 basis points.

Total segment revenues increased 19% . The portion of total segment revenues that we consider to be recurring is approximately 78% at December 31, 2016 , an increase from 76% at December 31, 2015 .  Recurring commission and fee revenues include asset-based fees, trailing commissions from mutual funds and variable annuities/insurance products, mutual fund and annuity service fees, fees earned on funds in our multi-bank sweep program, and interest. Assets in fee-based accounts at December 31, 2016 increased compared to the prior year by a percentage greater than the percentage increases for total PCG client assets as clients continue to elect fee-based alternatives versus traditional transaction-based accounts. At December 31, 2016, such assets were $240.2 billion , an increase of 26% compared to the $190 billion as of December 31, 2015.


68

Net interest income in the PCG segment increased $7 million , or 33% . Average customer cash balances and the related segregated asset balances increased compared to the prior year quarter. In addition to a full quarter’s impact of the December 2015 interest rate increase of 25 basis points and, to a lesser extent, the mid-December 2016 interest rate increase of 25 basis points, the net interest earned on these segregated asset balances also increased. Average client margin interest rates decreased compared to the prior year quarter but the negative impact on net interest was partially offset by an increase in average balances outstanding.
Non-interest expenses increased $164 million , or 20% .  Sales commission expense increased $103 million , or 19% , in line with the 18% increase in commission and fee revenue. Administrative and incentive compensation and benefits expense increased $28 million , or 19% , resulting from annual increases in salary expenses, increases in employee benefit plan costs and additional staffing levels, primarily in PCG operations and information technology functions, to support our continued growth. Occupancy and equipment expenses increased $4 million , or 13% , due to additional office related expenses relating to the acquisition of Alex. Brown. Clearance and other expense increased $32 million , or 129% , primarily resulting from an increase in legal expense, most of which is related a single matter. Offsetting the increases, business development expense decreased $3 million , or 10% , due to lower incoming account transfer fee expenses as well as decreases in conference and other travel-related expenses.

Results of Operations – Capital Markets

The following table presents consolidated financial information for our Capital Markets segment for the periods indicated:
Three months ended December 31,
2016
% change
2015
($ in thousands)
Revenues:
Institutional sales commissions:
Equity
$
64,319

8
%
$
59,390

Fixed income
75,374

5
%
71,633

Sub-total institutional sales commissions
139,693

7
%
131,023

Equity underwriting fees
14,509

51
%
9,622

Merger & acquisition and advisory fees
27,174

(12
)%
30,790

Fixed income investment banking
8,478

(1
)%
8,599

Tax credit funds syndication fees
11,126

33
%
8,389

Investment advisory fees
5,223

(35
)%
7,985

Net trading profit
19,319

(7
)%
20,790

Interest
6,474

12
%
5,787

Other
4,986

(17
)%
5,993

Total revenues
236,982

3
%
228,978

Interest expense
(3,966
)
41
%
(2,811
)
Net revenues
233,016

3
%
226,167

Non-interest expenses:



Sales commissions
50,973

3
%
49,569

Admin & incentive compensation and benefit costs
102,867

7
%
96,276

Communications and information processing
17,647

2
%
17,386

Occupancy and equipment
8,455

1
%
8,375

Business development
9,602

(12
)%
10,856

Losses and non-interest expenses of real estate partnerships held by consolidated VIEs
1,796

134
%
769

Clearance and all other
22,337

24
%
18,057

Total non-interest expenses
213,677

6
%
201,288

Income before taxes and including noncontrolling interests
19,339

(22
)%
24,879

Noncontrolling interests
(2,105
)
(289
)
Pre-tax income excluding noncontrolling interests
$
21,444

(15
)%
$
25,168



69

For an overview of our Capital Markets segment operations, refer to the information presented in Item 1, Business, on pages 6 - 7 of our 2016 Form 10-K, as well as the description of the key factors impacting our Capital Markets segment results of operations discussed on pages 48 - 50 of our 2016 Form 10-K.

Quarter ended December 31, 2016 compared with the quarter ended December 31, 2015 – Capital Markets

Net revenues increased $7 million , or 3% , to $233 million . Pre-tax income decreased $4 million , or 15% , to $21 million .

Commission revenues increased $9 million , or 7% . Institutional equity sales commissions increased $5 million , or 8% , resulting from improved equity market conditions during the current period. Institutional fixed income commissions increased $4 million , or 5% , in the volatile interest rate environment following the election in November.

Equity underwriting fees increased $5 million , or 51% , with the increase primarily occurring in our domestic operations. The total number of both lead-managed and co-managed underwritings increased over the prior period level. The revenues from our Canadian operations continued to be subdued as market conditions in Canada remain sluggish, continuing to reflect the adverse market conditions which existed throughout the prior year period.

We experienced continued solid performance in our public finance underwritings in the current period, which impact both our securities commissions and fee revenues and our investment banking revenues. The combined revenues resulting from these public finance business activities approximated the prior period level.

Our tax credit fund syndication business continues to perform well with an increase in the number of commitments and closings, generating a $3 million , or 33% , increase in fees.

Merger and acquisition and advisory fees decreased $4 million , or 12% , due to lower volume of merger and acquisition activity in the current quarter versus the prior year quarter. Merger and acquisition and advisory fees are a volatile revenue source in general, and in the current quarter, the number of merger and acquisition transactions was low.

Our net trading profit decreased $1 million , or 7% , reflecting the continuation of solid overall results.

Non-interest expenses increased $12 million , or 6% .  Administrative and incentive compensation and benefits expenses increased $7 million , or 7% , as compared to the prior year period primarily resulting from higher costs associated with personnel. Our Clearance and all other expenses increased $4 million , or 24% , primarily due to a higher volume of trades, as reflected by the increase in institutional sales commissions.


70

Results of Operations – Asset Management

The following table presents consolidated financial information for our Asset Management segment for the periods indicated:
Three months ended December 31,
2016
% change
2015
($ in thousands)
Revenues:
Investment advisory and related administrative fees:
Managed programs
$
76,308

11
%
$
68,513

Non-discretionary asset-based administration
21,194

21
%
17,559

Sub-total investment advisory and related administrative fees
97,502

13
%
86,072

Other
16,594

17
%
14,166

Total revenues
114,096

14
%
100,238

Expenses:



Admin & incentive compensation and benefit costs
27,682

—

27,616

Communications and information processing
6,671

—

6,659

Occupancy and equipment
1,160

3
%
1,128

Business development
2,313

(15
)%
2,729

Investment sub-advisory fees
17,384

27
%
13,738

Other
15,770

12
%
14,031

Total expenses
70,980

8
%
65,901

Income before taxes and including noncontrolling interests
43,116

26
%
34,337

Noncontrolling interests
1,207

971

Pre-tax income excluding noncontrolling interests
$
41,909

26
%
$
33,366

For an overview of our Asset Management segment operations, refer to the information presented in Item 1, Business, on page 8 of our 2016 Form 10-K, as well as the description of the key factors impacting our Asset Management segment results of operations discussed on pages 51 - 53 of our 2016 Form 10-K.

Managed Programs

As of December 31, 2016 , approximately 80% of investment advisory and related administrative fees recorded in this segment are earned from assets held in managed programs.  Of these revenues, approximately 70% of such fees recorded in each quarter are determined based on balances at the beginning of a quarter, approximately 15% are based on balances at the end of the quarter and the remaining 15% are computed based on average assets throughout the quarter.

The following table reflects fee-billable financial assets under management in managed programs at the dates indicated:
December 31,
2016
September 30, 2016
December 31, 2015
September 30,
2015
(in millions)
Financial assets under management:
Eagle Asset Management, Inc. (1)
$
27,787

$
27,235

$
26,220

$
25,692

Freedom accounts (2)
25,291

24,136

21,254

20,188

Raymond James Consulting Services (3)
19,660

18,883

14,201

13,484

Unified Managed Accounts (“UMA”) (4)
10,639

10,389

9,070

8,613

All other
1,080

1,086

1,094

1,116

Sub-total financial assets under management
84,457

81,729

71,839

69,093

Less: Assets managed for affiliated entities
(4,805
)
(4,744
)
(4,024
)
(3,916
)
Total financial assets under management
$
79,652

$
76,985

$
67,815

$
65,177


The text of the footnotes in the above table are on the following page.

71

The text of the footnotes to the table on the previous page are as follows:

(1)
Accounts by which Eagle portfolio managers are engaged to manage clients’ assets with investment decisions made by the Eagle portfolio manager.

(2)
Accounts that provide the client a choice between mutual funds, exchange traded funds or a combination of both with investment decisions made by an in-house investment committee.

(3)
Accounts by which in-house or third-party portfolio managers are engaged to manage clients’ assets with investment decisions made by such portfolio manager.

(4)
Accounts that provide the client with the ability to combine separately managed accounts, mutual funds and exchange traded funds all in one aggregate account with investment decisions made by an in-house investment committee.

The following table summarizes the activity impacting the total financial assets under management in managed programs (including activity in assets managed for affiliated entities) for the periods indicated:
Three months ended December 31,
2016
2015
(in millions)
Financial assets under management at beginning of period
$
81,729

$
69,093

Net inflows of client assets
1,984

738

Net market appreciation in asset values
744

2,008

Financial assets under management at end of period
$
84,457

$
71,839


Non-discretionary asset-based programs

As of December 31, 2016 , approximately 20% of investment advisory and related administrative fee revenues recorded in this segment are earned for administrative services on assets held in certain non-discretionary asset-based programs. These assets totaled $123.9 billion , $119.3 billion , and $96.4 billion as of December 31, 2016 , September 30, 2016 and December 31, 2015, respectively. The majority of administrative fees associated with these programs are determined based on balances at the beginning of the quarter, and are reflected within “non-discretionary asset-based administration” revenues in this segment’s results of operations.

Quarter ended December 31, 2016 compared with the quarter ended December 31, 2015 – Asset Management

Revenues increased $14 million , or 14% , to $114 million . Pre-tax income increased $9 million , or 26% , to $42 million .

Total investment advisory and related administrative fee revenues increased $11 million , or 13% . Advisory fee revenues arising from managed programs increased $8 million , or 11% , and fee revenues on non-discretionary asset-based administration activities increased $4 million , or 21% , both resulting from the increases in assets held by such programs over the prior year level. Assets under management were positively impacted by the acquisition of Alex. Brown in addition to financial advisor recruiting.

Other income increased $2 million , or 17% , in part resulting from Raymond James Trust, N. A. (“RJ Trust”) which generated an increase in trust fee income arising from their 33% increase in trust assets from the prior year level to $5.11 billion as of December 31, 2016 .

Expenses increased by approximately $5 million , or 8% , primarily resulting from a $4 million , or 27% , increase in investment sub-advisory fees resulting from the increase in assets in sub-advised managed programs.


72

Results of Operations – RJ Bank

The following table presents consolidated financial information for RJ Bank for the periods indicated:
Three months ended December 31,
2016
% change
2015
($ in thousands)
Revenues:
Interest income
$
140,774

27
%
$
110,518

Interest expense
(6,502
)
50
%
(4,330
)
Net interest income
134,272

26
%
106,188

Other income
3,743

70
%
2,208

Net revenues
138,015

27
%
108,396

Non-interest expenses:



Compensation and benefits
7,724

12
%
6,892

Communications and information processing
1,867

4
%
1,800

Occupancy and equipment
351

18
%
297

Loan loss provision (benefit)
(1,040
)
(107
)%
13,910

FDIC insurance premiums
4,260

19
%
3,581

Affiliate deposit account servicing fees
11,653

16
%
10,040

Other
9,079

51
%
6,011

Total non-interest expenses
33,894

(20
)%
42,531

Pre-tax income
$
104,121

58
%
$
65,865


For an overview of our RJ Bank segment operations, refer to the information presented in Item 1, Business, on page 9 of our 2016 Form 10-K, as well as the description of the key factors impacting our RJ Bank segment results of operations discussed on page 54 of our 2016 Form 10-K.

73


The following tables present certain credit quality trends for loans held by RJ Bank:
Three months ended December 31,
2016
2015
(in thousands)
Net loan (charge-offs)/recoveries:
C&I loans
$
(3,389
)
$
(267
)
CRE loans
5,013

—

Residential mortgage loans
(22
)
(57
)
SBL
—

1

Total
$
1,602

$
(323
)

December 31, 2016
September 30, 2016
(in thousands)
Allowance for loan losses:
Loans held for investment:


C&I loans
$
132,905

$
137,701

CRE construction loans
2,103

1,614

CRE loans
39,532

36,533

Tax-exempt loans
4,493

4,100

Residential mortgage loans
13,639

12,664

SBL
5,008

4,766

Total
$
197,680

$
197,378

Nonperforming assets:


Nonperforming loans:


C&I loans
$
24,762

$
35,194

CRE loans
—

4,230

Residential mortgage loans:
Residential first mortgage
39,672

41,746

Home equity loans/lines
36

37

Total nonperforming loans
64,470

81,207

Other real estate owned:


Residential:


Residential first mortgage
4,657

4,497

Total other real estate owned
4,657

4,497

Total nonperforming assets
$
69,127

$
85,704

Total nonperforming assets as a % of RJ Bank total assets
0.38
%
0.50
%
Total loans:
Loans held for sale, net (1)
$
202,201

$
214,286

Loans held for investment:

C&I loans
7,551,840

7,470,373

CRE construction loans
132,560

122,718

CRE loans
2,666,518

2,554,071

Tax-exempt loans
859,038

740,944

Residential mortgage loans
2,653,537

2,441,569

SBL
2,001,595

1,904,827

Net unearned income and deferred expenses
(40,857
)
(40,675
)
Total loans held for investment (1)
15,824,231

15,193,827

Total loans (1)
$
16,026,432

$
15,408,113


(1)
Net of unearned income and deferred expenses.


74

The following table presents RJ Bank’s allowance for loan losses by loan category:
December 31, 2016
September 30, 2016
Allowance
Loan category as a % of total loans receivable
Allowance
Loan category as a % of total loans receivable
Domestic loans:
($ in thousands)
Loans held for sale
$
—

1
%
$
—

1
%
C&I loans
116,856

40
%
123,459

42
%
CRE construction loans
2,103

1
%
1,452

1
%
CRE loans
33,025

14
%
30,809

14
%
Tax-exempt loans
4,493

5
%
4,100

5
%
Residential mortgage loans
13,630

17
%
12,655

16
%
SBL
5,006

13
%
4,764

12
%
Foreign loans
22,567

9
%
20,139

9
%
Total
$
197,680

100
%
$
197,378

100
%


Information on foreign assets held by RJ Bank:

Changes in the allowance for loan losses with respect to loans RJ Bank has made to borrowers who are not domiciled in the U.S. are as follows:
Three months ended December 31,
2016
2015
(in thousands)
Allowance for loan losses attributable to foreign loans, beginning of period:
$
20,139

$
26,174

Provision (benefit) for loan losses - foreign loans
2,688

(3,731
)
Net charge-offs - foreign loans
—

—

Foreign currency translation adjustment
(260
)
(385
)
Allowance for loan losses attributable to foreign loans, end of period
$
22,567

$
22,058


Cross-border outstandings represent loans (including accrued interest), interest-bearing deposits with other banks, and any other monetary assets which are cross-border claims according to bank regulatory guidelines for the country exposure report. The following table sets forth the country where RJ Bank’s total cross-border outstandings exceeded 1% of total RJF assets as of each respective period:
Deposits with other banks
C&I loans
CRE loans
Residential
mortgage loans
SBL
Total cross-border outstandings (1)
(in thousands)
December 31, 2016





Canada
$
86,482

$
415,904

$
125,360

$
535

$
307

$
628,588

September 30, 2016





Canada
$
36,843

$
367,258

$
109,577

$
540

$
311

$
514,529


(1)
Excludes any hedged, non-U.S. currency amounts.


75

Quarter ended December 31, 2016 compared with the quarter ended December 31, 2015 – RJ Bank

Net revenues increased $30 million , or 27% , to $138 million . Pre-tax income increased $38 million , or 58% , to $104 million .

The increase in pre-tax income was primarily attributable to a $30 million , or 27% , increase in net revenues, and a decrease of $15 million , or 107% , in the provision for loan losses, offset by a $6 million , or 22% , increase in non-interest expenses (excluding provision for loan losses). The increase in net revenues was attributable to a $28 million increase in net interest income and a $2 million increase in other income.
The $28 million increase in net interest income was the result of a $3 billion increase in average interest-earning banking assets and an increase in the net interest margin. The increase in average interest-earning banking assets was driven by a $2.1 billion increase in average loans and an increase of $887 million in average cash and investments. The increase in average loans was comprised of a $ 1.2 billion , or 12% , increase in average corporate loans, a $517 million , or 25% , increase in average residential mortgage loans, and a $396 million , or 25% , increase in average SBL balances. The net interest margin increased to 3.06% from 2.90% due to an increase in the average interest-earning banking assets yield, which was partially offset by an increase in total cost of funds. The increase in the yield of the average interest-earning banking assets to 3.21% from 3.02% was the result of an increase in the loan portfolio yield to 3.47% from 3.17% , partially offset by the impact of the increase in lower-yielding average cash balances. The increase in the loan portfolio yield was due to significant corporate loan growth, higher corporate loan fee income and to a lesser extent an increase in interest rates. The total cost of funds increased to 0.16% from 0.13% due to an increase in deposit and borrowing costs, which includes additional expense from our interest rate hedging activities. Borrowing costs increased to 1.94% from 1.44%.

Corresponding to the increase in average interest-earning banking assets, average interest-bearing banking liabilities increased $2.9 billion to $16 billion .

The decrease in the provision for loan losses as compared to the prior year was primarily due to the current period reflecting a net benefit from the resolution of certain corporate criticized loans. Also, the prior period reflected an additional $5 million provision for criticized loans outstanding in the energy sector, which did not recur in the current period. The provision for loan losses also reflects improved credit characteristics such as the continued decline in residential mortgage loan delinquencies and nonperforming loans.
Non-interest expenses (excluding provision for loan losses) increased $6 million as compared to the prior year quarter. This increase included a $2 million increase in affiliate deposit account servicing fees due to an increase in client accounts and a $1 million increase in FDIC insurance premiums resulting from the increase in deposit balances. Other increases in non-interest expense included a $1 million increase in compensation and benefits resulting from annual salary increases and additional staffing levels, primarily in mortgage banking operations, a $1 million increase in expense related to the reserve for unfunded lending commitments, and a $1 million increase in SBL affiliate fees due to increased SBL balances.

76

The following table presents average balance, interest income and expense, the related interest yields and rates, and interest spreads for RJ Bank for the periods indicated:
Three months ended December 31,
2016
2015
Average
balance
Interest
inc./exp.
Average
yield/
cost
Average
balance
Interest
inc./exp.
Average
yield/
cost
($ in thousands)
Interest-earning banking assets:
Loans, net of unearned income (1)

Loans held for sale
$
180,052

$
1,261

2.81
%
$
164,979

$
1,162

3.03
%
Loans held for investment:
Domestic:
C&I loans
6,388,176

60,409

3.72
%
6,080,594

52,929

3.41
%
CRE construction loans
116,665

1,357

4.55
%
128,730

1,422

4.32
%
CRE loans
2,189,731

19,394

3.47
%
1,773,571

11,481

2.53
%
Tax-exempt loans (2)
808,160

5,246

3.99
%
516,615

3,434

4.09
%
Residential mortgage loans
2,556,809

18,546

2.84
%
2,040,051

14,969

2.87
%
SBL
1,950,749

15,379

3.08
%
1,553,566

11,235

2.83
%
Foreign:
C&I loans
1,089,301

10,897

3.91
%
936,645

8,297

3.47
%
CRE construction loans
15,841

148

3.66
%
41,491

326

3.07
%
CRE loans
360,183

2,860

3.11
%
320,160

2,312

2.83
%
Residential mortgage loans
2,265

18

3.15
%
2,152

16

2.90
%
SBL
895

10

4.53
%
1,923

18

3.66
%
Total loans, net
15,658,827

135,525

3.47
%
13,560,477

107,601

3.17
%
Agency MBS
821,904

2,732

1.33
%
340,367

1,095

1.29
%
Non-agency CMOs
50,955

345

2.71
%
74,545

464

2.49
%
Cash
905,877

1,244

0.54
%
511,418

336

0.26
%
FHLB stock, Federal Reserve Bank of Atlanta (“FRB”) stock, and other
171,818

928

2.14
%
137,608

1,022

2.95
%
Total interest-earning banking assets
17,609,381

$
140,774

3.21
%
14,624,415

$
110,518

3.02
%
Non-interest-earning banking assets:






Allowance for loan losses
(196,895
)


(172,883
)


Unrealized loss on available for sale securities
(5,138
)


(3,905
)


Other assets
358,673



253,736



Total non-interest-earning banking assets
156,640



76,948



Total banking assets
$
17,766,021



$
14,701,363



Interest-bearing banking liabilities:






Deposits:






Certificates of deposit
$
303,243

$
1,135

1.48
%
$
359,583

$
1,448

1.60
%
Money market, savings, and NOW accounts
14,888,763

2,156

0.06
%
11,983,346

751

0.02
%
FHLB advances and other
796,174

3,211

1.58
%
743,044

2,131

1.12
%
Total interest-bearing banking liabilities
15,988,180

$
6,502

0.16
%
13,085,973

$
4,330

0.13
%
Non-interest-bearing banking liabilities
86,936



69,642



Total banking liabilities
16,075,116



13,155,615



Total banking shareholder’s equity
1,690,905



1,545,748



Total banking liabilities and shareholder’s equity
$
17,766,021



$
14,701,363



Excess of interest-earning banking assets over interest-bearing banking liabilities/net interest income
$
1,621,201

$
134,272

$
1,538,442

$
106,188

Bank net interest:




Spread


3.05
%


2.89
%
Margin (net yield on interest-earning banking assets)


3.06
%


2.90
%
Ratio of interest-earning banking assets to interest-bearing banking liabilities


110.14
%

111.76
%
Annualized return on average:




Total banking assets


1.52
%


1.20
%
Total banking shareholder’s equity


15.99
%


11.40
%
Average equity to average total banking assets


9.52
%


10.51
%
The text of the footnotes in the above table are on the following page .

77

Explanation of the footnotes to the table on the preceding page:

(1)
Nonaccrual loans are included in the average loan balances. Payment or income received on corporate nonaccrual loans are applied to principal. Income on other nonaccrual loans is recognized on a cash basis. Fee income on loans included in interest income for the three months ended December 31, 2016 and 2015 was $9 million and $4 million, respectively.

(2)
The yield is presented on a tax-equivalent basis utilizing the federal statutory tax rate of 35%.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning banking assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on RJ Bank’s interest-earning assets and the interest incurred on its interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous year’s volume. Changes applicable to both volume and rate have been allocated proportionately.
Three months ended December 31,
2016 compared to 2015
Increase (decrease) due to
Volume
Rate
Total
(in thousands)
Interest revenue:
Interest-earning banking assets:
Loans, net of unearned income:
Loans held for sale
$
106

$
(7
)
$
99

Loans held for investment:

Domestic:
C&I loans
2,677

4,803

7,480

CRE construction loans
(133
)
68

(65
)
CRE loans
2,694

5,219

7,913

Tax-exempt loans
1,938

(126
)
1,812

Residential mortgage loans
3,792

(215
)
3,577

SBL
2,872

1,272

4,144

Foreign:
C&I loans
1,352

1,248

2,600

CRE construction loans
(202
)
24

(178
)
CRE loans
289

259

548

Residential mortgage loans
1

1

2

SBL
(10
)
2

(8
)
Agency MBS
1,549

88

1,637

Non-agency CMOs
(147
)
28

(119
)
Cash
259

649

908

FHLB stock, FRB stock, and other
254

(348
)
(94
)
Total interest-earning banking assets
17,291

12,965

30,256

Interest expense:



Interest-bearing banking liabilities:



Deposits:



Certificates of deposit
(227
)
(86
)
(313
)
Money market, savings and NOW accounts
182

1,223

1,405

FHLB advances and other
152

928

1,080

Total interest-bearing banking liabilities
107

2,065

2,172

Change in net interest income
$
17,184

$
10,900

$
28,084










78

Results of Operations – Other

The following table presents consolidated financial information for the Other segment for the periods indicated:

Three months ended December 31,
2016
% change
2015
($ in thousands)
Revenues:
Interest income
$
4,688

70
%
$
2,761

Investment advisory fees
484

(4
)%
505

Other
10,287

807
%
1,134

Total revenues
15,459

251
%
4,400

Interest expense
(25,102
)
(31
)%
(19,178
)
Net revenues
(9,643
)
35
%
(14,778
)
Non-interest expenses:
Compensation and other
10,109

35
%
7,499

Acquisition-related expenses
12,666

577
%
1,872

Total non-interest expenses
22,775

143
%
9,371

Loss before taxes and including noncontrolling interests
(32,418
)
(34
)%
(24,149
)
Noncontrolling interests
2,035

1,052

Pre-tax loss excluding noncontrolling interests
$
(34,453
)
(37
)%
$
(25,201
)

This segment includes our principal capital and private equity activities as well as certain corporate overhead costs of RJF including the interest cost on our public debt, and the acquisition costs associated with certain acquisitions including acquisition costs associated with our fiscal year 2016 acquisitions of Mummert, Alex. Brown, and 3Macs (see Note 3 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information).

Quarter ended December 31, 2016 compared with the quarter ended December 31, 2015 – Other

The pre-tax loss generated by this segment increased by approximately $9 million , or 37% .

Total revenues in this segment increased $11 million , or 251% , most of which is comprised of an increase in our other revenues of $9 million , or 807% . Other revenues include gains or losses (both realized and unrealized) arising from our private equity portfolio, which increased $9 million compared to the prior year period.

Interest expense incurred on our senior notes increased by $6 million , or 29% , as the outstanding balance increased compared to the prior year due to the July 2016 issuances of $800 million in senior notes, offset by the April 2016 maturity and repayment of $250 million of senior notes.

The acquisition-related expenses (including legal and travel-related expense) in the current period pertain to certain incremental expenses incurred in connection with our fiscal year 2016 acquisitions of Alex. Brown and 3Macs. See Note 3 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding the components of these expenses.

The portion of revenue attributable to noncontrolling interests increased $1 million as a larger portion of the gains generated in the private equity portfolio in the current period were attributable to others.


79

Certain statistical disclosures by bank holding companies

As a financial holding company, we are required to provide certain statistical disclosures by bank holding companies pursuant to the Securities and Exchange Commission’s Industry Guide 3.  Certain of those disclosures are as follows for the periods indicated:
For the three months ended December 31,
2016
2015 (1)
RJF return on assets (2)
1.9%
1.6%
RJF return on equity (3)
11.7%
9.3%
Equity to assets (4)
16.3%
17.9%
Dividend payout ratio (5)
22.0%
27.4%
(1)
Recomputed after the impact of the deconsolidation of certain VIEs (see Note 1 of the Notes to Condensed Consolidated Financial Statements for additional information regarding the deconsolidation).

(2)
Computed as net income attributable to RJF for the period indicated, divided by average assets (the sum of total assets at the beginning and end of the period, divided by two) the product of which is then annualized.

(3)
Computed by utilizing the net income attributable to RJF for the period indicated, divided by the average equity attributable to RJF (computed by adding the total equity attributable to RJF as of the date indicated plus the prior quarter-end total, divided by two). The result is then annualized.

(4)
Computed as average equity (the sum of total equity at the beginning and end of the period, divided by two), divided by average assets (the sum of total assets at the beginning and end of the period, divided by two).

(5)
Computed as dividends declared per common share during the period as a percentage of diluted earnings per common share.

Refer to the RJ Bank section of this MD&A, various sections within Item 3 in this Form 10-Q, and the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, for the other required disclosures.

Liquidity and Capital Resources

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

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

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

Cash provided by operating activities during the three months ended December 31, 2016 was $808 million . Cash generated by successful operating results over the period resulted in a $236 million increase in cash.

Increases in cash from operations include:
•
A $1.02 billion decrease in assets segregated pursuant to regulations and other segregated assets, primarily resulting from the decrease in client cash balances described below.
•
Securities trading inventories decreased $193 million .
•
Securities purchased under agreements to resell, net of securities sold under agreements to repurchase, decreased $122 million .
•
A decrease in our brokerage client receivables and other receivables of $91 million .
•
Prepaid expenses and other assets decreased $86 million .
•
Proceeds from sales and securitizations of loans held for sale, net of purchases and originations, resulted in a $35 million increase.

80


Offsetting these, decreases in cash used in operations resulted from:
•
A decrease of $508 million in brokerage client payables and other accounts payable, in part, reflecting a decrease in client cash balances in our client interest program.
•
Stock loan, net of stock borrowed decreased $233 million .
•
Accrued compensation, commissions and benefits decreased $218 million , primarily resulting from the annual payment of certain incentive awards.
•
Loans to financial advisors, net of repayments increased resulting in the use of $14 million in cash to fund loans as a result of strong recruiting results.

Investing activities resulted in the use of $1.11 billion of cash during the three months ended December 31, 2016 .

The primary investing activities were:
•
An increase in bank loans used $728 million .
•
Purchases of available for sale investments held at RJ Bank, net of proceeds from maturations, repayments and sales within the portfolio, used $313 million .
•
We used $79 million to fund property investments. Of this total, $52 million results from our December 2016 purchase of three office buildings providing 300,000 square feet in total additional office space capacity, which are located adjacent to our existing corporate headquarters in St. Petersburg, Florida. We believe that this additional office space provides us the capacity we need to support our expected growth for five to ten years.
•
Other investments provided $17 million .

Financing activities provided $1.20 billion of cash during the three months ended December 31, 2016 .

Increases in cash from financing activities resulted from:
•
RJ Bank deposit balances provided $927 million .
•
Proceeds of $208 million from a net increase in our short-term borrowings.
•
Proceeds of $100 million from FHLB borrowings.
•
Proceeds from the exercise of stock options and employee stock purchases provided $24 million .

Offsetting these, decreases in cash from financing activities resulted from:
•
Payment of dividends to our shareholders of $31 million .
•
Purchases of treasury stock of $26 million , most of which resulting from the repurchase of shares when employees surrender shares as payment for option exercises or withholding taxes.

The effect of currency exchange rates on our cash balances has resulted in a $26 million decrease in our U.S. dollar denominated cash balance during the three months ended December 31, 2016 . This effect is primarily attributable to cash balances we have that are denominated in Canadian currency. The Canadian dollar to U.S. dollar exchange rate decreased 2% since September 30, 2016, which has a negative impact on this measure, the amount of our cash balance denominated in Canadian currency also increased during the period.

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


81

Sources of Liquidity

Approximately $1.16 billion of our total December 31, 2016 cash and cash equivalents (a portion of which resides in a deposit account at RJ Bank) was available to us without restrictions. The cash and cash equivalents held were as follows:
Cash and cash equivalents:
December 31, 2016
(in thousands)
RJF
$
423,413

(1) (2)
RJ&A
993,870

(2)
RJ Bank
394,170

RJ Ltd.
389,069

RJFS
119,440

RJFSA
36,065

Other subsidiaries
172,248

Total cash and cash equivalents
$
2,528,275

(1)
RJF maintains a depository account at RJ Bank which has a balance of $398 million as of December 31, 2016 . This cash balance is reflected in the RJF total, and is excluded from the RJ Bank total, since this balance is available to RJF on-demand and without restriction.

(2)
RJF has loaned $759 million to RJ&A as of December 31, 2016 (such amount is included in the RJ&A cash balance presented in this table), which RJ&A has invested on behalf of RJF in cash and cash equivalents or otherwise deployed in its normal business activities.

In addition to the cash balances described above, we have other various potential sources of liquidity which are described as follows.

Liquidity Available from Subsidiaries

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

RJ&A is required to maintain net capital equal to the greater of $1 million or 2% of aggregate debit balances arising from client transactions. Covenants in RJ&A’s committed secured financing facilities require its net capital to be a minimum of 10% of aggregate debit items.  At December 31, 2016 , RJ&A significantly exceeded both the minimum regulatory and its financing covenants net capital requirements. At that date, RJ&A had excess net capital of approximately $509 million, of which approximately $175 million is available for dividend while still maintaining the internally targeted net capital ratio of 15% of aggregate debit items.  There are also limitations on the amount of dividends that may be declared by a broker-dealer without Financial Industry Regulatory Authority (“FINRA”) approval.

RJ Bank may pay dividends to the parent company without the prior approval of its regulator as long as the dividend does not exceed the sum of RJ Bank’s current calendar year and the previous two calendar years’ retained net income, and RJ Bank maintains its targeted capital to risk-weighted assets ratios. At December 31, 2016 , RJ Bank had approximately $169 million of capital in excess of the amount it would need at December 31, 2016 to maintain its targeted total capital to risk-weighted assets ratio of 12.5%, and could pay a dividend of such amount without requiring prior approval of its regulator.

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

82

Borrowings and Financing Arrangements

The following table presents our financing arrangements with third party lenders that we generally utilize to finance a portion of our fixed income securities trading instruments held, and the outstanding balances related thereto, as of December 31, 2016 :
RJ&A (1)
RJ Ltd.
RJF
Total
Total number of arrangements
($ in thousands)
Financing arrangement:
Committed secured (2)
$
200,000

$
—

$
—

$
200,000

2

Committed unsecured
—

—

300,000

300,000

1

Uncommitted secured (2)(3)
1,950,000

33,790

(4)
—

1,983,790

7

Uncommitted unsecured (2)(3)
350,000

—

50,000

400,000

6

Total financing arrangements
$
2,500,000

$
33,790

$
350,000

$
2,883,790

16

Outstanding borrowing amount:
Committed secured (2)
$
30,000

$
—

$
—

$
30,000

Committed unsecured
—

—

—

—

Uncommitted secured (2)(3)(5)
381,778

—

—

381,778

Uncommitted unsecured (2)(3)
—

—

—

—

Total outstanding borrowing amount
$
411,778

$
—

$
—

$
411,778

(1)
We generally utilize the RJ&A facilities to finance a portion of our fixed income securities trading instruments.

(2)
Our ability to borrow is dependent upon compliance with the conditions in the various committed loan agreements and collateral eligibility requirements.

(3)
Lenders are under no contractual obligation to lend to us under uncommitted credit facilities.

(4)
This financing arrangement is primarily denominated in Canadian dollars, amounts presented in the table have been converted to U.S. dollars at the currency exchange rate in effect as of December 31, 2016 .

(5)
As of December 31, 2016, we had outstanding borrowings under six uncommitted secured borrowing arrangements with lenders.

The committed financing arrangements are in the form of tri-party repurchase agreements, or in the case of the RJF Credit Facility, an unsecured line of credit.  The uncommitted financing arrangements are in the form of secured lines of credit, secured bilateral or tri-party repurchase agreements, or unsecured lines of credit.

RJ Bank had $675 million in FHLB borrowings outstanding at December 31, 2016 , comprised of floating-rate advances totaling $650 million and a $25 million fixed-rate advance, all of which are secured by a blanket lien on RJ Bank’s residential loan portfolio (see Note 11 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information regarding these borrowings). RJ Bank has an additional $1.1 billion in immediate credit available from the FHLB as of December 31, 2016 and total available credit of 30% of total assets, with the pledge of additional collateral to the FHLB.

RJ Bank is eligible to participate in the Board of Governors of the Federal Reserve System (the “Fed”) discount-window program; however, RJ Bank does not view borrowings from the Fed as a primary source of funding.  The credit available in this program is subject to periodic review, may be terminated or reduced at the discretion of the Fed, and would be secured by pledged C&I loans.

From time to time we purchase short-term securities under agreements to resell (“Reverse Repurchase Agreements”) and sell securities under agreements to repurchase (“Repurchase Agreements”).  We account for each of these types of transactions as collateralized financings with the outstanding balances on the Repurchase Agreements included in securities sold under agreements to repurchase. At December 31, 2016 , collateralized financings outstanding in the amount of $203 million are included in securities sold under agreements to repurchase on the Condensed Consolidated Statements of Financial Condition included in this Form 10-Q. Of this total, outstanding balances on committed and uncommitted secured agreements (which are reflected in the table of financing arrangements above) were $30 million and $173 million as of December 31, 2016 , respectively.  Such financings are generally collateralized by non-customer, RJ&A owned securities.  The required market value of the collateral associated with the committed secured facilities ranges from 102% to 140% of the amount financed.

83

The average daily balance outstanding during the five most recent successive quarters, the maximum month-end balance outstanding during the quarter and the period end balances for Repurchase Agreements and Reverse Repurchase Agreements of RJF are as follows:
Repurchase transactions
Reverse repurchase transactions
For the quarter ended:
Average daily
balance
outstanding
Maximum month-end
balance outstanding
during the quarter
End of period
balance
outstanding
Average daily
balance
outstanding
Maximum month-end
balance outstanding
during the quarter
End of period
balance
outstanding
(in thousands)
December 31, 2016
$
219,095

$
241,773

$
203,378

$
424,548

$
445,646

$
358,493

September 30, 2016
202,687

195,551

193,229

412,513

470,222

470,222

June 30, 2016
239,237

266,158

266,158

433,003

457,777

444,812

March 31, 2016
268,150

266,761

190,679

419,112

471,925

428,864

December 31, 2015
270,586

247,730

245,554

423,059

415,346

405,507


At December 31, 2016 , in addition to the financing arrangements described above, we had $32 million outstanding on a mortgage loan for our St. Petersburg, Florida home-office complex, which we include in other borrowings in the Condensed Consolidated Statements of Financial Condition included in this Form 10-Q.

At December 31, 2016 , we have senior notes payable of $1.70 billion. Our senior notes payable, exclusive of any unaccreted premiums or discounts and debt issuance costs, is comprised of $300 million par 8.60% senior notes due 2019, $250 million par 5.625% senior notes due 2024, $500 million par 3.625% senior notes due 2026, $350 million par 6.90% senior notes due 2042, and $300 million par 4.95% senior notes due 2046. See Note 17 pages 167 - 168 of our 2016 Form 10-K for additional information on our senior notes payable.

Our current senior long-term debt ratings are:
Rating Agency
Rating
Outlook
Standard & Poor’s Ratings Services (“S&P”) (1)
BBB
Positive
Moody’s Investors Service (“Moody’s”) (2)
Baa2
Positive

(1)
The S&P rating and outlook are as presented in their September 2016 report.

(2)
The Moody’s rating and outlook are as presented in their December 2016 report.

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, our capital structure, our overall risk management, business diversification and our market share, and competitive position in the markets in which we operate. Deteriorations in any of these factors could impact our credit ratings.  Any rating downgrades could increase our costs in the event we were to pursue obtaining additional financing.

Should our credit rating be downgraded prior to a public debt offering it is probable that we would have to offer a higher rate of interest to bond holders.  A downgrade to below investment grade may make a public debt offering difficult to execute on terms we would consider to be favorable. A downgrade below investment grade could result in the termination of certain derivative contracts and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing overnight collateralization on our derivative instruments in liability positions (see Note 12 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information). A credit downgrade could create a reputational issue and could also result in certain counterparties limiting their business with us, result in negative comments by analysts and potentially impact investor perception of us, and resultantly impact our stock price and/or our clients’ perception of us. A credit downgrade would result in RJF incurring a higher commitment fee on any unused balance on one of its borrowing arrangements, the $300 million revolving 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 would have a favorable impact on the commitment fee as well as the interest rate applicable to any borrowings on such line. None of our credit agreements contain a condition or event of default related to our credit ratings.


84

Other sources of liquidity

We own life insurance policies which are utilized to fund certain non-qualified deferred compensation plans and other employee benefit plans. The policies which we could readily borrow against have a cash surrender value of approximately $350 million as of December 31, 2016 and we are able to borrow up to 90%, or $315 million of the December 31, 2016 total, without restriction.   There are no borrowings outstanding against any of these policies as of December 31, 2016 .

On May 22, 2015 we filed a “universal” shelf registration statement with the SEC to be in a position to access the capital markets if and when necessary or perceived by us to be opportune.

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

Impact on our liquidity from the announced redemption at par of certain senior notes

On February 6, 2017, we announced our intent to redeem all of our outstanding 6.90% Senior Notes due 2042, on March 15, 2017 (the “Redemption Date”). The aggregate principal amount outstanding of the 6.90% Senior Notes is $350 million. The redemption price on the Redemption Date will be equal to the principal, plus accrued and unpaid interest thereon to the Redemption Date. We intend to utilize available cash balances to fund this redemption, which will adversely impact our excess liquidity as of the Redemption Date.


Statement of financial condition analysis

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

Total assets of $31.7 billion at December 31, 2016 are approximately $182 million , or 1% greater than our total assets as of September 30, 2016 . Our cash and cash equivalents balances increased $878 million ; refer to the discussion of the components of this increase in the “Liquidity and Capital Resources” section within this Item 2. Net bank loans receivable increased $618 million primarily due to the growth of RJ Bank’s corporate loan portfolio during the current period. Our available for sale security portfolio increased by $304 million , as RJ Bank increased their investments in such securities during the period. Offsetting the increases, assets segregated pursuant to federal regulations (for the benefit of our clients) decreased $1.02 billion , in part due to a significant number of client accounts from the September 2016 Alex. Brown acquisition electing into our RJBDP program during the quarter. Our inventories of trading instruments decreased $249 million as we reduced our inventories of financial securities in the current period. The balance of derivative instruments associated with offsetting matched book positions decreased $123 million primarily as a result of the decrease in fair value of such derivatives. Brokerage client receivables from institutional clients decreased $113 million .

As of December 31, 2016 , our total liabilities of $26.5 billion approximated our total liability balance as of September 30, 2016 . Bank deposit liabilities increased $927 million as RJ Bank retained a higher portion of RJBDP balances to fund a portion of their increased securities portfolio and net loan growth. Other borrowings increased by $307 million as we increased our utilization of short-term financings to finance the securities trading inventory. Offsetting these increases, brokerage client payable balances decreased $417 million , reflecting a decrease in client cash balances in our client interest program (refer to the discussion of the decrease in assets segregated pursuant to federal regulations above). Stock loan balances decreased $249 million as a result of decreased activity at December 31, 2016 versus September 30, 2016 . Accrued compensation, commissions and benefits decreased $215 million , primarily resulting from the annual payment of certain incentive compensation during the current period. Our payables to broker-dealers and clearing organizations decreased $148 million , primarily resulting from a number of large unsettled institutional trades as of the prior period end which did not recur. Derivative instruments associated with offsetting matched book positions decreased $123 million primarily as a result of the decrease in fair value of such derivatives.

Contractual obligations

As of December 31, 2016 and since September 30, 2016 , there have been no material changes in our contractual obligations presented on pages 70 - 71 of our 2016 Form 10-K, other than in the ordinary course of business. See Note 15 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, for additional information regarding certain commitments as of December 31, 2016 .


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Regulatory

The following discussion should be read in conjunction with the description of the regulatory framework applicable to the financial services industry and relevant to us as described in the Regulation section of Item 1 on pages 10 - 15 of our 2016 Form 10-K, and the Regulatory section on pages 71 - 72 of our 2016 Form 10-K.

We continue to maintain a number of private equity investments, some of which meet the definition of “covered funds” and therefore are subject to certain limitations under the covered funds provisions of the Volcker Rule. The amount of future investments of this nature that we may make will be limited in order to maintain compliance levels specified by the Volcker Rule. The extension of the conformance deadline to July 21, 2017 provides us additional time to realize the value of many of our investments in their due course and assess what we expect to remain in our portfolio at the conformance deadline in the context of the new regulations and execute appropriate strategies to be in conformance with the Volcker Rule at such time. Additionally, in its July 2016 announcement of the extension of the conformance deadline, the Fed indicated upon the application of a banking entity, the Fed is permitted to provide up to an additional five years to conform investments in certain illiquid funds, where the banking entity had a contractual commitment to invest in the fund as of May 1, 2010. As many of our investments meet the criteria to be considered an illiquid fund, we have submitted a request to extend the conformance period for many of our investments. This request complied with the December 9, 2016 guidance provided by the Fed in filing such extension requests.

Other than the preceding paragraph, there are no additional updates to any of the other applicable aspects of the regulatory environment which we conduct our businesses, as described on pages 10 - 15 of our 2016 Form 10-K.

See Note 19 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for further information on regulatory and capital requirements.

Critical accounting estimates

The condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during any reporting period in our condensed consolidated financial statements. For a description of our accounting policies, see Note 2 of the Notes to the Consolidated Financial Statements on pages 108 - 127 of our 2016 Form 10-K, as well as Note 2 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.

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

Valuation of financial instruments, investments and other assets

The use of fair value to measure financial instruments, with related gains or losses recognized in our Condensed Consolidated Statements of Income and Comprehensive Income, is fundamental to our financial statements and our risk management processes. See Note 2 on pages 110 - 116 of our 2016 Form 10-K for a discussion of our fair value accounting policies regarding financial instruments owned and financial instruments sold but not yet purchased. Since September 30, 2016, we have not implemented any material changes in the fair value accounting policies described therein during the period covered by this report.

“Trading instruments” and “available for sale securities” are reflected in the Condensed Consolidated Statements of Financial Condition in this Form 10-Q at fair value or amounts that approximate fair value. Unrealized gains and losses related to these financial instruments are reflected in our net income or our total comprehensive income, depending on the underlying purpose of the instrument.

As of December 31, 2016 , 8% of our total assets and 2% of our total liabilities are instruments measured at fair value on a recurring basis.

Financial instruments measured at fair value on a recurring basis categorized as Level 3 amount to $224 million as of December 31, 2016 and represent 9% of our assets measured at fair value. Of the Level 3 assets as of December 31, 2016 , our ARS positions comprise $129 million , or 58% , and our private equity investments not measured at NAV comprise $83 million , or 37% , of the total.  Level 3 assets represent 4% of total equity as of December 31, 2016 .


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Financial instruments which are liabilities categorized as Level 3 amount to approximately $2 million as of December 31, 2016 and represent less than 1% of liabilities measured at fair value.

Our investments in private equity measured at NAV amount to $116 million at December 31, 2016 .

See Notes 5 , 6 , 7 and 12 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information on our financial instruments.

Goodwill impairment

Goodwill, under GAAP, must be allocated to reporting units and tested for impairment at least annually. The annual goodwill impairment testing involves the application of significant management judgment, especially when estimating the fair value of its reporting units. For a discussion of our goodwill accounting policies, see Note 2 on pages 122 - 123 of our 2016 Form 10-K.

We perform goodwill testing on an annual basis or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  We have elected December 31 as our annual goodwill impairment evaluation date. We performed our latest annual goodwill impairment testing during the quarter ended March 31, 2016. In that testing, we performed both a qualitative impairment assessment for certain of our reporting units and a quantitative impairment assessment for our two RJ Ltd. reporting units operating in Canada.

For each reporting unit that we performed qualitative assessments, we determined whether it is more likely than not that the carrying value of such reporting unit, including the recorded goodwill, is in excess of the fair value of the reporting unit. In any instance in which we are unable to qualitatively conclude that it is more likely than not that the fair value of the reporting unit exceeds the reporting unit carrying value including goodwill, a quantitative analysis of the fair value of the reporting unit would be performed. Based upon the outcome of our qualitative assessments, we determined that no quantitative analysis of the fair value of any of the reporting units we elected to qualitatively analyze for impairment as of December 31, 2015 was required, and we concluded that none of the goodwill allocated to any of those reporting units as of December 31, 2015 was impaired. No events have occurred since December 31, 2015 that would cause us to update this impairment testing.

In the RJ Ltd. reporting unit testing, we elected to perform quantitative assessments for the two reporting units within RJ Ltd. that include an allocation of goodwill. Although GAAP provides the option to perform a qualitative analysis which may result in a conclusion that no quantitative analysis of the reporting unit equity value is required, for this year’s annual goodwill testing of our two RJ Ltd. reporting units, we elected to perform a quantitative analysis. In these analyses, we make significant assumptions and estimates about the extent and timing of future cash flows and discount rates, as well as utilize data from peer group companies to assess the equity value of each RJ Ltd. reporting unit. Based upon the outcome of our quantitative assessments, we concluded there was no impairment of goodwill. The fair value of the equity of the RJ Ltd. PCG reporting unit was substantially in excess of its book carrying value, which includes goodwill. However, primarily as a result of the unfavorable impacts of the prolonged commodity recession in Canada on our business, most specifically impacting the natural resources sector of that economy, the fair value of the equity of the RJ Ltd. ECM reporting unit is not substantially in excess of its book carrying value, which includes goodwill. The RJ Ltd. ECM reporting unit goodwill balance was $16.9 million as of December 31, 2015, and we estimated that the excess of the fair value of the reporting unit over its carrying value including goodwill approximated 10% at such time. The equity market conditions in Canada have not improved significantly since the date of our latest goodwill impairment testing. Depending upon how this recent activity impacts our near and long-term projections, an impairment charge of some portion, or perhaps all, of such goodwill could occur.

Loss provisions

Refer to the discussion of loss provisions in Item 7 on page 78 of our 2016 Form 10-K.

Loss provisions arising from legal and regulatory matters

The recorded amount of liabilities related to legal and regulatory matters is subject to significant management judgment. For a description of the significant estimates and judgments associated with establishing such accruals, see the “Contingent liabilities” section of Note 2 on page 123 of our 2016 Form 10-K. In addition, refer to Note 15 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding legal and regulatory matter contingencies as of December 31, 2016.


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Loss provisions arising from operations of our Broker-Dealers

The recorded amount of liabilities associated with brokerage client receivables and loans to financial advisors and certain key revenue producers, is subject to significant management judgment. See Note 2 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding the allowance for doubtful accounts associated with loans to financial advisors as of December 31, 2016.

Loan loss provisions arising from operations of RJ Bank

RJ Bank provides an allowance for loan losses which reflects our continuing evaluation of the probable losses inherent in the loan portfolio. See the discussion regarding RJ Bank’s methodology in estimating its allowance for loan losses in Item 7A - Credit Risk, on pages 88 - 92 of our 2016 Form 10-K.

At December 31, 2016 , the amortized cost of all RJ Bank loans was $16.03 billion and an allowance for loan losses of $198 million was recorded against that balance. The total allowance for loan losses is equal to 1.25% of the amortized cost of the loan portfolio.

RJ Bank’s process of evaluating its probable loan losses includes a complex analysis of several quantitative and qualitative factors, requiring a substantial amount of judgment. Due to the uncertainty associated with this subjectivity, our underlying assumptions and judgments could prove to be inaccurate, and the allowance for loan losses could then be insufficient to cover actual losses. In such an event, any losses would result in a decrease in our net income as well as a decrease in the level of regulatory capital at RJ Bank.

Income taxes

For a description of the significant assumptions, judgments and interpretations associated with the accounting for income taxes, see the income taxes section of Item 7 on page 78 of our 2016 Form 10-K.

Effective October 1, 2016, we adopted new accounting guidance related to simplifying certain aspects of accounting for stock compensation which directly impacted our income tax expense for the three months ended December 31, 2016. See Notes 1 and 14 in the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for further information on our adoption of this new accounting guidance.

Effects of recently issued accounting standards, and accounting standards not yet adopted

In May 2014, the FASB issued new guidance regarding revenue recognition. The new guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also provides guidance on accounting for certain contract costs and requires additional disclosures. This new revenue recognition guidance, including subsequent amendments, is first effective for our financial report covering the quarter ending December 31, 2018. Although, early adoption is permitted for fiscal years beginning after December 15, 2016, we do not currently plan to early adopt. Upon adoption, we may use either a full retrospective or a modified retrospective approach with respect to presentation of comparable periods prior to the effective date. We are still evaluating which transition approach to use. We are also still evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.

In June 2014, the FASB issued amended guidance for the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance requires that a performance target that affects vesting of an award and that could be achieved after the requisite service period be treated as a performance condition. This new guidance is first effective for this interim financial report covering the quarter ending December 31, 2016. The adoption of this new guidance had no significant impact on our financial position or results of operations.

In August 2014, the FASB issued amended guidance that requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern. The new guidance: (1) provides for a definition of substantial doubt, (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This new guidance is first effective for this interim financial

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report covering the quarter ending December 31, 2016. The adoption of this guidance has no impact on our consolidated financial statements or related disclosures.

In November 2014, the FASB issued amended guidance regarding the accounting for hybrid financial instruments (which in this context would apply to any shares of RJF stock that include embedded derivative features such as conversion rights, redemption rights, voting rights, and liquidation and dividend payment preferences) issued in the form of a share. The new guidance clarifies how current GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. This new guidance is first effective for this interim financial report covering the quarter ending December 31, 2016. The adoption of this guidance had no significant impact on our financial position or results of operations.

In January 2015, the FASB issued guidance that eliminates from GAAP the concept of extraordinary items. This new guidance is effective for us for this fiscal year which commenced on October 1, 2016. The adoption of this new guidance has had no impact on the presentation in our consolidated statements of income.

In February 2015, the FASB issued amended guidance to the consolidation model. In October 2016, the FASB issued an additional amendment to this guidance. The impact of these amendments on the consolidation model are to:

•
Eliminates the deferral of the application of the new consolidation model, which had resulted in the application of prior accounting guidance to consolidation determinations of certain investment funds.
•
Make certain changes to the variable interest consolidation model.
•
Make certain changes to the voting interest consolidation model.

This amended guidance is first effective for us in this interim financial report covering the quarter ending December 31, 2016. See Notes 1 and 9 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for discussions of the impact the adoption of this new guidance had on our consolidated financial statements.

In April 2015, the FASB issued guidance governing a customer’s accounting for fees paid in a cloud computing arrangement. Under the new guidance, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This new guidance is effective for us for this fiscal year which commenced on October 1, 2016. Our adoption of this new guidance had no significant impact on our consolidated financial statements.

In June 2015, the FASB issued amended guidance related to technical corrections and improvements.  This amended guidance: 1) includes amendments related to differences between the original guidance and the codification. 2) Provides guidance clarification and reference corrections. 3) Streamlines or simplifies the codification through minor structural changes to headings or minor edits of text to improve the usefulness and understandability of the codification. 4) Makes minor improvements to the guidance.  The amendments that require transition guidance are effective for this fiscal year that commenced on October 1, 2016. The adoption of this new guidance did not have any significant impact on our consolidated financial statements.

In September 2015, the FASB issued guidance governing adjustments to the provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Such adjustments are required when new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement amounts initially recognized or would have resulted in the recognition of additional assets and liabilities. This new guidance eliminates the requirement to retrospectively account for such adjustments. This new guidance is effective for this fiscal year that commenced on October 1, 2016. The adoption of this new guidance has had no impact on our consolidated financial statements.

In November 2015, the FASB issued guidance simplifying the presentation of deferred income taxes on the statement of financial position by eliminating the requirement to separately present current and noncurrent deferred tax liabilities and assets on such statements. Given that we do not present current and noncurrent balances separately on our condensed consolidated statements of financial position, this simplifying guidance will have no impact our condensed consolidated statements of financial position.


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In January 2016, the FASB issued guidance related to the accounting for financial instruments. Among its provisions, this new guidance:

•
Requires equity investments (other than those accounted for under the equity method or those that result from the consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any.
•
Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment.
•
Eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
•
Requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
•
Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option.
•
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
•
Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets.

This new guidance is effective for us for our fiscal year commencing on October 1, 2018. Early adoption is generally not permitted. We are evaluating the impact, if any, the adoption of this new guidance will have on our financial position and results of operations.

In February 2016, the FASB issued new guidance related to the accounting for leases. The new guidance requires the recognition of assets and liabilities on the balance sheet related to the rights and obligations created by lease agreements regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease will primarily depend upon its classification as a finance or operating lease. The new guidance requires new disclosures to help financial statement users better understand the amount, timing, and cash flows arising from leases. The new guidance is first effective for our financial report covering the quarter ended December 31, 2019, early adoption is permitted. This new guidance will impact our financial position and results of operations. We are evaluating the magnitude of such impact.

In March 2016, the FASB issued new guidance related to derivatives and hedging, specifically the effect of derivative contract novations on existing hedge accounting relationships. The new guidance clarifies that a change in counterparty to a derivative instrument that has been designated as a hedging instrument under the current guidance does not, in and of itself, require re-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The new guidance is first effective for our financial report covering the quarter ended December 31, 2017, early adoption is permitted. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.

In March 2016, the FASB issued new guidance related to derivatives and hedging, specifically contingent put and call options in debt instruments. The new guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment is required to assess the embedded call (put) options solely in accordance with the following four-step decision sequence; an entity must consider 1) whether the payoff is adjusted based on changes in an index, 2) whether the payoff is indexed to an underlying other than interest rates or credit risk, 3) whether the debt involves a substantial premium or discount and 4) whether the call (put) option is contingently exercisable. The new guidance is first effective for our financial report covering the quarter ended December 31, 2017, early adoption is permitted. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.

In March 2016, the FASB issued new guidance related to equity method investments and joint ventures. The new guidance eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. Additionally, the new guidance requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting and therefore upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The new guidance is first effective for our financial report covering the quarter ended December 31, 2017, early adoption is permitted. Given that this guidance applies to entity specific

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transactions and would only become relevant in certain circumstances, we are unable to estimate the impact, if any, this new guidance may have on our financial position.

In March 2016, the FASB issued amended guidance related to stock compensation. The amended guidance involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amended guidance is first effective for our financial report covering the quarter ended December 31, 2017, although early adoption is permitted. We elected to adopt this new guidance early, see Notes 1 and 14 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for discussions of the impact the adoption of this new guidance had on our consolidated financial statements.
In June 2016, the FASB issued new guidance related to the measurement of credit losses on financial instruments. The amended guidance involves several aspects of the accounting for credit losses related to certain financial instruments including assets measured at amortized cost, available-for-sale debt securities and certain off-balance sheet commitments. The new guidance broadens the information that an entity must consider in developing its estimated credit losses expected to occur over the remaining life of assets measured either collectively or individually and expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses. Additionally the new guidance requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The new guidance is first effective for our financial report covering the quarter ended December 31, 2020, early adoption is permitted although not prior to our financial report covering the quarter ended December 31, 2019. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.

In August 2016, the FASB issued amended guidance related to the Statement of Cash Flows. The amended guidance involves several aspects of the classification of certain cash receipts and cash payments including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The amended guidance is first effective for our financial report covering the quarter ended December 31, 2017, early adoption is permitted. The adoption of this new guidance will impact our Statement of Cash Flows, however, we are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.

In October 2016, the FASB issued guidance related to the accounting for income tax consequences of intra-entity transfers of assets. Current GAAP prohibits the recognition of current and deferred income taxes for intra-entity asset transfer until the asset has been sold to an outside party. Under the new guidance, an entity should recognize the income tax consequences of an inter-entity transfer of an asset when the transfer occurs. The guidance is first effective for our financial report covering the quarter ended December 31, 2018, early adoption is permitted. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.

In November 2016, the FASB issued guidance related to the classification and presentation of changes in restricted cash on the Statement of Cash Flows. Current GAAP does not provide guidance to address how to classify and present changes in restricted cash or restricted cash equivalents that occur when there are transfers between cash, cash equivalents and restricted cash or restricted cash equivalents and when there are direct cash receipts into restricted cash or restricted cash equivalents or direct cash payments made from restricted cash or restricted cash equivalents. Under the new guidance, an entity should present in their Statement of Cash Flows the changes during the period in the total of cash and cash equivalents and amounts described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and ending-of-period total amounts shown on the statement of cash flows. The guidance is first effective for our financial report covering the quarter ended December 31, 2018, early adoption is permitted. We are evaluating the impact the adoption of this new guidance will have on our Consolidated Statements of Cash Flows.

In December 2016, the FASB issued amended guidance related to technical corrections and improvements.  This amended guidance makes changes to clarify, correct errors, or make minor improvements to the accounting standards codification. Generally, the amendment is effective immediately. The adoption of this guidance does not have any material impact on our consolidated financial statements.

In January 2017, the FASB issued amended guidance related to the definition of a business. This amended guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is first effective for our financial report covering the quarter ended December 31, 2018, early adoption is permitted in certain circumstances. Given the adoption of this amended

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guidance is dependent upon the nature of future events and circumstances, we are still evaluating the impact, if any, the adoption of this new guidance will have on our financial position and results of operations.

In January 2017, the FASB issued amended guidance to simplify the subsequent measurement of goodwill, eliminating “Step 2” from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the amended guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and subsequently recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The guidance is first effective for our financial report covering the quarter ended December 31, 2019, early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will adopt this simplification guidance in the earliest period it applies to our facts and circumstances.

Off-Balance Sheet arrangements

For information regarding our off-balance sheet arrangements, see Note 20 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q, and Note 26 on pages 194 - 195 of the Notes to Consolidated Financial Statements in our 2016 Form 10-K.

Effects of inflation

For information regarding the effects of inflation on our business, see the Effects of Inflation section of Item 7 on page 83 of our 2016 Form 10-K.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

RISK MANAGEMENT

For a description of our risk management policies, including a discussion of our primary market risk exposures, which include market risk and interest rate risk, as well as a discussion of our equity price risk, foreign exchange risk, credit risk including a discussion of our loan underwriting policies and risk monitoring processes applicable to RJ Bank, liquidity risk, operational risk, and regulatory and legal risk and a discussion of how these exposures are managed, refer to Item 7A on pages 83 - 98 of our 2016 Form 10-K.
Market risk

Market risk is our risk of loss resulting from changes in market prices of our inventory, hedge, interest rate derivative and investment positions. We have exposure to market risk primarily through our broker-dealer trading operations and, to a lesser extent, through our banking operations. See pages 83 - 84 of our 2016 Form 10-K for a discussion of our market risk including how we manage it.

See Notes 5 , 6 and 7 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q for fair value and other information regarding our trading inventories and available for sale securities.

Interest rate risk

Trading activities

We are exposed to interest rate risk as a result of our trading inventories (primarily comprised of fixed income instruments) in our Capital Markets segment, as well as our RJ Bank operations. See pages 84 - 87 of our 2016 Form 10-K for discussion of how we manage our interest rate risk.

We actively manage the interest rate risk arising from our fixed income trading securities through the use of hedging techniques that involve U.S. Treasury securities and futures contracts, liquid spread products, and swaps.

We monitor daily, the Value-at-Risk (“VaR”) for all of our trading portfolios. VaR is an appropriate statistical technique for estimating potential losses in trading portfolios due to typical adverse market movements over a specified time horizon with a suitable confidence level.

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We apply the Fed’s Market Risk Rule (“MRR”) for the purpose of calculating our capital ratios. The MRR, also known as the “Risk-Based Capital Guidelines: Market Risk” rule released by the Fed, OCC and FDIC, requires us to calculate VaR numbers for all of our trading portfolios, including fixed income, equity, foreign exchange, and derivative instruments.

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

The Fed’s MRR requires us to perform daily back testing procedures of our VaR model, whereby we compare each day’s projected VaR to its regulatory-defined daily trading losses, which excludes fees, commissions, reserves, net interest income, and intra-day trading. Based on these daily “ex ante” versus “ex post ” comparisons, we verify that the number of times that regulatory-defined daily trading losses exceed VaR is consistent with our expectations at a 99% confidence level. During the three months ended December 31, 2016 , our regulatory-defined daily loss in our trading portfolios exceeded our predicted VaR once.

The following table sets forth the high, low, and daily average VaR for all of our trading portfolios, including fixed income, equity, and derivative instruments, as of the period and dates indicated:
Three months ended December 31, 2016
VaR at
High
Low
Daily Average
December 31,
2016
September 30, 2016
(in thousands)
Daily VaR
$
2,274

$
1,113

$
1,670

$
1,881

$
1,804


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

Separately, RJF provides additional market risk disclosures to comply with the MRR. The results of the application of this market risk capital rule are available on our website under “More... - Investors - Financial Reports - Market Risk Rule Disclosure” within 45 days after the end of each of our reporting periods (the information on our website is not incorporated by reference into this report).

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

As a part of our fixed income public finance operations, RJ&A enters into forward commitments to purchase GNMA or FNMA MBS which are issued on behalf of various state and local housing finance agencies (see further discussion of these activities within “financial instruments owned, financial instruments sold but not purchased and fair value” in Note 2 on page 112 of our 2016 Form 10-K).  These activities result in exposure to interest rate risk. In order to hedge the interest rate risk to which RJ&A would otherwise be exposed between the date of the commitment and the date of sale of the MBS, RJ&A enters into TBA security contracts with investors for generic MBS securities at specific rates and prices to be delivered on settlement dates in the future. See Note 15 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information regarding these activities and the related balances outstanding as of December 31, 2016 .

Banking operations

RJ Bank maintains an earning asset portfolio that is comprised of C&I loans, tax-exempt loans, SBL, and commercial and residential real estate loans, as well as MBS and CMOs (both of which are held in the available for sale securities portfolio), Small Business Administration (“SBA”) loan securitizations and a trading portfolio of corporate loans.  Those earning assets are primarily

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funded by RJ Bank’s obligations to customers (i.e. customer deposits).  Based on its current earning asset portfolio, RJ Bank is subject to interest rate risk.  The current economic environment has led to an extended period of low market interest rates.  As a result, the majority of RJ Bank’s adjustable rate assets and liabilities have experienced a reduction in interest rate yields and costs that reflect these very low market interest rates.  During the current period, RJ Bank has focused its interest rate risk analysis on the risk of market interest rates rising.  RJ Bank analyzes interest rate risk based on forecasted net interest income, which is the net amount of interest received and interest paid, and the net portfolio valuation, both in a range of interest rate scenarios.

One of the objectives of RJ Bank’s Asset Liability Management Committee is to manage the sensitivity of net interest income to changes in market interest rates. The methods used to measure this sensitivity, including the economic value of equity (“EVE”) are described in Item 7A on page 85 of our 2016 Form 10-K. There were no material changes to these methods during the three months ended December 31, 2016 .

In February 2015, we implemented a hedging strategy using interest rate swaps as a result of RJ Bank’s asset and liability management process described above. For further information regarding this risk management objective, see the discussion of the RJ Bank Interest Hedges in the derivative contracts section of Note 2 of the Notes to Consolidated Financial Statements on pages 114 - 115 of our 2016 Form 10-K and additional information in Note 12 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.

The following table is an analysis of RJ Bank’s estimated net interest income over a 12 month period based on instantaneous shifts in interest rates (expressed in basis points) using RJ Bank’s own asset/liability model:
Instantaneous changes in rate
Net interest income
Projected change in
net interest income
($ in thousands)
+300
$610,075
(0.21)%
+200
$619,618
1.35%
+100
$628,786
2.85%
0
$611,355
—
-75
$528,985
(13.47)%

Refer to the Net Interest section of MD&A, in Item 2 of this Form 10-Q, for a discussion and estimate of the potential favorable impact on RJF’s pre-tax income that could result from an increase in short-term interest rates applicable to RJF’s entire operations.

The EVE analysis is a point in time analysis of current interest-earning assets and interest-bearing liabilities, which incorporates all cash flows over their estimated remaining lives, discounted at current rates. The EVE approach is based on a static balance sheet and provides an indicator of future earnings and capital levels as the changes in EVE indicate the anticipated change in the value of future cash flows. RJ Bank monitors sensitivity to changes in EVE utilizing board approved limits. These limits set a risk tolerance to changing interest rates and assist RJ Bank in determining strategies for mitigating this risk as it approaches these limits.

The following table presents an analysis of RJ Bank’s estimated EVE sensitivity based on instantaneous shifts in interest rates (expressed in basis points) using RJ Bank’s own asset/liability model:
Instantaneous changes in rate
Projected change in EVE
+300
(11.66)%
+200
(6.70)%
+100
(1.03)%
0
—
-75
(11.07)%


94

The following table shows the contractual maturities of RJ Bank’s loan portfolio at December 31, 2016 , including contractual principal repayments.  This table does not, however, include any estimates of prepayments.  These prepayments could shorten the average loan lives and cause the actual timing of the loan repayments to differ significantly from those shown in the following table:
Due in
One year or less
> One year – five years
> 5 years
Total (1)
(in thousands)
Loans held for sale
$
—

$
17,788

$
170,069

$
187,857

Loans held for investment:



C&I loans
130,412

4,622,841

2,798,587

7,551,840

CRE construction loans
27,218

94,990

10,352

132,560

CRE loans
302,721

1,780,496

583,301

2,666,518

Tax-exempt loans
—

5,250

853,788

859,038

Residential mortgage loans
825

1,816

2,650,896

2,653,537

SBL
1,996,347

5,248

—

2,001,595

Total loans held for investment
2,457,523

6,510,641

6,896,924

15,865,088

Total loans
$
2,457,523

$
6,528,429

$
7,066,993

$
16,052,945


(1)
Excludes any net unearned income and deferred expenses.

The following table shows the distribution of the recorded investment of those RJ Bank loans that mature in more than one year between fixed and adjustable interest rate loans at December 31, 2016 :
Interest rate type
Fixed
Adjustable
Total (1)
(in thousands)
Loans held for sale
$
4,051

$
183,806

$
187,857

Loans held for investment:



C&I loans
3,200

7,418,228

(2)
7,421,428

CRE construction loans
—

105,342

(2)
105,342

CRE loans
42,623

2,321,174

(2)
2,363,797

Tax-exempt loans
859,038

—

859,038

Residential mortgage loans
218,949

2,433,763

(2) (3)
2,652,712

SBL
5,248

—

5,248

Total loans held for investment
1,129,058

12,278,507

13,407,565

Total loans
$
1,133,109

$
12,462,313

$
13,595,422


(1)
Excludes any net unearned income and deferred expenses.

(2)
Related contractual loan terms may include an interest rate floor and/or fixed interest rates for a certain period of time, which would impact the timing of the interest rate reset for the respective loan.

(3)
See the discussion within the “Risk Monitoring process” section of Item 3 in this Form 10-Q, for additional information regarding RJ Bank’s interest-only loan portfolio and related repricing schedule.

Other

Within our available for sale securities portfolio, we hold ARS, which are long-term variable rate securities tied to short-term interest rates. Refer to the discussion of the interest rate risk associated with these securities in Item 7A on page 87 of our 2016 Form 10-K, and see Notes 5 and 7 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q for fair value and other information regarding such securities as of December 31, 2016.


95

Equity price risk

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

In addition, RJF’s private equity investments may be impacted by equity prices.

Foreign exchange risk

We are subject to foreign exchange risk due to our investments in foreign subsidiaries as well as transactions and resulting balances denominated in a currency other than the U.S. dollar.

Investments in foreign subsidiaries

RJ Bank has an investment in a Canadian subsidiary, resulting in foreign exchange risk. To mitigate this risk, RJ Bank utilizes short-term, forward foreign exchange contracts. These derivative agreements are primarily accounted for as net investment hedges in the condensed consolidated financial statements. See Note 12 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for further information regarding these derivative contracts.

We have foreign exchange risk in our investment in RJ Ltd., of approximately CDN $321 million at December 31, 2016 , which is not hedged. Foreign exchange gains/losses related to this investment are primarily reflected in other comprehensive income (loss) (“OCI”) on our Condensed Consolidated Statements of Income and Comprehensive Income, see Note 16 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for further information regarding all of our components of OCI.

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

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

In addition, we are subject to foreign exchange risk due to our holdings of cash and certain other assets and liabilities, which result from transactions denominated in a currency other than the U.S. dollar. Any currency related gains/losses arising from these foreign currency denominated balances are reflected in other revenue in our Condensed Consolidated Statements of Income and Comprehensive Income. The foreign exchange risk associated with a portion of such transactions and balances denominated in foreign currency are mitigated utilizing short-term, forward foreign exchange contracts. Such derivatives are not designated hedges and therefore the related gains/losses associated with these contracts are included in other revenue in our Condensed Consolidated Statements of Income and Comprehensive Income. See Note 12 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for information regarding our derivative contracts.

Credit risk

Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. The nature and amount of credit risk depends on the type of transaction, the structure and duration of that transaction, and the parties involved. Credit risk is an integral component of the profit assessment of lending and other financing activities. See further discussion of our credit risk on pages 88 - 92 of our 2016 Form 10-K.

RJ Bank has substantial corporate, SBL, and residential mortgage loan portfolios.  A significant downturn in the overall economy, deterioration in real estate values or a significant issue within any sector or sectors where RJ Bank has a concentration could result in large provisions for loan losses and/or charge-offs.
Several factors were taken into consideration in evaluating the allowance for loan losses at December 31, 2016 , including the risk profile of the portfolios, net charge-offs during the period, the level of nonperforming loans, and delinquency ratios. RJ Bank also considered the uncertainty related to certain industry sectors and the extent of credit exposure to specific borrowers within the portfolio. Finally, RJ Bank considered current economic conditions that might impact the portfolio. RJ Bank determined the allowance that was required for specific loan grades based on relative risk characteristics of the loan portfolio. On an ongoing basis, RJ Bank evaluates its methods for determining the allowance for each class of loans and makes enhancements it considers

96

appropriate. There was no material change in RJ Bank’s methodology for determining the allowance for loan losses during the three months ended December 31, 2016 .
Changes in the allowance for loan losses of RJ Bank are as follows:
Three months ended December 31,
2016
2015
($ in thousands)
Allowance for loan losses, beginning of year
$
197,378

$
172,257

(Benefit) provision for loan losses
(1,040
)
13,910

Charge-offs:

C&I loans
(3,389
)
(267
)
Residential mortgage loans
(87
)
(547
)
Total charge-offs
(3,476
)
(814
)
Recoveries:


CRE loans
5,013

—

Residential mortgage loans
65

490

SBL
—

1

Total recoveries
5,078

491

Net recoveries/(charge-offs)
1,602

(323
)
Foreign exchange translation adjustment
(260
)
(385
)
Allowance for loan losses, end of period
$
197,680

$
185,459

Allowance for loan losses to bank loans outstanding
1.25
%
1.35
%

The primary factors resulting in a benefit for loan losses during the year as compared to a provision for loan losses in the prior year were a more significant impact of the resolution of corporate criticized loans during the current year as well as the non-recurrence of a $5 million increased provision for criticized loans outstanding in the energy sector during the prior year. Additionally, the current year benefit for loan losses also reflects improved credit characteristics such as the continued decline in residential mortgage loan delinquencies and nonperforming loans. The allowance for loan losses of $198 million at December 31, 2016 increased from the prior year due to significant loan portfolio growth during the current period. As a result of improved credit quality in the loan portfolio, the total allowance for loan losses to total bank loans outstanding declined to 1.25% at December 31, 2016 from 1.35% at December 31, 2015 .

The following table presents net loan (charge-offs)/recoveries and the percentage of net loan (charge-offs)/recoveries to the average outstanding loan balances by loan portfolio segment:
Three months ended December 31,
2016
2015
Net loan
(charge-off)/recovery
amount
% of avg.
outstanding
loans
Net loan
(charge-off)/recovery
amount
% of avg.
outstanding
loans
($ in thousands)
C&I loans
$
(3,389
)
0.18
%
$
(267
)
0.02
%
CRE loans
5,013

0.79
%
—

—

Residential mortgage loans
(22
)
—

(57
)
0.01
%
SBL
—

—

1

—

Total
$
1,602

0.04
%
$
(323
)
0.01
%

The level of charge-off activity is a factor that is considered in evaluating the potential for and severity of future credit losses. The current period reflected net recoveries primarily resulting from the favorable resolution of a CRE criticized loan. This net recovery resulted in a decrease of $2 million in net charge-offs as compared to the prior year which reflected an insignificant amount of net charge-offs during that period.


97

The table below presents nonperforming loans and total allowance for loan losses:
December 31, 2016
September 30, 2016
Nonperforming
loan balance
Allowance for
loan losses
balance
Nonperforming
loan balance
Allowance for
loan losses
balance
(in thousands)
Loans held for investment:




C&I loans
$
24,762

$
(132,905
)
$
35,194

$
(137,701
)
CRE construction loans
—

(2,103
)
—

(1,614
)
CRE loans
—

(39,532
)
4,230

(36,533
)
Tax-exempt loans
—

(4,493
)
—

(4,100
)
Residential mortgage loans
39,708

(13,639
)
41,783

(12,664
)
SBL
—

(5,008
)
—

(4,766
)
Total
$
64,470

$
(197,680
)
$
81,207

$
(197,378
)
Total nonperforming loans as a % of RJ Bank total loans
0.40
%
0.53
%

The level of nonperforming loans is another indicator of potential future credit losses. The amount of nonperforming loans decreased during the three months ended December 31, 2016 .  This decrease was due to a $10 million decrease in nonperforming C&I loans, a $4 million decrease in CRE loans, and a $2 million decrease in residential mortgage loans.  Included in nonperforming residential mortgage loans are $38 million in loans for which $19 million in charge-offs were previously recorded, resulting in less exposure within the remaining balance.

The nonperforming loan balances above excludes $15 million as of December 31, 2016 and $14 million as of September 30, 2016 of residential TDRs which were returned to accrual status in accordance with our policy.

Loan underwriting policies

RJ Bank’s underwriting policies for the major types of loans are described on pages 92 - 93 of our 2016 Form 10-K. There were no material changes in RJ Bank’s underwriting policies during the three months ended December 31, 2016 .

Risk monitoring process

The credit risk strategy component of ongoing risk monitoring and review processes at RJ Bank for all residential, SBL and corporate credit exposures, as well as our rigorous processes to manage and limit credit losses arising from loan delinquencies, are discussed on pages 93 - 96 of our 2016 Form 10-K. There were no material changes to those processes and policies during the three months ended December 31, 2016 .

SBL and residential mortgage loans

The marketable collateral securing RJ Bank’s SBL is monitored on a daily basis. Collateral adjustments are made by the borrower as necessary to ensure RJ Bank’s loans are adequately secured, resulting in minimizing its credit risk. Collateral calls have been minimal relative to our SBL portfolio with no losses incurred to-date.

We track and review many factors to monitor credit risk in RJ Bank’s residential mortgage loan portfolio. The qualitative factors include, but are not limited to: loan performance trends, loan product parameters and qualification requirements, borrower credit scores, occupancy (i.e., owner occupied, second home or investment property), level of documentation, loan purpose, geographic concentrations, average loan size, loan policy exceptions, and updated LTV ratios. These qualitative measures, while considered and reviewed in establishing the allowance for loan losses, have not resulted in any material quantitative adjustments to RJ Bank’s historical loss rates.

RJ Bank obtains the most recently available information (generally updated every six months) to estimate current LTV ratios on the individual loans in the performing residential mortgage loan portfolio. Current LTV ratios are estimated based on the initial appraisal obtained at the time of origination, adjusted using relevant market indices for housing price changes that have occurred since origination. The value of the homes could vary from actual market values due to change in the condition of the underlying property, variations in housing price changes within current valuation indices and other factors.


98

The current average estimated LTV is 54% for the total residential mortgage loan portfolio. Residential mortgage loans with estimated LTVs in excess of 100% represent less than 1% of the residential mortgage loan portfolio. Credit risk management considers this data in conjunction with delinquency statistics, loss experience and economic circumstances to establish appropriate allowance for loan losses for the residential mortgage loan portfolio.

At December 31, 2016 , loans over 30 days delinquent (including nonperforming loans) decreased to 1.10% of residential mortgage loans outstanding, compared to 1.20% over 30 days delinquent at September 30, 2016 .  Additionally, our December 31, 2016 percentage compares favorably to the national average for over 30 day delinquencies of 4.28% as most recently reported by the Fed.  RJ Bank’s significantly lower delinquency rate as compared to its peers is the result of both our uniform underwriting policies and the lack of subprime loans and limited amount of non-traditional loan products.

The following table presents a summary of delinquent residential mortgage loans:
Delinquent residential loans (amount)
Delinquent residential loans as a percentage of outstanding loan balances
30-89 days
90 days or more
Total (1)
30-89 days
90 days or more
Total (1)
($ in thousands)
December 31, 2016
Residential mortgage loans:


First mortgage loans
$
4,502

$
24,868

$
29,370

0.17
%
0.94
%
1.11
%
Home equity loans/lines
10

20

30

0.04
%
0.09
%
0.13
%
Total residential mortgage loans
$
4,512

$
24,888

$
29,400

0.17
%
0.93
%
1.10
%
September 30, 2016






Residential mortgage loans:
First mortgage loans
$
3,950

$
25,429

$
29,379

0.16
%
1.05
%
1.21
%
Home equity loans/lines
—

20

20

—

0.10
%
0.10
%
Total residential mortgage loans
$
3,950

$
25,449

$
29,399

0.16
%
1.04
%
1.20
%

(1)
Comprised of loans which are two or more payments past due as well as loans in process of foreclosure.

Credit risk is also managed by diversifying the residential mortgage portfolio. The geographic concentrations (top five states) of RJ Bank’s one-to-four family residential mortgage loans are as follows:
December 31, 2016
September 30, 2016
Loans outstanding as a % of RJ Bank total residential mortgage loans
Loans outstanding as a % of RJ Bank total loans
Loans outstanding as a % of RJ Bank total residential mortgage loans
Loans outstanding as a % of RJ Bank total loans
CA (1)
20.3%
2.9%
CA (1)
21.0%
3.2%
FL
18.3%
2.6%
FL
18.9%
2.9%
TX
7.7%
1.1%
TX
7.1%
1.1%
NY
6.6%
0.9%
NY
5.5%
0.8%
IL
3.7%
0.5%
IL
3.6%
0.6%

(1)
The concentration ratio for the state of California excludes 4.0% and 4.4% from the computation of loans outstanding as a percentage of RJ Bank total residential mortgage loans, and 0.6% and 0.7% from the computation of loans outstanding as a percentage of RJ Bank total loans, for December 31, 2016 , and for September 30, 2016 , respectively, for loans purchased from a large investment grade institution that have full repurchase recourse for any delinquent loans.
Loans where borrowers may be subject to payment increases include adjustable rate mortgage loans with terms that initially require payment of interest only.  Payments may increase significantly when the interest-only period ends and the loan principal begins to amortize. At December 31, 2016 and September 30, 2016 , these loans totaled $390 million and $308 million, respectively, or approximately 15% and 10% of the residential mortgage portfolio, respectively.  At December 31, 2016 , the balance of amortizing, former interest-only, loans totaled $298 million.  The weighted average number of years before the remainder of the loans, which were still in their interest-only period at December 31, 2016 , begins amortizing is 5.7 years.


99

The outstanding balance of loans that were interest-only at origination and based on their contractual terms are scheduled to reprice are as follows:
December 31, 2016
(in thousands)
One year or less
$
39,680

Over one year through two years
11,178

Over two years through three years
28,411

Over three years through four years
21,407

Over four years through five years
49,228

Over five years
239,858

Total outstanding residential interest-only loan balance
$
389,762


A component of credit risk management for the residential portfolio is the LTV and borrower credit score at origination or purchase. The most recent LTV/FICO scores at origination of RJ Bank’s residential first mortgage loan portfolio are as follows:
December 31, 2016
September 30, 2016
Residential first mortgage loan weighted-average LTV/FICO
65%/761
65%/760

Corporate loans

At December 31, 2016 , other than loans classified as nonperforming, there were no loans that were delinquent greater than 30 days.

Credit risk is also managed by diversifying the corporate loan portfolio. RJ Bank’s corporate loan portfolio does not contain a significant concentration in any single industry. The industry concentrations (top five categories) of RJ Bank’s corporate loans are as follows:
December 31, 2016
September 30, 2016
Loans outstanding as a % of RJ Bank total corporate loans
Loans outstanding as a % of RJ Bank total loans
Loans outstanding as a % of RJ Bank total corporate loans
Loans outstanding as a % of RJ Bank total loans
Office (real estate)
6.0%
4.2%
Office (real estate)
5.6%
4.0%
Hospitality
5.1%
3.6%
Hospitality
5.2%
3.7%
Power & infrastructure
4.9%
3.4%
Consumer products and services
5.0%
3.6%
Consumer products and services
4.8%
3.4%
Retail real estate
4.6%
3.3%
Retail real estate
4.6%
3.2%
Power & infrastructure
4.6%
3.3%

RJ Bank’s energy loan portfolio is primarily comprised of loans to mid-stream pipeline and other borrowers that are not directly exposed to the commodity. At December 31, 2016, the total commitment for these loans was $704 million, of which $391 million was outstanding, representing 3% of RJ Bank’s total corporate loan portfolio, and 2% of RJ Bank’s total loans. At December 31, 2016, $38 million of this outstanding balance is rated as criticized loans, a decrease from $83 million at September 30, 2016. As of December 31, 2016, RJ Bank had provided an allowance for loan losses of $21 million for its energy loan portfolio, representing 5% of this loan portfolio.

Liquidity risk

See the section entitled “Liquidity and capital resources” in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Form 10-Q for information regarding our liquidity and how we manage liquidity risk.

Operational risk

Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, business disruptions, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems and inadequacies or breaches in our control processes including cyber security incidents. See pages 96 - 97 of our 2016 Form 10-K for a discussion of our operational risk and certain of our risk mitigation processes. There have been no material changes in such processes during the three months ended December 31, 2016 .

100


As more fully described in the discussion of our business technology risks included in various risk factors presented in Item 1A: Risk Factors on pages 16 - 29 of our 2016 Form 10-K, despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, spam attacks, unauthorized access, distributed denial of service attacks, computer viruses and other malicious code and other events that could have an impact on the security and stability of our operations.  Notwithstanding the precautions we take, if one or more of these events were to occur, this could jeopardize the information we confidentially maintain, including that of our clients and counterparties, which is processed, stored in and transmitted through our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our clients or counterparties. To-date, we have not experienced any material losses relating to cyberattacks or other information security breaches, however, there can be no assurances that we will not suffer such losses in the future.

Regulatory and legal risk

Our regulatory and legal risks are described on pages 97 - 98 of our 2016 Form 10-K.

There have been no material changes in our risk mitigation processes during the three months ended December 31, 2016 .

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls are procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A. RISK FACTORS

Not applicable.


101

ITEM 2.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

We purchase our own stock from time to time in conjunction with a number of activities, each of which is described below. The following table presents information on our purchases of our own stock, on a monthly basis, for the three months ended December 31, 2016 :
Total number of shares
purchased (1)
Average price
per share
Number of shares purchased as part of publicly announced plans or programs
Approximate dollar value (in thousands) at each month-end, of securities that may yet be purchased under the plans or programs
October 1, 2016 – October 31, 2016
13,245

$
60.46

—

$
135,671

November 1, 2016 – November 30, 2016
157,010

$
73.12

—

$
135,671

December 1, 2016 – December 31, 2016
189,500

$
72.70

—

$
135,671

First quarter
359,755

$
72.43

—


(1)
Of the total for the three months ended December 31, 2016 , share purchases for the trust fund established to acquire our common stock in the open market and used to settle restricted stock units granted as a retention vehicle for certain employees of our wholly owned Canadian subsidiaries amounted to 74,181 shares, for a total consideration of $5.4 million (for more information on this trust fund, see Note 2 of the Notes to Consolidated Financial Statements on page 125 of our 2016 Form 10-K, and Note 9 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q). These activities do not utilize the repurchase authority presented in the table above.

We also repurchase shares when employees surrender shares as payment for option exercises or withholding taxes.  Of the total for the three months ended December 31, 2016 , shares surrendered to us by employees for such purposes amount to 285,574 shares, for a total consideration of $20.7 million. These activities do not utilize the repurchase authority presented in the table above.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 5.
OTHER INFORMATION

Not applicable.


102

ITEM 6.
EXHIBITS
Exhibit Number

Description
3.1

Restated Articles of Incorporation of Raymond James Financial, Inc. as filed with the Secretary of State of Florida on November 25, 2008, incorporated by reference to Exhibit 3(i).1 to the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on November 28, 2008.
3.2

Amended and Restated By-Laws of Raymond James Financial, Inc., reflecting amendments adopted by the Board of Directors on February 20, 2015, incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 24, 2015.
11

Statement Re: Computation of per Share Earnings (the calculation of per share earnings is included in Part I, Item 1 in the Notes to Condensed Consolidated Financial Statements (Earnings Per Share) and is omitted here in accordance with Section (b)(11) of Item 601 of Regulation S-K).
12

Statement of Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
31.1

Certification of Paul C. Reilly pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2

Certification of Jeffrey P. Julien pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32

Certification of Paul C. Reilly and Jeffrey P. Julien pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS

XBRL Instance Document.
101.SCH

XBRL Taxonomy Extension Schema Document.
101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB

XBRL Taxonomy Extension Label Linkbase Document.
101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

RAYMOND JAMES FINANCIAL, INC.
(Registrant)
Date:
February 8, 2017
/s/ Paul C. Reilly
Paul C. Reilly
Chief Executive Officer
Date:
February 8, 2017
/s/ Jeffrey P. Julien
Jeffrey P. Julien
Executive Vice President - Finance Chief Financial Officer and Treasurer

103
TABLE OF CONTENTS
Part I Financial InformationprintItem 1. Financial StatementsprintNote 1 Introduction and Basis Of PresentationprintNote 2 Update Of Significant Accounting PoliciesprintNote 3 AcquisitionsprintNote 4 Cash and Cash Equivalents, Assets Segregated Pursuant To Regulations, and Deposits with Clearing OrganizationsprintNote 5 Fair ValueprintNote 6 Trading Instruments and Trading Instruments Sold But Not Yet PurchasedprintNote 7 Available For Sale SecuritiesprintNote 8 Bank Loans, NetprintNote 9 Variable Interest EntitiesprintNote 10 Bank DepositsprintNote 11 Other BorrowingsprintNote 12 Derivative Financial InstrumentsprintNote 13 Disclosure Of Offsetting Assets and Liabilities, Collateral, Encumbered Assets and Repurchase AgreementsprintNote 14 Income TaxesprintNote 15 Commitments, Contingencies and GuaranteesprintNote 16 Accumulated Other Comprehensive Income (loss)printNote 17 Interest Income and Interest ExpenseprintNote 18 Share-based CompensationprintNote 19 Regulatory Capital RequirementsprintNote 20 Financial Instruments with Off-balance Sheet RiskprintNote 21 Earnings Per ShareprintNote 22 Segment InformationprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart IIprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Market For Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 3. Defaults Upon Senior SecuritiesprintItem 5. Other InformationprintItem 6. Exhibitsprint