UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended September 30, 2016
Or
o | 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 | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
880 Carillon Parkway, St. Petersburg, Florida | 33716 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code | (727) 567-1000 |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $.01 Par Value | New York Stock Exchange | |
6.90% Senior Notes Due 2042 | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: | None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes o No x
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 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 definition 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 o No x
As of March 31, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold was $5,967,672,213.
The number of shares outstanding of the registrant’s common stock as of November 18, 2016 was 141,970,986.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held February 16, 2017 are incorporated by reference into Part III.
RAYMOND JAMES FINANCIAL, INC.
TABLE OF CONTENTS
PAGE | |||
PART I. | |||
Item 1. | Business | ||
Item 1A. | Risk factors | ||
Item 1B. | Unresolved staff comments | ||
Item 2. | Properties | ||
Item 3. | Legal proceedings | ||
PART II. | |||
Item 5. | Market for registrant’s common equity, related shareholder matters and issuer purchases of equity securities | ||
Item 6. | Selected financial data | ||
Item 7. | Management’s discussion and analysis of financial condition and results of operations | ||
Item 7A. | Quantitative and qualitative disclosures about market risk | ||
Item 8. | Financial statements and supplementary data | ||
Item 9. | Changes in and disagreements with accountants on accounting and financial disclosure | ||
Item 9A. | Controls and procedures | ||
Item 9B. | Other information | ||
PART III. | |||
Item 10. | Directors, executive officers and corporate governance | ||
Item 11. | Executive compensation | ||
Item 12. | Security ownership of certain beneficial owners and management and related shareholder matters | ||
Item 13. | Certain relationships and related transactions, and director independence | ||
Item 14. | Principal accountant fees and services | ||
PART IV. | |||
Item 15. | Exhibits and financial statement schedules | ||
Signatures | |||
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PART I
Item 1. | 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.
Established in 1962 and public since 1983, RJF has been listed on the New York Stock Exchange (the “NYSE”) since 1986 under the symbol “RJF.” As a financial holding company, RJF is subject to supervision, examination and regulation by the Board of Governors of the Federal Reserve System (the “Fed”).
RJF’s principal subsidiaries are Raymond James & Associates, Inc. (“RJ&A”), Raymond James Financial Services, Inc. (“RJFS”), Raymond James Financial Services Advisors, Inc. (“RJFSA”), Raymond James Ltd. (“RJ Ltd.”), Eagle Asset Management, Inc. (“Eagle”), and Raymond James Bank, N.A. (“RJ Bank”). All of these subsidiaries are wholly owned by RJF. RJF and its subsidiaries are hereinafter collectively referred to as “our,” “we,” or “us.” Our operations are predominately conducted in the United States of America (“U.S.”) and Canada.
Among the keys to our historical and continued success, our emphasis on putting the client first is at the core of our corporate values. We also believe in maintaining a conservative, long-term focus in our decision making. We believe that this disciplined decision-making approach translates to a strong, stable financial services firm for clients, advisors, associates and shareholders.
REPORTABLE SEGMENTS
We currently operate through four operating segments and our “Other” segment. The four operating segments are “Private Client Group” (“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.
The graph below depicts the relative net revenue contribution of each of our operating segments for the fiscal year ended September 30, 2016:
*Chart above does not include intersegment eliminations or the Other segment.
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PRIVATE CLIENT GROUP
We provide financial planning and securities transaction services to more than 2.9 million client accounts through the branch office systems of RJ&A, RJFS, RJFSA, RJ Ltd. and in the United Kingdom through Raymond James Investment Services Limited (“RJIS”). Financial advisors have multiple affiliation options, which we refer to as AdvisorChoice. Our two primary affiliation options for financial advisors are the employee option and the independent contractor option.
We recruit experienced financial advisors from a wide variety of competitors. As a part of their agreement to join us, we may make loans to financial advisors and to certain key revenue producers, primarily for transitional cost assistance and retention purposes.
Total assets under administration in the PCG segment as of September 30, 2016 amount to $574.1 billion. We have 7,146 financial advisors affiliated with us as of September 30, 2016.
Employee Financial Advisors
Employee financial advisors work in a traditional branch setting supported by local management and administrative staff. They provide services predominately to individual clients. These financial advisors are our employees, and their compensation primarily includes commission payments and participation in the firm’s benefit plans.
Independent Contractor Financial Advisors
Our financial advisors who are independent contractors are responsible for all of their direct costs and, accordingly, are paid a larger percentage of commissions and fees than employee financial advisors. Our independent contractor financial advisor option is designed to help our advisors build their businesses with as much or as little of our support as they determine they need. With specific approval, they are permitted to conduct, on a limited basis, certain other approved business activities, such as offering insurance products, independent registered investment advisory services, and accounting and tax services.
Irrespective of the affiliation choice, our financial advisors offer a broad range of investments and services, including both third party and proprietary products, and a variety of financial planning services. Revenues from this segment are typically driven by total client assets under administration, and are generally either recurring fee-based or transactional in nature. The proportion of our securities commissions and fee revenues originating from the employee versus the independent contractor affiliation models is relatively balanced.
Securities commissions and fee revenues by affiliation, as well as the portion of total segment revenues that is recurring versus transactional in nature, for the fiscal year ended September 30, 2016, are presented below:
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We provide the following types of services through this segment:
• | We provide investment services for which we charge sales commissions or asset-based fees based on established schedules. |
• | We offer investment advisory services. Fee revenues for such services are computed as either a percentage of the assets in the client account or a flat periodic fee charged to the client for investment advice. |
• | Our U.S. financial advisors provide insurance and annuity products through our general insurance agency, Raymond James Insurance Group, Inc. |
• | Our U.S. financial advisors offer a number of professionally managed load and no-load mutual funds. |
• | We provide margin loans to clients that are collateralized by the securities purchased or by other securities owned by the client. Interest is charged to clients on the amount borrowed based on current interest rates. |
• | We provide custodial, trading, research and other back office support and services (including access to clients’ account information and the services of the Asset Management segment) to the independent contractor registered investment advisors with whom we are affiliated. |
• | We conduct securities lending activities through RJ&A, in which we borrow and lend securities from and to broker-dealers, financial institutions, and other counterparties. Generally, we conduct these activities as an intermediary (referred to as “matched book”). However, RJ&A will also loan client marginable securities in a margin account containing a debit (referred to as lending from the “box”) to counterparties. The borrower of the securities puts up a cash deposit on which interest is earned. The lender in turn receives cash and pays interest. The net revenues of this business consist of the interest spreads generated on these activities. |
• | Through our Alternative Investments Group, we provide diversification strategies and products to qualified clients of our affiliated financial advisors. The Alternative Investments Group provides strategies and products for portfolio investment allocation opportunities where a selective addition of alternative investments that have historically demonstrated lower correlation to traditional market indices may reduce overall portfolio volatility and increase long-term performance. |
• | Through the formation of the Alex. Brown division of RJ&A, we enhanced our capabilities to service the needs of ultra-high-net-worth clients and select institutions. |
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CAPITAL MARKETS
Our capital markets segment conducts institutional sales, securities trading, equity research, investment banking, syndicate, and the syndication of investments that qualify for tax credits under Section 42 of the Internal Revenue Code (referred to as our “tax credit funds”). Within our management structure, we distinguish between activities that support equity and fixed income products and services. We primarily conduct these activities in the U.S., Canada, and Europe.
The graph below depicts the portions of this segment’s revenues that are derived from equity securities and products, fixed income securities and products, and our tax credit funds activities for the fiscal year ended September 30, 2016:
We provide the following services through this segment:
Equity Capital Markets Activities
• | We earn institutional sales commissions on the sale of equity products. Sales volume is influenced by a combination of general market activity and the Capital Markets group’s ability to identify and promote attractive investment opportunities for our institutional clients. Commission amounts on equity transactions are based on trade size and the amount of business conducted annually with each institution. |
• | We provide various investment banking services including public and private equity financing for corporate clients and merger and acquisition advisory services. Our investment banking activities include a comprehensive range of strategic and financial advisory services tailored to our clients’ business life cycles and backed by our strategic industry focus. |
• | In our syndicate operations, we coordinate the marketing, distribution, pricing and stabilization of lead and co-managed equity underwritings. In addition to lead and co-managed offerings, this department coordinates our participation in transactions managed by other investment banking firms. |
• | Our domestic research department supports our institutional and retail sales efforts and publishes research on a wide variety of companies. This research primarily focuses on U.S. and Canadian companies in specific industries, including agricultural, consumer, energy, clean energy, energy services, financial services, healthcare, industrial, mining and natural resources, forest products, real estate, technology, and communication and transportation. Proprietary industry studies and company-specific research reports are made available to both institutional and individual clients. |
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Fixed Income Activities
• | We earn institutional sales commissions from institutional clients who purchase both taxable and tax-exempt fixed income products, primarily municipal, corporate, government agency and mortgage-backed bonds. The commissions that we charge on fixed income products are based on trade size and the characteristics of the specific security involved. |
• | We carry inventories of taxable and tax-exempt securities to facilitate institutional sales activities. Our taxable and tax-exempt fixed income traders purchase and sell corporate, municipal, government, government agency, and mortgage-backed bonds, asset-backed securities, preferred stock, and certificates of deposit from and to our clients or other dealers. |
• | Our fixed income investment banking services include public finance and debt underwriting activities where we serve as a financial advisor, placement agent or underwriter to various issuers, including state and local government agencies (and their political subdivisions), housing agencies, and non-profit entities including health care and higher education institutions. We may also act as a consultant, underwriter, or selling group member for offerings of corporate bonds, mortgage-backed securities (“MBS”), whole loans, agency bonds, preferred stock and unit investment trusts. When underwriting new issue securities, we may agree to purchase the issue through a negotiated sale or submission of a competitive bid. |
• | In order to facilitate client transactions, hedge a portion of our fixed income securities inventories, or to a limited extent for our own account, we enter into interest rate swaps and futures contracts. In addition, we conduct a “matched book” derivatives business where we may enter into derivative transactions, including interest rate swaps, options, and combinations of those instruments, primarily with government entities and not-for-profit counterparties. In this matched book business, for every derivative transaction we enter into with a client, we enter into an offsetting derivative transaction with a credit support provider that is a third party financial institution. |
• | Through our fixed income public finance operations, we enter into forward commitments to purchase Government National Mortgage Association (“GNMA”) or Federal National Mortgage Association (“FNMA”) MBS. Such MBS securities are issued on behalf of various state and local housing finance agencies (“HFA”) clients and consist of the mortgages originated through their lending programs. |
Tax Credit Fund Activities
• | In our syndication of tax credit investments, one of our subsidiaries acts as the general partner or managing member in partnerships and limited liability companies that invest in real estate project entities which qualify for tax credits under Section 42 of the Internal Revenue Code. We earn fees for the origination and sale of these investment products as well as for the oversight and management of the investments over the statutory tax credit compliance period. |
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ASSET MANAGEMENT
Our Asset Management segment provides investment advisory and asset management services to individual and institutional investment portfolios, and sponsors mutual funds under the name “Eagle” (“Eagle Funds”). We also provide services to our PCG clients (“AMS”) and through Raymond James Trust, N.A. (“RJ Trust”).
We earn advisory fees on both managed and non-discretionary asset-based accounts. In managed programs, we make decisions about how to invest the assets in accordance with such programs objectives. In non-discretionary asset-based programs, we provide administrative support to each plan, which may include trade execution, record-keeping and periodic investor reporting. We generally earn higher fees for managed programs than for non-discretionary asset-based programs, since we provide additional services to managed programs. As of September 30, 2016, there were $77.0 billion in financial assets held in managed programs and $119.3 billion in financial assets held in non-discretionary asset-based programs.
The graph below depicts financial assets under management in our managed programs by objective as of September 30, 2016:
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RJ BANK
RJ Bank provides corporate loans, securities based loans (“SBL”) and residential loans. RJ Bank is active in corporate loan syndications and participations. RJ Bank also provides Federal Deposit Insurance Corporation (“FDIC”) insured deposit accounts to clients of our broker-dealer subsidiaries and to the general public. RJ Bank generates net interest revenue principally through the interest income earned on loans and investments, which is offset by the interest expense it pays on client deposits and on its borrowings.
RJ Bank operates primarily from a branch location adjacent to RJF’s corporate office complex in St. Petersburg, Florida. Access to RJ Bank’s products and services is available nationwide through the offices of our affiliated broker-dealers as well as through electronic banking services. RJ Bank’s assets include commercial and industrial (“C&I”) loans, commercial and residential real estate loans, tax-exempt loans, as well as loans fully collateralized by marketable securities. Corporate loans represent approximately 70% of RJ Bank’s loan portfolio, of which 95% are U.S. and Canadian syndicated loans. Residential mortgage loans are originated or purchased and held for investment or sold in the secondary market. RJ Bank’s liabilities primarily consist of deposits that are cash balances swept from the investment accounts of PCG clients.
RJ Bank has total assets of $16.6 billion at September 30, 2016, which are comprised of the following:
OTHER
Our “Other” segment includes our principal capital and private equity activities as well as certain corporate overhead costs of RJF, such as the interest cost on our senior notes payable, and the acquisition and integration costs associated with certain acquisitions (See Note 3 of the Notes to Consolidated Financial Statements in this Form 10-K for additional information on our acquisitions).
Our principal capital and private equity activities include various direct and third party private equity investments; employee investment funds (the “Employee Funds”); and various private equity funds which we sponsor.
EMPLOYEES AND INDEPENDENT CONTRACTORS
Our employees and independent contractors (collectively “associates”) are vital to our success in the financial services industry. As of September 30, 2016, we had over 11,900 employees, and over 4,000 affiliated independent contractor financial advisors.
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OPERATIONS AND INFORMATION PROCESSING
We have operations personnel at various locations throughout the U.S. who are responsible for processing securities transactions, custody of client securities, support of client accounts, the receipt, identification and delivery of funds and securities, and compliance with regulatory and legal requirements for most of our U.S. securities brokerage operations. RJ Ltd. operations personnel have similar responsibilities at our Canadian brokerage operations located in Vancouver, British Columbia.
The information technology department develops and supports the integrated solutions that provide a differentiated platform for our business. This platform is designed to allow our financial advisors to spend more time with their clients and enhance and grow their business.
In the area of information security, we have developed and implemented a framework of principles, policies and technology to protect both our own information as well as that of our clients. We apply numerous safeguards to maintain the confidentiality, integrity and availability of both client and Company information.
Our business continuity program has been developed to provide reasonable assurance that we will continue to operate in the event of disruptions at our critical facilities. Our business departments have developed operational plans for such disruptions, and we have a staff which devotes its full time to monitoring and facilitating those plans. Our business continuity plan continues to be enhanced and tested to allow for continuous operations in the event of weather-related or other interruptions at our corporate headquarters in Florida or one of our operations processing or data center sites in Florida, Colorado, Tennessee or Michigan.
We have also developed a business continuity plan for each of our PCG retail branches in the event any of these branches is impacted by severe weather.
COMPETITION
The financial services industry is an intensely competitive business. We compete with many other financial services firms, including a number of larger securities firms, most of which are affiliated with major financial services companies, insurance companies, banking institutions and other organizations. We also compete with companies that offer web-based financial services and discount brokerage services, usually with lower levels of service, to individual clients. We compete principally on the basis of the quality of our associates, services, product selection, location and reputation in local markets.
Our ability to compete effectively in these businesses is substantially dependent on our continuing ability to attract, retain and motivate qualified associates, including successful financial advisors, investment bankers, trading professionals, portfolio managers and other revenue producing or specialized personnel.
REGULATION
RJF is a bank holding company subject to the Bank Holding Company Act that has made an election to be a financial holding company. As a financial holding company, RJF is subject to regulation, oversight, and supervision, including periodic examination, by the Fed. RJ Bank is a national bank regulated, supervised and examined by the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”). Our trust company subsidiary also is regulated, supervised and examined by the OCC. The Fed and the FDIC also regulate and may examine RJ Bank and the trust company. Collectively, the rules and regulations of the Fed, the OCC, the FDIC and the CFPB cover all aspects of the banking business, including, for example, lending practices, the receipt of deposits, capital structure, transactions with affiliates, conduct and qualifications of personnel, and as discussed further below, capital requirements. This regulatory and supervisory framework is currently subject to significant changes that can affect the operating costs and permissible businesses of RJF, RJ Bank and the trust company. As a part of their supervisory function, the Fed, the OCC, the FDIC, and the CFPB also have the power to bring enforcement actions for violations of law and, in the case of the Fed, the OCC and the FDIC, unsafe or unsound practices. Our broker-dealer subsidiaries, which also are registered investment advisors, are subject to regulation and oversight by various regulatory and self-regulatory authorities discussed under “Other regulations applicable to our operations” below.
The following discussion summarizes briefly the principal elements of the supervisory and regulatory framework applicable to RJF. The framework is intended to protect our clients and customers, the integrity of the financial markets, and our depositors and the Federal Deposit Insurance Fund and is not intended to protect our creditors or shareholders. These rules and regulations limit our ability to engage in certain activities, as well as our ability to upstream to RJF funds from our regulated subsidiaries, which include RJ Bank or our broker-dealer subsidiaries. To the extent that the following information describes statutory and
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regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory or supervisory policy may have a material effect on our business.
Rules and regulations resulting from the Dodd-Frank Act
In July 2010, the U.S. government enacted sweeping changes to the supervision and regulation of the financial industry through the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The Dodd-Frank Act requires U.S. federal banking and other regulatory agencies to conduct hundreds of rulemakings, studies and reports. These regulatory agencies include: the Commodity Futures Trading Commission; the Securities and Exchange Commission (the “SEC”); the Fed; the OCC; the FDIC; the CFPB; and the Financial Stability Oversight Council. Certain elements of the Dodd-Frank Act became effective immediately; however, the details of some provisions are subject to implementing regulations. Furthermore, some provisions of the Dodd-Frank Act are still subject to further rulemaking proceedings and studies and will take effect over the next several years.
As a result of the Dodd-Frank Act and other regulatory reforms, we are experiencing a period of unprecedented change in financial regulation and supervision. These changes could have a significant impact on how we conduct our business. Many regulatory or supervisory policies remain in a state of flux. As a result, we cannot specifically quantify the impact that such regulatory or supervisory requirements will have on our business and operations (see Item 1A, “Risk Factors,” within this report for further discussion of the potential future impact on our operations). Below, we highlight certain of the more significant changes brought about as a result of the Dodd-Frank Act.
FDIC Assessment Rates
Since RJ Bank provides deposits covered by FDIC insurance, generally up to $250,000 per account ownership type, RJ Bank is subject to the Federal Deposit Insurance Act. In February 2011, pursuant to the Dodd-Frank Act, the FDIC issued a final rule changing its assessment base. For banks with greater than $10 billion in assets, the FDIC’s new rule changed the assessment rate calculation, which relies on a scorecard designed to measure financial performance and ability to withstand stress in addition to measuring the FDIC’s exposure should the bank fail. This new rule became effective for RJ Bank beginning with the December 2013 assessment period.
CFPB Oversight
In July 2011, the CFPB began operations and was given rulemaking authority for a wide range of consumer protection laws that apply to all banks and was provided broad powers to supervise and enforce federal consumer protection laws. The CFPB has supervisory and enforcement powers under several consumer protection laws, including the: (i) Equal Credit Opportunity Act; (ii) Truth in Lending Act; (iii) Real Estate Settlement Procedures Act; (iv) Fair Credit Reporting Act; (v) Fair Debt Collection Act; (vi) Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and unfair, deceptive or abusive acts or practices under section 1031 of the Dodd-Frank Act. Beginning with fiscal year 2014, the CFPB assumed supervisory authority over RJ Bank for its compliance with the various federal consumer protection laws. The CFPB has authority to promulgate regulations, issue orders, draft policy statements, conduct examinations, and bring enforcement actions. The creation of the CFPB has led to enhanced enforcement of consumer protection laws. To the extent that, as a result of such heightened scrutiny and oversight, we become the subject of any enforcement activity, we may be required to pay fines, incur penalties, or engage in certain remediation efforts.
Stress Tests
In October 2012, the Fed, FDIC and OCC jointly issued final rules requiring certain bank holding companies, state member banks, and savings and loan companies with total assets between $10 billion and $50 billion to conduct annual company-prepared stress tests, report the results to their primary regulator and the Fed (who is RJF’s primary regulator), and publish a summary of the results. Stress tests must be conducted using certain scenarios (baseline, adverse, and severely adverse) prescribed by the Fed. RJF was required to conduct its first stress test by March 2014. The Dodd-Frank Act also required that RJF begin publicly disclosing a summary of certain stress test results no later than June 30, 2015 for the stress test cycle beginning on October 1, 2014. The summary of certain stress test results is available on our website under “More... - Investors - Financial Reports - Other Reports and Information - 2016 Annual Dodd-Frank Act Stress Test Disclosure” (the information on our website is not incorporated by reference into this report).
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The Volcker Rule
RJF is subject to the Volcker Rule, which generally prohibits, subject to exceptions, insured depository institutions, bank holding companies and their affiliates (together, “Banking Entities”) from engaging in “proprietary trading” or acquiring or retaining an ownership interest in a hedge fund or private equity fund (“covered funds”). Banking Entities engaged in proprietary trading and/or investments in covered funds must establish a Volcker Rule-specific compliance program. We have adopted a program, which is designed to be effective in ensuring compliance with the Volcker Rule, however, in connection with their examinations, regulators will assess the sufficiency and adequacy of our program. The Volcker Rule also limits investments in, and relationships with, covered funds. The conformance period for compliance with the rule with respect to investments in certain illiquid funds has been extended and Banking Entities may still apply for an additional five-year extension with respect to investments in certain illiquid funds. We maintain a number of private equity investments, some of which meet the definition of covered funds under the Volcker Rule. The extension of the conformance deadline provides us with additional time to realize the value of these investments in due course and implement any additional actions necessary for conformance with the rule. To the extent that any of our covered funds satisfy the Fed’s criteria for further extension for certain illiquid funds, we may apply for such extensions, although there is no assurance that any such extension would be granted.
Basel III and U.S. Capital Rules
Both RJF, as a bank holding company, and RJ Bank are subject to capital requirements that have increased due to recent regulatory actions. In July 2013, the OCC, the Fed and the FDIC released final U.S. rules implementing the Basel III capital framework developed by the Basel Committee on Banking Supervision and certain Dodd-Frank Act and other capital provisions and updated the prompt corrective action framework to reflect the new regulatory capital minimums (the “U.S. Basel III Rules”). The U.S. Basel III Rules: (i) increase the quantity and quality of regulatory capital; (ii) establish a capital conservation buffer; and (iii) make changes to the calculation of risk-weighted assets. The U.S. Basel III Rules became effective for RJF on January 1, 2015, subject to applicable phase-in periods. The rules governing the capital conservation buffer became effective for both RJF and RJ Bank as of January 1, 2016. See Note 25 of the Notes to the Consolidated Financial Statements in this Form 10-K for information regarding RJF and RJ Bank regulatory capital levels and ratios, including information regarding the capital conservation buffer. The increased capital requirements could restrict our ability to grow during favorable market conditions or require us to raise additional capital. As a result, our business, results of operations, financial condition and prospects could be adversely affected. See Item 1A, “Risk Factors,” within this report for more information.
Failure to meet minimum capital requirements can trigger discretionary, and in certain cases, mandatory actions by regulators that could have a direct material effect on the financial results of RJF and RJ Bank. Under capital adequacy guidelines, RJF and RJ Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification for RJF and RJ Bank are also subject to the qualitative judgments of U.S. regulators based on components of capital, risk-weightings of assets, off-balance sheet transactions, and other factors. Quantitative measures established by federal banking regulations to ensure capital adequacy require that RJF, as a financial holding company, and RJ Bank maintain minimum amounts and ratios of: (i) Common Equity Tier 1 (or “CET1”), Tier 1 and Total capital to risk-weighted assets; (ii) Tier 1 capital to average assets; and (iii) capital conservation buffers. See Item 7, “Regulatory” in this report and Note 25 of the Notes to the Consolidated Financial Statements in this Form 10-K, for further information.
Money Market Funds
In July 2014, the SEC adopted amendments to the rules that govern money market mutual funds. The amendments make structural and operational reforms to address risks of excessive withdrawals over relatively short time frames by investors from money market funds, while preserving the benefits of the funds. We do not sponsor any money market funds. We utilize such funds in limited circumstances for our own investment purposes as well as to offer our clients with money market funds that are sponsored by third parties as one of several cash sweep alternatives.
Municipal Advisor Regulation
In September 2013, the SEC issued final rules regarding the mandatory registration of “municipal advisors” as required under the Dodd-Frank Act. These final rules for municipal advisors, which became effective in July 2014: (i) impose a fiduciary duty on municipal advisors when advising municipal entities; (ii) may result in the need for new written representations by issuers; and (iii) may limit the manner in which we, in our capacity as an underwriter or in our other professional roles, interact with municipal issuers. Our municipal finance business became subject to additional regulation and oversight by the SEC by virtue of our registration with the SEC as a municipal advisor in 2014. In August 2014, the SEC also announced that it will undertake a two-year review of municipal advisors as part of an exam initiative.
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Moreover, in December 2015, the Municipal Securities Rulemaking Board (the “MSRB”) received approval from the SEC on new MSRB Rule G-42 (regarding duties of non-solicitor municipal advisors) and related amendments to MSRB Rule G-8 (regarding books and records to be made by municipal advisors, among others), all of which became effective in June 2016. Additional rulemaking by the MSRB may cause further changes to the manner in which state and local governments are able to interact with outside finance professionals. These new rules may impact the nature of our interactions with public finance clients, as well as potentially have a negative short-term impact on the volume of public finance financing transactions while the industry attempts to adapt to the new regulatory landscape. However, we do not expect these new rules to have a materially adverse impact on our public finance results of operations, which are included in our Capital Markets segment.
Fiduciary Duty Standard
Pursuant to the Dodd-Frank Act, the SEC was charged with considering whether broker-dealers should be subject to a standard of care similar to the fiduciary standard applicable to registered investment advisors. The SEC has not yet proposed rules relating to a new standard of conduct applicable to broker-dealers. However in April 2016, the U.S. Department of Labor (the “DOL”) issued its final regulation (the “DOL Rule”) expanding the definition of who is deemed an “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (“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 arrangements (“IRAs”) and non-ERISA plans (collectively, “qualified plans”). As a result of adopting a new definition of “fiduciary” under ERISA, the final rule extends fiduciary status to many investment professionals that have not been considered fiduciaries under current law. A fiduciary is subject to strict duties to act solely in the interests of plan participants and beneficiaries and is personally liable to the ERISA plan for breaches in its discharge of its duties.
The DOL Rule also contains exemptions, including the Best Interest Contract exemption (the “BIC Exemption”) and Principal Transactions in Certain Assets exemption (the “Principal Transactions Exemption”), designed to enable investment professionals that will become fiduciaries to continue to operate under existing business models that would otherwise be prohibited, subject to compliance with new conditions. In order to rely on these exemptions, we will be required to: (i) act under defined impartial conduct standards that are in the best interest of our client; (ii) adopt certain anti-conflict policies and procedures; (iii) provide disclosure of certain information relating to fees, compensation and defined “material conflicts of interest;” (iv) provide a written acknowledgment of fiduciary status; and (v) for IRAs and non-ERISA plans, enter into an enforceable contract with our client that contains extensive warranties and does not allow exculpatory provisions waiving the client’s rights and remedies, including the right to participate in a class action in court. The DOL Rule became effective as of June 7, 2016, with phase-in of the fiduciary definition not applicable until April 10, 2017, and further transition periods until January 1, 2018 applying to both the BIC Exemption and Principal Transactions Exemption.
We are evaluating the impact of the DOL Rule on our business. However, because qualified accounts, particularly IRA accounts, comprise a significant portion of our business, we expect that compliance with the DOL Rule and reliance on the BIC Exemption and the Principal Transactions Exemption will require us to incur increased legal, compliance and information technology costs. In addition, as discussed above, we may face enhanced legal risks.
Incentive-Based Compensation Arrangements
Pursuant to the Dodd-Frank Act, six federal agencies are charged with jointly prescribing regulations or guidelines related to the prohibition of incentive-based compensation arrangements that encourage inappropriate risks at certain financial institutions. The agencies have released a proposed rule that would prohibit certain forms of incentive-based compensation arrangements for financial institutions with greater than $1 billion in total assets (the “Incentive-Based Compensation Proposal”). Much of the Incentive-Based Compensation Proposal would apply to financial institutions categorized as either “Level 1” institutions (assets of $250 billion or more) or “Level 2” institutions (assets of $50 billion to $250 billion), while “Level 3” institutions (assets of $1 billion to $50 billion) would be subject to less extensive obligations. All covered financial institutions would be required to, among other requirements: (i) annually document the structure of their incentive-based compensation arrangements; (ii) retain records of such annual documentation for at least seven years; and (iii) comply with general prohibitions on incentive-based compensation arrangements that could encourage inappropriate risk-taking. Should the Incentive-Based Compensation Proposal be adopted, we would be subject to the rule’s requirements as a “Level 3” financial institution, which would require us to incur additional legal and compliance costs, as well as subject us to increased legal risks.
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Other regulations applicable to our operations
The SEC is the federal agency charged with administration of the federal securities laws in the United States. Our broker-dealer subsidiaries are subject to SEC regulations relating to their business operations, including sales and trading practices, public offerings, publication of research reports, use and safekeeping of client funds and securities, capital structure, record-keeping, privacy requirements, and the conduct of directors, officers and employees. Financial services firms are also subject to regulation by state securities commissions in those states in which they conduct business. RJ&A and RJFS are currently registered as broker-dealers in all 50 states.
Broker-dealers are required to maintain the minimum net capital deemed necessary to meet their continuing commitments to customers and others, and are required to keep their assets in relatively liquid form. These rules also limit the ability of broker-dealers to transfer capital to parent companies and other affiliates. The SEC has adopted amendments to its financial stability rules, many of which became effective as of October 2013 and are applicable to our broker-dealer subsidiaries, including changes to the; (i) net capital rule; (ii) customer protection rule; (iii) record-keeping rules; and (iv) notification rules. We continue to evaluate the impact of these amendments on our broker-dealer subsidiaries; however, based on our current analysis, we do not believe these amendments will have a material adverse effect on any of our broker-dealer subsidiaries.
Financial services firms are subject to regulation by various foreign governments, securities exchanges, central banks and regulatory bodies, particularly in those countries where they have established offices. Outside of the United States, we have additional offices in Europe, Canada and Latin America that are subject to local regulatory bodies in these territories.
Much of the regulation of broker-dealers in the United States and Canada, however, has been delegated to self-regulatory organizations (“SROs”), the Financial Industry Regulatory Authority (“FINRA”), the Investment Industry Regulatory Organization of Canada (“IIROC”) and securities exchanges. These SROs adopt and amend rules for regulating the industry, subject to the approval of government agencies. These SROs also conduct periodic examinations of member broker-dealers.
The SEC, SROs and state securities commissions may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees. Such administrative proceedings, whether or not resulting in adverse findings, can require substantial expenditures and may adversely impact the reputation of a broker-dealer.
Our U.S. broker-dealer subsidiaries are subject to the Securities Investor Protection Act (“SIPA”) and are required by federal law to be members of the Securities Investors Protection Corporation (“SIPC”). The SIPC was established under SIPA, and oversees the liquidation of broker-dealers during liquidation or financial distress. The SIPC fund provides protection for cash and securities held in client accounts up to $500,000 per client, with a limitation of $250,000 on claims for cash balances.
RJ Ltd. is currently registered in all provinces and territories in Canada. The financial services industry in Canada is subject to comprehensive regulation under both federal and provincial laws. Securities commissions have been established in all provinces and territorial jurisdictions, which are charged with the administration of securities laws. Investment dealers in Canada are also subject to regulation by SROs, which are responsible for the enforcement of, and conformity with, securities legislation for their members and have been granted the powers to prescribe their own rules of conduct and financial requirements of members. RJ Ltd. is regulated by each of the securities commissions in the jurisdictions of registration, as well as by the SROs and IIROC. IIROC requires that RJ Ltd. be a member of the Canadian Investors Protection Fund (the “CIPF”), whose primary role is investor protection. The CIPF provides protection for securities and cash held in client accounts up to $1 million Canadian currency (“CDN”) per client, with separate coverage of CDN $1 million for certain types of accounts. See Note 25 of the Notes to Consolidated Financial Statements in this Form 10-K for further information on SEC, FINRA and IIROC regulations pertaining to broker-dealer regulatory minimum net capital requirements.
Our investment advisory operations, including the mutual funds that we sponsor, are also subject to extensive regulation in the United States. Our U.S. asset managers are registered as investment advisors with the SEC under the Investment Advisers Act of 1940 as amended (the “Investment Advisers Act”), and are also required to make notice filings in certain states. Virtually all aspects of our asset management business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to benefit the asset management clients.
RJ Bank is also subject to the Community Reinvestment Act (the “CRA”). The CRA is intended to encourage banks to help meet the credit needs of their communities, including low and moderate income neighborhoods, consistent with safe and sound bank operations. Under the CRA, the Fed, the FDIC and the OCC are required to periodically examine and assign to each bank one of the following public CRA ratings: “outstanding;” “satisfactory;” “needs to improve;” or “substantial noncompliance.” Members of the public may submit comments on a bank’s performance under the CRA; such comments will form part of the bank’s performance evaluation. The results of the evaluation, together with the bank’s CRA rating, are also taken into consideration
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when evaluating mergers, acquisitions, and applications to open a branch or facility. RJ Bank could face additional requirements and limitations should it fail to adequately meet the criteria stipulated under the CRA.
Bank Secrecy Act and USA PATRIOT Act of 2001
The Bank Secrecy Act and the USA PATRIOT Act of 2001 (“Patriot Act”) and requirements administered by the Office of Foreign Assets Control (“OFAC”) require financial institutions, among other things, to implement a risk-based program reasonably designed to prevent money laundering and to combat the financing of terrorism, including through suspicious activity and currency transaction reporting, compliance, record-keeping and due diligence on customers. The Patriot Act also contains financial transparency laws and enhanced information collection tools and enforcement mechanisms for the U.S. government, including: due diligence and record-keeping requirements for private banking and correspondent accounts; standards for verifying customer identification at account opening; and rules to produce certain records upon request of a regulator or law enforcement and to promote cooperation among financial institutions, regulators, and law enforcement in identifying parties that may be involved in terrorism, money laundering and other crimes. Failure to meet the requirements of the Bank Secrecy Act, the Patriot Act, or OFAC can lead to supervisory actions including fines.
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of the registrant (which includes officers of certain significant subsidiaries) are as follows:
Jennifer C. Ackart | 52 | Senior Vice President since August, 2009 and Controller since February, 1995 |
Bella Loykhter Allaire | 63 | Executive Vice President - Technology and Operations - Raymond James & Associates, Inc. since June, 2011; Managing Director and Chief Information Officer - UBS Wealth Management Americas, November, 2006 - January, 2011 |
Paul D. Allison | 60 | Chairman, President and CEO - Raymond James Ltd. since January, 2009; Co-President and Co-CEO - Raymond James Ltd., August, 2008 - January, 2009 |
John C. Carson, Jr. | 60 | President since April, 2012; President - Morgan Keegan & Company, LLC, formerly known as Morgan Keegan & Company, Inc., since July, 2013; Chief Executive Officer and Executive Managing Director - Morgan Keegan & Company, Inc., March, 2008 - July, 2013 |
George Catanese | 57 | Senior Vice President since October, 2005 and Chief Risk Officer since February, 2006 |
Scott A. Curtis | 54 | President - Raymond James Financial Services, Inc. since January, 2012; Senior Vice President - Private Client Group - Raymond James & Associates, Inc., July, 2005 - December, 2011 |
Jeffrey A. Dowdle | 52 | President - Asset Management Group since May, 2016; Executive Vice President - Asset Management Group, February, 2014 - May, 2016; President - Asset Management Services - Raymond James & Associates, Inc., January, 2005 - February, 2014; Senior Vice President - Raymond James & Associates, Inc., January, 2005 - February, 2014 |
Tashtego S. Elwyn | 45 | President - Private Client Group - Raymond James & Associates, Inc. since January, 2012; Regional Director - Raymond James & Associates, Inc., October, 2006 - December, 2011 |
Jeffrey P. Julien | 60 | Executive Vice President - Finance since August, 2009, Chief Financial Officer since April, 1987 and Treasurer since February, 2011; Director and/or officer of several RJF subsidiaries |
Steven M. Raney | 51 | President and CEO - Raymond James Bank, N.A. since January, 2006 |
Paul C. Reilly | 62 | Chief Executive Officer since May, 2010; Director since January, 2006; President, May, 2009 - April, 2010 |
Jonathan N. Santelli | 45 | Executive Vice President, General Counsel and Secretary since May, 2016; Senior Vice President and Deputy General Counsel - First Republic Bank, October, 2013 to April, 2016; Managing Director and Associate General Counsel - Preferred and Small Business Banking - Bank of America, December, 2011 - August, 2013; Managing Director and Associate General Counsel - Private Wealth Management - Bank of America, October, 2009 - November, 2011 |
Jeffrey E. Trocin | 57 | President - Global Equities and Investment Banking - Raymond James & Associates, Inc. since July, 2013; Executive Vice President - Equity Capital Markets - Raymond James & Associates, Inc., February, 2001 - July, 2013 |
Dennis W. Zank | 62 | Chief Operating Officer since January, 2012; Chief Executive Officer - Raymond James & Associates, Inc. since January, 2012; President - Raymond James & Associates, Inc., December, 2002 - December, 2011 |
Except where otherwise indicated, the executive officer has held his or her current position for more than five years.
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OTHER INFORMATION
Our Internet address is www.raymondjames.com. We make available on our website, free of charge and in printer-friendly format including “.pdf” file extensions, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Factors affecting “forward-looking statements”
Certain statements made in this Annual Report on Form 10-K 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 Item 1A, “Risk Factors,” in this report. 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.
Item 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, liquidity and the trading price of our common stock. The list of risk factors provided below is not exhaustive; there may be factors not discussed below or in this Form 10-K that adversely impact our results of operations, harm our reputation or inhibit our ability to generate new business prospects.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Damage to our reputation could damage our businesses.
Maintaining our reputation is critical to attracting and maintaining clients, customers, investors and associates. If we fail to address, or appear to fail to address, issues that may give rise to reputational risk, we could significantly harm our business prospects. These issues may include, but are not limited to, any of the risks discussed in this Item 1A, including appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money laundering, cybersecurity and privacy, record-keeping, and sales and trading practices, the failure to sell securities we have underwritten at the anticipated price levels, and the proper identification of the legal, reputational, credit, liquidity, and market risks inherent in our products. Failure to maintain appropriate service and quality standards, or a failure or perceived failure to treat customers and clients fairly, can result in client dissatisfaction, litigation and heightened regulatory scrutiny, all of which can lead to lost revenue, higher operating costs and reputational harm. Further, negative publicity about us, whether or not true, may also harm our future business prospects.
We are affected by domestic and international macroeconomic conditions that impact the global financial markets.
We are engaged in various financial services businesses. As such, we are affected by domestic and international macroeconomic and political conditions, including economic output levels, interest and inflation rates, employment levels, prices of commodities including oil and gas, consumer confidence levels, and fiscal and monetary policy. For example, Fed policies determine, in large part, the cost of funds for lending and investing and the return earned on those loans and investments. The market impact from such policies also can decrease materially the value of certain of our financial assets, most notably debt securities. Changes in Fed policies are beyond our control and, consequently, the impact of these changes on our activities and results of our operations are difficult to predict. Macroeconomic conditions also may directly and indirectly impact a number of factors in the global financial markets that may be detrimental to our operating results, including trading levels, investing, and origination activity in the securities markets, security valuations, the absolute and relative level and volatility of interest and currency rates, real estate values, the actual and perceived quality of issuers and borrowers, and the supply of and demand for loans and deposits.
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At times over the last several years we have experienced operating cycles during weak and uncertain U.S. and global economic conditions, including low economic output levels, artificially maintained levels of historically low interest rates, relatively high unemployment rates, and significant uncertainty with respect to domestic and international fiscal and monetary policy. These conditions led to changes in the global financial markets that from time to time negatively impacted our net revenue and profitability. While global financial markets have shown signs of improvement, uncertainty remains. A period of sustained downturns and/or volatility in the securities markets, prolonged continuation of the artificially low level of short-term interest rates, a return to increased credit market dislocations, reductions in the value of real estate, and other negative market factors could significantly impair our revenues and profitability. We could experience a decline in commission revenue from lower trading volumes, a decline in fees from reduced portfolio values of securities managed on behalf of our clients, a reduction in revenue from capital markets and advisory transactions due to reduced activity, increased credit provisions and charge-offs, losses sustained from our customers’ and market participants’ failure to fulfill their settlement obligations, reduced net interest earnings, and other losses. Periods of reduced revenue and other losses could be accompanied by periods of reduced profitability because certain of our expenses, including, but not limited to, our interest expense on debt, rent, facilities and salary expenses are fixed and, our ability to reduce them over short time periods is limited.
U.S. markets may also be impacted by political and civil unrest occurring in the Middle East and in Eastern Europe and Russia. Concerns about the European Union (“EU”), including Britain’s June 23, 2016 referendum to exit the EU (“Brexit”), and the stability of the EU’s sovereign debt, has caused uncertainty and disruption for financial markets globally. Continued uncertainties loom over the outcome of the EU’s financial support programs. It is possible that other EU member states may experience financial troubles in the future, or may choose to follow Britain’s lead and leave the EU. Any negative impact on economic conditions and global markets from these developments could adversely affect our business, financial condition and liquidity.
U.S. state and local governments also continue to struggle with budget pressures caused by the ongoing less than optimal economic environment and ongoing concerns regarding municipal issuer credit quality. If these trends continue or worsen, investor concerns could potentially reduce the number and size of transactions in which we participate and, in turn, reduce investment banking revenues. In addition, such factors could adversely affect the value of the municipal securities we hold in our trading securities portfolio.
RJ Bank is particularly affected by economic conditions in North America. Market conditions in the United States and Canada can be assessed through the following metrics: the level and volatility of interest rates; the unemployment and under-employment rates; real estate prices; consumer confidence levels and changes in consumer spending; and the number of personal bankruptcies, among others. Deterioration of market conditions can diminish loan demand, lead to an increase in mortgage and other loan delinquencies, affect loan repayment performance and result in higher reserves and net charge-offs, which can adversely affect our earnings.
Lack of liquidity or access to capital could impair our business and financial condition.
We must maintain appropriate liquidity levels. Our inability to maintain adequate liquidity and readily available access to the credit and capital markets could have a significant negative effect on our financial condition. If liquidity from our brokerage or banking operations is inadequate or unavailable, we may be required to scale back or curtail our operations, including limiting our efforts to recruit additional financial advisors, sell assets at unfavorable prices, and cut or eliminate dividend payments. Our liquidity could be negatively affected by the inability of our subsidiaries to generate cash in the form of dividends from earnings, regulatory changes to the liquidity or capital requirements applicable to our subsidiaries that may prevent us from upstreaming cash to the parent company, limited or no accessibility to credit markets for secured and unsecured borrowings by our subsidiaries, diminished access to the capital markets for RJF, and other commitments or restrictions on capital as a result of adverse legal settlements, judgments, or regulatory sanctions. Furthermore, as a bank holding company, we may become subject to a prohibition or limitations on our ability to pay dividends or repurchase our stock. The OCC, the Fed, the FDIC, and the SEC (through FINRA) have the authority, and under certain circumstances, the duty, to prohibit or to limit dividend payments by regulated subsidiaries to their parent.
The availability of financing, including access to the credit and capital markets, depends on various factors, such as conditions in the debt and equity markets, the general availability of credit, the volume of securities trading activity, the overall availability of credit to the financial services sector, and our credit ratings. Our cost of capital and the availability of funding may be adversely affected by illiquid credit markets and wider credit spreads. Additionally, lenders may from time to time curtail, or even cease to provide, funding to borrowers as a result of future concerns over the strength of specific counterparties, as well as the stability of markets generally. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in this report for additional information on liquidity and how we manage our liquidity risk.
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A downgrade in our credit ratings could have a material adverse effect on our operations, earnings and financial condition.
If our credit ratings were downgraded, or if rating agencies indicate that a downgrade may occur, our business, financial position, and results of operations could be adversely affected, perceptions of our financial strength could be damaged, and as a result, adversely affect our client relationships. Such a change in our credit ratings could also adversely affect our liquidity and competitive position, increase our borrowing costs, limit our access to the capital markets, trigger obligations under certain financial agreements, or decrease the number of investors, clients and counterparties willing or permitted to do business with or lend to us, thereby curtailing our business operations and reducing profitability.
We may not be able to obtain additional outside financing to fund our operations on favorable terms, or at all. The impact of a credit rating downgrade to a level below investment grade would result in our breaching provisions in certain of our derivative instruments, and may result in a request for immediate payment and/or ongoing overnight collateralization on our derivative instruments in liability positions (see Note 18 of the Notes to Consolidated Financial Statements in this Form 10-K for such information). A credit rating downgrade would also result in RJF incurring a higher commitment fee on any unused balance on its $300 million revolving credit facility executed on August 6, 2015, in addition to triggering a higher interest rate applicable to any borrowings outstanding on the line as of and subsequent to such downgrade (see Note 15 of the Notes to Consolidated Financial Statements in this Form 10-K for information on this revolving credit facility).
We are exposed to market risk.
We are, directly and indirectly, affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. For example, interest rate changes could adversely affect our net interest spread, the difference between the yield we earn on our assets and the interest rate we pay for deposits and other sources of funding, which in turn impacts our net interest income and earnings. Interest rate changes could affect the interest earned on assets differently than interest paid on liabilities. In our brokerage operations, a rising interest rate environment generally results in our earning a larger net interest spread. Conversely, in those operations, a falling interest rate environment generally results in our earning a smaller net interest spread. If we are unable to effectively manage our interest rate risk, changes in interest rates could have a material adverse effect on our profitability.
Market risk is inherent in the financial instruments associated with our operations and activities, including loans, deposits, securities, short-term borrowings, long-term debt, trading account assets and liabilities, derivatives, and venture capital and private equity investments. Market conditions that change from time to time, thereby exposing us to market risk, include fluctuations in interest rates, equity prices, relative exchange rates, and price deterioration or changes in value due to changes in market perception or actual credit quality of an issuer.
In addition, disruptions in the liquidity or transparency of the financial markets may result in our inability to sell, syndicate or realize the value of security positions, thereby leading to increased concentrations. The inability to reduce our positions in specific securities may not only increase the market and credit risks associated with such positions, but also increase the level of risk-weighted assets on our balance sheet, thereby increasing our capital requirements, which could have an adverse effect on our business results, financial condition and liquidity.
Our venture capital and private equity investments are carried at fair value with unrealized gains and losses reflected in earnings. The value of our private equity portfolios can fluctuate and earnings from our venture capital investments can be volatile and difficult to predict. When, and if, we recognize gains can depend on a number of factors, including general economic conditions, the prospects of the companies in which we invest, when these companies go public, the size of our position relative to the public float and whether we are subject to any resale restrictions. Further, our investments could incur significant mark-to-market losses, especially if they have been written up in prior periods because of higher market prices.
See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report for additional information regarding our exposure to and approaches to managing market risk.
We are exposed to credit risk.
We are generally exposed to the risk that third parties that owe us money, securities or other assets will fail to meet their performance obligations due to numerous causes, including bankruptcy, lack of liquidity, or operational failure, among others. We actively buy and sell securities from and to clients and counterparties in the normal course of our broker-dealers’ market making and underwriting businesses, which exposes us to credit risk. Although generally collateralized by the underlying security to the transaction, we still face risk associated with changes in the market value of collateral through settlement date. We also hold
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certain securities, loans and derivatives in our trading accounts. Deterioration in the actual or perceived credit quality of the underlying issuers of securities or loans, or the non-performance of issuers and counterparties to certain derivative contracts could result in trading losses.
We borrow securities from, and lend securities to, other broker-dealers, and may also enter into agreements to repurchase and/or resell securities as part of investing and financing activities. A sharp change in the security market values utilized in these transactions may result in losses if counterparties to these transactions fail to honor their commitments.
We manage the risk associated with these transactions by establishing and monitoring credit limits, as well as by monitoring collateral and transaction levels daily. Significant deterioration in the credit quality of one of our counterparties could lead to widespread concerns about the credit quality of other counterparties in the same industry, thereby exacerbating our credit risk exposure.
We permit our clients to purchase securities on margin. During periods of steep declines in securities prices, the value of the collateral securing client margin loans may fall below the amount of the purchaser’s indebtedness. If clients are unable to provide additional collateral for these margin loans, we may incur losses on those margin transactions. This may cause us to incur additional expenses defending or pursuing claims or litigation related to counterparty or client defaults.
We deposit our cash in depository institutions as a means of maintaining the liquidity necessary to meet our operating needs, and we also facilitate the deposit of cash awaiting investment in depository institutions on behalf of our clients. A failure of a depository institution to return these deposits could severely impact our operating liquidity, result in significant reputational damage, and adversely impact our financial performance.
We also incur credit risk by lending to businesses and individuals through the offering of: C&I loans, commercial and residential mortgage loans, tax-exempt loans, home equity lines of credit, and margin and other loans collateralized by securities. We incur credit risk through our investments. Our credit risk and credit losses can increase if our loans or investments are concentrated among borrowers or issuers engaged in the same or similar activities, industries, or geographies, or to borrowers or issuers who as a group may be uniquely or disproportionately affected by economic or market conditions. The deterioration of an individually large exposure, for example due to natural disasters, health emergencies or pandemics, acts of terrorism, severe weather events or other adverse economic events, could lead to additional loan loss provisions and/or charges-offs, or credit impairment of our investments, and subsequently have a material impact on our net income and regulatory capital.
Declines in the real estate market or sustained economic downturns may cause us to write down the value of some of the loans in RJ Bank’s portfolio, foreclose on certain real estate properties or write down the value of some of our available for sale securities portfolio. Credit quality generally may also be affected by adverse changes in the financial performance or condition of our debtors or deterioration in the strength of the U.S. economy. Our policies also can adversely affect borrowers, potentially increasing the risk that they may fail to repay their loans or satisfy their obligations to us.
See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report for additional information regarding our exposure to and approaches to managing credit risk.
The soundness of other financial institutions and intermediaries affects us.
We face the risk of operational failure, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other financial intermediaries that we use to facilitate our securities transactions. As a result of the consolidation over the years among clearing agents, exchanges and clearing houses, our exposure to certain financial intermediaries has increased and could affect our ability to find adequate and cost-effective alternatives should the need arise. Any failure, termination or constraint of these intermediaries could adversely affect our ability to execute transactions, service our clients and manage our exposure to risk.
Our ability to engage in routine trading and funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, funding, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients. Defaults by, or even rumors or questions about the financial condition of, one or more financial services institutions, or the financial services industry generally, have historically led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us
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cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. Losses arising in connection with counterparty defaults may have a material adverse effect on our results of operations.
Our business depends on fees generated from the distribution of financial products, fees earned from the management of client accounts by our asset management subsidiaries, and advisory fees.
A large portion of our revenues are derived from fees generated from the distribution of financial products, such as mutual funds and variable annuities. Changes in the structure or amount of the fees paid by the sponsors of these products could directly affect our revenues, business and financial condition. In addition, if these products experience losses or increased investor redemptions, we may receive lower fee revenue from the investment management and distribution services we provide on behalf of the mutual funds and annuities. The investment management fees we are paid may also decline over time due to factors such as increased competition, renegotiation of contracts and the introduction of new, lower-priced investment products and services. Changes in market values or in the fee structure of asset management accounts would affect our revenues, business and financial condition. Asset management fees often are primarily comprised of base management and incentive fees. Management fees are primarily based on assets under management (“AUM”). AUM balances are impacted by net inflow/outflow of client assets and market values. Below-market investment performance by our funds and portfolio managers could result in a loss of managed accounts and could result in reputational damage that might make it more difficult to attract new investors and thus further impact our business and financial condition. If we were to experience the loss of managed accounts, our fee revenue would decline. In addition, in periods of declining market values, our asset values under management may resultantly decline, which would negatively impact our fee revenues.
Our underwriting, market-making, trading, and other business activities place our capital at risk.
We may incur losses and be subject to reputational harm to the extent that, for any reason, we are unable to sell securities which we have underwritten at the anticipated price levels. As an underwriter, we also are subject to heightened standards regarding liability for material misstatements or omissions in prospectuses and other offering documents relating to offerings in which we are involved. As a market maker, we may own positions in specific securities, and these undiversified holdings concentrate the risk of market fluctuations and may result in greater losses than would be the case if our holdings were more diversified. In addition, despite risk mitigation policies, we may incur losses as a result of positions we hold in connection with our market making or underwriting activities.
From time to time and as part of our underwriting processes, we may carry significant positions in securities of a single issuer or issuers engaged in a specific industry. Sudden changes in the value of these positions could impact our financial results.
We have made and, to the limited extent permitted by applicable regulations, may continue to make principal investments in private equity funds and other illiquid investments. We may be unable to realize our investment objectives if we cannot sell or otherwise dispose of our interests at attractive prices or complete a desirable exit strategy. In particular, these risks could arise from changes in the financial condition or prospects of the portfolio companies in which investments are made, changes in economic conditions or changes in laws, regulations, fiscal policies or political conditions. It could take a substantial period of time to identify attractive investment opportunities and then to realize the cash value of such investments. Even if a private equity investment proves to be profitable, it may be several years or longer before any profits can be realized in cash.
We continue to experience pricing pressures in areas of our business which may impair our future revenue and profitability.
We continue to experience pricing pressures on trading margins and commissions in fixed income and equity trading. In the fixed income market, regulatory requirements have resulted in greater price transparency, leading to price competition and decreased trading margins. In the equity market, we experience pricing pressure from institutional clients to reduce commissions, and this pressure has been augmented by the use of electronic and direct market access trading, which has created additional competitive downward pressure on trading margins. We believe that price competition and pricing pressures in these and other areas will continue as institutional investors continue to reduce the amounts they are willing to pay, including by reducing the number of brokerage firms they use, and some of our competitors seek to obtain market share by reducing fees, commissions or margins.
We face intense competition.
We are engaged in intensely competitive businesses. We compete on the basis of a number of factors, including the quality of our financial advisors and associates, our products and services, pricing (such as execution pricing and fee levels), and location and reputation in relevant markets. Over time there has been substantial consolidation and convergence among companies in the
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financial services industry, which has significantly increased the capital base and geographic reach of our competitors. See the section entitled “Competition” of Item 1 of this report for additional information about our competitors.
We compete directly with national full service broker-dealers, investment banking firms, and commercial banks, and to a lesser extent, with discount brokers and dealers and investment advisors. In addition, we face competition from more recent entrants into the market and increased use of alternative sales channels by other firms. We also compete indirectly for investment assets with insurance companies, real estate firms and hedge funds, among others. This competition could cause our business to suffer.
To remain competitive, our future success also depends in part on our ability to develop and enhance our products and services. The inability to develop new products and services, or enhance existing offerings, could have a material adverse effect on our profitability. In addition, we may incur substantial expenditures to keep pace with the constant changes and enhancements being made in technology, including improvements made to internet connectivity, networking and telecommunications systems.
Our ability to attract and retain senior professionals, qualified financial advisors and other associates is critical to the continued success of our business.
Our ability to develop and retain our clients depends on the reputation, judgment, business generation capabilities and skills of our senior professionals, particularly our managing directors, and the members of our executive committees, as well as employees and financial advisors. To compete effectively we must attract, retain and motivate qualified professionals, including successful financial advisors, investment bankers, trading professionals, portfolio managers and other revenue producing or specialized personnel. Competitive pressures we experience could have an adverse effect on our business, results of operations, financial condition and liquidity.
Turnover in the financial services industry is high. The cost of retaining skilled professionals in the financial services industry has escalated considerably. Financial industry employers are increasingly offering guaranteed contracts, upfront payments, and increased compensation. These can be important factors in a current employee’s decision to leave us as well as in a prospective employee’s decision to join us. As competition for skilled professionals in the industry remains intense, we may have to devote significant resources to attracting and retaining qualified personnel. To the extent we have compensation targets, we may not be able to retain our employees, which could result in increased recruiting expense or result in our recruiting additional employees at compensation levels that are not within our target range. In particular, our financial results may be adversely affected by the costs we incur in connection with any upfront loans or other incentives we may offer to newly recruited financial advisors and other key personnel. If we were to lose the services of any of our investment bankers, senior equity research, sales and trading professionals, asset managers, or executive officers to a competitor or otherwise, we may not be able to retain valuable relationships and some of our clients could choose to use the services of a competitor instead of our services. If we are unable to retain our senior professionals or recruit additional professionals, our reputation, business, results of operations and financial condition will be adversely affected. Further, new business initiatives and efforts to expand existing businesses generally require that we incur compensation and benefits expense before generating additional revenues.
Moreover, companies in our industry whose employees accept positions with competitors frequently claim that those competitors have engaged in unfair hiring practices. We have been subject to several such claims and may be subject to additional claims in the future as we seek to hire qualified personnel, some of whom may work for our competitors. Some of these claims may result in material litigation. We could incur substantial costs in defending against these claims, regardless of their merits. Such claims could also discourage potential employees who work for our competitors from joining us.
Business growth could increase costs and regulatory and integration risks.
Integrating acquired businesses, including for example, the September 6, 2016 acquisition of the U.S. Private Client Services unit of Deutsche Bank Wealth Management (“Alex. Brown”) and the August 31, 2016 acquisition of MacDougall, MacDougall & MacTier, Inc. (“3Macs”), as well as providing a platform for new businesses and partnering with other firms involve risks and present financial, managerial and operational challenges. We may incur significant expense in connection with expanding our existing businesses, recruiting financial advisors, or making strategic acquisitions or investments. Our overall profitability would be negatively affected if investments and expenses associated with such growth are not matched or exceeded by the revenues derived from such investments or growth.
Expansion may also create a need for additional compliance, documentation, risk management and internal control procedures, and often involves hiring additional personnel to address these procedures. To the extent such procedures are not adequate or not adhered to with respect to our expanded business or any new business, we could be exposed to a material loss or regulatory sanction.
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Moreover, to the extent we pursue acquisitions we may be unable to complete such acquisitions on acceptable terms. We may be unable to integrate any acquired business into our existing business successfully. Difficulties we may encounter in integrating an acquired business could have an adverse effect on our business, financial condition, and results of operations. In addition, we may need to raise capital or borrow in order to finance an acquisition, which could result in dilution or increased leverage. We may not be able to obtain financing on favorable terms or perhaps at all.
A continued interruption to our telecommunications or data processing systems, or the failure to effectively update the technology we utilize, could be materially adverse to our business.
Our businesses rely extensively on data processing and communications systems. In addition to better serving clients, the effective use of technology increases efficiency and enables us to reduce costs. Adapting or developing our technology systems to meet new regulatory requirements, client needs, and competitive demands is critical for our business. Introduction of new technology presents challenges on a regular basis. There are significant technical and financial costs and risks in the development of new or enhanced applications, including the risk that we might be unable to effectively use new technologies or adapt our applications to emerging industry standards.
Our continued success depends, in part, upon our ability to: (i) successfully maintain and upgrade the capability of our technology systems; (ii) address the needs of our clients by using technology to provide products and services that satisfy their demands; and (iii) retain skilled information technology employees. Failure of our technology systems, which could result from events beyond our control, or an inability to effectively upgrade those systems or implement new technology-driven products or services, could result in financial losses, liability to clients, violations of applicable privacy and other applicable laws and regulatory sanctions. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report for additional information regarding our exposure to and approaches for managing these types of operational risks.
Security breaches of our technology systems, or those of our clients or other third-party vendors we rely on, could subject us to significant liability and harm our reputation.
The expectations of sound operational and informational security practices have risen among our clients and vendors, the public at large and regulators. Our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, cyber-attacks and breakdowns. Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although cyber security incidents among financial services firms are on the rise, we have not experienced any material losses relating to cyber-attacks or other information security breaches. However, there can be no assurance that we will not suffer such losses in the future. 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 and counterparties. We may be required to expend significant additional resources to modify our protective measures, to investigate and remediate vulnerabilities or other exposures or to make required notifications. We may also be subject to litigation and financial losses that are neither insured nor covered under any of our current insurance policies. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators.
In providing services to clients, we may manage, utilize and store sensitive or confidential client or employee data, including personal data. As a result, we may be subject to numerous laws and regulations designed to protect this information, such as U.S. federal and state laws governing the protection of personally identifiable information and international laws. These laws and regulations are increasing in complexity and number. If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to client or employee data, or otherwise mismanages or misappropriates such data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. In addition, unauthorized disclosure of sensitive or confidential client or employee data, whether through system failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients and related revenue. Potential liability in the event of a security breach of client data could be significant. Depending on the circumstances giving rise to the breach, this liability may not be subject to a contractual limit or an exclusion of consequential or indirect damages.
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See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report for additional information regarding our exposure to and approaches for managing these types of operational risks.
Associate misconduct, which is difficult to detect and deter, could harm us by impairing our ability to attract and retain clients and subject us to significant legal liability and reputational harm.
There have been a number of highly-publicized cases involving fraud or other misconduct by associates in the financial services industry. There is a risk that our associates could engage in misconduct that adversely affects our business. For example, our banking business often requires that we deal with confidential matters of great significance to our clients. If our associates were to improperly use or disclose confidential information provided by our clients, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial position, current client relationships and ability to attract future clients. We are also subject to a number of obligations and standards arising from our asset management business and our authority over the assets managed by our asset management business. In addition, our financial advisors may act in a fiduciary capacity, providing financial planning, investment advice and discretionary asset management. The violation of these obligations and standards by any of our associates would adversely affect our clients and us. It is not always possible to deter associate misconduct, and the precautions we take to detect and prevent this activity may not be effective. If our associates engage in misconduct, our business would be adversely affected.
Our operations could be adversely affected by serious weather conditions.
Certain of our principal operations are located in St. Petersburg, Florida. While we have a business continuity plan that permits significant operations to be conducted out of our Southfield, Michigan and Memphis, Tennessee locations and our information systems processing to be conducted out of our information technology data center in the Denver, Colorado area, our operations could be adversely affected by hurricanes or other serious weather conditions that could affect the processing of transactions, communications, and the ability of our associates to get to our offices, or work from home. Refer to the “we are exposed to credit risk” risk factor in this Item 1A for a discussion of how events, including weather events, could adversely impact RJ Bank’s loan portfolio. Refer to the “a continued interruption to our telecommunications or data processing systems, or the failure to effectively update the technology we utilize, could be materially adverse to our business” risk factor in this Item 1A for a discussion of how events beyond our control, including weather-related events, could impact our ability to conduct business.
Regions may fail to honor its indemnification obligations associated with Morgan Keegan matters.
Under the definitive stock purchase agreement entered into in connection with our acquisition of Morgan Keegan & Company, Inc., and MK Holding, Inc. and certain of its affiliates (collectively referred to as “Morgan Keegan”) from Regions Financial Corporation (“Regions”), Regions has obligations to continue to indemnify RJF with respect to certain litigation as well as other matters. Specifically, the terms of the agreement provide that Regions will indemnify RJF for losses incurred in connection with legal proceedings pending as of the closing date of that acquisition (April 2, 2012), or commenced thereafter and related to pre-closing matters that were received prior to the closing date, as well as any cost of defense pertaining thereto. RJF is relying on Regions to continue to fulfill its indemnification obligations under the SPA with respect to such matters. Our inability to enforce these indemnification provisions in the future, or our failure to recover future losses for which we are entitled to be indemnified, could result in our incurring significant costs for defense, settlement, and any adverse judgments, and resultantly have an adverse effect on our results of operations, financial condition, and our regulatory capital levels.
See Note 21 of the Notes to Consolidated Financial Statements in this Form 10-K for further information regarding the indemnification from Regions.
We are exposed to litigation risks, which could materially and adversely impact our business operations and prospects.
Many aspects of our business involve substantial risks of liability. We have been named as a defendant or co-defendant in lawsuits and arbitrations involving primarily claims for damages. The risks associated with potential litigation often may be difficult to assess or quantify and the existence and magnitude of potential claims often remain unknown for substantial periods of time. Unauthorized or illegal acts of our associates could result in substantial liability. Our Private Client Group business segment has historically been more susceptible to litigation than our institutional businesses.
In highly volatile markets, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial institutions has historically increased. These risks include potential liability under securities laws or other laws for: alleged materially false or misleading statements made in connection with securities offerings and other transactions; issues related
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to the suitability of our investment recommendations; the inability to sell or redeem securities in a timely manner during adverse market conditions; contractual issues; employment claims; and potential liability for other advice we provide to participants in strategic transactions. Substantial legal liability could have a material adverse financial impact or cause us significant reputational harm, which in turn could seriously harm our business and future business prospects. In addition to the foregoing financial costs and risks associated with potential liability, the costs of defending individual litigation and claims continue to increase over time. The amount of outside attorneys’ fees incurred in connection with the defense of litigation and claims could be substantial and might materially and adversely affect our results of operations.
See Item 3, “Legal Proceedings” in this report for a discussion of our legal matters and Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report for a discussion regarding our approach to managing legal risk.
The preparation of the consolidated financial statements requires the use of estimates that may vary from actual results and new accounting standards could adversely affect future reported results.
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions may require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. One of our most critical estimates is RJ Bank’s allowance for loan losses. At any given point in time, conditions in the real estate and credit markets may increase the complexity and uncertainty involved in estimating the losses inherent in RJ Bank’s loan portfolio. If management’s underlying assumptions and judgments prove to be inaccurate, one outcome could be that the allowance for loan losses could be insufficient to cover actual losses. Our financial condition, including our liquidity and capital, and results of operations could be materially and adversely impacted. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates,” in this report for additional information on the nature of these estimates.
Our financial instruments, including certain trading assets and liabilities, available for sale securities including Auction Rate Securities (“ARS”), certain loans, intangible assets and private equity investments, among other items, require management to make a determination of their fair value in order to prepare our consolidated financial statements. Where quoted market prices are not available, we may make fair value determinations based on internally developed models or other means, which ultimately rely to some degree on our subjective judgment. Some of these instruments and other assets and liabilities may have no direct observable inputs, making their valuation particularly subjective and, consequently, based on significant estimation and judgment. In addition, sudden illiquidity in markets or declines in prices of certain securities may make it more difficult to value certain items, which may lead to the possibility that such valuations will be subject to further change or adjustment, as well as declines in our earnings in subsequent periods.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. The Financial Accounting Standards Board (the “FASB”) and the SEC have at times revised the financial accounting and reporting standards that govern the preparation of our financial statements. In addition, accounting standard setters and those who interpret the accounting standards may change or even reverse their previous interpretations or positions on how these standards should be applied. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. For further discussion of some of our significant accounting policies and standards, see the “Critical Accounting Estimates” discussion within Item 7 in this report, and Note 2 of the Notes to Consolidated Financial Statements in this Form 10-K.
In June 2016, the FASB issued a new standard on accounting for credit losses. The new standard will replace multiple existing impairment models, including the replacement of the “incurred loss” model for loans with an “expected loss” model. We are evaluating the potential impact its adoption, which will occur no later than the quarter ended December 31, 2020, will have on our financial position and results of operations.
Our risk management and conflicts of interest policies and procedures may leave us exposed to unidentified or unanticipated risk.
We seek to manage, monitor and control our operational, legal and regulatory risk through operational and compliance reporting systems, internal controls, management review processes and other mechanisms; however, there can be no assurance that our procedures will be effective. Our banking and trading processes seek to balance our ability to profit from banking and trading positions with our exposure to potential losses. While we use limits and other risk mitigation techniques, those techniques and
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the judgments that accompany their application cannot anticipate unforeseen economic and financial outcomes or the specifics and timing of such outcomes. Our risk management methods may not predict future risk exposures effectively. In addition, some of our risk management methods are based on an evaluation of information regarding markets, clients and other matters that are based on assumptions that may no longer be accurate. A failure to manage our growth adequately, or to manage our risk effectively, could materially and adversely affect our business and financial condition.
Financial services firms are subject to numerous actual or perceived conflicts of interest, which are under growing scrutiny by U.S. federal and state regulators. Our risk management processes include addressing potential conflicts of interest that arise in our business. Management of potential conflicts of interest has become increasingly complex as we expand our business activities. A perceived or actual failure to address conflicts of interest adequately could affect our reputation, the willingness of clients to transact business with us or give rise to litigation or regulatory actions. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause result in material harm to our business and financial condition.
For more information on how we monitor and manage market and certain other risks, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report.
We are exposed to risk from international markets.
We do business in other parts of the world, including a few developing regions commonly known as emerging markets, and as a result, are exposed to risks, including economic, market, litigation and regulatory risks. Our businesses and revenues derived from non-U.S. operations are subject to risk of loss from currency fluctuations, social or political instability, less established regulatory regimes, changes in governmental or central bank policies, downgrades in the credit ratings of sovereign countries, expropriation, nationalization, confiscation of assets and unfavorable legislative, economic and political developments. Action or inaction in any of these operations, including failure to follow proper practices with respect to regulatory compliance and/or corporate governance, could harm our operations and our reputation. We also invest or trade in the securities of corporations located in non-U.S. jurisdictions. Revenues from trading non-U.S. securities also may be subject to negative fluctuations as a result of the abovementioned factors. The impact of these fluctuations could be magnified because non-U.S. trading markets, particularly those in emerging markets, are generally smaller and less developed, less liquid and more volatile than U.S. trading markets.
We have risks related to our insurance programs.
Our operations and financial results are subject to risks and uncertainties related to our use of a combination of insurance, self-insured retention and self-insurance for a number of risks, including most significantly property and casualty, workers’ compensation, errors and omissions liability, general liability and the portion of employee-related health care benefits plans we fund.
While we endeavor to purchase insurance coverage appropriate to our risk assessment, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages. Our business may be negatively affected if our insurance proves to be inadequate or unavailable. In addition, insurance claims may divert management resources away from operating our business.
RISKS RELATED TO OUR REGULATORY ENVIRONMENT
Financial services firms have been subject to increased regulatory scrutiny over the last several years, increasing the risk of financial liability and reputational harm resulting from adverse regulatory actions.
Financial services firms have been operating in an onerous regulatory environment, which will become even more stringent in light of recent well-publicized failures of regulators to detect and prevent fraud. The industry has experienced increased scrutiny from various regulators, including the SEC, the Fed, the OCC and the CFPB, in addition to stock exchanges, FINRA and state attorneys general. Penalties and fines imposed by regulatory authorities have increased substantially in recent years. We may be adversely affected by changes in the interpretation or enforcement of existing laws, rules and regulations. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many different aspects of financial services, including, but not limited to, the authority to fine us and to grant, cancel, restrict or otherwise impose conditions on the right to continue operating particular businesses or engage in certain activities. Substantial legal liability or significant regulatory action taken against us could harm our business prospects through adverse financial effects and reputational harm.
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Changes in regulations resulting from the Dodd-Frank Act, the DOL Rules, including the new fiduciary standard, or any new regulations or laws may adversely affect our businesses.
Market and economic conditions over the past several years have directly led to a demand by the public for changes in the way the financial services industry is regulated, including a call for more stringent legislation and regulation in the United States and abroad. The Dodd-Frank Act enacted sweeping changes and an unprecedented increase in the supervision and regulation of the financial services industry (see Item 1, “Regulation,” in this report for a discussion of such changes). The ultimate impact that the Dodd-Frank Act and implementing regulations will have on us, the financial industry and the economy at large cannot be quantified until all of the implementing regulations called for under the legislation have been finalized and fully implemented. Nevertheless, it is apparent that these legislative and regulatory changes could affect our revenue, limit our ability to pursue business opportunities, impact the value of our assets, require us to alter at least some of our business practices, impose additional compliance costs, and otherwise adversely affect our businesses.
The Dodd-Frank Act impacts the manner in which we market our products and services, manage our business and operations, and interact with regulators, all of which could materially impact our results of operations, financial condition and liquidity. Certain provisions of the Dodd-Frank Act that have (or may) impact our businesses include: the establishment of a fiduciary standard for broker-dealers; regulatory oversight of incentive compensation; the imposition of capital requirements on financial holding companies; restrictions on proprietary trading; and, to a lesser extent, greater oversight over derivatives trading. There is also increased regulatory scrutiny (and related compliance costs) as we continue to grow and surpass certain consolidated asset thresholds established under the Dodd-Frank Act, which have the effect of imposing enhanced standards and requirements on larger institutions. These include, but are not limited to, RJ Bank’s oversight by the CFPB. The CFPB has had an active enforcement agenda and any action taken by the CFPB could result in requirements to alter or cease offering affected products and services, make such products and services less attractive, impose additional compliance measures, or result in fines, penalties or required remediation. To the extent the Dodd-Frank Act impacts the operations, financial condition, liquidity and capital requirements of unaffiliated financial institutions with whom we transact business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present inefficiencies in their interactions with us. We were required to comply with the Volcker Rule’s provisions beginning on July 21, 2015. Although we have not historically engaged in significant levels of proprietary trading, due to our underwriting and market making activities, the Volcker Rule will likely adversely affect our results of operations through increased operational and compliance costs, possible reductions in our trading revenues, and changes to our private equity investments.
We are evaluating the impact of the DOL Rule on our business. However, because qualified accounts, particularly IRA accounts, comprise a significant portion of our business, we expect that implementation of the DOL Rule will negatively impact our results including the impact of increased costs related to compliance, legal and information technology. In addition, we expect that our legal risks will increase, in part, as a result of the new contractual rights required to be given to IRA and non-ERISA plan clients under the BIC Exemption and Principal Transactions Exemption.
The Basel III regulatory capital standards impose additional capital and other requirements on us that could decrease our competitiveness and profitability.
In July 2013, the Fed, the OCC and the FDIC released final U.S. Basel III Rules, which implemented the global regulatory capital reforms of Basel III and certain changes required by the Dodd-Frank Act. The U.S. Basel III Rules increase the quantity and quality of regulatory capital, establish a capital conservation buffer and make selected changes to the calculation of risk-weighted assets. We became subject to the requirements under the final U.S. Basel III Rules as of January 1, 2015, subject to a phase-in period for several of its provisions, including the new minimum capital ratio requirements, the capital conservation buffer and the regulatory capital adjustments and deductions. The increased capital requirements stipulated under the U.S. Basel III Rules could restrict our ability to grow during favorable market conditions or require us to raise additional capital. As a result, our business, results of operations, financial condition and prospects could be adversely affected. We continue to evaluate the impact of the U.S. Basel III Rules on both RJ Bank and RJF.
Failure to comply with regulatory capital requirements primarily applicable to RJF, RJ Bank or our broker-dealer subsidiaries would significantly harm our business.
RJF and RJ Bank are subject to various regulatory and capital requirements administered by various federal regulators in the United States, and, accordingly, must meet specific capital guidelines that involve quantitative measures of RJF and RJ Bank’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification for both RJF and RJ Bank are also subject to qualitative judgments by U. S. federal regulators based on components of our capital, risk-weightings of assets, off-balance sheet transactions, and other factors. Quantitative measures established by
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regulation to ensure capital adequacy require RJF and RJ Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Tier 1 and Total capital to risk-weighted assets, Tier 1 capital to average assets and capital conservation buffers (as defined in the regulations). Failure to meet minimum capital requirements can trigger certain mandatory (and potentially additional discretionary) actions by regulators that, if undertaken, could harm either RJF or RJ Bank’s operations and financial condition. As more fully discussed in Item 1, “Regulation,” in this report, RJF is required to perform annual stress tests using certain scenarios provided by the Fed. While we believe that both the quality and magnitude of our capital base is sufficient to support our current operations given our risk profile, the results of the stress testing process may affect our approach to managing and deploying capital.
We are subject to the SEC’s uniform net capital rule (Rule 15c3-1) and FINRA’s net capital rule, which may limit our ability to make withdrawals of capital from our broker-dealer subsidiaries. The uniform net capital rule sets the minimum level of net capital that a broker-dealer must maintain and also requires that a portion of its assets be relatively liquid. FINRA may prohibit a member firm from expanding its business or paying cash dividends if resulting net capital falls below certain thresholds. In addition, our Canada-based broker-dealer subsidiary is subject to similar limitations under applicable regulation in that jurisdiction by IIROC. Regulatory capital requirements applicable to some of our significant subsidiaries may impede access to funds that RJF needs to make payments on any such obligations.
See Note 25 of the Notes to Consolidated Financial Statements in this Form 10-K for further information on regulations and capital requirements.
As a financial holding company, RJF’s liquidity depends on payments from its subsidiaries, which may be subject to regulatory restrictions.
RJF is a financial holding company and therefore depends on dividends, distributions and other payments from its subsidiaries in order to meet its obligations, including debt service. RJF’s subsidiaries are subject to laws and regulations that restrict dividend payments or authorize regulatory bodies to prevent or reduce the flow of funds from those subsidiaries to RJF. RJF’s broker-dealers and bank subsidiary are limited in their ability to lend or transact with affiliates and are subject to minimum regulatory capital and other requirements, as well as limitations on their ability to use funds deposited with them in broker or bank accounts to fund their businesses. These requirements may hinder RJF’s ability to access funds from its subsidiaries. RJF may also become subject to a prohibition or limitations on its ability to pay dividends or repurchase its common stock. The federal banking regulators, including the OCC, the Fed and the FDIC, as well as the SEC (through FINRA) have the authority and under certain circumstances, the obligation, to limit or prohibit dividend payments and stock repurchases by the banking organizations they supervise, including RJF and its bank subsidiaries. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in this report for additional information on liquidity and how we manage our liquidity risk.
We operate in a highly regulated industry in which future developments could adversely affect our business and financial condition.
The securities industry is subject to extensive and constantly changing regulation. Broker-dealers and investment advisors are subject to regulations covering all aspects of the securities business, including, but not limited to: sales and trading methods; trade practices among broker-dealers; use and safekeeping of clients’ funds and securities; capital structure of securities firms; anti-money laundering efforts; recordkeeping; and the conduct of directors, officers and employees. Any violation of these laws or regulations could subject us to the following events, any of which could have a material adverse effect on our business, financial condition and prospects: civil and criminal liability; sanctions, which could include the revocation of our subsidiaries’ registrations as investment advisors or broker-dealers; the revocation of the licenses of our financial advisors; censures; fines; or a temporary suspension or permanent bar from conducting business.
The majority of our affiliated financial advisors are independent contractors. Legislative or regulatory action that redefines the criteria for determining whether a person is an employee or an independent contractor could materially impact our relationships with our advisors and our business, resulting in an adverse effect on our results of operations.
As a financial holding company, we are regulated by the Fed. RJ Bank is regulated by the OCC, the Fed, the CFPB, and the FDIC. This oversight includes, but is not limited to, scrutiny with respect to affiliate transactions and compliance with consumer regulations. The economic and political environment over the past several years has resulted in increased focus on the regulation of the financial services industry, including many proposals for new rules. Any new rules issued by U.S. regulators that oversee the financial services industry could affect us in substantial and unpredictable ways and could have an adverse effect on our business, financial condition, and results of operations. We also may be adversely affected as a result of changes to federal, state or foreign tax laws, or by changes to the interpretation or enforcement of existing laws and regulations.
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Regulatory actions brought against us may result in judgments, settlements, fines, penalties or other results, any of which could have a material adverse effect on our business, financial condition or results of operations. There is no assurance that regulators will be satisfied with the policies and procedures implemented by RJF and its subsidiaries. In addition, from time to time, RJF and its affiliates may become subject to additional findings with respect to compliance or other regulatory deficiencies, which could subject us to additional liability, including penalties. See Item 1, “Regulation,” in this report for additional information regarding our regulatory environment and Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in this report regarding our approaches to managing regulatory risk.
Numerous regulatory changes, and enhanced regulatory and enforcement activity, relating to the asset management business may increase our compliance and legal costs and otherwise adversely affect our business.
The SEC has proposed certain measures that would establish a new framework to replace the requirements of Rule 12b-1 under the 1940 Act with respect to how mutual funds pay fees to cover the costs of selling and marketing their shares. The staff of the SEC’s Office of Compliance, Inspections and Examinations has indicated that it is reviewing the use of fund assets to pay for fees to sub-transfer agents and sub-administrators for services that may be deemed to be distribution-related. Any adoption of such measures would be phased in over a number of years. As these measures are neither final nor undergoing implementation throughout the financial services industry, their impact cannot be fully ascertained at this time. As this regulatory trend continues, it could adversely affect our operations and, in turn, our financial results.
Asset management businesses have experienced a number of highly publicized regulatory inquiries, which have resulted in increased scrutiny within the industry and new rules and regulations for mutual funds, investment advisors and broker-dealers. As some of our wholly owned subsidiaries are registered as investment advisors with the SEC, increased regulatory scrutiny and rulemaking initiatives may result in augmented operational and compliance costs or the assessment of significant fines or penalties against our asset management business, and may otherwise limit our ability to engage in certain activities. It is not possible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Conformance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business. For example, pursuant to the Dodd-Frank Act, the SEC was charged with considering whether broker-dealers should be subject to a standard of care similar to the fiduciary standard applicable to registered investment advisors. It is not clear whether the SEC will determine that a heightened standard of conduct is appropriate for broker-dealers; however, any such standard, if mandated, would likely require us to review our product and service offerings and implement certain changes, as well as require that we incur additional regulatory costs in order to ensure compliance.
In addition, U.S. and foreign governments have recently taken regulatory actions impacting the investment management industry, and may continue to take further actions, including expanding current (or enacting new) standards, requirements and rules that may be applicable to us and our subsidiaries. For example, several states and municipalities in the United States have adopted “pay-to-play” rules, which could limit our ability to charge advisory fees. Such “pay-to-play” rules could affect the profitability of that portion of our business. Additionally, the use of “soft dollars,” where a portion of commissions paid to broker-dealers in connection with the execution of trades also pays for research and other services provided to advisors, is periodically reexamined and may be limited or modified in the future. A substantial portion of the research relied on by our investment management business in the investment decision making process is generated internally by our investment analysts and external research, including external research paid for with soft dollars. This external research generally is used for information gathering or verification purposes, and includes broker-provided research, as well as third-party provided databases and research services. If the use of soft dollars is limited, we may have to bear some of these additional costs. Furthermore, new regulations regarding the management of hedge funds and the use of certain investment products may impact our investment management business and result in increased costs. For example, many regulators around the world adopted disclosure and reporting requirements relating to the hedge fund business or other businesses, and changes to the laws, rules and regulations in the United States related to the over-the-counter swaps and derivatives markets require additional registration, recordkeeping and reporting obligations.
RJ Bank is subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to penalties.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other U.S. federal fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies, including the CFPB, are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil monetary penalties, injunctive relief, and the imposition of restrictions on mergers, acquisitions and expansion
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activity. Private parties may also have the ability to challenge a financial institution’s performance under fair lending laws by bringing private class action litigation.
Item 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
Item 2. PROPERTIES
The RJF and RJ Bank corporate headquarters are located on land we own that is located within the Carillon Office Park in St. Petersburg, Florida. This office complex currently includes buildings which provide approximately 920,000 square feet of office space. At this location, we also have the necessary rights to add approximately 440,000 square feet of new office space on our existing parcel. To facilitate certain storage needs, we lease approximately 30,000 square feet of warehouse space near this headquarters complex.
We conduct employee-based branch office operations in various locations throughout the U.S. and in certain foreign countries. With the exception of one company-owned RJ&A branch located in Crystal River, Florida, and certain interests in real estate holdings held under Morgan Properties, LLC which are insignificant in the aggregate, RJ&A branches are leased from third parties under leases that contain various expiration dates through 2027. Leases for branch offices of RJFS, the independent contractors of RJ Ltd., and RJIS, are the responsibility of the respective independent contractor financial advisors.
We conduct certain operations from our 88,000 square foot office building located on land we own in Southfield, Michigan. We operate a 40,000 square foot information technology data center on land we own in the Denver, Colorado area. We also conduct certain operations in approximately 240,000 square feet of leased office space in the Raymond James Tower located in downtown Memphis, Tennessee. During September 2016, we completed the purchase of approximately 65 acres of land located in Pasco County, Florida.
RJ Ltd. leases its main office premises in Vancouver, Calgary, Toronto, and Montreal, as well as certain branch offices located throughout Canada. These leases have various expiration dates through 2030. RJ Ltd. does not own any land or buildings.
See Note 21 of the Notes to Consolidated Financial Statements in this Form 10-K for further information on our lease commitments.
Item 3. | LEGAL PROCEEDINGS |
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.
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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 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.
See Note 21 of the Notes to Consolidated Financial Statements in this Form 10-K for additional information regarding legal and regulatory matter contingencies, and refer to the “loss provisions arising from legal and regulatory matters” section of Critical Accounting Estimates in Part II - Item 7 of this report, and Note 2 of the Notes to Consolidated Financial Statements in this Form 10-K, for information on our criteria for establishing accruals.
Jay Peak Litigation
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. The plaintiffs also generally allege some combination of the following: that we or our subsidiaries or employees were negligent in supervision, breached fiduciary duty, conspired to breach, and aided and abetted the breach of, fiduciary duty, committed, or aided and abetted, fraud and/or fraudulent inducement, engaged in or facilitated fraudulent transfers, committed conversion, civil theft, and/or commingled investor funds.
There are six civil court actions pending in which we or one of our subsidiaries are named:
• | On May 3, 2016, Alexandre Daccache filed a purported consolidated class action on behalf of approximately 836 individual investors in seven Jay Peak limited partnerships in the U.S. Federal District Court for the Southern District of Florida, styled Daccache, et al. v. Raymond James Financial, Inc. The plaintiffs demand, among other things, damages in the amount of $250 million, treble damages under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and unspecified punitive damages. |
• | On May 20, 2016, Michael I. Goldberg, a court-appointed receiver for Jay Peak, filed a complaint against the company and other defendants in the United States District Court for the Southern District of Florida, styled Michael I. Goldberg, as Receiver v. Raymond James Financial, Inc. et al. The complaint seeks, among other relief, compensatory damages and treble damages under RICO. |
• | On June 3, 2016, Milos Citakovic and other individual investors filed a complaint against RJ&A and a financial advisor in the Eleventh Judicial Circuit Court in Miami-Dade County, Florida, styled Citakovic v. Raymond James & Associates, Inc., and Joel Burstein. The plaintiffs seek, among other things, compensatory damages. |
• | On July 26, 2016, Caterina Calero and other individual investors filed a complaint against RJ&A and other defendants in the Eleventh Judicial Circuit Court in Miami-Dade County, Florida, styled Caterina Gonzalez Calero v. Raymond James & Associates, Inc. et al. (“Calero”). The complaint seeks, among other things, compensatory damages and treble damages for alleged violations of the Florida civil theft statute. |
• | On October 26, 2016, Caroline Walters and other individual investors filed a complaint against RJ&A in the Circuit Court of the 20th Judicial Circuit in and for Collier County, Florida, styled Caroline Walters, et al. v. Raymond James & Associates, Inc. The plaintiffs seek, among other things, compensatory damages in an undetermined amount and treble damages for alleged RICO violations. |
• | On November 7, 2016, Zheng Zhang and other individual investors filed a complaint against RJ&A, and certain other defendants, in the United States District Court for the Southern District of Florida, styled Zheng Zhang, et al. v. Raymond James & Associates, Inc., Joel Burstein and Ariel Quiros. The plaintiffs seek, among other things, compensatory damages and punitive damages in an undetermined amount. |
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Given the early stage of the cases, the complexity of the forensic accounting necessary to determine the amount of actual investor losses, the identification and availability of any assets for recovery by the plaintiffs and the potential for insurance coverage, a range of possible loss in excess of the amount accrued cannot be estimated. While there can be no assurance that we will be successful, we intend to vigorously defend the claims against us.
Morgan Keegan Litigation
Indemnification from Regions
Under the agreement with Regions governing our 2012 acquisition of 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.
Pending 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.
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PART II
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the NYSE under the symbol “RJF.” As of November 9, 2016, we had 358 holders of record of our common stock. A substantially greater number of shares of our common stock is held by beneficial owners, whose shares are held of record by banks, brokers, and other financial institutions. Our transfer agent is Computershare Inc. whose address is P.O. Box 30170, College Station, TX 77842-3170.
The following table sets forth for the periods indicated the high and low trades for our common stock:
Fiscal year | |||||||||||||||
2016 | 2015 | ||||||||||||||
High | Low | High | Low | ||||||||||||
First quarter | $ | 59.81 | $ | 45.86 | $ | 58.18 | $ | 48.06 | |||||||
Second quarter | $ | 56.68 | $ | 39.84 | $ | 59.77 | $ | 50.97 | |||||||
Third quarter | $ | 56.69 | $ | 44.22 | $ | 61.46 | $ | 54.99 | |||||||
Fourth quarter | $ | 58.97 | $ | 46.30 | $ | 61.82 | $ | 48.24 | |||||||
Cash dividends per share of common stock paid during the quarter are reflected below. The dividends were declared during the quarter preceding their payment.
Fiscal year | |||||||
2016 | 2015 | ||||||
First quarter | $ | 0.18 | $ | 0.16 | |||
Second quarter | $ | 0.20 | $ | 0.18 | |||
Third quarter | $ | 0.20 | $ | 0.18 | |||
Fourth quarter | $ | 0.20 | $ | 0.18 | |||
On August 24, 2016, our Board of Directors declared a quarterly cash dividend of $0.20 per share of common stock which was paid on October 17, 2016.
See Note 25 of the Notes to Consolidated Financial Statements in this Form 10-K for information regarding our intentions for paying cash dividends and the related capital restrictions.
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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 twelve month period ended September 30, 2016:
Total number of shares purchased (1) | Average price per share | Number of shares purchased as part of publicly announced plans or programs(2) | Approximate dollar value (in thousands) at each month-end, of securities that may yet be purchased under the plans or programs (3)(4) | ||||||||||
October 1, 2015 – October 31, 2015 | 4,699 | $ | 51.71 | — | $ | 93,112 | |||||||
November 1, 2015 – November 30, 2015 | 124,984 | 57.57 | — | $ | 150,000 | ||||||||
December 1, 2015 – December 31, 2015 | 80,836 | 58.15 | — | $ | 150,000 | ||||||||
First quarter | 210,519 | $ | 57.66 | — | |||||||||
January 1, 2016 – January 31, 2016 | 2,273,592 | $ | 47.44 | 2,234,366 | $ | 44,231 | |||||||
February 1, 2016 – February 28, 2016 | 930,678 | 41.71 | 929,213 | $ | 135,671 | ||||||||
March 1, 2016 – March 31, 2016 | 7,622 | 45.43 | — | $ | 135,671 | ||||||||
Second quarter | 3,211,892 | $ | 45.78 | 3,163,579 | |||||||||
April 1, 2016 – April 30, 2016 | 40,017 | $ | 48.83 | — | $ | 135,671 | |||||||
May 1, 2016 – May 31, 2016 | 6,098 | 52.73 | — | $ | 135,671 | ||||||||
June 1, 2016 – June 30, 2016 | 922 | 54.87 | — | $ | 135,671 | ||||||||
Third quarter | 47,037 | $ | 49.45 | — | |||||||||
July 1, 2016 – July 31, 2016 | 3,490 | $ | 53.86 | — | $ | 135,671 | |||||||
August 1, 2016 – August 31, 2016 | 12,615 | 56.54 | — | $ | 135,671 | ||||||||
September 1, 2016 – September 30, 2016 | 1,712 | 57.78 | — | $ | 135,671 | ||||||||
Fourth quarter | 17,817 | $ | 56.14 | — | |||||||||
Fiscal year total | 3,487,265 | $ | 46.60 | 3,163,579 | |||||||||
(1) | Of the total for the year ended September 30, 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 84,642 shares, for a total consideration of $4.9 million (for more information on this trust fund, see Note 2 and Note 11 of the Notes to Consolidated Financial Statements in this Form 10-K). These activities do not utilize the repurchase authority discussed in footnote (2) below. |
We also repurchase shares when employees surrender shares as payment for option exercises or withholding taxes. Of the total for the year ended September 30, 2016, shares surrendered to us by employees for such purposes amount to 239,044 shares, for a total consideration of $13.1 million. These activities do not utilize the repurchase authority discussed in footnote (2) below.
Of the total for the year ended September 30, 2016, we repurchased 3,163,579 shares pursuant to our securities repurchase authorization, see footnotes (2), (3) and (4) below for additional information.
(2) | During January and February 2016, we purchased shares of our common stock in open market transactions, for a total purchase price of $144.5 million, which reflects an average purchase price per share of $45.69. These share repurchases were made pursuant to the RJF securities repurchase authorizations described in footnotes (3) and (4) below. |
(3) | On November 19, 2015, we announced an increase in the amount previously authorized by our Board of Directors to be used, at the discretion of our Securities Repurchase Committee, for open market repurchases of our common stock and certain senior notes, to $150 million subject to cash availability and other factors. |
(4) | As a result of repurchases made during January 2016 and early February 2016, and to re-establish the prior authorization limit, on February 4, 2016, we announced an additional increase in the authorization limit. This action replenished the amount previously authorized by our Board of Directors to be deployed back to $150 million (after consideration of the 2016 repurchases through such date) at the discretion of our Securities Repurchase Committee, for open market repurchases of our common stock and certain senior notes, subject to cash availability and other factors. |
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Item 6. | SELECTED FINANCIAL DATA |
Year ended September 30, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
Operating results: | |||||||||||||||||||
Total revenues | $ | 5,520,344 | $ | 5,308,164 | $ | 4,965,460 | $ | 4,595,798 | $ | 3,897,900 | |||||||||
Net revenues | $ | 5,403,267 | $ | 5,200,210 | $ | 4,861,369 | $ | 4,485,427 | $ | 3,806,531 | |||||||||
Net income attributable to RJF | $ | 529,350 | $ | 502,140 | $ | 480,248 | $ | 367,154 | $ | 295,869 | |||||||||
Net income per share - basic | $ | 3.72 | $ | 3.51 | $ | 3.41 | $ | 2.64 | $ | 2.22 | |||||||||
Net income per share - diluted | $ | 3.65 | $ | 3.43 | $ | 3.32 | $ | 2.58 | $ | 2.20 | |||||||||
Weighted-average common shares outstanding - basic | 141,773 | 142,548 | 139,935 | 137,732 | 130,806 | ||||||||||||||
Weighted-average common and common equivalent shares outstanding - diluted | 144,513 | 145,939 | 143,589 | 140,541 | 131,791 | ||||||||||||||
Cash dividends per common share - declared | $ | 0.80 | $ | 0.72 | $ | 0.64 | $ | 0.56 | $ | 0.52 | |||||||||
Financial condition: | |||||||||||||||||||
Total assets(1) | $ | 31,593,733 | $ | 26,468,032 | $ | 23,312,788 | $ | 23,172,045 | $ | 21,144,975 | |||||||||
Senior notes maturing within twelve months(2) | $ | — | $ | 250,000 | $ | — | $ | — | $ | — | |||||||||
Long-term obligations: | |||||||||||||||||||
Non-current portion of other borrowings | $ | 604,080 | (3) | $ | 583,740 | (3) | $ | 537,932 | (3) | $ | 47,132 | $ | 173,918 | ||||||
Non-current portion of loans payable of consolidated variable interest entities(4) | $ | 4,291 | $ | 12,597 | $ | 25,928 | $ | 43,877 | $ | 62,938 | |||||||||
Non-current portion of senior notes payable(2) | $ | 1,700,000 | $ | 900,000 | $ | 1,150,000 | $ | 1,150,000 | $ | 1,150,000 | |||||||||
Total long-term debt | $ | 2,308,371 | $ | 1,496,337 | $ | 1,713,860 | $ | 1,241,009 | $ | 1,386,856 | |||||||||
Equity attributable to Raymond James Financial, Inc. | $ | 4,914,096 | $ | 4,522,031 | $ | 4,141,236 | $ | 3,662,924 | $ | 3,268,940 | |||||||||
Shares outstanding (5) | 141,545 | 142,751 | 140,836 | 138,750 | 136,076 | ||||||||||||||
Book value per share at end of year | $ | 34.72 | $ | 31.68 | $ | 29.40 | $ | 26.40 | $ | 24.02 | |||||||||
(1) | Effective September 30, 2016 we adopted new accounting guidance related to the presentation of debt issuance costs. Under this new guidance, debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. The applicable prior period balances have been reclassified to conform to the current year presentation. See Note 17 in the Notes to Consolidated Financial Statements in this Form 10-K for additional information. |
(2) | Senior notes payable balances presented exclude the impact of debt issuance costs. |
(3) | At September 30, 2016, 2015, and 2014, the outstanding balances were primarily comprised of borrowings from the Federal Home Loan Bank of Atlanta (“FHLB”) by RJ Bank and mortgage notes payable on our corporate headquarters offices. |
(4) | Loans payable of consolidated variable interest entities (“VIE”) are non-recourse to us. |
(5) | Excludes non-vested shares. |
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Item 7. | 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 consolidated financial statements and accompanying notes to consolidated financial statements. Where “NM” is used in various percentage change computations, the computed percentage change has been determined not to be meaningful.
Executive overview
We operate as a financial services and bank 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.
Year ended September 30, 2016 compared with the year ended September 30, 2015
We achieved net revenues of $5.4 billion, a $203 million, or 4%, increase over the prior year. Our net income of $529 million reflects an increase of $27 million, or 5%, and our diluted earnings per share for the current year amount to $3.65, a 6% increase. The current year diluted earnings per share benefited from our repurchase of common stock in open market transactions. Total client assets under administration increased to $604.4 billion at September 30, 2016, a 26% 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, high levels of retention of our existing financial advisors, and an increase in U. S. equity markets over the year.
After excluding the acquisition-related expenses we incurred during the current year, our Non-GAAP adjusted net income amounts to $556 million,(1) an increase of 11% over the prior year. Non-GAAP adjusted diluted earnings per share amounts to $3.84,(1) an increase of 12% over the $3.43 diluted earnings per share in the prior year.
Net revenues increased in each of our four operating segments. Our non-operating Other segment reflects a decline in net revenues as the prior year experienced higher valuation gains from our private equity investments than the current year as well as realized gains on sales of ARS. Non-interest expenses have increased $202 million, or 5%. The increase primarily results from: increases in compensation, commissions and benefits due to annual raises, growth in related commission and fee revenues, and increases in benefits expenses; increases in communications and information processing expenses resulting from our continued investment in our PCG platform and in improving our compliance and regulatory systems; an increase in the bank loan loss provision resulting from loan growth and an increase associated with the credit deterioration of certain loans in the energy sector, and increases in other expenses predominately due to increases in certain legal and regulatory expenses.
A summary of the most significant items impacting our financial results as compared to the prior year are as follows:
• | Our Private Client Group segment generated net revenues of $3.62 billion, a 3% increase, while pre-tax income decreased by $2 million to $341 million. The increase in revenues is primarily attributable to an increase in account and service fee income, most notably an increase in fees associated with our multi-bank client cash sweep program resulting from both an increase in short-term interest rates, and an increase in client cash balances resulting from clients’ reaction to market volatility and uncertainty. Securities commissions and fee revenues increased 1% overall. Fees arising from fee-based accounts as well as commissions on fixed income products increased substantially, more than offsetting declines in commissions on mutual funds, equity securities and new issue sales credits. Non-interest expenses increased compared to the prior year level, most significantly due to higher administrative expenses to support our continued growth, higher communications and information technology expenses resulting from our continued investments in our platform and in improving our compliance and regulatory systems, and an increase in other expense predominately due to certain legal and regulatory expenses. The segment’s margin on net revenues decreased to 9.4% from 9.8%. |
(1) | “Adjusted net income,” and “adjusted diluted earnings per share” are each non-GAAP financial measures. Please see the “reconciliation of the GAAP measures to the non-GAAP measures” in this Item 7, for a reconciliation of our non-GAAP measures to the most directly comparable GAAP measures, and for other important disclosures. |
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• | The Capital Markets segment generated net revenues of $1 billion, a 4% increase, while pre-tax income increased $32 million, or 30%, to $139 million. The increase in revenues is driven by an increase in trading profits, sales commissions on fixed income products, and to a lesser extent an increase in tax credit fund syndication fee revenues, offset by declines in equity underwriting fee and merger and acquisition and advisory fee revenues. Non-interest expenses increased a modest 1% over the prior year level. |
• | Our Asset Management segment generated net revenues of $404 million, a 3% increase, while pre-tax income decreased $3 million, or 2%, to $132 million. Non-discretionary asset-based administration fee revenues increased, driven by an increase in assets held in these programs over the prior year level. Advisory fee revenues from managed programs approximate the prior year despite the increase in balances of financial assets under management in managed programs as of fiscal year end due to the volatility of markets during the year and the timing of our fee computations. Expenses have increased 6% over the prior year level, due in large part to a prior year reversal of certain incentive compensation expense accruals for associates who left the firm during the prior year, which did not recur in the current year. |
• | RJ Bank generated net revenues of $494 million, a 19% increase, while pre-tax income increased $59 million, or 21%, to $337 million. The loan loss provision increased nearly $5 million, or 20%, over the prior year level due to higher corporate loan growth, charges during the current year resulting from loans outstanding within the energy sector, and additional provision for corporate loan downgrades. Non-interest expenses (excluding provision for loan losses) increased $16 million, or 15%, primarily due to an increase in the affiliate deposit account servicing fees paid to the Private Client Group resulting from an increase in balances, and an increase in FDIC insurance premiums. |
• | Activities in our Other segment reflect a pre-tax loss that is $84 million, or 129%, more than the prior year. Total revenues in the segment decreased $21 million, or 31%, primarily resulting from a decrease in private equity valuation gains, and a decrease of $11 million in gains on the sale of certain ARS securities resulting from prior year sales that did not recur in the current year, offset by increased interest revenue and foreign exchange gains. Acquisition-related expenses of $41 million are reflected in this segment, which did not occur in the prior year. These expenses result from our incremental acquisition-related expenses for our acquisitions of Alex. Brown, 3Macs, and Mummert. |
• | Our effective tax rate was 33.9% in fiscal year 2016, down from the 37.1% in the prior year. The reduction in our effective tax rate compared to the prior year was due to the following factors: (1) as a result of the fiscal year 2016 increase in equity market values compared to fiscal year 2015, the change in the amount of our non-taxable gains/losses arising from the value of our company-owned life insurance portfolio had the effect of decreasing our effective tax rate by 1.5% compared to the prior year; (2) adjustments associated with planned divestitures of our remaining businesses in South America accounted for an effective rate decrease of 1.1%; (3) we settled significant state tax audits during the year which reduced our effective rate by 0.4%; and (4) we were able to generate and utilize additional low-income housing tax credits to apply against our tax liability which had a favorable 0.5% impact on our effective tax rate. |
• | We repurchased approximately 3.2 million shares of our common stock in open market transactions during the year, for a total purchase price of approximately $144.5 million, reflecting an average per share repurchase price of $45.69 (see Part II, Item 5 in this report, for additional information on these share repurchases). The current year diluted earnings per share benefited by $0.05 as a result of these repurchases. |
Consistent with our growth strategies, we completed three acquisitions during the year - Alex. Brown, 3Macs, and Mummert. We continue to evaluate future opportunities, but remain committed to our strategy that acquisitions must meet our strategic growth objectives, involve entities that share our culture of conservatism and “client-first” values, and be executed at purchase prices that provide us opportunities to increase our shareholders’ value.
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. Refer to the “Fiduciary Duty Standard” section of Item 1 “Regulation” in this report for further discussion of the regulation, its effective dates, and its potential impact.
Year ended September 30, 2015 compared with the year ended September 30, 2014
We achieved net revenues of $5.2 billion in fiscal year 2015, a $339 million, or 7%, increase compared to the prior year. All four operating segments achieved net revenue increases. Total client assets under administration increased to $480 billion at September 30, 2015, a 1% increase over the prior year level. The increase in assets under administration is attributable to strong
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financial advisor recruiting results and high levels of retention of our existing financial advisors, which more than offset the decline in the U.S. equity markets for the year (primarily occurring in our fourth fiscal quarter of fiscal year 2015).
We achieved net income in fiscal year 2015 of $502 million, an increase of $22 million, or 5%, compared to the prior year. Three of our four operating segments achieved increased profitability in fiscal year 2015 over the prior year level. Fully diluted earnings per share of $3.43 increased $0.11, or 3%, over the prior year amount.
Non-interest expenses in fiscal year 2015 increased $278 million, or 7%, compared to the prior year. The increase is primarily due to the increase in compensation, commissions and benefits expenses associated with the increased revenues. In addition, as a result of various growth strategies across our businesses in fiscal year 2015, we experienced an increase in our business development expenses. Our strategic efforts during fiscal year 2015 to continually improve the technology available to our financial advisors, as well as the additional costs of compliance with various new rules and regulations impacting our industry, are factors impacting an increase in our communications and information processing expenses. The provision for loan losses increased significantly in fiscal year 2015 over the prior year, as fiscal year 2014 benefited to a greater extent than fiscal year 2015, from improved credit characteristics of the loan portfolio. The combination of the above noted factors, even after consideration of the incremental expenses resulting from activities associated with the strategic growth initiatives that should favorably impact future revenues, resulted in a pre-tax margin on net revenues in fiscal year 2015 of 15.3%, a level that is nearly equivalent to the 15.4% pre-tax margin on net revenues in the prior year.
A summary of the most significant items impacting our financial results in fiscal 2015 as compared to the fiscal year 2014 are as follows:
• | Our Private Client Group segment generated net revenues in fiscal year 2015 of $3.5 billion, a $228 million, or 7%, increase over the prior year. Pre-tax income amounted to $342 million, a $12 million, or 4%, increase over the prior year. The increase in revenues in fiscal year 2015 is primarily attributable to increased securities commissions and fee revenues, predominately arising from fee-based accounts, as well as an increase in mutual fund and annuity service fee revenues. Client assets under administration of the Private Client Group increased 1% over the prior year level, to $453.3 billion at September 30, 2015. The increase in fiscal year 2015 commission revenues and client assets have resulted primarily from successful recruiting of financial advisors, and high levels of financial advisor retention. Financial advisor recruiting in fiscal year 2015 was strong with a net increase of 331 financial advisors over the year to 6,596 affiliated financial advisors as of September 30, 2015. There was an overall net increase in client assets despite the impact of the decline in the market value of assets that occurred during the fourth quarter of fiscal year 2015 as a result of declining equity market conditions. Commission expenses in fiscal year 2015 increased in proportion to the increase in commission revenues while all other components of non-interest expense increased 5% as we incurred increases in certain costs associated with the successful recruiting efforts and continued information system improvements. On July 31, 2015, we completed our acquisition of The Producers Choice, LLC (“TPC”), a private insurance and annuity marketing organization based in Troy, Michigan. Our acquisition of TPC brings more life insurance and annuity experts to the firm to support financial advisors and their clients. |
• | The Capital Markets segment generated fiscal year 2015 net revenues of $960 million, a $7 million, or 1%, increase over the prior year. Pre-tax income in fiscal year 2015 was $107 million, a decrease of $24 million, or 18%, compared to the prior year. Fiscal year 2015 reflected increases over the prior year in merger and acquisition fees and tax credit fund syndication fees. Commission revenues from fixed income institutional sales increased in fiscal year 2015 over the prior year level, resulting in part from growth in our public finance activities. However, equity underwriting revenues declined compared to the prior year as a result of weakness in both the energy and real estate sectors, which also led to a decline in commission revenues on equity products in fiscal year 2015. The net profit generated by this segment in fiscal year 2015 was negatively impacted by increased costs, some of which result from our efforts during the year to broadly build out certain sector capabilities and to increase investment banking coverage in certain sectors, which we believe present solid long-term opportunities for future revenue growth. The continued difficult market environment in Canada in fiscal year 2015 negatively impacted this segment’s revenues and profitability. |
• | Our Asset Management segment generated net revenues in fiscal year 2015 of $392 million, a $23 million, or 6%, increase over the prior year. Pre-tax income in fiscal year 2015 was $135 million, a $7 million, or 5%, increase over the prior year. Financial assets under management increased 1% from the prior year, to $65.2 billion as of September 30, 2015. The increase resulted from net inflows of client assets, which more than offset the unfavorable impact of the decline in the market value of assets that occurred during the fourth quarter of fiscal year 2015 as a result of declining equity market conditions. On April 30, 2015, we completed our acquisition of Cougar Global Investments Limited (“Cougar”), an asset |
37
management firm based in Toronto, Canada that markets its investment services to high net worth individuals, families, foundations, trusts and institutions in Canada and the United States.
• | RJ Bank generated net revenues in fiscal year 2015 of $414 million, a $63 million, or 18%, increase over the prior year. Pre-tax income in fiscal year 2015 was $279 million, a $36 million, or 15% increase, over the prior year. Net interest income increased due to growth in average loans outstanding, coupled with a modest increase in net interest margin in fiscal year 2015. Our provision for loan losses in fiscal year 2015 increased $10 million, or 74% compared to the prior year. We incurred substantial provision for loan losses associated with loan growth in both years, however the majority of the year-over-year increase resulted from the prior year benefiting to a greater extent than fiscal year 2015, from improved credit characteristics of the loan portfolio. The credit characteristics of the loan portfolio generally improved over the year, reflecting the positive impact of improved economic conditions. |
• | Activities in our Other segment in fiscal year 2015 resulted in a pre-tax loss that was $19 million less than the prior year. Net revenues in this segment in fiscal year 2015 increased $25 million, resulting from increases in revenues associated with our private equity portfolio investments, and an increase in gains resulting from our auction rate securities portfolio sales and redemption activities. As a result of the fiscal year 2015 increase in private equity investment revenues, the portion of this segment’s pre-tax income that is attributable to noncontrolling interests also increased. |
• | Our fiscal year 2015 effective tax rate was 37.1%, up from the 35.8% in the prior year. As a result of the fiscal year 2015 decline in equity market values compared to positive markets in fiscal year 2014, the change in the amount of our non-taxable gains/losses arising from the value of our company-owned life insurance portfolio had the effect of increasing our effective tax rate by 1.2% compared to the prior year effective tax rate. |
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Segments
The following table presents our consolidated and segment gross revenues, net revenues and pre-tax income (loss), the latter excluding noncontrolling interests, for the years indicated:
Year ended September 30, | |||||||||||||||||
2016 | 2015 | % change | 2014 | % change | |||||||||||||
($ in thousands) | |||||||||||||||||
Total company | |||||||||||||||||
Revenues | $ | 5,520,344 | $ | 5,308,164 | 4 | % | $ | 4,965,460 | 7 | % | |||||||
Net revenues | 5,403,267 | 5,200,210 | 4 | % | 4,861,369 | 7 | % | ||||||||||
Pre-tax income excluding noncontrolling interests | 800,643 | 798,174 | — | 748,045 | 7 | % | |||||||||||
Private Client Group | |||||||||||||||||
Revenues | 3,626,718 | 3,519,558 | 3 | % | 3,289,503 | 7 | % | ||||||||||
Net revenues | 3,616,479 | 3,507,806 | 3 | % | 3,279,883 | 7 | % | ||||||||||
Pre-tax income | 340,564 | 342,243 | — | 330,278 | 4 | % | |||||||||||
Capital Markets | |||||||||||||||||
Revenues | 1,016,375 | 975,064 | 4 | % | 968,635 | 1 | % | ||||||||||
Net revenues | 999,919 | 960,035 | 4 | % | 953,215 | 1 | % | ||||||||||
Pre-tax income | 139,173 | 107,009 | 30 | % | 130,565 | (18 | )% | ||||||||||
Asset Management | |||||||||||||||||
Revenues | 404,421 | 392,378 | 3 | % | 369,690 | 6 | % | ||||||||||
Net revenues | 404,349 | 392,301 | 3 | % | 369,666 | 6 | % | ||||||||||
Pre-tax income | 132,158 | 135,050 | (2 | )% | 128,286 | 5 | % | ||||||||||
RJ Bank | |||||||||||||||||
Revenues | 517,243 | 425,988 | 21 | % | 360,317 | 18 | % | ||||||||||
Net revenues | 493,966 | 414,295 | 19 | % | 351,770 | 18 | % | ||||||||||
Pre-tax income | 337,296 | 278,721 | 21 | % | 242,834 | 15 | % | ||||||||||
Other | |||||||||||||||||
Revenues | 46,291 | 66,967 | (31 | )% | 42,203 | 59 | % | ||||||||||
Net revenues | (31,692 | ) | (10,198 | ) | (211 | )% | (35,253 | ) | 71 | % | |||||||
Pre-tax loss | (148,548 | ) | (64,849 | ) | (129 | )% | (83,918 | ) | 23 | % | |||||||
Intersegment eliminations | |||||||||||||||||
Revenues | (90,704 | ) | (71,791 | ) | (26 | )% | (64,888 | ) | (11 | )% | |||||||
Net revenues | (79,754 | ) | (64,029 | ) | (25 | )% | (57,912 | ) | (11 | )% | |||||||
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Reconciliation of the GAAP measures to the non-GAAP measures
For fiscal year 2016, we utilized 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 year to those in prior and future years. 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. There are no non-GAAP adjustments in either of the fiscal years ended September 30, 2015 or 2014. 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:
Year ended September 30, 2016 | |||
($ in thousands, except per share amounts) | |||
Net income attributable to RJF, Inc. - GAAP | $ | 529,350 | |
Non-GAAP adjustments: | |||
Acquisition-related expenses (1) | 40,706 | ||
Tax effect of non-GAAP adjustments (2) | (13,793 | ) | |
Non-GAAP adjustments, net of tax | 26,913 | ||
Adjusted net income attributable to RJF, Inc. - Non-GAAP basis | $ | 556,263 | |
Non-GAAP earnings per common share: | |||
Adjusted non-GAAP basic | $ | 3.91 | |
Adjusted non-GAAP diluted | $ | 3.84 | |
Average equity - GAAP (3) | $ | 4,693,138 | |
Adjusted average equity - non-GAAP(3)(4) | $ | 4,702,461 | |
Return on equity - GAAP | 11.3 | % | |
Adjusted return on equity - non-GAAP basis (5) | 11.8 | % | |
Pre-tax income attributable to RJF - GAAP | $ | 800,643 | |
Total pre-tax non-GAAP adjustments (as detailed above) | 40,706 | ||
Adjusted pre-tax income attributable to RJF non-GAAP | $ | 841,349 | |
Pre-tax margin on net revenues - GAAP | 14.8 | % | |
Pre-tax margin on net revenues - non-GAAP(6) | 15.6 | % | |
(1) | The non-GAAP adjustment adds back to pre-tax income acquisition-related expenses incurred during the fiscal year associated with our acquisitions described above. |
(2) | The non-GAAP adjustment reduces net income for the income tax effect of the pre-tax non-GAAP adjustments, utilizing the fiscal year effective tax rate to determine the current tax expense. |
(3) | Computed by adding the total equity attributable to RJF as of each quarter-end date during the fiscal year, plus the beginning of the fiscal year total, divided by five. |
(4) | The calculation of non-GAAP average equity includes the impact on equity of the non-GAAP adjustments described in the table above. |
(5) | Computed by utilizing the adjusted net income attributable to RJF non-GAAP and the average equity non-GAAP. See footnotes (3) and (4) above for the calculation of average equity non-GAAP. |
(6) | Computed by dividing the adjusted pre-tax income attributable to RJF by net revenues (GAAP basis). |
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Net interest analysis
Given the relationship of our interest sensitive assets to liabilities, any 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. Based on the current level of short-term interest rates, 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 7A - Interest Rate Risk in this report, 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).
The closing of the Alex. Brown acquisition occurred late in fiscal year 2016, therefore we expect that our average interest-earning assets will increase substantially in fiscal year 2017, over the average fiscal year 2016 levels. The substantial client cash and margin balances associated with the Alex. Brown division client accounts should have a favorable impact on our net interest earnings.
In December 2015, the Federal Reserve Bank announced an increase in its benchmark short-term interest rate by 25 basis points. We estimate that this increase had a favorable impact on our pre-tax income of an amount approximating $60 million in fiscal year 2016, reflecting approximately $80 million of additional pre-tax income on an annualized basis.
Our latest projection of the impact of additional increases by the Federal Reserve Bank in its benchmark short-term interest rate, which is based upon September 30, 2016 balances, projects that an additional 25 basis point rise would result in an additional increase in our annual pre-tax income in a range of approximately $48 million to $60 million over a twelve month period. The realization of such amounts is dependent upon the realization of certain key assumptions in our analysis. Such assumptions include our estimates of the timing and amounts of: earnings/deposit rates paid on our clients’ cash balances; client cash balance levels; the level of earning assets; and RJ Bank’s net interest margin. In our analysis, we assume that between 40% and 50% of such rate increase would also be reflected as a rate increase on earning/deposits paid on our clients’ cash balances.
We anticipate that a majority of any future increases would be reflected in account and service fee revenues (resulting from an increase in the fees generated in lieu of interest income from our multi-bank sweep program with unaffiliated banks and the discontinuance of money market fund fee waivers) which are reported in the PCG segment, and the remaining portion of the increase would be reflected in net interest income reported primarily in our PCG and RJ Bank segments.
If the Federal Reserve Bank was to reverse its December 2015 action and decrease the benchmark short-term interest rate, the impact on our net interest income would be an unfavorable reversal of the positive impact described above.
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The following table presents our consolidated average interest-earning asset and liability balances, interest income and expense balances, and the average yield/cost, for the years indicated:
Year ended September 30, | ||||||||||||||||||||||||||||||||
2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||
Average balance(1) | Interest inc./exp. | Average yield/cost | Average balance(1) | Interest inc./exp. | Average yield/cost | Average balance(1) | Interest inc./exp. | Average yield/cost | ||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||
Margin balances | $ | 1,811,845 | $ | 68,712 | 3.79 | % | $ | 1,805,312 | $ | 67,573 | 3.74 | % | $ | 1,764,305 | $ | 68,454 | 3.88 | % | ||||||||||||||
Assets segregated pursuant to regulations and other segregated assets | 3,565,252 | 22,287 | 0.63 | % | 2,498,357 | 13,792 | 0.55 | % | 2,783,598 | 15,441 | 0.55 | % | ||||||||||||||||||||
Bank loans, net of unearned income (2) | 14,336,765 | 487,366 | 3.42 | % | 12,129,531 | 405,578 | 3.34 | % | 10,048,719 | 343,942 | 3.39 | % | ||||||||||||||||||||
Available for sale securities | 561,925 | 7,596 | 1.35 | % | 508,223 | 5,100 | 1.00 | % | 648,515 | 6,560 | 1.01 | % | ||||||||||||||||||||
Trading instruments(3) | 757,734 | 19,362 | 2.56 | % | 716,409 | 19,450 | 2.71 | % | 630,295 | 17,883 | 2.84 | % | ||||||||||||||||||||
Stock loan | 577,002 | 8,777 | 1.52 | % | 433,642 | 12,036 | 2.78 | % | 423,466 | 8,731 | 2.06 | % | ||||||||||||||||||||
Loans to financial advisors (3) | 563,548 | 8,207 | 1.46 | % | 457,797 | 7,056 | 1.54 | % | 413,600 | 6,427 | 1.55 | % | ||||||||||||||||||||
Corporate cash and all other (3) | 2,701,258 | 18,018 | 0.67 | % | 2,917,208 | 12,622 | 0.43 | % | 3,396,796 | 13,448 | 0.40 | % | ||||||||||||||||||||
Total | $ | 24,875,329 | $ | 640,325 | 2.57 | % | $ | 21,466,479 | $ | 543,207 | 2.53 | % | $ | 20,109,294 | $ | 480,886 | 2.39 | % | ||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||
Brokerage client liabilities | $ | 4,291,632 | 2,084 | 0.05 | % | $ | 3,693,928 | $ | 940 | 0.03 | % | $ | 3,967,811 | $ | 1,269 | 0.03 | % | |||||||||||||||
Bank deposits (2) | 12,985,696 | (4) | 10,218 | (4) | 0.09 | % | 11,199,242 | 8,382 | 0.08 | % | 10,119,433 | 7,959 | 0.09 | % | ||||||||||||||||||
Trading instruments sold but not yet purchased (3) | 293,096 | 5,035 | 1.72 | % | 294,256 | 4,503 | 1.53 | % | 243,737 | 4,327 | 1.78 | % | ||||||||||||||||||||
Stock borrow | 79,613 | 3,174 | 3.99 | % | 135,027 | 5,237 | 3.88 | % | 114,404 | 2,869 | 2.51 | % | ||||||||||||||||||||
Borrowed funds | 723,904 | 12,957 | 1.79 | % | 721,296 | 6,079 | 0.84 | % | 485,594 | 3,939 | 0.81 | % | ||||||||||||||||||||
Senior notes | 1,210,148 | 78,533 | 6.49 | % | 1,149,136 | 76,088 | 6.62 | % | 1,148,947 | 76,038 | 6.62 | % | ||||||||||||||||||||
Loans payable of consolidated variable interest entities (3) | 18,090 | 1,021 | 5.64 | % | 33,225 | 1,879 | 5.66 | % | 51,518 | 2,900 | 5.63 | % | ||||||||||||||||||||
Other (3) | 229,859 | 4,055 | 1.76 | % | 271,476 | 4,846 | 1.79 | % | 319,328 | 4,790 | 1.50 | % | ||||||||||||||||||||
Total | $ | 19,832,038 | $ | 117,077 | 0.59 | % | $ | 17,497,586 | $ | 107,954 | 0.62 | % | $ | 16,450,772 | $ | 104,091 | 0.63 | % | ||||||||||||||
Net interest income | $ | 523,248 | $ | 435,253 | $ | 376,795 | ||||||||||||||||||||||||||
(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. |
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Year ended September 30, 2016 compared with the year ended September 30, 2015 – Net Interest Analysis
Net interest income increased $88 million, or 20%. 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 $75 million, or 19%, resulting from an increase in average interest-earning banking assets partially offset by a small decline in the net interest margin. 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 $8 million, or 9%. Average customer cash balances and the related segregated asset balances increased compared to the prior year as many clients reacted to uncertainties in the equity markets during portions of the current year by increasing the cash balances in their brokerage accounts. The December 2015 Federal Reserve Bank short-term interest rate increase further increased the net interest earned on these segregated asset balances. In addition, both the interest rates and the average balances associated with margin loans provided to brokerage clients increased.
Interest income earned on the available for sale securities portfolio increased $2 million, or 49%, due to increased yields and balances. See Note 7 of our Notes to Consolidated Financial Statements in this Form 10-K for additional information on our available for sale securities.
Interest expense incurred on our other borrowings increased by $7 million, or 113%. These borrowings are in large part comprised of RJ Bank’s borrowings from the FHLB and the related interest rate hedges. See Note 15 of our Notes to Consolidated Financial Statements in this Form 10-K for additional information regarding all of our borrowings other than our senior notes payable.
Interest expense incurred on our senior notes increased by $2 million, or 3%. The incremental interest expense arising from our July 2016 $800 million senior note issuances exceeded the interest savings resulting from our April 2016 repayment of the $250 million 4.25% issuance which matured. See Note 17 of our Notes to Consolidated Financial Statements in this Form 10-K for additional information.
Year ended September 30, 2015 compared with the year ended September 30, 2014 – Net Interest Analysis
Net interest income increased $58 million, or 16%, in fiscal year 2015 compared to the prior year. 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 in fiscal year 2015 increased $57 million, or 16%, primarily as a result of an increase in average loans outstanding as well as a modest increase in net interest margin. 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 was nearly unchanged in fiscal 2015 compared to the prior year. A decrease in net interest income arising from our broker-dealer margin lending activities, where a decline in margin interest rates more than offset the impact of slightly higher average client margin balances outstanding, was nearly offset by an increase in net interest revenue arising from our securities lending activities.
Net interest income arising from our securities lending activities increased $1 million, or 16%, in fiscal year 2015, due primarily to an increase in interest income associated with hard-to-borrow securities in our Box lending program. These revenues increased $3 million in fiscal year 2015 due to our ability to lend these securities at a premium. The increase in revenues was offset by a $2 million increase in interest expense during fiscal year 2015 associated with our stock borrow activities, as a result of additional expense associated with borrowing hard-to-borrow securities.
Interest income earned on the available for sale securities portfolio held in our RJ Bank and Other segments decreased $1 million, or 22%, due to lower average investment balances and a slight decrease in yields on the portfolio in fiscal year 2015. The decrease in average balances outstanding is the result of sales and redemptions within the portfolio during fiscal year 2015 (see Note 7 of our Notes to Consolidated Financial Statements in this Form 10-K for additional information on our available for sale securities).
Interest income earned on our trading instruments held in the Capital Markets segment increased $2 million, or 9%, in fiscal 2015, due to slightly higher average trading security inventory levels, partially offset by the impact of lower yields (see Note 6 of our Notes to Consolidated Financial Statements in this Form 10-K for additional information on our trading instruments).
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Results of Operations – Private Client Group
The following table presents consolidated financial information for our PCG segment for the years indicated:
Year ended September 30, | |||||||||||||||||
2016 | % change | 2015 | % change | 2014 | |||||||||||||
($ in thousands) | |||||||||||||||||
Revenues: | |||||||||||||||||
Securities commissions and fees: | |||||||||||||||||
Equities | $ | 240,855 | (11 | )% | $ | 270,435 | (9 | )% | $ | 297,535 | |||||||
Fixed income products | 95,908 | 29 | % | 74,448 | (5 | )% | 78,082 | ||||||||||
Mutual funds | 631,102 | (7 | )% | 680,375 | — | 678,577 | |||||||||||
Fee-based accounts | 1,589,124 | 8 | % | 1,472,877 | 17 | % | 1,261,267 | ||||||||||
Insurance and annuity products | 377,329 | 4 | % | 363,352 | 2 | % | 354,629 | ||||||||||
New issue sales credits | 44,088 | (41 | )% | 75,015 | (15 | )% | 88,341 | ||||||||||
Sub-total securities commissions and fees | 2,978,406 | 1 | % | 2,936,502 | 6 | % | 2,758,431 | ||||||||||
Interest | 107,281 | 7 | % | 100,594 | 1 | % | 99,147 | ||||||||||
Account and service fees: | |||||||||||||||||
Client account and service fees | 230,470 | 31 | % | 176,175 | 9 | % | 162,057 | ||||||||||
Mutual fund and annuity service fees | 255,405 | 2 | % | 249,232 | 17 | % | 212,342 | ||||||||||
Client transaction fees | 20,258 | 7 | % | 18,971 | 11 | % | 17,124 | ||||||||||
Correspondent clearing fees | 2,522 | 5 | % | 2,401 | (21 | )% | 3,022 | ||||||||||
Account and service fees – all other | 376 | 32 | % | 284 | (3 | )% | 293 | ||||||||||
Sub-total account and service fees | 509,031 | 14 | % | 447,063 | 13 | % | 394,838 | ||||||||||
Other | 32,000 | (10 | )% | 35,399 | (5 | )% | 37,087 | ||||||||||
Total revenues | 3,626,718 | 3 | % | 3,519,558 | 7 | % | 3,289,503 | ||||||||||
Interest expense | (10,239 | ) | (13 | )% | (11,752 | ) | 22 | % | (9,620 | ) | |||||||
Net revenues | 3,616,479 | 3 | % | 3,507,806 | 7 | % | 3,279,883 | ||||||||||
Non-interest expenses: | |||||||||||||||||
Sales commissions | 2,193,099 | 1 | % | 2,169,823 | 8 | % | 2,002,831 | ||||||||||
Admin & incentive compensation and benefit costs | 595,541 | 8 | % | 552,762 | 7 | % | 518,489 | ||||||||||
Communications and information processing | 166,507 | 6 | % | 157,729 | 3 | % | 153,076 | ||||||||||
Occupancy and equipment | 125,555 | 4 | % | 121,115 | 2 | % | 118,503 | ||||||||||
Business development | 88,535 | (4 | )% | 92,473 | 14 | % | 80,950 | ||||||||||
Clearance and other | 106,678 | 49 | % | 71,661 | (5 | )% | 75,756 | ||||||||||
Total non-interest expenses | 3,275,915 | 3 | % | 3,165,563 | 7 | % | 2,949,605 | ||||||||||
Pre-tax income | $ | 340,564 | — | $ | 342,243 | 4 | % | $ | 330,278 | ||||||||
Margin on net revenues | 9.4 | % | 9.8 | % | 10.1 | % | |||||||||||
The success of the PCG segment is dependent upon the quality of our products, services, financial advisors and support personnel including our ability to attract, retain and motivate a sufficient number of these associates. We face competition for qualified associates from major financial services companies, including other brokerage firms, insurance companies, banking institutions and discount brokerage firms.
Revenues of the PCG segment are correlated with total PCG client assets under administration, which include assets in fee-based accounts, and the overall U.S. equities markets. RJ&A advisors operate under the RJ&A registered investment advisor (“RIA”) license while independent contractors affiliated with RJFS may operate either under their own RIA license, or the RIA license of RJFSA. The investment advisory fee revenues associated with these activities are recorded within securities commissions and fee revenues on our consolidated financial statements. Refer to the securities commissions and fees section of our summary
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of significant accounting policies in Note 2 of the Notes to Consolidated Financial Statements in this Form 10-K for our accounting policies on presenting these revenues in our consolidated financial statements.
Net interest revenue in the Private Client Group is generated by client balances, predominantly the earnings on margin loans and assets segregated pursuant to regulations, less interest paid on client cash balances (the “Client Interest Program”). We also utilize a multi-bank sweep program which generates fee revenue from unaffiliated banks in lieu of interest revenue. The cash sweep program, known as the Raymond James Bank Deposit Program (“RJBDP”), is a multi-bank (RJ Bank and many non-affiliated banks) program under which clients’ cash deposits in their brokerage accounts are re-deposited into interest-bearing deposit accounts (up to $250,000 per bank for individual accounts and up to $500,000 per bank for joint accounts) at various third party banks. This program enables clients to obtain up to $2.5 million in individual FDIC deposit insurance coverage ($5 million for joint accounts) while earning competitive rates on their cash balances.
Clients’ transactions in securities are affected on either a cash or margin basis. Margin loans to clients are collateralized by the securities purchased or by other securities owned by the client. Interest is charged to clients on the amount borrowed. The interest rate charged to a client on a margin loan is based on current interest rates and on the outstanding amount of the loan.
Typically, broker-dealers utilize bank borrowings and equity capital as the primary sources of funds to finance clients’ margin account borrowings. RJ&A’s source of funds to finance clients’ margin account balances has been cash balances in brokerage clients’ accounts, which are funds awaiting investment. In addition, pursuant to written agreements with clients, broker-dealers are permitted by the SEC and FINRA rules to lend client securities in margin accounts to other financial institutions. SEC regulations, however, restrict the use of clients’ funds derived from pledging and lending clients’ securities, as well as funds awaiting investment, to the financing of margin account balances; to the extent not so used, such funds are required to be deposited in a special segregated account for the benefit of clients. The regulations also require broker-dealers, within designated periods of time, to obtain possession or control of, and to segregate, clients’ fully paid and excess margin securities.
No single client accounts for a material percentage of this segment’s total business.
PCG client asset balances are as follows as of the dates indicated:
As of September 30, | |||||||||||||||||
2016 | % change | 2015 | % change | 2014 | |||||||||||||
($ in billions) | |||||||||||||||||
Total PCG assets under administration | $ | 574.1 | 27 | % | $ | 453.3 | 1 | % | $ | 450.6 | |||||||
PCG assets in fee-based accounts | $ | 231.0 | 29 | % | $ | 179.4 | 7 | % | $ | 167.7 | |||||||
Total PCG assets under administration increased 27% over September 30, 2015. The increase results from net client inflows attributable to strong financial advisor recruiting results, high levels of retention of our existing financial advisors, our fiscal year 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, and an increase in U. S. equity markets at September 30, 2016 compared to the prior year. Total PCG assets in fee-based accounts increased 29% compared to September 30, 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 increase and client activity generally increases, 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 and the total number of PCG branch locations as of the dates indicated:
September 30, | ||||||||
2016 | 2015 | 2014 | ||||||
Employees | 3,098 | 2,738 | 2,634 | |||||
Independent Contractors | 4,048 | 3,858 | 3,631 | |||||
Total advisors | 7,146 | 6,596 | 6,265 | |||||
Total branch locations | 2,890 | 2,702 | 2,569 | |||||
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The number of financial advisors as of September 30, 2016 reflects a net increase of 550 individuals, or an 8% net increase, over the number of financial advisors as of September 30, 2015. The net increase results from strong financial advisor recruiting and high levels of retention throughout fiscal year 2016, as well as the addition of 265 financial advisors as a result of our acquisitions of Alex. Brown and 3Macs. Importantly, the client asset levels and productivity measures associated with those financial advisors recruited during the fiscal year exceed our historical benchmark averages. Notwithstanding the future impact of changes in the overall economy, and more specifically their impact on future equity markets and fixed income markets, factors over which we have no control, we believe that this increase in productive financial advisors is a positive indication of potential future revenue growth in this segment.
Year ended September 30, 2016 compared with the year ended September 30, 2015 – Private Client Group
Net revenues increased $109 million, or 3%, to $3.62 billion. Pre-tax income decreased $2 million, to $341 million. PCG’s pre-tax margin on net revenues decreased to 9.4% as compared to the prior year’s 9.8%. The 3Macs and Alex. Brown acquisitions were completed late in the fiscal year and therefore the impact of these acquisitions on this segment’s operations were not significant to our fiscal year 2016 results.
Securities commissions and fees increased $42 million, or 1%. Revenues earned on fee-based accounts increased $116 million, or 8%, commissions earned on fixed income products increased $21 million, or 29%, and commission revenues on insurance and annuity products increased $14 million, or 4%. Offsetting these increases, commissions on mutual funds decreased $49 million, or 7%, new issue sales credits declined $31 million, or 41%, and commissions on equity products decreased $30 million, or 11%, all of which reflect the challenging equity market conditions during significant portions of the current year.
Total account and service fees increased $62 million, or 14%. Client account and service fees increased $54 million, or 31%, primarily due to an increase in RJBDP fees resulting from increased average balances in the program as well as the December 2015 increase in interest rates. Mutual fund and annuity service fees increased $6 million, or 2%, primarily as a result of an increase in money market processing fees and omnibus fees arising from increased client assets and positions which are paid to us by companies whose products we distribute. Omnibus fees are generally based on the number of positions held in our client portfolios and compensate us for recordkeeping.
Total segment revenues increased 3%. The portion of total segment revenues that we consider to be recurring is approximately 77% at September 30, 2016, an increase from 75% at September 30, 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 in fiscal year 2016 increased 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 September 30, 2016, such assets were $231.0 billion, an increase of 29% compared to the $179.4 billion as of September 30, 2015.
Net interest income in the PCG segment increased $8 million, or 9%. Average customer cash balances and the related segregated asset balances increased compared to the prior year as many clients reacted to uncertainties in the equity markets during portions of the current year by increasing the cash balances in their brokerage accounts. The December 2015 Federal Reserve Bank short-term interest rate increase further increased the net interest earned on these segregated asset balances. In addition, both the average interest rate and the average client margin balances outstanding increased.
Non-interest expenses increased $110 million, or 3%. Administrative and incentive compensation and benefits expense increased $43 million, or 8%, resulting in part from annual increases in salaries, increases in employee benefit plan costs and additional staffing levels, primarily in PCG operations and information technology functions, to support our continuing growth. Clearance and other expense increased $35 million, or 49%, primarily resulting from increases in other expense related to certain legal and regulatory expenses which are approximately $40 million higher than the prior year level. Sales commission expense increased $23 million, or 1%, which is consistent with the 1% increase in securities commissions and fees revenues. Communications and information processing expense increased $9 million, or 6%, due to increases in software consulting and other information technology expenses associated with our continued investment in our platform and improving our compliance and regulatory systems.
Year ended September 30, 2015 compared with the year ended September 30, 2014 – Private Client Group
Net revenues in fiscal year 2015 increased $228 million, or 7%, to $3.5 billion while pre-tax income increased $12 million, or 4%, to $342 million. PCG’s pre-tax margin on net revenues decreased slightly to 9.8% as compared to 10.1% in fiscal year 2014.
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Securities commissions and fees in fiscal year 2015 increased $178 million, or 6%. Client assets under administration increased to $453.3 billion, an increase of $2.7 billion, or 1%, compared to September 30, 2014. The year over year increase in client assets in fiscal year 2015 was driven by positive net inflows generated by financial advisor retention and recruiting results, as the equity markets in the U.S. were down compared to the prior year. The most significant increase in these revenues in fiscal year 2015 arose from revenues earned on fee-based accounts, which increased $212 million, or 17%, and was partially offset by a $27 million, or 9%, decrease in commissions on equity products, a $13 million, or 15%, decrease in new issue sales credits due to a decrease in equity underwritings, and a $4 million, or 5%, decrease in commissions on fixed income products. Fiscal year 2015 includes a $7 million decrease in mutual fund commission revenues due to the resolution of a mutual fund share class issue that resulted in refunds of commissions being paid during the year to certain of our clients. Despite this unusual item, mutual fund commission revenues still increased $2 million, compared to fiscal year 2014. Commission revenues on equity products have decreased in our Canadian broker-dealer subsidiary as a result of the weaker Canadian currency compared to the U.S. dollar, as well as the overall challenging Canadian market conditions that existed throughout fiscal year 2015. Commission earnings on fixed income products in fiscal year 2015 decreased primarily due to the continuation of historically low interest rates which continue to result in challenging fixed income market conditions.
Total account and service fee revenues in fiscal year 2015 increased $52 million, or 13%. Mutual fund and annuity service fees increased $37 million, or 17%, primarily as a result of an increase in education and marketing support (“EMS”) fees (which include no-transaction-fee (“NTF”) program revenues), and mutual fund omnibus fees, all of which are paid to us by the mutual fund companies whose products we distribute. During fiscal year 2014, we implemented technology changes in our EMS program and standardized tiered service levels provided to many mutual fund companies, resulting in increased fees earned from EMS arrangements. Omnibus fees are generally based on the number of positions held in our client portfolios. Increases in such revenues are a result of increases in the number of positions for existing fund families on the omnibus platform as well as new fund families joining the omnibus program during fiscal year 2015. Client account and service fees in fiscal year 2015 increased $14 million, or 9%, as a result of the changes made in many of our fee schedules implemented since December 2013. In addition, transaction handling fees in fee-based accounts increased due to the increased number of transactions, fees generated in lieu of interest income from our multi-bank sweep program with unaffiliated banks increased due to higher average balances in the program, and SBL affiliate servicing fees increased (refer to the RJ Bank results of operations in this report for additional information on SBL activities) as SBL balances have continued to grow in fiscal year 2015.
PCG net interest is relatively unchanged in fiscal year 2015 compared to fiscal year 2014. Net interest income arising from our broker-dealer margin lending activities in fiscal year 2015 decreased slightly compared to the fiscal year 2014 level, a slight decline in margin interest rates more than offset the impact of slightly higher average margin loan balances outstanding. The rate of growth in margin loan balances in fiscal year 2015 has been negatively impacted by the popularity of our SBL product offered by RJ Bank. As a result of the extremely low rate interest rate environment that existed during fiscal year 2015 and the related low net interest spreads earned, there was only a nominal impact on our net interest revenues resulting from changes in client cash balances.
Total segment revenues in fiscal year 2015 increased 7%. The portion of total segment revenues that we consider to be recurring is approximately 75% at September 30, 2015, an increase from 72% at September 30, 2014. Assets in fee-based accounts in fiscal year 2015 increased more than average PCG client assets as clients continue to elect fee-based alternatives versus traditional transaction-based accounts. At September 30, 2015, such assets were $179.4 billion, an increase of 7% compared to the $167.7 billion as of September 30, 2014.
Non-interest expenses in fiscal year 2015 increased $216 million, or 7%. Sales commission expense increased $167 million, or 8%, largely consistent with the 6% increase in commission and fee revenues, coupled with increased hiring bonuses resulting from the high level of recruiting activity in fiscal year 2015. Administrative and incentive compensation and benefits expense in fiscal year 2015 increased $34 million, or 7%, in part from annual increases in salary expenses, increases in employee benefit plan costs, and additional staffing levels, primarily in information technology functions, to support our continuing growth. Business development expenses increased $12 million, or 14%, due to increased recruiting activity and the related incoming account transfer fee expenses, and conference and travel related expenses in fiscal year 2015.
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Results of Operations – Capital Markets
The following table presents consolidated financial information for our Capital Markets segment for the years indicated:
Year ended September 30, | |||||||||||||||||
2016 | % change | 2015 | % change | 2014 | |||||||||||||
($ in thousands) | |||||||||||||||||
Revenues: | |||||||||||||||||
Institutional sales commissions: | |||||||||||||||||
Equity | $ | 228,346 | (8 | )% | $ | 247,414 | (5 | )% | $ | 260,934 | |||||||
Fixed income | 316,144 | 11 | % | 283,828 | 15 | % | 246,131 | ||||||||||
Sub-total institutional sales commissions | 544,490 | 2 | % | 531,242 | 5 | % | 507,065 | ||||||||||
Equity underwriting fees | 54,492 | (27 | )% | 74,229 | (26 | )% | 100,091 | ||||||||||
Merger and acquisitions fees | 148,503 | (8 | )% | ||||||||||||||