Document


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

FORM 10-Q
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
Commission File Number: 1-9109
RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Florida
 
No. 59-1517485
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
880 Carillon Parkway, St. Petersburg, Florida 33716
(Address of principal executive offices)    (Zip Code)
(727) 567-1000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨                               No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

144,187,610 shares of common stock as of August 4, 2017

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES

INDEX
 
 
 
PAGE
PART I
 
 
Item 1.
 
 
 
Condensed Consolidated Statements of Financial Condition as of June 30, 2017 and September 30, 2016 (Unaudited)
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended June 30, 2017 and June 30, 2016 (Unaudited)
 
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended June 30, 2017 and June 30, 2016 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2017 and June 30, 2016 (Unaudited)
 
 
 
 
 
Note 1 - Introduction and basis of presentation
 
 
Note 2 - Update of significant accounting policies
 
 
Note 3 - Acquisitions
 
 
Note 4 - Cash and cash equivalents, assets segregated pursuant to regulations, and deposits with clearing organizations
 
 
Note 5 - Fair value
 
 
Note 6 - Trading instruments and trading instruments sold but not yet purchased
 
 
Note 7 - Available-for-sale securities
 
 
Note 8 - Bank loans, net
 
 
Note 9 - Variable interest entities
 
 
Note 10 - Goodwill and identifiable intangible assets
 
 
Note 11 - Bank deposits
 
 
Note 12 - Other borrowings
 
 
Note 13 - Senior notes payable
 
 
Note 14 - Derivative financial instruments
 
 
Note 15 - Disclosure of offsetting assets and liabilities, collateral, encumbered assets and repurchase agreements
 
 
Note 16 - Income taxes
 
 
Note 17 - Commitments, contingencies and guarantees
 
 
Note 18 - Accumulated other comprehensive income/(loss)
 
 
Note 19 - Interest income and interest expense
 
 
Note 20 - Share-based compensation
 
 
Note 21 - Regulatory capital requirements
 
 
Note 22 - Financial instruments with off-balance sheet risk
 
 
Note 23 - Earnings per share
 
 
Note 24 - Segment information
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
PART II
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 3.
 
Item 5.
 
Item 6.
 
 
 


2

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

 
 
 
 
 
June 30, 2017
 
September 30, 2016
 
($ in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
2,615,479

 
$
1,650,452

Assets segregated pursuant to regulations and other segregated assets
3,393,008

 
4,884,487

Securities purchased under agreements to resell and other collateralized financings
483,820

 
470,222

Financial instruments, at fair value:
 

 
 

Trading instruments
699,300

 
766,805

Available-for-sale securities
2,010,991

 
859,398

Private equity investments
196,037

 
194,634

Other investments
179,927

 
296,844

Derivative instruments associated with offsetting matched book positions
291,955

 
422,196

Receivables:
 

 
 

Brokerage clients, net
2,672,861

 
2,714,782

Securities borrowed
120,037

 
170,860

Bank loans, net
16,630,191

 
15,210,735

Brokers-dealers and clearing organizations
238,579

 
164,908

Loans to financial advisors, net
865,789

 
838,721

Other
641,706

 
610,417

Deposits with clearing organizations
211,446

 
245,364

Prepaid expenses and other assets
768,474

 
722,095

Investments in real estate partnerships held by consolidated variable interest entities
114,783

 
116,133

Property and equipment, net
421,174

 
321,457

Deferred income taxes, net
382,753

 
322,024

Goodwill and identifiable intangible assets, net
495,116

 
504,442

Total assets
$
33,433,426

 
$
31,486,976



(continued on next page)













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

3

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(continued from previous page)
 
 
 
 
 
June 30, 2017
 
September 30, 2016
 
($ in thousands)
Liabilities and equity:
 

 
 

Trading instruments sold but not yet purchased, at fair value
$
326,059

 
$
328,938

Securities sold under agreements to repurchase
226,972

 
193,229

Derivative instruments associated with offsetting matched book positions, at fair value
291,955

 
422,196

Payables:
 
 
 
Brokerage clients
5,773,289

 
6,444,671

Securities loaned
397,556

 
677,761

Bank deposits
16,310,881

 
14,262,547

Brokers-dealers and clearing organizations
267,511

 
306,119

Trade and other
781,640

 
583,340

Other borrowings
805,198

 
608,658

Accrued compensation, commissions and benefits
903,594

 
915,954

Senior notes payable
1,848,021

 
1,680,587

Total liabilities
27,932,676

 
26,424,000

Commitments and contingencies (see Note 17)


 


Equity
 

 
 

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

 
—

Common stock; $.01 par value; 350,000,000 shares authorized; 154,046,800 and 151,424,947 shares issued as of June 30, 2017 and September 30, 2016, respectively, and 143,853,338 and 141,544,511 shares outstanding as of June 30, 2017 and September 30, 2016, respectively
1,540

 
1,513

Additional paid-in capital
1,623,568

 
1,498,921

Retained earnings
4,178,883

 
3,834,781

Treasury stock, at cost; 10,143,369 and 9,766,846 common shares as of June 30, 2017 and September 30, 2016, respectively
(392,709
)
 
(362,937
)
Accumulated other comprehensive loss
(22,010
)
 
(55,733
)
Total equity attributable to Raymond James Financial, Inc.
5,389,272

 
4,916,545

Noncontrolling interests
111,478

 
146,431

Total equity
5,500,750

 
5,062,976

Total liabilities and equity
$
33,433,426

 
$
31,486,976

















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

4

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
Three months ended June 30,
 
Nine months ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Securities commissions and fees
$
1,017,908

 
$
871,764

 
$
2,994,405

 
$
2,574,756

Investment banking
104,191

 
72,714

 
267,993

 
198,971

Investment advisory and related administrative fees
117,378

 
96,343

 
335,901

 
288,816

Interest
204,224

 
163,810

 
579,550

 
467,920

Account and service fees
174,084

 
129,334

 
485,856

 
373,685

Net trading profit
23,404

 
29,795

 
59,770

 
66,379

Other
21,918

 
23,237

 
68,714

 
58,437

Total revenues
1,663,107

 
1,386,997

 
4,792,189

 
4,028,964

Interest expense
(38,560
)
 
(28,033
)
 
(111,203
)
 
(83,841
)
Net revenues
1,624,547

 
1,358,964

 
4,680,986

 
3,945,123

Non-interest expenses:
 

 
 

 
 

 
 

Compensation, commissions and benefits
1,082,382

 
908,884

 
3,124,563

 
2,663,219

Communications and information processing
77,819

 
71,717

 
226,047

 
212,337

Occupancy and equipment costs
46,507

 
40,825

 
140,057

 
123,505

Clearance and floor brokerage
12,296

 
10,214

 
36,053

 
30,727

Business development
39,305

 
36,488

 
116,186

 
112,529

Investment sub-advisory fees
20,133

 
15,030

 
57,206

 
43,866

Bank loan loss provision
6,209

 
3,452

 
13,097

 
26,991

Acquisition-related expenses
3,366

 
13,445

 
17,118

 
21,332

Other
59,589

 
54,055

 
304,900

 
141,582

Total non-interest expenses
1,347,606

 
1,154,110

 
4,035,227

 
3,376,088

Income including noncontrolling interests and before provision for income taxes
276,941

 
204,854

 
645,759

 
569,035

Provision for income taxes
91,590

 
72,261

 
204,160

 
206,541

Net income including noncontrolling interests
185,351

 
132,593

 
441,599

 
362,494

Net income/(loss) attributable to noncontrolling interests
1,927

 
7,089

 
(1,147
)
 
4,814

Net income attributable to Raymond James Financial, Inc.
$
183,424

 
$
125,504

 
$
442,746

 
$
357,680

 
 
 
 
 
 
 
 
Earnings per common share – basic
$
1.27

 
$
0.89

 
$
3.09

 
$
2.51

Earnings per common share – diluted
$
1.24

 
$
0.87

 
$
3.02

 
$
2.47

Weighted-average common shares outstanding – basic
143,712

 
141,165

 
143,059

 
141,902

Weighted-average common and common equivalent shares outstanding – diluted
147,103

 
143,952

 
146,347

 
144,618

 
 
 
 
 
 
 
 
Net income attributable to Raymond James Financial, Inc.
$
183,424

 
$
125,504

 
$
442,746

 
$
357,680

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

 
 

 
 

 
 

Unrealized gain/(loss) on available-for-sale securities and non-credit portion of other-than-temporary impairment losses
1,776

 
(955
)
 
(418
)
 
(6,647
)
Unrealized gain/(loss) on currency translations, net of the impact of net investment hedges
7,423

 
2,302

 
10,647

 
6,401

Unrealized gain/(loss) on cash flow hedges
(3,775
)
 
(6,922
)
 
23,494

 
(15,126
)
Total comprehensive income
$
188,848

 
$
119,929

 
$
476,469

 
$
342,308

 
 
 
 
 
 
 
 
Other-than-temporary impairment:
 

 
 

 
 

 
 

Total other-than-temporary impairment, net
$
1,022

 
$
423

 
$
2,279

 
$
444

Portion of charge-offs/(recoveries) recognized in other comprehensive income
(1,022
)
 
(423
)
 
(2,279
)
 
(444
)
Net impairment losses recognized in other revenue
$
—

 
$
—

 
$
—

 
$
—

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

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

5

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

 
Nine months ended June 30,
 
2017
 
2016
 
(in thousands, except per share amounts)
Common stock, par value $.01 per share:
 
 
 
Balance, beginning of year
$
1,513

 
$
1,491

Share issuances
27

  
20

Balance, end of period
1,540

 
1,511

 
 
 
 
Additional paid-in capital:
 

 
 

Balance, beginning of year
1,498,921

  
1,344,779

Employee stock purchases
20,229

  
23,861

Exercise of stock options and vesting of restricted stock units, net of forfeitures
31,556

  
15,337

Restricted stock, stock option and restricted stock unit expense
72,036

  
57,176

Excess tax benefit from share-based payments
—

(1) 
34,791

Other
826

  
379

Balance, end of period
1,623,568

 
1,476,323

 
 
 
 
Retained earnings: (2)
 

 
 

Balance, beginning of year
3,834,781

  
3,422,169

Net income attributable to Raymond James Financial, Inc.
442,746

  
357,680

Cash dividends declared
(98,644
)
 
(88,155
)
Balance, end of period
4,178,883

 
3,691,694

 
 
 
 
Treasury stock:
 

 
 

Balance, beginning of year
(362,937
)
 
(203,455
)
Purchases/surrenders
(9,265
)
 
(152,598
)
Exercise of stock options and vesting of restricted stock units, net of forfeitures
(20,507
)
 
(7,691
)
Balance, end of period
(392,709
)
 
(363,744
)
 
 
 
 
Accumulated other comprehensive loss: (3)
 

 
 

Balance, beginning of year
(55,733
)
 
(40,503
)
Net change in unrealized gain/(loss) on available-for-sale securities and non-credit portion of other-than-temporary impairment losses, net of tax
(418
)
 
(6,647
)
Net change in currency translations and net investment hedges, net of tax
10,647

 
6,401

Net change in cash flow hedges, net of tax
23,494

 
(15,126
)
Balance, end of period
(22,010
)
 
(55,875
)
Total equity attributable to Raymond James Financial, Inc.
$
5,389,272

 
$
4,749,909

 
 
 
 
Noncontrolling interests: (2)
 

 
 

Balance, beginning of year
$
146,431

 
$
154,454

Net income/(loss) attributable to noncontrolling interests
(1,147
)
 
4,814

Capital contributions
9,776

 
696

Distributions
(39,968
)
 
(10,367
)
Derecognition resulting from sales
(4,628
)
 
—

Other
1,014

 
(1,710
)
Balance, end of period
111,478

 
147,887

Total equity
$
5,500,750

 
$
4,897,796


(1)
During the nine months ended June 30, 2017, we adopted new stock compensation simplification guidance. See Notes 1, 16 and 20 for additional information.

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

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

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

6

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

 
Nine months ended June 30,
 
2017
 
2016
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income attributable to Raymond James Financial, Inc.
$
442,746

 
$
357,680

Net income/(loss) attributable to noncontrolling interests
(1,147
)
 
4,814

Net income including noncontrolling interests
441,599

 
362,494

 
 
 
 
Adjustments to reconcile net income including noncontrolling interests to net cash provided by/(used in) operating activities:
 

 
 

Depreciation and amortization
62,149

 
53,964

Deferred income taxes
(56,948
)
 
(33,857
)
Premium and discount amortization on available-for-sale securities and unrealized gain on other investments
(23,468
)
 
(18,284
)
Provisions for loan losses, legal and regulatory proceedings and bad debts
159,131

 
31,022

Share-based compensation expense
76,419

 
60,777

Compensation expense which is payable in common stock of an acquiree
12,810

 
—

Unrealized gain on company owned life insurance, net of expenses
(30,076
)
 
(12,959
)
Extinguishment of senior notes payable
8,282

 
—

Other
18,129

 
9,950

Net change in:
 

 
 

Assets segregated pursuant to regulations and other segregated assets
1,491,529

 
(758,424
)
Securities purchased under agreements to resell and other collateralized financings, net of securities sold under agreements to repurchase
20,145

 
(37,046
)
Securities loaned, net of securities borrowed
(229,382
)
 
144,559

Loans provided to financial advisors, net of repayments
(42,336
)
 
(100,186
)
Brokerage client receivables and other accounts receivable, net
(75,882
)
 
(48,418
)
Trading instruments, net
69,481

 
(98,318
)
Prepaid expenses and other assets
134,780

 
(25,730
)
Brokerage client payables and other accounts payable
(649,199
)
 
596,267

Accrued compensation, commissions and benefits
(17,117
)
 
(104,664
)
Proceeds from sales of securitizations and loans held for sale, net of purchases and originations of loans held for sale
44,369

 
(61,580
)
Net cash provided by/(used in) operating activities
1,414,415

 
(40,433
)
 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to property and equipment
(152,845
)
 
(86,518
)
Increase in bank loans, net
(1,789,994
)
 
(1,980,193
)
Purchases of Federal Home Loan Bank/Federal Reserve Bank stock, net
(9,125
)
 
(3,231
)
Proceeds from sales of loans held for investment
287,669

 
116,736

Purchases, or contributions to private equity or other investments, net of proceeds from sales of, or distributions received from, private equity and other investments
97,785

 
(37,427
)
Purchases of available-for-sale securities
(1,424,706
)
 
(108,931
)
Available-for-sale securities maturations, repayments and redemptions
198,654

 
65,723

Proceeds from sales of available-for-sale securities
65,656

 
1,530

Other investing activities, net
(1,830
)
 
(23,425
)
Net cash used in investing activities
$
(2,728,736
)
 
$
(2,055,736
)
 
 
 
 
 
 
 
 
(continued on next page)
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

7

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued from previous page)
 
Nine months ended June 30,
 
2017
 
2016
 
(in thousands)
Cash flows from financing activities:
 
 
 
Proceeds from/(repayments of) short-term borrowings, net
$
—

 
$
122,800

Proceeds from Federal Home Loan Bank advances
850,000

 
25,000

Repayments of Federal Home Loan Bank advances and other borrowed funds
(653,461
)
 
(3,287
)
Proceeds from senior note issuances, net of debt issuance costs paid
508,489

 
—

Repayment of senior notes payable
(350,000
)
 
(250,000
)
Acquisition-related contingent consideration received, net of payments
2,992

 
—

Exercise of stock options and employee stock purchases
51,183

 
36,850

Increase in bank deposits
2,048,334

 
1,812,313

Purchases of treasury stock
(32,179
)
 
(161,501
)
Dividends on common stock
(95,322
)
 
(84,997
)
Distributions to noncontrolling interests, net
(27,782
)
 
(9,671
)
Net cash provided by financing activities
2,302,254

 
1,487,507

 
 
 
 
Currency adjustment:
 

 
 

Effect of exchange rate changes on cash
(22,906
)
 
(14,287
)
Net increase/(decrease) in cash and cash equivalents
965,027

 
(622,949
)
Cash and cash equivalents at beginning of year
1,650,452

 
2,601,006

Cash and cash equivalents at end of period
$
2,615,479

 
$
1,978,057

 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 

 
 

Cash paid for interest
$
92,930

 
$
86,463

Cash paid for income taxes
$
243,585

 
$
210,789

Non-cash transfers of loans to other real estate owned
$
5,359

 
$
2,910























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

8

RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2017

NOTE 1 – INTRODUCTION AND BASIS OF PRESENTATION

Description of business

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

Basis of presentation

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

Accounting estimates and assumptions

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

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

Principal subsidiaries

As of June 30, 2017, our principal subsidiaries, all wholly owned, include: Raymond James & Associates, Inc. (“RJ&A”), a domestic broker-dealer carrying client accounts; Raymond James Financial Services, Inc. (“RJFS”), an introducing domestic broker-dealer; Raymond James Financial Services Advisors, Inc. (“RJFSA”), a registered investment advisor; Raymond James Ltd. (“RJ Ltd.”), a broker-dealer headquartered in Canada; Eagle Asset Management, Inc. (“Eagle”), a registered investment advisor; and Raymond James Bank, N.A. (“RJ Bank”) a national bank.

Adoption of new accounting guidance

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

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

9
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





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

Our adoption of the new stock compensation simplification guidance impacts our determination of income tax expense. Generally, the amount of compensation cost recognized for financial reporting purposes varies from the amount that can ultimately be deducted on the tax return for share-based payment awards. Under the prior guidance, the tax effects of deductions in excess of compensation expense (“windfalls”), as well as the tax effect of any deficiencies (“shortfalls”) were recorded in equity to the extent of previously recognized windfalls, with any remaining shortfall recorded in income tax expense. Under the new guidance, all tax effects related to share-based payments are recorded through tax expense in the periods during which the awards are exercised or vest, as applicable. Under the transition provisions of the new guidance, we have applied this new guidance prospectively to excess tax benefits arising from vesting after the October 1, 2016 adoption date. Under the new guidance, excess tax benefits are included along with other income tax cash flows as an operating activity in the Condensed Consolidated Statements of Cash Flows. Prior period cash flows have been adjusted to conform to the current presentation. See Notes 16 and 20 for additional information.

Reclassifications

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

NOTE 2 – UPDATE OF SIGNIFICANT ACCOUNTING POLICIES

A summary of our significant accounting policies is included in Note 2 on pages 108 - 127 of our 2016 Form 10-K. Other than the October 1, 2016 adoption of new consolidation guidance, which is described in Note 1 and below, and new guidance on stock compensation, which is discussed in Notes 1, 16 and 20, there have been no significant changes in our significant accounting policies since September 30, 2016.

Evaluation of VIEs to determine whether consolidation is required

Our significant accounting policies applicable to the evaluation of legal entities to determine whether consolidation is required are discussed on pages 125 - 127 of our 2016 Form 10-K. As of June 30, 2017, the nature of our involvement in legal entities as described therein is unchanged. However, our assessments of whether our involvement in such legal entities constitutes a VIE, and if so, whether we are deemed to be the primary beneficiary of such VIE, are now governed under new accounting guidance.

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

EIF Funds

The employee investment funds (“EIF Funds”) were formed many years ago as a compensation and retention mechanism offered to certain of our key employees. After application of the new consolidation guidance, we no longer consider the EIF Funds to be VIEs. Our consolidation conclusion regarding the EIF Funds is unchanged after application of the new consolidation guidance, and we continued to consolidate the EIF Funds through the application of the voting interest model. During the three months ended March 31, 2017, we sold our interests in the EIF Funds.

Non-guaranteed low-income housing tax credit funds

Raymond James Tax Credit Funds, Inc. (“RJTCF”), a wholly owned subsidiary of RJF is a managing member or general partner of low-income housing tax credit (“LIHTC”) funds (the “LIHTC Funds”). Under the new consolidation guidance, the fees earned by RJTCF from the LIHTC Funds are excluded from the determination of whether RJTCF has an obligation to absorb losses of, or the right to receive benefits from, the LIHTC Fund VIE, which could be potentially significant to the LIHTC Fund. Additionally, we determined that as the managing member, RJTCF acts as an agent in its decision-making role and not as a principal. As a result of these changes in the primary beneficiary determination criteria under the new guidance, we concluded that we are not the primary beneficiary of any of the non-guaranteed LIHTC Funds. Accordingly, we deconsolidated such funds as of our adoption of this new guidance.


10
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)






Other real estate limited partnerships and LLCs

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

Managed Funds

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

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

Private Equity Interests

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

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

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

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

As more fully described in Note 2 on page 116 - 117 of our 2016 Form 10-K, we have certain financing receivables that arise from businesses other than our banking business. Specifically, we offer loans to financial advisors and certain key revenue producers, primarily for recruiting, transitional cost assistance, and retention purposes. We present the outstanding balance of loans to financial advisors on our Condensed Consolidated Statements of Financial Condition, net of the allowance for doubtful accounts. Of the gross balance outstanding, the portion associated with financial advisors who are no longer affiliated with us is $23 million and $13 million at June 30, 2017 and September 30, 2016, respectively. Our allowance for doubtful accounts is $7 million and $5 million at June 30, 2017 and September 30, 2016, respectively.

NOTE 3 – ACQUISITIONS

Acquisition announcements

On April 20, 2017, we announced we had entered into a definitive agreement to acquire 100% of the outstanding shares of Scout Investments, Inc. (the “Scout Group”), an asset management and distribution entity, from UMB Financial Corporation. The Scout Group includes Scout Investments (“Scout”) and its Reams Asset Management division (“Reams”), as well as Scout

11
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Distributors. The addition of Scout, an equity asset manager, and Reams, an institutional-focused fixed income specialist, broadens the investment solutions available to our clients. As of December 31, 2016, Scout and its Reams division had combined assets under management and advisement of approximately $27 billion. Upon completion of this acquisition, which we expect to occur prior to December 31, 2017, the Scout Group will operate within our Asset Management segment.

Acquisitions completed in the prior fiscal year

Mummert & Company Corporate Finance GmbH

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

MacDougall, MacDougall & MacTier Inc.

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

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

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

The acquisition-related expenses presented on our Condensed Consolidated Statements of Income and Comprehensive Income pertain to certain incremental expenses incurred in connection with the acquisitions described above. The table below provides a summary of acquisition-related expenses incurred in each respective period:
 
 
Three months ended June 30,
 
Nine months ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
Acquisition and integration related incentive compensation costs (1)
 
$
—

 
$
—

 
$
5,474

 
$
—

Severance (2)
 
177

 
—

 
5,734

 
—

Early termination costs of assumed contracts
 
—

 
—

 
1,329

 
—

Information systems integration costs
 
29

 
7,610

 
1,651

 
9,265

Legal and regulatory
 
1,509

 
2,309

 
2,336

 
4,232

Post-closing purchase price contingency
 
—

 
—

 
(3,499
)
 
—

DBRSU obligation and related hedge (3)
 
(28
)
 
2,468

 
770

 
5,787

All other
 
1,679

 
1,058

 
3,323

 
2,048

Total acquisition-related expenses
 
$
3,366

 
$
13,445

 
$
17,118

 
$
21,332


(1) 
Primarily comprised of non-recurring restricted stock unit (“RSU”) grants authorized by the Board of Directors in their November 2016 meeting, made to certain employees and consultants for acquisition-related purposes. See Note 20 for discussion of share-based compensation.
(2)
Primarily arising from the 3Macs acquisition. Such costs include severance costs as well as any forgiven employee loan balances and any unamortized balance of the prepaid compensation asset associated with terminated associates, which will not be collected (refer to the discussion of this prepaid asset in Note 3 on page 128, and Note 10 on page 157, each in our 2016 Form 10-K).    
(3) 
The nine months ended June 30, 2017 include a loss on the Deutsche Bank RSU (“DBRSU”) awards related to a Deutsche Bank AG (“DB”) rights offering during the period, partially offset by a related gain on the DB shares purchased to satisfy the DBRSU obligation, which act as an economic hedge to this obligation. Refer to Note 3 on page 129 of our 2016 Form 10-K, as well as Notes 14 and 20 in this Form 10-Q for more information. The three and nine months ended June 30, 2016 represent the pre-Alex. Brown closing date unrealized loss on DB shares purchased to satisfy the DBRSU obligation.

12
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





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

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

Our cash and cash equivalents, assets segregated pursuant to regulations and other segregated assets, and deposits with clearing organization balances are as follows:
 
June 30,
2017
 
September 30,
2016
 
(in thousands)
Cash and cash equivalents:
 
 
 
Cash in banks
$
2,613,725

 
$
1,649,593

Money market fund investments
1,754

 
859

Total cash and cash equivalents (1)
$
2,615,479

 
$
1,650,452

 
 
 
 
Assets segregated pursuant to regulations and other segregated assets (2)
$
3,393,008

 
$
4,884,487

 
 
 
 
Deposits with clearing organizations:
 
 
 
Cash and cash equivalents
$
160,787

 
$
215,856

Government and agency obligations
50,659

 
29,508

Total deposits with clearing organizations
$
211,446

 
$
245,364


(1)
The total amounts presented include cash and cash equivalents of $1.47 billion and $810 million as of June 30, 2017 and September 30, 2016, respectively, which are either held directly by RJF in depository accounts at third party financial institutions, held in a depository account at RJ Bank, or are otherwise invested by one of our subsidiaries on behalf of RJF, all of which are available without restrictions.

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



13
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 5 – FAIR VALUE

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

Assets and liabilities measured at fair value on a recurring and nonrecurring basis are presented below:
June 30, 2017
 
Quoted prices
in active
markets for
identical
instruments
(Level 1) (1)
 
Significant
other
observable
inputs
(Level 2) (1)
 
Significant
unobservable
inputs
(Level 3)
 
Netting
adjustments (2)
 
Balance as of
June 30,
2017
 
 
(in thousands)
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments:
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
363

 
$
216,812

 
$
—

 
$
—

 
$
217,175

Corporate obligations
 
9,724

 
83,414

 
—

 
—

 
93,138

Government and agency obligations
 
8,149

 
33,411

 
—

 
—

 
41,560

Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)
 
1,920

 
164,716

 
—

 
—

 
166,636

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

 
65,502

 
6

 
—

 
65,508

Total debt securities
 
20,156

 
563,855

 
6

 
—

 
584,017

Derivative contracts
 
—

 
83,873

 
—

 
(49,862
)
 
34,011

Equity securities
 
15,652

 
25

 
—

 
—

 
15,677

Brokered certificates of deposit
 
—

 
60,957

 
—

 
—

 
60,957

Other
 
43

 
—

 
4,595

 
—

 
4,638

Total trading instruments
 
35,851

 
708,710

 
4,601

 
(49,862
)
 
699,300

Available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 
—

 
1,877,395

 
—

 
—

 
1,877,395

Other securities
 
1,407

 
—

 
—

 
—

 
1,407

Auction rate securities (“ARS”):
 
 
 
 
 
 
 
 

 
 

Municipal obligations
 
—

 
—

 
26,075

 
—

 
26,075

Preferred securities
 
—

 
—

 
106,114

 
—

 
106,114

Total available-for-sale securities
 
1,407

 
1,877,395

 
132,189

 
—

 
2,010,991

Private equity investments:
 
 
 
 
 
 
 
 
 


Measured at fair value
 
—

 
—

 
85,043

 
—

 
85,043

Measured at net asset value (“NAV”)
 
 
 
 
 
 
 
 
 
110,994

Total private equity investments
 
—

 
—

 
85,043

 
—

 
196,037

Other investments (3)
 
179,476

 
333

 
118

 
—

 
179,927

Derivative instruments associated with offsetting matched book positions
 
—

 
291,955

 
—

 
—

 
291,955

Deposits with clearing organizations:
 
 
 
 
 
 
 
 
 
 
Government and agency obligations
 
50,659

 
—

 
—

 
—

 
50,659

Total assets at fair value on a recurring basis
 
$
267,393

 
$
2,878,393

 
$
221,951

 
$
(49,862
)
 
$
3,428,869

Assets at fair value on a nonrecurring basis:
 
 
 
 

 
 

 
 

 
 

Bank loans, net:
 
 

 
 

 
 

 
 

 
 

Impaired loans
 
$
—

 
$
17,933

 
$
25,410

 
$
—

 
$
43,343

Loans held for sale (4)
 
—

 
110,516

 
—

 
—

 
110,516

Total bank loans, net
 
—

 
128,449

 
25,410

 
—

 
153,859

Other assets: Other real estate owned (“OREO”) (5)
 
—

 
506

 
—

 
—

 
506

Total assets at fair value on a nonrecurring basis
 
$
—

 
$
128,955

 
$
25,410

 
$
—

 
$
154,365

 
(continued on next page)

14
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





June 30, 2017
 
Quoted prices
in active
markets for
identical
instruments
(Level 1) (1)
 
Significant
other
observable
inputs
(Level 2) (1)
 
Significant
unobservable
inputs
(Level 3)
 
Netting
adjustments (2)
 
Balance as of
June 30,
2017
 
 
(in thousands)
 
 
(continued from previous page)
Liabilities at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments sold but not yet purchased:
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
647

 
$
910

 
$
—

 
$
—

 
$
1,557

Corporate obligations
 
2,564

 
20,235

 
—

 
—

 
22,799

Government obligations
 
233,004

 
—

 
—

 
—

 
233,004

Agency MBS and CMOs
 
1,456

 
—

 
—

 
—

 
1,456

Total debt securities
 
237,671

 
21,145

 
—

 
—

 
258,816

Derivative contracts
 
—

 
99,533

 
—

 
(39,153
)
 
60,380

Equity securities
 
6,304

 
57

 
—

 
—

 
6,361

Other
 
—

 
502

 
—

 
—

 
502

Total trading instruments sold but not yet purchased
 
243,975

 
121,237

 
—

 
(39,153
)
 
326,059

Derivative instruments associated with offsetting matched book positions
 
—

 
291,955

 
—

 
—

 
291,955

Trade and other payables:
 
 
 
 
 
 
 
 
 


Derivative contracts (6)
 
—

 
6,709

 
—

 
—

 
6,709

Other liabilities
 
—

 
—

 
1,202

(7) 
—

 
1,202

Total trade and other payables
 
—

 
6,709

 
1,202

 
—

 
7,911

Accrued compensation, commissions and benefits:
 
 
 
 
 
 
 
 
 
 
Derivative contracts (8)
 
—

 
26,561

 
—

 
—

 
26,561

Total liabilities at fair value on a recurring basis
 
$
243,975

 
$
446,462

 
$
1,202

 
$
(39,153
)
 
$
652,486


(1)
We had $2 million and $4 million in transfers of financial instruments from Level 1 to Level 2 during the three and nine months ended June 30, 2017, respectively.  These transfers were a result of decreased market activity in these instruments. Our transfers from Level 2 to Level 1 were insignificant during the three months ended June 30, 2017 and amounted to $1 million during the nine months ended June 30, 2017.  These transfers were a result of increased market activity in these instruments.  Our policy is to treat transfers between levels as having occurred at the end of the reporting period.

(2)
For derivative transactions, where permitted, we have elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists. See Note 14 for additional information on the collateral related to our derivative contracts and Note 15 for information on offsetting financial instruments.

(3)
Other investments include $43 million of financial instruments that are related to obligations to perform under certain deferred compensation plans (see Note 2 on page 116 and Note 24 on pages 186 - 191 of our 2016 Form 10-K, for further information regarding these plans), and DB shares with a fair value of $20 million as of June 30, 2017 which we hold as an economic hedge against the DBRSU obligation (see Note 20 for additional information).

(4)
Includes individual loans classified as held for sale, which were recorded at a fair value lower than cost.

(5)
Represents the fair value of foreclosed properties which were measured at a fair value subsequent to their initial classification as OREO. The recorded value in the Condensed Consolidated Statements of Financial Condition is net of the estimated selling costs.

(6)
Consists of derivatives arising from RJ Bank’s business operations. See Note 14 for additional information.

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

(8)
The balance reflects the DBRSU obligation from our acquisition of Alex. Brown. See Notes 14 and 20 for additional information.

15
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)






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

 
$
273,683

 
$
—

 
$
—

 
$
274,163

Corporate obligations
 
10,000

 
122,885

 
—

 
—

 
132,885

Government and agency obligations
 
6,412

 
43,186

 
—

 
—

 
49,598

Agency MBS and CMOs
 
413

 
164,250

 
—

 
—

 
164,663

Non-agency CMOs and ABS
 
—

 
34,421

 
7

 
—

 
34,428

Total debt securities
 
17,305

 
638,425

 
7

 
—

 
655,737

Derivative contracts
 
—

 
163,242

 
—

 
(107,539
)
 
55,703

Equity securities
 
14,529

 
1,500

 
—

 
—

 
16,029

Brokered certificates of deposit
 
—

 
35,206

 
—

 
—

 
35,206

Other
 
555

 
3

 
3,572

 
—

 
4,130

Total trading instruments
 
32,389

 
838,376

 
3,579

 
(107,539
)
 
766,805

Available-for-sale securities:
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 
—

 
682,297

 
—

 
—

 
682,297

Non-agency CMOs
 
—

 
50,519

 
—

 
—

 
50,519

Other securities
 
1,417

 
—

 
—

 
—

 
1,417

ARS:
 
 

 
 

 
 

 
 

 


Municipal obligations
 
—

 
—

 
25,147

 
—

 
25,147

Preferred securities
 
—

 
—

 
100,018

 
—

 
100,018

Total available-for-sale securities
 
1,417

 
732,816

 
125,165

 
—

 
859,398

Private equity investments:
 
 
 
 
 
 
 
 
 


Measured at fair value
 
—

 
—

 
83,165

 
—

 
83,165

Measured at NAV
 
 
 
 
 
 
 
 
 
111,469

Total private equity investments
 
—

 
—

 
83,165

 
—

 
194,634

Other investments (3)
 
296,146

 
257

 
441

 
—

 
296,844

Derivative instruments associated with offsetting matched book positions
 
—

 
422,196

 
—

 
—

 
422,196

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

 
—

 
—

 
—

 
29,508

Other assets:
 
 
 
 
 
 
 
 
 
 
Derivative contracts (4)
 
—

 
2,016

 
—

 
—

 
2,016

Other assets
 
—

 
—

 
2,448

(5) 
—

 
2,448

Total other assets
 
—

 
2,016

 
2,448

 
—

 
4,464

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

 
$
1,995,661

 
$
214,798

 
$
(107,539
)
 
$
2,573,849

 
 
 
 
 
 
 
 
 
 
 
Assets at fair value on a nonrecurring basis:
 
 
 
 

 
 

 
 

 
 

Bank loans, net:
 
 
 
 
 
 
 
 
 
 
Impaired loans
 
$
—

 
$
23,146

 
$
47,982

 
$
—

 
$
71,128

Loans held for sale (6)
 
—

 
18,177

 
—

 
—

 
18,177

Total bank loans, net
 
—

 
41,323

 
47,982

 
—

 
89,305

Other assets: OREO (7)
 
—

 
679

 
—

 
—

 
679

Total assets at fair value on a nonrecurring basis
 
$
—

 
$
42,002

 
$
47,982

 
$
—

 
$
89,984

 
 
 
 
 
 
 
 
 
 
 
(continued on next page)

16
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





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

 
 

 
 

 
 

Trading instruments sold but not yet purchased:
 
 
 
 

 
 

 
 

 
 

Municipal and provincial obligations
 
$
1,161

 
$
—

 
$
—

 
$
—

 
$
1,161

Corporate obligations
 
1,283

 
29,791

 
—

 
—

 
31,074

Government obligations
 
266,682

 
—

 
—

 
—

 
266,682

Agency MBS and CMOs
 
2,804

 
—

 
—

 
—

 
2,804

Total debt securities
 
271,930

 
29,791

 
—

 
—

 
301,721

Derivative contracts
 
—

 
151,694

 
—

 
(142,859
)
 
8,835

Equity securities
 
18,382

 
—

 
—

 
—

 
18,382

Total trading instruments sold but not yet purchased
 
290,312

 
181,485

 
—

 
(142,859
)
 
328,938

Derivative instruments associated with offsetting matched book positions
 
—

 
422,196

 
—

 
—

 
422,196

Trade and other payables:
 
 
 
 
 
 
 
 
 
 
Derivative contracts (4)
 
—

 
26,671

 
—

 
—

 
26,671

Other liabilities
 
—

 
—

 
67

 
—

 
67

Total trade and other payables
 
—

 
26,671

 
67

 
—

 
26,738

Accrued compensation, commissions and benefits:
 
 
 
 
 
 
 
 
 
 
Derivative contracts (8)
 
—

 
17,769

 
—

 
—

 
17,769

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

 
$
648,121

 
$
67

 
$
(142,859
)
 
$
795,641


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

(1)
We had $3 million in transfers of financial instruments from Level 1 to Level 2 during the year ended September 30, 2016. These transfers were a result of decreased market activity in these instruments. We had $1 million in transfers of financial instruments from Level 2 to Level 1 during the year ended September 30, 2016.  These transfers were a result of an increased market activity in these instruments.  Our policy is to treat transfers between levels of the fair value hierarchy as having occurred at the end of the reporting period.

(2)
For derivative transactions not cleared through a clearing organization, and where permitted, we have elected to net derivative receivables and derivative payables and the related cash collateral received and paid when a legally enforceable master netting agreement exists (see Note 15 for additional information regarding offsetting financial instruments). Deposits associated with derivative transactions cleared through a clearing organization are included in deposits with clearing organizations on our Condensed Consolidated Statements of Financial Condition as of September 30, 2016.

(3)
Other investments include $77 million of financial instruments that are related to obligations to perform under certain deferred compensation plans (see Note 2 and Note 24 of our 2016 Form 10-K for further information regarding these plans) and DB shares with a fair value of $12 million as of September 30, 2016 which we hold as an economic hedge against the DBRSU obligation (see Notes 2, 18, and 24 of our 2016 Form 10-K for additional information).

(4)
Consists of derivatives arising from RJ Bank’s business operations. See Note 14 for additional information.

(5)
Includes the fair value of forward commitments to purchase GNMA or FNMA (as hereinafter defined) MBS arising from our fixed income public finance operations. See Note 2 and Note 21 of our 2016 Form 10-K for additional information.

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

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

(8)
The balance reflects the DBRSUs obligation from our acquisition of Alex. Brown. See Notes 14 and 20 for additional information.

The adjustment to fair value of the nonrecurring fair value measures for the nine months ended June 30, 2017 resulted in a $1 million increase to the provision for loan losses relating to impaired loans and an insignificant amount of other losses relating to loans held for sale and OREO. The adjustment to fair value of the nonrecurring fair value measures for the nine months ended June 30, 2016 resulted in a $7 million additional provision for loan losses relating to impaired loans and an insignificant amount of other losses relating to loans held for sale and OREO.


17
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)





Changes in Level 3 recurring fair value measurements

The realized and unrealized gains and losses for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.  Our policy is to treat transfers between levels of the fair value hierarchy as having occurred at the end of the reporting period.

Additional information about Level 3 assets and liabilities measured at fair value on a recurring basis is presented below:
       Three months ended June 30, 2017 Level 3 instruments at fair value
(in thousands)
 
Financial assets
 
Financial
liabilities
 
Trading instruments
 
Available-for-sale securities
 
Private equity, other investments and other assets
 
Payables-
trade and
other
 
Non-
agency
CMOs &
ABS
 
Other
 
ARS –
municipal obligations
 
ARS -
preferred
securities
 
Private
equity
investments
 
Other
investments
 
Other
assets
 
Other
liabilities
Fair value beginning of period
$
7

 
$
13,141

 
$
25,728

 
$
105,418

 
$
88,623

 
$
374

 
$
2,148

 
$
(64
)
Total gains/(losses) for the period:
 
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Included in earnings
—

 
(379
)
 
—