RAYMOND JAMES FINANCIAL INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INDEX PAGE Factors affecting “forward-looking statements” 46 Introduction 46 Executive overview 46 Reconciliation of non-GAAP financial measures to GAAP financial measures 48 Segments 49 Net interest analysis 49 Results of Operations Private Client Group 52 Capital Markets 55 Asset Management 56 RJ Bank 58 Other 59 Certain statistical disclosures by bank holding companies 59 Liquidity and capital resources 60 Statement of financial condition analysis 64 Contractual obligations 65 Regulatory 65 Critical accounting estimates 65 Recent accounting developments 66 Off-balance sheet arrangements 66 Risk management 67 45 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis FACTORS AFFECTING “FORWARD-LOOKING STATEMENTS” Certain statements made in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include information concerning future strategic objectives, business prospects, anticipated savings, financial results (including expenses, earnings, liquidity, cash flow and capital expenditures), industry or market conditions, demand for and pricing of our products, acquisitions and divestitures, anticipated results of litigation, regulatory developments, effects of accounting pronouncements, and general economic conditions. In addition, words such as “believes,” “expects,” “anticipates,” “plans,” and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would,” as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from those expressed in the forward-looking statements. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our filings with the SEC from time to time, including our most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q, which are available at www.raymondjames.com and the SEC’s website at www.sec.gov. We expressly disclaim any obligation to update any forward-looking statement in the event it later turns out to be inaccurate, whether as a result of new information, future events or otherwise. INTRODUCTION The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of our operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and accompanying notes to condensed consolidated financial statements. Where “NM” is used in various percentage change computations, the computed percentage change has been determined to be not meaningful. We operate as a financial holding company and bank holding company. Results in the businesses in which we operate are highly correlated to general economic conditions and, more specifically, to the direction of the U.S. equity and fixed income markets, changes in interest rates, market volatility, corporate and mortgage lending markets and commercial and residential credit trends. Overall market conditions, economic, political and regulatory trends, and industry competition are among the factors which could affect us and which are unpredictable and beyond our control. These factors affect the financial decisions made by market participants, including investors, borrowers, and competitors, impacting their level of participation in the financial markets. These factors also impact the level of investment banking activity and asset valuations, which ultimately affect our business results. EXECUTIVE OVERVIEW Three months ended December 31, 2020 compared with the three months ended December 31, 2019 Net revenues of $2.22 billion increased $213 million, or 11%. Pre-tax income of $399 million increased $40 million, or 11%, and our net income of $312 million increased $44 million, or 16%. Our earnings per diluted share were $2.23, reflecting an 18% increase. Our annualized return on equity (“ROE”) during the three months ended December 31, 2020 was 17.2%, compared with 16.0% for the prior-year quarter, and annualized return on tangible common equity (“ROTCE”) was 19.0% (1) , compared with 17.5% (1) for the prior-year quarter. Client assets under administration increased to $1.02 trillion as of December 31, 2020. The $213 million increase in net revenues compared with the prior-year quarter was primarily driven by higher asset management and related administrative fees, largely attributable to higher PCG assets in fee-based accounts, as well as strong investment banking and brokerage revenues, which also increased compared with the prior-year quarter. Revenues in the current year also included private equity valuation gains, compared with losses in the prior-year quarter, a portion of which was attributable to noncontrolling interests and was offset in other expenses. Offsetting these increases was the negative impact of lower short-term interest rates on our net interest income and RJBDP fees from third-party banks. (1) “ROTCE” is a non-GAAP financial measure. Please see the “Reconciliation of non-GAAP financial measures to GAAP financial measures” in this MD&A for a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure and for other important disclosures. 46 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Compensation, commissions and benefits expense increased $149 million, or 11%, mostly resulting from the increase in asset management and related administrative fees, brokerage revenues and investment banking revenues. Our compensation ratio, or the ratio of compensation, commissions and benefits expense to net revenues, increased slightly to 67.5%, compared with 67.2% for the prior-year quarter, primarily due to the negative impact of lower interest rates on revenues that are not directly compensable, such as net interest income and RJBDP fees from third-party banks. Non-compensation expenses increased $24 million, or 8%, primarily due to a $16 million increase in the bank loan provision for credit losses, which was $14 million in the current quarter computed under the CECL methodology compared with a benefit of $2 million in the prior-year quarter computed under the incurred loss methodology. Other expenses increased, primarily due to the aforementioned private equity valuation gains attributable to noncontrolling interests. These increases were partially offset by a decline in business development expenses, primarily due to lower travel and event-related expenses as a result of the COVID-19 pandemic. Our effective income tax rate was 21.8% for the three months ended December 31, 2020, a decrease compared with the 25.3% effective income tax rate for the prior-year quarter, primarily due to a number of discrete tax items impacting the prior-year quarter’s effective tax rate that did not recur in the current quarter. The firm ended our fiscal first quarter of 2021 with capital ratios well in excess of regulatory requirements and substantial liquidity, with approximately $1.8 billion (1) of cash at the parent company. In December 2020, the Board of Directors increased the quarterly dividend by 5% to $0.39 per share and authorized share repurchases of up to $750 million, which replaced the previous authorization. Pursuant to this authorization, we repurchased approximately 108,000 shares of common stock during the three months ended December 31, 2020 for $10 million at an average price of approximately $92.80 per share. As of December 31, 2020, we had $740 million of availability remaining under the authorization. We expect to continue share repurchases in fiscal 2021 to offset share-based compensation dilution. We also plan to continue to be opportunistic in deploying our capital in future quarters, through a combination of organic growth, additional share repurchases and acquisitions, such as the NWPS acquisition we announced and completed during the quarter, as well as our announced acquisition of Financo, which is anticipated to close in March or April of 2021. While our results for our fiscal first quarter of 2021 were strong and we remain well-positioned entering our fiscal second quarter, with strong capital ratios and over $1 trillion of client assets under administration, we expect to continue to face headwinds from a full year of lower short-term interest rates due to the impact of the 150 basis point reduction by the Federal Reserve of its benchmark short-term interest rate in March 2020, as we do not anticipate short-term interest rates will recover to the beginning of the fiscal year 2020 level during fiscal 2021. In addition, there is still a high degree of economic uncertainty resulting from the COVID-19 pandemic, as well as a new federal government administration. As a result, volatility of both brokerage revenues and investment banking revenues could continue, which may negatively impact our ability to sustain the current quarter revenue levels in future periods. While our results during the quarter were negatively impacted by provisions for credit losses related to our bank loan portfolio, further market deterioration could result in additional provisions in future quarters. The timing and amount of the business development expenses we will incur in future quarters will be heavily influenced by the status of the COVID-19 pandemic and related vaccine distribution. A summary of our financial results by segment as compared to the prior-year quarter is as follows: • PCG segment net revenues of $1.47 billion increased 4%, while pre-tax income of $140 million decreased 8%. The $53 million increase in net revenues was primarily attributable to an increase in asset management and related administrative fees due to higher assets in fee-based accounts at the beginning of the current-year quarter, partially offset by decreases in RJBDP fees from third-party banks and net interest income due to lower short-term interest rates. Non-interest expenses increased $66 million, or 5%, primarily resulting from an increase in compensation expenses largely due to the growth in compensable net revenues, primarily asset management and related administrative fees, partially offset by a decrease in business development expenses. • Capital Markets net revenues of $452 million increased 69% and pre-tax income of $129 million increased 345%. The $184 million increase in net revenues was primarily due to an increase in investment banking revenues, particularly merger & acquisition revenues, as well as continued strength in fixed income brokerage revenues. Non-interest expenses increased $84 million, or 35%, due to higher compensation expenses, primarily attributable to the increase in revenues. (1) For additional information, please see the “Liquidity and capital resources - Sources of liquidity” section in this MD&A. 47 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis • Asset Management segment net revenues of $195 million increased 6% and pre-tax income of $83 million increased 14%. The increase in net revenues was driven by higher assets in fee-based programs offered to PCG clients and market appreciation, partially offset by net outflows at Carillon Tower Advisers. • RJ Bank net revenues of $167 million decreased 23% and pre-tax income of $71 million decreased 47%. The $49 million decrease in net revenues reflected the negative impact of lower short-term interest rates, which more than offset the growth in interest-earning assets. Non-interest expenses increased $15 million, or 19%, primarily due to a $16 million increase in the bank loan provision for credit losses. • Our Other segment reflected a pre-tax loss that was $7 million less than the loss in the prior-year quarter, primarily due to the aforementioned private equity valuation gains, partially offset by lower interest income on corporate cash balances due to lower short-term interest rates, and increased interest expense due to the issuance of $500 million of senior notes in March 2020. RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP FINANCIAL MEASURES We utilize certain non-GAAP financial measures as additional measures to aid in, and enhance, the understanding of our financial results and related measures. These non-GAAP financial measures have been separately identified in this document. We believe that annualized ROTCE is meaningful to investors as this measure facilitates comparison of our results to the results of other companies. This non-GAAP financial measure should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be comparable to similarly titled non-GAAP financial measures of other companies. The following table provides a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure for the periods indicated. Three months ended December 31, $ in millions 2020 2019 Average equity $ 7,239 $ 6,712 Less: Average goodwill and identifiable intangible assets, net 717 610 Average deferred tax liabilities, net (45) (30) Average tangible common equity $ 6,567 $ 6,132 Return on equity 17.2 % 16.0 % Return on tangible common equity 19.0 % 17.5 % Average equity is computed by adding the total equity attributable to RJF as of the date indicated to the prior quarter-end total, and dividing by two, or in the case of average tangible common equity, computed by adding tangible common equity as of the date indicated to the prior quarter-end total, and dividing by two. ROE is computed by dividing annualized net income for the period indicated by average equity for each respective period or, in the case of ROTCE, computed by dividing annualized net income by average tangible common equity for each respective period. 48 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis SEGMENTS We currently operate through five segments. Our business segments are PCG, Capital Markets, Asset Management and RJ Bank. Our Other segment includes our private equity investments, interest income on certain corporate cash balances, and certain corporate overhead costs of RJF, including the interest costs on our public debt. The following table presents our consolidated and segment net revenues and pre-tax income/(loss) for the periods indicated. Three months ended December 31, $ in millions 2020 2019 % change Total company Net revenues $ 2,222 $ 2,009 11 % Pre-tax income $ 399 $ 359 11 % Private Client Group Net revenues $ 1,467 $ 1,414 4 % Pre-tax income $ 140 $ 153 (8) % Capital Markets Net revenues $ 452 $ 268 69 % Pre-tax income $ 129 $ 29 345 % Asset Management Net revenues $ 195 $ 184 6 % Pre-tax income $ 83 $ 73 14 % RJ Bank Net revenues $ 167 $ 216 (23) % Pre-tax income $ 71 $ 135 (47) % Other Net revenues $ 4 $ (8) NM Pre-tax loss $ (24) $ (31) 23 % Intersegment eliminations Net revenues $ (63) $ (65) NM NET INTEREST ANALYSIS The following table presents the high, low and end of period target federal funds rates for the periods presented. Target federal funds rate Three months ended Low High End of period December 31, 2020 0.00% 0.25% 0% - 0.25% December 31, 2019 1.50% 2.00% 1.50% - 1.75% In response to macroeconomic concerns resulting from the COVID-19 pandemic, The Federal Reserve decreased its benchmark short-term interest rate in March 2020 to a range of 0-0.25%, a reduction of 150 basis points. These decreases, in addition to the interest rate cuts implemented in calendar 2019 (225 basis points in total), negatively impacted our net interest income, as well as the fees we earn from third-party banks on client cash balances swept to such banks as part of the RJBDP, which are also sensitive to changes in interest rates. The negative impact of the decline in short-term interest rates outweighed the growth in interest-earning assets and RJBDP balances swept to third-party banks compared with the prior-year quarter, and we expect a continuation of this trend for the remainder of fiscal 2021. Given the relationship between our interest-sensitive assets and liabilities (primarily held in our PCG, RJ Bank and Other segments) and the nature of fees we earn from third-party banks on the RJBDP, decreases in short-term interest rates generally result in an overall decrease in our net earnings, although the magnitude of the impact to our net interest margin depends on the yields on interest-earning assets relative to the cost of interest-bearing liabilities, including deposit rates paid to clients on their 49 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis cash balances. Conversely, any increases in short-term interest rates and/or decreases in the deposit rates paid to clients generally have a positive impact on our earnings. Refer to the discussion of the specific components of our net interest income within the “Management’s Discussion and Analysis - Results of Operations” of our PCG, RJ Bank, and Other segments. Also refer to “Management’s Discussion and Analysis - Results of Operations - Private Client Group - Clients’ domestic cash sweep balances” for further information on the RJBDP. The following tables present our consolidated average interest-earning asset and interest-bearing liability balances, interest income and expense and the related rates. Three months ended December 31, 2020 compared with the three months ended December 31, 2019 Three months ended December 31, 2020 2019 $ in millions Average daily balance Interest Annualized average rate Average daily balance Interest Annualized average rate Interest-earning assets: Cash and cash equivalents $ 5,712 $ 4 0.25 % $ 3,855 $ 17 1.72 % Assets segregated pursuant to regulations 5,816 3 0.21 % 2,331 11 1.89 % Available-for-sale securities 7,478 23 1.21 % 3,089 18 2.30 % Brokerage client receivables 2,082 18 3.48 % 2,438 27 4.48 % Bank loans, net of unearned income and deferred expenses: Loans held for investment: C&I loans 7,535 51 2.63 % 8,061 86 4.16 % CRE loans 2,582 17 2.59 % 2,538 27 4.14 % REIT loans 1,235 8 2.43 % 1,323 13 3.88 % Tax-exempt loans 1,237 8 3.35 % 1,225 8 3.36 % Residential mortgage loans 5,001 35 2.77 % 4,641 37 3.19 % SBL and other 4,286 25 2.29 % 3,337 34 3.97 % Loans held for sale 141 1 2.94 % 161 1 4.06 % Total bank loans, net 22,017 145 2.62 % 21,286 206 3.85 % All other interest-earning assets 2,288 10 2.00 % 2,534 18 2.82 % Total interest-earning assets $ 45,393 $ 203 1.78 % $ 35,533 $ 297 3.33 % Interest-bearing liabilities: Bank deposits: Savings, money market and NOW accounts $ 26,637 $ 1 0.02 % $ 21,649 $ 12 0.21 % Certificates of deposit 952 5 1.93 % 782 4 2.19 % Brokerage client payables 7,324 1 0.06 % 3,197 3 0.47 % Other borrowings 866 5 2.19 % 893 5 2.15 % Senior notes payable 2,045 24 4.70 % 1,550 18 4.69 % All other interest-bearing liabilities 574 2 1.14 % 1,135 9 2.17 % Total interest-bearing liabilities $ 38,398 $ 38 0.39 % $ 29,206 $ 51 0.66 % Net interest income $ 165 $ 246 Net interest margin (net yield on interest-earning assets) 1.45 % 2.78 % Nonaccrual loans are included in the average loan balances in the preceding tables. Any payments received for corporate nonaccrual loans are applied entirely to principal. Interest income on residential mortgage nonaccrual loans is recognized on a cash basis. The yield on tax-exempt loans in the preceding tables is presented on a taxable-equivalent basis utilizing the applicable federal statutory rates for each of the three months ended December 31, 2020 and 2019. 50 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average yield/cost. Similarly, the effect of rate changes is calculated by multiplying the change in average yield/cost by the previous period’s volume. Changes attributable to both volume and rate have been allocated proportionately. Three months ended December 31, 2020 compared to 2019 Increase/(decrease) due to $ in millions Volume Rate Total Interest income: Interest-earning assets: Cash and cash equivalents $ 8 $ (21) $ (13) Assets segregated pursuant to regulations 17 (25) (8) Available-for-sale securities 25 (20) 5 Brokerage client receivables (3) (6) (9) Bank loans, net of unearned income and deferred expenses: Loans held for investment: C&I loans (6) (29) (35) CRE loans — (10) (10) REIT loans (1) (4) (5) Tax-exempt loans 2 (2) — Residential mortgage loans 3 (5) (2) SBL and other 9 (18) (9) Total bank loans, net 7 (68) (61) All other interest-earning assets (2) (6) (8) Total interest-earning assets 52 (146) (94) Interest expense: Interest-bearing liabilities: Bank deposits: Savings, money market and NOW accounts 2 (13) (11) Certificates of deposit 1 — 1 Brokerage client payables 6 (8) (2) Senior notes payable 6 — 6 All other interest-bearing liabilities (6) (1) (7) Total interest-bearing liabilities 9 (22) (13) Change in net interest income $ 43 $ (124) $ (81) 51 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis RESULTS OF OPERATIONS – PRIVATE CLIENT GROUP For an overview of our PCG segment operations, as well as a description of the key factors impacting our PCG results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Form 10-K. Operating results Three months ended December 31, $ in millions 2020 2019 % change Revenues: Asset management and related administrative fees $ 885 $ 782 13 % Brokerage revenues: Mutual and other fund products 148 144 3 % Insurance and annuity products 98 101 (3) % Equities, ETFs and fixed income products 107 102 5 % Total brokerage revenues 353 347 2 % Account and service fees: Mutual fund and annuity service fees 94 90 4 % RJBDP fees: Third-party banks 21 58 (64) % RJ Bank 43 47 (9) % Client account and other fees 32 29 10 % Total account and service fees 190 224 (15) % Investment banking 6 11 (45) % Interest income 30 49 (39) % All other 5 9 (44) % Total revenues 1,469 1,422 3 % Interest expense (2) (8) (75) % Net revenues 1,467 1,414 4 % Non-interest expenses: Financial advisor compensation and benefits 931 857 9 % Administrative compensation and benefits 249 247 1 % Total compensation, commissions and benefits 1,180 1,104 7 % Non-compensation expenses: Communications and information processing 62 59 5 % Occupancy and equipment 43 44 (2) % Business development 16 27 (41) % Professional fees 13 8 63 % All other 13 19 (32) % Total non-compensation expenses 147 157 (6) % Total non-interest expenses 1,327 1,261 5 % Pre-tax income $ 140 $ 153 (8) % 52 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Selected key metrics PCG client asset balances As of $ in billions December 31, 2020 September 30, 2020 December 31, 2019 September 30, 2019 Assets under administration (“AUA”) $ 974.2 $ 883.3 $ 855.2 $ 798.4 Assets in fee-based accounts (1) $ 532.7 $ 475.3 $ 444.2 $ 409.1 Percent of AUA in fee-based accounts 54.7 % 53.8 % 51.9 % 51.2 % (1) A portion of our “Assets in fee-based accounts” is invested in “managed programs” overseen by our Asset Management segment, specifically our Asset Management Services division of RJ&A (“AMS”). These assets are included in our Financial assets under management as disclosed in the “Selected key metrics” section of our “Management’s Discussion and Analysis - Results of Operations - Asset Management.” Fee-based accounts within our PCG segment are comprised of a wide array of products and programs that we offer our clients. The majority of assets in fee-based accounts within our PCG segment are invested in programs for which our financial advisors provide investment advisory services, either on a discretionary or non-discretionary basis. Administrative services for such accounts (e.g., record-keeping) are generally performed by our Asset Management segment and, as a result, a portion of the related revenues is shared with the Asset Management segment. We also offer our clients fee-based accounts that are invested in “managed programs” overseen by AMS, which is part of our Asset Management segment. Fee-billable assets invested in managed programs are included in both “Assets in fee-based accounts” in the preceding table and “Financial assets under management” in the Asset Management segment. Revenues related to managed programs are shared by our PCG and Asset Management segments. The Asset Management segment receives a higher portion of the revenues related to accounts invested in managed programs, as compared to the portion received for non-managed programs, as it is performing portfolio management services in addition to administrative services. The vast majority of the revenues we earn from fee-based accounts are recorded in “Asset management and related administrative fees” on our Condensed Consolidated Statements of Income and Comprehensive Income. Fees received from such accounts are based on the value of client assets in fee-based accounts and vary based on the specific account types in which the client invests and the level of assets in the client relationship. As fees for substantially all of such accounts are billed based on balances as of the beginning of the quarter, revenues from fee-based accounts may not be immediately affected by changes in asset values, but rather the impacts are seen in the following quarter. PCG assets under administration increased during the three months ended December 31, 2020 primarily due to equity market appreciation, as well as net inflows of client assets. In addition, PCG assets in fee-based accounts continued to increase as a percentage of overall PCG assets under administration due to clients’ increased preference for fee-based alternatives versus transaction-based accounts. As a result of the shift to fee-based accounts over the past several years, a larger portion of our PCG revenues are more directly impacted by market movements. Financial advisors December 31, 2020 September 30, 2020 December 31, 2019 September 30, 2019 Employees 3,387 3,404 3,331 3,301 Independent contractors 4,846 4,835 4,729 4,710 Total advisors 8,233 8,239 8,060 8,011 The number of financial advisors decreased slightly from September 30, 2020 as new recruits and trainees that were moved into production were outpaced by the number of financial advisors who left the firm, including planned retirements which are generally higher during the December quarter than in other quarters. In addition, a number of advisors who were previously affiliated with the firm as independent contractors or employees, transferred their affiliation to our RIA & Custody Services (“RCS”) Division. Advisors in RCS are not included in our financial advisor count, although their assets are still included in client assets under administration. While the recruiting pipeline remains active, the recruiting environment has become increasingly competitive, particularly in the employee advisor affiliation option. 53 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Clients’ domestic cash sweep balances As of $ in millions December 31, 2020 September 30, 2020 December 31, 2019 September 30, 2019 RJBDP RJ Bank $ 26,697 $ 25,599 $ 21,891 $ 21,649 Third-party banks 26,142 25,998 15,061 14,043 Subtotal RJBDP 52,839 51,597 36,952 35,692 CIP 8,769 3,999 2,528 2,022 Total clients’ domestic cash sweep balances $ 61,608 $ 55,596 $ 39,480 $ 37,714 Three months ended December 31, 2020 2019 Average yield on RJBDP - third-party banks 0.31 % 1.64 % A significant portion of our clients’ cash is included in the RJBDP, a multi-bank sweep program in which clients’ cash deposits in their accounts are swept into interest-bearing deposit accounts at RJ Bank and various third-party banks. We earn servicing fees for the administrative services we provide related to our clients’ deposits that are swept to such banks as part of the RJBDP. The amounts from third-party banks are variable in nature and fluctuate based on client cash balances in the program, as well as the level of short-term interest rates and the interest paid to clients by the third-party banks on balances in the RJBDP. The “Average yield on RJBDP - third party banks” in the preceding table is computed by dividing annualized RJBDP fees from third-party banks, which are net of the interest expense paid to clients by the third-party banks, by the average daily RJBDP balance at third-party banks. The PCG segment also earns RJBDP servicing fees from the RJ Bank segment, which are based on the number of accounts that are swept to RJ Bank. The fees from RJ Bank are eliminated in consolidation. PCG segment results are impacted by changes in the allocation of client cash balances in RJBDP between RJ Bank and third-party banks, and by changes in the allocation of cash balances between RJBDP and CIP. Client cash balances remained elevated as of December 31, 2020 as a result of market uncertainty caused primarily by the COVID-19 pandemic and uncertainty of the nature and timing of policy changes by the new federal government administration. Three months ended December 31, 2020 compared with the three months ended December 31, 2019 Net revenues of $1.47 billion increased $53 million, or 4%, while pre-tax income of $140 million decreased $13 million, or 8%, largely due to the impact of lower short-term interest rates. Asset management and related administrative fees increased $103 million, or 13%, primarily due to higher assets in fee-based accounts at the beginning of the quarter. As assets in these accounts are billed primarily on balances as of the beginning of the quarter, the 12% increase in fee-based assets during the quarter will positively impact asset management fees in our fiscal second quarter of 2021. Brokerage revenues increased $6 million, or 2%. Account and service fees decreased $34 million, or 15%, primarily due to a decline in RJBDP fees from third-party banks as a result of lower short-term interest rates, which more than offset the impact of the significant increase in client cash balances swept to such banks. Net interest income decreased $13 million, or 32%, primarily driven by a decline in short-term interest rates, reducing the interest income earned on assets segregated pursuant to regulations and client margin loans. Partially offsetting the decrease in interest income, interest expense also decreased, primarily due to the impact of lower deposit rates paid on client cash balances. Compensation-related expenses increased $76 million, or 7%, primarily due to higher compensable net revenues. Compensation-related expenses increased more than net revenues as RJBDP fees from third-party banks and net interest income, which have no associated direct compensation expense, significantly declined. Non-compensation expenses decreased $10 million, or 6%, primarily due to decreases in travel and event-related expenses as a result of the COVID-19 pandemic. 54 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis RESULTS OF OPERATIONS – CAPITAL MARKETS For an overview of our Capital Markets segment operations, as well as a description of the key factors impacting our Capital Markets results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Form 10-K. Operating results Three months ended December 31, $ in millions 2020 2019 % change Revenues: Brokerage revenues: Fixed income $ 131 $ 81 62 % Equity 42 34 24 % Total brokerage revenues 173 115 50 % Investment banking: Merger & acquisition and advisory 149 60 148 % Equity underwriting 60 39 54 % Debt underwriting 46 31 48 % Total investment banking 255 130 96 % Interest income 3 8 (63) % Tax credit fund revenues 16 18 (11) % All other 7 3 133 % Total revenues 454 274 66 % Interest expense (2) (6) (67) % Net revenues 452 268 69 % Non-interest expenses: Compensation, commissions and benefits 252 166 52 % Non-compensation expenses: Communications and information processing 19 19 — Occupancy and equipment 9 9 — Business development 9 16 (44) % Professional fees 13 10 30 % All other 21 19 11 % Total non-compensation expenses 71 73 (3) % Total non-interest expenses 323 239 35 % Pre-tax income $ 129 $ 29 345 % Three months ended December 31, 2020 compared with the three months ended December 31, 2019 Net revenues of $452 million increased $184 million, or 69%, and pre-tax income of $129 million increased $100 million, or 345%. Brokerage revenues increased $58 million, or 50%, due to a significant increase in fixed income brokerage revenues and, to a lesser extent, equity brokerage revenues. The increase in fixed income brokerage revenues was primarily due to continued high levels of client activity during the current quarter, particularly with depository clients. Based on the current level of interest rates and economic conditions, we expect fixed income brokerage revenues to remain strong in the near-term. Investment banking revenues increased $125 million, or 96%, due to a significant increase in merger & acquisition revenues, as well as continued strength in equity and debt underwriting. The significant increase in merger & acquisition revenues reflected an increase in the number of transactions, as well as larger individual transactions. Equity underwriting revenues also increased significantly, primarily due to an increase in market activity. The increase in debt underwriting primarily reflected higher revenues from asset-backed and corporate underwritings. While our investment banking pipelines are strong, future activity may be negatively impacted by economic uncertainty or factors resulting from the ongoing COVID-19 pandemic. 55 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Compensation-related expenses increased $86 million, or 52%, primarily due to the increase in revenues. Non-compensation expenses decreased $2 million, or 3%, primarily due to lower travel-related expenses as a result of the COVID-19 pandemic, partially offset by higher investment banking transaction expenses due to increased activity. During the quarter, we completed the sale of our interests in certain entities that operated predominantly in France, which did not have a significant impact on our fiscal first quarter of 2021 results as an estimate of the loss on the sale was included in our fiscal fourth quarter of 2020 results. RESULTS OF OPERATIONS – ASSET MANAGEMENT For an overview of our Asset Management segment operations as well as a description of the key factors impacting our Asset Management results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Form 10-K. Operating results Three months ended December 31, $ in millions 2020 2019 % change Revenues: Asset management and related administrative fees: Managed programs $ 129 $ 125 3 % Administration and other 59 51 16 % Total asset management and related administrative fees 188 176 7 % Account and service fees 4 5 (20) % All other 3 3 — Net revenues 195 184 6 % Non-interest expenses: Compensation, commissions and benefits 45 45 — Non-compensation expenses: Communications and information processing 11 11 — Investment sub-advisory fees 28 25 12 % All other 28 30 (7) % Total non-compensation expenses 67 66 2 % Total non-interest expenses 112 111 1 % Pre-tax income $ 83 $ 73 14 % Selected key metrics Managed programs Management fees recorded in our Asset Management segment are generally calculated as a percentage of the value of our fee-billable financial assets under management (“AUM”). These AUM include the portion of fee-based AUA in our PCG segment that is invested in programs overseen by our Asset Management segment (included in the “AMS” line of the following table), as well as retail accounts managed on behalf of third-party institutions, institutional accounts and proprietary mutual funds that we manage (collectively included in the “Carillon Tower Advisers” line of the following table). Revenues related to fee-based AUA in our PCG segment are shared by the PCG and Asset Management segments, the amount of which depends on whether clients are invested in assets that are in managed programs overseen by our Asset Management segment and the administrative services provided (see our “Management’s Discussion and Analysis - Results of Operations - Private Client Group” for more information). Our AUM in AMS are impacted by market fluctuations and net inflows or outflows of assets, including transfers between fee-based accounts and transaction-based accounts within our PCG segment. Revenues earned by Carillon Tower Advisers for retail accounts managed on behalf of third-party institutions, institutional accounts and our proprietary mutual funds are recorded entirely in the Asset Management segment. Our AUM in Carillon Tower Advisers are impacted by market and investment performance and net inflows or outflows of assets. Fees for our managed programs are generally collected quarterly. Approximately 65% of these fees are based on balances as of the beginning of the quarter, approximately 10% are based on balances as of the end of the quarter, and approximately 25% are based on average daily balances throughout the quarter. 56 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Financial assets under management $ in billions December 31, 2020 September 30, 2020 December 31, 2019 September 30, 2019 AMS (1) $ 113.9 $ 102.2 $ 98.7 $ 91.8 Carillon Tower Advisers 64.9 59.5 60.6 58.5 Subtotal financial assets under management 178.8 161.7 159.3 150.3 Less: Assets managed for affiliated entities (9.2) (8.6) (7.6) (7.2) Total financial assets under management $ 169.6 $ 153.1 $ 151.7 $ 143.1 (1) Represents the portion of our PCG segment fee-based AUA (as disclosed in “Assets in fee-based accounts” in the “Selected key metrics - PCG client asset balances” section of our “Management’s Discussion and Analysis - Results of Operations - Private Client Group”) that is invested in managed programs overseen by the Asset Management segment. See “Management’s Discussion and Analysis - Results of Operations - Private Client Group” for further information about our retail client assets, including those fee-based assets invested in programs managed by AMS. Activity (including activity in assets managed for affiliated entities) Three months ended December 31, $ in billions 2020 2019 Financial assets under management at beginning of period $ 161.7 $ 150.3 Carillon Tower Advisers - net outflows (0.3) (0.4) AMS - net inflows 1.7 2.1 Net market appreciation in asset values 15.7 7.3 Financial assets under management at end of period $ 178.8 $ 159.3 Carillon Tower Advisers Assets managed by Carillon Tower Advisers include assets managed by its subsidiaries and affiliates: Eagle Asset Management, the Scout Group, ClariVest Asset Management and Cougar Global Investments. The following table presents Carillon Tower Advisers’ AUM by objective, excluding assets for which it does not exercise discretion, as well as the approximate average client fee rate earned on such assets for the period presented. $ in billions December 31, 2020 Average fee rate for the three months ended December 31, 2020 Equity $ 29.3 0.54 % Fixed income 30.1 0.18 % Balanced 5.5 0.37 % Total financial assets under management $ 64.9 0.36 % Non-discretionary asset-based programs The following table includes assets held in certain non-discretionary asset-based programs for which the Asset Management segment does not exercise discretion but provides administrative support (including for affiliated entities). The vast majority of these assets are also included in our PCG segment fee-based AUA (as disclosed in “Assets in fee-based accounts” in the “Selected key metrics - PCG client asset balances” section of our “Management’s Discussion and Analysis - Results of Operations - Private Client Group”). Administrative fees associated with these programs are predominantly based on balances at the beginning of the quarter. $ in billions December 31, 2020 September 30, 2020 December 31, 2019 September 30, 2019 Total assets $ 313.5 $ 280.6 $ 251.3 $ 229.7 RJ Trust The following table includes assets held in asset-based programs in RJ Trust (including those managed for affiliated entities). $ in billions December 31, 2020 September 30, 2020 December 31, 2019 September 30, 2019 Total assets $ 7.6 $ 7.1 $ 7.2 $ 6.6 57 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Three months ended December 31, 2020 compared with the three months ended December 31, 2019 Net revenues of $195 million increased $11 million, or 6%, and pre-tax income of $83 million increased $10 million, or 14%. Asset management and related administrative fees increased $12 million, or 7%, driven by higher assets in non-discretionary asset-based programs, as well as higher financial assets under management. The increase in financial assets under management during the quarter reflected equity market appreciation and net inflows at AMS, partially offset by net outflows at Carillon Tower Advisers, which continues to be negatively impacted by the industry shift from actively managed investment strategies to passive investment strategies. If this trend continues, our AUM and asset management fees would continue to be negatively affected. Compensation expenses were unchanged compared with the prior-year quarter and non-compensation expenses increased $1 million, or 2%. RESULTS OF OPERATIONS – RJ BANK For an overview of our RJ Bank segment operations, as well as a description of the key factors impacting our RJ Bank results of operations, refer to the information presented in “Item 1 - Business” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Form 10-K. Operating results Three months ended December 31, $ in millions 2020 2019 % change Revenues: Interest income $ 168 $ 231 (27) % Interest expense (11) (21) (48) % Net interest income 157 210 (25) % All other 10 6 67 % Net revenues 167 216 (23) % Non-interest expenses: Compensation and benefits 12 12 — Non-compensation expenses: Bank loan provision/(benefit) for credit losses 14 (2) NM RJBDP fees to PCG 43 47 (9) % All other 27 24 13 % Total non-compensation expenses 84 69 22 % Total non-interest expenses 96 81 19 % Pre-tax income $ 71 $ 135 (47) % Three months ended December 31, 2020 compared with the three months ended December 31, 2019 Net revenues of $167 million decreased $49 million, or 23%, and pre-tax income of $71 million decreased $64 million, or 47%. Net interest income decreased $53 million, or 25%, as the negative impact from lower short-term interest rates more than offset the impact of higher average interest-earning assets. The increase in average interest-earning assets was primarily driven by significant growth in the available-for-sale securities portfolio, as well as increases in average loans and average cash balances. The net interest margin decreased to 2.02% from 3.23% for the prior-year quarter, primarily due to the significant decline in short-term interest rates, as well as a higher concentration of agency-backed available-for-sale securities, which have a lower yield than loans, on average. Based on current rates, as well as the elevated prepayment speeds of higher-yielding securities and mortgages, we expect our net interest margin to further decline by 5 to 10 basis points throughout the remainder of our current fiscal year. The bank loan provision for credit losses was $14 million, which was calculated under the CECL model, compared with a $2 million benefit in the prior-year quarter, which was calculated under the incurred loss model. The current quarter provision was largely attributable to changes in inputs to our CECL model since our October 1, 2020 adoption date, including forecasted declines in commercial real estate values, partially offset by improvements in other forecasted macroeconomic inputs, including unemployment and gross domestic product, as well as a reduction in criticized loans. 58 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis RESULTS OF OPERATIONS – OTHER This segment includes our private equity investments, interest income on certain corporate cash balances, and certain corporate overhead costs of RJF that are not allocated to other segments, including the interest costs on our public debt. For an overview of our Other segment operations, refer to the information presented in “Item 1 - Business” of our 2020 Form 10-K. Operating results Three months ended December 31, $ in millions 2020 2019 % change Revenues: Interest income $ 3 $ 12 (75) % Gains/(losses) on private equity investments 24 (2) NM All other 1 2 (50) % Total revenues 28 12 133 % Interest expense (24) (20) 20 % Net revenues 4 (8) NM Non-interest expenses: Compensation and all other 26 23 13 % Acquisition-related expenses 2 — NM Total non-interest expenses 28 23 22 % Pre-tax loss $ (24) $ (31) 23 % Three months ended December 31, 2020 compared with the three months ended December 31, 2019 The pre-tax loss of $24 million was $7 million less than the loss in the prior-year quarter. Net revenues increased $12 million as the current quarter included positive net revenues of $4 million compared with negative net revenues of $8 million in the prior-year quarter. The current quarter included $24 million of private equity valuation gains, of which $10 million were attributable to noncontrolling interests, which are offset within other expenses. These valuation gains were primarily the result of an improved outlook on certain of our investments resulting from improved market conditions since the onset of the COVID-19 pandemic. Interest income earned on corporate cash balances decreased compared with the prior-year quarter due to lower short-term interest rates, partially offset by the impact of higher average balances, and interest expense increased as a result of the issuance of $500 million of senior notes in March 2020. Non-interest expenses increased $5 million, or 22%, primarily due to the aforementioned $10 million related to noncontrolling interests and $2 million of acquisition-related expenses in the current quarter arising from our acquisition of NWPS and our announced acquisition of Financo, partially offset by a reduction in compensation expense. CERTAIN STATISTICAL DISCLOSURES BY BANK HOLDING COMPANIES We are required to provide certain statistical disclosures as a bank holding company under the SEC’s Industry Guide 3. The following table provides certain of those disclosures. Three months ended December 31, 2020 2019 Return on assets 2.5% 2.7% Return on equity 17.2% 16.0% Average equity to average assets 14.3% 17.0% Dividend payout ratio 17.5% 19.6% Return on assets is computed by dividing annualized net income for the period indicated by average assets for each respective period. Average assets is computed by adding total assets as of the date indicated to the prior quarter-end total and dividing by two. Return on equity is computed by dividing annualized net income for the period indicated by average equity for each respective period. Average equity is computed by adding total equity attributable to RJF as of the date indicated to the prior quarter-end total and dividing by two. 59 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Average equity to average assets is computed by dividing average equity by average assets, as calculated in accordance with the previous explanations. Dividend payout ratio is computed by dividing dividends declared per common share during the period by earnings per diluted common share for the period. Refer to the “Net interest analysis” and “Risk management - Credit risk” sections of this MD&A and to the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for the other required disclosures. LIQUIDITY AND CAPITAL RESOURCES Liquidity is essential to our business. The primary goal of our liquidity management activities is to ensure adequate funding to conduct our business over a range of economic and market environments. Senior management establishes our liquidity and capital management framework. This framework includes senior management’s review of short- and long-term cash flow forecasts, review of monthly capital expenditures, monitoring of the availability of alternative sources of financing, and daily monitoring of liquidity in our significant subsidiaries. Our decisions on the allocation of capital to our business units consider, among other factors, projected profitability, cash flow, risk, and future liquidity needs. Our treasury department assists in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure, and maintains our relationships with various lenders. The objective of this framework is to support the successful execution of our business strategies while ensuring ongoing and sufficient liquidity. Liquidity is provided primarily through our business operations and financing activities. Financing activities could include bank borrowings, collateralized financing arrangements or additional capital raising activities under our “universal” shelf registration statement. Cash and cash equivalents was relatively unchanged at $5.38 billion as of December 31, 2020. During the quarter, we had a significant increase in client cash balances, which increased both our brokerage client payables and our bank deposits. This cash was largely used to purchase U.S. Treasuries that were segregated pursuant to regulations as of December 31, 2020 or held to meet future customer reserve requirements in our broker-dealer activities, or were invested in available-for-sale securities and bank loans as part of our banking activities. In addition, cash provided by our operations, including positive net income and a decrease in certain receivable balances, was offset by annual bonus payments during the quarter, as well as cash used for the NWPS acquisition. We believe our existing assets, most of which are liquid in nature, together with funds generated from operations and available from committed and uncommitted financing facilities, provide adequate funds for continuing operations at current levels of activity. Sources of liquidity Nearly $1.8 billion of our total December 31, 2020 cash and cash equivalents included cash on hand at the parent, as well as parent cash loaned to RJ&A. The following table presents our holdings of cash and cash equivalents. $ in millions December 31, 2020 RJF $ 480 RJ&A 2,741 RJ Bank, N.A. 968 RJ Ltd. 764 RJFS 113 Carillon Tower Advisers 78 Other subsidiaries 233 Total cash and cash equivalents $ 5,377 RJF maintained depository accounts at RJ Bank, N.A. with a balance of $ 185 million as of December 31, 2020. The portion of this total that was available on demand without restrictions, which amounted to $108 million as of December 31, 2020, is reflected in the RJF total (and is excluded from the RJ Bank, N.A. cash balance in the preceding table). 60 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis RJF had loaned $1.32 billion to RJ&A as of December 31, 2020 (such amount is included in the RJ&A cash balance in the preceding table), which RJ&A has invested on behalf of RJF in cash and cash equivalents or otherwise deployed in its normal business activities. A large portion of the RJ Ltd. cash and cash equivalents balance as of December 31, 2020 was held to meet regulatory requirements and was not available for use by the parent. In addition to the cash balances described, we have various other potential sources of cash available to the parent from subsidiaries, as described in the following section. Liquidity available from subsidiaries Liquidity is principally available to RJF, the parent company, from RJ&A and RJ Bank, N.A. Certain of our broker-dealer subsidiaries are subject to the requirements of the Uniform Net Capital Rule (Rule 15c3-1) under the Securities and Exchange Act of 1934. As a member firm of FINRA, RJ&A is subject to FINRA’s capital requirements, which are substantially the same as Rule 15c3-1. Rule 15c3-1 provides for an “alternative net capital requirement,” which RJ&A has elected. Regulations require that minimum net capital, as defined, be equal to the greater of $1.5 million or 2% of aggregate debit items arising from client transactions. In addition, covenants in RJ&A’s committed financing facilities require its net capital to be a minimum of 10% of aggregate debit items. At December 31, 2020, RJ&A exceeded the minimum regulatory requirements, the covenants in its financing arrangements pertaining to net capital, as well as its internally-targeted net capital tolerances. FINRA may impose certain restrictions, such as restricting withdrawals of equity capital, if a member firm were to fall below a certain threshold or fail to meet minimum net capital requirements. RJ&A, as a nonbank custodian of Individual Retirement Accounts (“IRAs”), must also satisfy certain IRS regulations in order to accept new IRAs and qualified plans and retain the accounts for which it serves as nonbank custodian. With growth in the value of client assets in such accounts, the capital of RJ&A may need to grow to continue to satisfy this requirement. As a result, RJ&A may limit dividends it would otherwise remit to RJF. We evaluate regulatory requirements, loan covenants and certain internal tolerances when determining the amount of liquidity available to RJF from RJ&A. RJ Bank, N.A. may pay dividends to RJF without prior approval of its regulator as long as the dividend does not exceed the sum of RJ Bank, N.A.’s current calendar year and the previous two calendar years’ retained net income, and RJ Bank, N.A. maintains its targeted regulatory capital ratios. Dividends from RJ Bank, N.A. may be limited to the extent that capital is needed to support its balance sheet growth. Although we have liquidity available to us from our other subsidiaries, the available amounts are not as significant as those previously described and, in certain instances, may be subject to regulatory requirements. 61 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Borrowings and financing arrangements Committed financing arrangements Our ability to borrow is dependent upon compliance with the conditions in our various loan agreements and, in the case of secured borrowings, collateral eligibility requirements. Our committed financing arrangements consist of a tri-party repurchase agreement (i.e., securities sold under agreements to repurchase) and, in the case of the $500 million revolving credit facility agreement (the “Credit Facility”), an unsecured line of credit. The required market value of the collateral associated with the tri-party repurchase agreement ranges from 105% to 125% of the amount financed. The following table presents our committed financing arrangements with third-party lenders, which we generally utilize to finance a portion of our fixed income trading instruments, and the outstanding balances related thereto. December 31, 2020 $ in millions RJ&A RJF Total Total number of arrangements Financing arrangement: Committed secured $ 100 $ — $ 100 1 Committed unsecured (1) 200 300 500 1 Total committed financing arrangements $ 300 $ 300 $ 600 2 Outstanding borrowing amount: Committed secured $ — $ — $ — Committed unsecured — — — Total outstanding borrowing amount $ — $ — $ — (1) The Credit Facility provides for maximum borrowings of up to $500 million, with a sublimit of $300 million for RJF. RJ&A may borrow up to $500 million under the Credit Facility, depending on the amount of outstanding borrowings by RJF. For additional details on our committed unsecured financing arrangement, see our discussion of the Credit Facility in Note 14 of the Notes to Consolidated Financial Statements of our 2020 Form 10-K. Uncommitted financing arrangements Our uncommitted financing arrangements are in the form of secured lines of credit, secured bilateral or tri-party repurchase agreements, or unsecured lines of credit. Our arrangements with third-party lenders are generally utilized to finance a portion of our fixed income securities or for cash management purposes. Our uncommitted secured financing arrangements generally require us to post collateral in excess of the amount borrowed and are generally collateralized by non-customer, RJ&A-owned securities or by securities that we have received as collateral under reverse repurchase agreements. As of December 31, 2020, we had outstanding borrowings under three uncommitted secured borrowing arrangements out of a total of 11 uncommitted financing arrangements (seven uncommitted secured and four uncommitted unsecured). However, lenders are under no contractual obligation to lend to us under uncommitted credit facilities. The following table presents our borrowings on uncommitted financing arrangements, all of which were in the form of repurchase agreements in RJ&A and were included in “Collateralized financings” on our Condensed Consolidated Statements of Financial Condition. $ in millions December 31, 2020 Outstanding borrowing amount: Uncommitted secured $ 233 Uncommitted unsecured — Total outstanding borrowing amount $ 233 62 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis The average daily balance outstanding during the five most recent quarters, the maximum month-end balance outstanding during the quarter and the period-end balances for repurchase agreements and reverse repurchase agreements are detailed in the following table. Repurchase transactions Reverse repurchase transactions For the quarter ended: ($ in millions) Average daily balance outstanding Maximum month-end balance outstanding during the quarter End of period balance outstanding Average daily balance outstanding Maximum month-end balance outstanding during the quarter End of period balance outstanding December 31, 2020 $ 211 $ 236 $ 233 $ 204 $ 259 $ 162 September 30, 2020 $ 140 $ 165 $ 165 $ 199 $ 260 $ 207 June 30, 2020 $ 222 $ 278 $ 228 $ 168 $ 193 $ 193 March 31, 2020 $ 218 $ 238 $ 215 $ 283 $ 388 $ 130 December 31, 2019 $ 184 $ 200 $ 200 $ 355 $ 351 $ 326 Other borrowings and collateralized financings RJ Bank had $850 million in FHLB borrowings outstanding at December 31, 2020, comprised of floating-rate advances, all of which were secured by a blanket lien on RJ Bank’s residential mortgage loan portfolio (see Note 14 of the Notes to Consolidated Financial Statements of our 2020 Form 10-K for additional information regarding these borrowings). RJ Bank had an additional $3.04 billion in immediate credit available from the FHLB as of December 31, 2020 and, with the pledge of additional eligible collateral to the FHLB, total available credit of 30% of total assets. RJ Bank is eligible to participate in the Federal Reserve’s discount window program; however, we do not view borrowings from the Federal Reserve as a primary source of funding. The credit available in this program is subject to periodic review, may be terminated or reduced at the discretion of the Federal Reserve, and is secured by pledged C&I loans. We act as an intermediary between broker-dealers and other financial institutions whereby we borrow securities from one broker-dealer and then lend them to another. Where permitted, we have also loaned, to broker-dealers and other financial institutions, securities owned by clients or the firm. We account for each of these types of transactions as collateralized agreements and financings, with the outstanding balance of $64 million as of December 31, 2020 related to the securities loaned included in “Collateralized financings” on our Condensed Consolidated Statements of Financial Condition of this Form 10-Q. See Note 7 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for more information on our collateralized agreements and financings. At December 31, 2020, in addition to the financing arrangements previously described, we had $12 million outstanding on a mortgage loan for our St. Petersburg, Florida home-office complex that is included in “Other borrowings” on our Condensed Consolidated Statements of Financial Condition of this Form 10-Q. Senior notes payable At December 31, 2020, we had aggregate outstanding senior notes payable of $2.05 billion. Our senior notes payable, exclusive of any unaccreted premiums or discounts and debt issuance costs, was comprised of $250 million par 5.625% senior notes due 2024, $500 million par 3.625% senior notes due 2026, $500 million par 4.65% senior notes due 2030, and $800 million par 4.95% senior notes due 2046. See Note 15 of the Notes to Consolidated Financial Statements of our 2020 Form 10-K for additional information. Credit ratings Our issuer and senior long-term debt ratings as of the most current report are detailed in the following table. Rating Agency Rating Outlook Standard & Poor’s Ratings Services BBB+ Stable Moody’s Investors Services Baa1 Stable Our current long-term debt ratings depend upon a number of factors, including industry dynamics, operating and economic environment, operating results, operating margins, earnings trends and volatility, balance sheet composition, liquidity and liquidity management, capital structure, overall risk management, business diversification and market share, and competitive 63 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis position in the markets in which we operate. Deteriorations in any of these factors could impact our credit ratings. Any rating downgrades could increase our costs in the event we were to obtain additional financing. Should our credit rating be downgraded prior to a public debt offering, it is probable that we would have to offer a higher rate of interest to bond holders. A downgrade to below investment grade may make a public debt offering difficult to execute on terms we would consider to be favorable. A downgrade below investment grade could result in the termination of certain derivative contracts and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing overnight collateralization on our derivative instruments in liability positions. A credit downgrade could damage our reputation and result in certain counterparties limiting their business with us, result in negative comments by analysts, potentially negatively impact investors’ and/or clients’ perception of us, and cause a decline in our stock price. None of our borrowing arrangements contains a condition or event of default related to our credit ratings. However, a credit downgrade would result in the firm incurring a higher facility fee on the $500 million Credit Facility, in addition to triggering a higher interest rate applicable to any borrowings outstanding on that line as of and subsequent to such downgrade. Conversely, an improvement in RJF’s current credit rating could have a favorable impact on the facility fee, as well as the interest rate applicable to any borrowings on such line. Other sources and uses of liquidity We have company-owned life insurance policies which are utilized to fund certain non-qualified deferred compensation plans and other employee benefit plans. Certain of our non-qualified deferred compensation plans and other employee benefit plans are employee-directed while others are company-directed. Certain policies which we could readily borrow against had a cash surrender value of $750 million as of December 31, 2020, comprised of $460 million related to employee-directed plans and $290 million related to company-directed plans, and we were able to borrow up to 90%, or $675 million, of the December 31, 2020 total without restriction. To effect any such borrowing, the underlying investments would be converted to money market investments, therefore requiring us to take market risk related to the employee-directed plans. There were no borrowings outstanding against any of these policies as of December 31, 2020. On May 18, 2018, we filed a “universal” shelf registration statement with the SEC pursuant to which we can issue debt, equity and other capital instruments if and when necessary or perceived by us to be opportune. Subject to certain conditions, this registration statement will be effective through May 18, 2021. On December 17, 2020, we announced we had entered into a definitive agreement to acquire all of the outstanding shares of Financo. We expect the closing date of the transaction to occur in March or April of 2021. We currently have the ability to utilize our cash on-hand to fund the purchase. See Note 3 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information. See the Contractual obligations section of this MD&A for information regarding our contractual obligations. STATEMENT OF FINANCIAL CONDITION ANALYSIS The assets on our Condensed Consolidated Statements of Financial Condition consisted primarily of cash and cash equivalents, assets segregated pursuant to regulations (segregated for the benefit of clients), receivables including bank loans, financial instruments held either for trading purposes or as investments, and other assets. A significant portion of our assets are liquid in nature, providing us with flexibility in financing our business. Total assets of $53.66 billion as of December 31, 2020 were $6.18 billion, or 13%, greater than our total assets as of September 30, 2020. The increase in assets was primarily due to a $4.52 billion increase in assets segregated pursuant to regulations, due to a significant increase in client cash balances. Bank loans, net increased by $762 million due to an increase in SBL and CRE loans. In addition, Other investments increased $529 million, primarily due to the purchase of U.S. Treasuries to meet future customer reserve requirements, and available-for-sale securities increased $350 million. Goodwill and identifiable intangible assets, net increased $234 million due to the acquisition of NWPS during the quarter. As of December 31, 2020, our total liabilities of $46.22 billion were $5.91 billion, or 15%, greater than our total liabilities as of September 30, 2020. The increase in total liabilities was primarily related to the significant increase in client cash balances as of December 31, 2020, including a $5.13 billion increase in brokerage client payables, primarily due to an increase in client cash held in our CIP, and a $989 million increase in bank deposits, reflecting higher RJBDP balances held at RJ Bank, N.A. Offsetting these increases was a decrease in accrued compensation, commissions and benefits of $249 million, primarily due to the payment of accrued bonuses during the three months ended December 31, 2020. 64 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis CONTRACTUAL OBLIGATIONS There were no significant changes to the contractual obligations presented in our 2020 Form 10-K, other than in the ordinary course of business, as of December 31, 2020. See Note 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information regarding our commitments as of December 31, 2020. REGULATORY Refer to the discussion of the regulatory environment in which we operate and the impact on our operations of certain rules and regulations in “Item 1 - Business - Regulation” and “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory” of our 2020 Form 10-K. RJF and many of its subsidiaries are each subject to various regulatory capital requirements. As of December 31, 2020, all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. In addition, RJF and RJ Bank, N.A. were categorized as “well-capitalized” as of December 31, 2020. The maintenance of certain risk-based and other regulatory capital levels could influence various capital allocation decisions impacting one or more of our businesses. However, due to the current capital position of RJF and its regulated subsidiaries, we do not anticipate these capital requirements will have a negative impact on our future business activities. See Note 19 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information on regulatory capital requirements. Legislative and regulatory changes in connection with the COVID-19 pandemic In addition to the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act enacted in March 2020, the U.S. government enacted the Consolidated Appropriations Act, 2021 in December 2020. The new stimulus bill provides additional emergency COVID-19 relief, as well as extends certain provisions of the CARES Act. Under the CARES Act, financial institutions were permitted to temporarily suspend any determination of a loan modification as a result of the effects of COVID-19 as being a TDR, including impairment for accounting purposes. The Consolidated Appropriations Act, 2021 extends such relief until the earlier of: (1) 60 days after the date on which the national emergency concerning COVID-19 terminates; or (2) January 1, 2022. We elected to apply the extension for relief under the Consolidated Appropriations Act, 2021 to certain loan modifications that primarily relate to short-term payment deferral and have not classified such modifications as TDRs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk” for further information on the impact of such loans. RJ Bank, N.A. On February 2, 2021, RJ Bank, N.A. filed an application with the Florida Office of Financial Regulation (“OFR”) to convert from a national bank primarily supervised by the Office of the Comptroller of the Currency (the “OCC”) to a Florida-chartered state bank. RJ Bank, N.A. will also apply to the Federal Reserve Bank of Atlanta to retain its membership in the Federal Reserve System. If approved as a state member bank, RJ Bank, N.A. would cease to be supervised by the OCC and instead become jointly supervised by the OFR and the Fed. As a state member bank, RJ Bank, N.A. will also continue to be supervised by the FDIC and the Consumer Financial Protection Bureau. As a state member bank, we do not anticipate that there will be any material changes to RJ Bank, N.A.’s existing business or operations. CRITICAL ACCOUNTING ESTIMATES The condensed consolidated financial statements are prepared in accordance with GAAP, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during any reporting period in our condensed consolidated financial statements. Management has established detailed policies and control procedures intended to ensure the appropriateness of such estimates and assumptions and their consistent application from period to period. For a description of our significant accounting policies, see Note 2 of the Notes to Consolidated Financial Statements of our 2020 Form 10-K and Note 2 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. Due to their nature, estimates involve judgment based upon available information. Actual results or amounts could differ from estimates and the difference could have a material impact on the consolidated financial statements. Therefore, understanding these critical accounting estimates is important in understanding our reported results of operations and financial position. We believe that of our accounting estimates and assumptions, those described in the following sections involve a high degree of judgment and complexity. Market disruptions as a result of the COVID-19 pandemic have made it more challenging for us to determine the amount of our allowance for credit losses and the fair value of certain of our assets, particularly our private equity 65 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis investments. The current circumstances have required a greater reliance on judgment than in recent periods in determining these amounts as of December 31, 2020. Valuation of financial instruments The use of fair value to measure financial instruments, with related gains or losses recognized on our Condensed Consolidated Statements of Income and Comprehensive Income, is fundamental to our financial statements and our risk management processes. See Note 2 of the Notes to Consolidated Financial Statements of our 2020 Form 10-K for a discussion of our fair value accounting policies regarding financial instruments and financial instrument liabilities. See Note 4 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on our financial instruments at fair value. Loss provisions for legal and regulatory matters The recorded amount of liabilities related to legal and regulatory matters is subject to significant management judgment. For a description of the significant estimates and judgments associated with establishing such accruals, see the “Contingent liabilities” section of Note 2 of the Notes to Consolidated Financial Statements of our 2020 Form 10-K. In addition, refer to Note 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding legal and regulatory matter contingencies as of December 31, 2020. Allowance for credit losses We evaluate our held for investment bank loans, unfunded lending commitments, loans to financial advisors and certain other financial assets to estimate an allowance for credit losses. Effective October 1, 2020, we adopted the CECL accounting guidance which changed the methodology used to measure the allowance for credit losses from an allowance based on incurred losses to an allowance based on expected credit losses over a financial asset’s lifetime. The remaining life of our financial assets is determined by considering contractual terms, expected prepayments and cancellation features, among other factors. We employ multiple methodologies in estimating an allowance for credit losses and our approaches differ by type of financial asset and the risk characteristics within each financial asset type. Our estimates are based on ongoing evaluations of the portfolio, the related credit risk characteristics, and the overall economic and environmental conditions affecting the financial assets. Our process for determining the allowance for credit losses includes a complex analysis of several quantitative and qualitative factors, requiring significant management judgment due to matters that are inherently uncertain. This uncertainty can produce volatility in our allowance for credit losses. In addition, the allowance for credit losses could be insufficient to cover actual losses. In such an event, any losses in excess of our allowance would result in a decrease in our net income, as well as a decrease in the level of regulatory capital. See the discussion regarding our methodology in estimating the allowance for credit losses in Note 2 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. See Notes 8 and 9 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on our RJ Bank and financial advisor loan portfolios. Our allowance for credit losses at December 31, 2020 was primarily related to bank loans held by RJ Bank and loans to financial advisors. At December 31, 2020, the amortized cost of all RJ Bank loans was $22.34 billion and the related allowance for credit losses was $378 million, or 1.71% of the held for investment loan portfolio. At December 31, 2020, the amortized cost of loans to financial advisors was $1.01 billion and the related allowance for credit losses was $29 million, which was 2.89% of the loan portfolio. RECENT ACCOUNTING DEVELOPMENTS The FASB has issued certain accounting updates which were assessed and either determined to be not applicable or are not expected to have a significant impact on our financial statements. OFF-BALANCE SHEET ARRANGEMENTS For information regarding our off-balance sheet arrangements, see Note 2 of the Notes to Consolidated Financial Statements of our 2020 Form 10-K and Note 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q. 66 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis RISK MANAGEMENT Risks are an inherent part of our business and activities. Management of risk is critical to our fiscal soundness and profitability. Our risk management processes are multi-faceted and require communication, judgment and knowledge of financial products and markets. We have a formal Enterprise Risk Management (“ERM”) program to assess and review aggregate risks across the firm. Our management takes an active role in the ERM process, which requires specific administrative and business functions to participate in the identification, assessment, monitoring and control of various risks. The principal risks related to our business activities are market, credit, liquidity, operational, model, and compliance. Governance Our Board of Directors oversees the firm’s management and mitigation of risk, reinforcing a culture that encourages ethical conduct and risk management throughout the firm. Senior management communicates and reinforces this culture through three lines of risk management and a number of senior-level management committees. Our first line of risk management, which includes all of our businesses, owns its risks and is responsible for helping to identify, escalate, and mitigate risks arising from its day-to-day activities. The second line of risk management, which includes the Compliance, Legal, and Risk Management departments, supports and provides guidance and oversight to client-facing businesses and other first-line risk management functions in identifying and mitigating risk. The second line of risk management also tests and monitors the effectiveness of controls, escalates risks when appropriate, and reports on these risks. The third line of risk management, Internal Audit, independently reviews activities conducted by the previous lines of risk management to assess their management and mitigation of risk, providing additional assurance to the Board of Directors and senior management, with a view toward enhancing our oversight, management, and mitigation of risk. Market risk Market risk is our risk of loss resulting from the impact of changes in market prices on our trading inventory, derivatives and investment positions. We have exposure to market risk primarily through our broker-dealer trading operations and, to a lesser extent, through our banking operations. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Market risk” of our 2020 Form 10-K for a discussion of our market risk, including how we manage such risk. See Notes 4, 5 and 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for fair value and other information regarding our trading inventories, available-for-sale securities and derivative instruments. Interest rate risk Trading activities We are exposed to interest rate risk as a result of our trading inventory (primarily comprised of fixed income instruments) in our Capital Markets segment. We actively manage the interest rate risk arising from our fixed income trading securities through the use of hedging strategies that involve U.S. Treasury securities, futures contracts, liquid spread products and derivatives. We monitor the Value-at-Risk (“VaR”) for all of our trading portfolios on a daily basis. VaR is an appropriate statistical technique for estimating potential losses in trading portfolios due to typical adverse market movements over a specified time horizon with a suitable confidence level. We apply the Fed’s Market Risk Rule (“MRR”) for the purpose of calculating our capital ratios. The MRR, also known as the “Risk-Based Capital Guidelines: Market Risk” rule released by the Fed, the OCC and FDIC, requires us to calculate VaR for all of our trading portfolios (including derivatives), which include fixed income, equity, and foreign exchange instruments. To calculate VaR, we use historical simulation. This approach assumes that historical changes in market conditions, such as in interest rates and equity prices, are representative of future changes. Simulation is based on daily market data for the previous twelve months. VaR is reported at a 99% confidence level for a one-day time horizon. Assuming that future market conditions change as they have in the past twelve months, we would expect to incur losses greater than those predicted by our one-day VaR estimates about once every 100 trading days, or about three times per year on average. For regulatory capital calculation purposes, we also report VaR numbers for a ten-day time horizon. The Fed’s MRR requires us to perform daily back-testing procedures of our VaR model, whereby we compare each day’s projected VaR to its regulatory-defined daily trading losses, which exclude fees, commissions, reserves, net interest income and 67 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis intraday trading. Regulatory-defined daily trading losses are used to evaluate the performance of our VaR model and are not comparable to our actual daily net revenues. Based on these daily “ex ante” versus “ex post ” comparisons, we determine whether the number of times that regulatory-defined daily trading losses exceed VaR is consistent with our expectations at a 99% confidence level. During the three months ended December 31, 2020, our regulatory-defined daily losses in our trading portfolios did not exceed our predicted VaR. The following table sets forth the high, low, period-end and daily average VaR for all of our trading portfolios, including fixed income and equity instruments, for the period and dates indicated. Three months ended December 31, 2020 Period-end VaR Three months ended December 31, $ in millions High Low December 31, 2020 September 30, 2020 $ in millions 2020 2019 Daily VaR $ 10 $ 3 $ 3 $ 8 Average daily VaR $ 6 $ 1 Our period-end VaR decreased to $3 million as of December 31, 2020 from $8 million as of September 30, 2020, primarily due to lower trading inventory as of December 31, 2020. However, average trading inventories were higher during the current quarter compared with the prior-year quarter, which resulted in an increase in average daily VaR when combined with the impact of increased volatility from the COVID-19 pandemic on our VaR model. The modeling of the risk characteristics of trading positions involves a number of assumptions and approximations. While management believes that these assumptions and approximations are reasonable, there is no uniform industry methodology for estimating VaR, and different assumptions or approximations could produce materially different VaR estimates. As a result, VaR statistics are more reliable when used as indicators of risk levels and trends within a firm than as a basis for inferring differences in risk-taking across firms. Separately, RJF provides additional market risk disclosures to comply with the MRR which are available on the Investor Relations section of our website under “SEC filings and Other Reports - Other Reports and Information.” Should markets suddenly become more volatile, actual trading losses may exceed VaR results presented on a single day and might accumulate over a longer time horizon, such as a number of consecutive trading days. Accordingly, management applies additional controls including position limits, a daily review of trading results, review of the status of aged inventory, independent controls on pricing, monitoring of concentration risk, review of issuer ratings and stress testing. We utilize stress testing to complement our VaR analysis so as to measure risk under historical and hypothetical adverse scenarios. During volatile markets, we may choose to pare our trading inventories to reduce risk. Banking operations RJ Bank maintains an interest-earning asset portfolio that is comprised of cash, C&I loans, commercial and residential real estate loans, REIT loans, tax-exempt loans and SBL and other loans, as well as agency MBS and agency CMOs (held in the available-for-sale securities portfolio), SBA loan securitizations and a trading portfolio of corporate loans. These interest-earning assets are primarily funded by client deposits. Based on its current asset portfolio, RJ Bank is subject to interest rate risk. RJ Bank analyzes interest rate risk based on forecasted net interest income, which is the net amount of interest received and interest paid, and the net portfolio valuation, both across a range of interest rate scenarios. One of the objectives of RJ Bank’s Asset Liability Management Committee is to manage the sensitivity of net interest income to changes in market interest rates. The methods used to measure this sensitivity are described in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Market risk” of our 2020 Form 10-K. We utilize a hedging strategy using interest rate swaps as a result of RJ Bank’s asset and liability management process. For further information regarding this hedging strategy, see Note 2 of the Notes to Consolidated Financial Statements of our 2020 Form 10-K. 68 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis The following table is an analysis of RJ Bank’s estimated net interest income over a 12-month period based on instantaneous shifts in interest rates (expressed in basis points) using RJ Bank’s own asset/liability model, which assumes that interest rates do not decline below zero. Instantaneous changes in rate Net interest income ($ in millions) Projected change in net interest income +200 $874 35.3% +100 $823 27.4% 0 $646 — -25 $617 (4.5)% Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Net interest analysis” of this Form 10-Q for a discussion of the impact changes in short-term interest rates could have on the firm’s operations. The following table shows the contractual maturities of RJ Bank’s loan portfolio at December 31, 2020, including contractual principal repayments. This table does not include any estimates of prepayments, which could shorten the average loan lives and cause the actual timing of the loan repayments to differ significantly from those shown in the table. Due in $ in millions One year or less > One year – five years > Five years Total C&I loans $ 219 $ 4,402 $ 2,878 $ 7,499 CRE loans 727 1,403 534 2,664 REIT loans 83 1,096 75 1,254 Tax-exempt loans 1 71 1,165 1,237 Residential mortgage loans 1 4 4,923 4,928 SBL and other 4,509 35 — 4,544 Total loans held for investment 5,540 7,011 9,575 22,126 Held for sale loans — 1 208 209 Total loans $ 5,540 $ 7,012 $ 9,783 $ 22,335 The following table shows the distribution of the recorded investment of those RJ Bank loans that mature in more than one year between fixed and adjustable interest rate loans at December 31, 2020. Interest rate type $ in millions Fixed Adjustable Total C&I loans $ 257 $ 7,023 $ 7,280 CRE loans 122 1,815 1,937 REIT loans — 1,171 1,171 Tax-exempt loans 1,236 — 1,236 Residential mortgage loans 183 4,744 4,927 SBL and other — 35 35 Total loans held for investment 1,798 14,788 16,586 Held for sale loans 3 206 209 Total loans $ 1,801 $ 14,994 $ 16,795 Contractual loan terms for C&I, CRE, REIT and residential mortgage loans may include an interest rate floor, cap and/or fixed interest rates for a certain period of time, which would impact the timing of the interest rate reset for the respective loan. See the discussion within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk - Risk monitoring process” section of this Form 10-Q for additional information regarding RJ Bank’s interest-only residential mortgage loan portfolio. In our RJ Bank available-for-sale securities portfolio, we hold primarily fixed-rate agency MBS and agency CMOs which are carried at fair value on our Condensed Consolidated Statements of Financial Condition, with changes in the fair value of the portfolio recorded through OCI on our Condensed Consolidated Statements of Income and Comprehensive Income. At December 31, 2020, our RJ Bank available-for-sale securities portfolio had a fair value of $8 billion with a weighted-average yield of 1.35% and a duration of 3 years. See Note 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information. 69 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Equity price risk We are exposed to equity price risk as a result of our capital markets activities. Our broker-dealer activities are generally client-driven, and we carry equity securities as part of our trading inventory to facilitate such activities, although the amounts are not as significant as our fixed income trading inventory. We attempt to reduce the risk of loss inherent in our inventory of equity securities by monitoring those security positions throughout each day and establishing position limits. Equity securities held in our trading inventory are generally included in VaR. In addition, we have a private equity portfolio, included in “Other investments” on our Condensed Consolidated Statements of Financial Condition, which is comprised of various direct investments, as well as investments in third-party private equity funds and various legacy private equity funds which we sponsor. Of the total private equity investments at December 31, 2020 of $137 million, the portion we owned was $ 102 million. See Note 4 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on this portfolio. Foreign exchange risk We are subject to foreign exchange risk due to our investments in foreign subsidiaries as well as transactions and resulting balances denominated in a currency other than the U.S. dollar. For example, our bank loan portfolio includes loans which are denominated in Canadian dollars, totaling $1.16 billion and $1.05 billion at December 31, 2020 and September 30, 2020, respectively, when converted to the U.S. dollar. A portion of such loans are held by RJ Bank, N.A.’s Canadian subsidiary, which is discussed in the following sections. Investments in foreign subsidiaries RJ Bank, N.A. has an investment in a Canadian subsidiary, resulting in foreign exchange risk. To mitigate its foreign exchange risk, RJ Bank, N.A. utilizes short-term, forward foreign exchange contracts. These derivatives are primarily accounted for as net investment hedges in the condensed consolidated financial statements. See Note 2 of the Notes to Consolidated Financial Statements of our 2020 Form 10-K and Note 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding these derivatives. We had foreign exchange risk in our investment in RJ Ltd. of CAD 362 million at December 31, 2020, which was not hedged. Foreign exchange gains/losses related to this investment are primarily reflected in OCI on our Condensed Consolidated Statements of Income and Comprehensive Income. See Note 15 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information regarding our components of OCI. We also have foreign exchange risk associated with our investments in subsidiaries located in Europe. These investments are not hedged and we do not believe we have material foreign exchange risk either individually, or in the aggregate, pertaining to these subsidiaries. Transactions and resulting balances denominated in a currency other than the U.S. dollar We are subject to foreign exchange risk due to our holdings of cash and certain other assets and liabilities resulting from transactions denominated in a currency other than the U.S. dollar. Any currency-related gains/losses arising from these foreign currency denominated balances are reflected in “Other” revenues in our Condensed Consolidated Statements of Income and Comprehensive Income. The foreign exchange risk associated with a portion of such transactions and balances denominated in foreign currency are mitigated utilizing short-term, forward foreign exchange contracts. Such derivatives are not designated hedges and therefore, the related gains/losses are included in “Other” revenues in our Condensed Consolidated Statements of Income and Comprehensive Income. See Note 6 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding our derivatives. Credit risk Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. The nature and amount of credit risk depends on the type of transaction, the structure and duration of that transaction, and the parties involved. Credit risk is an integral component of the profit assessment of lending and other financing activities. See further discussion of our credit risk, including how we manage such risk, in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk” of our 2020 Form 10-K. 70 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis The decline in economic activity as a result of the COVID-19 pandemic has caused increased credit risk in general and particularly with regard to companies in sectors that have been most significantly impacted by the economic disruption, including energy, airlines, entertainment and leisure, restaurants and gaming. Given the stresses on certain of our clients’ liquidity, we enhanced our credit monitoring activities, with an increased focus on monitoring our credit exposures and counterparty credit risk. Since the onset of the pandemic, RJ Bank has enacted risk mitigation strategies including, but not limited to, the sale of loans in those sectors with a high likelihood of adverse impact arising from the pandemic. We have also required collateral to be posted across our credit risk exposures in accordance with agreements with our borrowers and counterparties. Brokerage activities We are engaged in various trading and brokerage activities in which our counterparties primarily include broker-dealers, banks and other financial institutions. We are exposed to risk that these counterparties may not fulfill their obligations. The risk of default depends on the creditworthiness of the counterparty and/or the issuer of the instrument. We manage this risk by imposing and monitoring individual and aggregate position limits within each business segment for each counterparty, conducting regular credit reviews of financial counterparties, reviewing security and loan concentrations, holding and calculating the fair value of collateral on certain transactions and conducting business through clearing organizations, which may guarantee performance. Our client activities involve the execution, settlement, and financing of various transactions on behalf of our clients. Client activities are transacted on either a cash or margin basis. Credit exposure results from client margin loans, which are monitored daily and are collateralized by the securities in the clients’ accounts. We monitor exposure to industry sectors and individual securities and perform analysis on a daily basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions. In addition, when clients execute a purchase, we are at some risk that the client will default on their financial obligation associated with the trade. If this occurs, we may have to liquidate the position at a loss. We offer loans to financial advisors and certain other key revenue producers primarily for recruiting, transitional cost assistance and retention purposes. We have credit risk and may incur a loss primarily in the event that such borrower is no longer affiliated with us. See Notes 2 and 9 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information about our loans to financial advisors. Banking activities RJ Bank has a substantial loan portfolio. While RJ Bank’s loan portfolio is diversified, a significant downturn in the overall economy, such as that experienced in our fiscal year 2020 as a result of the COVID-19 pandemic, deterioration in real estate values or a significant issue within any sector or sectors where RJ Bank has a concentration will generally result in large provisions for credit losses and/or charge-offs. RJ Bank determines the allowance required for specific loan grades based on relative risk characteristics of the loan portfolio. On an ongoing basis, RJ Bank evaluates its methods for determining the allowance for each class of loans and makes enhancements it considers appropriate. RJ Bank’s allowance for credit losses methodology is described in Note 2 of the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q. As RJ Bank’s loan portfolio is segregated into six portfolio segments, likewise, the allowance for credit losses is segregated by these same segments. The risk characteristics relevant to each portfolio segment are as follows. C&I: Loans in this segment are made to businesses and are generally secured by all assets of the business. Repayment is expected from the cash flows of the respective business. Unfavorable economic and political conditions, including the resultant decrease in consumer or business spending, may have an adverse effect on the credit quality of loans in this segment. CRE: Loans in this segment are primarily secured by income-producing properties. For owner-occupied properties, the cash flows are derived from the operations of the business, and the underlying cash flows may be adversely affected by the deterioration in the financial condition of the operating business. The underlying cash flows generated by non-owner-occupied properties may be adversely affected by increased vacancy and rental rates, which are monitored on a quarterly basis. This portfolio segment includes CRE construction loans which also look at other risks such as project budget overruns and performance variables related to the contractor and subcontractors. With respect to commercial construction of residential developments, there is also the risk that the builder has a geographical concentration of developments. Adverse developments in any of these areas may have a negative effect on the credit quality of loans in this segment. 71 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis REIT: Loans in this segment are made to businesses that own or finance income-producing real estate across various property sectors. This portfolio segment may include extensions of credit to companies that engage in real estate development. Repayment of these loans is dependent on income generated from real estate properties or the sale of real estate. A portion of this segment may consist of loans secured by residential product types (single-family residential, including condominiums and land held for residential development) within a range of markets. Deterioration in the financial condition of the operating business, reductions in the value of real estate, as well as increased vacancy and rental rates may all adversely affect the loans in this segment. Tax-exempt: Loans in this segment are made to governmental and nonprofit entities and are generally secured by a pledge of revenue and, in some cases, by a security interest in or a mortgage on the asset being financed. For loans to governmental entities, repayment is expected from a pledge of certain revenues or taxes. For nonprofit entities, repayment is expected from revenues which may include fundraising proceeds. These loans are subject to demographic risk, therefore much of the credit assessment of tax-exempt loans is driven by the entity’s revenue base and general economic environment. Adverse developments in either of these areas may have a negative effect on the credit quality of loans in this segment. Residential mortgage (includes home equity loans/lines): All of RJ Bank’s residential mortgage loans adhere to stringent underwriting parameters pertaining to credit score and credit history, debt-to-income ratio of borrower, LTV, and combined LTV (including second mortgage/home equity loans). RJ Bank does not originate or purchase option adjustable rate mortgage (“ARM”) loans with negative amortization, reverse mortgages, or loans to subprime borrowers. Loans with deeply discounted teaser rates are not originated or purchased. All loans in this segment are collateralized by residential real estate and repayment is primarily dependent on the credit quality of the individual borrower. A decline in the strength of the economy, particularly unemployment rates and housing prices, among other factors, could have a significant effect on the credit quality of loans in this segment. SBL and other: Loans in this segment are collateralized generally by the borrower’s marketable securities at advance rates consistent with industry standards. These loans are monitored daily for adherence to LTV guidelines and when a loan exceeds the required LTV, a collateral call is issued. Past due loans are minimal as any past due amounts result in a notice to the client for payment or the potential sale of the collateral which will bring the loan to a current status. In evaluating credit risk, RJ Bank considers trends in loan performance, the level of allowance coverage relative to similar banking institutions, industry or customer concentrations, the loan portfolio composition and macroeconomic factors (both current and forecasted). These factors have a potentially negative impact on loan performance and net charge-offs. Our allowance for credit losses as of December 31, 2020 was determined under the CECL model due to our October 1, 2020 adoption of the new credit impairment standard. See Notes 2 and 8 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for further information. Our allowance for credit losses, as well as our methodologies and assumptions used in estimating the allowance, are regularly evaluated to determine if our methods and estimates continue to be appropriate for each class of loans, with adjustments made on a quarterly basis. Several factors were taken into consideration in evaluating the allowance for credit losses at December 31, 2020, including loan and borrower characteristics, such as internal risk ratings, delinquency status, collateral type and the remaining term of the loan adjusted for expected prepayments. In addition, the estimate of credit losses considered the lack of net charge-offs during the period, the level of nonperforming loans and the impact of the COVID-19 pandemic. RJ Bank also considered the uncertainty related to certain industry sectors, including commercial real estate, and the extent of credit exposure to specific borrowers within the portfolio. Finally, RJ Bank considered current economic conditions that might impact the portfolio. We will continue to assess the impact of the COVID-19 pandemic and, as more information becomes available regarding the financial repercussions to our borrowers, the risk ratings for individual loans will be updated and the allowance will be adjusted accordingly. RJ Bank’s allowance for credit losses as a percentage of bank loans held for investment was 1.71% and 1.65% at December 31, 2020 and September 30, 2020, respectively. See Note 8 in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for detail on the changes in RJ Bank’s allowance for credit losses. The bank loan provision for credit losses for the three months ended December 31, 2020 was $14 million compared to a benefit for credit losses of $2 million for the prior-year quarter. See further explanation of the credit loss provision increase in “Management’s Discussion and Analysis - Results of Operations - RJ Bank” of this Form 10-Q. The level of charge-off activity is a factor that is considered in evaluating the potential severity of future credit losses. See Note 8 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information on charge-offs. 72 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis The level of nonperforming loans is another indicator of potential future credit losses. The following table presents the nonperforming loans balance and total allowance for credit losses for the periods presented. December 31, 2020 September 30, 2020 $ in millions Nonperforming loan balance Allowance for credit losses balance Nonperforming loan balance Allowance for credit losses balance C&I loans $ — $ 198 $ 2 $ 200 CRE loans 14 112 14 81 REIT loans — 30 — 36 Tax-exempt loans — 2 — 14 Residential mortgage loans 14 33 14 18 SBL and other — 3 — 5 Total nonperforming loans held for investment $ 28 $ 378 $ 30 $ 354 Total nonperforming loans as a % of RJ Bank total loans 0.13 % 0.14 % Included in nonperforming residential mortgage loans as of December 31, 2020 were $7 million in loans for which $3 million in charge-offs were previously recorded, resulting in less exposure within the remaining balance. See Note 8 in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for loan categories as a percentage of total loans receivable. The nonperforming loan balances in the preceding table exclude $10 million as of both December 31, 2020 and September 30, 2020 of residential TDRs which were returned to accrual status in accordance with our policy. Total nonperforming assets, including the nonperforming loans in the preceding table and other real estate acquired in the settlement of residential mortgages, amounted to $28 million and $32 million at December 31, 2020 and September 30, 2020, respectively. Total nonperforming assets as a percentage of RJ Bank total assets were 0.09% and 0.10% at December 31, 2020 and September 30, 2020, respectively. Although our nonperforming assets as a percentage of RJ Bank assets remained low as of December 31, 2020, prolonged or further market deterioration could result in an increase in our nonperforming assets, an increase in our allowance for credit losses and/or an increase in net charge-offs in future periods, although the extent will depend on future developments that are highly uncertain. We have received requests from certain borrowers for forbearance, which is generally a short-term deferral of their loan payments to us, driven or exacerbated by the economic impacts of the COVID-19 pandemic. Certain borrowers have also requested modifications of covenant terms and repayment plans. In accordance with the CARES Act and the Consolidated Appropriations Act, 2021, we have elected to not apply TDR classification to any COVID-19 related loan modifications that were performed after March 1, 2020 to borrowers who were current as of December 31, 2019. Based on the amortized costs as of the end of December 31, 2020, we have active payment deferrals on approximately $90 million and $49 million of our corporate and residential loans, respectively. Such deferrals could delay the recognition of charge-offs, delinquencies, and nonaccrual status for these borrowers who would have otherwise moved into past due or nonaccrual status. Modification requests have continued to decline and a majority of the borrowers that have exited forbearance have become current on their principal and interest payments. Loan underwriting policies RJ Bank’s underwriting policies for the major types of loans are described in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Credit risk” of our 2020 Form 10-K. There were no material changes in RJ Bank’s underwriting policies during the three months ended December 31, 2020. Risk monitoring process Another component of credit risk strategy at RJ Bank is the ongoing risk monitoring and review processes for all residential, SBL, corporate and tax-exempt credit exposures, as well as our rigorous processes to manage and limit credit losses arising from loan delinquencies. There are various other factors included in these processes, depending on the loan portfolio. There were no material changes to those processes and policies during the three months ended December 31, 2020. Residential mortgage and SBL and other loan portfolios The collateral securing RJ Bank’s SBL and other portfolio is monitored on a recurring basis, with marketable collateral monitored on a daily basis. Collateral adjustments are made by the borrower as necessary to ensure RJ Bank’s loans are 73 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis adequately secured, resulting in minimizing its credit risk. Collateral calls have been minimal relative to our SBL and other portfolio with no losses incurred to date. We track and review many factors to monitor credit risk in RJ Bank’s residential mortgage loan portfolio. The factors include, but are not limited to: loan performance trends, loan product parameters and qualification requirements, borrower credit scores, level of documentation, loan purpose, geographic concentrations, average loan size, risk rating and LTV ratios. See Note 8 in the Notes to the Condensed Consolidated Financial Statements of this Form 10-Q for additional information. The following table presents a summary of delinquent residential mortgage loans, the vast majority of which are first mortgage loans, which are comprised of loans which are two or more payments past due as well as loans in the process of foreclosure. Amounts in the following table do not include residential loans to borrowers who have been granted forbearance as a result of the COVID-19 pandemic and whose loans were not considered delinquent prior to the forbearance. Such loans may be considered delinquent after the forbearance period, depending on their payment status. As a result, the amount of residential loans considered delinquent may increase significantly when the forbearance periods expire. Amount of delinquent residential loans Delinquent residential loans as a percentage of outstanding loan balances $ in millions 30-89 days 90 days or more Total 30-89 days 90 days or more Total December 31, 2020 $ 5 $ 7 $ 12 0.10 % 0.14 % 0.24 % September 30, 2020 $ 3 $ 7 $ 10 0.06 % 0.14 % 0.20 % Our December 31, 2020 percentage continues to compare favorably to the national average for over 30 day delinquencies of 3.16%, as most recently reported by the Fed. Credit risk is also managed by diversifying the residential mortgage portfolio. Most of the loans in our residential loan portfolio are to PCG clients across the country. The following table details the geographic concentrations (top five states) of RJ Bank’s one-to-four family residential mortgage loans. December 31, 2020 Loans outstanding as a % of RJ Bank total residential mortgage loans Loans outstanding as a % of RJ Bank total loans CA 24.6% 5.4% FL 16.8% 3.7% TX 9.1% 2.0% NY 7.2% 1.6% CO 4.2% 0.9% Loans where borrowers may be subject to payment increases include ARM loans with terms that initially require payment of interest only. Payments may increase significantly when the interest-only period ends and the loan principal begins to amortize. At December 31, 2020 and September 30, 2020, these loans totaled $1.73 billion and $1.67 billion, respectively, or approximately 35% and 34% of the residential mortgage portfolio, respectively. The weighted-average number of years before the remainder of the loans, which were still in their interest-only period at December 31, 2020, begins amortizing is 6 years. Corporate and tax-exempt loans Credit risk in RJ Bank’s corporate and tax-exempt loan portfolios is monitored on an individual loan basis. The majority of RJ Bank’s tax-exempt loan portfolio is comprised of loans to investment-grade borrowers. Credit risk is managed by diversifying the corporate loan portfolio. RJ Bank’s corporate loan portfolio does not contain a significant concentration in any single industry. The following table details the industry concentrations (top five categories) of RJ Bank’s corporate loans. December 31, 2020 Loans outstanding as a % of RJ Bank total corporate loans Loans outstanding as a % of RJ Bank total loans Office real estate 7.6% 3.9% Automotive/transportation 6.9% 3.5% Hospitality 6.2% 3.2% Business systems and services 6.0% 3.1% Multi-family 5.8% 3.0% 74 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis The COVID-19 pandemic negatively impacted our corporate loan portfolio in fiscal 2020 and could do so again in the future. Although we have reduced our exposure and revised our credit limits related to sectors that we believe to be most vulnerable to the COVID-19 pandemic, such as the energy, airlines, entertainment and leisure, restaurant and gaming sectors, we may experience further losses on our remaining loans to borrowers in these sectors, particularly if economic conditions deteriorate. In addition, we continue to monitor our exposure to office real estate, where trends have changed rapidly and possibly permanently as a result of the COVID-19 pandemic, and may experience additional losses on loans in this sector in the future. We may also experience further losses on corporate loans in other industries as a direct or indirect result of the pandemic, including on our CRE loans secured by retail and hospitality properties. Although we saw deterioration in oil prices for much of fiscal year 2020 due to the pandemic and prices continued to be below pre-pandemic levels during the fiscal first quarter of 2021, our energy portfolio has minimal direct commodity price exposure since it consists of loans to midstream distribution companies and convenience stores, with no loans to exploration and production enterprises. However, if we continue to see a significant deterioration in oil prices, our borrowers, and as a result our loans to such clients, could be negatively impacted in the future. Liquidity risk See the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and capital resources” of this Form 10-Q for information regarding our liquidity and how we manage liquidity risk. Operational risk Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, business disruptions, improper or unauthorized execution and processing of transactions, deficiencies in our technology or financial operating systems and inadequacies or breaches in our control processes, including cybersecurity incidents. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Operational risk” of our 2020 Form 10-K for a discussion of our operational risk and certain of our risk mitigation processes. In response to the COVID-19 pandemic, we activated and successfully executed on our business continuity protocols and continue to monitor the COVID-19 pandemic under such protocols. We have endeavored to protect our associates and our clients and to ensure continuity of business operations for our clients. As a result, a substantial portion of our associates continue to work remotely. The firm continues to monitor conditions and has developed a phased approach to reopening our offices based on regional indicators of infection positivity rates, and has and will continue to operate in compliance with all applicable laws and regulations. As of December 31, 2020, we have reopened certain of our offices in a limited capacity and are operating under strict public health and safety protocols in such locations. Periods of severe market volatility, such as those that arose in response to the COVID-19 pandemic, can result in a significantly higher level of transactions on specific days and other activity which may cause operational challenges from time to time that may result in losses. These losses can result from, but are not limited to, trade errors, failed transaction settlements, late collateral calls to borrowers and counterparties, or interruptions to our system processing. We did not incur any significant losses related to our operations during the three months ended December 31, 2020. As more fully described in the discussion of our business technology risks included in various risk factors presented in “Item 1A - Risk Factors” of our 2020 Form 10-K, despite our implementation of protective measures and endeavoring to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to human error, natural disasters, power loss, cyber-attacks and other information security breaches, and other events that could have an impact on the security and stability of our operations. Model risk Model risk refers to the possibility of unintended business outcomes arising from the design, implementation or use of models. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management - Model risk” of our 2020 Form 10-K for information regarding how we utilize models throughout the firm and how we manage model risk. Compliance risk Compliance risk is the risk of legal or regulatory sanctions, financial loss, or reputational damage that the firm may suffer from a failure to comply with applicable laws, external standards, or internal requirements. See “Item 7 - Management’s Discussion 75 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis and Analysis of Financial Condition and Results of Operations - Risk management - Compliance risk” of our 2020 Form 10-K for information on our compliance risks, including how we manage such risks. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk management” of this Form 10-Q for our quantitative and qualitative disclosures about market risk.