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” 52 Introduction 52 Executive overview 52 Reconciliation of non-GAAP financial measures to GAAP financial measures 55 Segments 56 Net interest analysis 57 Results of Operations Private Client Group 62 Capital Markets 66 Asset Management 67 RJ Bank 70 Other 71 Certain statistical disclosures by bank holding companies 72 Liquidity and capital resources 72 Statement of financial condition analysis 76 Regulatory 77 Critical accounting estimates 78 Recent accounting developments 79 Risk management 79 51 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,” “estimates,” “projects,” 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 Quarter ended March 31, 2021 compared with the quarter ended March 31, 2020 Net revenues of $2.37 billion increased $304 million, or 15%. Pre-tax income of $447 million increased $208 million, or 87%, and our net income of $355 million increased $186 million, or 110%. Our earnings per diluted share were $2.51, reflecting a 109% increase. Our annualized return on equity (“ROE”) during the quarter was 19.0%, compared with 9.9% in the prior-year quarter, and annualized return on tangible common equity (“ROTCE”) was 21.2% (1) , compared with 10.8% (1) for the prior-year quarter. Client assets under administration increased to $1.09 trillion as of March 31, 2021. The $304 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 quarter also included $8 million of private equity valuation gains, compared with losses in the prior-year quarter of $39 million of which $22 million were attributable to noncontrolling interests and were 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 measure, and for other important disclosures. 52 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Compensation, commissions and benefits expense increased $226 million, or 16%, primarily resulting from the growth in revenues and pre-tax earnings compared with the prior-year quarter. Our compensation ratio, or the ratio of compensation, commissions and benefits expense to net revenues, increased to 69.5%, compared with 68.8% for the prior-year quarter, primarily due to a change in the composition of net revenues compared with the prior-year quarter, as revenues that are directly compensable (i.e., asset management and related administrative fees, brokerage revenues and investment banking revenues) increased, while revenues that are not directly compensable (i.e., net interest income and RJBDP fees from third-party banks) declined. Non-compensation expenses decreased $130 million, or 32%, primarily due to a $141 million decrease in the bank loan provision for credit losses, which was a benefit of $32 million in the current-year quarter computed under the CECL methodology compared with a provision of $109 million in the prior-year quarter computed under the incurred loss methodology. Business development expenses also decreased, primarily due to lower travel and event-related expenses as a result of the COVID-19 pandemic. Other expenses increased, primarily due to the aforementioned private equity valuation losses in the prior-year quarter that were attributable to noncontrolling interests and were offset within other expenses. Our effective income tax rate was 20.6% for our fiscal second quarter of 2021, a decrease compared with the 29.3% effective income tax rate for the prior-year quarter, primarily due to valuation gains associated with our company-owned life insurance policies which are not subject to tax, compared with valuation losses on such policies in the prior-year quarter. The firm ended our fiscal second quarter of 2021 with capital ratios well in excess of regulatory requirements and substantial liquidity, with approximately $1.7 billion (1) of cash at the parent company. Pursuant to our Board of Directors’ share repurchase authorization, we repurchased 500,000 shares of common stock during our fiscal second quarter for $60 million at an average price of approximately $120 per share, leaving $680 million of availability remaining under the authorization as of March 31, 2021. We expect to continue share repurchases during the second half of fiscal 2021, for total repurchases throughout the fiscal year of at least $200 million to offset share-based compensation dilution. We also expect 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 and Financo acquisitions announced and completed during fiscal 2021. During the quarter, we announced a $750 million 30-year senior notes offering at 3.75%, which closed at the beginning of our fiscal third quarter of 2021. We utilized the proceeds from the offering and cash on hand to early-redeem our existing $250 million of 5.625% senior notes due 2024 and our $500 million of 3.625% senior notes due 2026, which were outstanding as of March 31, 2021. We expect to record a loss on the early-extinguishment of the existing notes approximating $97 million during our fiscal third quarter of 2021. Our results for our fiscal second quarter of 2021 were strong and we remain well-positioned entering our fiscal third quarter, with strong capital ratios, over $1 trillion of client assets under administration, a 7% increase in PCG fee-based accounts as of March 31, 2021 compared with December 31, 2021, which provides a tailwind for our fiscal third quarter asset management and related administrative fees, and a strong investment banking backlog. However, we expect to continue to face headwinds from 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. In addition, there is still economic uncertainty resulting from the COVID-19 pandemic, as well as a new federal government administration. As a result, we may experience volatility of brokerage revenues and investment banking revenues, which may negatively impact our ability to sustain the current quarter revenue levels in future periods. Although our results during the quarter were positively impacted by a benefit for credit losses related to our bank loan portfolio, net loan growth and/or future market deterioration could result in increased provisions in future quarters. In addition, we expect that business development expenses will increase over the next several quarters, as COVID-19 vaccination rates increase and business and event-related travel resumes. A summary of our financial results by segment as compared to the prior-year quarter is as follows: • PCG segment net revenues of $1.65 billion increased 10% and pre-tax income of $192 million increased 13%. The $152 million increase in net revenues was primarily attributable to an increase in asset management fees due to higher assets in fee-based accounts at the beginning of the current-year quarter and higher brokerage revenues, 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 $130 million, or 10%, primarily resulting from an increase in compensation expenses largely due to the growth in compensable net revenues. (1) For additional information, please see the “Liquidity and capital resources - Sources of liquidity” section in this MD&A. 53 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis • Capital Markets net revenues of $433 million increased 49% and pre-tax income of $105 million increased 275%. The $143 million increase in net revenues was primarily due to an increase in investment banking revenues from both mergers & acquisition activity and underwriting activity, as well as growth in fixed income brokerage revenues. Non-interest expenses increased $66 million, or 25%, due to higher compensation expenses, primarily attributable to the increase in revenues, partially offset by a decrease in business development expenses. • Asset Management segment net revenues of $209 million increased 14% and pre-tax income of $87 million increased 19%. The $25 million increase in net revenues was primarily driven by net inflows into fee-based programs offered to PCG clients and by equity market appreciation. Non-interest expenses increased $11 million, or 10%, primarily due to higher compensation expenses and higher investment sub-advisory fees. • RJ Bank net revenues of $160 million decreased 24%, while pre-tax income of $111 million increased 693%. The $50 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 decreased $147 million, or 75%, primarily due to a $141 million decrease in the bank loan provision for credit losses. • Our Other segment reflected a pre-tax loss that was $2 million larger than the loss in the prior-year quarter, due to lower interest income on corporate cash balances resulting from lower short-term interest rates, and increased interest expense due to the issuance of $500 million of senior notes in March 2020, partially offset by the impact of private equity gains in the current-quarter period compared with losses in the prior-year quarter. Six months ended March 31, 2021 compared with the six months ended March 31, 2020 Net revenues of $4.59 billion increased $517 million, or 13%. Pre-tax income of $846 million increased $248 million, or 41%, and our net income of $667 million increased $230 million, or 53%. Our earnings per diluted share were $4.74, reflecting a 53% increase. Our annualized ROE for the six months ended March 31, 2021 was 18.1%, compared with 13.0% for the prior-year period, and annualized ROTCE was 20.1% (1) , compared with 14.2% (1) for the prior-year period. The $517 million increase in net revenues compared with the prior-year period 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 period. Revenues in the current year also included private equity valuation gains of $32 million ($10 million attributable to noncontrolling interests), compared with $41 million of losses in the prior-year period ($23 million attributable to noncontrolling interests). Offsetting these increases was the negative impact of lower short-term interest rates on our net interest income and RJBDP fees from third-party banks. Compensation, commissions and benefits expense increased $375 million, or 14%, primarily resulting from the growth in revenues and pre-tax earnings compared with the prior-year period. Our compensation ratio, or the ratio of compensation, commissions, and benefits expense to net revenues, increased to 68.5%, compared with 68.0% for the prior-year period, primarily due to a change in the composition of net revenues compared with the prior-year period, as revenues that are directly compensable (i.e. asset management and related administrative fees, brokerage revenues and investment banking revenues) increased, while revenues that are not directly compensable (i.e., net interest income and RJBDP fees from third-party banks) declined. Non-compensation expenses decreased $106 million, or 15%, primarily due to a $125 million decrease in the bank loan provision for credit losses, which was a benefit of $18 million in the current year computed under the CECL methodology compared with a provision of $107 million in the prior-year period computed under the incurred loss methodology. Business development expenses also declined, primarily due to lower travel and event-related expenses as a result of the COVID-19 pandemic. Offsetting these decreases, other expenses increased, primarily due to the change in private equity valuations attributable to noncontrolling interests compared with the prior-year period. Our effective income tax rate was 21.2% for the six months ended March 31, 2021, a decrease from 26.9% for the prior-year period, primarily due to valuation gains associated with our company-owned life insurance policies which are not subject to tax, compared with valuation losses on such policies in the prior-year period. (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. 54 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Pursuant to the Board of Directors’ repurchase authorization, we repurchased 607,750 shares of common stock during the six months ended March 31, 2021 for approximately $70 million at an average price of approximately $115 per share. A summary of our financial results by segment as compared to the prior-year period is as follows: • PCG segment net revenues of $3.11 billion increased 7% and pre-tax income of $332 million increased 3%. The $205 million increase in net revenues was primarily attributable to an increase in asset management fees due to higher assets in fee-based accounts at the beginning of each quarterly billing period within the current-year period and higher brokerage revenues, 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 $196 million, or 8%, primarily resulting from an increase in compensation expenses largely due to the growth in compensable net revenues. • Capital Markets net revenues of $885 million increased 59% and pre-tax income of $234 million increased 311%. The $327 million increase in net revenues was primarily due to an increase in investment banking revenues, particularly merger & acquisition revenues, as well as growth in fixed income brokerage revenues. Non-interest expenses increased $150 million, or 30%, due to higher compensation expenses, primarily attributable to the increase in net revenues, partially offset by a decrease in business development expenses. • Asset Management segment net revenues of $404 million increased 10% and pre-tax income of $170 million increased 16%. The increase in net revenues was primarily driven by net inflows into fee-based programs offered to PCG clients and by equity market appreciation. Non-interest expenses increased $12 million, or 5%, due to higher investment sub-advisory fees and an increase in compensation expenses. • RJ Bank net revenues of $327 million decreased 23%, while pre-tax income of $182 million increased 22%. The $99 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 decreased $132 million, or 48%, primarily due to a $125 million decrease in the bank loan provision for credit losses. • Our Other segment reflected a pre-tax loss that was $5 million less than the loss in the prior-year period, primarily due to the aforementioned private equity valuation gains compared with losses in the prior-year period, 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 March 31, Six months ended March 31, $ in millions 2021 2020 2021 2020 Average equity $ 7,478 $ 6,820 $ 7,356 $ 6,740 Less: Average goodwill and identifiable intangible assets, net 851 606 767 608 Average deferred tax liabilities, net (56) (31) (49) (30) Average tangible common equity $ 6,683 $ 6,245 $ 6,638 $ 6,162 Return on equity 19.0 % 9.9 % 18.1 % 13.0 % Return on tangible common equity 21.2 % 10.8 % 20.1 % 14.2 % 55 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Average equity for the quarter-to-date period 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. Average equity for the year-to-date period is computed by adding the total equity attributable to RJF as of each quarter-end date during the indicated year-to-date period to the beginning of the year total, and dividing by three, or in the case of average tangible common equity, computed by adding tangible common equity as of each quarter-end date during the indicated year-to-date period to the beginning of the year total, and dividing by three. 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. 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 March 31, Six months ended March 31, $ in millions 2021 2020 % change 2021 2020 % change Total company Net revenues $ 2,372 $ 2,068 15 % $ 4,594 $ 4,077 13 % Pre-tax income $ 447 $ 239 87 % $ 846 $ 598 41 % Private Client Group Net revenues $ 1,647 $ 1,495 10 % $ 3,114 $ 2,909 7 % Pre-tax income $ 192 $ 170 13 % $ 332 $ 323 3 % Capital Markets Net revenues $ 433 $ 290 49 % $ 885 $ 558 59 % Pre-tax income $ 105 $ 28 275 % $ 234 $ 57 311 % Asset Management Net revenues $ 209 $ 184 14 % $ 404 $ 368 10 % Pre-tax income $ 87 $ 73 19 % $ 170 $ 146 16 % RJ Bank Net revenues $ 160 $ 210 (24) % $ 327 $ 426 (23) % Pre-tax income $ 111 $ 14 693 % $ 182 $ 149 22 % Other Net revenues $ (12) $ (44) 73 % $ (8) $ (52) 85 % Pre-tax loss $ (48) $ (46) (4) % $ (72) $ (77) 6 % Intersegment eliminations Net revenues $ (65) $ (67) NM $ (128) $ (132) NM 56 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis 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 Low High End of period Three months ended March 31, 2021 0.00% 0.25% 0% - 0.25% March 31, 2020 0.00% 1.75% 0% - 0.25% Six months ended March 31, 2021 0.00% 0.25% 0% - 0.25% March 31, 2020 0.00% 2.00% 0% - 0.25% 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 other interest rate cuts implemented during calendar 2019 (225 basis points in total), have negatively impacted our net interest income, as well as the fees we earn from third-party banks on client cash balances swept to such banks as part of the RJBDP which are also sensitive to changes in interest rates. The negative impact of the decline in short-term interest rates has outweighed the growth in interest-earning assets and RJBDP balances swept to third-party banks compared with the prior-year periods. We expect the current near-zero interest rate environment to continue 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 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. 57 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Quarter ended March 31, 2021 compared with the quarter ended March 31, 2020 Three months ended March 31, 2021 2020 $ in millions Average daily balance Interest Annualized average rate Average daily balance Interest Annualized average rate Interest-earning assets: Cash and cash equivalents $ 5,284 $ 2 0.20 % $ 4,601 $ 16 1.40 % Assets segregated pursuant to regulations 10,087 5 0.18 % 2,820 11 1.64 % Available-for-sale securities 7,997 21 1.08 % 3,443 19 2.28 % Brokerage client receivables 2,222 19 3.36 % 2,366 21 3.57 % Bank loans, net of unearned income and deferred expenses: Loans held for investment: C&I loans 7,540 48 2.56 % 8,017 81 3.99 % CRE loans 2,665 17 2.54 % 2,620 26 3.93 % REIT loans 1,309 8 2.50 % 1,322 12 3.69 % Tax-exempt loans 1,227 8 3.35 % 1,212 8 3.36 % Residential mortgage loans 5,005 34 2.72 % 4,847 38 3.13 % SBL and other 4,638 26 2.23 % 3,469 31 3.60 % Loans held for sale 177 1 1.89 % 142 2 3.85 % Total bank loans, net 22,561 142 2.56 % 21,629 198 3.67 % All other interest-earning assets 2,201 11 1.87 % 2,487 20 2.96 % Total interest-earning assets $ 50,352 $ 200 1.61 % $ 37,346 $ 285 3.06 % Interest-bearing liabilities: Bank deposits: Savings, money market and NOW accounts $ 27,662 $ 2 0.02 % $ 22,877 $ 6 0.12 % Certificates of deposit 898 4 1.88 % 1,094 6 2.03 % Total bank deposits 28,560 6 0.08 % 23,971 12 0.24 % Brokerage client payables 11,485 1 0.02 % 3,827 3 0.35 % Other borrowings 862 5 2.18 % 895 5 2.23 % Senior notes payable 2,045 24 4.74 % 1,556 19 4.71 % All other interest-bearing liabilities 600 1 0.88 % 911 4 1.82 % Total interest-bearing liabilities $ 43,552 $ 37 0.34 % $ 31,160 $ 43 0.56 % Net interest income $ 163 $ 242 Firmwide net interest margin (net yield on interest-earning assets) 1.32 % 2.60 % RJ Bank net interest margin 1.94 % 3.02 % Nonaccrual loans are included in the average loan balances in the preceding table. Any payments received for corporate nonaccrual loans are applied entirely to principal. Interest income on residential mortgage nonaccrual loans is recognized on a cash basis. The yield on tax-exempt loans in the preceding table is presented on a taxable-equivalent basis utilizing the applicable federal statutory rates for each of the three months ended March 31, 2021 and 2020. 58 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 March 31, 2021 compared to 2020 Increase/(decrease) due to $ in millions Volume Rate Total Interest income: Interest-earning assets: Cash and cash equivalents $ 2 $ (16) $ (14) Assets segregated pursuant to regulations 30 (36) (6) Available-for-sale securities 26 (24) 2 Brokerage client receivables (2) — (2) Bank loans, net of unearned income and deferred expenses: Loans held for investment: C&I loans (5) (28) (33) CRE loans — (9) (9) REIT loans — (4) (4) Tax-exempt loans — — — Residential mortgage loans 1 (5) (4) SBL and other 9 (14) (5) Loans held for sale 1 (2) (1) Total bank loans, net 6 (62) (56) All other interest-earning assets (4) (5) (9) Total interest-earning assets 58 (143) (85) Interest expense: Interest-bearing liabilities: Bank deposits: Savings, money market and NOW accounts 2 (6) (4) Certificates of deposit (1) (1) (2) Total bank deposits 1 (7) (6) Brokerage client payables 7 (9) (2) Other borrowings — — — Senior notes payable 5 — 5 All other interest-bearing liabilities (1) (2) (3) Total interest-bearing liabilities 12 (18) (6) Change in net interest income $ 46 $ (125) $ (79) 59 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Six months ended March 31, 2021 compared with the six months ended March 31, 2020 Six months ended March 31, 2021 2020 $ in millions Average daily balance Interest Annualized average rate Average daily balance Interest Annualized average rate Interest-earning assets: Cash and cash equivalents $ 5,500 $ 6 0.23 % $ 4,227 $ 33 1.55 % Assets segregated pursuant to regulations 7,954 8 0.19 % 2,583 22 1.75 % Available-for-sale securities 7,735 44 1.14 % 3,265 37 2.29 % Brokerage client receivables 2,152 37 3.42 % 2,402 48 4.04 % Bank loans, net of unearned income and deferred expenses: Loans held for investment: C&I loans 7,537 99 2.60 % 8,039 167 4.07 % CRE loans 2,623 34 2.56 % 2,572 53 4.04 % REIT loans 1,272 16 2.47 % 1,330 25 3.77 % Tax-exempt loans 1,232 16 3.35 % 1,218 16 3.36 % Residential mortgage loans 5,003 69 2.75 % 4,743 75 3.16 % SBL and other 4,460 51 2.26 % 3,403 65 3.78 % Loans held for sale 159 2 2.36 % 151 3 3.97 % Total bank loans, net 22,286 287 2.59 % 21,456 404 3.76 % All other interest-earning assets 2,247 21 1.93 % 2,511 38 2.89 % Total interest-earning assets $ 47,874 $ 403 1.69 % $ 36,444 $ 582 3.19 % Interest-bearing liabilities: Bank deposits: Savings, money market and NOW accounts $ 27,144 $ 3 0.02 % $ 22,260 $ 18 0.16 % Certificates of deposit 925 9 1.90 % 937 10 2.10 % Total bank deposits 28,069 12 0.08 % 23,197 28 0.24 % Brokerage client payables 9,403 2 0.04 % 3,513 6 0.40 % Other borrowings 864 10 2.21 % 894 10 2.23 % Senior notes payable 2,045 48 4.74 % 1,553 37 4.71 % All other interest-bearing liabilities 587 3 1.01 % 1,023 13 2.02 % Total interest-bearing liabilities $ 40,968 $ 75 0.36 % $ 30,180 $ 94 0.61 % Net interest income $ 328 $ 488 Firmwide net interest margin (net yield on interest-earning assets) 1.38 % 2.69 % RJ Bank net interest margin 1.98 % 3.12 % Nonaccrual loans are included in the average loan balances in the preceding table. Any payments received for corporate nonaccrual loans are applied entirely to principal. Interest income on residential mortgage nonaccrual loans is recognized on a cash basis. The yield on tax-exempt loans in the preceding table is presented on a taxable-equivalent basis utilizing the applicable federal statutory rates for each of the six months ended March 31, 2021 and 2020. 60 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. Six months ended March 31, 2021 compared to 2020 Increase/(decrease) due to $ in millions Volume Rate Total Interest income: Interest-earning assets: Cash and cash equivalents $ 9 $ (36) $ (27) Assets segregated pursuant to regulations 47 (61) (14) Available-for-sale securities 52 (45) 7 Brokerage client receivables (5) (6) (11) Bank loans, net of unearned income and deferred expenses: Loans held for investment: C&I loans (10) (58) (68) CRE loans 1 (20) (19) REIT loans (1) (8) (9) Tax-exempt loans — — — Residential mortgage loans 4 (10) (6) SBL and other 20 (34) (14) Loans held for sale — (1) (1) Total bank loans, net 14 (131) (117) All other interest-earning assets (6) (11) (17) Total interest-earning assets 111 (290) (179) Interest expense: Interest-bearing liabilities: Bank deposits: Savings, money market and NOW accounts 4 (19) (15) Certificates of deposit — (1) (1) Total bank deposits 4 (20) (16) Brokerage client payables 13 (17) (4) Other borrowings — — — Senior notes payable 11 — 11 All other interest-bearing liabilities (7) (3) (10) Total interest-bearing liabilities 21 (40) (19) Change in net interest income $ 90 $ (250) $ (160) 61 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 March 31, Six months ended March 31, $ in millions 2021 2020 % change 2021 2020 % change Revenues: Asset management and related administrative fees $ 979 $ 833 18 % $ 1,864 $ 1,615 15 % Brokerage revenues: Mutual and other fund products 183 163 12 % 331 307 8 % Insurance and annuity products 109 99 10 % 207 200 4 % Equities, ETFs and fixed income products 121 122 (1) % 228 224 2 % Total brokerage revenues 413 384 8 % 766 731 5 % Account and service fees: Mutual fund and annuity service fees 99 88 13 % 193 178 8 % RJBDP fees: Third-party banks 19 51 (63) % 40 109 (63) % RJ Bank 44 48 (8) % 87 95 (8) % Client account and other fees 42 35 20 % 74 64 16 % Total account and service fees 204 222 (8) % 394 446 (12) % Investment banking 16 11 45 % 22 22 — Interest income 30 45 (33) % 60 94 (36) % All other 8 7 14 % 13 16 (19) % Total revenues 1,650 1,502 10 % 3,119 2,924 7 % Interest expense (3) (7) (57) % (5) (15) (67) % Net revenues 1,647 1,495 10 % 3,114 2,909 7 % Non-interest expenses: Financial advisor compensation and benefits 1,040 915 14 % 1,971 1,772 11 % Administrative compensation and benefits 260 245 6 % 509 492 3 % Total compensation, commissions and benefits 1,300 1,160 12 % 2,480 2,264 10 % Non-compensation expenses: Communications and information processing 69 62 11 % 131 121 8 % Occupancy and equipment 45 44 2 % 88 88 — Business development 15 24 (38) % 31 51 (39) % Professional fees 10 9 11 % 23 17 35 % All other 16 26 (38) % 29 45 (36) % Total non-compensation expenses 155 165 (6) % 302 322 (6) % Total non-interest expenses 1,455 1,325 10 % 2,782 2,586 8 % Pre-tax income $ 192 $ 170 13 % $ 332 $ 323 3 % 62 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Selected key metrics PCG client asset balances As of $ in billions March 31, 2021 December 31, 2020 September 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 Assets under administration (“AUA”) $ 1,028.1 $ 974.2 $ 883.3 $ 734.0 $ 855.2 $ 798.4 Assets in fee-based accounts (1) $ 567.6 $ 532.7 $ 475.3 $ 383.5 $ 444.2 $ 409.1 Percent of AUA in fee-based accounts 55.2 % 54.7 % 53.8 % 52.2 % 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 March 31, 2021 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 March 31, 2021 December 31, 2020 September 30, 2020 March 31, 2020 Employees 3,375 3,387 3,404 3,376 Independent contractors 4,952 4,846 4,835 4,772 Total advisors 8,327 8,233 8,239 8,148 The number of financial advisors increased compared with the prior quarter and September 30, 2020 due to recruiting of financial advisors and new trainees that were moved into production roles, partially offset by the impact of advisors who left the firm, including planned retirements, where assets are generally retained at the firm. The growth in the number of financial advisors has been impacted by a smaller training class in the current year, as well as the transfer of advisors who were previously affiliated with the firm as independent contractors or employees to our RIA & Custody Services (“RCS”) division. Advisors in RCS are not included in the financial advisor count, although their assets are still included in client assets under administration. While the recruiting pipeline remains active across our affiliation options, the recruiting environment has become increasingly competitive, particularly in the employee channel, which has caused us to increase the value offered to prospects in our recruiting packages for financial advisors. 63 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Clients’ domestic cash sweep balances As of $ in millions March 31, 2021 December 31, 2020 September 30, 2020 March 31, 2020 RJBDP RJ Bank $ 28,174 $ 26,697 $ 25,599 $ 28,711 Third-party banks 25,110 26,142 25,998 20,379 Subtotal RJBDP 53,284 52,839 51,597 49,090 CIP 9,517 8,769 3,999 3,782 Total clients’ domestic cash sweep balances $ 62,801 $ 61,608 $ 55,596 $ 52,872 Three months ended March 31, Six months ended March 31, 2021 2020 2021 2020 Average yield on RJBDP - third-party banks 0.30 % 1.33 % 0.31 % 1.48 % 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. PCG segment results are also impacted by changes in the allocation of cash balances between RJBDP and CIP, as the net yield to the firm on cash balances in CIP (i.e., the spread between amounts earned on assets segregated for regulatory purposes and the interest paid to clients on CIP balances) is lower than the yield to the firm on RJBDP balances, on average. Client cash balances remained elevated as of March 31, 2021 compared to prior year balances as a result of a number of factors, including the continuing economic uncertainty caused by the COVID-19 pandemic, as well as uncertainty related to the nature and timing of policy changes that may be put forth by the new federal government administration. The average yield on RJBDP - third party banks decreased compared with the prior-year periods due to the significant decline in short-term interest rates. We expect the average yield on RJBDP balances at third-party banks to remain approximately 0.30% for the remainder of our 2021 fiscal year; however, this projected yield could decline if demand for deposits from third-party banks does not improve from current levels. Quarter ended March 31, 2021 compared with the quarter ended March 31, 2020 Net revenues of $1.65 billion increased $152 million, or 10%, and pre-tax income of $192 million increased $22 million, or 13%. Asset management and related administrative fees increased $146 million, or 18%, 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 7% increase in fee-based assets as of March 31, 2021 compared to December 31, 2020, should positively impact asset management fees in our fiscal third quarter of 2021. Brokerage revenues increased $29 million, or 8%, primarily due to higher trailing revenues from mutual and other fund products and annuity products, as well as higher transactional revenues. Account and service fees decreased $18 million, or 8%, primarily due to a decline in RJBDP fees from third-party banks as a result of lower short-term interest rates. Partially offsetting this decrease was an increase in mutual fund service fees, as well as incremental client account and other fees resulting from our acquisition of NWPS at the end of our fiscal first quarter of 2021. Net interest income decreased $11 million, or 29%, driven by a decline in interest income due to lower short-term interest rates applicable to both cash and segregated asset balances, which more than offset the impact of significantly higher segregated asset balances. As reflected in the table above, our CIP balances increased significantly compared with the prior-year quarter resulting in the increase in segregated assets, and a significant portion of the increase was related to lower-yielding segregated 64 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis short-term U.S. Treasury securities and, where capacity allowed us, cash deposit accounts at various financial institutions to meet our reserve requirements. Partially offsetting the impact of a decrease in interest income, interest expense also decreased despite the significant increase in client cash balances in our CIP, due to the impact of lower deposit rates paid on these balances. Compensation-related expenses increased $140 million, or 12%, primarily due to higher compensable net revenues. Compensation-related expenses increased at a higher rate 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 lower provisions for legal matters, as well as lower travel and event-related expenses as a result of the COVID-19 pandemic. Partially offsetting these decreases was an increase in technology-related expenses reflecting ongoing upgrades to our technology platforms. Six months ended March 31, 2021 compared with the six months ended March 31, 2020 Net revenues of $3.11 billion increased $205 million, or 7%, and pre-tax income of $332 million increased $9 million, or 3%. Asset management and related administrative fees increased $249 million, or 15%, primarily due to higher assets in fee-based accounts at the beginning of each of the current-year quarterly billing periods compared with the prior-year quarterly billing periods. Brokerage revenues increased $35 million, or 5%, primarily due to higher trailing revenues from mutual and other fund products and annuity products, as well as higher transactional revenues due to increased client activity. Account and service fees decreased $52 million, or 12%, primarily due to a decline in RJBDP fees from third-party banks as a result of lower short-term interest rates. Partially offsetting this decrease was an increase in mutual fund service fees, as well as incremental client account and other fees resulting from our acquisition of NWPS at the end of our fiscal first quarter of 2021. Net interest income decreased $24 million, or 30%, driven by a decline in interest income due to lower short-term interest rates applicable to both cash and segregated asset balances, which more than offset the impact of significantly higher segregated asset balances. As reflected in the table above, our CIP balances increased significantly compared with the prior-year period resulting in the increase in segregated assets, and a significant portion of the increase was related to segregated short-term U.S. Treasury securities and, where capacity allowed us, cash deposit accounts at various financial institutions. Partially offsetting the impact of a decrease in interest income, interest expense also decreased despite the significant increase in client cash balances in our CIP, due to the impact of lower deposit rates paid on these balances. Compensation-related expenses increased $216 million, or 10%, primarily due to higher compensable net revenues. Non-compensation expenses decreased $20 million, or 6%, primarily due to decreases in travel and event-related expenses as a result of the COVID-19 pandemic and lower provisions for legal matters, partially offset by higher technology-related expenses, reflecting ongoing upgrades to our technology platforms. 65 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 March 31, Six months ended March 31, $ in millions 2021 2020 % change 2021 2020 % change Revenues: Brokerage revenues: Fixed income $ 142 $ 90 58 % $ 273 $ 171 60 % Equity 34 40 (15) % 76 74 3 % Total brokerage revenues 176 130 35 % 349 245 42 % Investment banking: Merger & acquisition and advisory 122 72 69 % 271 132 105 % Equity underwriting 67 43 56 % 127 82 55 % Debt underwriting 37 22 68 % 83 53 57 % Total investment banking 226 137 65 % 481 267 80 % Interest income 5 10 (50) % 8 18 (56) % Tax credit fund revenues 24 12 100 % 40 30 33 % All other 4 7 (43) % 11 10 10 % Total revenues 435 296 47 % 889 570 56 % Interest expense (2) (6) (67) % (4) (12) (67) % Net revenues 433 290 49 % 885 558 59 % Non-interest expenses: Compensation, commissions and benefits 259 184 41 % 511 350 46 % Non-compensation expenses: Communications and information processing 20 20 — 39 39 — Occupancy and equipment 9 9 — 18 18 — Business development 6 15 (60) % 15 31 (52) % Professional fees 13 13 — 26 23 13 % All other 21 21 — 42 40 5 % Total non-compensation expenses 69 78 (12) % 140 151 (7) % Total non-interest expenses 328 262 25 % 651 501 30 % Pre-tax income $ 105 $ 28 275 % $ 234 $ 57 311 % Quarter ended March 31, 2021 compared with the quarter ended March 31, 2020 Net revenues of $433 million increased $143 million, or 49%, and pre-tax income of $105 million increased $77 million, or 275%. Brokerage revenues increased $46 million, or 35%, primarily due to a significant increase in fixed income 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 $89 million, or 65%, due to a significant increase in merger & acquisition revenues, as well as continued strength in equity and debt underwriting, which also increased significantly compared with the prior-year quarter. The increase in merger & acquisition revenues reflected a higher number of transactions, as well as larger individual transactions. The increase in equity underwriting revenues was primarily due to higher levels of market activity and the increase in debt underwriting primarily reflected higher revenues from asset-backed and corporate underwritings. In addition to the strong results during the quarter, our investment banking pipelines are also strong and reflect the investments we have made in the business over the past several years, including the acquisition of Financo which closed at the end of our fiscal second 66 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis quarter of 2021. However, future activity may be negatively impacted by economic uncertainty or factors resulting from the ongoing COVID-19 pandemic. Compensation-related expenses increased $75 million, or 41%, primarily due to the increase in compensable net revenues. Non-compensation expenses decreased $9 million, or 12%, primarily due to lower travel and event-related expenses as a result of the COVID-19 pandemic. Six months ended March 31, 2021 compared with the six months ended March 31, 2020 Net revenues of $885 million increased $327 million, or 59%, and pre-tax income of $234 million increased $177 million, or 311%. Brokerage revenues increased $104 million, or 42%, due to a significant increase in fixed income brokerage revenues due to the aforementioned increase in client activity levels during the current-year period, particularly with depository clients. Investment banking revenues increased $214 million, or 80%, due to a significant increase in merger & acquisition revenues, as well as an increase in underwriting revenues. 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. An increase in debt underwriting primarily reflected higher revenues from asset-backed and corporate underwritings. Compensation-related expenses increased $161 million, or 46%, primarily due to the increase in compensable net revenues. Non-compensation expenses decreased $11 million, or 7%, primarily due to lower travel and event-related expenses as a result of the COVID-19 pandemic. 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 March 31, Six months ended March 31, $ in millions 2021 2020 % change 2021 2020 % change Revenues: Asset management and related administrative fees: Managed programs $ 137 $ 124 10 % $ 266 $ 249 7 % Administration and other 64 53 21 % 123 104 18 % Total asset management and related administrative fees 201 177 14 % 389 353 10 % Account and service fees 5 4 25 % 9 9 — All other 3 3 — 6 6 — Net revenues 209 184 14 % 404 368 10 % Non-interest expenses: Compensation, commissions and benefits 50 45 11 % 95 90 6 % Non-compensation expenses: Communications and information processing 12 12 — 23 23 — Investment sub-advisory fees 30 26 15 % 58 51 14 % All other 30 28 7 % 58 58 — Total non-compensation expenses 72 66 9 % 139 132 5 % Total non-interest expenses 122 111 10 % 234 222 5 % Pre-tax income $ 87 $ 73 19 % $ 170 $ 146 16 % 67 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Selected key metrics Managed programs Management fees recorded in our Asset Management segment are generally calculated as a percentage of the value of our fee-billable 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, as well as 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. Financial assets under management $ in billions March 31, 2021 December 31, 2020 September 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 AMS (1) $ 121.2 $ 113.9 $ 102.2 $ 84.0 $ 98.7 $ 91.8 Carillon Tower Advisers 66.6 64.9 59.5 51.7 60.6 58.5 Subtotal financial assets under management 187.8 178.8 161.7 135.7 159.3 150.3 Less: Assets managed for affiliated entities (9.6) (9.2) (8.6) (7.5) (7.6) (7.2) Total financial assets under management $ 178.2 $ 169.6 $ 153.1 $ 128.2 $ 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 March 31, Six months ended March 31, $ in billions 2021 2020 2021 2020 Financial assets under management at beginning of period $ 178.8 $ 159.3 $ 161.7 $ 150.3 Carillon Tower Advisers - net inflows/(outflows) 1.4 (2.0) 1.1 (2.4) AMS - net inflows 3.6 1.2 5.3 3.3 Net market appreciation/(depreciation) in asset values 4.0 (22.8) 19.7 (15.5) Financial assets under management at end of period $ 187.8 $ 135.7 $ 187.8 $ 135.7 Carillon Tower Advisers Assets managed by Carillon Tower Advisers include assets managed by its subsidiaries and affiliates: Eagle Asset Management, Scout Investments, Reams Asset Management (a division of Scout Investments), ClariVest Asset Management and Cougar Global Investments. The following table 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. 68 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis $ in billions March 31, 2021 Average fee rate for the three months ended March 31, 2021 Equity $ 30.4 0.52 % Fixed income 30.5 0.18 % Balanced 5.7 0.35 % Total financial assets under management $ 66.6 0.35 % Non-discretionary asset-based programs The following table includes assets held in certain non-discretionary asset-based programs for which the Asset Management segment does not exercise discretion but provides administrative support (including for affiliated entities). The vast majority of these assets are also included in our PCG segment fee-based AUA (as disclosed in “Assets in fee-based accounts” in the “Selected key metrics - PCG client asset balances” section of our “Management’s Discussion and Analysis - Results of Operations - Private Client Group”). Administrative fees associated with these programs are predominantly based on balances at the beginning of the quarter. $ in billions March 31, 2021 December 31, 2020 September 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 Total assets $ 334.2 $ 313.5 $ 280.6 $ 217.3 $ 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 March 31, 2021 December 31, 2020 September 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 Total assets $ 7.8 $ 7.6 $ 7.1 $ 6.4 $ 7.2 $ 6.6 Quarter ended March 31, 2021 compared with the quarter ended March 31, 2020 Net revenues of $209 million increased $25 million, or 14%, and pre-tax income of $87 million increased $14 million, or 19%. Asset management and related administrative fees increased $24 million, or 14%, driven by higher AUM and higher assets in non-discretionary asset-based programs, primarily driven by equity market appreciation and net inflows into fee-based accounts in PCG. Carillon Tower Advisers generated net inflows during the current-year quarter, despite the structural headwinds for active asset managers resulting from the industry shift from actively managed investment strategies to passive investment strategies. Compensation expenses increased $5 million, or 11%, and included the impact of higher net revenues. Non-compensation expenses increased $6 million, or 9%, largely due to an increase in investment sub-advisory fees resulting from an increase in AUM in sub-advised programs. Six months ended March 31, 2021 compared with the six months ended March 31, 2020 Net revenues of $404 million increased $36 million, or 10%, and pre-tax income of $170 million increased $24 million, or 16%. Asset management and related administrative fees increased $36 million, or 10%, driven by higher assets in non-discretionary asset-based programs and higher AUM, primarily due to equity market appreciation and net inflows into fee-based accounts in PCG. Compensation expenses increased $5 million, or 6%, and included the impact of higher net revenues. Non-compensation expenses increased $7 million, or 5%, due to an increase in investment sub-advisory fees resulting from an increase in AUM in sub-advised programs. 69 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis 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 March 31, Six months ended March 31, $ in millions 2021 2020 % change 2021 2020 % change Revenues: Interest income $ 165 $ 223 (26) % $ 333 $ 454 (27) % Interest expense (10) (18) (44) % (21) (39) (46) % Net interest income 155 205 (24) % 312 415 (25) % All other 5 5 — 15 11 36 % Net revenues 160 210 (24) % 327 426 (23) % Non-interest expenses: Compensation and benefits 13 13 — 25 25 — Non-compensation expenses: Bank loan provision/(benefit) for credit losses (32) 109 NM (18) 107 NM RJBDP fees to PCG 44 48 (8) % 87 95 (8) % All other 24 26 (8) % 51 50 2 % Total non-compensation expenses 36 183 (80) % 120 252 (52) % Total non-interest expenses 49 196 (75) % 145 277 (48) % Pre-tax income $ 111 $ 14 693 % $ 182 $ 149 22 % Quarter ended March 31, 2021 compared with the quarter ended March 31, 2020 Net revenues of $160 million decreased $50 million, or 24%, and pre-tax income of $111 million increased $97 million, or 693%. Net interest income decreased $50 million, or 24%, 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 and securities-based loans to PCG clients. The net interest margin decreased to 1.94% from 3.02% 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 to approximately 1.9% throughout the remainder of our current fiscal year. We had a $32 million bank loan benefit for credit losses in the current quarter, which was calculated under the CECL model, compared with a $109 million provision in the prior-year quarter, which was calculated under the incurred loss model. The current quarter benefit reflected changes in macroeconomic inputs to our CECL model during the quarter, including an improved outlook for the commercial real estate and residential mortgage bank loan portfolios, partially offset by the impact of weakened equity market forecasts on the C&I and REIT loan portfolios and an increase in criticized loans. The provision for credit losses in the prior-year quarter reflected the rapid economic deterioration caused by the COVID-19 pandemic. Six months ended March 31, 2021 compared with the six months ended March 31, 2020 Net revenues of $327 million decreased $99 million, or 23%, and pre-tax income of $182 million increased $33 million, or 22%. Net interest income decreased $103 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 and securities-based loans to PCG clients. The net interest margin decreased to 1.98% from 3.12% for the prior-year period, 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. 70 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis We had a bank loan benefit for credit losses of $18 million, which was calculated under the CECL model, compared with a $107 million provision in the prior-year period, which was calculated under the incurred loss model. The current period benefit was largely attributable to changes in inputs to our CECL model since our October 1, 2020 adoption date, reflecting improvements in certain forecasted macroeconomic inputs, including unemployment and gross domestic product, partially offset by forecasted declines in commercial real estate values since our CECL adoption date, as well as an increase in criticized loans. The provision for credit losses in the prior-year period reflected the rapid economic deterioration caused by the COVID-19 pandemic. RJBDP fees paid to PCG decreased compared with the prior-year period due to a decrease in the number of accounts swept to RJ Bank as part of the RJBDP. The fees paid by RJ Bank to PCG are eliminated in consolidation. 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 March 31, Six months ended March 31, $ in millions 2021 2020 % change 2021 2020 % change Revenues: Interest income $ 3 $ 12 (75) % $ 6 $ 24 (75) % Gains/(losses) on private equity investments 8 (39) NM 32 (41) NM All other 2 — NM 3 2 50 % Total revenues 13 (27) NM 41 (15) NM Interest expense (25) (17) 47 % (49) (37) 32 % Net revenues (12) (44) 73 % (8) (52) 85 % Non-interest expenses: Compensation and all other 36 2 1,700 % 62 25 148 % Acquisition-related expenses — — — 2 — NM Total non-interest expenses 36 2 1,700 % 64 25 156 % Pre-tax loss $ (48) $ (46) (4) % $ (72) $ (77) 6 % Quarter ended March 31, 2021 compared with the quarter ended March 31, 2020 The pre-tax loss of $48 million was $2 million larger than the loss in the prior-year quarter. Net revenues increased $32 million, as the current quarter included $8 million of private equity valuation gains, compared with $39 million of private equity valuation losses in the prior-year quarter, of which $22 million were attributable to noncontrolling interests and were offset within other expenses. The current quarter valuation gains primarily reflected the impact of continued improvement in market conditions on certain of our fund investments, while the prior-year losses reflected the impact of challenging market conditions at the onset of the COVID-19 pandemic. Offsetting this increase, interest income earned on corporate cash balances decreased compared with the prior-year quarter due to lower short-term interest rates, and interest expense increased as a result of the issuance of $500 million of senior notes in March 2020. Non-interest expenses increased $34 million, primarily due to the aforementioned $22 million offset of private equity valuation losses attributable to noncontrolling interests in the prior-year quarter and an increase in compensation expense. Six months ended March 31, 2021 compared with the six months ended March 31, 2020 The pre-tax loss of $72 million was $5 million less than the loss in the prior-year period. Net revenues increased $44 million, primarily due to private equity valuation gains in the current period, compared with losses in the prior-year period. The current period included $32 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 continued improvement in market conditions on certain of our investments. The prior-year period included $41 million of private equity valuation losses, of which $23 million were attributable to noncontrolling interests and were offset within other 71 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis expenses. Interest income earned on corporate cash balances decreased compared with the prior-year period 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 $39 million, or 156%, primarily due to the aforementioned $10 million in gains attributable to noncontrolling interests, compared with $23 million in losses in the prior-year period. The $2 million of acquisition-related expenses in the current-year period arose from our acquisitions of NWPS and Financo during fiscal 2021. 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 March 31, Six months ended March 31, 2021 2020 2021 2020 Return on assets 2.6% 1.5% 2.5% 2.0% Return on equity 19.0% 9.9% 18.1% 13.0% Average equity to average assets 13.6% 15.2% 14.0% 15.7% Dividend payout ratio 15.5% 30.8% 16.5% 23.9% Return on assets is computed by dividing annualized net income for the period indicated by average assets for each respective period. Average assets for the quarter is computed by adding total assets as of the date indicated to the prior quarter-end total and dividing by two. Average assets for the year-to-date period is computed by adding total assets as of each quarter-end date during the year-to-date period to the beginning of the year total and dividing by three. Return on equity is computed by dividing annualized net income for the period indicated by average equity for each respective period. Average equity for the quarter is computed by adding total equity attributable to RJF as of the date indicated to the prior quarter-end total and dividing by two. Average equity for the year-to-date period is computed by adding total equity attributable to RJF as of each quarter-end date during the year-to-date period to the beginning of the year total and dividing by three. 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. 72 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Cash and cash equivalents increased $461 million during the six months ended March 31, 2021 to $5.85 billion. During the six months ended March 31, 2021, cash provided by our operations, including significant net income, was offset by cash used to fund dividend payments and share repurchases, and investments in future growth with our acquisitions of NWPS and Financo. We also had significant increases in client cash balances, which increased both our brokerage client payables and our bank deposits. However, this cash was largely used to increase our assets segregated pursuant to regulations, primarily through the purchase of U.S. Treasuries, as part of our brokerage activities, and to increase our available-for-sale securities and our bank loan portfolio as part of our banking activities. 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 Approximately $1.7 billion of our total March 31, 2021 cash and cash equivalents included cash held directly at the parent, or parent cash loaned to RJ&A. As of March 31, 2021, RJF had loaned $1.24 billion to RJ&A (such amount is included in the RJ&A cash balance in the following table), which RJ&A has invested on behalf of RJF in cash and cash equivalents or otherwise deployed in its normal business activities. The following table presents our holdings of cash and cash equivalents. $ in millions March 31, 2021 RJF $ 480 RJ&A 2,560 RJ Bank, N.A. 1,491 RJ Ltd. 826 RJFS 131 Carillon Tower Advisers 64 Other subsidiaries 299 Total cash and cash equivalents $ 5,851 RJF maintained depository accounts at RJ Bank, N.A. with a balance of $185 million as of March 31, 2021. The portion of this total that was available on demand without restrictions, which amounted to $108 million as of March 31, 2021, is reflected in the RJF total (and is excluded from the RJ Bank, N.A. cash balance in the preceding table). A large portion of the RJ Ltd. cash and cash equivalents balance as of March 31, 2021 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 the Financial Industry Regulatory Authority (“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 March 31, 2021, 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 73 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis 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. 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. March 31, 2021 $ in millions RJ&A RJF Total Total number of arrangements Financing arrangement: Committed secured $ 100 $ — $ 100 1 Committed unsecured 200 300 500 1 Total committed financing arrangements $ 300 $ 300 $ 600 2 Outstanding borrowing amount: Committed secured $ — $ — $ — Committed unsecured — — — Total outstanding borrowing amount $ — $ — $ — Our committed unsecured financing arrangement in the preceding table represents our Credit Facility, which provides for maximum borrowings of up to $500 million, with a sublimit of $300 million for RJF. RJ&A may borrow up to $500 million under the Credit Facility, depending on the amount of outstanding borrowings by RJF. For additional details on our committed unsecured financing arrangement, see our discussion of the Credit Facility in Note 14 of the Notes to Consolidated Financial Statements of our 2020 Form 10-K. In April 2021, we amended our Credit Facility, maintaining the $500 million maximum borrowing amount, but extending the term through April 2026 and incorporating a lower cost of borrowing under the facility and certain favorable covenant modifications. Uncommitted financing arrangements Our uncommitted financing arrangements are in the form of secured lines of credit, secured bilateral or tri-party repurchase agreements, or unsecured lines of credit. Our arrangements with third-party lenders are generally utilized to finance a portion of our fixed income securities or for cash management purposes. Our uncommitted secured financing arrangements generally require us to post collateral in excess of the amount borrowed and are generally collateralized by non-customer, RJ&A-owned securities or by securities that we have received as collateral under reverse repurchase agreements. As of March 31, 2021, we had outstanding borrowings under two uncommitted secured borrowing arrangements out of a total of 11 uncommitted financing arrangements (seven uncommitted secured and four uncommitted unsecured). However, lenders are under no contractual obligation to lend to us under uncommitted credit facilities. 74 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis 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 March 31, 2021 Outstanding borrowing amount: Uncommitted secured $ 222 Uncommitted unsecured — Total outstanding borrowing amount $ 222 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 March 31, 2021 $ 226 $ 260 $ 222 $ 242 $ 280 $ 224 December 31, 2020 $ 211 $ 236 $ 233 $ 204 $ 259 $ 162 September 30, 2020 $ 140 $ 165 $ 165 $ 199 $ 260 $ 207 June 30, 2020 $ 222 $ 278 $ 228 $ 168 $ 193 $ 193 March 31, 2020 $ 218 $ 238 $ 215 $ 283 $ 388 $ 130 Other borrowings and collateralized financings RJ Bank had $850 million in FHLB borrowings outstanding at March 31, 2021, 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 $3.13 billion in immediate credit available from the FHLB as of March 31, 2021 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 $56 million as of March 31, 2021 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 March 31, 2021, in addition to the financing arrangements previously described, we had $11 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 March 31, 2021, 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. In April 2021, we sold in a registered underwritten public offering $750 million in aggregate principal amount of 3.75% senior notes due April 2051. We utilized the proceeds from the offering and cash on hand to early-redeem our existing $250 million 75 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis par 5.625% senior notes due 2024 and our $500 million par 3.625% senior notes due 2026, which were outstanding as of March 31, 2021. See Note 14 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q 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. In April 2021, Fitch Ratings, Inc. assigned its first issuer and senior long-term debt rating for Raymond James Financial, Inc. Rating Agency Rating Outlook Fitch Ratings, Inc. A- Stable Moody’s Investors Services Baa1 Stable Standard & Poor’s Ratings Services BBB+ 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 position in the markets in which we operate. Deterioration in any of these factors could impact our credit ratings. Any rating downgrades could increase our costs in the event we were to obtain additional financing. Should our credit rating be downgraded prior to a public debt offering, it is probable that we would have to offer a higher rate of interest to bond holders. A downgrade to below investment grade may make a public debt offering difficult to execute on terms we would consider to be favorable. A downgrade below investment grade could result in the termination of certain derivative contracts and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing overnight collateralization on our derivative instruments in liability positions. A credit downgrade could damage our reputation and result in certain counterparties limiting their business with us, result in negative comments by analysts, potentially negatively impact investors’ and/or clients’ perception of us, and cause a decline in our stock price. None of our borrowing arrangements contains a condition or event of default related to our credit ratings. However, a credit downgrade would result in the firm incurring a higher facility fee on the Credit Facility, in addition to triggering a higher interest rate applicable to any borrowings outstanding on that line as of and subsequent to such downgrade. Conversely, an improvement in RJF’s current credit rating could have a favorable impact on the facility fee, as well as the interest rate applicable to any borrowings on such line. Other sources and uses of liquidity We have company-owned life insurance policies which are utilized to fund certain non-qualified deferred compensation plans and other employee benefit plans. Certain of our non-qualified deferred compensation plans and other employee benefit plans are employee-directed while others are company-directed. Certain policies which we could readily borrow against had a cash surrender value of $789 million as of March 31, 2021, comprised of $484 million related to employee-directed plans and $305 million related to company-directed plans, and we were able to borrow up to 90%, or $710 million, of the March 31, 2021 total without restriction. To effect any such borrowing, the underlying investments would be converted to money market investments, therefore requiring us to take market risk related to the employee-directed plans. There were no borrowings outstanding against any of these policies as of March 31, 2021. 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. 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 $56.07 billion as of March 31, 2021 were $8.58 billion, or 18%, greater than our total assets as of September 30, 2020. The increase in assets was primarily due to a $5.43 billion increase in assets segregated pursuant to regulations, primarily due to a significant increase in client cash balances. Bank loans, net increased by $1.68 billion, primarily due to an increase in 76 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis SBL and corporate loans. In addition, available-for-sale securities increased $508 million and cash and cash equivalents increased $461 million. Goodwill and identifiable intangible assets, net increased $268 million due to the acquisitions of NWPS and Financo during the six months ended March 31, 2021. As of March 31, 2021, our total liabilities of $48.43 billion were $8.12 billion, or 20%, 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 March 31, 2021, including a $5.68 billion increase in brokerage client payables, primarily due to an increase in client cash held in our CIP, and a $2.45 billion increase in bank deposits, reflecting higher RJBDP balances held at RJ Bank. 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 March 31, 2021, 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 March 31, 2021. The maintenance of certain risk-based and other regulatory capital levels could influence various capital allocation decisions impacting one or more of our businesses. However, due to the current capital position of RJF and its regulated subsidiaries, we do not anticipate these capital requirements will have a negative impact on our future business activities. See Note 21 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. This additional stimulus bill provided further emergency COVID-19 relief, as well as extended 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 extended 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. also filed an application with the Federal Reserve Bank of Atlanta to retain its membership in the Federal Reserve System. Upon conversion to a state member bank, RJ Bank, N.A. will 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. Privacy and data protection The legislature of the State of Florida recently considered a proposed data privacy law which would have required companies to reveal the data they are gathering, required them to delete that data upon a consumer’s request and made them liable for selling this data when instructed not to. If adopted, this legislation (as well as additional emerging state and international privacy laws) could increase compliance risk, client servicing costs, and potentially result in additional litigation and regulatory fines. Personal data collection associated with the use of artificial intelligence, mobile applications, and remote connectivity solutions, generally increases the amount of personal data collected and processed about consumers and contributes to risks associated with unauthorized data disclosure and access. 77 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Discontinuation of LIBOR The administrator of LIBOR has proposed to extend publication of the most commonly used U.S. dollar LIBOR settings to June 30, 2023 and to cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies have issued guidance strongly encouraging banking organizations to cease using the U.S. dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021. Our enterprise-wide initiative is continuing to assess and implement necessary changes to our contracts, systems, processes, documentation, and models . 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. Economic uncertainty as a result of the COVID-19 pandemic has made it more challenging for us to determine the amount of our allowance for credit losses and has required a greater reliance on judgment in recent periods in determining this amount. 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 16 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for information regarding legal and regulatory matter contingencies as of March 31, 2021. 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 and expected prepayments, among other factors. We employ multiple methodologies in estimating an allowance for credit losses and our approaches differ by type of financial asset and the risk characteristics within each financial asset type. Our estimates are based on ongoing evaluations of the portfolio, the related credit risk characteristics, and the overall economic and environmental conditions affecting the financial assets. Our process for determining the allowance for credit losses includes a complex analysis of several quantitative and qualitative factors, requiring significant management judgment due to matters that are inherently uncertain. This uncertainty can produce volatility in our allowance for credit losses. In addition, the allowance for credit losses could be insufficient to cover actual losses. In such an event, any losses in excess of our allowance would result in a decrease in our net income, as well as a decrease in the level of regulatory capital. See the discussion regarding our methodology in estimating the allowance for credit losses in Note 2 of the 78 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis 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 March 31, 2021 was primarily related to bank loans held by RJ Bank and loans to financial advisors. At March 31, 2021, the amortized cost of all RJ Bank loans was $23.22 billion and the related allowance for credit losses was $345 million, or 1.50% of the held for investment loan portfolio. At March 31, 2021, the amortized cost of loans to financial advisors was $1.02 billion and the related allowance for credit losses was $28 million, which was 2.76% 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. 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. 79 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis 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 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 six months ended March 31, 2021, 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. Six months ended March 31, 2021 Period-end VaR Three months ended March 31, Six months ended March 31, $ in millions High Low March 31, 2021 September 30, 2020 $ in millions 2021 2020 2021 2020 Daily VaR $ 11 $ 3 $ 5 $ 8 Average daily VaR $ 6 $ 1 $ 6 $ 1 Average daily VaR was higher during the current-year period compared with the prior-year period, as a result of the impact of increased volatility from the COVID-19 pandemic on our VaR model. However, toward the end of the current-year quarter, COVID-19 pandemic related scenarios started to fall outside of the VaR model’s twelve-month historical simulation period, resulting in period-end VaR decreasing to $5 million as of March 31, 2021 from $8 million as of September 30, 2020. 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 80 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis 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. 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 $907 36.6% +100 $852 28.3% 0 $664 — -25 $635 (4.4)% 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 March 31, 2021, including contractual principal repayments. This table does not include any estimates of prepayments, which could shorten the average loan lives and cause the actual timing of the loan repayments to differ significantly from those shown in the table. Due in $ in millions One year or less > One year – five years > Five years Total C&I loans $ 233 $ 4,366 $ 3,217 $ 7,816 CRE loans 823 1,395 492 2,710 REIT loans 231 1,129 20 1,380 Tax-exempt loans 1 69 1,153 1,223 Residential mortgage loans — 4 4,997 5,001 SBL and other 4,856 35 — 4,891 Total loans held for investment 6,144 6,998 9,879 23,021 Held for sale loans — 7 196 203 Total loans $ 6,144 $ 7,005 $ 10,075 $ 23,224 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 March 31, 2021. 81 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Interest rate type $ in millions Fixed Adjustable Total C&I loans $ 315 $ 7,268 $ 7,583 CRE loans 90 1,797 1,887 REIT loans — 1,149 1,149 Tax-exempt loans 1,222 — 1,222 Residential mortgage loans 185 4,816 5,001 SBL and other — 35 35 Total loans held for investment 1,812 15,065 16,877 Held for sale loans 8 195 203 Total loans $ 1,820 $ 15,260 $ 17,080 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 March 31, 2021, our RJ Bank available-for-sale securities portfolio had a fair value of $8.16 billion with a weighted-average yield of 1.15% and a weighted-average life of approximately 4 years. See Note 5 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for additional information. Equity price risk We are exposed to equity price risk as a result of our capital markets activities. Our broker-dealer activities are generally client-driven, and we carry equity securities as part of our trading inventory to facilitate such activities, although the amounts are not as significant as our fixed income trading inventory. We attempt to reduce the risk of loss inherent in our inventory of equity securities by monitoring those security positions each day and establishing position limits. Equity securities held in our trading inventory are generally included in VaR. In addition, we have a private equity portfolio, included in “Other investments” on our 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 March 31, 2021 of $140 million, the portion we owned was $105 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 $1.14 billion and $1.05 billion at March 31, 2021 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 has an investment in a Canadian subsidiary, resulting in foreign exchange risk. To mitigate its foreign exchange risk, RJ Bank 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 380 million at March 31, 2021, which was not hedged. Foreign exchange gains/losses related to this investment are primarily reflected in OCI on our Condensed Consolidated 82 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Statements of Income and Comprehensive Income. See Note 17 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. The initial decline in economic activity as a result of the COVID-19 pandemic caused increased credit risk particularly with regard to companies in sectors that were most significantly impacted by the economic disruption, including energy, airlines, entertainment and leisure, restaurants and gaming. The speed and magnitude in which various sectors have recovered since the onset of the pandemic has been continually evolving. Given the stresses on certain of our clients’ liquidity, we enhanced our credit monitoring activities, with an increased focus on monitoring our credit exposures and counterparty credit risk. 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. Although economic conditions have generally improved, we have maintained our increased focus on monitoring our credit exposures and counterparty credit risk. Brokerage activities We are engaged in various trading and brokerage activities in which our counterparties primarily include broker-dealers, banks and other financial institutions. We are exposed to risk that these counterparties may not fulfill their obligations. 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 83 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis 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. Conversely, should the economy recover at a faster pace than initially forecasted, or the negative impact of the significant downtown event be less than originally projected, the timing and magnitude of any decreases in required reserves for credit losses can be uncertain. 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. 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 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. 84 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis 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 March 31, 2021 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 March 31, 2021, including loan and borrower characteristics, such as internal risk ratings, delinquency status, collateral type and the remaining term of the loan adjusted for expected prepayments. In addition, the estimate of credit losses considered the relatively small amount of net charge-offs during the period, the level of nonperforming loans and the impact of the COVID-19 pandemic. 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 continue to assess the impact of both the COVID-19 pandemic and the economic recovery therefrom, as new information becomes available regarding the financial repercussions to our borrowers, the risk ratings for individual loans will be updated and the allowance will be adjusted accordingly. RJ Bank’s allowance for credit losses as a percentage of bank loans held for investment was 1.50%, 1.69% and 1.65% at March 31, 2021, October 1, 2020 (our CECL adoption date) and September 30, 2020, respectively. During the three and six months ended March 31, 2021, we had a benefit for credit losses on our bank loan portfolio of $32 million and $18 million, respectively, compared to a provision for credit losses of $109 million and $107 million for the three and six months ended March 31, 2020, respectively. 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 and Note 8 in the Notes to Condensed Consolidated Financial Statements of this Form 10-Q for detail on the changes in RJ Bank’s allowance for credit losses. The level of charge-off activity is a factor that is considered in evaluating the potential severity of future credit losses. The following table presents net loan (charge-offs)/recoveries and the percentage of net loan (charge-offs)/recoveries to the average outstanding loan balances by loan portfolio segment. Three Months Ended March 31 Six months ended March 31 2021 2020 2021 2020 $ in millions Net loan (charge-off)/recovery amount (1) % of avg. outstanding loans Net loan (charge-off)/recovery amount % of avg. outstanding loans Net loan (charge-off)/recovery amount (1) % of avg. outstanding loans Net loan (charge-off)/recovery amount % of avg. outstanding loans C&I loans $ (2) 0.11 % $ — — % $ (2) 0.05 % $ — — % Total $ (2) 0.04 % $ — — % $ (2) 0.02 % $ — — % (1) Charge-offs for both the three and six months ended March 31, 2021 related to loan sales during the period. 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. March 31, 2021 September 30, 2020 $ in millions Nonperforming loan balance Allowance for credit losses balance Nonperforming loan balance Allowance for credit losses balance C&I loans $ — $ 203 $ 2 $ 200 CRE loans 13 74 14 81 REIT loans — 36 — 36 Tax-exempt loans — 2 — 14 Residential mortgage loans 18 26 14 18 SBL and other — 4 — 5 Total nonperforming loans held for investment $ 31 $ 345 $ 30 $ 354 Total nonperforming loans as a % of RJ Bank total loans 0.13 % 0.14 % 85 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Included in nonperforming residential mortgage loans as of March 31, 2021 were $6 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 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 $9 million and $10 million as of March 31, 2021 and September 30, 2020, respectively, 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 $31 million and $32 million at March 31, 2021 and September 30, 2020, respectively. Total nonperforming assets as a percentage of RJ Bank total assets were 0.09% and 0.10% at March 31, 2021 and September 30, 2020, respectively. Although our nonperforming assets as a percentage of RJ Bank assets remained low as of March 31, 2021, 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, or modification of certain covenant terms, driven or exacerbated by the economic impacts of the COVID-19 pandemic. Based on the amortized costs, approximately $52 million and $5 million of our corporate and residential loans, respectively, were in active forbearance as of March 31, 2021. As certain borrowers exit forbearance we have received requests for loan modifications, including repayment plans. In accordance with the CARES Act and the Consolidated Appropriations Act, 2021, we have elected to not apply TDR classification to any COVID-19 related loan modifications performed between March 1, 2020 and December 31, 2021, to borrowers who were current as of December 31, 2019. As of March 31, 2021, we had residential loans of $31 million for which the borrower had requested a loan modification, where the request had been initiated but not completed or approved. As the delinquency status is not affected for loans that are in active forbearance or for loan modifications that have not yet been approved, the recognition of charge-offs, delinquencies, and nonaccrual status could be delayed for these borrowers who would have otherwise moved into past due or nonaccrual status. Forbearance and modification requests have continued to decline and the majority of the borrowers that have exited forbearance, but have not requested loan modifications, have become current on their principal and interest payments. Loan underwriting policies 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 six months ended March 31, 2021. 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 six months ended March 31, 2021. 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 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. 86 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis The following table presents a summary of delinquent residential mortgage loans, the vast majority of which are first mortgage loans, which are comprised of loans which are two or more payments past due as well as loans in the process of foreclosure. Amounts in the following table do not include residential loans to borrowers who were granted forbearance as a result of the COVID-19 pandemic and whose loans were not considered delinquent prior to the forbearance. Such loans may be considered delinquent after the forbearance period or completion of loss mitigation efforts, depending on their payment status. As a result, the amount of residential loans considered delinquent may increase significantly in the future. 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 March 31, 2021 $ 3 $ 8 $ 11 0.06 % 0.16 % 0.22 % September 30, 2020 $ 3 $ 7 $ 10 0.06 % 0.14 % 0.20 % Our March 31, 2021 percentage continues to compare favorably to the national average for over 30 day delinquencies of 3.12%, 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. March 31, 2021 Loans outstanding as a % of RJ Bank total residential mortgage loans Loans outstanding as a % of RJ Bank total loans CA 25.2% 5.4% FL 16.8% 3.6% TX 8.9% 1.9% NY 7.3% 1.6% CO 4.3% 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 March 31, 2021 and September 30, 2020, these loans totaled $1.82 billion and $1.67 billion, respectively, or approximately 36% 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 March 31, 2021, 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. March 31, 2021 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% Business systems and services 6.8% 3.5% Automotive/transportation 6.4% 3.3% Multi-family 6.0% 3.1% Hospitality 5.7% 2.9% 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. 87 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES Management’s Discussion and Analysis Although we saw deterioration in oil prices for much of fiscal year 2020 due to the pandemic, oil prices returned to pre-pandemic levels during the second quarter of fiscal 2021. In addition, 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, in the event of significant deterioration in oil prices in the future, our borrowers, and our loans to such borrowers, could be negatively impacted. 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 which complies with all applicable laws, regulations, and Centers for Disease Control guidelines. As of March 31, 2021, we had reopened most of our offices in a limited capacity and have been operating under strict public health and safety protocols in such locations. We are also closely monitoring the rollout of the COVID-19 vaccines as well as monitoring the ongoing infection positivity rates, to provide insight to the nature of our plans and their implementation timing. We are working to develop and finalize such plans for a post-pandemic return to a more normal, pre-pandemic type of operating environment that allows us to be efficient, but is also safe for both our associates and clients. Periods of severe market volatility, such as those that arose most notably in fiscal 2020 in response to the onset of the COVID-19 pandemic, can result in a significantly higher level of transactions on specific days and other activity which may present operational challenges from time to time that may result in losses. These losses can result from, but are not limited to, trade errors, failed transaction settlements, late collateral calls to borrowers and counterparties, or interruptions to our system processing. We did not incur any significant losses related to such operational challenges during the six months ended March 31, 2021. 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 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. 88 RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES