Company Quick10K Filing
Quick10K
Raymond James Financial
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$88.55 141 $12,490
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-08-08 Quarter: 2017-08-08
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-04-03 Earnings, Exhibits
8-K 2019-03-20 Regulation FD, Exhibits
8-K 2019-03-18 Officers, Exhibits
8-K 2019-03-11 Earnings, Exhibits
8-K 2019-02-20 Regulation FD, Exhibits
8-K 2019-02-19 Enter Agreement, Exhibits
8-K 2019-01-23 Earnings, Exhibits
8-K 2019-01-23 Earnings, Exhibits
8-K 2018-12-19 Regulation FD, Exhibits
8-K 2018-12-14 Officers, Exhibits
8-K 2018-11-29 Officers, Exhibits
8-K 2018-11-28 Officers, Exhibits
8-K 2018-11-20 Regulation FD, Exhibits
8-K 2018-11-09 Regulation FD, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-10-04 Officers, Exhibits
8-K 2018-09-19 Regulation FD, Exhibits
8-K 2018-09-13 Earnings, Exhibits
8-K 2018-08-28 Regulation FD, Exhibits
8-K 2018-08-22 Regulation FD, Exhibits
8-K 2018-08-22 Regulation FD, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-06-28 Regulation FD, Exhibits
8-K 2018-06-20 Regulation FD, Exhibits
8-K 2018-06-14 Regulation FD, Exhibits
8-K 2018-06-07 Earnings, Exhibits
8-K 2018-05-23 Regulation FD, Exhibits
8-K 2018-05-22 Regulation FD, Other Events, Exhibits
8-K 2018-04-25 Earnings, Exhibits
8-K 2018-04-16 Officers, Exhibits
8-K 2018-03-21 Regulation FD, Exhibits
8-K 2018-03-14 Earnings, Exhibits
8-K 2018-02-25 Officers, Exhibits
8-K 2018-02-22 Shareholder Vote, Regulation FD, Exhibits
8-K 2018-02-21 Regulation FD, Exhibits
8-K 2018-01-24 Earnings, Exhibits
8-K 2018-01-11 Other Events
WRK Westrock Company 9,420
TTD Trade Desk 9,010
CG Carlyle Group 6,530
VIAV Viavi Solutions 2,910
COT Cott 2,010
SIEN Sientra 220
SRTS Sensus Healthcare 105
EMES Emerge Energy Services 51
RVEN Reven Housing REIT 43
MRIN Marin Software 29
RJF 2018-12-31
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Organization and Basis of Presentation
Note 2 - Update of Significant Accounting Policies
Note 3 - Fair Value
Note 4 - Available-For-Sale Securities
Note 5 - Derivative Assets and Derivative Liabilities
Note 6 - Collateralized Agreements and Financings
Note 7 - Bank Loans, Net
Note 8 - Variable Interest Entities
Note 9 - Bank Deposits
Note 10 - Other Borrowings
Note 11 - Income Taxes
Note 12 - Commitments, Contingencies and Guarantees
Note 13 - Accumulated Other Comprehensive Income/(Loss)
Note 14 - Revenues
Note 15 - Interest Income and Interest Expense
Note 16 - Share-Based Compensation
Note 17 - Regulatory Capital Requirements
Note 18 - Earnings per Share
Note 19 - Segment Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex311_20181231-10qrjf.htm
EX-31.2 ex312_20181231-10qrjf.htm
EX-32 ex32_20181231-10qrjf.htm

Raymond James Financial Earnings 2018-12-31

RJF 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 rjf-2018123110q.htm 10-Q Document


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

FORM 10-Q
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
 
Commission File Number: 1-9109
RAYMOND JAMES FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Florida
 
No. 59-1517485
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
880 Carillon Parkway, St. Petersburg, Florida 33716
(Address of principal executive offices)    (Zip Code)
(727) 567-1000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨                               No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

141,037,985 shares of common stock as of February 7, 2019



INDEX
 
 
 
PAGE
PART I
 
 
Item 1.
 
 
 
Condensed Consolidated Statements of Financial Condition as of December 31, 2018 and September 30, 2018 (Unaudited)
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended December 31, 2018 and December 31, 2017 (Unaudited)
 
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended December 31, 2018 and December 31, 2017 (Unaudited)
 
 
Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2018 and December 31, 2017 (Unaudited)
 
 
 
 
 
Note 1 - Organization and basis of presentation
 
 
Note 2 - Update of significant accounting policies
 
 
Note 3 - Fair value
 
 
Note 4 - Available-for-sale securities
 
 
Note 5 - Derivative assets and derivative liabilities
 
 
Note 6 - Collateralized agreements and financings
 
 
Note 7 - Bank loans, net
 
 
Note 8 - Variable interest entities
 
 
Note 9 - Bank deposits
 
 
Note 10 - Other borrowings
 
 
Note 11 - Income taxes
 
 
Note 12 - Commitments, contingencies and guarantees
 
 
Note 13 - Accumulated other comprehensive income/(loss)
 
 
Note 14 - Revenues
 
 
Note 15 - Interest income and interest expense
 
 
Note 16 - Share-based compensation
 
 
Note 17 - Regulatory capital requirements
 
 
Note 18 - Earnings per share
 
 
Note 19 - Segment information
Item 2.
 
Item 3.
 
Item 4.
 
PART II
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
 
Item 4.
 
Mine Safety Disclosures
Item 5.
 
Item 6.
 
 
 


2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
in millions, except share amounts
 
December 31, 2018
 
September 30, 2018
Assets:
 

 

Cash and cash equivalents
 
$
4,322

 
$
3,500

Cash segregated pursuant to regulations
 
2,782

 
2,441

Securities purchased under agreements to resell
 
399

 
373

Securities borrowed
 
140

 
255

Financial instruments, at fair value:
 
 
 
 
Trading instruments (includes $444 and $465 pledged as collateral)
 
691

 
702

Available-for-sale securities (includes $18 and $20 pledged as collateral)
 
2,797

 
2,696

Derivative assets
 
213

 
180

Private equity investments
 
154

 
147

Other investments (includes $25 and $25 pledged as collateral)
 
259

 
202

Brokerage client receivables, net
 
2,863

 
3,343

Receivables from brokers, dealers and clearing organizations
 
249

 
257

Other receivables
 
611

 
583

Bank loans, net
 
19,887

 
19,518

Loans to financial advisors, net
 
925

 
934

Investments in real estate partnerships held by consolidated variable interest entities
 
103

 
107

Property and equipment, net
 
490

 
486

Deferred income taxes, net
 
186

 
203

Goodwill and identifiable intangible assets, net
 
633

 
639

Other assets
 
840

 
847

Total assets
 
$
38,544

 
$
37,413

 
 
 
 
 
Liabilities and equity:
 
 
 
 
Bank deposits
 
$
21,673

 
$
19,942

Securities sold under agreements to repurchase
 
156

 
186

Securities loaned
 
330

 
423

Financial instruments sold but not yet purchased, at fair value:
 
 
 
 
Trading instruments
 
279

 
235

Derivative liabilities
 
232

 
247

Brokerage client payables
 
5,245

 
5,625

Payables to brokers, dealers and clearing organizations
 
131

 
206

Accrued compensation, commissions and benefits
 
799

 
1,189

Other payables
 
726

 
459

Other borrowings
 
1,198

 
899

Senior notes payable
 
1,550

 
1,550

Total liabilities
 
32,319


30,961

Commitments and contingencies (see Note 12)
 


 


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

 

Common stock; $.01 par value; 350,000,000 shares authorized; 157,645,318 and 156,363,615 shares issued as of December 31, 2018 and September 30, 2018, respectively, and 140,616,735 and 145,642,437 shares outstanding as of December 31, 2018 and September 30, 2018, respectively
 
2

 
2

Additional paid-in capital
 
1,871

 
1,808

Retained earnings
 
5,236

 
5,032

Treasury stock, at cost; 17,028,583 and 10,693,026 common shares as of December 31, 2018 and September 30, 2018, respectively
 
(927
)
 
(447
)
Accumulated other comprehensive loss
 
(39
)
 
(27
)
Total equity attributable to Raymond James Financial, Inc.
 
6,143

 
6,368

Noncontrolling interests
 
82

 
84

Total equity
 
6,225

 
6,452

Total liabilities and equity
 
$
38,544

 
$
37,413

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

3


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended December 31,
in millions, except per share amounts
 
2018
 
2017
Revenues:
 
 
 
 
Asset management and related administrative fees
 
$
865

 
$
729

Brokerage revenues:
 
 
 
 
Securities commissions
 
388

 
416

Principal transactions
 
76

 
97

Total brokerage revenues
 
464

 
513

Account and service fees
 
185

 
171

Investment banking
 
137

 
88

Interest income
 
316

 
232

Other
 
37

 
33

Total revenues
 
2,004

 
1,766

Interest expense
 
(73
)
 
(40
)
Net revenues
 
1,931

 
1,726

Non-interest expenses:
 
 

 
 

Compensation, commissions and benefits
 
1,265

 
1,153

Communications and information processing
 
92

 
80

Occupancy and equipment costs
 
51

 
50

Business development
 
43

 
34

Investment sub-advisory fees
 
24

 
22

Professional fees
 
22

 
12

Bank loan loss provision
 
16

 
1

Acquisition and disposition-related expenses
 
15

 
4

Other
 
73

 
59

Total non-interest expenses
 
1,601

 
1,415

Income including noncontrolling interests and before provision for income taxes
 
330

 
311

Provision for income taxes
 
83

 
192

Net income including noncontrolling interests
 
247

 
119

Net loss attributable to noncontrolling interests
 
(2
)
 

Net income attributable to Raymond James Financial, Inc.
 
$
249

 
$
119

 
 
 
 
 
Earnings per common share – basic
 
$
1.73

 
$
0.82

Earnings per common share – diluted
 
$
1.69

 
$
0.80

Weighted-average common shares outstanding – basic
 
144.2

 
144.5

Weighted-average common and common equivalent shares outstanding – diluted
 
147.3

 
148.3

 
 
 
 
 
Net income attributable to Raymond James Financial, Inc.
 
$
249

 
$
119

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

 
 

Net change in unrealized loss on available-for-sale securities
 
22

 
(12
)
Net change in unrealized loss on currency translations, net of the impact of net investment hedges
 
(13
)
 

Net change in unrealized gain on cash flow hedges
 
(17
)
 
7

Total comprehensive income
 
$
241

 
$
114

 











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

4


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
 
 
Three months ended December 31,
$ in millions, except per share amounts
 
2018
 
2017
Common stock, par value $.01 per share:
 
 
 
 
Balance beginning of period
 
$
2

 
$
2

Share issuances
 

  

Balance end of period
 
2

 
2

 
 
 
 
 
Additional paid-in capital:
 
 

 
 

Balance beginning of period
 
1,808

  
1,645

Employee stock purchases
 
8

  
6

Exercise of stock options and vesting of restricted stock units, net of forfeitures
 
16

  
21

Restricted stock, stock option and restricted stock unit expense
 
39

  
33

Balance end of period
 
1,871

 
1,705

 
 
 
 
 
Retained earnings:
 
 

 
 

Balance beginning of period
 
5,032

  
4,340

Net income attributable to Raymond James Financial, Inc.
 
249

  
119

Cash dividends declared (see Note 18)
 
(50
)
 
(39
)
Other
 
5

 

Balance end of period
 
5,236

 
4,420

 
 
 
 
 
Treasury stock:
 
 

 
 

Balance beginning of period
 
(447
)
 
(390
)
Purchases/surrenders
 
(464
)
 
(7
)
Exercise of stock options and vesting of restricted stock units, net of forfeitures
 
(16
)
 
(13
)
Balance end of period
 
(927
)
 
(410
)
 
 
 
 
 
Accumulated other comprehensive loss:
 
 

 
 

Balance beginning of period
 
(27
)
 
(15
)
Net change in unrealized loss on available-for-sale securities, net of tax
 
22

 
(12
)
Net change in unrealized loss on currency translations, net of the impact of net investment hedges, net of tax
 
(13
)
 

Net change in unrealized gain on cash flow hedges, net of tax
 
(17
)
 
7

Other
 
(4
)
 

Balance end of period
 
(39
)
 
(20
)
Total equity attributable to Raymond James Financial, Inc.
 
$
6,143


$
5,697

 
 
 
 
 
Noncontrolling interests:
 
 

 
 

Balance beginning of period
 
$
84

 
$
112

Net loss attributable to noncontrolling interests
 
(2
)
 

Capital contributions
 
2

 

Distributions
 
(2
)
 
(6
)
Balance end of period
 
82

 
106

Total equity
 
$
6,225

 
$
5,803














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

5


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

 
 
Three months ended December 31,
$ in millions
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income attributable to Raymond James Financial, Inc.
 
$
249

 
$
119

Net loss attributable to noncontrolling interests
 
(2
)
 

Net income including noncontrolling interests
 
247

 
119

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

 
 

Depreciation and amortization
 
26

 
23

Deferred income taxes
 
6

 
121

Premium and discount amortization on available-for-sale securities and loss on other investments
 
3

 

Provisions for loan losses, legal and regulatory proceedings and bad debts
 
32

 
9

Share-based compensation expense
 
37

 
38

Unrealized (gain)/loss on company-owned life insurance policies, net of expenses
 
58

 
(17
)
Other
 
11

 
6

Net change in:
 
 

 
 

Securities purchased under agreements to resell, net of securities sold under agreements to repurchase
 
(60
)
 
104

Securities borrowed, net of securities loaned
 
22

 
(140
)
Loans provided to financial advisors, net of repayments
 

 
(22
)
Brokerage client receivables and other accounts receivable, net
 
446

 
124

Trading instruments, net
 
62

 
(47
)
Derivative instruments, net
 
(60
)
 
30

Other assets
 
(22
)
 
(19
)
Brokerage client payables and other accounts payable
 
(242
)
 
467

Accrued compensation, commissions and benefits
 
(389
)
 
(266
)
Proceeds from sales of securitizations and loans held for sale, net of purchases and originations of loans held for sale
 
48

 
(108
)
Net cash provided by operating activities
 
225

 
422

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Additions to property and equipment
 
(27
)
 
(36
)
Increase in bank loans, net
 
(461
)
 
(645
)
Proceeds from sales of loans held for investment
 
129

 
22

Purchases of available-for-sale securities
 
(291
)
 
(340
)
Available-for-sale securities maturations, repayments and redemptions
 
151

 
114

Business acquisition, net of cash acquired
 

 
(159
)
Other investing activities, net
 
(34
)
 
(30
)
Net cash used in investing activities
 
(533
)
 
(1,074
)
 
 
 
 
 
 
 
 
 
 
(continued on next page)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited).

6


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued from previous page)
 
 
Three months ended December 31,
$ in millions
 
2018
 
2017
Cash flows from financing activities:
 
 
 
 
Proceeds from borrowings on the RJF Credit Facility
 
300

 
300

Repayments of short-term borrowings, net
 

 
(280
)
Repayments of Federal Home Loan Bank advances and other borrowed funds
 
(1
)
 
(1
)
Exercise of stock options and employee stock purchases
 
23

 
26

Increase in bank deposits
 
1,731

 
993

Purchases of treasury stock
 
(480
)
 
(20
)
Dividends on common stock
 
(47
)
 
(32
)
Distributions to noncontrolling interests, net
 

 
(6
)
Net cash provided by financing activities
 
1,526

 
980

 
 
 
 
 
Currency adjustment:
 
 

 
 

Effect of exchange rate changes on cash
 
(55
)
 
(7
)
Net increase in cash, cash equivalents, and cash segregated pursuant to regulations
 
1,163

 
321

Cash, cash equivalents, and cash segregated pursuant to regulations at beginning of year
 
5,941

 
7,146

Cash, cash equivalents, and cash segregated pursuant to regulations at end of period
 
$
7,104

 
$
7,467

 
 
 
 
 
Cash and cash equivalents
 
$
4,322

 
$
3,898

Cash segregated pursuant to regulations
 
2,782

 
3,569

Total cash, cash equivalents, and cash segregated pursuant to regulations at end of period
 
$
7,104

 
$
7,467

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest
 
$
62

 
$
28

Cash paid for income taxes, net
 
$
10

 
$
9






























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

7


RAYMOND JAMES FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2018

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Organization

Raymond James Financial, Inc. (“RJF,” the “firm” or the “Company”) is a financial holding company which, together with its subsidiaries, is engaged in various financial services activities, including providing investment management services for retail and institutional clients, the underwriting, distribution, trading and brokerage of equity and debt securities and the sale of mutual funds and other investment products.  The firm also provides corporate and retail banking services, and trust services.  For further information about our business segments, see Note 19 of this Form 10-Q. As used herein, the terms “our,” “we,” or “us” refer to RJF and/or one or more of its subsidiaries.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of RJF and its consolidated subsidiaries that are generally controlled through a majority voting interest. We consolidate all of our 100% owned subsidiaries. In addition, we consolidate any variable interest entity (“VIE”) in which we are the primary beneficiary. Additional information on these VIEs is provided in Note 2 of our Annual Report on Form 10-K (the “2018 Form 10-K”) for the year ended September 30, 2018, as filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”) and in Note 8 of this Form 10-Q. When we do not have a controlling interest in an entity, but we exert significant influence over the entity, we apply the equity method of accounting. All material intercompany balances and transactions have been eliminated in consolidation.

Accounting estimates and assumptions

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

The nature of our business is such that the results of any interim period are not necessarily indicative of results for a full year. These unaudited condensed consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in our 2018 Form 10-K. To prepare condensed consolidated financial statements in conformity with GAAP, we must make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates and could have a material impact on the condensed consolidated financial statements.

Reclassifications

Effective with the firm’s first fiscal quarter ended December 31, 2018, we have reclassified certain revenues among income statement line items and renamed certain line items. These reclassifications do not affect the Company’s reported total revenues or the total revenues in any of our segments for any of the previously reported periods. Prior period results have been conformed to the current presentation.

In addition to the reclassification discussed above, certain other prior period amounts have been reclassified to conform to the current period’s presentation.



8

Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 2 – UPDATE OF SIGNIFICANT ACCOUNTING POLICIES

A summary of our significant accounting policies is included in Note 2 of our 2018 Form 10-K. During the three months ended December 31, 2018, there were no significant changes to our significant accounting policies other than the accounting policies adopted or modified as part of our implementation of new or amended accounting guidance, as noted below.

Loans to financial advisors, net

We offer loans to financial advisors and certain other key revenue producers, primarily for recruiting, transitional cost assistance, and retention purposes. We present the outstanding balance of loans to financial advisors on our Condensed Consolidated Statements of Financial Condition, net of the allowance for doubtful accounts. Of the gross balance outstanding, the portion associated with financial advisors who are no longer affiliated with us was $22 million and $20 million at December 31, 2018 and September 30, 2018, respectively. Our allowance for doubtful accounts was $10 million and $8 million at December 31, 2018 and September 30, 2018, respectively.

Recent accounting developments

Accounting guidance recently adopted

Revenue recognition - In May 2014, the FASB issued new guidance regarding revenue recognition (ASU 2014-09). The new guidance is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also provides guidance on accounting for certain contract costs and requires additional disclosures. We adopted this guidance as of October 1, 2018, under a modified retrospective approach for all open contracts as of the date of initial adoption. As such, there was no impact on our prior period results.

The primary impact of this guidance was the change in the presentation of certain costs from a net presentation within revenues to a gross presentation, particularly related to merger & acquisitions advisory and underwriting transactions and certain administrative costs related to our multi-bank sweep program.  These presentation changes had no impact on our net earnings.  There were no material changes in timing of revenues recognized associated with the adoption. As a result, adoption of this guidance had no material impact on our net results of operations or financial position. See Note 14 for further information.

Financial instruments - In January 2016, the FASB issued new guidance related to the accounting for financial instruments (ASU 2016-01). Among its provisions, this new guidance generally requires equity investments to be measured at fair value with changes in fair value recognized in net income, subject to certain exceptions, and amends certain disclosure requirements associated with the fair value of financial instruments. We adopted this guidance as of October 1, 2018, under a modified retrospective approach. As a result, on a prospective basis beginning as of the date of adoption, we record changes in the fair value of our investments in equity securities that were previously classified as available-for-sale in net income. Previously, such unrealized gains/(losses) were reflected in other comprehensive income/(loss) (“OCI”). The impact of adopting the new guidance resulted in a reclassification from accumulated other comprehensive income/(loss) (“AOCI”) to retained earnings of an accumulated gain of approximately $4 million at October 1, 2018. See Note 4 for further information.

Statement of Cash Flows (classification of certain cash receipts and cash payments) - In August 2016, the FASB issued amended guidance related to the Statement of Cash Flows (ASU 2016-15). The amended guidance provides guidance on disclosure and classification of certain items within the statements of cash flows. We adopted this guidance on October 1, 2018, under a retrospective approach. The adoption did not have a material impact on our consolidated statements of cash flows and did not have an impact on our financial position or results of operations.

Statement of Cash Flows (restricted cash) - In November 2016, the FASB issued new guidance related to the classification and presentation of changes in restricted cash on the statement of cash flows (ASU 2016-18). The guidance requires an entity to include restricted cash and cash equivalents in its total of cash and cash equivalents on its statement of cash flows and to present a reconciliation of the beginning-of-period and end-of-period total of such amounts on the statement of cash flows. We adopted this guidance on October 1, 2018, under a retrospective approach. Upon adoption, we recorded a decrease of $96 million in net cash provided by operating activities for the three months ended December 31, 2017 related to reclassifying changes in cash segregated pursuant to regulations from operating activities to the cash and cash equivalents balance in the Condensed Consolidated Statements of Cash Flows. The total of cash segregated pursuant to regulations and cash and cash equivalents is included in a separate table in the Condensed Consolidated Statements of Cash Flows. The adoption did not have an impact on our financial position or results of operations.


9

Notes to Condensed Consolidated Financial Statements (Unaudited)





Definition of a business - In January 2017, the FASB issued amended guidance related to the definition of a business (ASU 2017-01). This amended guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We adopted this guidance on October 1, 2018, on a prospective basis. The impact of the adoption of this amended guidance is dependent upon acquisition and disposal activities subsequent to the date of adoption. The adoption did not have any impact on our financial position or results of operations.

Share-based payment awards (modifications) - In May 2017, the FASB issued amended guidance that clarifies when changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting (ASU 2017-09). The amended guidance states an entity should account for the effects of a modification unless certain criteria are met which include that the modified award has the same fair value, vesting conditions and classification as the original award. We adopted the guidance on October 1, 2018, on a prospective basis. We generally do not modify our share-based payments awards. The adoption did not have an impact on our financial position or results of operations.

Share-based payment awards (nonemployee) - In June 2018, the FASB issued amended guidance that aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions (ASU 2018-07). The amended guidance states an entity should measure the fair value of the award by estimating the fair value of the equity instruments to be issued and, for equity-classified awards, the fair value should be measured on the grant date. The amended guidance also clarifies that nonemployee awards that contain a performance condition are to be measured based on the outcome that is probable and that entities may elect, on an award-by-award basis, to use the expected term or contractual term to measure the award. We early-adopted this standard on October 1, 2018, using a modified retrospective approach. The adoption did not have a significant impact on our financial position or results of operations.

Accounting guidance not yet adopted as of December 31, 2018

Lease accounting - In February 2016, the FASB issued new guidance related to the accounting for leases (ASU 2016-02). The new guidance requires the recognition of assets and liabilities on the balance sheet related to the rights and obligations created by lease agreements with terms greater than twelve months, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement and presentation of expenses and cash flows arising from a lease will primarily depend upon its classification as a finance or operating lease. The new guidance requires new disclosures to help financial statement users better understand the amount, timing and cash flows arising from leases. This new guidance, including subsequent amendments, is first effective for our fiscal year beginning on October 1, 2019. Although permitted, we do not plan to early adopt. Upon adoption, we will use a modified retrospective approach, with a cumulative effect adjustment to opening retained earnings. Our implementation efforts include reviewing existing leases and service contracts, which may include embedded leases. We are in the process of identifying changes to our business processes, systems and controls to support adoption of the new guidance. This new guidance will impact our financial position and results of operations. We are evaluating the magnitude of such impact.

Credit losses - In June 2016, the FASB issued new guidance related to the measurement of credit losses on financial instruments (ASU 2016-13). The amended guidance involves several aspects of the accounting for credit losses related to certain financial instruments including assets measured at amortized cost, available-for-sale debt securities and certain off-balance sheet commitments. The new guidance broadens the information that an entity must consider in developing its estimated credit losses expected to occur over the remaining life of assets measured either collectively or individually to include historical experience, current conditions and reasonable and supportable forecasts, replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses (“CECL”) model.  The new guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This new guidance is first effective for our fiscal year beginning October 1, 2020 and will be adopted under a modified retrospective approach. Early adoption is permitted although not prior to our fiscal year beginning October 1, 2019. We have continued with our implementation and evaluation efforts, which include a cross-functional team to assess the required changes to our credit loss estimation methodologies and systems, as well as the determination of additional data and resources required to comply with the new guidance. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations, which will depend on, among other things, the current and expected macroeconomic conditions and the nature and characteristics of financial assets held by us on the date of adoption.

Goodwill - In January 2017, the FASB issued amended guidance to simplify the subsequent measurement of goodwill, eliminating “Step 2” from the goodwill impairment test (ASU 2017-04). In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this amended guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and subsequently recognize an impairment charge for the amount by which the carrying amount exceeds

10

Notes to Condensed Consolidated Financial Statements (Unaudited)





the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is first effective for our fiscal year beginning October 1, 2019 and will be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We early-adopted this guidance on January 1, 2019, our goodwill impairment test date.

Callable debt securities - In March 2017, the FASB issued new guidance that requires certain premiums on callable debt securities to be amortized to the earliest call date instead of the contractual life of the security (ASU 2017-08). Discounts on callable debt securities will continue to be amortized to the contractual maturity date. This guidance is first effective for our fiscal year beginning on October 1, 2019 and will be adopted using a modified retrospective approach. Although permitted, we do not plan to early adopt. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.

Internal use software (cloud computing) - In August 2018, the FASB issued guidance on the accounting for implementation costs incurred by customers in cloud computing arrangements (ASU 2018-15). This guidance requires implementation costs incurred by customers in cloud computing arrangements to be deferred over the non-cancellable term of the cloud computing arrangements plus any optional renewal periods (1) that are reasonably certain to be exercised by the customer or (2) for which exercise of the renewal option is controlled by the cloud service provider. This amended guidance is first effective for our fiscal year beginning on October 1, 2020 with early adoption permitted. The guidance may be adopted either using the prospective or retrospective approach. We are currently evaluating the impact of this new guidance on our financial position and results of operations.

Derivatives and hedging (interest rate) - In October 2018, the FASB issued guidance amending Derivatives and Hedging (Topic 815) to add the overnight index swap (OIS rate) rate based on the Secured Overnight Financing Rate (SOFR) to the list of US benchmark interest rates that are eligible to be hedged (ASU 2018-16). This guidance is first effective for our fiscal year beginning on October 1, 2019. Early adoption is permitted. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.

Consolidation (decision making fees) - In October 2018, the FASB issued guidance on how all entities evaluate decision-making fees under the variable interest entity guidance (ASU 2018-17). Under the new guidance, to determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportionate basis, rather than in their entirety. This guidance is first effective for our fiscal year beginning on October 1, 2020. Early adoption is permitted. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations.



11

Notes to Condensed Consolidated Financial Statements (Unaudited)





NOTE 3 – FAIR VALUE

Our “Financial instruments owned” and “Financial instruments sold but not yet purchased” on our Condensed Consolidated Statements of Financial Condition are recorded at fair value under GAAP. For further information about such instruments and our significant accounting policies related to fair value, see Note 2 and Note 4 of our 2018 Form 10-K. The following tables present assets and liabilities measured at fair value on a recurring and nonrecurring basis. Netting adjustments represent the impact of counterparty and collateral netting on our derivative balances included on our Condensed Consolidated Statements of Financial Condition. See Note 5 for additional information. Bank loans held for sale measured at fair value on a nonrecurring basis are recorded at a fair value lower than cost.
$ in millions
 
Level 1
 
Level 2
 
Level 3
 
Netting
adjustments
 
Balance as of
December 31,
2018
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$

 
$
163

 
$

 
$

 
$
163

Corporate obligations
 
10

 
76

 

 

 
86

Government and agency obligations
 
11

 
78

 

 

 
89

Agency mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”)
 
2

 
226

 

 

 
228

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

 
101

 

 

 
101

Total debt securities
 
23


644

 

 

 
667

Equity securities
 
14

 

 

 

 
14

Brokered certificates of deposit
 

 
5

 

 

 
5

Other
 

 
2

 
3

 

 
5

Total trading instruments
 
37

 
651

 
3

 

 
691

Available-for-sale securities
 

 
2,797

 

 

 
2,797

Derivative assets
 
 
 
 
 
 
 
 
 
 
Interest rate contracts - Matched book
 

 
188

 

 

 
188

Interest rate contracts - Other
 

 
64

 

 
(39
)
 
25

Total derivative assets
 

 
252

 

 
(39
)
 
213

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

 

 
59

 

 
59

Other investments
 
190

 
2

 
67

 

 
259

Subtotal
 
227

 
3,702

 
129

 
(39
)
 
4,019

Private equity investments - measured at NAV
 
 
 
 
 
 
 
 
 
95

Total assets at fair value on a recurring basis
 
$
227


$
3,702


$
129


$
(39
)

$
4,114

Assets at fair value on a nonrecurring basis:
 
 
 
 

 
 

 
 

 
 

Bank loans, net - Impaired loans
 
$

 
$
8

 
$
37

 
$

 
$
45

Bank loans, net - Loans held for sale
 

 
49

 

 

 
49

Total assets at fair value on a nonrecurring basis
 
$

 
$
57

 
$
37

 
$

 
$
94

 
 
 
 
 
 
 
 
 
 
 
Liabilities at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments sold but not yet purchased
 
 
 
 
 
 
 
 
 
 
Corporate obligations
 
$
2

 
$
31

 
$

 
$

 
$
33

Government obligations
 
235

 

 

 

 
235

Agency MBS and CMOs
 
3

 

 

 

 
3

Total debt securities
 
240

 
31

 

 

 
271

Equity securities
 
4

 

 

 

 
4

Other
 

 

 
4

 

 
4

Total trading instruments sold but not yet purchased
 
244

 
31

 
4

 

 
279

Derivative liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate contracts - Matched book
 

 
188

 

 

 
188

Interest rate contracts - Other
 

 
85

 

 
(54
)
 
31

Foreign exchange contracts
 

 
2

 

 

 
2

Deutsche Bank restricted stock unit (“DBRSU”) obligation (equity)
 

 
11

 

 

 
11

Total derivative liabilities
 

 
286

 

 
(54
)
 
232

Total liabilities at fair value on a recurring basis
 
$
244

 
$
317

 
$
4

 
$
(54
)
 
$
511


12

Notes to Condensed Consolidated Financial Statements (Unaudited)





$ in millions
 
Level 1
 
Level 2
 
Level 3
 
Netting
adjustments
 
Balance as of
September 30,
2018
Assets at fair value on a recurring basis:
 
 
 
 
 
 
 
 
 
 
Trading instruments
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$
1

 
$
247

 
$

 
$

 
$
248

Corporate obligations
 
10

 
100

 

 

 
110

Government and agency obligations
 
19

 
72

 

 

 
91

Agency MBS and CMOs
 
3

 
124

 

 

 
127

Non-agency CMOs and ABS
 

 
69

 

 

 
69

Total debt securities
 
33

 
612

 

 

 
645

Equity securities
 
15

 

 

 

 
15

Brokered certificates of deposit
 

 
39

 

 

 
39

Other
 

 
2

 
1

 

 
3

Total trading instruments
 
48

 
653

 
1

 

 
702

Available-for-sale securities
 
 

 
 

 
 

 
 

 
 

Agency MBS and CMOs
 

 
2,628

 

 

 
2,628

Other securities
 
1

 

 

 

 
1

Auction rate securities (“ARS”) preferred
 

 

 
67

 

 
67

Total available-for-sale securities
 
1

 
2,628

 
67

 

 
2,696

Derivative assets
 
 
 
 
 
 
 
 
 
 
Interest rate contracts - Matched book
 

 
160

 

  

 
160

Interest rate contracts - Other
 

 
74

 

 
(55
)
 
19

Foreign exchange contracts
 

 
1

 

 

 
1

Total derivative assets
 


235




(55
)

180

Private equity investments - not measured at NAV
 

 

 
56

 

 
56

Other investments
 
201

 
1

 

 

 
202

Subtotal
 
250

 
3,517

 
124

 
(55
)
 
3,836

Private equity investments measured at NAV
 
 
 
 
 
 
 
 
 
91

Total assets at fair value on a recurring basis
 
$
250

 
$
3,517

 
$
124

 
$
(55
)
 
$
3,927

Assets at fair value on a nonrecurring basis:
 
 
 
 

 
 

 
 

 
 

Bank loans, net - Impaired loans
 
$

 
$
10

 
$
18

 
$

 
$
28

Bank loans, net - Loans held for sale
 

 
41

 

 

 
41

Total assets at fair value on a nonrecurring basis
 
$

 
$
51

 
$
18

 
$

 
$
69

 
 
 
 
 
 
 
 
 
 
 
Liabilities at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
 
Trading instruments sold but not yet purchased
 
 
 
 
 
 
 
 
 
 
Municipal and provincial obligations
 
$

 
$
1

 
$

 
$

 
$
1

Corporate obligations
 
2

 
25

 

 

 
27

Government obligations
 
194

 

 

 

 
194

Non-agency MBS and CMOs
 

 
1

 

 

 
1

Total debt securities
 
196

 
27

 

 

 
223

Equity securities
 
5

 

 

 

 
5

Other
 

 

 
7

 

 
7

Total trading instruments sold but not yet purchased
 
201

 
27

 
7

 

 
235

Derivative liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate contracts - Matched book
 

 
160

 

 

 
160

Interest rate contracts - Other
 

 
114

 

 
(47
)
 
67

Foreign exchange contracts
 

 
4

 

 

 
4

DBRSU obligation (equity)
 

 
16

 

 

 
16

Total derivative liabilities
 

 
294

 

 
(47
)
 
247

Total liabilities at fair value on a recurring basis
 
$
201

 
$
321

 
$
7

 
$
(47
)
 
$
482



13

Notes to Condensed Consolidated Financial Statements (Unaudited)





Level 3 recurring fair value measurements

The following tables present the changes in fair value for Level 3 assets and liabilities measured at fair value on a recurring basis. The realized and unrealized gains and losses in the tables may include changes in fair value that were attributable to both observable and unobservable inputs. In the following tables, gains/(losses) on trading instruments are reported in “Net trading profit,” gains/(losses) on private equity and other investments are reported in “Other” revenues, and gains/(losses) on available-for-sale securities are reported in either “Other” revenues (when included in earnings) or “Other comprehensive income” in our Condensed Consolidated Statements of Income and Comprehensive Income.
Three months ended December 31, 2018
Level 3 instruments at fair value
 
 
Financial assets
 
Financial
liabilities
 
 
Trading instruments
 
Private equity and other investments
 
Trading instruments
$ in millions
 
Other
 
Private equity
investments
 
Other
investments (1)
 
Other
Fair value beginning of period
 
$
1

 
$
56

 
$
67

 
$
(7
)
Total gains/(losses) for the period:
 
 

 
 

 
 

 
 

Included in earnings
 
1

 

 

 
2

Purchases and contributions
 
38

 
3

 

 
5

Sales
 
(37
)
 

 

 
(4
)
Transfers:
 
 

 
 

 
 

 
 

Into Level 3
 

 

 

 

Out of Level 3
 

 

 

 

Fair value end of period
 
$
3

 
$
59

 
$
67

 
$
(4
)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period
 
$
1

 
$

 
$

 
$


(1)
Beginning of period balance includes $67 million of preferred ARS, which were reclassified from available-for-sale securities in connection with adoption of ASU 2016-01. See Note 2 for additional information.
Three months ended December 31, 2017
Level 3 instruments at fair value
 
 
Financial assets
 
Financial
liabilities
 
 
Trading instruments
 
Available-for-sale securities
 
Private equity and other investments
 
Trading instruments
$ in millions
 
Other
 
ARS -
preferred
 
Private equity
investments
 
Other
Fair value beginning of period
 
$
6

 
$
106

 
$
89

 
$

Total gains/(losses) for the period:
 
 
 
 
 
 

 
 

Included in earnings
 
(1
)
 

 

 
(1
)
Included in other comprehensive income
 

 
1

 

 

Purchases and contributions
 
20

 

 

 

Sales
 
(22
)
 

 

 

Transfers:
 
 
 
 
 
 
 
 
Into Level 3
 

 

 

 

Out of Level 3
 

 

 

 

Fair value end of period
 
$
3

 
$
107

 
$
89

 
$
(1
)
Unrealized gains/(losses) for the period included in earnings for instruments held at the end of the reporting period
 
$

 
$

 
$

 
$
(1
)
Unrealized gains/(losses) for the period included in other comprehensive income for instruments held at the end of the reporting period
 
$

 
$
1

 
$

 
$


As of December 31, 2018, 11% of our assets and 2% of our liabilities were measured at fair value on a recurring basis.  In comparison as of September 30, 2018, 10% of our assets and 2% of our liabilities were measured at fair value on a recurring basis. Instruments measured at fair value on a recurring basis categorized as Level 3 represented 3% of our assets measured at fair value as of both December 31, 2018 and September 30, 2018.

14

Notes to Condensed Consolidated Financial Statements (Unaudited)





Quantitative information about level 3 fair value measurements

The following tables present the valuation techniques and significant unobservable inputs used in the valuation of a significant majority of our financial instruments classified as level 3. These inputs represent those that a market participant would take into account when pricing these instruments. Weighted averages are calculated by weighting each input by the relative fair values of the related financial instrument.
Level 3 financial instrument
$ in millions
 
Fair value at December 31, 2018
 
Valuation technique(s)
 
Unobservable input
 
Range
(weighted-average)
Recurring measurements
 
 
 
 
 
 
 
 
Other investments - ARS preferred
 
$
67

 
Discounted cash flow
 
Average discount rate
 
6.14% - 7.76% (6.86%)

 
 
 

 
 
 
Average interest rates applicable to future interest income on the securities (1)
 
3.54% - 4.71% (3.83%)

 
 
 

 
 
 
Prepayment year (2)
 
2019 - 2021 (2021)

Private equity investments (not measured at NAV)
 
$
46

 
Income approach - discounted cash flow
 
Discount rate
 
25
%
 
 
 
 
 
 
Terminal EBITDA multiple
 
10.0x

 
 
 
 
 
 
Terminal year
 
2022 - 2042 (2023)

 
 
$
13

 
Transaction price or other investment-specific events (3)
 
Not meaningful (3)
 
Not meaningful (3)

Nonrecurring measurements
 
 
 
 
 
 
 
 

Bank loans: impaired loans - residential
 
$
16

 
Discounted cash flow
 
Prepayment rate
 
7 yrs. - 12 yrs. (10.5 yrs.)

Bank loans: impaired loans - corporate
 
$
21

 
Collateral or discounted cash flow value (4)
 
Not meaningful (4)
 
Not meaningful (4)

Level 3 financial instrument
$ in millions
 
Fair value at September 30, 2018
 
Valuation technique(s)
 
Unobservable input
 
Range (weighted-average)
Recurring measurements
 
 
 
 
 
 
 
 
ARS preferred
 
$
67

 
Discounted cash flow
 
Average discount rate
 
6.50% - 7.85% (7.13%)

 
 
 

 
 
 
Average interest rates applicable to future interest income on the securities (1)
 
4.13% - 5.51% (4.47%)

 
 
 

 
 
 
Prepayment year (2)
 
2018 - 2021 (2021)

Private equity investments
(not measured at NAV)
 
$
43

 
Income approach - discounted cash flow
 
Discount rate
 
25
%
 
 
 
 
 
 
Terminal EBITDA multiple
 
10.0x

 
 
 
 
 
 
Terminal year
 
2022 - 2042 (2023)

 
 
$
13

 
Transaction price or other investment-specific events (3)
 
Not meaningful (3)
 
Not meaningful (3)

Nonrecurring measurements
 
 

 
 
 
 
 
 

Bank loans: impaired loans - residential
 
$
17

 
Discounted cash flow
 
Prepayment rate
 
7 yrs. - 12 yrs. (10.5 yrs.)

Bank loans: impaired loans - corporate
 
$
2

 
Collateral or discounted cash flow value (4)
 
Not meaningful (4)
 
Not meaningful (4)


(1)
Interest rates are projected based upon a forward interest rate path, plus a spread over such projected base rate that is applicable to each future period for each security within this portfolio segment. The interest rates presented represent the average interest rate over all projected periods for securities within the portfolio segment.

(2)
Assumed calendar year of at least a partial redemption of the outstanding security by the issuer.

(3)
Certain investments are valued initially at transaction price and updated as other investment-specific events take place which indicate that a change in the carrying values of these investments is appropriate. Other investment-specific events include such events as our periodic review, significant transactions occur, new developments become known, or we receive information from a fund manager which allows us to update our proportionate share of net assets.

(4)
The valuation techniques used for the impaired corporate loan portfolio are appraisals or collateral value less selling costs for the collateral dependent loans and discounted cash flows for impaired loans that are not collateral dependent.

15

Notes to Condensed Consolidated Financial Statements (Unaudited)





Qualitative disclosure about unobservable inputs

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

Other investments - ARS preferred

The future interest rate and prepayment assumptions impacting the valuation of the auction rate securities are directly related. As short-term interest rates rise, the penalty interest rates, which are embedded in most of these securities in the event auctions fail to set the security’s interest rate, also increase. As penalty interest rates rise, we estimate that issuers of the securities will have the economic incentive to refinance (and thus prepay) the securities. As such, increases in the interest rate, which would generally result in an earlier prepayment assumption, would have increased the fair value of the security. Increases in the discount rate would have resulted in a lower fair value of the securities.

Private equity investments

The significant unobservable inputs used in the fair value measurement of private equity investments generally relate to the financial performance of the investment entity and the market’s required return on investments from entities in industries in which we hold investments. Increases in the discount rate and/or a later terminal year would have resulted in a lower fair value measurement. Increases in the terminal EBITDA multiple would have resulted in a higher fair value measurement.

Investments in private equity measured at net asset value per share

As more fully described in Note 2 of our 2018 Form 10-K, as a practical expedient, we utilize NAV or its equivalent to determine the recorded value of a portion of our private equity investments portfolio. We utilize NAV when the fund investment does not have a readily determinable fair value and the NAV of the fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the investments at fair value.

Our private equity portfolio as of December 31, 2018 included various direct investments, as well as investments in third-party private equity funds and various private equity funds which we sponsor. The portfolio is primarily invested in a broad range of industries including leveraged buyouts, growth capital, distressed capital, venture capital and mezzanine capital. Due to the closed-end nature of certain of our fund investments, such investments cannot be redeemed directly with the funds. Our investment is monetized by distributions received through the liquidation of the underlying assets of those funds, the timing of which is uncertain.

The following table presents the recorded value and unfunded commitments related to our private equity investments portfolio.
$ in millions
 
Recorded value
 
Unfunded commitment
December 31, 2018
 
 
 
 
Private equity investments measured at NAV
 
$
95

 
$
18

Private equity investments not measured at NAV
 
59

 
 
Total private equity investments 
 
$
154

 
 
 
 
 
 
 
September 30, 2018
 
 
 
 
Private equity investments measured at NAV
 
$
91

 
$
18

Private equity investments not measured at NAV
 
56

 
 
Total private equity investments
 
$
147

 
 

Of the total private equity investments, the portions we owned were $108 million and $103 million as of December 31, 2018 and September 30, 2018, respectively. The portions of the private equity investments we did not own were $46 million and $44 million as of December 31, 2018 and September 30, 2018, respectively, and were included as a component of noncontrolling interests on our Condensed Consolidated Statements of Financial Condition.

Many of these fund investments meet the definition of prohibited covered funds as defined by the Volcker Rule enacted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). We have received approval from the Board of Governors of the Federal Reserve System (the “Fed”) to continue to hold the majority of our covered fund investments until July 2022. However, our current focus is on the divestiture of this portfolio.

16

Notes to Condensed Consolidated Financial Statements (Unaudited)





Financial instruments not measured at fair value

The following table presents the estimated fair value and fair value hierarchy of financial assets and liabilities that are not recorded at fair value on the Condensed Consolidated Statements of Financial Condition. This table excludes financial instruments that are carried at amounts which approximate fair value. Refer to Note 4 of our 2018 Form 10-K for discussion of the fair value hierarchy classification of our financial instruments that are not recorded at fair value.

Effective October 1, 2018, we adopted new accounting guidance (ASU 2016-01), which requires the fair value of financial instruments not carried at fair value on our statement of financial condition to be estimated utilizing an exit price and eliminates certain disclosure requirements related to these instruments, including exempting certain financial instruments from disclosure (e.g., demand deposits). Prior periods have not been updated to reflect this new accounting guidance.
$ in millions
 
Level 1
 
Level 2
 
Level 3
 
Total estimated fair value
 
Carrying amount
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Financial assets: