Quarterly Analyst Conference Call – Text Summary

Highlights of Raymond James Financial, Inc. Analyst Conference Call, October 22, 2009

Conference Leader: Tom James, Chairman & CEO

• I would like to welcome everyone to the analyst call for the 4^th and final quarter of the 2009 Fiscal Year. The past year has not been the most pleasant year in the history of the business but as the firm comes out of this we often forget how painful parts of it can be. Obviously, the first half of the fiscal year was a very painful period with uncertainty about what might happen the next day, whether credit lines might be available, payment systems might fail, or something else might become illiquid. The fact is that Raymond James Financial survived this in pretty good condition. As a matter of fact, Raymond James has strengthened its platform considerably for launching into 2010 and beyond. That’s the most important part of the message I have tried to convey in my comments in the press release.
• I am not only encouraged by the fact that the firm survived this trauma with very little damage, but stress that this taught a whole new generation of people at the firm, and in the industry, what a downside is not only in the market but in terms of things that are taken for granted such as the stability of the system, the predominance of the U.S., etc. Speaking as a CEO with 40 years of tenure, not very many of the firms’ associates have experienced this kind of event and this will make them better managers and associates going forward because they have learned to plan to servive these kinds of incidents.
• While revenues were down for the quarterly comparison on a net basis by 4%, they were actually up 7% from the preceding quarter. Some momentum is beginning to be seen developing in the Securities and Fees line of the financials which were up 9% and actually up more than that in the PCG segment.
• The Investment Banking activity was flat with last year, which was a good year, due to a delayed reaction to the market in terms of the firms’ own financial results. It took a while for investors to realize how bad the markets and the economy had really become. However, Investment Banking was up 74% from the immediately preceding quarter and in the six month period saw rebounding activity in the corporate sector and in some of the public finance infrastructural needs that will need to be financed going forward.
• Investment Advisory fees, which are largely impacted based on a trailing value because they are billed at the beginning of the quarter for the succeeding quarter, showed a dramatic decline of 28% but were up from the immediately preceding quarter by 34%. Given the September 30^th balances these fees are expected to increase again next quarter.
• The net trading profit was much better over the same quarter last year and flat with the preceding quarter due entirely to Fixed Income.
• Regarding expenses, the watch word is control. The firm has done a very good job of controlling expenses with the numbers showing good control.
• Net income was $43 million, down from $49 million last year and up slightly from last quarter. The major factor causing the low tax rate for the quarter was the effect of the COLI investment portfolio, which had accumulated an $11 million loss with $6 million being reversed during this quarter.
• After tax margin on net revenues was at 6.44%, down a bit from last year’s margin.
• The Private Client Group has begun to see an increase in business which manifested itself in an increase in profits in the quarter from $18 million pre-tax last quarter to $22.3 million.
• The Capital Markets numbers were very good compared to last year’s quarter, which was largely the function of the absence of equity capital markets toward the end of the last fiscal year. The pipeline is beginning to grow.
• Fixed Income has continued to knock the cover off the ball during all of these quarters. Another positive for Raymond James on this front has been the recruiting that has occurred in the Institutional Fixed Income business.
• Asset Management profits were down but as a result of the increasing assets they were actually up dramatically from the preceding quarter and far above where we thought they were going to be due to the rally in the market and cost saving plans that were designed to off-set the projected loss of revenues.
• Emerging Markets were largely a non-factor. Proprietary Capital was profitable at almost the same level as last year.
• There was not much contribution from Canada this quarter although conditions there are improving.
• The year to year comparisons of the Private Client Group were up slightly over 400 financial advisors, which was an 8% increase. The net growth has been outstanding.
• There was some movement of the assets under management out of the cash trust into a bank sweep program. The program the firm is utilizing for the sweep program is Promontory.
• Assets under management are growing rapidly in terms of net sales as well as appreciation.
• I believe increases will continue going forward as long as the economy continues to improve. The factors that influence the business are so much a part of the general economic framework that while we can distinguish ourselves with conservative practices we cannot totally avoid the impacts of the kinds of catastrophic events we have experienced this fiscal year.

Questions and Answers:

Daniel Harris from Goldman Sachs:
What did the bank see on the Shared National Credit Review when looking at your portfolio?

Steve Raney:
We received the results of the Shared National Credit Review in August. We had 200 of our borrowing relationships reviewed as part of this exam. The results were relatively benign in terms of any major differences due to the Bank’s rigorous process to assign the appropriate risk rating to our credit relationships, which are also further evaluated by a third party loan review company as well as reviewed by the audit firm KPMG. Out of the 200 relationships that were reviewed as part of this process, 14 loans were more harshly rated by the regulatory exam and we had 7 relationships that we rated more harshly than what they had. The net impact of this in terms of dollars was approximately $15 million which was embedded in our provision expense for the quarter.

Jeff Julien:
The reason that’s an estimate is at the time we received this we had not finished our own quarterly process which may also have come to the same conclusion as the regulators came to.

Daniel Harris from Goldman Sachs:
Given the 100 b.p. increase in delinquencies on the residential side of your portfolio, what is your future outlook in this area?

Steve Raney:
About 30 b.p. of that increase was related to the reduction in the loan balances. We had an increase of $17 million of total loans past due quarter over quarter (over 30 days past due). We continue to be concerned that we have not seen decreases of these residential past-dues yet and it is also problematic in terms of loans being in the pipeline of over 90 days past due with the servicer going through the foreclosure process. We now have 20 OREO properties, residential mortgages that have gone through the foreclosure process. We had 15 at the end of last quarter. We had 5 that were resolved in the quarter and 10 new properties for a total of 20. We think that by the middle of next year we will have peaked in terms of the residential past due issue. However, the performance of our residential portfolio continues to far exceed any of the national statistics on residential mortgage portfolios.

Daniel Harris from Goldman Sachs:
What products are really driving the results in Fixed Income and what areas do you think could be more opportunistic in 2010?

Tom James:
Generally, most of the business is still being driven by the mortgage backed securities activity, although there has been an increase in corporate bond activity also. We have an analytical group that reviews the underlying mortgages and provides good evaluations for institutional clients who own these securities in order to help them upgrade or get rid of securities that they should not own, which is still a very successful operation for us. A lot of the growth in the Fixed Income institutional sales group is the financial group which is doing business with small and medium sized banks and they do more traditional business generally speaking. As these banks become healthier I expect that business to increase in the more traditional product line.

Devin Ryan from Sandler O’Neill:
What is the current balance outstanding for Nuveen and what’s the timing of when you expect Nuveen to re-finance the rest of the ARS?

Tom James:
They were working on three different funds in this first series of re-financings which have been completed. It takes up to 30 days to refund the ARS. There is roughly a total of $500 million of Nuveen ARS in our client’s hands.

Devin Ryan from Sandler O’Neill:
What drove the decline in NPL’s in the corporate portfolio and what are your thoughts on loan growth in the future?

Steve Raney:
There was a very small decline in the commercial portfolio in terms of non-performers. Some of the $26 million charge-off impacted this. We only had two new borrowers go into non-performing status for the quarter so the net net of that was a very small reduction of $4 million in the commercial non-performers for the quarter. We have re-engaged in attempting to replace the run-off in loans which continues to be higher even last quarter than we anticipated. The capital markets continued to open for our borrowers that resulted in some pay downs. The residential pay downs continue to be strong. At best for the current quarter we will be running flat with 7-8% net loan growth projected for the balance of the new fiscal year.

Devin Ryan from Sandler O’Neill:
Can you explain why the comp ratio was at the highest level in a number of quarters?

Jeff Julien:
As the mix of revenues shifts more towards investment banking, this is a higher variably compensated business, as is the independent contractor business which has a much higher payout. Further, as contrasted to last quarter, the contribution from RJBank, a predominately fixed compensation cost business, declined.

Joel Jefferies from KBW:
Can you talk about the growth in the investment banking revenues?

Tom James:
M&A revenues are in the mix, which were pretty good in the quarter. It’s a little misleading to just look at number of offerings because a lot of these financings are last minute overnight offerings where we might get 2-10%. In the actual numbers for the September quarter, M&A revenues were $13 million vs. $4 million in the June quarter.

Joel Jefferies from KBW:
What are your thoughts on what specific business lines would be benefit the most from interest rate increase and which ones would be most negatively impacted?

Tom James:
It’s an attractive time to be going back to building the asset totals in the bank but we would expect spreads to diminish as the market returns to a more normal operating environment and rates begin to rise over time. At the same time, we expect that the Private Client Group, where we attribute part of these interest earnings since they are based on client deposits, will benefit as well as RJF itself. Essentially it’s a trade off that happens. I think bank spreads are going to continue to be pretty good in the foreseeable future.

Joel Jefferies from KBW:
Was the contraction of the net interest margin primarily due to roll-off or was that more towards the cash not generating any spread at the Bank?

Tom James:
It’s both.

Steve Raney:
About 15 b.p. of the reduction this past quarter was related to the excess cash balances at the Bank. We are working diligently on securing other banks to join into the Promontory program which will alleviate this problem.

Joel Jefferies from KBW:
Can you give an update on the status of the Bank Holding Company?

Tom James:
They finished their inspection here and have issued a staff report. We don’t know what the result of that is until we hear from them. As far as we can tell they are becoming a lot more comfortable with our business and now understand the brokerage side of the business which is far less complex than the investment banks in which they were interacting with already. Along with the re-financing of Nuveen and the continuing run-off of the individual muni based ARS’s, which have diminished greatly, they are showing less concern over the ARS issue.

Steve Raney:
The field team that completed the examination has sent their recommendation to the Board of Governors. It was a very thorough examination and we are still waiting to hear where they are in their process.

Hugh Miller from Sidoti & Company:
With the increase in security commissions from a month to month basis in September how much of that is seasonal vs. pick up in head- count or just a change in sentiment on the client side?

Tom James:
It’s mainly sentiment change going on now. Obviously, the large head- count percentage is having an effect but was spread pretty evenly throughout the year. Basically what happened is that our commissions were buffered by the fact that we were added all the new financial advisors and now you are beginning to see the affect of their addition plus just the investor sentiment.

Hugh Miller from Sidoti & Company:
In looking at the increase in margin balances from a quarter to quarter standpoint is that just a change in risk taking sentiment or if that’s more just client accounts coming over?

Tom James:
We were almost at $2 billion before the market began to go down so you are seeing a combined effect of some of the brokers bringing margin accounts with them and now some of the investors beginning to add to their investment as they become more confident in the market. I think you will continue to see an increase in these margin balances going forward.

Hugh Miller from Sidoti & Company:
On a quarter to quarter basis there has been a substantial pickup in the investment banking business which was driven by the incremental increase in M&A fees. Can you give us a sense of what sectors you are seeing the demand in?

Tom James:
The M&A front is more spread across sectors and is not impacted by what industry sector happens to be financing that quarter. We obviously started in the recovery process doing a lot for real estate and energy. Those are two of our largest sectors. Financial services and health care are also large sectors. The M&A activity in health care is pretty consistent and I expect that to continue. I expect real estate to still be active as the REITs try to stay in front of any re-financing requirement they may have in their balance sheet. We added the firm in Boston which will add to M&A activity going forward next year. I also believe activity in Canada is going to rev up.

Hugh Miller from Sidoti & Company:
On a competitive front are you seeing larger firms coming back into the market trying to re-take share?

Tom James:
It is a very clear trend as there has been a 180 degree reversal. There is no question they are back in the market looking for people to re-hire. I expect our recruiting to taper off in the financial advisor side of the business largely due to the fact that there are larger retention plans now and fewer firms.

Steve Stelmach from FBR Capital Markets:
What was the specific percentage of criticized credits from the Shared National Credit Review this year?

Steve Raney:
It was 14% for us vs. 23% for the national coverage.

Steve Stelmach from FBR Capital Markets:
Do you think there is follow through in terms of client activity towards year end and into 2010?

Tom James:
I would have actually anticipated we would have already had a correction based on the size of the recent rally. We don’t usually see this rapid of a rise to this degree without some form of correction. I would not be surprised by a short-term correction in the near future. However the fundamentals underlying the economy, which will determine the intermediate term and longer term direction of the market, are fairly strong. I think we really are in the course of a good reversal that will be slow but will be fairly consistent on the economic front. Client activity should pick up.

There being no further questions, the conference call ended.