Raymond James | Analysts Covering RJF

For the quarter we expected slow improvements in the economy generally as a backdrop for whatever our performance would be. We didn’t expect as rapid an increase in stock market values as we have experienced which has led many commentators to suggest that the risk of corrections or consolidations in the marketplace is present. The general economy might surprise some people in 2010 in terms of improvement. Unemployment which has started to go down in the second half will be slow to recover. I think small business and even big business have a “show me” attitude about what is going on in terms of where they ought to deploy capital expenditures and whether they ought to add to their employment bases or not.
Because of the market improvement, client assets were up dramatically. This is due to a combination of the good early recruiting that was done and pure market appreciation. Client activity is slowly beginning to increase, due to the general comments about the economy, but it is slower than anticipated by the degree of recovery in the market. Fortunately, we have a fairly large fee-based revenue component.
Sequential improvement is to be expected in the PCG related activities going forward, which also impacts the asset management numbers. With respect to the capital markets activity we are seeing in the marketplace, while the transaction volume is high, the percentage participation on all of the overnight deals that are occurring tend to be smaller unless you happen to be the lead manager and unfortunately pure IPO activity isn’t up enough to influence our lead managed statistics very much.
It has been very difficult to increase net revenues at a meaningful level, which is similar to the rest of the industry in this economy. It has been a little more intractable than I might have expected but you have to dissect the income statement again to come back and say where do you see the vibrancy? Where do you see the return? The private client commissions and fees I would focus on because they were up 15.5%. That is dramatic growth in these comparisons to.
Total commissions and fees is a little lower but still up sequentially 7% and up 12% year-over-year. This is due to institutional commissions being down slightly in fixed income.
Equity institutional business is still lackluster even in our European operations because of the weakness of the dollar.
Net income of $49 million was actually very good contrasted to the $61 million last year and up from $43 million in the immediately preceding quarter for a 14% increase. This led us to the $0.39 diluted earnings versus $0.50 and versus $0.35 from the sequential prior quarter.
We have been performing much analysis around our net interest. What I am going to do is ask Jeff Julien, our CFO, ably supported here by our Comptroller, to respond on net interest. Jeff if you would give some input with all these new bonds we have outstanding and the changes with the money market funds and what is really going on here.

Jeff Julien

Reported net interest was down $7 million sequentially from last quarter. The interest on our note issuance last quarter added interest expense of about $7 million this quarter and about $3 million the previous quarter. If that were added back to what we will call interest earnings from operations, which is kind of taking that financing activity away just to look at the ongoing run rate of operating earnings, with respect to interest and you get $86 million in the previous quarter and $83 million in the current quarter; still a decline of $3 million which again doesn’t really comport with all the sequential improvement comments we have been making.
Last quarter we talked about the inception of the multi-bank sweep program in the month of September which we completed sometime in early November. That added $7 million of fee income in the December quarter which is in the financial service fee line item; not in interest earnings. That recoups some of the spread that has been lost by the interest rate environment.
As Tom mentioned last time the magnitude of our earnings from the multi bank sweep is going to be roughly an offset to our bond interest cost. When I add the $7 million into the quarter just ended we actually get $90 million versus about $87 million, as there was a little bit of this in the previous quarter. So we actually did have a sequential improvement from those interest earnings and related activities from September to December. Not a huge jump but about $3 million. We think that as balances grow that will continue.

Tom James

Do you see any change in spreads or in terms of client deposits in all of your areas? With what is going on here with the improved markets you might think you might see a decline in cash balances.

Jeff Julien

It has actually run about flat to slightly down. We have had some net investment in other securities but we have increased client assets coming into the firm. Another dynamic is we were earning virtually nothing on the billions that we had in our proprietary money market funds. As of today about 2/3 of the taxable funds or about $3 billion has moved into the bank sweep program. That still leaves $1.5 billion in the taxable fund and a similar balance in the tax-free fund.
We are looking into alternatives for our money market funds given the lost earnings from that activity as well. Most of the decline in net interest income is bank related. Compared to last year, interest earnings were down $36 million, with $28 million because of the bank. Spreads are down from a year ago when we had the record bank quarter. We also had a very strange LIBOR rate. LIBOR spiked over 4% and we benefited somewhat from that but we had unrealistically and unsustainably high spreads for that quarter as well as very high balances. So we had the best of all worlds. But the spreads are hanging in there pretty well at the bank although our balances are way down and the challenge, now is to grow the loan balances to recapture some of that lost interest earnings.

Tom James

We expect rates at some point during this year to begin escalating which will actually have a favorable impact over time.
There was a slight decrease of total financial advisors at the firm over the last quarter due to normal factors. We had a number of our smaller offices close in December and the rate of new additions was less in the holiday season. We have seen home office visits, where financial advisors come here and visit us, increase lately.
We should be back on positive footing for the rest of the year in adding advisors also in Canada and the United Kingdom.
The book value per share of the company has increased to $17.58.
The trend in the bank will be to increase profitability as we begin to grow assets again and more importantly see more traditional levels of loan loss provisions quarter-to-quarter going forward. The outlook is good.

Questions and Answers:

Daniel Harris – Goldman Sachs:
You mentioned earlier in the call the decision at some point to start growing the loans at the bank. As you think about that, where do you see the most opportunity? Is it in residential or is it in the commercial and CRE space where you think you might grow loans going forward?

Steve Raney:
As you see over the last three quarters, and this most recent quarter, our loan portfolio was down about $140 million following two quarters where we were down roughly $500 million. The effort started in earnest at the end of the September quarter in terms of growing the portfolio. We did 18 transactions in our corporate portfolio that represented about $200 million of new funded loans.

The residential business has been a little bit more challenging where we moved from an environment where there were a lot more sellers than there were buyers. That dynamic has changed. We are actively looking for new channels for new residential loans. We have a couple of things that are closing this quarter but we are also not going to sacrifice credit quality for the sake of putting on new loans.

The primary market right now is still very light, but we are very active with all potential participants that we have been doing business with. The activity in the capital markets has increased as we are getting a couple of payoffs and pay down’s as a result of borrowers accessing the high yield market. We are not going to sacrifice quality just for the sake of putting loans on but we do think we will be able to eventually grow the loan portfolio in the next few quarters.

Tom James:
There is one other item you need to consider. We still have the application to convert to a commercial bank from a S&L which the government has chosen to move very slowly on mainly due to concerns about ARS activity but has no problems with respect to the quality of the bank activities or the financial stability of the holding company. There is no real incentive for a regulator to approve anything that has any risk associated with it at this time.

We can empathize with them though it is frustrating from our standpoint because it caused us to go through the “gross up” activity at the end of September. If we are going to have to continue to comply with OTS regulation it is important that we do add more residential mortgage loans to our portfolio.

Daniel Harris – Goldman Sachs:
Staying within the bank, but moving over to the securities portfolios, as you look out to March or April with the government cutting back involvement in the mortgage market how do you think about your securities portfolio? I think most of it is agency MBS. Does that change your view in terms of maturity or type of security you are borrowing or how you are thinking about the mix of securities and loans?

Steve Raney:
We haven’t been buying any securities. There have been a couple of Ginnie Mae and agency bonds we have bought over the last 12 months, but in the December quarter we didn’t buy any new securities at all. The private label portion of our securities portfolio continues to get paid down on a monthly basis and as Tom mentioned we have had some improvement in that negative mark-to-market by about $20 million in the December quarter.

In terms of the impact of the GSEs pulling back their purchases and support of the mortgage market, I don’t think that is going to have a lot of impact on our existing portfolio. Right now we are really more interested in deploying our liquidity into loans. I’m not sure exactly how that is going to play out.

Daniel Harris – Goldman Sachs:
As you look forward here to the spring and potential transition how are you thinking about any changes going forward for the firm or do you think it is just still the same business strategy we have had for the last few years?

Tom James:
Paul Reilly, who is will be replacing me as CEO on May 1, is here and is increasingly involved in all of the activities here on a management level. From my standpoint the transition thus far has gone extremely well. In terms of his rapid learning curve and in terms of all of our business activities, and in terms of his understanding of, as well as endorsement of, the general values and policies we have here at the firm.

It is interesting that for the first time since we have stopped worrying about survival we are seeing demand for the use of our existing capital again and we are having to go through some of these decisions. For example, do we invest more in Latin America, how aggressive are we on the recruiting front? We are going to deal with all of these things in our long-range planning meeting in February of our Board of Directors which is always useful. These kinds of discussions are ongoing. From my standpoint I don’t see a lot of changes but things will be done differently. That is what happens when you change CEO. I think the basic precepts are going to continue to be followed. We certainly share amongst all our senior management team a view that there is tremendous opportunity in our business not only to restore rates of return on equity that we have enjoyed in the past and get back some of the operating margins we had, but also to capture market share in almost every single one of these businesses. I know Steve certainly shares the fact that we would like to return to a little more normal banking environment where people spend a lot more time worrying about adding new loans than they are about protecting the value of existing ones. Paul is here so I will ask Paul to comment if he has anything to add.

Paul Reilly:
Let me briefly say that first I am here because I believe in the strategy, direction and values of the firm. As I tell people internally the biggest difference on May 1^st is it will be the day after April 30^th. This isn’t about drastic changes. It is maybe about tweaks or looking at different things a little bit differently but we share the same values and direction.

Tom and I consistently agree on 90% of decisions. Then we debate the 10%. He has certainly got a lot of experience and I will continue to lean on that too as we continue.

Devin Ryan - Sandler O’Neill:
I believe you said that productivity per financial advisor is down 16-17%. Can you quantify or qualify how much of that is related to the new hires that haven’t ramped up yet? What I am trying to get a sense of is there a large amount of revenues from more recent hires that isn’t reflected yet in the results?

Tom James: As you compare year-over-year, we had a lot of new hires in prior periods too. So I would say the quality of the hires we are making hasn’t declined. We are still adding above average producers in general at the firm with the exception perhaps of the FID division where we have brokers in banks who tend to range all over in production but I would say on average you have a little lower production in some of those positions. I don’t think that is really the major factor. Certainly we had some build in ramp from the hires over the last year that still will be ongoing this year. I really think this is just a major deficit in terms of recovering the levels that existed on prior assets.

Since the asset levels have recovered to a large degree I actually think that we have a great opportunity to see that difference recovered here within the next 12 months. That is a substantial increase in commission activity by itself without some increment from new hires or them reestablishing prior productivity levels.

Chet is here too and he is still running all the retail operations. Chet you are probably the best one to comment on this.

Chet Helck:
I agree, the latest productivity is more impacted by continued fear in the marketplace on the part of retail investors. People are starting to get their legs under them again and some confidence but there is still a great deal of apprehension about a second leg down or some double dip or some other impact that would put them through another decline in asset values and there is fear out there. Consequently, there are large cash reserves building. There are people waiting to see what is going to happen. The commission part of our business has not recovered anywhere nearly as robustly as the fee part of our business has.

So we have that to look forward to along with the increased productivity potential of the people we have recruited which is much higher than our averages were before. There is a great deal of leverage built into our system.

Tom James:
We are still seeing some movement of assets to fixed income in spite of the recent market performance. I would say that a number of our elderly clients, and I can relate to them because I am one of them, are looking at those assets and they are saying “gee, I don’t know if I want to go through the probability that one of these could happen again in my lifetime now that I am 65. Consequently I am going to move more assets to fixed income because I was really under-diversified”. I would tell you the clients believes that because of prior performance.

I know what has happened historically and that is people will continue to invest in equities. I will remind everybody that we forget too soon. When you look back last March there wasn’t a real market for a lot of equity. I always described the behavior of what the stocks were doing a safe in freefall, falling off the top of a building. There was no way to interrupt it. There was no logic to it other than physical laws. No one should have pushed it off of the roof of the building in the first place. When you see that, that is what causes people uncertainty because they realize it wasn’t rational and they don’t want to be subject to that.

Devin Ryan - Sandler O’Neill:
You had commented that the bank appears to be on the road to higher profit. Maybe there is some lumpiness in the provisions going forward but can I extrapolate from your comment that it is your expectation the provisions going forward on average should be lower than what we saw this quarter? Essentially, no big surprises in volatility or above normal in any one quarter.

Steve Raney:
Just a couple of additional points on that. In residential loans we did have an increase in past dues but it was relatively nominal, an aggregate of $1 million of loan balances being higher in terms of our past due. The percentage looks a little bit higher in terms of past dues to total loan as a result of loan balance declines but the less than 90 day past dues in the residential portfolio are actually down quarter-over-quarter so these loans we would like to think are working their way through the pike.

We are continuing to be very cautious in the residential portfolio in terms of another leg down or a double dip in housing. On the corporate side of our portfolio, we saw pretty marked improvement across the board but we still remain extremely cautious on commercial real estate. Out of the new deals we did in the quarter two were real estate related. So predominately corporate, commercial or industrial focused at this point.

All that being said we know over the last 4-5 quarters we have been very aggressive in terms of how we are reserving and charging loans off. As Tom mentioned, we would like to think we are starting to head into a more normalized environment. But we are also not here to predict what the next few quarters are going to look like because as you know our portfolio and loan loss reserves and charge offs can be lumpy just given the large nature of some of our credit exposures, particularly in our corporate portfolio.

Christopher Nolan – Maxim Group:
The decline in non-performing assets from the prior quarter was that mostly seen in the commercial real estate portfolio?

Steve Raney:
We actually had an increase in residential non-performers of a little over $10 million so the corporate and commercial real estate portfolio in terms of the non-performers actually were down quite a bit. The total reduction was a little over $20 million in non-performing reduction and it was pretty broad. We had some pay downs and one of our commercial real estate loans actually paid off entirely that was non-performing. We had some upgrades of some loans both one corporate loan that was non-performing was put back on accrual status and we have had a couple of upgrades in the commercial real estate portfolio that were upgraded as well.

We did have some charge off’s that lowered the balance of non-performing loans so all of those things factored together resulted in a net reduction in non-performering commercial real estate space.

Christopher Nolan – Maxim Group:
Did the regulatory changes in terms of recognition of non-performers, where the loan is performing but the underlying collateral is worth less than the loan change your results from one quarter to the next?

Steve Raney:
That had no impact on our results.

Christopher Nolan – Maxim Group:
Positive or negative - do you see any sort of impact from the proposed Obama tax on financial institutions? I am saying from the standpoint you may see some talent coming over from the larger banks to Raymond James. I know you commented at length on it and I am completely sympathetic with it. I am just trying to get it more distilled.

Tom James:
I really don’t think that it is large enough to impact very much. It is more of the comp issues and the disaffection that has grown amongst employees, not just financial advisors, with the large institutions that didn’t perform not just because they were large but because the performance was subpar during this period and certainly didn’t conform to their prior opinion that they were situated on a lot of stability.

In fact they may have been on rocks of stability but the seawater was rising. So I think there is some of that still going on. They are not really convinced that the commitment in some of these institutions is at the level it ought to be and that some of the institutions have totally lost credibility. I won’t specifically mention them but if you look at where you have the biggest outflows of financial advisors you might get a feel for that.

It is also true in the investment banking and public finance areas at those firms. They have similar levels of discontent arising from the performance. There is just not going to be as much movement but there will continue to be net loss from those firms during this coming year.

Also, they are going to start worrying next about margins in their different business units when they get past the survival mentality. You may see continued activity in terms of exiting certain businesses or you may see a board of directors in some foreign country sitting down and saying we really don’t want to be in that business. We don’t understand that business very well. We haven’t had very good managers in the business. We want out. We would certainly benefit from that if that happened.

Steve Stelmach – FBR:
On the bank margins the banks have been a little higher clearly than last year. At this point what do we need to see to get that margin to at least stabilize? Is it short term rates or are we looking for something else?

Steve Raney:
Just making sure we are on the same page in terms of our reported results here because it may have got lost, our net interest spreads over the last couple of quarters have actually been very stable when you take out the effect of the excess cash balances that are in the bank that started in the September quarter and then continued on in the December quarter. We have that excess cash now outside of Raymond James Bank and in the other banks that are in the multi-bank sweep program. If you take all that out, our net interest spreads were roughly 3.37% last quarter and that was one basis point higher than the prior quarter.

What we are seeing right now that is going on, in the incremental business, we are doing in the corporate portfolio is actually accretive to margins but as Tom mentioned we are seeing more demand than there is supply. For many quarters there were very high LIBOR floors with much higher spreads and we are seeing that start to come in just slightly and we are seeing more buyers and therefore our allocations in the primary deal will be cut back.

Still that being said, the incremental business is actually a net positive to spreads in the corporate portfolio. On the residential side it has been somewhat stable but maybe slightly down in terms of loans that are coming up for reset. They are coming off of their initial 5-year fixed rate period and then they are resetting to the reset rate which is slightly lower than what it was before. The net-net of that is our margins are going to be somewhat stable. In the bank we would be negatively impacted by rising short-term rates but I think that would be offset at the rest of the firm. It is not a big impact though because most of our assets are floating rate and we would benefit in the corporate portfolio so it really wouldn’t be a significant impact. It would impact our residential portfolio from rising rates.

Tom James:
I would conclude that absent all the problems in the economy, that the rates of return on equity currently are not where they ought to be given anything like these spreads. As you see some normalization occur you are going to see higher rates of return on equity and Steve certainly likes double digits. There is a lot of latent potential on that front as well as from ramping up lending balances.

Steve Stelmach – FBR: The bank began with higher capital than last year. It seems like you are pretty close to where you want to be in terms of capital. In terms of incremental capital, where do you think it goes? Is it on the retail side? Institutional? Back to the bank?

Tom James:
Well I didn’t mention our proprietary activity. We expect to be making some transactions on the proprietary front. We continue to look at outside private equity investments as part of our overall rate of return but also assisting in the investment banking activities we have got. So there is some demand from that sector of the business and I would tell you we are seeing pretty good transactions. As a practical matter, we limit our capital allocation to that kind of assets unlike some of our higher learning institutions did prior to the market decline and then the illiquidity they are now bemoaning. I think we are going to continue to have some demand there and on that front where we will put some money. I think we are going to have enough capital generated from retained earnings and from existing sources. That $300 million addition was actually a good idea. It wasn’t just totally for a buffer fund in the event of continuing difficult times.

I think we have enough capital actually to allocate to things like additional foreign offices if we decide to do that or to make a smaller firm acquisition. There is certainly bank lines out there we are not even bothering currently to utilize that we could utilize or new ones we could establish for specific purposes in the event we want to do something. We have been told that by some of our banks. So I don’t really see a shortage of capital. It is just we are going to be tough.

We are looking at a lot of things again though and it will be subject, as I said, to the long-range planning meeting. I think a lot of the recovery, for example, in PCG, doesn’t really require capital commitment of anything like what we have been making over the last couple of years. So I think we are going to be fine.

Hugh Miller – Sidoti:
Do you know what the cost implications are at the bank from the expected rise in OREO properties you alluded to in the press release?

Steve Raney: It is still a relatively small and manageable number of properties that are currently in non-performing that will be working their way into foreclosure and into OREO. I don’t have a figure for you. It shouldn’t be a huge impact to our overall earnings and we have budgeted and are planning for an increase in OREO expense both in the actual ongoing management of those properties and also as we have seen in the past we have taken some charges, we didn’t have any write down of OREO in the December quarter but we have had a write down of OREO properties in prior periods. So we are factoring that into our operation.

Hugh Miller – Sidoti: I know there was a question asked before about provision levels on a go-forward basis. I was wondering if you could talk a bit about barring any type of double dip in the economy and with where we are yet you are still cautious on the CRE cycle as we move forward but how comfortable you are with the notion that September’s NPA levels could represent a peak as we look back a year from now?

Steve Raney:
We could have a couple of loans go on non-accrual that could be a big number and have another spike. Obviously we don’t feel like we have anything like that identified or it would already have been put on non-accrual. We are still at risk for having something like that fall out of bed, so to speak, and have to be put on non-performing and it still could impact the numbers. We did have a $10 million increase in non-performers in our residential portfolio. I think there is still some risk we could have an increase so it is hard for me to handicap what that is going to look like going forward. Obviously we would like to think we have seen the peak in the September quarter but that may not be the case.

Hugh Miller – Sidoti:
With regard to the equity capital markets business, obviously you have been doing some opportunistic hiring. It seems as though you are positive on the outlook with regard to increased activity as we head further into 2010. Can you talk about what following the hiring you have done and how you feel about the opportunity to not only benefit from any increase in activity but also just maybe gaining some market share as we move forward?

Tom James:
On the equity capital markets front there aren’t as many players in the small and mid cap space. As activity picks up generally the big funds will be less apt to participate in some of these smaller transactions they have been involved in lately and then they just sort of go away after the deal.

I think if you look at our SBU groups with our largest businesses being energy, real estate, financial services, and healthcare practices, these are going to be vibrant areas for additional finance going forward and we are trying to expand our consumer presence and some of the other activities. I think we have a good chance to increase the space and our market share if the market is as attractive as it is now.

A big positive is our retail distribution, which is more important than a lot of issuing firms advertise in terms of who you want to have own your stock in an initial offering, or who will own your stock because of the interest or the type of security. European institutional sales and US institutional sales and global research, which we are building, has resulted in underwriting assignments in Brazil and Argentina. I think that we are in a good place. Canada is going to pick up on the investment banking front too.

I think there is a lot of opportunity but we are in the position between making it to another plateau in terms of levels of investment banking activity which we earned on our research base but we haven’t yet earned that in terms of direct competition for the underwriting assignments. That is what is going to be the differentiating factor going forward. We have to do better. We will do better.

Joel Jeffrey – KBW:
In terms of the fewer opportunities you are seeing on the commercial loan purchases, is that really being driven by larger banks generating fewer loans at this time or is it just more competition for the loans?

Steve Raney:
I would say more the former than the latter. But we have had our allocations cut down on several deals we have done in the last few months quite substantially, but the deal flow is slower right now in our sweet spot in terms of credit quality. We are hoping that the overall economic environment and capital markets will continue to fuel M&A activity and therefore deal flow for us. There are opportunities in the secondary market. We have added to certain positions and taken on a few new things in the secondary market, but as Tom alluded to earlier prices have moved up substantially across the broad senior loan market probably 30 points in the last 12 months.

Tom James:
Arising like a phoenix is the high yield bond market as a number of borrowers are concerned about having too much commitment to bank loans that have shorter terms when they can go out further with less terms and conditions and the good ones qualify to do that. The fact is some of these companies are quality credits, the BB type credit quality companies, but often because of size and not because of quality of the company. They are looking at this and saying maybe it is worthwhile to pay the premium to get the term commitment and have more flexibility.

Tom James:
If you go out even like we did and do an 8 or an 8.50 coupon, that is not much premium to pay for that much more freedom. I think that is part of the cause. I also really believe, and you need to keep this in mind, that the companies have really battened down the hatches. They have cut costs and gotten rid of employees. They have improved their balance sheets and they can pay back bank lines even if they intend to go back into the bank markets when things pick up. So we had some of that happening right now too. You add that to the natural disinclination of any financial institution to make a loan that has any risk associated with it, real risk of non-payment, you are not going to get a lot of it. I would not blame it all on banks not making loans. They are not making loans because demand is declining too. As we see business pick up that will reverse. I expect that to happen but it is not going to be an overnight process.

Steve Raney:
I would also add that about one-third of our corporate borrowers have an institutional relationship with the firm, either research and/or equity capital markets. In the December quarter about 75% of the deals we did were actually with firm clients. You will probably see that percentage of our borrowers that have another relationship with the firm increase over time. We think that is obviously good client selection tool and we won’t be exclusively doing that but it will be a larger percentage of our new business will be other relationships with the firm.

Tom James: In fairness that also reflects the fact that issuers are more sensitive to trying to make relationships with people who have equity offering capability and also can join that with lending capability and looking to maintain a group of relationships that are all similarly capable so they don’t have to maintain ten relationships. They are more sure that those financial providers stay on top of the stocks, write research and are just as sensitive to making sure the overall capital balances are right at the firm as the issuer is.

I think that is going on all over the world and it certainly hasn’t slowed down as a result of what we have just been through.

Joel Jeffrey – KBW:
As a follow-up to that, given what you said about the relationship aspect of this and I realize this could be a complete sea change in strategy but would you ever consider building out an origination capability to take care of this?

Tom James:
Oh yes. We have talked about that on numerous occasions. That is mainly a consequence of what size we are and what new products or processes we are adding at the bank. That is in the foreseeable future. We would do some of that for our client base. It is almost competitively necessary that we begin to consider doing that.

Joel Jeffrey – KBW:
Lastly, when you talked about the impact of higher interest rates on the private client business and the increase in net interest income how should we think about that falling to the bottom line? Would the comp ratio on client go down or is this sort of all factored into the advisor’s comp rate?

Tom James:
I don’t think the comp ratio would change too much. The advisors share modestly and some of the advisors and some of the products share some of the interest spread but that is not going to impact the comp ratio too much. We are trying to get our hands around better sensitivity analysis of interest rates but the positive impact on the private client group would be more than the negative impact on the bank of a modest rise in interest rates. So we think that the first couple of raises would be a net positive to the overall firm although again we have a positive on one hand and a negative on another segment so it wouldn’t be as dramatic as it would have been in the past before we had the bank.

Steve Raney:
I actually think that where you are going to see comp ratio go down a little bit is mainly in the G&A section of the PCG as the productivity levels are restored and indeed they increase above prior levels. That will lower some of the overall costs but it is not going to be a tremendously large factor from either source.

There being no further questions, the conference call ended.

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.

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