Raymond James Financial, Inc. (RJF)

F3Q10 (Qtr End 06/30/10) Earnings Call Transcript

July 22, 2010 8:15 am ET

Executives

Paul Reilly – CEO

Jeff Julien – SVP, Finance and CFO

Chet Helck – COO

Steven Raney – President and CEO, Raymond James Bank

Tom James – Executive Chairman

Analysts

Devin Ryan – Sandler O'Neill & Partners L.P.

Daniel Harris – Goldman Sachs

Hugh Miller – Sidoti & Company

Christopher Nolan – Maxim Group

Steve Stelmach – FBR Capital Markets

Joel Jeffrey – Keefe, Bruyette & Woods

Douglas Sipkin – Ticonderoga Securities

Presentation

Paul Reilly

Good morning. Pleased to be here to present our third quarter 2010 results, which compared favorably to last year and third quarter and the sequential quarter. You are hearing a different voice than you have. You know Tom has been for four years presenting to our lead spokesman, presenting to our investors. So, although you have a new voice, you are not going to, if you are looking for a lot of change, you are going to be a little disappointed. Raymond James will still continue its conservative management as long-term orientation in the cantor which are used to on these calls. The transition I think has gone exceedingly well. We have been able to reduce Tom’s working load from 80 hours to 70 hours as he continues to be extremely involved and help us all continue the direction for Raymond James.

Our call is going to take a little different format today. We are going to give it a try and see how it works. I am going to give you kind of a general overview and then do an overview by segment and Jeff Julien, our CFO will then join in and talk about that segment, and then we will move on to the next segment. We are going to see how that works. We also have a lot of support in the room here. I have Chet Helck, our COO and Head of our PCG segment. Tom and Jeff as I have indicated, Paul Matecki, our Chief General Counsel; Steven Raney, Head of our Bank; and Jennifer Ackert. So, we should be able to answer anything you have.

From an overview standpoint, I know a lot of people have been looking and talking about financial reform and the impact that’s going to have in our industry, but particularly our business. I think the way Raymond James has conducted its business over these 40 years puts us in great shape and have little impact, I think from the regulation. We are not a proprietary trading shop, we are an agency and we should not have much impact from a language in that bill. We really don’t write a lot of derivatives, we do some interest rates, swaps for people in the bank at a very limited proprietary tap or fund activities, there may be some impact but it’s not material really to our overall business. Company continues to be well capitalized, the banks hitting over 13% in our broker dealer subs, notables at a regulatory capital. And under fiduciary standards, this company was founded on clients first. And so, we believe we act and always thought we acted in that capacity.

Now, the caveat is that most of the bill as you know is subject to regulated writing, the interpretations or the studies which haven’t been done and the doubles will be in the detail. But we are certainly well positioned and I think we will be able to just generally operate our business the way and continue our long-term performance. For the quarter, net income was $60.7 million or $0.48 per diluted share, up 42% from last year’s third quarter, albeit last year was a pretty turbulent market, but 9% under the immediate proceeding quarter, and last quarter was really a tale of do have. The first half of the quarter, we had pretty strong markets, and benefited both in PCG from a rising market and a strong capital market. And then in the second half in May, you can remember as the European credit crisis kind of hit, the markets went down and capital markets got much tougher.

The real story of the quarter is really driven by the recruiting success in the past, 2008 and 2009 as PCG really owe a lot of increases from those results. So, let me start and say into our first segment which is the Private Client Group. Private Client Group is about 64% of our revenues or approximately 45% of our pretax income for the quarter. So, obviously our results were heavily impacted by what individual investors were doing. 33% of the increase over last year and 4% over the previous quarter driven by commission volume, and revenues reacted generally the same way. Those numbers were driven by our success in recruiting in a good market environment in the first half. Recruiting has slowed this year. Last year was kind of a record recruiting year, given the problems in the marketplaces and the disruption and we are recruiting at a slower rate, but last year, we were about, you know, probably peaked maximum recruiting and maybe as much as we could possibly have handled.

The quarter also showed increased margin balances, modest improvement for spreads, and we have some enhanced fee income from our bank suite program that we implemented in September of 2009. On the expense side, expenses stayed well controlled if you look at expenses without our interest expense and compensation expense for the quarter. With that, I will turn it over to Jeff to talk about some more detail on the Private Client Group segment.

Jeff Julien

And referring to the segment data included in the press release, compared to last year’s June, you can see the significant increase over 30% in Private Client Group revenues, largely driven by commission and fees. That comparison shouldn’t be too surprising as the June quarter was just the very beginning of the recovery from the low point in March of last year. And so, all the fee-based accounts were buildoff of virtually the low point in the market cycle. So, it was predominantly driven by commissions and fees, but an additional factor is that toward the end of last fiscal year, we launched the promontory program and that’s contributing about $9 million a quarter. Now, recapturing part of the lost interest spreads that we have endured as they took rates down to near zero. And on a 31% increase in revenues, you would certainly expect some significant operating leverage and obviously we saw that in the bottom line. Pretax profits in that segment were up 144% over the prior year.

The FA count was actually up 13 versus last year and fine assets were up 18% year-over-year. So, all those factors versus a year ago looked very, very positive. Versus the immediately preceding quarter, revenues were up just 3%, and that’s actually on 13 fewer FAs at the end of the period at least. So, that actually indicative of slightly higher average production, and there was a nice pickup in profits on that modest increase in revenues as there were some expense controls that certainly functioned properly of some of the expense categories in this segment declined that resulted in a better margin. Client assets, it did decline during the quarter as you might expect with the market activity, down 4.5%, which is something we will talk about a little later on in terms of what that might mean for next quarter.

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