Tom and Paul

Dear Fellow Investor,

In retrospect, it’s hard to imagine that Raymond James Financial achieved record earnings in the financial environment that existed in fiscal 2011. It’s a testament to a combination of surviving the 2007-2009 market meltdown with minimal damage and sagacious investments in productive personnel when the outlook was bleak. As we now know, European companies and investment banks failed to clean up their balance sheets as we did in the United States, which has prolonged their financial plight and impeded a European recovery, as well as inhibited growth in the rest of the world.

For the year ended September 30, 2011, Raymond James Financial achieved a record $3.33 billion in net revenues, up 14% from last year. Net expenses grew only 13%, providing operating leverage that enabled net income to increase by 22% over last year to $278 million. Consequently, earnings per fully diluted share were $2.19. More importantly, excluding the $41 million pre-tax loss associated with the repurchase of auction rate securities, after-tax net income exceeded $303 million, representing a 33% gain over last year on a non-GAAP basis, or $2.39 per fully diluted share. On the same non-GAAP basis, the after-tax operating margin on net revenues was 9.1% and the rate of return on average equity was 12.2% for 2011. Although that doesn’t meet our target ROE return of 15%, it is more than acceptable in light of both economic and market conditions.

Segment results are instructive with respect to understanding the drivers of the improved results. In spite of the consternation engendered in investors by the day-to-day price volatility of securities, Private Client Group revenues of almost $2.2 billion in 2011 increased 15% over last year’s results. Consequently, the pre-tax contribution from our largest segment grew 36% to $219 million. The increase was a function of some annual growth in client assets to $256 billion, continued additions to our financial advisor count and enhanced individual advisor productivity during the year. Those factors were bulwarked by a growing recognition of our clients that almost all of their market losses had been recovered since March 2009 and that the U.S. economy was recovering, albeit at a snail’s pace.

The Capital Markets segment was negatively impacted by a combination of less underwriting activity in the turbulent market and lower fixed income trading and commission revenues in the low interest rate environment, wherein it was obvious that the government was stimulating the mortgage and housing markets, which depressed investor incentives to save and invest in fixed income securities. However, the continuing increase in corporate earnings should catalyze more investment in equities in 2012. To offset some of the lower results, the smaller Tax Credit Funds operation incorporated in Capital Markets generated record revenues and profits as banks and insurance companies found the after-tax returns inviting in the low-income housing sector.

The 7% increase in financial assets under management to $32.1 billion resulted from both net sales and asset performance and fueled a 15% increase in revenues and 41% growth in pre-tax profit contribution to $66 million in the Asset Management Group. This segment is poised to generate good margins on any increases in the equity markets in the future. Last, but far from least, Raymond James Bank grew its loan balances from $6.1 billion to $6.55 billion during the year and dramatically improved its loan loss experience from the prior year to increase its pre-tax profit contribution by 54% on a 2% increase in revenues. Our excess capital in the Bank will enable us to continue growing loan balances in 2012, and we anticipate that profits will continue to grow moderately next year, in the absence of any untoward event, which might affect credit.

We experienced a number of significant events in 2011, which are summarized below.

  • In the December quarter, Raymond James announced that it had reached an agreement to purchase Howe Barnes Hoefer & Arnett, Inc., a small, but high-quality investment bank, which employed 115 associates to provide investment banking services to community banks and thrifts, as well as serve individual investors through its team of professional financial advisors. More importantly, the integration into our firm has been smooth, and we are proud to have added its outstanding team to the Raymond James family.
  • Raymond James’ client statement was voted “Excellent” for the fourth consecutive year by the independent measurement expert Dalbar.
  • Bank Investment Consultant magazine’s annual Top 50 Financial Advisors ranking included 17 of Raymond James’ Financial Institutions Division financial advisors – the most of any brokerage firm in the country.
  • Raymond James & Associates placed second in the J.D. Power and Associates 2010 U.S. Employee Financial Advisor Satisfaction survey, scoring highest in the perception of firm performance, and Raymond James Financial Services placed third in J.D. Power and Associates 2010 U.S. Independent Financial Advisor survey, highest in firm performance, products for clients and usefulness of the firm’s investment research. Raymond James & Associates also topped Registered Rep.’s Annual Broker Report Card, which noted the superiority of the firm’s risk management, training and resources, and products and services.
  • Our equity research continued to win numerous awards for the quality of its recommendations and individual analysts. For example, Raymond James was recognized in the Greenwich Associates Quarterly Leaders Survey for calendar 2010 for its U.S. Equity Research and Analyst Service Quality, as well as for its U.S. Equity Sales Quality in the small and mid-cap funds segment. Furthermore, Raymond James tied for second overall out of 86 research firms in the Wall Street Journal’s Best on the Street Survey as a result of the selection of seven of our analysts as Master Stock Pickers for 2010 performance.
  • SmartMoney’s annual broker survey ranked us first against six national firms. In May, Agência Estado named Raymond James Brasil the number one stock picking team in Brazil.
  • In its March issue, Fortune magazine ranked Raymond James the fourth most admired securities firm in the world, which, given our size, is a notable achievement.
  • In April, we successfully sold $250 million five-year notes with a coupon of 4.25% to bolster our liquidity and to fund future growth or acquisitions.
  • Bella Loykhter Allaire was recruited as head of Operations and IT after distinguished careers at Prudential Securities and UBS. We’re happy to report that she has been well accepted and is already engaged in leading our efforts to be at the forefront of quality service to our clients and financial advisors through continuous software improvement.
  • In the fiscal fourth quarter, in accordance with our previously announced stock repurchase authorization, Raymond James repurchased 636,724 shares of its common stock at $25.16. In October, we added another 394,080 shares at $24.53. These prices are approximately 1.2 times book value, a very favorable price by historical comparison.
  • The repurchase of illiquid client auction rate securities positions at par value was substantially completed, closing an unpleasant vestige of the 2008-2009 financial crisis.

While the United States and the rest of the world are still suffering from the fallout related to the global financial crisis and recession, our confidence that a sluggish, albeit volatile and somewhat painful, recovery would follow has been affirmed. Our record results are a manifestation of the initial phase of that process. More importantly, the future promises more of the same. U.S. corporations are continuing to grow and prosper. The price earnings ratios of larger companies are less than 13 times, representing a terrific value, particularly relative to other alternatives. In 2012, Gross Domestic Product should grow at a rate exceeding 2%. Unemployment should decline in 2012 at a somewhat faster rate than in 2011.

That is not to say that there aren’t risks to this benign view of the future. Our politicians and citizens must face the challenge of righting our financial ship. Large reductions in all governmental spending and increases in revenues must be generated by new legislation. Adopting the Simpson-Bowles Commission’s recommendations would be a good start. We’re sure that most of you join us in our frustration over the continuing lack of action in Washington. It’s appalling.

At this time of year, it’s appropriate for us to count our blessings and to reflect on both the past and future. It’s been a great year for Raymond James, and the transition to Paul as CEO has been very successful. Tom is still fully engaged. We both are very optimistic as the Raymond James platform is stronger than ever at the same time the economy is continuing to improve. The future of all our core businesses is bright. We are committed to continuing to provide nonpareil service to all of our clients and to provide good returns to our shareholders without assuming excessive risk.

Best wishes for a happy, healthy and prosperous New Year!


Paul C. Reilly
CEO

Thomas A. James
Chairman


December 23, 2011