Tom and Paul
From left: Paul Reilly, CEO, and Tom James, Chairman

MESSAGE FROM THE CEO AND THE CHAIRMAN

Dear Fellow Shareholders,
This year's annual report theme is "well planned," enabling us to showcase examples of the challenges our financial professionals resolved in assisting clients – whether individual, corporate, institutional or governmental – to attain some of their financial goals. Extraordinary service begins by providing superior resources and support to our financial advisors, investment bankers, institutional salespeople and public finance experts, which is integral to both serving the end client and to achieving revenue growth by continuing to attract additional experienced financial professionals. Obviously, managing a successful business requires the same combination of planning and execution to attain corporate goals. Our letter will focus on this aspect of "well planned" by recounting Raymond James' performance in 2010, as well as describing the outlook for 2011.

In our 2008 annual report, we described the horror of the beginning of the meltdown in the financial and real estate industries, and expressed fear that 2009 might be much worse. At the same time, we concluded that when investors regained confidence that things would recover, Raymond James would have a tremendous opportunity to gain market share in the private client, capital markets, banking and asset management businesses. By the time our 2009 annual report was written, the S&P 500 had recovered 61% from its March low. Although the fallout of the market decline depressed our results, we remained profitable and, by year-end, our results were improving, although the drag of the ensuing deep recession dictated a slow and painful recovery.

By fiscal 2010, our observations about the opportunities for Raymond James to improve its position in the financial services industry proved prescient. Aggressive recruiting in all of our business segments during the meltdown was rewarded. Investment in talented and experienced professionals, who have values compatible with our business model, resulted in a 49% increase in net income to $228 million in fiscal 2010, up from $153 million in 2009. Record net revenues of $2.9 billion were up 15% from the preceding year.

As the financial markets rallied, and the economy stabilized and began to grow anew, all of our major segments participated in the improved results. In fiscal 2010, the pre-tax profit contribution of the Private Client Group grew 89% to $160 million. As Equity Capital Markets joined Fixed Income as a major contributor, Capital Markets' pre-tax contribution grew 15% to $84 million. Driven by asset appreciation and positive net sales arising from excellent portfolio performance, Asset Management's contribution increased 54% to $47 million. Through a combination of continued healthy loan spreads and lower loan loss provisions, Raymond James Bank's pre-tax contribution grew 40% to $112 million.

Profit growth was inhibited by a combination of high unemployment, understandable conservatism in hiring and capital expenditures by business, and reluctance on the part of investors to begin investing in equities due to the losses they experienced in 2008-2009. In addition, the continuing low rates of interest on cash balances, resulting from the Federal Reserve Board's determination to stimulate economic growth and reduce unemployment, restricted our net interest earnings. Consequently, after-tax margins on net revenues of 7.7% and the rate of return on average equity of 10.6% trailed historical averages. However, those results should improve as revenues continue their upward climb.

A number of the important occurrences of 2010 are enumerated below.

SIGNIFICANT EVENTS, ACCOMPLISHMENTS AND UNDERTAKINGS

  • In the December quarter, the Industrial Growth strategic business unit of our investment bank received The M&A Advisor Middle Market Deal of the Year award for its assistance in the sale of Nuclear Fuel Services to Babcock & Wilcox.
  • Raymond James Financial Services was named the 2009 Broker/Dealer Excellence Award winner in the large independent firm category by Boomer Market Advisor for the second consecutive year.
  • On March 1, Eagle Asset Management launched the Eagle Investment Grade Bond Fund, co-managed by James Camp, CFA, and Joe Jackson, CFA, to complement its fixed income managed account program. By September 30, the fund's excellent performance had attracted $96 million in investor assets.
  • Equity Capital Markets' investment banking team was recognized as Middle Market Investment Bank of the Year in Buyouts magazine's "Deal of the Year Yearbook."
  • In March, the St. Petersburg Times named Raymond James one of its "Top Workplaces 2010." Soon thereafter, the Tampa Bay Business Journal recognized Raymond James among the state's "Best Places to Work" in its "Biggest" category (100 employees and up).
  • For the second consecutive year, our Canadian subsidiary, Raymond James Ltd., has ranked highest in investor satisfaction among Canadian full-service brokerage firms, according to the 2010 J.D. Power and Associates survey.
  • In the Forbes/Zacks Investment Research survey that identifies top analysts based on buy, sell and hold advice, as well as earnings forecast accuracy, Raymond James placed third, with nine analysts receiving a total of 15 awards.
  • In a further substantiation of the excellence of Raymond James research, the Financial Times, in conjunction with Starmine, a leading research performance consultant, awarded our analysts 11 awards for stock selection and earnings accuracy, ranking us 10th in the industry.
  • The Raymond James board named Gordon Johnson as our sixth independent director. He possesses experience in commercial banking, investment banking and corporate management. He is co-owner and president of Highway Safety Devices, and already serves on the board of Raymond James Bank.
  • During the year, Raymond James Bank increased its total capital to risk-weighted assets ratio to 14.2%, excluding overnight borrowings on September 30, 2010, required to meet point-in-time regulatory thrift requirements.
  • The average rate of return on equity for the year was 10.6%, up from 7.9% last year. While this performance measure is still below our target of 15%, the increase signifies the impressive improvement in results.
  • At the November board meeting, the Raymond James board of directors increased our quarterly dividend from $0.11 to $0.13, reflecting its confidence in the future.

Although the world economy is still suffering from the repercussions of the 2008-2009 financial crisis and resultant recession, as exemplified by recent aftershocks in Greece, Ireland, Portugal and Spain, the U.S. recovery, led by corporate earnings and the stock market, continues. Estimates for GDP growth in 2011 and 2012 are being raised to the 3% range by some economists, which would create sufficient job growth to absorb new additions to the workforce, as well as begin to reduce unemployment slowly. Corporate cash is at record levels and inflation is still depressed. The stock market is approaching levels that will engender a higher volume of new issues, as well as continue to fuel increased merger activity in conjunction with the aforementioned surfeit of corporate cash. Consumer spending is up this holiday season. There is no evidence of a double-dip recession. It appears that President Obama and our legislators have forged a compromise on taxes, which should be constructive for the economy and the stock market. In short, the immediate outlook for the economy and the stock market is propitious. All of the above presages an excellent outlook for Raymond James.

You should note that we limited our enthusiasm to the short term. We should even caveat that to add, "in the absence of any major unforeseen negative events." Our reluctance to embrace a more constructive view for the long term stems from the need for our politicians to work together earnestly to reduce the current deficit. The current compromise on taxes is probably too costly in light of this longer-term challenge. Government spending must be reduced. Social Security must be fixed and the growth in healthcare costs must be arrested. The United States' and the world's balance sheets have too much debt. Germany and the United Kingdom are ahead of us in attacking this challenge. "Well planned" government demands redress. In any case, the outlook for Raymond James in 2011 is bright.

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


Paul C. Reilly
CEO

Thomas A. James
Chairman


December 15, 2010