雷蒙詹姆斯金融 (RJF) 2009 Q4 法說會逐字稿

Good morning, everyone. It's a pleasure as usual to talk to you a little bit about the quarterly results. We survived a period where indeed the uncertainty about what might happen the next day and whether credit lines might be available or payment systems might fail or something else might become illiquid, the fact is that we survived this in pretty good condition.

As a matter of fact, as I will point out later in my comments, we really have strengthened the platform considerably for launching into 2010 and beyond. I think probably that's the most important part of the message. I tried to convey part of that with the description of all the noise in the financial statement in my comments on our press release.

But I'm actually not only encouraged by the fact that we survived this trauma with very little damage, certainly I think no long-term damage and perhaps benefit from the longer-term, we certainly taught a whole new generation of people at our firm and in the industry what the downside is not only in the markets but in terms of things that we take for granted; the stability of the system, the predominance of the US, et cetera. We shook some of those to the core.

And from my standpoint, speaking as a CEO with 40 years of tenure, the fact is that not very many of our employees have experienced this kind of an event, and it will make them better employees, better managers, better leaders going forward for having experienced this because they will plan to avoid these kinds of incidents.

As we reported, while revenues were down for the quarterly comparison on a net basis, 4%, actually we were up 7%, up from the preceding quarter. So we are beginning to see some momentum develop. You see that in the securities and fees line of our financials, which were up 9%, and actually up more in the PCG segment.

The investment banking activity that you see in those financials again was about flat with last year, which really was a good year for us in almost all senses. I think we had kind of a delayed reaction to the market in terms of our own financial results, because it took a while for investors to realize how bad the markets and the economy had really become.

But we were up 74% from the immediately preceding quarter and, in fact, as you look at this six-month period, we are seeing rebounding activity not only in the corporate sector but also now in some of the public finance infrastructural needs that need to be financed going forward.

Investment advisory fees, which from our firm's standpoint are impacted almost on a -- based on a trailing value, which I've explained to you because we bill on the beginning of the quarter for the succeeding quarter, you can see that we actually showed a pretty dramatic decline of 28%. But we were up from the immediately preceding quarter 34%.

And obviously, given the September 30 balances that we have, which again increased fairly dramatically, we expect those fees to increase. If you look just at managed assets, you obviously don't get a full impact of this because we have a lot of wrap fee unmanaged assets that are affected by that same calculation since we have such a high proportion of our overall commission and fee stream in the fee segment. So continued to do well there.

The net trading profits, since we had gyrations in that September 30 quarter last year, were actually a lot better this quarter and about flat with the preceding quarter. More than all of that is fixed income, because we do take some facilitation losses on the equity side to support institutional equity business.

The other number bounces around a lot. You can't really describe differences because the individual data underlying that is so different quarter to quarter. Just as a comment, compared to the prior-quarter activity that we were having in other or in prior quarters, we record our changes in value in our private company or private venture capital fund investments.

In that line, we actually had almost a neutral kind of effect this time, lower numbers, and they offset each other so really didn't have much impact. Those investments, by the way, while I am touching on them are actually performing quite well, better than you might have expected in this kind of market condition; albeit we had some systems problems in our Event Photography Group Company that both deferred some revenues and probably lost some revenues during graduation season, since that is a photography company that takes pictures of graduations and marathons.

But the system's problems are being addressed, and actually the business is stronger than it has ever been. So we are actually quite confident that that is going to be a very good business for us going forward.

When you look at expenses, I think the watchword here is control. We have done a very good job of controlling expenses if you eliminate the compensation commission and benefit line and look at the controllable expenses, line item by line item even. The fact is that the numbers are well-controlled.

The only one that bounces around a little is bank loan loss provisions where we are actually up $10 million from the preceding quarter and more than double last year. I am sure Steve Raney, our RJ Bank President, will provide more color for you when we discuss bank items in more issue -- in more detail.

But the fact is we -- I think we are on the cusp of the end of our major write-offs and bank loans unless we see another leg down that impacts the corporate sector. Most of our commercial loans have been marked down to extremely low values. And as a result of this, we actually reported net roughly $43 million of after-tax income, down from $49 million last year. and up slightly from last quarter.

And then I tried to describe that noise in the press release. The major factor that I focused on was the tax rate, which obviously was low this quarter. But actually it had cumulatively been way too high the preceding three quarters, not because we were estimating high or anything like that.

It was because of the effect of the COLI investment portfolio, which over the prior months had accumulated an $11 million less and then $6 million of it essentially was reversed in the increment here in this quarter, and continues to actually be offset as long as the market rallies.

I for one am not a big fan of running these kinds of adjustments through income statements, because it is really money that doesn't belong to us anyway effectively. So when you look at after-tax margins on net revenues, they were 6.44%, which is down a bit from last year's margins. But what I would tell you is that the most important thing as you review these financials, I think, is to think about what you might see in the numbers on the segment basis occurring compared to the prior quarter.

So if we might, I'd like to go to some of that. When you look at the Private Client Group, you essentially are in a position here where we are beginning to see the increases in business on the part of our two broker-dealers here in the US, and our other subs in the brokerage business. And that manifested itself in an increase in profits in the quarter from about $18 million pretax to $22.3 million. And we are seeing, as I said, increases in fees and commissions as we go.

On the capital markets front, the numbers look very good compared to last year, but again that is largely a function of the absence of equity capital markets. From contribution numbers, they are not losing money, they are not making money to speak of. But the activity levels, as I said, the pipeline is beginning to grow.

And fixed income has continued to knock the cover off the ball during all of these quarters as you might find in our other comparable companies. This is -- I think the win-win for us on that front has been the recruiting that has occurred in our institutional fixed income business, not just in institutional sales people but also in originators and public finance, etc., largely as a result, as I've mentioned in prior conversations, of the upset at the major firms, some of whom have actually exited some of these spaces.

Asset management, the profits were down for the reasons I said before. But as a result of the increasing earnings, they were actually up dramatically from the preceding quarter and certainly far above where we thought they were going to be. And that was a consequence of two factors; number one, the rally, the major factor, which increases the assets under management. But also from cost-savings plans that were designed to offset some of the projected loss of revenues at earlier asset levels.

Emerging markets were largely a non-factor, and proprietary capital was profitable at almost the same level as last year. So it is actually, as I said, doing quite well.

The other thing I would say about the Private Client Group is I always update you when we go through those numbers. If you look at the year-to-year comparisons, we are up a little over 400 financial advisors, about an 8% increase on a firm basis and 300 domestically. So the growth net -- and remember, you do you lose some brokers who decide to absent themselves from the business, especially trainee level brokers that never thought they were entering the fire pit when they decided to join a financial services company.

So that growth has been outstanding. And again, it has been -- in the high-quality levels you also see some shift inside those numbers, as I said, as people leave at the lower end and are added in the upper end.

In fact, if you wanted to look at it on a gross additions basis, we recruited about 650 new financial advisors in the US, gross, during this period. So things are going well on that front.

When we look at it segmenting a little bit out, we didn't really get any contribution from Canada. Although conditions there are improving, they operated around breakeven. We expect them to be back doing better here as market conditions and the economy improve. Here the economy never got as bad in Canada because they avoided a lot of the real estate issues.

And as we all know, oil prices are up again and even gas prices are up. Albeit it's not likely that they will be escalating very fast, we're looking at a longer-term recovery period for natural gas, even though it's a very attractive fuel alternative currently.

When we looked at the financial assets under management, we had some movement out of our cash trusts into a bank sweep program, which actually has been a little problematic only in the sense that we have had some of that money that essentially hasn't been deployed sitting at RJ Bank with flat spreads, basically, so that it's impacted bank results this quarter. So we haven't gotten the full benefit.

While I'm on that subject, many of you are familiar with Promontory. That happens to be the program that we are utilizing. And we are still at the very end now of aligning all of the banks that are in our waterfall program. And the intention was, of course, to obtain FDI insurance for all these deposits at the same time that we could increase yield to clients and increase returns to the firm at the same time, which is a win-win.

And while this may be an immediate effect, it may not always exist, we still have other cash depository alternatives. We've not moved all of our assets into this sweep. But Jeff and I were considering this earlier and just as a rough estimate, I would tell you our increased earnings from this at these kinds of rates over the next year would probably offset the cost of our $300 million in note offering that we did during the quarter.

So it is a meaningful number, in other words. Essentially, while our net interest figures when you look at them grossed up with the bank don't reflect the pain and suffering experienced at the broker-dealer from having virtually no interest rates, the fact is that we virtually lost one of the larger contributors to profitability in the private client business, as well as just at the general corporate level, that we should benefit from as interest rates rise some time in the future.

The Fed seems intent on keeping them pretty low for the immediate future, perhaps even as long as all of 2010. But as some have argued, you could see some increase in these levels without really impacting general liquidity in the marketplace. So they may start earlier than we might guess. But just taking it on a conservative front, I would tell you that this is another potential source of increased profitability in the future for the industry, not just our firm.

Some of the other factors that I ought to talk to you about, I did mention the assets under management numbers. If you need to correct for that, we will make that clear when we see quarterly releases because we actually include tables showing where that money is actually held.

But assets under management are growing rapidly in terms of net sales, as well as appreciating. So that side of the business is actually much better than it looks in that statistic.

I think that we will continue to see increases going forward, would be my argument from that evaluation of what is going on in almost all of our segments, so long as the economy continues to improve. I think it is important that you recognize that the factors that influence our business are so much a part of that general economic framework that while we can distinguish ourselves with conservative practices, we can't totally avoid the impacts of the kind of catastrophe that we experienced in this fiscal year.

And I know all of us, those on the other end as well as here, will be glad to have this year gone and be looking forward, as we have been experiencing recently, to listening to increasing earnings reports from our American corporations which seem to be doing better than one might guess given the general economy, as a result of cost savings principally.

But you are seeing revenue enhancement in some areas, and you will see it in ours. So I think the outlook is pretty good.

I think with that, rather than address all of the issues in the line that I have here, I will leave it open to questions so that we can focus on what the issues that you think need some more color or clarification.

With that, we are ready for questions.

Are you there, Kanisha?

Yes, sir. (Operator Instructions) [Daniel Harris].

Good morning, guys. How are you?

Good morning, Dan.

So good quarter. Appreciate all of the color today. I was wondering if, Steve, you could just talk us through what the -- put some more color around the shared national credit review, what you guys saw, some of what you looked at your portfolio, and then ultimately it didn't seem like the provisions of the chargeoffs had to be increased by that much. So, in general, what you are looking for going forward?

Yes, Dan, good morning. In terms of the shared national credit exam, we received those results back in August. We had 200 of our borrowing relationships as part of the shared national credit exam. It was relatively benign, I would say, in terms of any major differences. As you know, we go through a rigorous process every quarter to assign the probate risk ratings to our credit relationships.

They are also further validated by a third-party loan review company, and also our audit from KPMG reviews loans as well. But out of the 200 relationships that were reviewed as part of the process, 14 loans were more harshly rated by the regulatory exam, and we had seven relationships that were more harshly rated than what they had. We left those intact more harshly rated during the quarter.

The net impact of that in terms of dollars was approximately $15 million, which was embedded in our provision expense for the quarter. So once again, a relatively manageable amount and a smaller percentage than our overall provision expense for the quarter, just our own process of reviewing the credits and the ongoing impact of the economy to our borrowers.

The reason, Dan, that is an estimate is at the time we got this, we hadn't even finished our own quarterly process and may well have come to the same conclusions that they had come to anyway. But they saved us a little time.

Great. That is really great color, thanks for that. So just shifting over to the residential side then, because it certainly seems like you guys put a lot of color on the commercial side already. So about a 100 basis point increase sequentially in delinquencies. Not overly dramatic, especially given your NPAs are still fairly low. How should we be thinking about the resi book at this point?

Sure, yes, about 30 basis points, Dan, of that increase was related to just the reduction in the loan balance. So we did have an increase of $17 million of loans, total loans past due quarter-over-quarter. That is over 30 days. We continue to be concerned just that we have not seen a decrease of these residential past dues to occur yet. And it's also a little bit problematic in terms of just loans being in the pipeline over 90 days past due with the servicers 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 five that were resolved in the quarter and 10 new properties. So now we have 20 OREO properties.

We think that maybe by the middle of next year, we will have peaked in terms of the residential past due issue. You know, obviously this is very much tied to the employment situation. But as you mentioned, our results and the performance of our residential portfolio continue to far exceed any of the national statistics on residential mortgage portfolios. But we have seen a continued increase across the board in terms of past dues.

Okay, great.

We are being very vocal with the servicers in managing and trying to actively work these loans through to resolution. We are also being very aggressive with, once the loan gets past due, us writing the loan down and/or reserving against that loan.

Okay, Steve, thanks for that color. I will let you off the hook here. I just want to shift over for my last question to fixed income. Tom, you talked about that being very solid again. What products are you seeing really driving the results, and what areas do you think could be more opportunistic in 2010?

What I would say generally is that most of the business is still being driven by the mortgage-backed securities activity, although there is an increase in terms of corporate bond activity also. As you may recall, we have an analytical group that actually reviews the underlying mortgages and provides goods evaluations for institutional clients particularly who own these securities, in order to help them upgrade or get rid of securities that they shouldn't own. And that is still a very successful operation for us.

As you know, a lot of the growth in the Fixed Income Institutional Sales Group there is what we call the Financial Group, which is doing business with smaller banks, medium-sized banks, et cetera, and other institutions. And they do more traditional business, generally speaking. And as those banks become more healthy, I expect that business to actually increase in the more traditional product lines.

So I think there is good opportunity on that front for offsetting some of the decline, which will result from two factors dealing with the securitized type securities, because the spread will narrow as more information develops and the market gets a lot more liquidity.

And obviously, that doesn't benefit us in the sense of the spreads you might be able to earn or the commissions you might earn on transactions, but it does benefit it in terms of perhaps bringing more people into the marketplace who are buying things, that they better understand when they buy them in an environment where you have improving underlying economics.

So I think you will see a trend towards more of the traditional business going forward. I expect that there will still be pretty high levels of fixed income activity over the next year or two. But you will begin to see it taper off a little bit as more attention is paid to the equity markets and as the spreads begin to diminish.

Thanks, Tom, I appreciate the color.

Devin Ryan.

Good morning. I just have a couple here. Sorry if I missed this. But can you speak about the Nuveen refinancing in the quarter, what the current balance outstanding is and the timing of when you'd expect Nuveen to refinance the rest of the ARS?

Essentially, they were working on three different funds in this first series of refinancings they have done, which they have completed the -- the money hasn't been refinanced yet, so you don't have the return of the ARS money. It takes up to 30 days after they have the money to basically refund them.

You are looking at roughly a portfolio of $500 million in our clients' hands, which this particular financing which was small by intention, since they didn't know what the market reaction would be and they wanted to work their way through the process in a more test-like fashion. This was met with success to such a level that I tried to buy some of them, but it was traded as a hot issue because we had so much demand from retail buyers.

So what I would tell you -- and there was more demand than you might have guessed from institutional buyers. After all, a well-secured five-year note with 3% tax-free interest is pretty attractive in this market. So they are going to move as fast as they physically can.

I don't know specifically whether that will mean that they do something that is more like a serial shelf financing or whether they will have smaller groups done. But if you had to do them fund by fund, it would take six months to work your way through this. If you could do it in a more condensed fashion by offering different funds at the same time, I think you would have enough demand to do that, by the way. You might even have more demand. And as a result, it would go much faster.

Beyond that, I really don't have a whole lot of insight for this, other than that they want to get it done as fast as they can, too.

Sorry, did you say what the balance outstanding was currently?

About $500 million of ours; it was $11 billion total.

Okay. Steve, can you give some color around what drove the decline in NPLs in the corporate portfolio in the quarter; and then also just get your thoughts on loan growth moving forward? I guess, obviously, you have shrunk the loan portfolio through year-end, and just want to get some thoughts going forward from here.

Yes. Devin, it was a very small decline in the commercial portfolio in terms of nonperformers. Actually, some of the charge-offs, the $26 million in charge-offs impacted that. We only had two new borrowers go into nonperforming status for the quarter. So the net-net of that was a very small reduction by about $4 million in our commercial nonperformers for the quarter.

And then in terms of -- (multiple speakers)?

Loan growth going forward. Yes, we have reengaged in, at least this quarter, attempting to at least replace the runoff. The runoff continued to be higher even last quarter than we anticipated. The capital markets continued to be open for a lot of our borrowers that resulted in some paydowns, and the residential paydowns continued to be rather strong.

So I would think that maybe at best for this quarter, we would be running flat. We may actually wind up being down slightly. There is absolutely zero pressure to find assets. We are going to be extremely selective in our credit selection, but we are -- we have reengaged in and are doing new loans, both residential and some high-quality corporate loans.

So this quarter probably flat to maybe slightly down, but the balance of the fiscal year I would anticipate loans year-over-year being up maybe in the 7% to 8% range.

Okay, that is helpful. Thanks, Steve. And then just lastly maybe for Jeff, the comp ratio seemed to be at its highest level in a number of quarters. And I just wanted to get some color on what is going on there. Was that due to just the mix of revenues or maybe some recent hiring, or just that there's anything else going on there?

A combination of all those things, but it also -- the mix of revenues as it shifts more toward investment banking becomes a higher compensated business. And we had some of the year-end -- I'll call it year-end true-up -- when you have a better profitability than we had been estimating running throughout the year, you have to bring that to actuals by the end of the year.

And again, another thing that is going to skew it as an independent contractor business picks up and they've done a lot of recruiting and some -- seeing some better revenue growth in that side, that has a much higher payout attendant to it. So when you see PCG revenues go up, it makes a big difference whether it's on the contractor or employee side from a revenue perspective.

Right, okay. All right, great. Thanks a lot.

Joel Jeffrey.

Can you talk a little bit about the growth in the investment banking revenues? It seems to be the exact opposite of what the trend we saw last quarter where you had a lot of deals and low revenues, and this time it seems like you had a bit lower number of deals and higher revenues.

Yes. You've got to remember you get M&A revenues in your mix there, too. So M&A revenues were pretty good during the quarter. The activity level, it's a little misleading as I said the last quarter, because a lot of these financings are last-minute overnight kinds of offerings wherein we might get 2% to 10% single-digit kinds of participations.

In the old days, we would have called these worthy of syndicate recognition, not of being a co-manager, but that is not the way business is done today. So the actual numbers I'm reminded here by Jennifer, our Controller, that for the September quarter the merger revenues were $13 million versus $4 million in the June quarter.

So that gives you some specifics that you can utilize to understand some of that difference. The thing that is encouraging actually is not so much the gross numbers as the fact that we are getting some lead designations. When you get lead designations and the financial ramifications of a transaction might equal 10 of these small pieces, and we are seeing more of that. So I am more favorably impressed by that than I am by just these sheer numbers.

Okay, great. Then, Tom, I know you touched on this a little bit before, but can you just give us a little bit more color on your thoughts on what specific business lines would be the most -- would benefit the most from interest rate increase and maybe what ones would be most impacted on the negative side?

Steve raised his hand for the negative side.

Yes.

The bank has obviously got spreads. The whole industry has spreads that are ridiculous. I would tell Steve -- the other part of what Steve said, there are plenty of loans out there to make. There are also plenty of loans to make with very high return.

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 come based on client deposits, will benefit as well as RJF itself, which has a lot of uninvested capital that gets invested overnight that is earning next to nothing, whereas as times improve, that will get better.

And the other depositories, the credit interest program at the firm, would earn more. The cash deposits earn more. All of these things happen as interest rates go up. So essentially, it is mainly a trade-off that happens.

I think bank spreads are going to continue to be pretty good for the foreseeable future even if rates begin to go up some, just because I think lenders are going to be very chary of making loans that don't work out, and they are still going to be inclined to try to retain margin to work their way out of their problems.

While I would describe our situation as better than our peers as you can tell from some of these relative percentages that we operate with, a lot of them still have a lot of problems. And we are going to see over the next year on the small bank front continuing loss of some of these smaller banks as the FDIC has time to work its way through the problem list. I mean this is a big list.

So I think basically we are going to see more interest coming to the brokerage side of the business and not much change at the bank. It will continue to go down, as Steve has prognosticated now, probably thinking it was going to be actually greater than it has declined in the past.

Okay, and then just sticking with that. The contraction of net interest margin, was that primarily due to again rolloffs and things being done at lower rates, or was that more towards what you had alluded to before about maybe some of that cash not generating any kind of spread at the bank?

You got it. It's those two. Steve, do you want to elaborate?

Yes. Joel, about 15 basis points of that reduction this quarter was related to these cash balances that we have that are really in excess of what our liquidity needs are currently. So much of the margin reduction was related to that fact.

That cash is -- we are working diligently on these other banks joining into the Promontory program. Several of them are very close to joining into the program. So that problem should -- we should alleviate ourselves of that problem here sometime this quarter. But in those areas, even net of that there was a small reduction in net margins for the quarter.

Okay. So barring that cash staying on the balance sheet again, you can assume that maybe net interest margins stay relatively flat going forward?

Yes, relatively flat to maybe slightly down. Maybe 10 basis points down more during the course of the year or so.

Okay, great. And then just lastly, can you just give us an update on where you guys stand in terms of bank holding company status?

Yes, we would love to. Maybe that is the answer. We laugh about this. They finished their investigation here. They have issued the staff report to the governors. We don't know what the result of that is until we hear from them, basically.

As we can tell here by past action, I think they are becoming a lot more comfortable with our business. They now understand the brokerage side of our business, which is far less complex than the investment banks with which they were interacting already. And consequently, I think they are feeling more comfortable with our business.

I think they will be equally impressed about the beginning of the refinancing of Nuveen, the recent announcements of continuing financing from a couple of the other issuers here recently, and the continuing runoff of the individual muni based ARSs, which have diminished a lot in total.

So they had some concern about that. I think they have less about that, but it is still a concern. And we don't know if they have any other concerns of any moment. Steve, I don't know what your --.

No. I think, Tom, as you mentioned, the field team that completed the examination have sent their recommendation to the Board of Governors. Part of their examination, while it wasn't a full-blown safety and soundness exam on the bank, they spent a lot of time with us as well, as you can imagine.

So it was a very thorough examination. There were probably 15 people here for over two weeks. And we are still, as Tom mentioned, still waiting to hear where they are in their process.

All right, great. Thanks for taking my questions.

Hugh Miller.

Good morning. Most of my questions were asked. I had a couple other ones. With the increase in security commissions from a quarter-to-quarter basis -- I'm sorry, from a month-to-month basis in September, can you just give us a sense of how much of that is seasonal versus pickup in headcount, or just a change in sentiment on the client side?

It is mainly sentiment change going on now. Obviously, the headcount since it is such a large percentage, it is having an effect, but it was spread pretty evenly throughout the year. I don't think you see a lot from that. Essentially what happened was our commissions were buffered. The decline in commissions were buffered by the fact we were adding all of those new financial advisors. And now you are beginning to see the effect of their addition, plus just the investor sentiment.

If you add a lot of brokers, it usually takes them a year to get back to the levels of production that they were at. They might only produce 70% in their first year in a normal market, and we didn't have a normal market. So it was probably impacted more greatly.

All right, that's great. And then also looking at the increase in margin balances as well, I guess from a quarter-to-quarter standpoint there, just thoughts on whether or not that is also just a change in risk-taking sentiment or if that is more just client accounts coming over?

No. We were almost at $2 billion before we added all of these brokers and the market started going down. So you are seeing a combination effect of some of these brokers bringing margin accounts with them, and now some of the investors beginning to add to their investments, getting more confidence and actually leveraging some of these investments, or for other needs.

The way -- most of our margin accounts are really not so much speculative in nature as they are borrowing cheaply for other purposes. So I think you will see a continuing increase in these margin balances going forward for that purpose alone.

No one asked the question and I didn't really talk about it; Jeff didn't talk about it. But maybe you guys are all used to the ballooning that we had to go through for the OTS test -- QTL test last year, which we did again at the end of this year which, of course, was not planned. I mean, we expected to be a bank by now.

And I can understand that the Fed was otherwise engaged. I can understand their reluctance to take any risk with except -- with the prospect of having a firm get in trouble after they moved them, because that makes those that do the staff evaluations subject to criticism.

So I think that this process ought to -- they ought to come to a resolution on this process now. We clearly, the way we operate today are not set up to be an S&L. But the other side of that is that if the decision is made we need to stay as an S&L, we can readjust our operating strategy. But I don't think that is good for anybody.

And as a matter of fact, I think for a financial services company like ours, which while it is smaller than many of these larger investment banks that have become bank holding companies, the fact is we are a complex financial institution that should be regulated by a large safety and soundness administrator that understands the holistic approach to risk reduction and understands all segments of the business at the same time, as opposed to having those segments regulated by a host of independent regulators slowly.

So I'm pretty comfortable that that is going to happen. We don't like this ballooning effect. We have to explain it to everybody that it's not well understood. It isn't easy to manage the complexities of doing it at year-end, and that is not what the rules were intended to do. It was certainly never an idea that entered our mind on our own to do that.

So, hopefully, we will get this resolved because, as you know, we had planned to become a bank anyway. It has nothing to do with this recent experience which caused us to accelerate the process or try to accelerate the process, but we were doing it anyway. So it is just more of an irritation now than anything else. We like both sets of regulators. We don't have a problem working with either one.

Okay. And it seems as though on a quarter-to-quarter basis that a substantial pickup in the investment banking business was driven by the incremental increase in M&A fees.

Can you give us a sense of what sectors you were seeing the demand and what your thoughts are on a go-forward basis on the M&A front?

On the M&A front. The M&A front is more spread across sectors. It's not as impacted by what happened -- what industry sector happens to be financing that quarter. We obviously started in this recovery process doing a lot for real estate and energy. Those are two of our biggest sectors.

Financial services is another big sector and healthcare is another one. And healthcare M&A activity is pretty consistent. I expect that to continue, if not accelerate, going forward. I expect real estate to still be active as these REITs try to stay in front of any refinancing requirements they might have in their balance sheets.

Most of them are in reasonably good shape now, certainly the bigger ones are now. But I could see some financings coming down the street in that area continuing to go.

We added, as you know, the firm in Boston which will add M&A activity going forward next year. In just total numbers, that is really the focus of their operation as they work with venture capital firms and just general M&A transactions.

And now with the sector support they get from working with our analysts and existing investment bankers, I suspect -- I'll be in that office this afternoon as a matter of fact in Boston -- I'm encouraged that that number will be up.

And Chet Helck reminds me that Canada activity has been slow relative to where you might guess with natural resource activity. So I think that is going to heat up also in Canada, which would be focused in natural resources. But again, they have more sectors that they do business with. And I suspect you are going to see a pretty broad-based re-equification of balance sheets here, as conservative business guys who have their stocks selling at 15 times earnings again begin to say, you know, gee whiz, it's not a bad idea to add some equity here so we don't get caught with our pants down ever again.

I think that is an appropriate thought process for a lot of American industry to go through. Finance while you can is a very good investment banking rule for CEOs to follow. So actually, I think it's going to be a pretty good period for those that have big practices here. That goes for all of our operations, not just Canada and the US.

Excellent color there, I do appreciate that. The last question I had is with regards to the fixed income segment. On the competitive landscape there, obviously you mentioned that you expect some of the spreads to taper off as we move into next year if that business will kind of maybe slow a little bit, but remain somewhat active.

On the competitive front, are you seeing firms and larger firms coming back into the market trying to retake share; and your thoughts there on a go-forward basis?

Yes, that is a very clear trend. There has been like a 180-degree reversal. You know, I've joked over the years that Wall Street has a way of firing a lot of young talent every time they have some sort of a downturn, only to have to do a 180-degree turn six months later when those guys would have been six months better and more ready to take advantage of the circumstances and go out and try to rehire.

There is no question that they are back in the market looking for people, at least those that didn't totally exit sub-sectors of the marketplace. But -- and this is a big but -- if I were one of these investment bankers or institutional salesman or a normal financial advisor looking for a job, I would still be extremely nervous about the risks of going to work for a very large institution that has demonstrated that they weren't really in control of all of the risk metrics in their business; and had a strategy that really put at risk not only the institution itself but all of its employees and its investments. And I don't think that is going away tomorrow.

So I actually think we are still in the catbird seat, while I expect our recruiting to taper off also in the financial advisor side of the business. I expect that largely because there are larger retention plans now, that there are fewer firms. The firms that are in the market that have indeed tried to do things to retain their people because they had large net losses.

But those that have stayed committed to the business at least are -- I think are resting some of that. So I think that will be slower, too. But do I think it will stop? No. And I think it won't stop for the reason that I mentioned on the general front. There is a big advantage to having come through a situation like this demonstrating that you follow your values and principles, as opposed to demonstrating that you did not.

Well, I certainly appreciate your insight. Thanks so much for all of the answers on the call. Thank you.

Steve Stelmach.

Good morning, everyone. Steve, just a quick data point actually on the SNC review. I think last year you gave us numbers that resembled something like your criticized credits were 4% and in the industry was 12%. I'm not sure if I have those numbers correctly. But you managed through the process pretty well this year. What were those numbers this year?

14% versus roughly 23% or so.

Okay. Okay, that is helpful. Then, Tom, most of my questions have been answered, but it sounded as if you're incrementally more positive today than you were maybe even last quarter. Do you think there is follow-through in terms of client activity towards year-end and into 2010, or is your --?

My crystal ball is somewhat limited with respect to timing short-term market moves. But I would actually have anticipated we would have already had a correction based on the size of this rally we've had off the bottom. And if you can be informed by prior market environments like this when you are coming out of downturns, whether it is the 30s or the 70s, it really doesn't matter. The fact is you normally don't see this rapid a rise to this degree without some form of correction.

So I have plugged into my own forecast going forward here a short-term correction. However, the fundamentals underlying the economy which will determine the intermediate term and longer-term direction of the market is fairly strong, stronger than I would have anticipated as you quite correctly point out last quarter.

I actually thought that this period that corporate earnings would disappoint, not actually make everybody enthusiastic, because it looked like the analysts had actually not totally addressed moving down earning estimates for everything.

And clearly, there are stocks that disappoint today. We all know that. It's pretty hard to be in it your business. But I do think that for all the factors that I have mentioned dealing with the economy, I think we really are in the course of a good reversal that will be slow but it will be fairly consistent on the economic front. The stock market will have more gyrations in it.

But the general trend in the stock market when we are sitting here a year from now -- I may not be sitting here a year from now, but when Paul and the rest of my team here are sitting here a year from now. And I will probably listen in to see if they know what they are doing. I expect that the report will be good. And that is about as close as I ever get to making any kind of a prognostication about directions, either of the industry or of the market.

Okay, great. I was thinking more in terms of client activity and sort of their --.

I'm telling you client activity will pick up. A lot of clients already think that they have somewhat missed the boat here and they need to have some involvement. Some of the clients that I know very well, some of which I still -- some of whom I still service after years of my inability to push them off on someone else -- have effectively never gotten out of equities because based they've made so much money.

And I would tell you we have actually repositioned some of those people for the first time because I couldn't move them before. I tried. And they still do it very slowly, but they talk to their friends about their recovery being up 50% and how they are doing, and the fact is it was a blip to them now.

And that is why I say for heaven sakes, I told all my department heads don't let this be a blip, you know. This is not a blip. This is a great opportunity for a learning experience, and make sure you have learned everything you can coming out of this so that you are prepared for the next one.

And the lessons that I have learned in the past for this kind of period are normally that you get a very rapid increase in revenues in environments coming out of an economic situation like this. But because of the damage done to the financial system and the depth of damage on the economic system where we still haven't got the total commitment of our administration to fix those problems instead of focusing on other less important issues, I'm telling you it's going to take longer than it should take to have this happen.

But fortunately, the free enterprise system is a mighty vehicle and it will find its way to climb all of these hazards on its own. And that is what I foresee will be happening over the coming couple of years.

Great. All right, Tom, thanks so much and congrats on a good quarter.

Thanks.

And there are no further questions at this time.

I would like to take this opportunity to thank you all for sitting through another year of quarterly meetings. This one has been a little more exciting than prior years. Hopefully, next year will be more fun. I'm sure there will be some excitement, but I hope it is all with your teams winning as opposed to your teams losing.

Thanks so much. I look forward to seeing you sometime in the near future.