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Raymond James Financial (NYSE:RJF)

Q2 2011 Earnings Call

April 21, 2011 8:15 am ET

Executives

Paul Reilly - Chief Executive Officer and Director

Unknown Executive -

Jeffrey Julien - Chief Financial Officer, Executive Vice President of Finance and Chairman of Raymond James Bank

Chester Helck - Chief Operating Officer and Director

Steven Raney - Chief Executive Officer of Raymond James Bank and President of Raymond James Bank

Analysts

Devin Ryan - Sandler O'Neill

Steve Stelmach - FBR Capital Markets & Co.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc.

Hugh Miller - Sidoti & Company, LLC

Daniel Harris - Goldman Sachs Group Inc.

Paul Reilly

[Audio Gap] Here for your question entertainment; and Jeff Julien, our CFO; Steve Raney, Head of our Bank; Ken Armstrong, Legal; Chet Helck

From PCG; and Jennifer Ackert, our Controller.

To start off, that we, I think, had another strong solid quarter. We put in the release that we had record net revenue, record assets under administration and record assets under management And some of you commented that we had record commissions and investment banking revenue. But as Jeff Julien reminded me, we probably had record expenses in some areas, too, as we grow. So it's kind of hard with the growth to keep tracking how we're topping each individual line item. The highlights of the quarter: net revenue of $852.1 million, up 16% over last year and 6% sequentially; net income of $80.9 million, up 45% over last year and down 1% sequentially; and EPS of $0.64, up 42% over a quarter a year ago and down 2% sequentially.

So as we compare the quarters, obviously, strong results year-over-year. To compare the quarters, we get a little noisy. We -- last quarter, we talked about some positive, kind of, unusual adjustments in a bank interest accrual and a performance fee and reversal of incentive comp. This quarter, we had some items probably going the other way about $4.5 million of legal reserves and about a $3 million of kind of valuation adjustment. So as we look to the numbers and compare, it gets a little lumpy. But if you look through the six months, I think good solid results.

We'll talk a little bit about the segments. Then I'm going to turn it over to Jeff. Our Private Client Group, again, result's up 7%, driven really by record assets under administration up 5%. And if you consider the mix of cash and bonds there, I'm sure it's partly inflows and partly obviously, the market up; and commission revenue up 8% for strong performance. The financial advisor account was essentially flat, but you can see productivity is going up. We continue to recruit still at a slower pace, but really kind of holding total count even as productivity is increasing and we recruit people at higher levels.

On the Expense side, you can see comp expense up in PCG a little bit. Part of that is just this time of year where we get FICA and start funding our plans a little bit as a mix as RJF grew a little bit faster than RJA. And most of the legal reserves and the other were in this segment. And communication expense is also up, and I'll have Jeff talk about that overall a little bit later. But this is a quarter we do a lot of statement mailings to our customers.

Capital Market, also a very, very solid quarter coming off of a very solid quarter sequentially. Again, a lot of moving parts in our business, which is actually the strength of our model. We have some parts up and some parts down, but it always seemed to give us a good solid performance. Our underwriting revenue was down actually, sequentially, on the Equity Capital Markets side, and that's even though, if you look at investment banking, we've manage deals at 28 versus 26, up slightly, but our pieces of the deals were somewhat smaller. So we still struggle with that metric to give you on how banking is doing. But that 28 is up over a comparison of 15 to last year. What -- and that the revenue's down both in Canada and in the U.S. sequentially, but we had our second best M&A quarter ever. So strong M&A activity really took up the slack in that business.

Also our fixed income, our trading profits were very strong, especially in municipal area. Commissions were down in fixed income, about 18%, but trading profits were strong. So again, netted out to give us a very, very good quarter overall.

Asset Management, our assets under administration set a record of 35.6%. Both segments of the business, our Eagle balances were up 5.5% and our internal Asset Management Group about 6.8% to give us a 6.6% increase. Very strong inflows, good net inflows and, again, a good market that helped the results. The earnings on that increase were flattish, but we have to remember, last quarter, we had a performance fee that wasn't repeated that made the earnings look flat, but we're very happy with the growth and strength of Asset Management.

The bank, again, performing very well. Loans down slightly at $6 billion. And again, the challenge is good production, good pipeline, but people keep paying off their loans. Again, it's the challenge in the Banking business, you want to lend money to people who can pay you back, but don't. And we're just in a position that we're going to hold our credit quality level. And if we have to run in place, we will. We hope to grow loans. Pipeline's good, but the payoffs remain high. And obviously, our provision expenses are much lower this quarter, which just shows the improving kind of credit quality environment both for our portfolio and the market, in general.

For the quarter two, post the quarter, we had a number of transactions that completed in April. One is the Howe Barnes acquisition that's going to add 12 investment bankers in our Financial Institutions Group. So the people are now on board, and that integration has gone very well. We just had our first hands-on meeting of our fixed income and Equity Capital Markets and our FID [ph] financial advisor all around that space meeting together in Chicago.

And we continue to grow that Investment Banking segment as we've also added, in the technology space, bankers in both Boston and San Francisco. We also completed $250 million note offering, a five-year note offering that we think we transacted successfully. And we also purchased controlling interest in a venture that we have in Paris in our European Equities business. So just past the end of the quarter, we had a number of transactions that also, I think, impacted us -- that will impact us positively over time.

With that, let me turn it to Jeff for a little more color on the numbers. And then, I'll be back to you. Jeff?

Jeffrey Julien

Yes, just to complete the discussion on the bank, there's a lot of detail that we include in the supplement that we put out with the press release, which tells the whole story. But I think it's important to note that the credit metrics continue to improve. While criticized loans are relatively flat this quarter, they're down 27% since last fiscal year end. And the capital ratios are all in very good shape, and that's subsequent to a $25 million dividend that was paid to the parent company in March. As Paul pointed out, if we run in place for a while, generating $100 million a year and dividend-ing into the parent, then that's what we'll do. But we're going to wait for the right opportunities to grow the bank.

Some of the other metrics that -- regarding the entire firm that many of you mentioned in your morning comments. Net interest looks like it was down. But actually, excluding the interest adjustment in the first quarter, net interest was actually up slightly. The bank's net interest was down, has compressed a little bit. And loan balances dropped a little. But Private Client Group more than made up that difference with increased margin debits, and we're actually starting to benefit from the rate increases in Canada where we have Private Client assets as well. That country's ahead of us in raising rates.

We benefited in the quarter in the tax rate slightly from some of the corporate-owned life insurance gains. That's been a factor that swung both directions in the positive markets. We do get the benefit of the nontaxable gains, so that drove a little bit lower tax rate this particular quarter and year-to-date versus the prior year. The comp ratio is up slightly from the prior quarter, but that's mainly due to the commission increase, being driven by independent contractor operations. The bonus reversals in the prior quarter, which didn't recur. As Paul mentioned, FICA's starting over, but we didn't really see anything that looked out of line in the comp arena in looking across our operations. And I think it came in pretty close to where one would expect it with those factors.

On the data communications line, aside -- we had two real factors that drove the sequential increase. One is the seasonal mailing cost that Paul mentioned, all the 1099s to the brokerage customers and all the annual report information to the shareholders. But in addition to that, we have -- we're starting to incur some of these costs related to systems initiatives that we mentioned in prior calls that we're evaluating a lot of our core systems here. So we may see that continue going forward for, at least, a couple of quarters, if not longer, as we continue to evaluate and possibly upgrade or change some of our major systems.

The other expense Paul mentioned, it was predominantly in some of these legal accruals and some of the valuation adjustments. And there were a number of other smaller items. There's not one big item that we can point to in that particular line item.

As a result for the quarter, the ROE was about 13.2%, which brings us to about 13.5% for the year-to-date, which is again, we have a 15% target rate. I'll remind everyone that if we were at normalized interest spreads that, that would mean about 200 basis points to our ROE. So we would be operating within that range if those spreads were present today.

And lastly, I'll point out book value. The Equity's up over $100 million against the second quarter in a row. It doesn't work anymore taking net incomes, subtracting dividends. I mean, there are other factors. And most notably for the last two quarters, we've had significant equity activity and stock compensation, stock purchase plan by employees, exercises of stock options, et cetera, as equity compensation becomes a pretty big factor in the compensation structure of financial services firms. So as a result, book value went from $19.73 up to $20.42. We do have -- obviously some of that -- the consequence of that stock comp activity is, yes, a few more shares outstanding. So $20.42 at the end of the period.

Paul Reilly

Okay, thank you, Jeff. Obviously, again, the business is such that we're going to have up and down and line item adjustments. But I think overall, the business has performed well.

A good -- another solid quarter, which I think we're getting used to here at Raymond James and hope they continue. But certainly, with the market conditions, as we look forward, assets under administration are certainly a driver of our PCG business and look good. The backlog in ECM looks good. But we have no idea where the markets are going, fixed income. Again, we had a strong quarter, but tends to be volatile. So as we look out, the fundamentals in the core part of the business look very strong, but obviously, we're subject to whatever happens in the market. And although the last couple of days look good or looks like today we'll start off, who knows what tomorrow will bring.

So I also want to spend a second on the bragging part just for our folks. The Wall Street Journal online released their Best on the Street Survey, and we had seven. Analysts were recognized, which would tie us in Number 2 in terms of number of analysts recognized in their stock-picking performance. And the bank investment consultant top 20, our FID [ph] Division here in our PCG Group. Not only do we have the number 1, we had 5 of the top 10 and 7 of the top 20. So I'd like to congratulate those folks also.

With that, I'll turn it over for questions from you guys.

Question-and-Answer Session

Operator

[Operator Instructions] And we have a question from the line of Devin Ryan with Sandler O'Neill.

Devin Ryan - Sandler O'Neill

The net financial advisor headcount declined modestly again. And it's been down about 1% from last year. I just want to see if I could get a little bit more detail on the reduction this quarter? Were they independent or traditional FAs? And then any additional color you can provide on the current recruiting landscape, including, I guess, the pipeline would be very helpful?

Chester Helck

Good morning, Devin. This is Chet. As you point out, it's a tough environment for some people in the business. We're seeing that there continues to be some fallout of financial advisors at the low end. We are focused on this intensely given the interest that you and others have expressed in it, as we always have been focused on it. But we're starting to drill down into the numbers, and we're seeing that the people that we're losing are people who were doing considerably less production than average. And as you might imagine, most of that is happening in the independent contractor space, where the expenses fall to the financial advisors. So you can understand the economics drive them to the edge quicker than people producing more or are having their expenses paid. And so the logic you would expect is holding up as we drill down into it, and that's where most of the losses are coming. That said, on the other side, the recruiting part, as investor confidence is restored and the public comes back into the business, which we're seeing and that's driving our assets and that's driving our revenues, it's also driving demand for financial advisors. So competition in the recruiting part of the equation is intense. And we're getting our share, but everybody is seeing less movement overall. So therefore, less people are being recruited in total and competition for the ones that are is pretty high level. And we're not going to pay top dollar. We're going to hold out for the people that come for the right reasons and will stay with us and be good parts of our organization. And so we're not seeing the kind of inflows that you would like to see, given the continued deterioration at the low end. But that said, it's not a wipeout. I mean, we're actually seeing recruiting levels that are reflective of what we saw prior to the meltdown and the inordinate amounts of high numbers of people moving in '08 and '09. So I would say it's a tough recruiting business, but it's not unusual. And we're getting our share, and we're frankly optimistic that the pipeline is good. And we'll continue to produce at these rates. I think you will start to see less fallout at the bottom as business levels pick up and those people, who were maybe close to an edge, get back into solid footing in terms of their revenue flows in their businesses.

Devin Ryan - Sandler O'Neill

Okay, that's very helpful. And then I guess you just touched on this, but just want to get a sense of what you're seeing from retail clients. We have been hearing that they're slowly moving back into riskier assets and allocating more capital equity products. So just when you think about where we are in terms of stages of them doing that, I mean, is this still the very early stage of maybe, that moved back into equities? And if you just look at the, call it, $275 billion of client assets, has that mix changed dramatically in terms of two higher fee-paying products?

Paul Reilly

I think we're seeing, Devin what the industry's seeing. And so you see people slowly returning into equities and reducing their fixed income exposure. So we still have high cash levels, maybe as a percentage, diminishing a little bit as the equity values go up. Investors are being cautious. So they're moving into equities, they're moving into a little more risk product, but it's not a massive move. So if they get reinvested to where they were, it would be a big uptick for us. But probably if you look back, people might have been overinvested in equities. Or if you look at the aging population, you see a shift more into a broader set of fixed income and equity balance. So there's certainly room to return, so it's just early cycles. And the question is how much where will they end up?

Jeffrey Julien

It's hard to say what inning we're in because we don't where the end is.

Paul Reilly

I also think that the game has changed a bit because we've seen -- we crossed over that magic date that they all told us about for years where the baby boomers were retiring at the rate of 10,000 a day. And so the flows are on. And I think that as people do come back into the equity markets, they may not come back into the same segment of the equity markets that they once were in. I think dividend-paying stocks and revenue or income-producing equities will be favored over some of the high alpha growth sort of strategies that entailed more risk as people are more concerned about retirement planning.

Jeffrey Julien

There's still room, the question is how much though.

Devin Ryan - Sandler O'Neill

And then just lastly, I apologize. I missed some of the detail, but can you just repeat the size of the unusual items that showed up in -- I guess, I'm assuming that all showed up in other expenses?

Paul Reilly

There was some in other and some in data comp. But there was about a compendium of about $10 million of, I won't call them nonrecurring, but identifiable items, which predominantly were legal expense and some asset valuation write-downs and private equity that we're participants in.

Devin Ryan - Sandler O'Neill

Okay. And how much I guess was in the Other?

Jeffrey Julien

About $10 million was in the Other. It was probably $1.5 million of mailing cost that are seasonal in data comp communications.

Devin Ryan - Sandler O'Neill

Great, okay. Thanks, guys.

Operator

And your next question comes from the line of Steve Stelmach of FBR.

Steve Stelmach - FBR Capital Markets & Co.

You guys went a long way -- actually, in answering my question before I asked on the Private Client Group and the pretax earnings there. But if you could give us a little more color, that pretax operating margins, historically, the past couple of quarters have been running between, call it, 9%, 10.5% or so. At this elevated revenue run rate, how should we think about pretax margins in a leverage once you get beyond sort of the noise of these onetime or seasonal issues?

Jeffrey Julien

I think like we've said, I think the six-month result is pretty indicative of where we should be. There was noise back and forth between the first and second quarters. We do some internal allocations that affect segments a little bit and things like that. Then we had some of these nonrecurring items going both directions in each quarter. So I think if you want a sense going forward, I think I would point you to the six-month results in that segment.

Steve Stelmach - FBR Capital Markets & Co.

So something between that 9% and 10%, sort of pretax operating margin seems about right? Okay. And then, can you give some color on the legal accruals that you've mentioned?

Paul Reilly

Nothing, nothing systemic. Just a couple of issues that came up.

Jeffrey Julien

And that was several added together, that wasn't just one item.

Paul Reilly

Yes, just a couple of items that came up. And they know they do come up from time to time. And sometimes they fit in the quarter and sometimes they spread out.

Steve Stelmach - FBR Capital Markets & Co.

Got it, okay. And then just on the bank provision. I know you guys have never given guidance on this number, but it kind of felt like it was settling into the low to mid-teens number. Obviously, credit's coming in, I would argue, better than expected. Any color on what sort of outlook there?

Steven Raney

Well hey, Steve. This is Steve Raney. Obviously, we had the lowest provision expense in charge-off quarter in a couple of years. The thing that is a very positive sign is the number of delinquent residential loans came down quite a bit. That's the second quarter in a row we've seen some reductions. We actually -- the dollar amount of the loans that are now delinquent in the residential portfolio, there were 314 loans at the end of December. Now it's down to 295. So we're seeing more activity also in just the foreclosure of pipeline and some short sales. So we're pretty encouraged that we're starting to see some positive momentum in the residential portfolio. We had a very good quarter in terms of just the number of upgrades versus the number of downgrades in the corporate portfolio. As Jeff alluded to, in terms of our total criticized loans, they were up slightly, but down in a big way year-over-year and year-to-date, down, like Jeff said, nearly 30%. So all that -- adding all that together, we're pretty optimistic in seeing a lot of positive trends in credit. And I would only hedge to that by saying, as you know Steve, we're -- it's all very lumpy portfolio, and you're subject to one loan going on, some type of nonaccrual status. When you've got -- I think we've only got about $50 million of nonaccrual commercial loans at this point. So that could be dramatically impacted by just one loan.

Steve Stelmach - FBR Capital Markets & Co.

Can you just remind us what the average loan size on the commercial side is?

Steven Raney

Yes, it's actually come down. And I would kind of split it up, Steve. Our average commercial real estate loan is less than $15 million, probably in the $13.5 million to $14 million range. And our average commercial loan is slightly less than $20 million.

Paul Reilly

And [indiscernible] I'm kind of hoping the provision goes up. We're trying to grow loans.

Jeffrey Julien

Yes, grow loans and...

Paul Reilly

Part of this with the slightly shrinking portfolio.

Steve Stelmach - FBR Capital Markets & Co.

Right. Up as a function of asset growth, not as the function of credit quality, right?

Paul Reilly

Absolutely.

Steve Stelmach - FBR Capital Markets & Co.

And then lastly, any update on auction-rate securities?

Paul Reilly

Continue and Nuveen has been fairly active and the balance is -- customers down significantly. Again, I think, $360 million at the end of the quarter, $360 million, so we've come along way from over $2 billion. And we continue to talk with regulators trying to get it behind us, but the balance seems to be going down. And news on most of the individual securities, we're getting positive news in traction. So we're still working on it and like it to go away, but it's heading in the right direction.

Steve Stelmach - FBR Capital Markets & Co.

Got it. Okay, thanks.

Operator

And your next question is from the line of Joel Jeffrey with KBW.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc.

Could you just give us a couple of comments maybe on some of the outlook you think for retail activity? I mean, it looked like, just looking at your numbers, sort of backing into a March number that sort of commissions and fees per day were down, maybe about 10% from February, which is a pretty strong one. I'm just wondering if you're seeing that kind of trend continue into April. And I know you've said the retail investors are a little more engaged, but just looking for a little bit more color there?

Paul Reilly

I think the trends in the first six months, again, looking at both quarters, have been good. We see the business solid, and a lot of it's depending on the market. So I wouldn't look at any one month commission trend to see anything.

Jeffrey Julien

And once again, they've got a little bit of a running start with assets under management being higher than our April 1 billings than they were on January 1.

Unknown Executive

There's also a continued flow of retail-oriented investment banking products coming out that are augmenting some of those numbers. So I don't sense the softening that you maybe perceiving now.

Jeffrey Julien

I don't see it either.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc.

Okay, great. And then your principal transaction line was again, pretty strong. I think you'd commented that some of it was driven by good results in the Muni business. I mean it's been fairly volatile. It looks like issuance is down substantially. I mean is that a sustainable trend, you think, for the remainder of the year? Is that something we should just expect to be pretty...

Paul Reilly

If issuance stays down, it stays volatile, sustainable. So it's actually good for -- to trading profits in that kind of environment. So if the environment steadies, you'd expect less. On the taxable side, certainly it's way down. Its spread came in and you have heavy, new issues. So it just depends on the market trends. So I can't tell you it's sustainable as long as the market stays a little bit volatile. It helps us in that space. So I can't forecast or tell you what it's going to be this quarter. And frankly, that's probably the hardest item to predict for us.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc.

And then just lastly on the bank, I know you guys have said it's been tough to grow loans. And I think in the past, you talked a little bit about, sort of new product areas you may be looking at. Is there any update on that or any thoughts on where you could go to upsize your core business to try to grow the loan portfolio?

Paul Reilly

We're looking at a number of programs in multiple fronts really working with our PCG and ECM businesses. So the PCG area and even outside of it, we're really ramping up our own mortgage origination program in the bank, so both for the market and to service our financial advisors. We are focusing. We've been hiring, looking to hire lenders within our ECM business to focus on our Capital Markets clients because the quality of those loans and performance has been very, very strong. Again, we've been aligning more, making more calls in those clients and also looking at a nonpurpose lending product, which I think most other people have to roll out, again with our PCG group. Again, that performance of that product was very strong in the downturn. And so the programs are all under way. We're working on them. Steve, I don't know if you want to give any more update or color, but they're coming and in progress.

Steven Raney

Yes, just a couple of things. We've actually now made a couple of loans to Canadian-based companies that are clients of Raymond James Limited, are Capital Markets clients of the firm in Canada. So we're looking to expand that business to support our clients. I would also just offer that the area that's been the biggest challenge. Historically, we were buyers of pools of whole mortgage loans, residential mortgage loans, which was always an attractive asset if you can buy it right. And if you're able to do the credit due diligence, I would say that, that business, while it's not really, represents -- it doesn't represent core clients obviously to the firm. That business has been more challenging, defined, new product to buy. And that portfolio has shrunk over the last couple of years. And if you take that out, the rest of our business has actually grown quite substantially, including doing more business with clients at Raymond James. So that will -- we're looking to expand that, the linkage with our Equity Capital Markets business and also Private Client Group, as Paul just alluded to, the rollout of the securities-based nonpurpose lending product later on this summer. We did -- we hired a healthcare industry banker this year, and we just recently, this last quarter, hired a senior syndications banker as we're starting to have conversations with clients regarding co-managing and ultimately lead managing their syndications. So those are some of the efforts that are underway to grow the bank's loan portfolio. But nothing that's not outside of our existing businesses. We really -- we want to stick to our core competencies at this point.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc.

And just a follow-up, I mean in terms of ramping up origination, are there other expected increase in costs associated with that? Or are you guys pretty well scaled for that right now?

Paul Reilly

No, there have been some increase in expenses in terms of HR -- hired some additional talent, our own mortgage banking operation. We actually -- this most recent six months had the highest loan production in terms of mortgage originations that the bank has ever had as a result of adding that talent and adding capacity, obviously adding some of these new bankers, the industry bankers. But that being said, our efficiency ratio is still one of the lowest in the industries. And I think that those investments in capacity and talent are appropriate to grow the business and also manage the risk of the portfolio.

Jeffrey Julien

I mean there's clearly some upfront investment to get -- launch these new endeavor, but they're pretty rapid paybacks in all of them.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc.

Great. Thanks for my answering my questions.

Operator

And your next question is from the line of Daniel Harris with Goldman Sachs.

Daniel Harris - Goldman Sachs Group Inc.

I want to touch on the Emerging Market segment. You guys actually have shown some pretty nice growth. It's a really good number this quarter. I was wondering, a, what's sort of driving that and b, can that type of growth be sustained? Are you doing anything different than you've done before?

Paul Reilly

Well I think it's again, a little bit of a cyclical phenomenon. We've had a very good business in Argentina. That was the good and the bad news because nothing was being done there for a long period of time, and we had two fairly large transactions there, which we led in banking, investment banking. And in Brazil, as we've ramped up, although we've had -- ramping up on expenses, again, we've had a little bit of traction there. So they've all hit this quarter. So I think you're seeing a pretty big number this quarter based on the past.

Daniel Harris - Goldman Sachs Group Inc.

[indiscernible] my comment.

Paul Reilly

No, and I'm saying I don't think it's -- I wouldn't say it's a ramp-up. We have some big fees that have hit this quarter and probably a little higher than usual.

Daniel Harris - Goldman Sachs Group Inc.

Fair enough. I wanted to come back to that 200 basis point improvement in ROE that you mentioned with higher interest rates assumptions. So as you think about that, when rates move up from sort of an attachment perspective, do you guys retain a majority of the interest on the cash balances and/or how much do you pay out to the brokers in terms of what they're doing?

Chester Helck

We -- our assumption is that when rates rise 100 basis points, that we would pass 60% of that through the clients. As I've been told by others that, that will be more than competitive because banks will never pass that much through. But where I really gauge that to is to be competitive with money market fund yields at that point in the cycle. We view that as a competitive factor as well. Our payout to brokers is where it is today. We share a small portion of, we call, a controlled asset fee, just based on cash balances, it's being done today, just as it would be done. So that won't incrementally go up as rates rise.

Paul Reilly

Our view is that 100 basis point rise gives us between a $80 million and $100 million pretax, the bottom line for us. So that's where we...

Jeffrey Julien

If you get the $45 million or $50 million after-tax and your 2% ROE.

Daniel Harris - Goldman Sachs Group Inc.

Okay. And then just on the Private Client Group, just thinking forward, if more assets do come to the equity market, how does that sort of impact the different items? I'm assuming you'll lose money in net interest income because people will be shifting money out of cash. But is the revenues that you'll earn, say, per dollar of asset go up? Is that how to think about that?

Steven Raney

Well, it would go up, I think a lot of them go into ramp [ph] fee type of programs, which is how a lot of the investing is being done here, as you know. So certainly, that fee is a lot more than that we're earning relative to the interest spread on cash. So that would certainly be a positive factor for us. And there are certainly increased Asset Management fees as more went into Equity as our Asset Management effort is largely small and mid-cap equity-based, at this point. So those were -- and so I think they would be a positive to PCG and to Asset Management for sure.

Chester Helck

And certainly over, what we're earning on interest today. Because I don't think anyone is earning a lot on it.

Daniel Harris - Goldman Sachs Group Inc.

Yes, I would imagine.

Chester Helck

We'd make that trade today, for sure.

Daniel Harris - Goldman Sachs Group Inc.

Well let us all hope that, that happens. All right, guys. Thanks a lot.

Operator

[Operator Instructions] And your next question is from the line of Hugh Miller with Sidoti.

Hugh Miller - Sidoti & Company, LLC

I was wondering if you could talk a bit about, I guess, the debt offering that you guys did issue. I was wondering, I guess when you consider the pace at which you guys put to work or have put to work the prior senior note offering, I was just trying to get a sense as to why you guys are looking at, I guess, five-year paper as opposed to the ten-year paper you issued before?

Paul Reilly

Well you know we looked all up and done the curve. Even 30 year looked attractive, if you're looking at equity replacement. I think the issue really is we think there's just going to be opportunities to invest, then we want to stay liquid. And we're generating positive cash flow. So if we had a specific purpose for it, we would've gone longer to fund whatever we're going to use it for. But given that, we just kind of chose a shorter-term range that we figured if we need cash, we're still generating good cash flow. We wanted to be liquid, be able to have opportunities to do whatever we wanted to do and cash over the period of time, we thought would pay it back. So we took probably more of an intermediate position given that and went up and down the yield curve. So we just thought the markets were attractive, wanted to stay liquid and debated up and down the curve. So we could have argued -- we could argue 10, we could argue 5 and we could argue 30, but we chose the five based on that we did the last one at 10 to prevent a bunching of the maturities.

Hugh Miller - Sidoti & Company, LLC

And I guess obviously we've talked about the importance of rising short-term rates to your bottom line. I was wondering if you could tell us what your strategists are kind of looking at now with regards to expectations and when the Fed might start to move?

Paul Reilly

I don't know if everyone -- you keep looking and it seems like every couple of quarters, prediction gets a couple of quarters later. We've assumed that rates are going to have to move up, whether it's the end of this year or beginning of next year, which I guess is more of a consensus, we don't know. So we're in a position to benefit from it, but I don't know if we could tell you when that will be, better than anybody else.

Hugh Miller - Sidoti & Company, LLC

And I guess in thinking about the prepayment pressure that the bank has been under, I was wondering, I guess maybe if you could make some comments, Steve, about how much of an influence would higher short-term rates kind of play on some of that prepayment pressure that really more a function of the long-end of the curve? What kind of starts to get that prepayment pressure to subside?

Steven Raney

I think that would impact it for sure. We have seen that the pace by which our corporate borrowers are able to refinance has slowed down here recently. As a matter of fact average loans for the quarter were actually up during the March quarter. We're still seeing some of that activity, but it has slowed down a little bit. Clearly, our residential portfolio, they would be a direct correlation with the prepayments and repayments of our mortgage portfolio with rising rates.

Hugh Miller - Sidoti & Company, LLC

Okay, and once you do start to kind of go into the mode of growth in the loan portfolio, can you just remind us again on the expected reserve rates that you would administer for the residential and the corporate originations?

Steven Raney

Sure. Our corporate portfolio, it's obviously -- we've got a risk rating system. So it's based on what grade of loan, but the going-on rate for new loans is approximately 160 basis points of new reserves. And the residential portfolio is just slightly less than 100 basis points right now going on.

Hugh Miller - Sidoti & Company, LLC

Okay, and I guess if you start to increase your expectations or become a little more comfortable with the overall economic climate and so forth, would you think that there is the opportunity for reserve releases? Or should we just kind of start to see the reserve ratio come down just as we see growth in the portfolio and then a lower pace of which the new loans are coming on at those reserve levels?

Steven Raney

Yes, it kind of not in our DNA to release reserves. But definitely, the latter versus the former comment for sure.

Chester Helck

I don't see us changing our system that would systemically release reserves. It's just as individual credits improve occasionally, we see reserves, specific reserve release. .

Steven Raney

So I think you'd see the same discipline you saw in '09 where people question whether we're reserving, whether we reserved well, not as well as we thought, I guess, going into '08 or '09, but we keep the same discipline even in the up markets. We assume over a cycle, we're going to use them and try to value them appropriately.

Chester Helck

One thing that you could see though, Hugh, is holding everything else constant if you actually had a loan that you had reserved, and you decided to actually charge part of the loan offer or all of it, that in and of itself, would just reduce reserves, once again, holding everything else flat.

Operator

And we have a follow-up question from the line of Devin Ryan of Sandler O'Neill.

Devin Ryan - Sandler O'Neill

Yes, I just wanted to follow-up on the loan paydowns. I believe last quarter, you benefited by maybe $10 million or so from loans paying off early, which seemed to be a little bit higher than normal. And I just wanted to see if -- a couple of things, one, does that run through interest income? And then secondly, how much was the positive impact from loans paying off early this quarter?

Paul Reilly

Yes, that is correct, Devin. That fee recognition of the unamortized portion happens at the time that a loan pays down or pays off. And also if a loan has a material refinancing element, if there's a change of maturity date, we go through an exercise to determine if it's in effect, a new loan or not. The March quarter looked very similar to the December quarter in that regard. So there was -- there's been quite a bit of fee recognition, but both quarters looked relatively consistent with one another.

Steven Raney

And it does flow through interest...

Paul Reilly

Interest income, yes.

Steven Raney

That's why the spreads stayed up at 3.5% whereas we've been steering people guidance-wise to numbers lower than that. And it's lower than last quarter because last quarter included that interest adjustment. It was [ph] present in the quarter.

Jeffrey Julien

The other thing that impacted the margin this last quarter, our cash balances were higher by a couple of $100 million, which there's very little margin in the overnight liquidity that the bank has, so that lowered the margin on total assets.

Devin Ryan - Sandler O'Neill

Got it. Okay, that's helpful. So just thinking about, call it, maybe $10 million or so in benefit from that, that's higher than maybe the last couple of quarters. The last couple of quarters, it's higher than maybe it had been running previously? I just want to make sure I'm thinking about that right.

Steven Raney

That is correct. And as the refinancing subside, then we wouldn't have that recognition. I think it was a little bit less than $10 million number over the last couple of quarters though.

Operator

[Operator Instructions]

Paul Reilly

Okay, well if there are no more questions, I thank you for joining the call. And Tom James has joined us in the room, so every time I see 93 consecutive quarters, I'm always reminded what's in front of me is to keep the firm operating positively. So I appreciate your participation, and talk to you all soon.

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