雷蒙詹姆斯金融 (RJF) 2011 Q2 法說會逐字稿

--Steve Raney, head of our bank; Ken Armstrong, legal; Chet Helck from PCG; and Jennifer Ackart, our Controller.

To start off, that we I think -- 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 Julian 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 track in 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.

An 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.

As you compare the quarters, we get a little noisy.

Last quarter we talked about some positive, kind of unusual adjustments and 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 $3 million dollars kind of valuation adjustment.

So as we look through the numbers and compare, it gets a little lumpy, but if you look through the six months I think good solid results.

Talk a little bit about the segments, and then I'm going to turn it over to Jeff.

Our private client group, again, results 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% per strong performance.

The financial advisor count 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 and 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 is 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 seems to give us a good solid performance.

Our underwriting revenue was down, actually, sequentially on the equity capital market side.

That's even though, if you look at investment banking lead managed 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.

And that -- the revenue is down both in Canada and the US 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 the municipal area.

Commissions were down in fixed income, about 18%, but trading profits were strong.

So again, it netted out to give us a 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 to help 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 is good but the pay offs remain high.

And obviously our provision expenses, much lower this quarter, which just shows the improving kind of credit quality environment both in our portfolio and the market in general.

For the quarter too, 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 SID 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 -- five year note offering that we think we transacted successfully and we also have 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.

Yes.

Just to complete the discussion on the bank, there is 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 were 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 dividending it to 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 as 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 is 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's swung both directions.

In positive markets we do get the benefit of the non taxable 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 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 costs that Paul mentioned, all the 1099's to the brokerage customers and all the annual report information to the shareholders, but in addition to that we have an -- we're starting to incur some of these costs related to systems initiatives that we have 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 will remind everyone that if we were at normalized interest spreads, 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.

Equity is up over $100 million again the second quarter in a row.

It just doesn't work any more, taking net income and subtracting dividends.

I mean there are other factors and most notably for the last two quarters we have he had significant equity activity in stock compensation, stock purchase plan by employees, exercises of stock options, etcetera, 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 you have a few more shares outstanding so $20.42 at the end of the period.

Okay, thank you, Jeff.

Obviously, again, the business is such that we're going to have up and down in 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 back log in ECM looks good, but we have no idea where the markets are going, fixed income.

Again we had a strong quarter but it tends to be volatile so as we look out, the fundamentals and the core part of the business look very strong but obviously we're is subject to whatever happens in the market and although the last couple days look good or looks like today will start off, who knows what tomorrow will bring so.

I also want to spend a second on the bragging part just for our folks at -- the Wall Street Journal online released their Best on the Street survey and we had seven analysts who were recognized which would tie us in number two in terms of number of analysts recognized and their stock picking performance and the bank investment consultant top 20 our SID division here in our PCG group.

Not only do we have the number one, we had five of the top ten and seven 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.

(Operator Instructions).

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

Hi.

Good mornings, guys.

Good morning.

The net financial advisor headcount declined modestly again, down about 1% from last year.

I just want to see if I could get a little bit more detail on 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.

Okay.

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 are seeing that the people that we're losing are people who are 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 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 part 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 wipe out.

I mean we're actually seeing recruiting levels that are reflective of what we saw prior to the meltdown in the -- inordinate amounts of high numbers of people moving in 2008 and 2009 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 will 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 on the edge get back into solid footing in terms of their revenue flows in their businesses.

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 to 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 move 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 to higher fee paying products?

I think we're seeing, Devin -- what the industry is seeing is that you see people slowing 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 are moving into equities, they're moving into a little more risk products, 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 over invested 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.

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

I also think that the game has changed a bit bus we've seen we've crossed over that magic date that they told us about for years, where the baby boomers are 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.

There's still room.

The question is how much, though.

Okay.

And than just lastly, I apologize, I missed some of the details 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?

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 non-recurring but identifiable items which predominantly were legal expense and some asset valuation write downs in private equity that we're participants in.

Okay and how much I guess was in the other?

About $10 million was in the other.

In the other, okay.

It was probably about $1.5 million of mailing costs that are seasonal in data comp communications.

Great.

Okay.

Thanks, guys.

Sure.

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

Morning.

Hi Steve.

You guys went a long way actually in answering my question on the Private Client Group and the pre-tax earnings there, but if you could give us a little bit more color that pre-tax operating margins historically the last couple of quarter have been running between, call it 9% to 10.5% or so.

At this elevated revenue run rate how should we think about pre-tax margins and the leverage once you get beyond sort of the noise of these one time or seasonal issues?

I think like we 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, and we had some of these non-recurring items go in 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.

Okay.

So something between that 9% and 10% sort of pre-tax seems about right?

Okay.

And then can you give some color on the legal accruals that you mentioned?

Nothing systemic.

Just a couple of issues that came up.

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

Yes.

Okay.

Just a couple of items that came up and they do come up from time to time and sometimes they fit in a quarter, sometimes they spread out.

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 credits coming in I would argue better than expected.

Any color on what sort of outlook there?

Well, hey Steve good morning is this Steve Raney.

Obviously we had the lowest provision expense and charge-off quarter in a couple of years.

Yes.

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 have seen some reductions.

We actually -- the dollar amount of 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 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 down grades 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 and seeing a lot of positive trends in credit and I would only hedge that by saying as you know, Steve, we're a very lumpy portfolio and you're subject to one loan going on some type of non-accrual status, when you've got -- I think we've only got about $50 million of non-accrual commercial loans at this point so that could be dramatically impacted by just one loan.

Sure.

Could you just remind us what the average loan size on the commerce side is?

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 and our average commercial loan is slightly less than $20 million.

Okay.

And I'm kind of hoping the provision goes up.

Yes.

We're trying to do loans.

Yes, grow loans and add --

Harder with this slightly shrinking portfolio.

Right.

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

Absolutely.

And then lastly any update on (inaudible) securities?

Continue, Nuveen has been fairly active, and the balance is -- Customers down significantly.

Again, I think 360 at the end of the quarter, $360 million so we've come a long 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 and traction so we're still working on it.

We would like it to go away and -- but it's heading in the right direction.

Got it.

Okay.

Thanks.

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

Morning, guys.

Hi Joel.

Hi Joel.

Could you just give is 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 was a pretty strong month and just wondering if you're seeing that kind of trend continue into April and I know you have said the retail investor is a little more engaged but just looking for a little bit already color there.

I think the trends from the first six months, again looking at both quarters, have been good.

We see the business solid and a lot of it is depending on the market so I wouldn't look at any one month commission trend to see anything.

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

There's also a continued flow of retail-oriented investment banking products that are coming up that are augmenting some of those numbers so I don't sense the softening that you may be perceiving.

I don't see it either.

Okay.

Great.

And then your principal transaction line was again pretty strong.

I think you had commented that some of it was driven by good results in the muni business.

I mean that's been fairly volatile and it looks like issuance is down substantially.

I mean is that a sustainable trend do you think for the remainder of the year or is that something we should just expect to be pretty lumpy?

If issuance stays down it stays volatile sustainable, so it's actually good for the trading profits and that kind of environment so as the environment steadies, you would expect less on the taxable sidecertainly it's way down.

Its spread came in and you have your new issues.

So it just depends on the market trends, and 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's it's going to be this quarter and frankly that's probably the hardest item to predict for us.

Okay.

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've 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 outside your core business to try to grow the loan portfolio?

We've got a number of programs, multiple fronts really working with our PCG and ECM businesses, so in 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 on those clients and also looking at a none purpose lending product which I think most other people have to roll out, again with our PCG group.

Again that performance of at 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.

Yes.

Just a couple of things.

Wave actually now made a couple of loans to Canadian based companies that are clients of Raymond James Limited, our 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 business while it's not really represents -- it doesn't represent core clients obviously to the firm, that business has been more challenging to find 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 of 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 non purpose lending product later on this summer.

We did -- we've 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 syndication.

So those are some of the efforts that are under way to grow the bank's loan portfolio.

So but nothing that's not outside of our existing businesses.

We really -- we want to stick to our core competencies at this point.

And just a follow-up in terms of ramping up origination are there expected increase in costs associated with that or are you guys pretty well scaled for that right now.

No.

There have been some increase in expenses in terms of HR, hire of 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.

There's clearly some up front investment that launch these new endeavors, but they're pretty rapid pay backs in all of them.

Yes.

Great.

Thanks for taking my question.

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

Hi.

Good morning, guys.

Hi Dan.

I wanted to touch on the emerging market segment.

You guys actually have shown some pretty nice growth there and a really good number this quarter.

I was wondering A, what is sort of driving that, and B, can that type of growth be sustained?

Are you doing anything different than you've done before?

Well, I think it's, again, a little bit of the cyclical phenomena.

We have he 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 then Brazil, as we have 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.

(inaudible).

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.

Okay.

Fair enough.

I wanted to come back to that 200 basis point improvement in ROE that you mentioned with a higher interest rate assumption.

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 -- and/or how much do you pay out to the brokers in terms of what they're doing?

We -- our assumption is that when rates rise 100 basis points that we would pass 60% of that through to clients.

I've been told by others that will be more than competitive because banks will never pass that much through but where I have really gauged 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 it controlled asset fee just based on cash balances.

It's being done today just as it would be then so that won't incrementally go up as rates rise.

Our view is that a 100 basis point rise gives us between $80 million and $100 million pre-tax to the bottom line so that's where we back into the -- That's where you gets the $45 million or $50 million after tax and your 2% ROE.

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 line items.

I'm assuming you will 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?

Well, it would go up -- a lot of them go into ramped fee type of programs.

Which is how a lot of the investing is being done here, as you know, so certainly that fee it a lot more than we're earning relative to the interest spreads 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 would -- and so I think there would be a positive to PCG and to asset management for sure.

And certainly over what we're earning on interest today.

I don't think anyone is earning a lot on it.

Yes.

I would imagine.

We would make that trade today for sure.

Well, let's all hope that happens.

Alright guys.

Thanks a lot.

Thank you Daniel.

(Operator Instructions).

And your next question is from the line of Hugh Miller with Sidoti.

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 of why you guys were looking at I guess five year paper as opposed to the ten year paper you issued before.

Well, you know we looked all up and down 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 -- there are going to be opportunities to be to invest and we want to stay liquid.

We're generating positive cash flow so if we had a specific purpose for it we would have gone longer to fund whatever we were 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 are 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 say liquid and debated up and down the curve so we could argue ten, we could argue five.

We could argue 30 but we chose the five based on that we did the last one at ten to prevent a bunching of the maturities.

Okay.

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 strategies are kind of looking at now with regards to expectations on when the fed might start to mover?

Well, I don't know of everyone.

You keep looking and it seems like every couple of quarters the prediction gets a couple of quarters later so we've assumed that rates are going to have to move up.

Whether it's the end of this year, beginning of next year which I guess is more the consensus.

We don't know so we're in a position to benefit from it and we -- I don't know if we could tell you when that will be.

Okay.

Better than anybody else.

All right.

And I guess in thinking about the pre-payment pressure that the bank has been under, I was wondering I guess maybe if you could make some comment, Steve, about how much of an influence would higher short term rates kind of play on some of that pre payment pressure or is that more a function of the longer end of the curve, what kind of starts to get that pre-payment pressure to subside?

No.

I think that would impact it for sure.

We have seen the pace by which our corporate borrowers are able to refinance had 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, there would be a direct correlation with pre-payments and repayments of our mortgage portfolio with rising rates.

Okay.

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

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.

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 a lower pace at which the new loans are coming on at those reserve levels.

It's kind of not in our DNA to release reserves but yes, definitely the latter versus the former comment for sure so.

I don't see us changing our system.

Yes.

That would systematically release reserves.

It'sjust as individual credits improve occasionally we see reserves, specific reserves release.

Yes, specific reserves.

I think you would see the same discipline you saw in 2009 where people questions whether we were reserving.

We reserved well.

Not as well as we thought I guess going into 2008 and 2009, 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.

Okay.

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 off or all of it, that in and of itself would just reduce reserves once again holding everything else flat.

Okay.

Well, I appreciate the insight there.

Thank you.

Okay.

Thank you.

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

Yes.

I just wanted to follow up on the loan pay downs.

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 want to see if -- a couple things.

One, does that run through interest income, and then secondly how much was the positive impact from loans paying off early this quarter?

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 is 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 look relatively consistent with one another.

And it does flow through -- yes.

Interest earnings.

Interest income, yes.

Which is why the spreads stayed up at 3.5% where we've been steering people guidance wise to numbers lower than that.

It's lower than last quarter because last quarter included that interest adjustment.

(inaudible)

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

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 in the last couple quarters -- the last couple quarters is higher than maybe it had been running previously?

Just want to make sure that I'm thinking about that right.

That is correct and as the refinancing subsides and then we wouldn't have that recognition.

I think it was a little bit less than that $10 million number the last couple of quarters, though.

Got you.

Okay.

Great, thanks a lot.

(Operator Instructions).

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 am always reminded what's in front of me, to keep the firm operating positively so appreciate your participation and talk to you all soon.

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