Jan 22, 2009
Operator
Thank you, ladies and gentlemen. (Operator Instructions).
We are going to the line of Joel Jeffrey with KBW. Please go ahead.
Joel Jeffrey
Good morning.
Tom James
Hi, Joel.
Joel Jeffrey
Can you give us the most updated capital ratios at the bank?
Steve Raney
Joel, this is Steve Raney. We are actually finalizing our true financial report, which is due next week.
We are still finalizing all those numbers, but we are in a well capitalized status as of 12/31. Approximately, our risk-weighted capital ratio is going to be in the 10.2% range, as an example.
Once again, we are finalizing that, and we will have it all filed next week.
Tom James
Our goal, just giving you some forward, is to move that up to the 11% range in the not-too-distant future. We will be continuing on that process over the quarter.
Steve Raney
Adding some cushion in the bank, as you know, Joel, we have been managing the capital on a just-in-time basis and all feel that it is appropriate and prudent to have a little bit more cushion in the capital ratios in the bank.
Joel Jeffrey
Okay, great. In terms of the net interest margin; do you see any possibilities for expansion in the upcoming quarter, given the timing of the Fed cuts in the last quarter?
Steve Raney
I would say that probably will not happen, Joel. These are record margins already.
Our cost of funds is extremely low right now, with really no ability to take them lower. We do enjoy wide margins both in our residential portfolio and in our corporate borrowers as well.
If it was to improve, it would only be nominally. There is probably more risk of margin compression than expansion.
Tom James
Because responses to the client yield concerns, we may have to increase yield to depositors from current levels in spite of what is going on in the marketplace, just because there are these anomalies that allow customers to be able to find higher yields. I would not look for that, and as I said, I do not foresee much change in terms of net earning contributions from the bank going forward.
However, that would be the negative part of that formula.
Joel Jeffrey
Okay, great. Lastly, if you guys could just expand a little bit on the strength of the fixed income business in the quarter, and was it purely tied to the mortgage-backed securities?
Or were there other asset classes within that that were driving this?
Tom James
All fixed income institutional activities are at high levels. In addition, we have a retail-driven trading book for the industry as well as for ourselves.
The retail interest in fixed income securities is also high. The trading jolts that we have received have often been muni generated heretofore.
What I would say is that the muni business has had a rally in these securities. The spreads are all positive on the carries at inventory.
It does not make a big difference to us, because we do not carry large inventories. We are not a proprietary bet shop.
The fact is those are all incremental, and that is why I say, I do not see that changing here. I expect those levels, you might not have quite the volume of institutional commissions we had in the December quarter going forward, but they are still going to be very good.
They should be above what we internally budget.
Joel Jeffrey
Okay, great. Lastly I apologize, because I think I missed your comments on the status of the TARP filing.
Tom James
We are proceeding through the process.
Unidentified Company Representative
We have been in front of the committee and we are just waiting to hear; the call might come any day soon.
Tom James
These guys have other concerns. They have been going to a lot of parties this week.
Joel Jeffrey
All right, great. Thanks for taking my questions.
Operator
Thank you. We will go to the line of Steve Stelmach with FBR Capital Markets.
Steve Stelmach
Hi. Good morning.
Tom James
Good morning.
Steve Stelmach
Congratulations on managing through a pretty tough three-month period. Count me as one of the surprised by the magnitude of the margin expansion at the bank.
I think you touched on the cost of funds side and how it is probably at a base level and may migrate higher in terms of deposit cost competition. But, we are at the asset side.
How should we think about the lag in terms of asset yields relative to cost of funds? Is that a couple quarter event or a year-long event?
How should we think about the asset yield side?
Steve Raney
Well, Steve, our residential portfolio as you know are primarily 5/1, 3/1 and a handful of 7/1 ARMs.
Steve Stelmach
Yeah.
Steve Raney
With the rate reductions lately, we are anticipating an increase in prepayments across the mortgage portfolio, but that portfolio is pretty stable at this point. Prepayments, although we are anticipating them to pick up, are really at historically low levels right now.
Our corporate portfolio continues the opportunities that we are adding on to the portfolio. Currently, they are at widening spreads.
Corporate borrowers are paying more. There are more fees being added to yields.
In terms of the lag, the corporate portfolio continues to widen but I would say the residential portfolio based on the prepayment speeds will probably be negatively impacted.
Steve Stelmach
So you think asset yields, and I know it is not the forecast, but asset yields probably in the year about where they started and is it mostly a function of the cost of funds side of the margin?
Steve Raney
Cost of funds-related. Jeff, were you going to add?
Jeff Julien
Yes. The increase in cost of funds, the corporate side, is pretty much a floating rate portfolio.
That is not very much impacted by movements in rates in general, but the mortgage portfolio is pretty much a static rate right now. An increase in cost of funds would likely be spread there.
Steve Stelmach
Okay, great.
Jeff Julien
A third of the portfolio is in residential and two-thirds in corporate.
Steve Stelmach
Yeah.
Steve Raney
$2.8 billion of the $7.7 billion is in residential loans.
Steve Stelmach
Yeah. That is helpful.
Just turning to credit real quick; I guess no one expects NPAs to be going down anytime soon, but what about your watch list? Is that developing at about the same pace as your non-performers, the stuff that you think that has not gone non-perform yet, but are sort of on the watch list for you guys?
How is that developing?
Steve Raney
Part of the additional provision expense approaching $25 million for the quarter is related to downgrades in the portfolio. Credit size loans are up, watch loans are up.
We are being very rigorous with how we are going through the portfolio and trying to be as forward-looking as we can be in terms of what we think may happen to the portfolio loan by loan. We have seen increases in those credit-sized loan categories, and the provision expense reflects that.
Jeff Julien
About 70% of the provision expense for the quarter related to credit re-grading as opposed to new loan production.
Tom James
A lot of that re-grading is generated by our own views. What I would say, since you do not have as much experience in dealing with the mentality of our general accounting principles here, is that we are an extremely conservative organization with respect to evaluating reserves and trying to put ourselves in a situation where we do not get unexpected surprises, and that has always been true of the company and it certainly is reflected in what we do in the loan portfolio at the bank.
Steve Stelmach
Just one last question; in terms of your discussions surrounding TARP, what seems to be the bogies that the regulators of the government is looking for? What is the nature of the discussions and what is the hold-up if you get any sort of body language from them?
Tom James
Actually, I would not point to any individual fact. We got very high recommendations from our own regulator.
They did not have any exceptions and things like that they asked for. I am not quite sure I can tell you how they think related to individual classes of applicants.
I do think that perhaps savings and loans are looked at closer than banks because there is more confidence, I think on the part of the FDIC, as well as clearly the banking side of the business in terms of the regulation. I would tell you, we have had very good regulation in terms of the quality of supervision by the OTS.
The reason we are moving does not have anything to do with that. It has much more to do with the fact that we are clearly more comfortable at this size of the institution managing a more corporate loan-directed portfolio than we are in a mortgage portfolio, and we never liked commercial development much.
They just do not pay you for it, for taking the risk. We like where we are going here in terms of our own allocation of assets on our own balance sheet.
Steve Stelmach
Great. Thanks very much for the time.
Operator
Thank you. We will go to Devin Ryan with Sandler O'Neill.
Please go ahead.
Devin Ryan
Yeah. Good morning.
Steve Raney
Yeah. We got you.
Devin Ryan
Most of my questions have been answered, but just a few here. On the provision, it sounds like you are being conservative, but based on kind of what you are seeing today, and I know that this is difficult.
But, is it at least reasonable to expect that the provision level should be increasing from this quarter's level, especially if credit losses are increasing?
Tom James
That is a very hard question to answer, because it is very sensitive to whatever is going on in the portfolio. If you ask me, I would tell you that while they may stay in the range they are in, with the same logic that we are applying now.
If anything, at the rate of growth we are forecasting, which is slightly less than the $500 million plus addition to loans, I would think the provision will be lower.
Devin Ryan
Thanks. Just a general question here; can you just talk a little bit about the general health of the retail investor today, kind of relative to prior downturns?
Are they still engaged, and what has changed in recent months? Just trying to get a sense of where we are today versus some prior downturns that you have seen.
Tom James
I would tell you after reading their December statements, and probably again after two days ago, they are nearing a state of shock and a lot of them have already changed their life plans because of this. They are looking hard at their portfolios.
They are very concerned about the institutions with which they are doing business. The icons of finance in the United States are clearly no longer icons in their eyes.
I had a call from a client of mine who is an American that lives in France, asking me if he should move his money out of his Bank of America checking account. That is the state of the American consumer investor.
One of the things that we are most sensitive to, while we are doing cost cuts, is not reducing the level of service to our financial advisers, and to our clients, because we know their level of concern, we know their level of need for high touch. High service has probably never been any higher than it is, at least not since the 70s.
I would not be surprised to see branches open for business on Saturday mornings as they were in those timeframes here during 2009. I actually think, and that is one of my reasons for forecasting that securities activity as a result of this, you will mobilize decision-making.
You don't have the resources to necessarily redeploy, although there is a lot of money on the sidelines. Even Jamie Dimon doesn't have as much as he did two days ago.
The fact is I am going down to speak tomorrow at a meeting in Miami to pretty wealthy individual clients. I can tell you the attendance is doubled, and what was expected at the meeting.
The reason for that is there is this very high level of concern in looking for guidance in the marketplace. You can forget about the bounces, you can forget about exuberant results here in the near term for the securities firms.
They are just not going to have that happen. Average productivity will be off 25% in 2009.
Devin Ryan
In terms of the clients, are they actually just sitting on cash today or are they pulling money out of their accounts?
Tom James
They did pull money out of their accounts in the fourth calendar quarter, our first quarter. They did not pull them out of the firm; they moved them to cash alternatives; they moved out of both managed and unmanaged asset classes.
They do have cash on the sidelines, and one of my biggest concerns is they miss. As you know, rallies, they occur in these discrete short periods, and I am deathly afraid that they are going to miss the opportunity for recovery because they tend to always get out at the worst times.
My guess is, although I haven't seen the cash flows yet from sales of securities two days ago, but I would bet you that there is going to be a high cash movement during that period just as there was in the month of October. So, it was nice to see a rally the next day, but I see the futures when I came in.
I don't know what has happened now. We are going to opening at the moment.
I don't know what's going to go on, but I don't think this volatility is totally gone yet in the marketplace.
Devin Ryan
Okay, that is helpful. And then just lastly, Jeff, I am not sure if I missed this, but what drove the minority interest line in the quarter?
Jeff Julien
Must be our diversity program. The two things that I know drove it were additional losses in Turkey that we are reserving for shutting that operation.
They are still the minority owner there.
Devin Ryan
Right. Okay.
Jeff Julien
And the other thing is there are some write-downs in some of the Raymond James tax credit funds, which we own only a very small percentage of, but some of which are consolidated under VIE rules. So they are really partnership that we own only a very, very small percentage of that had some net partnership losses because those partnerships fell off ongoing operating losses as part of their benefits to the investors.
Devin Ryan
Okay, thanks for taking my questions.
Jeff Julien
Thank you.
Operator
Thank you. We have no further questions.
Tom James
I would like to take this opportunity to thank you for sitting through a long quarterly call. As you might guess, we are pleased with the results in the quarter.
As you can tell, I am making plenty of cautionary statements going forward, but I still think that the major income generators that affected the first quarter are still healthy and will continue to do so in the succeeding quarters. And I wish all of you good luck in navigating through these difficult times that we are bound to still have to go through for a while.
And I look forward to talking to you again next quarter, if not sooner. Thank you.
Operator
Thank you. Ladies and gentlemen, that does conclude our conference for today.
Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.