Apr 21, 2009
Operator
Good afternoon. At this time, I would like to welcome everyone to the M&T Bank first quarter 2009 conference call.
(Operator Instructions) I would now like to turn the call over to Mr. Donald MacLeod, Vice President of Investor Relations; please go ahead sir.
Donald MacLeod
Good afternoon, this is Donald MacLeod. I’d like to thank everyone for participating in M&T’s first quarter 2009 earnings conference call, both by telephone, and through the web cast.
If you have not read the earnings release we issued earlier this morning, you may access it, along with the financial tables and schedules, from our website www.mtb.com, and by clicking on the Investor Relations link. Also before we start, I’d like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation.
M&T encourages participants to refer to our SEC filings including those found on Forms 8-K, 10-K, and 10-Q for a complete discussion of forward-looking statements. Now I’d like to introduce our Chief Financial Officer, Rene Jones.
Rene Jones
Thank you Donald and welcome everyone. I’d like to thank all of you for joining us today on the call.
I know its been a busy day for everybody but for M&T at least, its difficult for us to break from the tradition of having our earnings release on the day of our Annual Shareholders Meeting. So I thank you for your patience.
There are a few items from this morning’s press release that I’d like to discuss before I respond to questions. Diluted earnings per share were $0.49 in the first quarter of 2009 compared with $0.92 earned in the fourth quarter of 2008.
Net income in the recent quarter was $64 million compared to $102 million in the linked-quarter. The amortization of core deposits and other intangible assets amounted to $0.09 per share in the first quarter of 2009, compared with $0.08 per share in the linked quarter.
There were after-tax merger related costs of $1 million or $0.01 per share in the recent quarter. There were no merger-related costs in the linked quarter.
Net operating earnings per share which exclude the amortization of core deposits and other intangible assets, as well as merger-related charges were $0.59 for the recent quarter compared with $1.00 in the linked quarter. Net operating income for the quarter was $75 million compared to $112 million in the linked quarter.
The recent quarter’s results included $20 million or $0.18 per share of after-tax other then temporary impairment charges on non agency mortgage securities. This reflects our determination that the bonds are unlikely to pay their full contractual level of interest and principal over the remaining life.
Because of previous unrealized losses taken on the bonds through other comprehensive income, the charge taken through the income statement this quarter had no impact on tangible common equity. I’d like to cover a few highlights from the balance sheet and the income statement, taxable-equivalent on net interest income was $453 million for the first quarter compared with $491 million in the linked quarter and the $485 million in the first quarter of 2008.
Net interest margin was 3.19% compared with 3.37% we reported in the fourth quarter of 2008. As we noted on the January conference call this came as a result of a very sharp reduction in short-term interest rates in December.
In addition to the 75 basis point reduction in the Fed Funds target, there was almost 150 basis point reduction in the one-month LIBOR to Fed Funds spread. These two factors combined to put sharp but short-term pressure on the margins early in the quarter.
The margin widened again in February and March as our interest bearing liabilities began to reprice in conformity with the lower prevailing market interest rates. So for example, net interest income earned in March was $12 million higher then earned in January even though both months had 31 days.
Average loans for the first quarter were $48.8 billion, flat compared with the linked quarter. Average commercial and industrial loans excluding automobile floorplan loans declined an annualized 4%.
Auto floorplan loans declined an annualized 19% compared to the linked quarter reflecting the slow auto sales environment to which dealers have responded by reducing inventories. Commercial real estate loans grew an annualized 3% and consumer loans declined an annualized 2%.
Residential real estate loans grew an annualized 11% reflecting an increase in the level of mortgage originations primarily driven by refinancing activity. As we discussed through most of last year, we remain focused on relationship lending within our community bank footprint and have limited appetite for transactional type business such as indirect consumer and pretty much anything else outside of our core market.
In essence we want to be there for our core customers when they need us. We are now seeing the result of this community bank focus in comparison to last year’s first quarter and we believe it is an indication that we’re growing share within our branch footprint.
For example, average commercial industrial loans, again excluding automobile floorplan loans, are up 8% compared to last year’s first quarter. Commercial real estate loans are up 4% year over year and home equity lines of credit are up 10%.
On the other hand categories that are either transactional or which reflect the deliberate exit from certain lending activities beyond our footprint are declining. Some examples are indirect auto loans that are down 13% from last year’s fourth quarter, automobile floorplan loans that declined 15% for the same period, and our portfolio of Alt-A mortgages is down 18% from last year’s first quarter and down 23% from the first quarter of 2007 when we made the decision to hold and work out the entire Alt-A portfolio.
Average investments for the first quarter of 2009 were down 5% compared to last year’s first quarter. On the deposit side we experienced our sixth consecutive quarter of core deposit growth.
We believe that customers continue to see M&T as somewhat of a safe harbor [from] the volatility in the marketplace. The numbers are impressive.
Average core deposits which excluded wholesale and foreign deposits were $34.7 billion for the first quarter, up an annualized 20% from the linked quarter and up 13% from a year ago. We experienced balance annualized linked quarter deposit growth across all of our entire geographic footprint including 17% in Upstate New York, 17% growth in the New York City Metro area, 13% in Pennsylvania, and 19% in the Mid Atlantic.
Noninterest bearing checking accounts were up an annualized 28% compared with the linked quarter and up 15% compared with last year’s first quarter. Turning to noninterest income, excluding securities gains and losses, noninterest income was $264 million for the recent quarter.
This compares with $265 million in the linked quarter and $279 million in the first quarter of 2008. Mortgage banking fees were a record $56 million for the quarter compared with $40 million in both the linked quarter and the first quarter of 2008 as the current low rate environment drove refinancing activities.
Higher gain on sale volumes and margins boosted the fees for the quarter. Service charges on deposit accounts were $101 million during the recent quarter reflecting the seasonal decline from $106 million in the linked quarter.
Service charges decreased by $2 million from last year’s first quarter. In addition to the expected seasonal impact there also appears to be some impact from the general slowdown in consumer spending.
Turning to expenses, operating expenses which exclude the merger-related charges and amortization of intangible assets were $421 million compared with $404 million in the first quarter of 2008 and $431 million in the fourth quarter of 2008. Recall that last year’s first quarter result include a $15 million partial reversal of Visa related litigation accrual.
The quarter’s results also reflect our usual seasonally high salaries and benefits expense which excludes the accelerated recognition of equity compensation expense for certain retirement eligible employees as well as higher FICA expense, unemployment insurance expense, and expenses related to our 401-K match. In aggregate these expenses were some $24 million higher then in the linked quarter.
This is consistent with our experience in each of the past three years. The first quarter results include a $5 million partial reversal of the valuation allowance for capitalized residential mortgage servicing rights, compared with a $19 million addition in the fourth quarter of 2008 and a $5 million addition to the valuation allowance for the first quarter of 2008.
Excluding the Visa related reversal in last year’s first quarter and the $10 million year over year change from the MSR valuation allowance operating expenses increased on $12 million or 2.9% from last year’s first quarter. Next let’s turn to credit, nonaccrual loans increased to $1 billion or 2.05% of loans at the end of the recent quarter compared with $755 million or 1.54% at the end of the previous quarter.
The increase included $62 million of loans to builders and developers of residential real estate and $41 million of residential mortgage loans. Also contributing to the increase was the transfer to nonaccrual status of our largest unsecured commercial loans amounting to $95 million.
Through the first quarter and continued efforts to assist borrowers M&T modified an additional $60 million of residential real estate loans. This brings our modified loan total to $216 million.
The modifications continue to be primarily attributable to our portfolio of Alt-A mortgages and of that total $106 million were in included in nonaccrual loans as of March 31, 2009. After a period of demonstrated performance they may return to accrual status.
The remaining $110 million of modified loans were classified as renegotiated loans and were accruing interest as of March 31. M&T six-month re-default rate is currently 25%, considerably better then the 40% published by the OCC on April 3rd.
Our nonperforming assets consisting of assets taken in foreclosure of defaulted loans were $100 million, unchanged from the linked quarter. Net charge-offs for the quarter were $100 million, improved from $144 million in the fourth quarter of 2008.
This is an annualized charge-off rate of 83 basis points of total loans compared with 117 basis points in the linked quarter. Residential construction and development loans accounted for $22 million of the charge-offs for the quarter, down from $25 million in the linked quarter.
Consumer loans accounted for $36 million of net charge-offs in the recent quarter, unchanged from the linked quarter. Alt-A loans both first and second liens accounted for $16 million of net charge-offs, compared to $12 million in the linked quarter.
Net charge-offs for the total residential mortgage portfolio were $19 million, also unchanged from the fourth quarter. Net charge-offs for the commercial and industrial portfolio were $23 million compared with $61 million in the linked quarter.
The provision for credit losses was $158 million and exceed charge-offs by $58 million. This compares with $151 million in the linked quarter and $60 million in the year earlier quarter.
The provision in excess of charge-offs included a large specific reserve for the unsecured commercial loan that I mentioned earlier. The allowance for credit losses at the end of the quarter was $846 million, and increased to 1.73% of total loans at the end of March 31, 2009, up 12 basis points from the linked quarter and up 16 basis points from last year’s first quarter.
The allowance as of March 31, 2009 covered the first quarter annualized net charge-offs by more than 2x. We would expect this measure to continue to compare favorably to the average of our peer group of large regional banks.
Loans past due 90 days but still accruing were $143 million at the end of this recent quarter compared with $159 million at the end of the sequential quarter. This includes $127 million and $114 million respectively of loans that are guaranteed by government related entities.
M&T’s tangible common ratio was 4.86% at the end of the first quarter, improved from 4.59% at the end of last year. Our preliminary estimates for Tier 1 capital ratio as of March 31, 2009 was approximately 8.76%.
Excluding the other then temporary impairment charges, which were already reflected in our tangible capital ratio as of year end 2008, net operating earnings again exceeded our quarterly dividend. Consistent with our comments on January’s conference call, actually I’m now turning to our outlook, consistent with our comments on the January conference call we would expect a rebound in the net interest margin over the remainder of 2009 and a full year margin not materially different then that which we had for the full year of 2008.
We continue to expect credit costs to remain elevated throughout the year and to expect a certain level of variability in charge-offs in any single quarter. Put another way it would be incorrect to annualize any single quarter’s charge-offs for use as a projection for future loss experience.
With the difficult credit environment M&T remains very focused on expenses. This is particularly important as we’re having to absorb an increase in FDIC assessments for 2009 of over $40 million.
Finally, the Provident transaction is progressing well. The merger has received the approval of the Provident shareholders and we’re awaiting for the remaining of regulatory approvals.
As we get closer to completing the transaction and integrating the two banks, in typical M&T fashion we are finding that we may well exceed the initial assumptions that were made following our due diligence review. As a result, we now expect to realize modest earnings accretion in 2009 as opposed to our earlier belief that the deal would not be accreted until 2010.
All of these projections are of course subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors which may differ materially from what actually unfolds in the future. We’ll now open up the call for questions.
Operator
(Operator Instructions) Your first question comes from the line of Steven Alexopoulos – JPMorgan
Steven Alexopoulos
The $95 million commercial loans, is that a shared national credit?
Rene Jones
Yes it is.
Steven Alexopoulos
And I take it you’re not the lead bank.
Rene Jones
No.
Steven Alexopoulos
Do you have the total size of that loan?
Rene Jones
Yes, that’s it. What we have is a large commercial loan, $95 million that we transferred to nonaccrual status and its an unsecured loan that we’ve had, the relationship comes from our acquired [inaudible] portfolio and prior to that the company [Alfers] client did business with this company for, since 1968 I believe.
And then the company was acquired and we stayed into the merged entity in the shared national credit. So it’s a company that has some, that is real estate based, but its not sort of in our real estate portfolio in the classic real estate sense of M&T.
Steven Alexopoulos
Total size of the credit is much larger then the $95 million.
Rene Jones
No.
Steven Alexopoulos
--portion of that.
Rene Jones
I’m sorry, I don’t know that number.
Steven Alexopoulos
And what was the specific reserve on the credit today?
Rene Jones
We reserved a healthy amount, let me say that.
Steven Alexopoulos
Okay. Looking at the other revenue line, which was down to $59 million, was off quite a bit from where its been.
Anything going on there or is that a new run rate for that line item.
Rene Jones
I know that answer but give me a second.
Donald MacLeod
It largely has to do with just the state of commercial activity. Included in there are loan fees, syndication fees, letter of credit fees, all of which are running at a reduced level in this environment.
Rene Jones
I think what you’re seeing is with the slowdown in the economy, some people are being very cautious. The investment has slowed down that’s why you see a little bit slower loan growth from us, but having said that, when I talk with the commercial folks, they tend to be relatively optimistic about that not being a permanent thing.
Operator
Your next question comes from the line of Ken Zerbe – Morgan Stanley
Ken Zerbe
First question, I wanted to make sure my math is correct, if I heard you correctly full year NIM should be roughly equal to 2008 levels, so 338, so I guess given the 319 this quarter that would imply 345 for the next three quarters, is that, which is higher then obviously any of the quarters back in 2008, is that something you can achieve just through deposit repricing or are you relying on increases in Fed Funds or some other factors.
Rene Jones
I think when you get done with the earning season you’re going to see that the magnitude of our drop in margin is probably not different from anybody else in terms of basis points but let me explain to you what’s going on. At least at M&T, remember at the end of the year we had taken our Fed Funds position down to less then a billion dollars and our overall overnight position down pretty substantially to improve our liquidity profile when there was a lot of turbulence.
So we termed out a lot of money and quite frankly money that was for term money was fairly cheap but that sort of changed our profile and we talked about that in January. So what has to happen now is that with the sharp decline in interest rates its going to take a little bit longer to reprice but its more timing then anything else.
Now the other thing to think about is that the sort, I can’t describe it any way, I mean we had $1.7 billion of core customer deposit growth this quarter on the heels of $1.6 billion last quarter. In effect from a financial standpoint you’re not seeing the impact of that in our earnings until some of the term debt rolls off, right?
And then you’ll actually see the benefit of all that. So its bit of a timing issue.
I can’t expect us to jump to the number you mentioned in one quarter but I would expect that we get a nice rebound from where we are here and then a steady build over the course of the year.
Ken Zerbe
And then just on [Bayview] it looks like your equity loss was just over $4 million this quarter, I guess you’re going on what, a year and a half or so of consistent losses. At what point would you might need to consider a write-down of Bayview.
Rene Jones
Well a couple of things let’s revisit. This is kind of what we said would happen right.
We said that they had to sort of get through the right sizing of that original origination business that we invested in. So that’s actually coming along fairly nicely and has dropped, I don’t know for the last three or four quarters in a row, that’s what we’ve seen in terms of the loss they are posting.
What you’ve got now is our valuation is heavily reliant on the other two businesses I’ll call them, that they have when we restructured that contract back mid last year. And so just recall that the company has something in the neighborhood of $1.5 billion of residuals which go first to support some loans that probably have another year in duration and then second, those cash flows as they pay off, 20% goes to M&T and the 80% goes to the 80% partner.
The second thing they’ve got is their Bayview asset management which is a fund which essentially brings them back to their core competency which the environment is ripe for, which is buying discounted scratch and dent loans in this environment. So everything we’ve seen there in that business has been running as expected and we think that there’s a fairly favorable outlook from the perspective that we fit in.
So right now we don’t see any issue today with Bayview.
Operator
Your next question comes from the line of Matthew Clark - KBW
Matthew Clark
Can you give us a 30 to 89 day past due bucket.
Rene Jones
Thirty to 90 day past due bucket for consumer loans?
Matthew Clark
For the, I won’t ask you for the entire breakdown, just the overall bucket. I think it was $487 million last quarter.
Rene Jones
Give us a second. We’ll get you that answer in a minute.
I think what we’re seeing though is, if you look at it, there’s not a big change in the consumer book. I would say the delinquency has probably ticked up a bit but for us from the lows that they’re at, they’re performing pretty well but you can clearly see the weakness but you also see that our portfolio which is performing probably better then the industry average, that’s not changed, right?
So I would expect that you’ll see that on the consumer side, maybe we’ll be up linked quarter, maybe six basis points or something like that on 30 plus delinquencies but nothing more then that. If you come up with a number, I’ll mention it again later on the call.
Matthew Clark
Can you talk a bit about the transition portfolio that I think we discussed up in Buffalo, obviously you’ve had some follow-up questions on that, I would like to discuss it here, so I think at the time it was talked about as being about a $2 billion portfolio. Can you just better address that book in terms of size and type and even geography and then what kind of issues might you be witnessing from a slowdown in the pace of condo conversions.
Rene Jones
I don’t have the New York City breakout in front of me, but let me just give you some sense. When you talk about a transition portfolio, it’s a bit of a label to sort of, what I would characterize as the first step as we review the portfolio.
It doesn’t really indicate a problem but for the group, in the industry apparently they use the term transitional in real estate to mean something like that you’re relying on a turnover of the rents and a change or renovation in the nature of the building over time. So while we have credits in our portfolio that fit that description, what’s probably most important is when you sort of compare our portfolio and the decisions we made to the underwriting standards that were out there in the conduit market, which you see now in [CMBX], they’re vastly different.
So for example whenever we’re looking at projecting future rents we had a cap on 3% per year growth in rents. We never went higher.
When we looked at turnover rates for portfolios we actually never allowed a turnover rate in the apartment greater then 3%. And so that was our standard all through the 90’s.
We never changed that standard when we got into sort of the frothy market. And then finally I think what you see is that while people will characterize each of their portfolios as transition, what really matters is what were you doing with the cap rate.
And clearly again we didn’t change our cap rate as dramatically as everybody so we probably had a two to three point advantage there. That’s the description of transitional.
When we look at the portfolio we’ve kind of broken down the portfolio between office, I’ll give you some numbers, in the portfolio that we have for example in New York City, its $5.9 billion. There’s 36% is retail, 22% is multifamily, 17% is office, 11% is hotel, I’m kind of looking for our construction portfolio.
I know its relatively small, maybe total construction portfolio or condo portfolio was $400 million in total. So that gives you a profile but as you get into that, we’re reviewing those portfolios and when we review the portfolios we kind of get that narrowed down into specific credits that we’re looking at.
What you basically see for M&T is not different from what you hear about from other long-term investors or balance sheet lenders, that much of the portfolio that we have in commercial real estate particularly in New York City, is not a portfolio that reprices in 2009 and in fact, we have very little that reprices in 2010 but more of our repricing risk if you will, comes out in 2010, 2011, and 2012. Whereas if you were to look at the CMBX and particularly variable rate CMBX, there’s a fair amount of that that comes due in 2009 and 2010.
So the big risk that we see out there in commercial real estate is a refinancing risk and we’re fortunate enough that while we are watching a number of credits, most of those credits that we have under our watch are trying to figure out solutions for our clients when they reprice sometime between 2010 and 2012. So what it does is it allows us to be relatively proactive.
We assume that the [inaudible] market today doesn’t really change and we’ve been trying to work on credits to work out solutions there. To give you some view of that, today in New York City, and knock on wood because numbers can’t get better then this, but out of that $5.9 billion portfolio, we only have $5 million of delinquent loans.
So I think a lot of the commercial real estate story depends on the refinancing issues that come out and some of the programs that come into place. But for us its not necessarily a 2009 issue, actually its much further out and I think that gives us time to sort of work through the credit.
Having said that, not changing our underwriting standards through this sort of frothy periods, I think is going to make our portfolio stand out better then average. None of us can predict what’s going to happen to New York City, but I just think, I just feel that we’ll perform a little bit better.
Matthew Clark
On the pending Provident deal, is there anything that relates to the change in the TARP related agreement that would make it more difficult to close this deal or is that not an issue.
Rene Jones
We have not heard anything like that.
Operator
Your next question comes from the line of Collyn Gilbert - Stifel Nicolaus
Collyn Gilbert
Just first a follow-up question, when you’re talking about you’re seeing the repricing risk of the CRE portfolio in New York City, 2010, 2011, 2012, were those originated at 10 year terms or where was, at what point were the origination buckets of some of those credits.
Rene Jones
I don’t have specific numbers for you but I think that’s the essence of the issue which is that specifically what we’ve, I think typically what we book is 10 year notes with a five year reprice. So there’s a logic behind what I’m saying is that as things got very heated up in 2005 and 2006 and 2007, because we tend to focus so much on profitability we couldn’t make the numbers work so we stopped booking the loans.
So that means that a lot of our vintages are of these loans, are probably earlier then 2005 but more important the relationships are early 90’s. So the individuals that we’re banking are people who have been with us for the last 18 years and they’re the people that survived the last real estate crisis so we have a fairly astute group and they are the people that we’re doing a lot of their projects prior to the frothiness of the high prices in real estate.
Collyn Gilbert
One thing that was surprising to me was the yield that you are posting on your commercial portfolio, but are you not putting floors in some of the pricing on some of your commercial relationships.
Rene Jones
We tend to price to LIBOR and its pretty simple and its very consistent so you can’t change your terms with your customers if you’re going to be a relationship lender. And LIBOR is very low.
I would say that you’re simply seeing the fact that spreads actually are very much, much wider. I would say spreads to LIBOR are probably well in excess of 3% where in the past they were south of 2% but what you’re seeing there is just the simple fact that LIBOR, LIBOR [priced up] at one month LIBOR as well.
So what’s one month LIBOR, probably 50 basis points, somewhere in that range.
Collyn Gilbert
Do you, what did the loss severities look like for the quarter and then have you been tracking that to see how that maybe compares to the fourth quarter or even the first quarter of last year.
Rene Jones
When you say loss severities, which asset type are you talking about.
Collyn Gilbert
Well, to provide a range of your different, within the loan book, if you want to provide a range and then the different segments of the loan book would be helpful.
Rene Jones
First let me just give you a bit of an overview, I think we continue to see the performance of the Alt-A book is kind of the same over last year delinquencies have been trending slowly down. And you can’t declare a victory there but what you do know is that those losses are relatively stable.
And I would say, and I’m doing this off the top of my head because I don’t have the sheet in front of me, but I would say that on those portfolios we’ve seen severities of anywhere from 35% to 40% depending on the state in which the properties are located. But that’s sort of been the case for some time.
I’d say they’re slightly higher now then they were before. But the good news is that we got through $400 million of that $1.3 billion book before that happened.
So this is why we were moving so fast. We changed our policies.
We just felt that we didn’t want to take the risk that the severities would get greater. So they’re in that range.
I don’t expect to see much change in that portfolio in our residential mortgage charge-offs going forward. In the builder/construction portfolio the best I can give you is $100 million of losses last year, I can’t see any reason why it would be any different this year.
If you look at that book, I think almost $80 million of it came from the build, from the Mid Atlantic portfolio. In this quarter we had about $22 million of charge-offs in builder, all but $2 million of it came from that same portfolio.
So we’ve talked about that before. We’re not seeing a big change at this point in appraisal values.
There’s actually some activity but nothing really to speak of in terms of people being able to sell homes. And so it hasn’t changed.
Raw land is probably still $0.40 on the dollar and anything with homes on it is probably looking like $0.70 to $0.60 on the dollar.
Collyn Gilbert
So if we were to look at the kind of the loss trends going forward, do you think then its going to be more a frequency issue then necessarily a severity issue in your overall loan book.
Rene Jones
I think in the things you’ve been seeing now, I think what we’ve been talking about is a frequency issue and timing of each individual project. Remember we talked about the builder being lumpy.
And so I think that will continue to happen. Then as you look at C&I, the C&I losses but for the fourth quarter has actually been relatively light I think and as we look into that portfolio we kind of see a continued migration.
First and foremost anything related to housing in any way, shape, or form is been weak and has been weakening. So I would expect if you don’t take any one quarter the trend in C&I to continue to go up.
And on the real estate side as I said, I think a lot of people are worried about 2009 and maybe early 2010, while I think that you can’t say that you won’t have a few charge-offs here and there, you never know what’s going to happen. We think more of that issue, and if the environment does not change from the sort of mess we’re in today, we think then that starts to rear its head out in 2010 and so forth.
But again, its hard to predict that far out.
Collyn Gilbert
What’s the size of your overall [SNIC] portfolio.
Rene Jones
I want to say 7%.
Donald MacLeod
Its about 7% of outstandings.
Collyn Gilbert
And do you have a delinquency rate on it?
Donald MacLeod
That I do not. A large portion of that is where we’re the lead.
Collyn Gilbert
You had mentioned that Provident is sort of exceeding your initial targets and you’re expecting now earnings accretion in 2009, what’s driving that. Is there any one particular item or business that’s driving that.
Rene Jones
No, as you go into these things there’s a fair amount of uncertainty and you do due diligence and you try to do, in this case we did I think a fairly extensive due diligence, but as you begin to work with the actual people and you so to speak get under the hood as you’re starting to convert the bank you begin to see a little bit more of the opportunity and you also begin to sort of get comfort with your estimates. So you’re [vending] the loan portfolio, you’ve look at that.
The biggest issue is my head of corporate finance is a very conservative guy and I think that the synergies are greater then we had expected.
Operator
Your next question comes from the line of James Abbott – FBR Capital
James Abbott
Quick question to follow-up on some of the construction questions is trying to understand a little bit about the process for which you reappraise these loans, how much of that, I think its about a $4.7 billion portfolio or so.
Rene Jones
Yes, I think now its down to about, we don’t think about it that way but—
James Abbott
I was just going to ask, how much of that has been reappraised within the last six months or some sort of frequency there.
Rene Jones
We have $1.8 billion of residential builder construction and obviously we’ve been at that for quite a bit and so we’re very frequently getting appraisals and then in particularly on the Mid Atlantic portfolio those appraisals in many cases are updated several times a year. So I think we feel like we’re very much on top of that.
As we look at the other construction book I think about a billion of that is in the Mid Atlantic and its in our traditional commercial real estate space. And in that portfolio, I’m sure we’re doing appraisals in the typical fashion, we would probably get at least each year but as we begin to look at commercial real estate we’re doing more and more around that front.
But I would say relative to an average bank we’re at least as frequent if not more frequent especially in this environment.
James Abbott
A question related to interest reserves on that, is if sales continue at the pace and maybe we’ll use the $1.8 billion figure, if sales continue at the same pace for the next six to 12 months, how much of those loans will hit and become nonaccrual, in other words, they’ll exhaust the interest reserves and not be the capacity to continue to pay will diminish.
Rene Jones
I think the way to answer that is each loan is on a case by case basis. So as I’ve looked at the classified loan book and things that might move into the classified loan book, in some cases its because the interest reserve is running down and there’s an issue.
But in other cases there are interest reserves but we’re really focused on the wherewithal of the underlying operator. And just because you have interest reserves doesn’t necessarily mean that the project or the loan is not impaired.
I’m trying to think if there is anything else I can give you. We do have a chart but I don’t seem to see it in front of me that gives you some sense of the portfolio.
I think the best way to say it is that overall we think, we really look at that book and we say we think charge-offs will be consistent with 2008, not materially different.
James Abbott
There has been an acceleration in the delinquent loans or the nonaccrual, actually we don’t have delinquent loans I think on that but we have nonaccrual loans on that from the text in the press release and so there was an acceleration there in each of the last couple of quarters, so even despite that you’re comfortable without, with still the charge-offs number being the same.
Rene Jones
Well yes, you know what, I think in the number we mentioned in the press release, there are two loans in particular, both are in the Mid Atlantic portfolio that we’ve been talking about for a very long time. So that portfolio is now down to about $447 million in balances and so the fact that more has migrated to nonperforming there is not a surprise to us.
They are credits we’ve been watching for some time.
James Abbott
Just to clarify a question on the appraisals, those are actual field appraisals as opposed to just kind of a desk review of the property and an estimated value.
Rene Jones
Absolutely, field appraisals, yes.
James Abbott
Just shifting to the dealer floorplan loans, where are you seeing stress there versus which dealerships are not showing stress and what additional color can you give us on the dealer floorplan.
Rene Jones
When we talked about this, actually not several years ago, we talked about our focus being on domestic dealers with a monoline operation. They didn’t have multiple brand and we did a fair amount of work to clean, to prepare that portfolio for the environment we have now.
A number of those dealers are no longer with us. So as we look at it, its not really different.
We’ve seen anybody who doesn’t have the cash flows because they are single line monoline domestic dealer, is having difficulty. If you look at our book there, and this is not done by dealer, this is done by the inventories, one’s about 30% is domestic in our portfolio and the rest is foreign.
So I think we’re in a position now where we’re going to continue to see some losses. I think we had $9 million of charge-offs in the first quarter, this quarter the losses were, sorry we had $9 million this quarter, we had $11 million last quarter.
I think we’ll see more and I think though that I don’t expect that to be a place where I’m overly concerned but I do think that we’ll see a loss here or two. We’ve seen a couple of credits migrate into what we call [out of trust] situation.
I think we had four of those during the quarter, one of which actually corrected itself. So dealers are having a difficult time.
James Abbott
So do you expect the charge-off trend there to move up modestly, maybe $2, $3 million a quarter or how would you look for trends there.
Rene Jones
You kind of just said it. I think, given the weakness we’re seeing in auto sales, to see a quarter like we just saw is not going to be a surprise is the best way to do it.
We could somewhere, less and maybe a little more.
Operator
Your next question comes from the line of Ken Usdin – Banc of America
Ken Usdin
Just quick questions about capital, I think you made the point in your comments about if you back out the securities gains and amortization that you did out earn the dividend, I just wanted to ask you to update us to your thought process and the Board’s thoughts on keeping the dividend where it is relative to your earnings expectations and also if you could elaborate on your current thoughts about TARP and potential payback and what your process might need to be in order to get that done.
Rene Jones
I can’t, the Board gives us their opinion once a quarter and we’ll sit with them next month, but I can give you my thoughts. First I guess, first thing to understand is really simple technical thing.
One is that your tangible, your regulatory capital ratio and your tangible ratio are unaffected by goodwill, so goodwill is not in it. So its not GAAP earnings that matter, its operating earnings that matter.
And remember M&T has a difference between GAAP and operating because all those years we were doing purchase accounting and we probably have a little bit higher intangible amortization then most. So if you look at our operating earnings and you, for example if you look at consensus estimates, and you put them on an operating basis.
Take out the $50 some odd million dollars of one-time expenses and take out the goodwill amort, you see that we comfortably cover the dividend even with the Street’s own estimate. So I think that’s important.
I also think that when I look at this quarter, this is a good anecdotal but remember this a quarter where the days are fewer, the lowest number of days in this quarter. We tend to see seasonally lower fees.
We know we have seasonally higher expenses from the salaries space. And we saw the margin compression which we feel that we’re comfortably on.
As I sit there, back in January my number would have been within a basis point of what actually happened. So as we look at where we’re going, from the simple issue of covering the dividend, we just sort of feel comfortable today based on what we see out there.
So we don’t have any change, nothing we’ve seen in this quarter changes our outlook. Having said that in this environment you just take it one quarter at a time and you kind of sit down and look at the facts when you get ready to make that decision every quarter.
I don’t know if there’s any more I can give you.
Ken Usdin
No that’s a good assessment. Essentially you’re saying that you had a lot of one-time issues this quarter and, not one-time issues, but amalgamation of things that make you feel a little bit, even better about some of the alleviation of some of those items as we move forward, at least as far as your eye can see.
Rene Jones
Yes, and a big one for me is you can’t double count so when I gave my guidance on where I thought we would be when we announced the deal, our tangible, I obviously considered that we’re going to have one-time expenses and marks. You can’t then draw that in your number and take it again.
We look at operating, and your dividend policy is a long-term policy. It’s the reason our dividend payout was low.
It was appropriate in hindsight given what we’ve now seen. And as we think about it, we’ll be very, very conservative but very thoughtful in thinking about that payment.
Ken Usdin
That said, is there any way you can give us an update of where you expect TCE to be post Provident versus the first quarter, so that we don’t double count.
Rene Jones
No, but I don’t have any change to what I initially said back in December. I don’t have any, maybe I’m off here or there five or 10 basis points or whatever, but back in December I think we said [4 4] we would be around right, and there’s nothing in there that changes our opinion of that.
Ken Usdin
Right, so your perspective was that 4 4 was inclusive of earnings, balance sheet changes, etc. all things getting to the point of closing.
Rene Jones
Yes.
Ken Usdin
Could you just elaborate on the TARP, how you’re feeling about it, what you may need to do as far as your decision [tree] in paying it back and how you’ll evaluate that going forward.
Rene Jones
How I feel about the TARP, I’ll tell you, I’m very happy that we decided to take the TARP. I’m very happy that we only took 1%.
In terms of paying it back, there’s a lot of talk out there about people paying back the TARP. We tend not to be a first mover, again we’ll be very thoughtful about it.
I think we along with everybody would like to be able to do that, but you can see that there’s a fair amount of uncertainty about people’s, I don’t want to use the wrong word, whether that will be allowed to happen as we move forward. You saw at least today in the print that there was some statement made that the requirement for paying back the TARP is not to just be a healthy bank.
There would be additional requirements and I think that as we get more clarity, we’re strong enough to do it but I think we’ll be patient and think that through. We’ll let you know when we decide.
But other then that, we haven’t made any commitments.
Operator
Your next question is a follow-up from the line of Matthew Clark - KBW
Matthew Clark
I think I’m all set unless you have that 30 to 89 day bucket.
Rene Jones
We don’t, I apologize, we’ll have to publish that somewhere but I don’t have that with me. Again I would say that I would expect maybe its up six basis points.
Operator
Your next question comes from the line of Gary Paul – Private Investor
Gary Paul
I have two questions related to TARP and a couple related to [Allied Irish] and I promise not to ask you are you negotiating to buyback the stake.
Rene Jones
The only question is with those two questions, how many parts are there?
Gary Paul
Only about two each, the first on the TARP, the day after JPMorgan cut their dividend and announced they weren’t required to having previously said they weren’t going to cut, CNBC reported that all banks that received TARP money had gotten a letter saying they couldn’t declare a dividend without permission of the Fed and with a tone that almost everybody would have to cut and indeed the big banks I follow, the unhealthy ones have all cut to about $0.01 a quarter and the healthy ones to $0.05 a quarter, is the declaring of your next dividend within M&T’s control so to speak.
Rene Jones
I believe so.
Gary Paul
You did not get such a letter and have not had Fed pressure.
Rene Jones
No, I’m not aware of that story at all.
Gary Paul
And you’re not one of the 19 banks undergoing the stress test, correct?
Rene Jones
That is correct. And remember given our size that we, our regulator is on site.
So we would know.
Gary Paul
Fine, that’s encouraging, I’m shocked but I’m encouraged. On Allied Irish, I believe you had indicated that if they failed to meet well capitalized you had an option to require them to sell back, is that accurate?
Rene Jones
You know, I don’t know that that is true or not. I don’t think that’s really the point.
I think right now things are going well with Allied Irish and we have an outstanding relationship with them. We haven’t heard anything from them about the announcement or their intention to do anything.
Gary Paul
Okay so you don’t know if they failed to reach well capitalized given how banks tend to be able to account, [inaudible] even when they’re failing.
Rene Jones
That I do know. I do know that [NIB] is well capitalized.
Gary Paul
Okay that is where I wanted to get to. The second question is today’s Wall Street Journal says that they have to sell $1.5 billion in assets and identified one other investment and you and the most likely will forget what reporters say they said the current value of the Allied Irish stock is about $6 billion, I won’t ask you to confirm that, my mere question is if Allied Irish wanted to sell and you have said that you have right of first refusal, do you believe you could raise the capital to buy.
Rene Jones
First, I wouldn’t speculate on that kind of thing. I think that at the end of the day we’ve got a great working relationship and we would know if they had any intention to do anything and there’s really been no communication on that front.
But having said that I think you raise a point which is that we both AIB and M&T have an agreement to cover this type of thing that dates back to 2003, a public agreement, and I think its an agreement that gives us a lot of rights. In some circumstances it gives us the notification requirements, the right of first refusals, but the most important thing is that if they were ever to go down that road, it calls for an orderly disposition.
So we don’t know anything and I’d hate to speculate but its not something that’s on my top 10 list.
Operator
Your final question comes from the line of Al Savastano – Fox-Pitt Kelton
Al Savastano
Just wondering how you’re planning to assess the M&T balance sheet and the Provident balance sheet pre-deal and specifically what I’m asking if you’re going to downsize the balance sheet at either company before the deal.
Rene Jones
Downsize, I think I know what you’re asking, I think in that fashion, other then the marked in the portfolio which we intend to conservatively, we intend to use conservative marks particularly on the investment securities book, from times when our corporate plans group puts together assumptions on what we’ll do when we integrate a transaction there is sometimes looking at securities books and those types of things and delevering, but we never made such an assumption in this environment simply because there’s not liquidity available out there. So all of our assumptions were based around taking assets that we thought were risky, marking them down appropriately and holding the community based bank assets to term.
Al Savastano
And M&T’s balance sheet?
Rene Jones
Well that would be an M&T event. We would never sort of merge all that stuff together and one of the things you would see as an investor in M&T, is that we would tell you that was an M&T event but we have no plans to do that in any way.
Operator
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Donald MacLeod
I’d like to thank everybody for joining us on the call today and as usual if you have any further question or any clarification of the items on the call or in the news release, please contact our Investor Relations Department at 716-842-5138.