Jan 21, 2010
Operator
At this time I would like to welcome everyone to the M&T Bank fourth quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speakers remarks there will be a question and answer session. (Operator Instructions) I will now turn the call over to Don MacLeod, Vice President of Investor Relations.
Donald J. MacLeod
I’d like to thank everyone for participating in M&T’s fourth quarter 2009 earnings conference call both by telephone and through the webcast. If you have not read our earnings release that we issued earlier this morning you may access it along with the financial tables and schedules for our website at 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 8K, 10K and 10Q for a complete discussion of forward-looking statements.
Now, I would like to introduce our Chief Financial Officer Rene Jones.
Rene F. Jones
Based on the feedback we received from some of you we have added tables in the back section of the release which represent five quarter trends for the income statement and the balance sheet. Hopefully we’ve made your analysis a little easier.
I know it’s been a busy day for some of you so let’s go through the highlights quickly and get to your questions. For the full year of 2009 diluted earnings per common share were $2.89 compared to $5.01 for 2008.
Net income for 2009 was $380 million compared with $556 million in 2008. Included in our GAAP earnings for 2009 were after tax merger related expenses net of the gain from the Bradford acquisition of $36 million or $0.31 per common share.
There were $2 million or $0.02 per share of merger related expenses in 2008. Also included in GAAP earnings for the past year was after tax expense from the amortization of intangible assets amounting to $39 million or $0.34 per common share.
This compares with $41 million or $0.36 per share in 2008. Net operating income which we believe helps investors understand the effect of acquisitions on our results and which excludes the amortization of intangibles as well as merger related items was $455 million or $3.54 per common share for 2009 compared with $599 million or $5.39 per share in 2008.
In accordance with the SEC guidelines, this morning’s press release contains a tabular reconciliation of GAAP and non-GAAP results including intangible assets and equity. Turning to the fourth quarter, diluted earnings per common share were $1.04 in the fourth quarter of 2009 improved from $0.97 earned in the third quarter of 2009.
Net income for the recent quarter was $137 million up from $128 million in the linked quarter. After tax merger related expenses in the quarter relating to both Provident and Bradford Bank acquisitions were $4 million or $0.03 per common share in the recent quarter.
This compares with net after tax merger related benefits of $9 million or $0.08 per common share in the third quarter of 2009 which came as a result of our acquisition of Bradford bank. We expect no further merger related expenses from either of the two acquisitions.
The amortization of core deposit and other intangible assets amounted to $0.09 per common share in the fourth quarter of 2009 and in the linked quarter. Diluted net operating earnings per common share excluding the amortization of core deposits and other intangibles as well as merger related items that I just mentioned were $1.16 per common share for the recent quarter, up 18% from $0.98 in the linked quarter.
M&T’s net operating income for the quarter was $151 million, an increase of 17% from $129 million in the linked quarter. Next I’d like to cover a few highlights from the balance sheet and the income statement.
Tangible equivalent net interest income was $565 million for the fourth quarter, an 8% annualized increase from $553 million in the linked quarter and an increase of 15% from $491 million in the fourth quarter of 2008. The net interest margin continued to expand during the fourth quarter averaging 3.71% up from 3.61% in the third quarter.
Approximately four basis points of the margin expansion came from repricing on consumer timed deposits. An additional four basis points came from a shift in our funding mix with higher non-maturity savings and commercial DDA balances replacing time deposits and wholesale borrowing and the remainder of the expansion came from lower rates on wholesale borrowing.
Notable during the quarter was the rise in yields on commercial and industrial loans up nine basis points compared with the third quarter. Looking forward, we expect further widening of the margin for 2010.
As for the balance sheet, average loans for the fourth quarter declined approximately $200 million from $52.3 billion in the third quarter to $52.1 billion. Compared with this year’s third quarter, changes in average loans by category were as follows commercial and industrial loans declined by 8%, average loans to auto dealers to finance new model year inventory grew by an annualized 18% as compared with the third quarter of 2009 while remaining C&I loan balances declined an annualized 10%.
The decline in this latter category was exacerbated by pay downs and charge offs in both the third and fourth quarters and a reduction in certain non-core customer exposures. Commercial real estate loans and the residential real estate loans each grew by an annualized 2% and consumer loans declined by an annualized 3%.
This includes a 14% annualized decline of indirect auto loans reflecting continued run off in the out of footprint part of that portfolio. This was partially offset by modest mid single digit growth in our home equity lines of credit.
Regionally, we experienced low single digit annualized growth in upstate New York while experiencing low to mid single digit declines in the New York City metro region and in Pennsylvania. The decline in commercial and industrial loans from pay downs, charge offs and exits were concentrated in the mid Atlantic.
Excluding those items, loans in the mid Atlantic were relatively flat. We continue to see strong growth in core deposits.
Average core customer deposits in the fourth quarter which excludes foreign deposits and CDs over $100,000 as well as excluding any acquisition impact increased by an annualized 15% from the third quarter with growth coming in every geographic region. Also notable is the fact that the average non-interest bearing deposits in the fourth quarter of ’09 were up 50% compared with the fourth quarter of 2008.
This also excludes the impact from acquisitions. Turning to non-interest income, excluding securities gains and losses and the third quarter $29 million gain from the Bradford acquisition, non-interest income was $300 million for the recent quarter compared with $296 million in the third quarter.
Mortgage banking fees were $50 million for the quarter up from $48 million in the linked quarter. This reflects the impact of wider gain on sale margins partially offset by slightly lower origination volumes.
Service charges on deposit accounts were $127 million during the quarter compared with $129 million in the linked quarter. The decline came primarily on the commercial side and was largely attributable to fewer processing days in the fourth quarter compared with the third quarter.
M&T’s share of operating results of Bayview Lending Group or BLG was a loss of $11 million, unchanged from the linked quarter. BLG’s recent performance was largely attributable to an increase in loan loss provisioning.
Securities losses in the fourth quarter amounted to $34 million predominately reflecting an additional other than temporary impairment charges on our available for sale securities portfolio. This was down from $47 million of other than temporary impairment charges in the third quarter.
Operating expenses were well controlled during the recent quarter. Excluding merger related expenses and the amortization of intangible assets, operating expenses were $455 million, down from $469 million in the third quarter of ’09.
The decline is primarily attributable to the lower compensation expense including core salaries as well as incentive compensation. The fourth quarter’s results included a $4 million reversal of the valuation allowance for capitalized residential mortgage servicing rights.
This compares to no adjustment to the valuation allowance in the third quarter of ’09 and a $19 million addition to the allowance in the fourth quarter of 2008. As of the end of 2009 we have reversed substantially all of the valuation allowance for capitalized residential mortgage servicing [inaudible].
Excluding the benefit from the MSR, other operating expenses also declined slightly. The operating efficiency ratio which excludes securities gains and losses as well as merger related items and intangible amortization was 52.7% in the fourth quarter 2009 compared with 55.2% in the linked quarter and 57% in the fourth quarter of 2008.
The decline in efficiency ratio in the fourth quarter of 2008 is impressive given that it reflects an $18 million increase in the FDIC assessment relative to the fourth quarter of 2008. Let’s turn to credit; overall credit trends progressed as expected with stable net charge offs and modest increase in non-performing assets.
Non-accrual loans increased to $1.3 billion or 2.56% of loans at the end of the recent quarter up $103 million from $1.2 billion or 2.35% of loans at the end of the previous quarter, an increase of about 8%. Substantially all of the linked quarter increase relates to a single commercial real estate loan for $104 million in Manhattan.
This represents one of only two non-accrual loans of any significance in our greater New York City metropolitan area. This particular loan is one I mentioned on the October earnings conference call and for which the recent appraisals indicate that the property value continues to be in excess of the loan balance.
Despite the move to non-performing status, our outlook with regard to the resolution of this particular credit hasn’t changed much. We continue to view the loss content as low based on our original underwriting.
Other non-performing assets consisting of assets taken in foreclosure of defaulted loans were $95 million as of December 31st compared with $85 million as of September 30th. Net charge offs for the fourth quarter were $135 million down from $141 million in the third quarter of 2009.
Annualized net charge offs as a percentage of loans were 1.03% improved from 1.07% in the linked quarter. Charge offs for commercial and industrial loans were $31 million in the fourth quarter, down from $71 million in the linked quarter.
Net charge offs for residential builder construction loans were $40 million for the recent quarter, compared with $13 in the prior quarter. For the full year of 2009 net charge offs on residential construction credits totaled $92 million, down from $100 million in 2008.
Net charge offs for all other commercial real estate loans were $11 million compared with $8 million in the third quarter. Net charge offs on residential real estate loans were $21 million in the fourth quarter, up just one million from the linked quarter and net charge offs on consumer loans were $32 million in the fourth quarter compared with $30 million in the linked quarter.
The provision for credit losses was $145 million for the fourth quarter compared with $154 million in the linked quarter. Provision exceeded net charge offs by $10 million and increased the allowance for loan losses to $878 million as of the end of 2009.
The ratio of allowance for credit losses to legacy M&T loans which exclude the acquired loans against which there is already a credit mark was 1.83% up from 1.81% in the linked quarter. As of December 31, 2008 that ratio was 1.61%.
For the full year of 2009, charge offs were $514 million or 1.01% of average loans. We believe this represents the lowest rate among large regional and super regional banks.
The loan loss allowance as of December 31, 2009 was 1.7 times net charge offs for the past year. Loans past due 90 days but still accruing were $208 million at the end of the recent quarter and included $193 million of loans guaranteed by government related entities.
Those figures were $183 million and $173 million respectively at the end of the sequential quarter. M&T’s tangible common equity ratio was 5.13% at the end of the fourth quarter, an increase of 24 basis points from 4.89% at the end of the quarter.
Unrealized pre-tax losses on our available for sale investment portfolio was $293 million as of the end of the quarter compared with $313 million at the end of the third quarter and $806 million at the end of 2008. Turning to our outlook, as most of you know we don’t offer much in the way of earnings guidance but we’ll share our thoughts on some general trends.
While the economy appears to be stable, the pace of recovery is slow. As a result we expect both loan and overall earnings asset growth to be in the low single digits.
With the current trends being slightly negative we’ll need to see a turnaround in the current trends by the middle of the year in order to be able to achieve that growth. The demand for credit from customers whether to build inventories or to expand plant capacity just isn’t there yet and when combined with the portfolios that we had that are in run off mode like parts of our indirect audio asset growth should be relatively modest.
The strong inflows of deposits, particularly on the commercial side are also an indication that businesses aren’t ready to increase investment. As I mentioned earlier, the outlook for our net interest margin is for additional widening as two fundamental trends remain in effect, turnover in the loan portfolio, that is to say repayments and renewals is pricing in the benefit from today’s widening credit spreads and the continued inflows of non-interest bearing deposits I just mentioned are also positive.
We’d expect less impact going forward from the favorable repricing of timed deposits. While credit costs remain elevated as the current credit cycle continues to play out, our inflows of loans in to non-accrual status and our loss experience continue to be very manageable.
Over the past several quarters it appears that the consumer and the residential real estate credit trends have stabilized but they are not improving yet. Fortunately, our exposure to these portfolios is relatively modest.
We had the lowest charge off rate among larger regional and super regional banks through this year’s third quarter and given our underwriting culture, our habit of addressing problem areas proactively and the trends we have seen in our criticized loan portfolio we believe we’ll continue to report strong relative performance in 2010. As you know, we’ve always placed a priority on operating efficiency and we’ll continue to do so.
That said, as we plan for the future the area of most uncertainty is in the rising cost of regulation. Finally, I’ll remind you that normalized for unusual items, the first quarter’s results have tended to be seasonally low for us reflecting fewer days and higher expenses associated with FICA accelerated recognition of option expense or equity expense and the 401K match.
Of course, all of these projections are subject to a number of uncertainties, various assumptions regarding national 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 before which Christie will briefly review the instructions.
Operator
(Operator Instructions) Your first question comes from Steve Alexopoulus – JP Morgan Securities.
Steve Alexopoulus
Can you talk about are all of the cost save and revenue synergies from the two deals now in the run rate?
Rene F. Jones
I think the answer is no and the way you think about that is when you think about the opportunity that we have on the distribution side, that just takes some time. So we’re seven months through the transaction, I would think that 2010 particularly for our retail folks will be continuing to sort of work through the distribution type issues which at the end of the day will result in additional expense savings.
I think we are more than half way through the expense savings though. In fact, I know we’re well more than half way through the expense savings.
On the revenue side I think the same is true there. The idea of sort of optimizing the work you do on the revenue side particularly with sort of offering all your services to the new customers I think that takes a little bit of time so we would hope that there is continued opportunity through the year 2010 on that side as well.
It is harder to identify on the revenue side.
Steve Alexopoulus
Just a second question, looking at the $6 billion of commercial real estate loans in the New York City area, one can you talk about what the renewal schedule looks like this year and maybe next year and second, are you seeing anything in terms of early stage delinquencies there?
Rene F. Jones
It is a tough question to answer because when you look at the renewals if you think about what we do, it matters what year that they are coming from. So, the thing that helps us most is that from say 2004 through the third quarter of 2007 we kept our commercial real estate portfolio relatively flat.
So maybe the numbers in December ’04 were something like $5.1 billion, by the time we got to September of ’07 we were at about $5.3 billion, somewhere in that range. We put some stuff on in the fourth quarter of ’07.
The average life of our portfolio my guess would be somewhere around five years but if you think about what is coming through renewal next year a lot of it would be things that were booked as far as long ago as 10 years. What is good about that is they are not booked anywhere near the frothy time and so you have much more equity component in there.
If you go back to 2004 if you think of our portfolio as a five year portfolio, it would give you kind of an average life of five years. You’re basically saying we must have booked $1 billion a year to do that.
I would say in 2004 for example, we booked half of that because we just couldn’t figure out what was going on. So of the renewals that we’ll see this year I would guess that most of them are coming from things that were booked way before 2004.
We’re still doing our work on the schedules, I think at some point we’re going to publish that maturity schedule but the more we get in to it in order to sort of give you something that gives you a sense of our portfolio, it just sort of takes us a little time. So that’s on that sense.
In terms of the portfolio as I said on the last call we had a couple of credits that we sort of had what I would call on our watch list, one of them came in to non-performing this quarter. There hasn’t been anything new that we’ve seen through our portfolio reviews and our portfolio reviews are pretty granular.
I think the thing to think about is because we are so granular and focused on getting ahead of the problem and because the lead time is long, my sense is that to the extent that we have additional credits that go in to non-performing you are going to sort of hear about them from us before they happen. So no real change, we haven’t seen any sort of additional problem credits and delinquencies in the New York City portfolio.
The last thing I’ll say on this if I could, is that reflecting back on 2009 actually you learn a lot. We had no losses in the portfolio in 2009 and we actually had nothing roll in to non-performing but for this last credit that we just took this quarter.
So when you look back at that really one of the most significant factors is not that actual credit wasn’t weakening in New York City it was that most, if not all of our sponsors were willing to step up because they saw real value in the properties and they were willing to kick in additional resources if they were needed in order to keep the project moving forward. So when we look at ’09 and we look at how our sponsors behaved and what the result was we feel pretty good about where we are today.
Operator
Your next question comes from Ken Zerbe – Morgan Stanley.
Ken Zerbe
I guess the first question just on Bayview, it obviously lost about $11 million or so this quarter do you mind just providing another update it looks like we’re kind of going on about two years of consistent losses and I am just wondering if anything has changed?
Rene F. Jones
There is no change. Again, the largest share of our valuation is supported by residuals that are not included in what you are seeing there on the income statement and it’s afforded by their other businesses namely, the Bayview Asset Management.
So while I think the losses were maybe a little bit higher than I would have expected for the quarter. Much of it has to do with relooking at the credit for the loans that were in BLG, the original BLG and looking at the adequacy of the allowance there and the value of the assets.
So, no real change and I wouldn’t expect to see a big change in the future either.
Ken Zerbe
The other question I just had was on the net interest margin. I heard your comments that obviously the repricing of the CDs should provide less of a benefit going forward it is going to be more mix shift so to speak.
I guess from what I understand the mix shift should happen a little more slowly or have a lesser impact. Is that consistent with your view that if you have 10 basis points of improvement this quarter maybe it is less than that going forward or am I wrong in terms of that thinking?
Rene F. Jones
Boy, I could ask the question the same way. I think first of all you are right, the time deposit benefit if I kind of did that over time, the four basis points this quarter was less of a contribution than we see in the past quarter.
But, what is starting to happen now and I kind of made that comment that while we didn’t see the yield rise much on earnings assets, underlying you do have this trend where you are repricing your commercial loan book and even the rest of your book. You saw in the C&I book that nine basis point rise in the yield.
So I think what you’re going to get is some shifting over to the asset side where you’re going to start to see some of that benefit from there so that should pick up a little of the slack. Then, it’s amazing, we have yet to see this trend in non-interest bearing deposits keep growing.
So my sense is yes, you are probably right. If I were to guess again I would say it is going to slow but going in to the quarter we didn’t see much slowing so my sense is that it will be a little slower than we have seen on a quarter-to-quarter basis.
I’d be surprised if we were above 385 or 380 for the full year. I’d be surprised by that.
Ken Zerbe
Barring an increase in fed funds I assume?
Rene F. Jones
Yes, that’s the other issue is because we’re assets sensitive today we have kind of positioned ourselves that if there is an increase in short term rates that is a positive to us today. So we have kind of barred that.
Operator
Your next question comes from Matthew Clark – KBW.
Matthew Clark
Just first maybe a housekeeping item, the 30 to 89 day bucket can you just update us on that number?
Rene F. Jones
On the consumer side the 30 plus delinquencies were 1.67% up six basis points from the linked quarter and up six basis points from a year ago so not much of a change there. That’s the $10 billion portfolio.
On the resi mortgages there was almost no change when you look at the core and the ALT-A portfolio together, we just didn’t see much change. I think the dollar amount actually may have come down a little bit but the rate was flat.
On the commercial side what’s interesting is we often get a lot of questions about our provisioning and our allowance. The thing that you can’t see even though the non-performers went up is that the classified loan book was down probably $200 to $300 million underneath.
So there was a bit of progress there and I guess when you step back and look at that and go all the way back to midyear it means sort of the second half of the year the rising base of criticized or classified loans actually slowed dramatically and there really wasn’t much of an increase from June 30th to December 31st. So all the trends are I guess from where we have been positive.
But, we also don’t see a dramatic rebound in credit.
Matthew Clark
Then if you gross up your problem loans, if you include the TDRs for example it looks like that pace, the additions look like they have been fairly consistent the last three quarters somewhere around $290 million a quarter. It just sounds like we’ve got the $104 million tied to that Manhattan CRE credit but I’m just wondering if you can give us some additional granularity as to what else might have been added in the quarter?
Rene F. Jones
There wasn’t a lot, nothing of that magnitude maybe a handful of credits I’d say that were over $5 million and then there were just a host of pay downs and payoffs and those types to offset it. Let me give this, if you look at the book non-performing loans and C&I were down, residential was down, consumer loans were up $2 million and the only increase in real estate was about $119 of which this was $104.
Donald J. MacLeod
At the risk of sort of characterizing other inflows in to non-performers they were primarily residential construction credits.
Rene F. Jones
That’s right. On the real estate side what you had was many of the sort of credits we had previously identified on the residential side have sort of migrated through the process.
There is nothing new so to speak.
Matthew Clark
Lastly if I may, in terms of your coverage on annualized net charge offs I know you guys have internally targeted at least on average two times. The last couple of quarters we have drifted a little below that.
I am just curious whether or not you’ve changed your view on the loss content, maybe that you expect coming out of the cycle or if there is a change in how you are managing that reserve?
Rene F. Jones
No, no we’re looking at it pretty closely and when you look at the reserves to charge offs you sort of see that, I think you have described that pretty well. We feel pretty comfortable where we are.
I think from what we can see there is only one bank in the top 20 or at least in the large regional or super regionals that had a number reserved that was high relative to the losses. So I think we feel pretty good about it.
We also then are looking at the trends in the classified loan book as well.
Operator
Your next question comes from Bob Ramsey – Friedman Billings Ramsey.
Bob Ramsey
In terms of capital your rapidly approaching what historically you’ve targeted for TCE of I guess 5.2 to 5.6 could you give us some updated thoughts just given sort of industry wide higher capital levels, maybe plans to repay TARP, etc.?
Rene F. Jones
We’re sort of approaching our range but my sense is that we’re not going to change anything with our distribution policies and we’ll just continue to build capital until there is some clarity as to what the expectations will be. But to date, you haven’t heard much so I would suggest that we’ll just keep building capital and stay on the same page that we’re at until we actually get some sort of tangible guidance on what the new capital rules will be if there are any and a little bit more clarity there.
The environment is not such that you would actually sort of change that so my sense is that we’ll keep building.
Bob Ramsey
Do you think you will attempt to repay TARP in 2010?
Rene F. Jones
Our view is sort of to wait and see, watch the environment, the economy hasn’t turned yet. We have the ability to do it and to the extent that things improve and the economy turns around and it makes sense to do it then maybe we will but at this point we’ve made no determination of that.
Bob Ramsey
Do you have handy what the Tier-1 common to risk weighted assets was at the end of the quarter?
Rene F. Jones
Tier-1 common to risk weighted assets?
Bob Ramsey
Yes.
Rene F. Jones
I have an estimate, I’ll get it for you in a second I don’t want to misquote it.
Bob Ramsey
Maybe while you look for that number, as you think about provision for 2010 given the sort of promising trends in classified loans and new non-accruals, your provision was down in the quarter, do you think your provision has peaked if things continue on the track they are on economically?
Rene F. Jones
No. I mean, I can’t say yes or no, that is hard to say.
The trends were nice to see but relative to normal times, the environment is still shaky and if you happen to see a problem credit or two come up then you have got to provide for them. It would be too early to call a peak and I think maybe we’ll all be calling the peak about three or four quarters after it happens.
The answer to your other question is it is about 566.
Operator
Your next question comes from Craig Siegenthaler – Credit Suisse.
Craig Siegenthaler
First really just on the NIM guidance, can you talk about what levers MTB still has available to improve the NIM? Also, should we expect a similar sort of pick up in the first quarter the first half?
And maybe you can talk about how asset sensitive you are relative to peers especially if the Fed is raising the rates in the second half?
Rene F. Jones
Let me take the second part first, we’re asset sensitive. I think for 200 basis points gradual increase we’ve got something like a 2% positive.
But having said that, that all depends on what you end up doing with your deposit rates, right? So, the way I like to think about it is if we get to a situation where rates are rising it will either result in a higher net interest margin or it gives us a lot of powder in terms of pricing deposits and doing what we want to do that because we could make that neutral pretty easily.
So I like to kind of think of it as we’re sort of well positioned either for deposit growth or for actually a rising margin in that event. I talked about the net interest margin over time, I think the thing that is going to work well for banks like M&T that do a lot of plain vanilla banking is as long as the securitization markets are shut down it means credit spreads are wider and it takes a long time for sort of that repricing to roll through our books based on the terms of the credit that we have on our books.
I think a lot of it depends on how long the securitization markets and Wall Street remain quiet and quite frankly that just has not come back yet and it tends to be a help to regional banks. Will it be 10 basis points a quarter?
I find that hard to believe but I don’t have much more insight on that on the actual magnitude.
Craig Siegenthaler
Then just a follow up to Ken’s question on Bayview, just think about how it has been flowing, it has been pretty steady the last few quarters but can you help us understand the duration and how many more quarters of losses we should expect? And, is there a risk of a spike in any given quarter depending on the frequency of delinquencies in the portfolio?
Rene F. Jones
Well again, I said this before, I would expect on an ongoing basis for that originations franchise based on how it is operating not originating many loans that it is going to operate at a slight loss. Maybe that is a $5 million or somewhere in that range a quarter, I wouldn’t be surprised by that at all.
Is there a risk that you could get some kind of event particularly like the value of the residuals has changed? Sure but, we would talk about that when we saw it and where we saw it.
I think the basis of Bayview is now $246 million so relative to sort of our earnings power and those types of things I don’t look at it as much different than any other sort of loan relationship that we have. But, if there was new news we’d tell you about it.
We haven’t had any new news yet.
Operator
Your next question comes from Heather Wolf – UBS.
Heather Wolf
Just one quick question on the securities losses, can you give us a little bit more color on where those are coming from? I am assuming it is from the hybrid ARM book.
And also, where we are and how much further you think we have to go in those write downs?
Rene F. Jones
Maybe $29 million or so were from the private label mortgage backed securities, that same portfolio and then there were some small other items, the remainder of the CDO that I think we had wrote down in 2007 maybe $2 million there on another small security. So mostly private label mortgage backed securities.
The process is not different than what we have been going through. What you need to be able to see is remember we have taken about $148 million of losses on that portfolio in terms of we have written down $148 million.
But, the actual losses that we have experienced, breaks in the bonds, is about $70 million. What we’re doing every quarter is we’re projecting out when the mortgage and housing market is going to turn and what the delinquencies are likely to be.
Because we haven’t seen any change really in those trends as time goes by if you don’t see a change there’s a probability that you in the future you may have more losses. Most of the losses as I have said before Heather, have come from as we disclosed in the Qs the subordinated notes.
So of the total $1.2 billion that we have of private label mortgaged backed securities that didn’t get originated by M&T because this is the portfolio we are talking about, of the most subordinated parts of those structures there is about $100 million left and there’s about $1.7 or $1.8 billion of which are at the most senior end which we feel very good about. So as we kind of look to [2008] we could see more charges if we don’t see a turnaround in the housing market.
Overall though I wouldn’t expect them to be anything larger than we might have seen to date.
Operator
Your next question comes from [John Fox – Finnamore Asset Management].
[John Fox
I just had a follow up on the securities, the AOCI has obviously been improving throughout the year and helping the ratios and I am just curious, do you expect to see that continue ? Some of these mortgage backs I assume they are amortizing or getting par back so could you just talk about that outlook for the mark and for the amortization of the securities for 2010?
Rene F. Jones
It depends on what happens with interest rates. We talk about private label mortgage backed securities a lot but most of what we have is agency so all of that is just sort of subject to the change in rate.
When you go from December 31st of ’08 to now it has just been a dramatic improvement in the pricing on the private label mortgage backed securities and if you talk to your capital markets groups and that sort of has continued at a fairly steady pace. But, it is too hard to tell.
Obviously we’re out of the lows but it is hard to predict where that is going to go. So when we think about capital planning we don’t assume that there will be any change.
In fact, we might go the other way.
[John Fox
Rates are going to change and people get scared about credit but is there any amount of normal amortization that you get par back on a regular basis? And if so, how fast?
Rene F. Jones
I haven’t looked recently on those but last time I checked we were running somewhere around $40 or $50 million a month, something like that.
[John Fox
My second question is when you made the acquisitions you had to make assumptions about losses and did your marking to market on the accounting, the merger accounting. I am just curious if you could update us on how are those loans performing against your assumptions you made at the time of the acquisitions?
Rene F. Jones
No negative news. That was 13 months ago that we did that due diligence work and right now our losses are really tracking nowhere near what we would have estimated.
But, having said that I think the thing that you should look to is when we are really confident in that we would actually say something because it is a little too early. We’ve had the portfolio for about seven months.
But, no problems. Things for the first seven months for what we expected they are much better than we thought but we have yet to sort of declare victory there and I think we are going to wait for another year to sort of see what happens before we think about monetizing that in anyway.
[John Fox
Then your comments about 2010 if I remember them correctly, I am sure you will correct me but low to mid single digit earning asset growth I think you said earlier in the call?
Rene F. Jones
I think I said low single digit.
[John Fox
I just look at the last few quarters other than third quarter of ’09 where you had that acquisition, I mean earnings asset growth has been negative and I am just curious what has to happen in the economy for you to achieve the low single digit growth in earning assets?
Rene F. Jones
On a macro level I think there needs to be much more certainty out there with the regulatory environment, the economic environment for people to start drawing down on their lines and to start making investments. So as we kind of look out for our planning purposes for 2010 my sense is that the current trends are what you are going to see for the first half and we sort of had this thought that it is possible that we’ll begin to see more utilization as we get to the second half of the year.
Something like that. But remember, there is a bit of a natural hedge going on here because if that doesn’t happen we won’t have the loan growth but I would bet you we still have a lot of deposit growth.
Operator
Your next question comes from Ken Usdin – Bank of America Merrill Lynch.
Ken Usdin
Two questions if I may, first of all just a follow up on the provisions, I know it is hard to call the peak on provisioning but I am just wondering you said you are starting to see the migration patterns look better and the classifieds be down and the NPA growth rate has kind of slowed so I am just wondering you did over provide this quarter and I am just wondering what drove the over provision given those factors? And, would you expect to be pretty close to the end of the need to build reserves as you look ahead?
Rene F. Jones
I guess what I would say this quarter is we just took a pretty standard consistent process. I think that we started to show on a quarterly basis our allowance as we go through each of our loan portfolios, I think we broke our allowance out in our Q or at least we do that at the yearend.
You’ll see that, where we’re putting aside allowance is probably the areas that would make the most sense to do so. So, you’ll see higher allowance in the real estate portfolio and maybe steady allowances in other places.
Our thought process was not different than any other quarter that we’ve seen. If you go back to the first quarter of last year we added $58 million of excess because we saw some problems.
This [inaudible] we didn’t see much new.
Ken Usdin
I would just think it was such a big change in the kind of criticized classified that would kind of be your signal or kind of not necessarily prevent you from adding more but certainly the magnitude of over providing didn’t really change although it looks like some of the underlying signals got a lot better.
Rene F. Jones
Let’s see, let’s see. It’s one quarter but I’d be very happy to see it.
I am just not sure you can call that a trend.
Ken Usdin
My second question is just on AIB, they’re back in the news again with getting an infusion from the government. I’m just wondering can you help us understand at all where that stands and if there is any way that we can understand where their holding is relative to the stock price today?
Rene F. Jones
One, I have no new news on AIB. You guys know what I know and I think they are working through their issues with NAMA and there will be more to come on that as they get in to the middle of the year.
Ken Usdin
I’m just trying to have an understanding of where their cost basis is?
Rene F. Jones
Part of the issue for them is not a cost basis issue it is how our investment is treated for regulatory purposes. But, I would guess when we made that transaction our stock prices we probably in the low 70s, somewhere about in there so you’re kind of at a breakeven point where we are right now from an economic standpoint.
Ken Usdin
But that might be different from how they need to evaluate it from a regulatory standpoint.
Rene F. Jones
That is correct. They have done a lot of disclosures on that so I think that is sort of out there.
Ken Usdin
The last quick one just on the asset types for M&A given the fact that your capital levels have continued to improve and you are continuing to build organically versus your prior comments of kind of wait and see on TARP. Any thoughts there on assisted or strategic and how you would be looking now that these deals are kind of now further in the past from an integration perspective?
Rene F. Jones
If my corporate finance guy was willing to do a deal on December 16th of 2008 I would have to say we’re probably able to do something. But, we’re really most focused on – and we can do anything if it were to arrive but we’re probably most focused on just sort of keeping our bank healthy and focusing on internal growth.
But, like any other time if something were to come up we would be prepared to look at it.
Operator
Your next question comes from Gary Paul – Retired Executive.
Gary Paul
My only two areas of concern are Bayview and construction. On Bayview you keep referring to the residuals and yet the losses keep happening.
When would one expect the residuals to start providing a cash flow justifying the present book value?
Rene F. Jones
Now remember the residuals that we are talking about are from Bayview Financial not BLG. Those residuals are providing a fairly significant amount of cash flow today.
Those cash flows have first priority to debt and that is a sort of shared national credit that they have outstanding that they have been paying down and maybe that number was maybe in the $170 million a year ago and is scheduled to pay down fully this year.
Gary Paul
So indirectly you have been getting a significant amount of cash flow that is not showing up in the financial numbers?
Rene F. Jones
That is true.
Gary Paul
Can you tell me what your construction lending was at year end and what it was at the prior year end?
Rene F. Jones
This is the residential construction portfolio we have been talking about?
Gary Paul
Yes.
Rene F. Jones
I am just going to square this away because we did a couple of acquisitions. If you remember we talked about that, I don’t have it the year before but I think we talked about that being close to $2 billion.
If you look at that same portfolio that portfolio would be about $1.4 on its own, maybe it is $1.5 and then you have got to add back $407 that we bought from Provident and then we got about a little less than $50 from Bradford so it is back up to $1.9.
Gary Paul
But that $457 you would have taken significant marks against. Of the $500,000,000 drop in the core, how much of that was payoff and how much was write down just crudely?
Rene F. Jones
This year $92 million of the reduction was charge offs.
Gary Paul
So most if it was paying off then?
Rene F. Jones
Paying off or selling down. Think of it this way, we may take a $10 million charge off on something to bring it down to marketable value and then we may have sold it off.
The number at the end of last year was $1.9 billion.
Gary Paul
Is most of that now in footprint but in the Allfirst footprint?
Rene F. Jones
Most of the portfolio that we’re talking about here is in northern Virginia, Delaware Shore as opposed to close to our branches in the mid Atlantic. These are not a group that came with Allfirst this is a separate group that we sometimes refer to as the mid Atlantic but most of the loans are taking place in places just outside of where we would have branches.
Delaware Shore would be an example, so we call that the mid Atlantic portfolio.
Gary Paul
So this is not stuff that was acquired in the Allfirst deal?
Rene F. Jones
No. This is stuff that we originated from 2004.
Operator
Your next question comes from Jennifer Demba – SunTrust Robinson Humphrey.
Jennifer Demba
Could you give us some guidance on your tax rate going forward? Then secondly I have a question, could you give a little bit more color on the new non-accrual loan, the $100 billion CRE loan in Manhattan?
Anything you can give detail wise.
Rene F. Jones
On the tax rate that is a tough one for the full year so I get why you are asking it. Let me think about it a minute and I will come back to that.
The loan that we took to non-accrual this year, if you go back to what we did this is a loan that we booked in 2007 in December of 2007 and we booked it as a bridge loan. So we hadn’t done much and the capital markets sort of shut down, the CMBS market has been shut down ever sense.
At that point in time we saw a lot of folks coming to us with different credits. This is one of the ones that we did.
I think it is probably a pretty good case of sort of the culture of M&T. We actually booked that loan at a loan-to-value between 43% to 50%.
The range is dependent upon whether you want to do it just on the face value of the loan or on the cost to maintain it and improve it and get it ready for use over time. When you look at it we booked that loan of $100 million we had more than $100 million of ownership equity in front of us in terms of loss content.
You hear a lot about commercial real estate being down by large percentages in New York City, most of those are quoting things that are off the 2007 high in terms of rent. But for us we tend not to focus on sort of market value of current rents and we focus on pure historical value and in this case is Class C space and we tend to underwrite it relatively conservatively.
Here we had an event where we’re taking it to non-performing but because of the way we structured the deal in our mind the loss content is low, if any.
Jennifer Demba
And the tax rate?
Rene F. Jones
Somewhere in the 32%ish.
Operator
Your next question comes from Collyn Gilbert – Stifel Nicolaus.
Collyn Gilbert
Hopefully I have three what will hopefully be quick questions. First on Rene your comment about the fact that the growth rate in upstate New York is a little bit better than what you are seeing in the mid Atlantic.
Any thoughts as to why or kind of color you can give to support that comment?
Rene F. Jones
Well, while Washington DC relative to other places is pretty strong economically I do think that Maryland relative to New York state, upstate New York there is a difference there. There is still a lot of health up here in upstate New York and we never saw the sort of big problems here so you have a fair amount of health companies.
But having said that, the biggest issue is simply that when you look at places where we have either paid down credits or we’ve sort of exited credits or had a couple of larger charge offs, particular the C&I one we mentioned last quarter for $40 million, they were just concentrated in those portfolios. So what you’re getting is much more about payoffs and then finally much more lower utilization where people are just not making as much in the way of investments.
If you were to look at commitments we continue to book new commitments and we’re growing but people are just not drawing down on them. I would say that there’s probably not that much of a difference in the two portfolios and I would say if you were to look at it on raw commitments that my guess would be that we’re actually probably doing more new raw commitments in the Maryland area.
Collyn Gilbert
Then just on the non-interest bearing deposit growth that you’ve seen, is that a function of just carrying higher balances per account or are you actually seeing increase in the number of accounts?
Rene F. Jones
Over time it’s been both, it’s been both. I mean over the course of the 2009 we picked up a lot of new relationships but we also have seen that with a low rate environment it is beneficial for people who pay for their cash management services with balances.
Collyn Gilbert
Then just finally again, on the significant drop in the sort of watch list loans, any thought as to what might have been driving that? Was there a large loan in particular that drove that $200 to $300 million drop?
Rene F. Jones
I think in terms of trends I think there are certain things that have been improving. I think in some cases there is a willingness for financial buyers to come in and put in equity in to these companies because their prices have been very depressed so as long as you actually get new buyers coming in or people willing to actually put in new equity and help the companies out you are going to start to get some improving credits.
I think if there was a trend there is probably more activity across almost every portfolio, we see it in the residential builder, construction, sort of more people just willing to put money to work and those people are investors basically.
Operator
Your last question comes from Amanda Larsen – Raymond James.
Amanda Larsen
Can you give us an update on deposit growth/retention at Bradford and Provident? Then possible compare it to legacy and to specifically upstate New York and downstate New York?
Rene F. Jones
If you start out the gate with the idea that in our mind for the first six to 12 months we would expect that after an acquisition we’re going to see some run off in deposits. I would say that we’ve seen some of that with the Provident acquisition but most of it is on very high rate time and single service customers so nothing out of the ordinary beyond what we would have expected to see.
Bradford there’s some run off but most of it is in the wholesale time. We’ve actually had growth in DDA and now have been combined relatively stable and the time deposits running off.
There is no unusual trend there.
Amanda Larsen
My second question, you mentioned that competition today is better because securitization is shut down. I’m trying to get some color on when securitization does start back up again what does M&T look like?
How does competition compare versus what it was? The big element, have you picked up enough market share at this point where it’s not a big deal?
I know it’s really forward looking but if you can sort of give some color on that.
Rene F. Jones
One, I think it takes time. Two, I think we would welcome things that could be done that would provide confidence back in to the markets because I think it is good for everybody overall.
Remember, if you go back two years ago or three years ago now maybe 2005 and 2006 people were saying, “Geeze you don’t have much revenue growth.” Well, the issue there was just everybody was lending and money was relatively cheap and so you couldn’t get much growth.
Now, we’re at the opposite end of the spectrum and I think there is probably a lot of ground in the middle. I think for regional banks there will be somewhat of a favorable environment relative to competition for some time.
The longer that we don’t see much in the way of reform on a regulatory side I think the longer we’ll see that the securitization markets and those types of things, people have some leeriness about them. But, it’s hard to tell.
These things take a long time to change.
Amanda Larsen
One last question, longer term do you guys target an efficiency ratio as we’re trying to look at core EPS a couple of years out? Does it look more like legacy M&T?
Rene F. Jones
I’m still savoring our progress that we made this quarter. I don’t know, I think we said before low 50s is something that we think M&T has done in the past and can do and I think we’ll continue to work our way there because at the end of the day I think that is what is going to make a difference in your ability to be competitive, low 50s.
Operator
At this time there are no further questions. I will turn it back over for closing remarks.
Donald J. MacLeod
Again, I’d like to thank you all for participating today and as always if clarification of any items on the call or news release is necessary, please contact our investor relations department at 716-842-5138.
Operator
This concludes today’s conference call. You may disconnect.