M&T Bank Corp (MTB) 2009 Q4 法說會逐字稿

Good afternoon. I'll be your conference operator today. 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). Thank you. I'll now turn the call over to Don MacLeod, Vice President of Investor Relations. Mr. MacLeod, you may begin.

Thank you, Christy, and good afternoon. 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 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.

Thank you, Don, and welcome, everyone. Thank you for joining us on the call today. Based on the feedback, we received from some of you, we've added tables in the back section of the release which present 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 share per common share were $2.89 compared with $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 to $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 tangible 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 deposits 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 deposit 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 4 basis points of the margin expansion came from repricing on consumer time deposits. An additional 4 basis points came from a shift in our funding mix, with higher non-maturity savings and commercial [DDA] balances replacing time deposits and wholesale borrowings, and the remainder of the expansion came from lower rates on wholesale borrowings. Notable during the quarter was the rise in yields on commercial and industrial loans, up 9 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 paydowns, 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 a 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 paydowns, 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 exclude 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 2009 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, predominantly 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 amortization of intangible assets, operating expenses were $455 million, down from $469 million in the third quarter of 2009. The decline is primarily attributable to 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 adjustments in the valuation allowance in the third quarter of 2009 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 rights.

Excluding the benefit from the MSR, other operating expenses also declined slightly. The operating efficiency ratio, which excludes security 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 from 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.

Overall credit, let's turn to credit. Overall credit trends progressed as expected with stable net charge-offs and a 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 value of the property continues to be in excess -- the property values continue 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 into foreclosure of defaulted loans, were $95 million as of December 31 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 [$14] million for the recent quarter compared with $13 million 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 $1 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 excludes 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 rates 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 were $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 have that are in run-off mode like parts of our indirect auto -- and 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 investments.

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 wider credit spreads, and the continued inflows of non-interest bearing deposits I just mentioned are also a positive. We would expect less impact going forward from the favorable repricing of time deposits.

While credit costs remain elevated as the current credit cycle continues to play out, our inflows of loans into 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 have the lowest chargeoff rate among large 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 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 costs 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 401(k) 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 to questions, before which Christy will briefly review the instructions.

Thank you. (Operator Instructions). Your first question comes from the line of Steven Alexopolous with JPMorgan.

Hi, Rene.

Hi, Steven.

Can you talk about -- are all of the cost saves and revenue synergies from the two deals now in the run rate?

I think the answer is no. And the way that you think about that is that when you think about the opportunity we have on the distribution side, that just takes some time. So we're seven months through the transaction. I would think that 2010, for our -- particular for our retail folks will be continuing to work through the distribution type issues, which at the end of the day will result in additional expense savings. I think we're more than halfway through the expense savings though. In fact, I know we're well more than halfway through the expense savings.

If you look at the revenue side, the same is true there. The idea of optimizing the work you do on the revenue side, particularly with offering all of your services to the new customer, I think that takes a little time. So we would hope that there's continued opportunity through the year 2010 on that side as well. It's harder to identify on the revenue side.

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 then second, are you seeing anything in terms of early stage delinquencies there?

Well, let me start out, I'll take your questions in the order. It's a tough question to answer, because when you look at the renewals, if you think about what we do, it matters what year they're 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 of 2004 were something like $5.1 billion. By the time we got to September of 2007, we were at about $5.3 billion, somewhere in that range. We put some stuff on in the fourth quarter of 2007.

So the average life of our portfolio -- my guess would be somewhere around five years. But if you think about what's coming to renewal next year, a lot of it would be things booked as far along ago as 10 years. And what's good about that is they are not booked anywhere near the frothy time, so you have much more equity component in there. If you go back to 2004 and think of our portfolio as a five year portfolio, it would give you an average, say an average life of five years, you're basically saying we must have booked $1 billion a year to do that, right? 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 most of them are coming from things that were booked way before 2004. And we're still doing our work on the schedule, and I think at some point we'll publish that maturity schedule. But the more we get into it, in order to give you something that gives you a sense of our portfolio takes a little bit of time.

So in terms of the portfolio, as I said in the last call, we had a couple of credits that we had what I would call on our watch list. One of them came into 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. The thing to think about is that because we're 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 into non-performing, you'll hear about them from us before they happen. So no real change. We haven't seen any additional problem credits and delinquencies in the New York City portfolio.

Perfect.

Last thing I'll say on this is, if I could, is that reflecting back on 2009, actually you learn a lot. So we had no losses in the portfolio in 2009 and we actually had nothing roll into non-performing but for the slashed 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 additional resources if they were needed in order to keep the project moving forward, right? So when we look at 2009 and how our sponsors behaved and what the result was, we feel pretty good about where we are today.

Thanks, Rene.

Your next question comes from the line of Ken Zerbe, Morgan Stanley.

Great, thank you. I guess first question on Bayview, obviously lost about $11 million this quarter. Do you mind just providing another update? Looks like we're going out about two years of consistent losses. Wondering if anything has changed?

No. There's no change. Again, the largest share of our valuation is supported by residuals that are not included in what you're seeing on the income statement, and it's supported by their other businesses, mainly 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.

Okay, the other question I just had was on the net interest margin. I heard your comments that obviously the CD benefit or the repricing of the CD should provide less of an [event], but going forward it's 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 got 10 basis points of improvement this quarter, maybe it's less than that going forward? Or am I wrong in terms of that thinking?

Boy, I could ask the question the same way. I think first of all you're right. The time deposit benefit -- if I did that over time, the 4 basis points this quarter was less of a contribution than we see in the past quarters. But what is starting to happen now, and I made that comment that while we didn't see the yield rise much on earnings assets, underlying you do have this trend where you're repricing your commercial loan book and even the rest of your book. And you saw in the C&I book that 9 basis point rise in the yield, right? 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 bit of the slack. And then I think that we've yet to see -- it's amazing, we've yet to see this trend in non-interest bearing deposits keep growing. So my sense is that yes, you're probably right. If I were to guess again, I'd say yes, it's going to slow. But going into the quarter, we didn't see much slowing, so my sense is it will be a little slower than we've seen on a quarter to quarter basis. Maybe we'll be somewhere, I'd be surprised if we were above [3.85 to 3.80] for the full year. I'd be surprised by that.

Barring an increase in Fed funds I assume?

That's the other issue is because we're asset sensitive today, we've positioned ourself that if there is an increase in short-term rates, that's a positive to us today. So you borrow that.

Okay, great. Thank you.

Your next question comes from the line of Matthew Clark with KBW.

Good afternoon guys. Just first maybe housekeeping item, the 30 to 89 day bucket, could you just update us on that number?

On the consumer side, the 30 plus delinquencies were 1.67%, up 6 basis points from the linked quarter and up 6 basis points from a year ago, so not much of a change there. That's the $10 billion portfolio. On the resi mortgages, there's almost no change. When you look at the core and the Alt-A portfolio together, you wouldn't see much change. I think the dollar amount may actually 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, and the thing that you saw that you can't see even though the non-performers went up is that the classified loan book was down probably -- I don't know, $200 million to $300 million underneath. So there was a bit of progress there. And I guess when you step back and look at that and you go all the way back to mid year, it means the second half of the year, the rising pace of criticized or classified loans actually slowed dramatically and there really wasn't much of an increase from June 30 to December 31. So all the trends are I guess from where we've been positive, but we also don't see a dramatic rebound in credit.

Okay, and then if you gross up your problem loans, if you include the TDRs for example, and it looks like that in pace of -- the additions look like they've been fairly consistent in the last three quarters, somewhere around $290 million a quarter, 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?

There wasn't a lot. Nothing of that magnitude. Maybe a handful of credits I'd say that were, give me a second and let me take a quick look here, over $5 million. And then there were just a host of paydowns and pay-offs and those types to offset it. But let me give you this. If you look at the book, C&I, non-performing loans in C&I were down. Residential was down. Consumer loans were up $2 million, and the only increase was about -- real estate was $119 million, of which this was $104 million.

At the risk of sort of characterizing other inflows into non-performers, they were primarily residential construction credits.

Yes, and that's right. So anything besides that -- on the real estate side, what you had was many of the credits that we had previously identified on the residential side have of migrated through the process. Nothing new.

Great, and then lastly if I may -- in terms of your coverage on annualized net charges, I know you have internally targeted at least on average two times. And the last couple of quarters we've drifted a little bit below that. Just curious whether or not you changed your view on the loss content, maybe what you expect coming out of this cycle or if there's a change in how you're managing that reserve?

No, no, we're looking at it pretty closely. And when you look at the reserves to charge-offs, you see that, and I think you described that pretty well. We feel pretty comfortable where we are. And from what we can see, there's only one bank in the top 20 or at least the large super regionals that has a number of reserves that's high relative to the losses, so I think we feel pretty good about it. And we are also looking at the trends in the classified loan books as well.

Great. Thanks guys.

Your next question comes from the line of Bob Ramsey, FBR Capital Markets.

Hi, good afternoon.

Hi, Bob.

In terms of capital, you're 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 industry wide higher capital levels, maybe plans to repay TARP, et cetera?

Bob, it's a good question. I mean we are approaching our range. But my sense is that we're just going to, we're not going to change anything with our distribution policies and we'll just continue to build capital until there's 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 staying on the same page that we're at until we actually get some tangible guidance on what the new capital rules will be, if there are any, and a little bit more clarity there. And the environment is not such that you would actually change that, so my sense is that we'll keep building.

And do you think you will attempt to repay TARP in 2010?

I mean, our view is to wait and see, watch the environment. The economy hasn't turned yet and 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.

Okay, and do you have handy what the Tier 1 common to risk weighted assets was at the end of the quarter?

Maybe. Oh, Tier 1 common risk weighted assets?

Yes.

I've got an estimate. I'll get it for you in a second. I don't want to misquote it.

Okay. And then maybe just I guess while you look for that number, as you think about provision for 2010, given the promising trends in classified loans and new non-accruals that your provision was down in the quarter, do you think the provision has peaked if things continue on the track they're on economically?

No -- I mean I can't say yes or no, that's 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 got to provide for them. So 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.

That's all the questions I have.

Yes, and the answer to your other question was it's about 5.66%.

Okay.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Thanks, good afternoon.

Good afternoon.

First really just on the NIM guidance. Can you talk about what levers MTB still has available to improve the NIM? And also, should we expect a similar pick up in the first quarter, the first half? And then maybe you can talk about how asset sensitive you are relative to the peers, especially with the Fed's raising rates in the second half?

Let me take the second part first. Our asset sensitivity, we're asset sensitive, and I think for 200 basis point gradual increase, we've got something like a 2% positive, bear with me one second -- it's about 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 that 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 there because we could make that neutral pretty easily. So I like to think of it as we're well positioned either for deposit growth or actually a rising margin in that event.

I talked about the net interest margin over time. I think the thing that's 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 that repricing to roll through our books based on the terms of the credit that we have on our books. So I think a lot of it depends on how long the securitization markets and Wall Street remain quiet, and quite frankly that's just 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 than that on the actual magnitude.

And then Rene, just a follow-up to Ken's question on Bayview. Just thinking about how it's been flowing in, it's been pretty steady the last few quarter. But can you help us understand the duration of how many more quarters of losses we should expect? And is there a risk of a spike in any given quarter depending upon the frequencies of the delinquencies in the portfolio?

Well, again, I said this before. I would expect on an ongoing basis for that origination franchise based on how it's operating not originating many loans that it's going to operate at a slight loss. And maybe that's $5 million, I don't know, 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 an event that says 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 our earnings power and those types of things, I don't look at it as much different than any other loan relationships that we have. But if there was new news we would tell you about it. We haven't had any new news yet.

All right, great. Thanks for taking my questions.

Sure.

Your next question comes from the line of Heather Wolf, UBS.

Hi, good afternoon. Just one quick question on the securities losses. Can you give us a little bit more color on where those are coming from? I'm assuming it's from the hybrid ARM book. And also where we are and how much further you think we have to go in those writedowns?

So maybe $29 million or so were from the private label mortgage backed securities, that same portfolio. And then there was some small other items, the remainder of CDO I think that 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 from what we've been going through.

What you need to be able to see is remember, we've taken about $148 million of losses on that portfolio, in terms of we've written down $148 million. But the actual losses that we've experienced, breaks in the bonds, is about $7 million. And 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. And 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 in the future you may have more losses, right?

Most of the losses as I've said before, Heather, have come from as we've disclosed in the Q's, the subordinated notes. And so of the total $1.2 billion that we have of private label mortgage backed securities that didn't get originated by M&T, this portfolio we're talking about are -- of the most subordinated parts of those structures, there's about $100 million left and there's about $1.7 billion or $1.8 billion of which are at the most senior end which we feel very good about. So as we 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.

Okay, that's very helpful, thanks.

Sure.

Your next question comes from the line of John Fox with Fenimore Asset Management.

Hello, Rene, Don. I just had a follow-up on the securities. The AOCI has obviously been improving throughout the year and helping the ratios. And I'm just curious, do you expect to see that to continue to some of these mortgage backs? I assume they're amortizing or getting par back. So can you just talk about that outlook for the mark and for amortization of the securities for 2010?

I mean, 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 and so all of that is just subject to the change in rate. When you go from December 31 of 2008 to now, it's been just a dramatic improvement in the pricing on the private label mortgage backed securities. And you know as you talk to your capital markets groups that that has continued at a fairly steady pace. But it's too hard to tell. Obviously we're out of the lows, but it's hard to predict where that's going to go. So when we think about capital planning, we don't assume that there will be any change or go the other way.

Right. Obviously 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?

Well, I haven't looked recently on those, but last time I checked, we were running somewhere around $40 million to $50 million a month.

Okay.

Something like that.

Okay, great. And my second question is when you made the acquisitions, you had to make assumptions about losses and did your marketing to market and the accounting, merger accounting. And I'm curious if you could update us on how are those loans performing against your assumptions that you made at the time of the acquisition?

No negative news. I think if you look at where we were -- so 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 you should look to is when we're really confident is that that you would actually say something because it's a little too early. We've had the portfolio for about seven months. But no problems, things have -- for the first seven months what we expected, they're much better than we thought. But we've yet to declare victory there and I think we'll wait for another year to see what happens before we think about monetizing that in any way.

Okay, and then your comments about 2010 -- if I remember them correctly, I'm sure you'll correct me, but low to mid single digit earning asset growth, I think you said earlier in the call?

I think I said low single digits.

Low single, okay. I knew you'd correct me. I'm just looking at the last few quarters other than third quarter of 2009 where you had the acquisition. Earnings asset growth has been negative, and I'm just curious what has to happen in the economy to see you achieve the low single digit growth in earnings assets?

On a macro level, I think there needs to be much more certainty out there with the regulatory environment and economic environment for people to start drawing down on their lines and to start making investments. And so as we look out for our planning purposes for 2010, my sense is that the current trends are what you're going to see for the first half and we had this thought that it's possible that we'll begin to see more utilization as we get to the second half of the year.

Okay.

Something like that. There's 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.

Right. Okay, thank you.

Your next question comes from the line of Ken Usdin, Banc of America Merrill Lynch.

Thanks. Two questions if I may. First of all, just a follow-up on the provision. So I know it's hard to call the peak on provisioning, but I'm just wondering, you said you're starting to see the migration patterns look better and the classifieds be down and the NPA growth rate has kind of slowed. So just wondering, you did overprovide this quarter. And I'm just wondering what drove the overprovision giving those factors and would you expect to be pretty close to the end of the need to build reserves as you look ahead?

I guess what I'd say this quarter is we just followed a pretty standard consistent process. I think that we've started to show on a quarterly basis our allowance along with as they go to each of our loan portfolios -- I think we broke our allowance out in our Q, or at least we do that at the year-end. You'll see that where we're putting aside allowance is probably the areas that would make more sense to do so. So you'll see higher allowance in the real estate portfolios and maybe steady allowances in other places. So our thought process was it's not different than any other quarter that we've seen, and if you go back to the first quarter of last year, we added $58 million of excess -- we saw some problems. This quarter we didn't see much new.

Right. I would just think that with such a big change in the criticized classified, that would be your signal or kind of not prevent you from adding more, but certainly the magnitude of overproviding didn't really change, although it looks like some of the underlying signals got a lot better.

Let's say one quarter we're very happy to see it, but I'm just not sure you can call that a trend.

Right, okay. My second question is just on AIB -- they're back in the news again with getting an infusion from the government. I'm wondering, can you help us understand at all where that stands and if there's any way that we can understand where their holding is relative to the stock price today?

One, I have no new news on AIB. You guys know what I know, and I think they're working through their issues with NAMA and there will be more to come on that as they get into the middle of the year. Your other question was -- help me out with the last part again?

Just trying to have an understanding of where their cost basis is.

Part of the issue for them is not a cost basis issue. It's how our investment is treated for regulatory purposes. But I would guess when we made that transaction, the Allfirst transaction, our stock price was probably in the low 70s, somewhere about in there. So you're at a breakeven point of where we are right now, from an economic standpoint.

Right, but that might be different from how they need to evaluate it from a regulatory standpoint.

That's right, and they've done a lot of disclosures, so I think that's out there.

Okay, last quick one, just on the appetite for M&A given the fact that your capital levels have continued to improve and you're continuing to build organically versus your prior comments of wait and see on TARP. Any thoughts on assisted or strategic and how you'd be looking now these deals are further in the past from an integration perspective?

If my corporate finance guy was willing to do a deal on December 16 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 arise. But we're most focused on just keeping our balance 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.

Okay, thanks a lot.

You're welcome.

Your next question comes from the line of Gary Paul, retired executive.

Hello?

Hi, Gary, how are you?

Fine. I wonder how they got that because I didn't tell them that I was retired executive.

I don't know. The gig is up.

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?

Well, it's a good question, Gary, and remember the residuals that we're talking about are from Bayview Financial, not BLG.

Yes, no, I understand that.

And those residuals are providing a fairly significant amount of cash flow today. Those cash flows have first priority to debt, and that is a shared national credit that they have outstanding that they've 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.

So indirectly, you've been getting a significant amount of cash flow that is not showing up in the financial numbers?

That's true.

Okay, that makes sense then. You were going to say anything further?

Nope.

Okay, and then can you tell me what your construction lending was at year-end and what it was at the prior year-end?

So this is the residential construction portfolio we've been talking about?

Yes.

Yes, I have that somewhere here. Hang on one second, I'll find that. So I'm just going to square this away because we did a couple of acquisitions. So 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. And if you look at that same portfolio, that portfolio would be about $1.4 billion on its own, maybe it's $1.5 billion. And then you got to add back $407 million that we bought from Provident and then we got about a little less than $50 million from Bradford. So it's back up to $1.9 billion.

Okay, but that $457 million you would have taken significant marks against, so -- and of the $0.5 billion drop in the core, how much of that was payoff and how much was writedown just crudely?

Oh, my goodness. Wow.

You don't know?

Well, I do know. This year it was $92 million of the reduction was charge-offs.

Okay, so most of it was paying off then?

Paying off or selling down, right. So let's think of it this way. We may take a $10 million chargeoff on something to bring it down to marketable value, and then we may have sold it off.

Okay, that makes sense.

And the number at the end of last year, Gary was $1.9 billion.

Okay, and is most of that now in footprint but in the Allfirst footprint?

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.

Oh, okay.

So this is not a group that came with offers. 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.

So this is not stuff that was acquired in the Allfirst deal?

No. This is stuff that we originated from 2004.

Okay. That answers my question.

Thank you.

Your next question comes from the line of Jennifer Demba with SunTrust Robinson Humphrey.

Hi, Jennifer.

Good afternoon. Could you give us some guidance on your tax rate going forward? And 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 detailwise?

On the tax rate, I don't know that there was anything. That's a tough one for the full year, but I get what you're asking, so let me think about it a minute and I'll come back to that.

Okay.

What else can I tell you? Well, the loan that we took the non-accrual this year, if you go back to what we did -- this is a loan that we booked in 2007, so in December of 2007. And we booked it as a bridge loan. And if you remember -- so we hadn't done much, and the capital markets sort of shut down, the CMBS market has been shut down ever since. And at that point in time we saw a lot of folks coming to us with different credits, and this is one of the ones that we did, and I think it's probably a pretty good case of the culture of M&T. We actually booked that loan at a loan to value of between 43% to 50%. The range is dependent upon whether you want to do it 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, right.

So 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. So you hear a lot about commercial real estate being down by a large percentage in New York City. Most of those are quoting things that are off of the 2007 high in terms of rent. But for us, we tend not to focus on market value of current rents and we focus on pure historical value in this case is the Class B space, and we tended to underwrite it relatively conservatively. So here, we had an event where we're taking it non-performing, but because of the way we structure the deal, in our minds the loss content is low if any.

That's helpful. And the tax rate?

Somewhere in the 32% ish.

That's helpful, thank you very much.

Your next question comes from the line of Collyn Gilbert with Stifel Nicolaus.

Hi, Collyn.

Hopefully I have three -- what hopefully will be quick questions. First, on -- Rene, your comment about the fact that growth rate, the growth rate in upstate New York is a little better than what you're seeing in the Mid Atlantic. Any thoughts as to why or color you can give to support that comment?

Well, I mean, I think while Washington DC relative to other places is pretty strong economically, I do think that Maryland relative to New York State, upstate New York is just a difference there. So there's still a lot of health up here in upstate New York and we never saw the big problems here. So you've got a fair amount of healthy companies. But having said that, the biggest issue is simply that when you look at places where we've either paid down credits or exited credits or had a couple of larger charge-offs, particularly the C&I one that we mentioned last quarter for $40 million, they were just concentrated in those portfolios. And so what you're getting is much more about payoff 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 just aren't drawing down on them. So 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.

Okay, that's helpful. And 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?

Over time it's been both. It's been both. I mean over the course of 2009 we've picked up a lot of new relationships, but we also have seen that with the low rate environment, it's beneficial to people who pay for their cash management services with balances.

Okay, and then just finally, again, on the significant drop in the the watch list loans, any thought as to what might have been driving that? Was there a large loan in particular that drove that $200 million to $300 million drop?

I think in terms of trends, I think that there are certain things that have been improving. I think in some cases, there's a willingness for financial buyers to come in and put an equity into these companies, because their prices have been very depressed. So as long as you actually get new buyers coming in or people willing to put in new equity and help the companies out, you're going to start to get some improving credits. So I think if there was a trend, there's probably more activity across almost every portfolio. We see it in the residential builder construction and more people willing to put money to work, and those people are investors basically.

Okay, that's helpful, thanks.

Your last question comes from the line of Amanda Larson with Raymond James.

Hi, Rene.

How you doing, Amanda?

Good, thanks. Can you give us an update on deposit growth/retention at Bradford and Provident and then possibly compare it to legacy, and then to specifically upstate New York and downstate New York?

Compare, I mean I guess you could start out of the gate with the idea that in our minds for the first, I don't know, six to 12 months we would expect that after an acquisition we'll see some run-off of deposits. And then I would say that we've seen some of that with the Provident acquisition, but most of it's on very high rate time and single service customers. So nothing out of the ordinary beyond what we would have expected to see. Bradford I actually don't -- hold on a second. Bradford, there's some run-off, but most of it is in the wholesale time. So I think we've actually had growth in DDA. DDA and NOW have been combined relatively stable and the time deposits running off, so there's not an unusual trend there.

Okay, that's good. 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 when it was a 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 could give some color on that?

One, I think it takes time. Two, I think we would welcome things that could be done that would provide confidence back into the markets because I think it's good for everybody overall. And I think -- remember if you go back two years ago or three years ago now, maybe 2005 and 2006, people were saying that the issue is you don't have much revenue growth. Well, the issue there is 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's probably a lot of ground in the middle. And I think that for regional banks, there will be somewhat of a favorable environment relative to competition for some time. And 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.

Sure. Okay, one last question. Longer term, do you guys target an efficiency ratio as we're trying to look at core EPS a couple years out? Look more like legacy M&T?

I'm still savoring our progress that we made this quarter. I think we said before, low 50s is something that we think that 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's what's going to make a difference in your ability to be competitive, low 50s.

All right, thanks so much.

At this time, there are no further questions. I'll turn it back over for closing remarks.

Again I'd like to thank you all for participating today, and as always if clarification of any items in the call or news release is necessary, please contact our Investor Relations department at 716-842-5138.

Thank you. This concludes today's conference call. You may now disconnect.