M&T Bank Corp (MTB) 2011 Q1 法說會逐字稿

Good afternoon. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank first-quarter 2011 earnings conference call. (Operator Instructions). Thank you. I would now turn the conference over to Don MacLeod, Director of Investor Relations. Please go ahead.

Thank you, Melissa, and good afternoon. This is Don MacLeod. I'd like to thank everyone for participating in M&T's first-quarter 2011 earnings conference call, both by telephone and through the webcast. If you've not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.MTB.com, and by clicking on the investor relations link.

Also, before we start, I'd like to mention that comments made during this call might contain forward-looking statements relating to the banking industry and to M&T Bank Corporation. M&T encourages participants to refer to our SEC filings, including those found on Forms 8-K, 10-K, and 10-Q for a complete discussion of forward-looking statements.

Now I'd like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don, and good afternoon, everyone. Thank you for joining us on the call. I'll cover a few of the highlights from our earnings, and then we'll take your questions.

Overall, our results for the first quarter of 2011 were consistent with the trends we've seen over the past several quarters, that is to say modest but steady improvement in most of our metrics.

Turning to the specific numbers, for the first quarter of 2011, diluted earnings per common share were $1.59, unchanged from the prior quarter and up 38% from the $1.15 in the first quarter of 2010. Net income for the recent quarter was $206 million, compared with $204 million in the linked quarter and $151 million in last year's first quarter.

M&T's results for the first quarter include the impact of a repositioning of our balance sheet leading up to the merger with Wilmington Trust. During the recent quarter, M&T sold investment securities, predominantly including $484 million of agency pass-through securities, resulting in an after-tax gain amounting to $24 million, or $0.20 per common share. As we included in our November 1, 2010, investor presentation announcing the Wilmington deal, we have targeted post-closing capital ratios at a level that will approximate those in place as of September 30, 2010, before announcement of the deal.

Also, included in our GAAP earnings for this year's first quarter was after-tax expense from the amortization of intangible assets amounting to $7 million, or $0.06 per common share. This compares with $8 million, or $0.07 per common share, in the linked quarter, and $10 million, or $0.08 per common share, in the year-ago quarter.

The first-quarter results included after-tax expenses related to the completed K Bank acquisition, as well as the upcoming Wilmington Trust merger, amounting to $3 million, or $0.02 per common share. The results in the fourth quarter of 2010 included a merger-related gain of $16 million, or $0.14 per common share, relating to the K Bank acquisition. There were no merger-related items in last year's first quarter.

Net operating income, which excludes the amortization of intangibles, as well as merger-related items, was $216 million, or $1.67 per common share, for the first quarter of 2011, compared with $196 million, or $1.52 per common share, in the linked quarter and $161 million, or $1.23 per common share, in last year's first quarter. Excluding the securities gains I just mentioned, net operating income was improved by 20% from the year-ago quarter.

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. The annualized return on average tangible assets and average tangible common shareholders' equity was 1.36% and 20.16% for the recent quarter, compared with 1.2% and 18.43% in the fourth quarter of 2010.

Next, I'd like to cover a few highlights from the balance sheet and the income statement. Taxable equivalent net interest income was $575 million for the quarter -- for the first quarter of 2011, up 2% from $562 million in the first quarter of 2010, but due to a lower day count, down from a hundred -- from $580 million in the linked quarter. The net interest margin widened during the first quarter, averaging 3.92%, an increase of seven basis points from 3.85% in the sequential quarter.

Five basis points of the improvement came as a result of a lower level of money market assets in the first quarter as compared with the fourth quarter. Recall that in the fourth quarter, we had an average of almost $800 million of reverse repurchase agreements on the balance sheet to collateralize the seasonal inflow of municipal deposits. The low yield on those balances and a downward -- those balances had a downward impact on the net interest margin in the fourth quarter. Those balances were virtually zero in the first quarter.

Our use of reverse repurchase agreements will fluctuate from time to time, based on seasonal levels of municipal deposits which require collateralization. The day count of 90 days in the first quarter versus 92 days in the linked quarter accounted for an approximate three basis points' increase in the margin as well.

As for the balance sheet, average loans in the first quarter increased by approximately $830 million for an annualized 7% to $52 billion compared with the fourth quarter. This reflects the surge of lending activity which came on late in the fourth quarter and which wasn't fully reflected in the average loans for that quarter.

On an end-of-period basis, loans grew by $128 million, or 1% annualized. Compared with last year's fourth quarter, changes in end-of-period loans by category were as follows. Commercial and industrial loans grew by an annualized 13%. This reflects continued demand by auto dealers to finance inventory. This is consistent with the stronger demand for automobiles noted recently in the business press. All other C&I loans grew an annualized 11% -- at an 11% annualized rate, reflecting the improved demand across various industries and regions.

Commercial real estate loans declined by an annualized 6%. Roughly half of this decline came as a result of lower level of held-for-sale multifamily commercial mortgages at March 31 as compared to the end of last year. Those loans were delivered to the federal housing finance agencies during the first quarter in the normal course of business.

Consumer loans declined by an annualized 9%, reflecting a lower level of indirect auto loans, as well as weak demand for home equity loans and lines.

Residential real estate loans grew an annualized 16%, reflecting a $425 million increase in mortgages held for investment since year-end and an $811 million increase since September 30 of 2010. These increases were the result of a decision we made at the end of the third quarter to retain a higher proportion of our conforming mortgage originations.

In light of the growth we've seen in C&I lending, and also as part of our actions to position the balance sheet in advance of the merger, late in the first quarter we decided to resume selling the majority of our conforming mortgage production to the agencies. We continue to see a favorable mix shift, with core deposits replacing wholesale borrowings. Within core deposits, we're also seeing a favorable mix shift with non-interest-bearing deposits replacing timed deposits. Demand deposits as of March 31 increased an annualized 18% from December 31 of last year.

Turning to noninterest income, noninterest income was $314 million in the first quarter of 2011, compared with $287 million in the linked quarter. Excluding net securities' gains and losses in both periods, the fourth quarter's $28 million -- and the fourth quarter's $28 million pretax gain from the K Bank acquisition, noninterest income was $291 million for the recent quarter, compared with $286 million in the fourth quarter. On that same basis, non-interest income increased by 2.5% from last year's first quarter, despite the negative impact from regulatory changes impacting deposit service charges.

Mortgage banking fees were $45 million for the quarter, up from $35 million in the linked quarter. The primary reason for the improvement was an $11 million lower level of expense associated with the obligation to repurchase certain mortgage loans previously sold as compared to the fourth quarter. To a lesser degree, the decision I just noted, to resume selling a higher proportion of our mortgage production to the agencies rather than to retain the loans for investment, benefited residual gains on sale revenues.

Service charges on deposit accounts were $110 million during the recent quarter, compared with $111 (sic - see Press Release) in the linked quarter. The normal seasonal decline in debit card interchange and NSF fees was partially offset by higher commercial service charges.

Turning to expense, excluding merger-related expenses and the amortization of intangible assets, operating expenses were $483 million for the first quarter, compared with $455 million in the fourth quarter of 2010. The first quarter's results included higher compensation expense, reflecting seasonally higher salary and benefits costs, which include the accelerated recognition of equity compensation expense for certain retirement-eligible employees, as well as higher FICA expense, unemployment insurance expense, and expenses related to the 401(k) match.

In aggregate, the expense from these items was some $23 million higher than in the linked quarter. This is consistent with our experience in each of the past five years.

These seasonal factors negatively impacted the efficiency ratio, which excludes securities gains and losses, as well as intangible amortization and merger-related gains and losses. The efficiency ratio was 55.8% for the first quarter, compared with 52.5% in the fourth quarter of 2010.

Next, let's cover credit. Overall, credit trends showed some improvement. Criticized loans outstanding declined from the levels as of year-end. Notably, with most institutions now disclosing criticized loans in their 10-K filings, it appeared to us that M&T's levels of criticized loans as of year-end compared very favorably to those of our peer group of the largest regional and superregional banks.

Nonaccrual loans decreased to $1.21 billion, or 2.32% of loans, at the end of March, from $1.24 billion, or 2.38% of loans, at the end of 2010. Other nonperforming assets consisting of assets taken into foreclosure of defaulted loans were $218 million as of the end of the first quarter, compared with $220 million as of the end of December 31.

Net charge-offs for the first quarter were $74 million, improved from $77 million in the fourth quarter of 2010. Annualized net charge-offs as a percentage of total loans were 58 basis points, down from 60 basis points in the linked quarter. The provision for credit losses was $75 million for the first quarter, compared with $85 million in the linked quarter. The provision exceeded net charge-offs by $1 million, and as a result, the allowance for loan losses increased to $904 million as of the end of the first quarter of 2011.

The ratio of allowance to credit losses -- for credit losses to legacy M&T loans, which excludes the acquired loans against which there is a credit mark, was 1.81%, down slightly from 1.82% in the linked quarter. The loan-loss allowance as of March 31, 2011, was three times annualized net charge-offs for the recent quarter.

We disclose loans past due 90 days but still accruing separately from nonaccrual loans because they are deemed to be well secured and in the process of collection, which is to say there's a low risk of principal loss. Loans 90 days past due were $264 million at the end of the recent quarter. Of these, $215 million, or 81%, are guaranteed by government-related entities. Those figures were $270 million and $214 million, respectively, at the end of December.

Turning to capital, M&T's internal capital generation rate remained strong. M&T's tangible common equity ratio was 6.44% at the end of the first quarter, an increase of 25 basis points from 6.19% at the end of the fourth quarter. Our estimate of the Tier 1 common ratio as of March 31 is 6.78%, up 27 basis points from 6.51% at December 31.

Turning to our outlook, as we noted at the beginning of the call, the trends for the quarter are generally in line with what we've seen over the past three to four quarters. Loan demand overall appears to be improving, although it's stronger on the commercial side. Deposit flows are continuing. The net interest margin is relatively stable and the credit continues to improve.

In light of this, we don't see anything to alter our outlook for the remainder of the year.

If events play out as we expect, we will close the Wilmington Trust merger sometime this quarter. This will likely result in the net interest margin for the combined company to be slightly lower than the standalone M&T. In addition, we'll have a larger portfolio of impaired loans in runoff mode, which may subdue reported loan growth for the combined Company.

Of course, all these projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events, and other macroeconomic factors which may differ materially from what actually unfolds in the future.

We will now open up the call to questions, before which Melissa will briefly review the instructions.

(Operator Instructions). Matthew Clark, KBW.

Just on the Wilmington Trust securities portfolio, can you give us a sense for what you plan to do with that? Whether or not you expect to maintain, I guess, recent levels, or is that going to come down?

Well, I guess the way to look at that, Matt, is that we are going to try to look at the portfolios as a whole. So there's nothing specific that we would do to Wilmington Trust's securities portfolio. But when we look at the whole, we're trying to manage the overall level given where actual loan growth comes out. So we would just view them as part of our overall discretionary portfolio -- discretionary assets' portfolio.

And I guess with the pending Wilmington Trust deal, is it fair to assume the regulators are going -- in order to approve that, they are going to want to see you guys with some -- with either possibly repaying TARP in conjunction with that close or just having a plan in place to repay at some point in the future?

I guess you kind of asked the question that's on everybody's mind. For myself, I guess we would've hoped to have been able to sort of talk about the fact that we had approval for the deal at this point, but I think these things are just taking a little bit longer than we expected.

But once we do that, as we had said before, once we understand where we are with the Wilmington transaction, and then, we would be able to sort of address questions on the whole capital structure of the bank and what we need to do, TARP and those types of things. So, once we get through this first step, I think we'll be able to say more on that.

We don't see anything that's -- we've answered all the questions. We think we would be -- we would guess that we would hear something relatively soon. We just haven't heard yet.

Okay, and then just lastly, in terms of your guidance, I think at the start of the year you had mentioned that you thought provisioning would be moderately lower relative to last year. Obviously, you're coming in a little bit better than I think probably most had expected in terms of provisioning. Should we expect it to be lumpy or can we assume that this trend can continue? Right (multiple speakers) this level?

Yes, I guess the one thing that Don and I had been saying for several quarters is that we think that our credit picture would be somewhat lumpy. And I think that that's probably still the case, but I guess one change that we see is that, as we look at our classified loan books and relative to a year ago or maybe even 18 months ago, the size of the credits are smaller that we've been dealing with.

So, I do think that's one nice sort of bit that as you get into a space where you look at your -- not the size of your classified loan book but the size of the individual credits, it becomes a little bit more predictable. So, if that helps --

And then, just in terms of the move, I think you had mentioned, since year-end your criticized assets are down a little bit. I'm just curious in terms of magnitude how much that might be.

We won't -- because we are putting this in our Q, we'll have to give a final number there. But they were down, I would say, somewhere in the neighborhood of $100 million or maybe a little bit more. So, that was encouraging.

I think the other thing that was encouraging was that when you kind of looked at where the improvement came from, it didn't come from one sector of the economy. You saw improvements in transportation, a number of transportation companies. You saw, obviously, some improvement in real estate and development, which was -- those were more from things that we did to work out the process. But also, media-related companies, consumer retail companies. So, it was actually nice to kind of look through the classified loan book by client and type of industry, and you got some sense that the improvement wasn't sort of just centered in one space.

Steven Alexopoulos, JPMorgan.

Maybe I'll start, the time you had for due diligence on the Wilmington deal was pretty short. Now that you've a little more time, should we expect any changes to what you had disclosed for the fair value marks on the loan book?

At the time we did -- at the time that we had the announcement, as you describe that pretty well, so we were at November 1, what we provided in that presentation was, just to be clear, was our expectation of credit losses over the life of the loans. So we didn't do a marks. We didn't have an interest-rate mark in all that in there.

And then, what we did is we went back, and I think we spent another 11 or 12 days in the month of December, and we took another look and sort of set everything up. We didn't see any change in our expectations, really, at that point in time.

So what we've been doing ever since is just watching as Wilmington goes through their process. We're able to look at, for example, at what they charge off and try to get some sense of whether those are the same credits that we saw that we would've predicted would've had some difficulty.

And I would say we haven't had a -- any big material change in what we're thinking. Obviously, they had a fair amount of charge-offs in the fourth quarter, and so maybe that's a little accelerated. But in terms of total content, there is nothing really that we've seen that's materially different.

Rene, regarding your comments that we should expect capital ratios post the Wilmington deal to be somewhere where they were before you announced it, should we be focusing more on regulatory capital ratios, TCE ratio, just where should we be focusing on that?

I don't know. I guess these days you've got to focus on them all. We tend to focus heavily on tangible because that's how our philosophy has gone, but we're looking at all the ratios.

Okay. Just one final one, looking at the margin, it looks like cost of deposit is pretty much at a bottom. The NIM, I guess, will go down a bit with the Wilmington deal, but do you expect to see pressure on the portfolio in terms of NIM, just from loan yields continuing to come down?

Pressure on -- do I expect to see pressure on the margins?

Yes.

I don't know. No, I think our margin outlook is very stable. I think -- you are right on the liability side. The thing that we have seen, though, is we've actually been able to continue to eke out small improvements, in part because the time-deposit portfolio is repricing, but also wholesale rates have been down. They've been markedly down.

But I think the other thing when I step back and look at the margin as a whole, for a very, very long time, we had put on loans and replacing runoff that were at a much higher margin. I'd say the peak of that was probably somewhere around the first or second quarter of 2009, and since that time, from a match-funded basis, we've put on a fair amount of loans at a much wider margin that was embedded in the existing portfolio already. So, you kind of see it as no shrinkage of the asset side in terms of yields.

But I think our margin is going to be pretty stable for a while. You know, sans the Wilmington transaction.

Erika Penala, BofA Merrill Lynch.

Could you walk us through sort of a range of how much you think you have to pump into Wilmington Trust in terms of capital once you mark the balance sheet to purchase accounting?

We kind of give you where we are trying to head, and then the best thing to do is kind of take a look at essentially what our capital generation is -- rate is, and I think from where we were, that's been a pretty big contributor. Whether you looked at Tier 1 common or tangible, we're running at somewhere between 25 to 30 basis points a quarter. And we think that's probably the biggest -- the most healthy contributor. But I don't understand what you mean by pump in.

Let me ask it another way. Once you mark the Wilmington balance sheet to purchase accounting, is it fair for us to assume that you would want to recapitalize this at, let's call it, a 5.5%, 6% TCE, which would -- what you would be comfortable with on a standalone basis for your bank?

I guess I'll just reiterate. Our goal as we kind of work our way through it is to have capital ratios that look a lot like what they looked at before we announced the transaction on November 1.

And in terms -- I guess to just not talk about capital (multiple speakers)

Erika, let me just go back. If you go back over time, we've been very consistent, right, as you go back with the [product]. As we look at where we think we're going to head, we make our estimates, and so generally, without some event happening, we tend to do a pretty decent job of sort of managing to what we say.

The biggest issue you saw there is that's one of the reasons why we repositioned some of the securities portfolio, right, to sort of manage to those levels.

Just trying to figure out what the tail risks could be on the credit side. How have the -- how has the redefault rate on your loan modification portfolio been trending?

That's -- we talked about for a very long time that when you compare our statistics to what you get in the OCC sort of nationally published statistics, that that's -- that actually has fared pretty well and that hasn't changed.

So, for example, one second -- if you look -- if you'll look at our total redefault rate -- I've just got to make sure I'm looking at the total loans here, that from 2008 to 2010, it would be something like 35%. 35.2%. And then, if you look at nonagency, and then if you do a comparison sort of with the OCC, for example, and we take various quarters, right, so if you look at the average of the quarters from 2009 to the second quarter of 2010, so those are seasoned, we would be at 25% versus the -- I'm sorry, we'd be at 10% versus the OCC of 25%, and that's just after six months of experience.

So, very much the same as what we had been tracking before. The absolute numbers, I think, are up a little bit, but still very good in comparison to what the national averages seem to be.

Craig Siegenthaler, Credit Suisse.

Rene, I was wondering if you could update us on your comments for industry NIMs. I think you started this back in September, but you kind of mentioned how we are at peak NIMs, I think driven mainly by a slowing deposit cost there, interest rates that aren't going materially higher at this point. I know you just kind of said stable NIMs for M&T, but do you still think we're kind of at peak levels for the industry?

I mean, I guess it all depends on what happens with rates, but if rates were to stay flat, right, then it's hard to find a lot of catalyst for margin expansion.

And the thing that I said then, and that I still believe, is if you were going to show outsized loan growth, demand is picking up, for example, in the C&I space. But for anybody to produce outside loan growth, I think there's a fair amount of pricing competition there and you might actually begin to see some margin compression. The only exception to that is if somebody has a boatload of securities sitting on their books and they are replacing the two. But for a relatively balanced portfolio, I think it would be hard to create margin expansion today.

Got it. And then, earlier you said you look for stable NIM here in the next few quarters, and that's also in light of the fact that you'll be going through the Wilmington consolidation. Or is that just on M&T legacy?

What we said back in January is that we thought that our net interest margin for the full year of 2011 wouldn't be materially different from what it was in 2010. And I think we're still there. I think that if I look at where we are in the quarter, maybe it's a little stronger than I had thought.

And then, when you bring in Wilmington for half a year, let's say, that's going to have some dampening effect, but again, I don't expect it to be all that material.

Having said that, when we sit here talking about the third quarter, we'll get a better picture of what the run rate is, right, on -- from the impact of Wilmington, and that could be down some. So, we'll have to take a look and see.

All right, thanks, and is there any update on your commentary for indirect auto? I think also on the prior call, you mentioned how competition was kind of heavy there, too. Has that slowed up at all, or is that even more competitive?

I don't think it's changed. I think it's -- for us, it's been competitive for a long time. I think our volume has been -- I think our volume has been pretty steady. We're running around somewhere between $60 million to $100 million a month in volume. When times were good and when we thought we were getting adequate returns in that portfolio, it could be as high as $200 million a month. So, it's down quite a bit and hasn't changed too much.

Ken Zerbe, Morgan Stanley.

Great. Thanks. Just a question, in terms of reserve release, obviously M&T is run at a fairly high level of reserves, consistently over the last many years. When you think about the environment going forward and where you are now, how much leverage do you have to potential reserve release, excluding the impact of Wilmington, of course, or are you already there? Thanks.

Yes, sure. I'll say a few things. I think we summed it up as best we could in the press release is that while we've seen signs in our book that there is some improvement, it's hard to ignore the fact that relative to the last 20 years, we are at an all-time high in our nonperforming book and, I would guess as well, in our classified book.

So, when you look at that, you saw some turnaround mid last year and people were asking, well, is that the turnaround? And then, we actually had a couple of upticks, right? And now we're coming down a little bit. So I think that we are cautiously optimistic, but to noticeably take the allowance down when you're at an all-time high, somehow it just doesn't seem to make much sense to us at all.

No, I would agree, I guess, but maybe then (multiple speakers)

So I say, Ken, the other thing is, as you look around the corner, you look at the facts that may be out there, but also the overall macro environment for the economy outside the U.S., it changes rapidly, and with that level of weakness, things could turn around pretty quickly.

No, no, understood. And then, just a quick question on the resi mortgages. I heard your comment that you said you're stopped -- or you've stopped portfolioing those. Are you now done portfolioing those going forward now that Wilmington is close to close, or is that something you may reconsider in the future?

I think that when you look at where our asset sensitivity, because we are asset sensitive, I think that we might reconsider that as we get to the second half of the year. We've put on about $800 million in mortgages, and so now what we're just doing is stopping and we're stepping back and taking a look at where we're going to fall with our capital ratios and the positioning of our balance sheet up to Wilmington, and then we'll have to reconsider post that.

Bob Ramsey, FBR.

You mentioned a couple of times, I guess, the focus of the securities in the resi mortgages driving towards the capital ratios. Is this really just to get back into that range that you all were at at third quarter, which was the guidance you all had given at the time you had done it, and do you anticipate further security sales in the second quarter of the year?

First question is yes. And the second question is maybe. We'll have to see what we need to do.

Okay. And then, I guess it looks like the security sales that you all did in this quarter isn't fully impacted into the average balances. So is that going to sort of weigh on the average earning asset growth in the second quarter?

Yes, there is no impact on average this quarter, you're right, but it will -- yes, that's right, you'll see -- so just take the as-ats, and then you can start from there when you think about the second quarter.

Okay, and then, last question, just on the credit front, were there any large or notable items that you can share any color on, either in terms of charge-offs or nonperformers, new nonperformers?

No. Wasn't anything, I think just to our comment about the size of credits, there were still inflows into nonperforming, but more outflows, but nothing really notable.

Marty Mosby, Guggenheim Partners.

I have two questions for you. The operating expenses jumped up about $28 million this quarter, related to the compensation and the FICA seasonality. Last year, it was like 11 to 15. I was just curious what the difference was this year and why it seemed to be a little bit more amplified?

You're saying that the uptick in FICA was a little higher than last year?

Just looking at your total expenses, and we were talking about the reason that it had gone from where it was in the fourth quarter to first quarter was related to FICA and the option expensing. So it just seemed to be stronger this year relative to the increase last year.

I wouldn't know of any specific difference in the salary line. But it seems all -- seems to be -- I'm trying to think what that would be, it would be something from last year.

I mean, I don't think so, Marty. There's nothing unusual there. If you look at the total amount, as we said in the script, it's very, very similar to what we saw last year. The one difference might be that when you look year over year, of all the categories of expense, that we spent a little more this year, this first year quarter, on technology initiatives that relate to sort of technology initiatives around the web, around deposit and deposit products, and services around our business banking customers. So if you're looking at total, I would say you look at the other category and professional services are up. But other than that --

Okay. So that's probably where it's located. The other thing was your private CMOs have been being impaired every quarter. How do you see that going forward from here?

You know, this quarter if you look, it was -- I've got to be careful. There's two different things that you're looking at there. There's private-label residential mortgages, which were more of what generated the OTTI in the fourth quarter. And then, these were a different set of securities, also sort of residential mortgage-based CMOs that we took charges on, but it's a different set of securities, right?

So as you look at it, the total -- if you look at the private label, which has generated most of the charges, it's actually come down over time, and I would guess that might have been somewhere around $4 million or $5 million relative to what you saw last quarter, and then this other group of securities came in, so it's hard to say. It depends on how long we see the weakness in the housing market.

The last thing was we're -- saying we're asset sensitive and our long-term margin has been closer to 350, if we are asset sensitive, rates go up and the margin would start to improve. What's been the fundamental shift in the core margin that you think really places us in a much better sustainable level than where we've been in the past?

First of all, at M&T, our time horizon is very long, so I'll caveat this with that, but we've been through a very long period -- I'm trying to see what it would be, where our margins that we're getting on originations are just higher because the capital markets shut down.

And I would say that if you look, for example, since maybe the first or second quarter of 2009, take C&I or take all the commercial lending, that's actually -- those origination margins have come down steadily, but they're still, I would say, almost -- in some cases, 90 basis points higher than what we were running in 2006 and 2007, right? So I think that that's a fundamental change for some time. Now, guess what, when the economy heats up and the capital markets come back, I wouldn't be surprised to see more margin pressure.

John Pancari, Evercore Partners.

Rene, on the Wilmington deal, can you talk a little bit about your expectation to be able to realize a tax benefit on the NOLs on the DTA there?

I don't know if I can add anything to what we've said in the past, but I can talk about kind of how it works, and I would say that if you think about it from a simple GAAP perspective versus a regulatory perspective, we'll be able to -- our view is that we'll be able to realize a lot of the deferred tax items that they lost, so to speak.

I can't tell you the exact amount. In part, it's -- because of the fact that your allowance or disallowance, I forget which one it is, is dependent upon the price of the deal and where our share price is at the close. But I can say it's fair to say that we'll recapture a fair amount of that.

But when you look at the point of the close of the deal, from a regulatory perspective you can only look out one year in your earnings capabilities. With all the one-time expenses and other types of things to convert, it sort of limits in the first year your amount that you can use for your regulatory ratios. You obviously over time get a lot of that back, but it's somewhat limited.

Okay. All right. And then, that GAAP benefit would more likely be immediate whereas the regulatory, therefore, could be a little bit more protracted, then.

Yes, exactly. You'd see that right away.

All right, and then, on the capital front, I know you mentioned you really are not going to be in too much of a position to talk TARP until you get more clarity on the closing of the Wilmington transaction. But can you talk about where you expect that, from a Tier 1 common perspective, obviously you've seen some of your peers go to 9% or north of 9% in terms of a payback. But you would expect that you may be able to come in below that. Can you just talk about your expectations of how M&T could possibly get some credit for doing a Wilmington deal and also, given the -- your positioning with the regulators historically, where -- how that may weigh in?

Let me tell you what I can say. The way in which we monitor our capital levels is we don't just look at the ratio. Obviously with the new ratio coming out there being 7% Tier 1 common, obviously we have to focus on that, but underlying what we do is we look at the quality of our loan book in particular and the other risks that are in our balance sheet, and we look at that relative to the capital that we have.

And if we saw that we had weakening credit or worse position, obviously we'd have to hold higher capital. When we think about where we are today, and we've said this for some time, we are generating capital very, very quickly, right, so if you take our estimate that we gave you of Tier 1 common and just exclude Wilmington for a minute, we are already at 678, somewhere in that neighborhood, right? So, a quarter or two, you're at 700, and then you're quickly kind of getting yourself well above, right?

So, when we think about it, obviously we'll have to be above the regulatory guidance, but what the number is is going to really be dependent at any given time by the quality of our loan book and what we see underneath.

The other thing I would say to you is that you're not really looking at normalized numbers yet. You see that a number of people out there, some larger than us, some are particularly, are showing two numbers. They are showing that maybe they will be at nine or 10 today, but if you converted that down to Basel III, particularly the number of people with their derivative books and the those types of things, that they're closer to seven.

So my sense is that you're going to have to keep some sort of cushion above the seven, and the size of that cushion will change over time depending on what you see in the quality of your loan book, but I don't think we're an outlier, especially when you kind of consider the remaining pending rules that are out there.

Okay. All right. Then lastly, in terms of the loan growth outlook, can you give us an idea about where your commercial line utilization stands as of right now?

I don't have the same -- what I can tell you is that -- I'll grab that for you in a minute, but about half of the improvement we saw this quarter on an as-at basis came from improved line utilization and half came from just new customers or new balances.

You know, we were up slightly. Our utilization that we track was 49.3 versus 48.7. And then, the total commitments were up from year-end, but down from September 30.

Ken Usdin, Jefferies.

Rene, I was just wondering, Wilmington, I don't believe, did a report this quarter. Can you give us any update as far as to how core trends in the Wilmington side are looking, what -- maybe either just on pretax pre-provision income or whatever metric you might have and could share with us on the core business?

Yes, obviously I can't comment on their earnings, right? That's in their core.

But, and I guess I can say that there's nothing that I see that surprises us from any of the original work that we did. We haven't seen anything materially different. Obviously, they're -- they've got a number of runoff portfolios, and whether that beats their just normal runoff of those portfolios or through -- on the loan book or through charge-offs, right, balances keep coming down, and you probably saw that at the end of fourth quarter, though.

Right. Okay. And then, just one clarification on your NIM comments again. So you're talking about the pro forma margin would be a little bit lower with Wilmington. Is that inclusive of any accreteable yield that would also come via the transaction or is that just mashing the two balance sheets together?

No, that's the whole deal. I can only come up with one number.

That's fine. I just wanted to make sure that it was, in fact, one number and that we're still going to -- so that's inclusive of your current views of what accreteable yield might be post-merger.

Yes. Yes, that's right. And then, Ken, just wanted just to be very clear. So what I'm saying is the thing that's not terribly effective, I don't believe, is the full-year margin. Part of that's because you've only got six months of Wilmington. It might be a little bit larger affect when we get into the, what I would call, the run rate.

I understand. So if we're a little bit above it and you're talking not much material versus the full-year 2010, then the second half reset might be a little bit bigger just to get to that averaging effect.

Exactly.

Then my last question is just on the mortgage banking business. I heard your comments about the gain on sale margins being still strong, but maybe coming down a little bit. So, just trying to understand that line item, because there's a lot of things in it, you mentioned the lower repurchase losses. But last quarter, you were still keeping more than you were selling. So I guess if you could just give kind of a general understanding of, all things equal, how that line item should kind of work going forward with you now starting to sell more of it than keep it.

Good question. I guess the way I'd say it is that most of the decline you saw this quarter came from the lower repurchase costs, and those numbers were something like last quarter was about $14 million, and this quarter it was somewhere around $3 million.

So, you're kind of at a -- I guess the good news is you're kind of at a low point there, right, so it's relatively clean. And I would then say that if you look at the impact from changing the repurchase rule, maybe that was a smaller amount. I guess you're -- I don't know how to say it, but if you just assume most of the change there was from the repurchase risk, I think you're probably at a pretty good starting base.

Right, but last quarter you wouldn't have sold much and this quarter you'll be selling more, so technically, all things equal, wouldn't you have more mortgage banking revenues next quarter?

Yes, but I mean, you got most of -- I don't -- how do I say this? It might have been about a $7 million impact or something like that this quarter. Of a positive, right, so that's a pretty big positive.

So, you remember, when you look at our mortgage banking income, right? You've got three big items. You've got residential mortgage service originations, you've got commercial mortgage originations, and you've got servicing. Servicing is a big piece as well. So a $7 million swing tells you that you got a fair amount of the impact -- a pretty good impact in the first quarter. I guess maybe it's a little larger as you go to the second quarter. But I'd kind of think of it as a relatively normal quarter. The first quarter being relatively normal.

Gerard Cassidy, RBC.

A question for you. Do you have a sense -- the larger banks, of course, have a good sense about Basel III and the impact to capital. I'm interested in what you're hearing from the Federal Reserve for banks your size. When do you get some color on what the capital ratios will be for the non-Basel banks in the United States?

It's a good question. I'll try to hit two parts of it. One, we just -- when you take Basel III and you kind of run through it, and assuming we would be under it, we just -- based on the types of business we're in, we don't have a really significant impact.

Now the example I'd give you is maybe we were at mortgage servicing rights, which is one of the issues, maybe it's three, in the three-ish range of our capital. Nowhere near 10, right? We don't have a lot of trade -- derivative trading, so I don't expect there to be any material impact, even if we were under it.

The real question that's out there is more on the last topic to come, which is liquidity, and the liquidity coverage ratios, and given that we are a predominantly deposit-funded institution, that's going to be the big question out there and whether they treat everybody equal. And as you well know, as you went through the storm, and as we went through past storms, our deposit portfolio holds up pretty well. And I think that's an area where we're out there asking questions and seeing if we're all going to be treated as one, but there really isn't much of an answer yet.

Okay. You mentioned in your prepared remarks about the seasonality of the commercial real estate portfolio. Half of the decline was attributed to that. What about the other half of the decline, and what are you seeing in commercial real estate? Are you losing some -- losing to more aggressive competitors or no, you're still in there fighting the fight? What's going on in commercial real estate?

Yes, I think much of what you see that's holding that down a little bit is probably cures of nonperformings or pay-offs, right? You've got a couple of runoff portfolios there.

I would say that -- how do I say this? You know, we haven't seen big growth. If you were focused on looking for growth and doing transactions, there is plenty of it out there at a decent margin, but generally it's been pretty slow.

The positive news, I think, in the real estate space is that there are transactions happening. Investors are in the market. So that really helps you in terms of the -- when someone is looking to refinance or whether you have to restructure a transaction. That's been the most positive thing that we have heard.

The other thing I think that's been out there has been the sort of resurgence, a little bit, of some of the conduits. And we've heard rumors of that, or they've come back a little bit and are expecting to do some volume.

But I'll give you a sense. We asked -- we have a survey of our customers that we do. And on the CRE side, we asked, how do you feel about the availability of CRE financing over the next six months? And 57% of those customers ranked it as sufficient when they're thinking about regional banks, and in July, that was just 45%. And then, 53% said it was sufficient, up from 41%, when it talks about the capital markets.

So generally, people are feeling that credit is more available. They're interested in doing things. It just hasn't resulted in a lot of loan growth, I think, because I think there's still a whole lot of runoff in the overall portfolios that are -- and the properties being worked out. And if I were a real estate investor, I would go for the low-hanging fruit first.

No doubt. One final question, on the commercial loan book, you referenced utilization rates improving. Two questions. One, geographically within your footprint, are you seeing more demand for commercial loans in upstate New York versus the Maryland versus the Pennsylvania market?

And then, second, what yields are you putting commercial loans on the books at today? If your average yield, if I'm reading it correctly here, is 3.93%, what's the new -- what are the new loans coming in on at this time?

Well, let me answer the last question first. I'm not going to give you a ton of specifics there, but we fund -- primarily the C&I loans are funded with LIBOR. So LIBOR is -- our spreads are to LIBOR.

So, look at 25 to 30 basis points as really what one month's LIBOR should be, somewhere in that range over time. So pretty healthy margins and you can kind of come to the yield.

You know, we've seen loan growth that's been strong kind of across the board. If I look at our middle market space, we had, and if I look at it on an as-at basis to kind of get rid of the big fourth-quarter, year-end effect there, we had loan growth that was pretty decent in upstate New York. We had it in what we call our metro region, which is sort of everything from Tarrytown to New York, Philadelphia. We had growth in the Baltimore and Chesapeake area. So just about everybody is participating.

You know, if you look at the average growth, I'll give you another example. We had 9% growth on an average basis in upstate New York. 21% in metro, annualized growth. 7% in PA. 3% in the mid-Atlantic. And then, if you look at what types of companies, they cover the gamut. So service companies, media-type businesses, distribution businesses. I mentioned transportation earlier. So it covers the gamut.

Great. Thank you.

Gerard, what about the Red Sox? What's going on with them?

They're winning big today, but it's going to be a tough year for them.

Collyn Gilbert, Stifel Nicolaus.

A lot of my questions actually surrounded what Gerard just asked, but just going back on the CRE side, Rene, you said transactions are happening. If you want to do them, they're out there. And given the growth rate that you just said in the metro area of 21%, do we assume then that you are in it, that you are in the flow of the transactions and your appetite to do large real estate deals is there, or maybe kind of just talk about your appetite for putting on large deals and how you're structuring them and how you are thinking about the rate environment with those types of transactions?

Yes, sure. You know, there is no change from what we would do in the past, and I guess my comment would be that we've -- our loan growth, but for on the CRE side a little bit in the fourth quarter, has been relatively subdued, and that's not because we couldn't do transaction-type stuff if we wanted to. It's just not where we operate.

So we tend to focus on our pre-existing customers and people that we've known for a very, very long time, and I would suggest that but for the end of last year, the loan growth hasn't been that great and there really hasn't been that much of a change in -- actually, there hasn't been any change in the way we think about it.

So no change, then, in kind of the loan sizes in terms of what's rolling off the relationships or the loan sizes that are rolling off versus what you are putting on?

No, no. Nothing there. We've kind of -- that's one of the reasons why we disclosed that in our annual report. You can see the mix and size of the deals, and if we were to have a big change, you'd see that.

Okay. And then, just one final point on clarification. In the press release, you had indicated -- I think, if I have this right -- part of your desirability is to sort of increase liquidity, it said, was anticipation -- was it of average strong loan growth or something like that, but I'm trying to reconcile that. Because it doesn't seem as if average loan growth was all that strong in the first quarter. Is it what you're anticipating in the second quarter, given timing of closings?

The average was up almost $1 billion. It was eight hundred -- what did we say? $830 million, I think it was, and of course, as we -- relative to where we were on November 1, those numbers are even higher than that, right? And then, when you consider the fact that we put on $800 million of resis, we have a fair amount of loan growth, I guess I would say we'd have more loans than we probably would've anticipated back when we were sitting there on November 1.

You said it -- because I -- all right (multiple speakers)

We've got a couple of things going on, right? We had over $1 billion of loan growth in -- from November to December, right? And on top of that, we've put on since September $800 million of discretionary assets, right, through the resis.

I got you. That was year over year. That's what threw me. Okay, that's all I had. Thanks.

Todd Hagerman, Sterne, Agee.

Rene, we've kind of beaten the capital question to death, but I want to ask a couple of questions more from an M&A perspective. A number of the foreign banks seem to be heating up the speculation in terms of potential acquisitions returning here to the states, whether it's some of the European banks, the Canadian banks. It seems like there are an increasing number of opportunities potentially coming your way in your footprint, if you will.

So I guess, on the one hand, how do you size, given kind of what you guys have done over the last 12 to 18 months, the number of transactions, but how do you now view or size future opportunities post-Wilmington within your respective markets, per se?

And then, secondarily, as everyone asks the capital question, does it change your view at all? I've heard -- as long as I've been following you, it's always been about capital formation, but yet the opportunities on the M&A side seem to be increasing, not diminishing, for the likes of an M&T. What does that potentially mean in terms of how you view capital?

Yes, I guess I'd start off by agreeing with you in the fact that in this broad environment, and as kind of has been proven, right, that there's more opportunities that are out there.

And then within that opportunity set, you've got to think about what types of things does M&T typically do? And what I keep saying is that at least history has shown and probably our preferred way to do things is with partnerships where people kind of stay into the pre-existing organization. You saw that with Provident and Gary Geisel being on our board. An all-stock kind of transaction.

So when you kind of think about that, the idea that you might stock up and store capital because you're going to go out and buy something really doesn't fit that type of profile. Our thought process is that if we were to happen to need capital at the time, and the opportunity was that attractive, then we would go out and get it, but at the end of the day if our shareholders weren't giving us capital for the transaction, I guess we'd probably better think twice about doing it.

So I think you're right. The environment is there. There's a lot -- the population is large, but as we kind of move forward and try to look for people who are looking to sort of continue on with a stronger combined organization, we think that generally the capital issues have, at least historically, tended to take care of themselves.

Right, and I don't mean to imply hoard capital for the sake of hoarding capital. Maybe you'll do a deal, but I guess -- it's more along the lines, again, that the opportunities actually seem to be increasing, not diminishing for the likes of M&T. And given this idea that M&T historically has preferred to improve capital organically as opposed to go out and dilute existing shareholders, I'm just wondering if something out there may change your mind on that point in terms of having to raise more equity capital for the sake of, perhaps, a transaction.

I think for that to happen, I think we'd have to see it. We'd have to physically see the deal in front of us, right, and one way to think about it is we are pretty plain vanilla, and so we're not out there speculating a lot. We do see what you're talking about in terms of the environment of potential opportunity, but having said that, I think our nature is to just deal with what's in front of us, and that's sort of served well so far, so we don't think it's different -- we don't think it's different today.

And you don't think Wilmington limits you in any way? You're not looking at the world any differently because of Wilmington?

No, I mean, I think that's -- I'll say it again a different way, but the idea that we were able to -- we would be able to bring on Wilmington and have our capital ratios not be materially different, right, I think gives you the answer.

And the idea that we would do two or three of those at once doesn't really make too much sense because we've got to do it right. So we will focus on Wilmington. We've got to get it closed, and then we've actually got to get it converted, and that's what our sort of big task is today. And then, what we've seen over time is that we could do that relatively quickly, and so it doesn't take us off the table for what might come next.

Matt O'Connor, Deutsche Bank.

This is actually [Adam Jame] calling in for Matt O'Connor. I have a couple of questions regarding the Wilmington acquisition. One of them is just a clarification item. Wilmington actually had around $70 million of OREO expenses in 2010, which was about 10% of their non-interest expense. Regarding your 15% guidance figure, how much of that was actually factored in because we -- I'd guessed that a good chunk of that would just go away after the loans were marked at acquisition.

Adam, could you just give me that again? 15% what?

You gave a guidance figure of 15% of Wilmington's, I guess, non-interest expense for their -- for your synergies. In terms of what's included in that figure, Wilmington had around $70 million of OREO expense alone, which was 10% of their expense base. Was that something that was specifically looked at when you came up with that 15% estimate?

No, we wouldn't look at that. We wouldn't do anything with that. We would just look at the core infrastructure of the institution when we are coming up with [a goss a].

Okay. So that 15% would just be taken right off the top or that would be removed first, the OREO?

Think of it this way. You take the expense base. You don't consider that ORE expense. And then you get 15% of the combined -- of the institution from the rest of the categories.

Got it. The second one was just on the side of revenue synergies. It's -- that's been something that you've discussed before. But, just curious as to if -- when the Wilmington wealth management services would actually be -- start being offered to M&T legacy customers?

As soon as we get approval and close the deal, I think then we'd be free and clear, and I think there's some pent-up demand for that as well already, so we are cautiously optimistic about that. But we've got to get the deal closed and we've got to merge the holding companies.

That was your final question. I will now turn it back to management for closing remarks.

Again, thank you all for participating today. And as always, if clarification of any of the items on the call or news release is necessary, please contact our investor relations department at area code 716-842-5138.

Thank you for participating in today's conference call. You may now disconnect.