M&T Bank Corp (MTB) 2011 Q4 法說會逐字稿

Good morning. My name is Jackie, and I will be your conference operator today. At this time I would like to work him everyone to the M&T Bank fourth quarter 2011 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 would now like to turn the call over to Don MacLeod, Director of Investor Relations. Please go ahead.

Thank you, Jackie, and good morning. This is Don MacLeod. I would like to thank everyone for participating in M&T's fourth quarter 2011 earnings conference call both by telephone and through the webcast. If you have 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 would 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 would like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don, and good morning, everyone. Thank you for joining us on the call today to discuss the fourth quarter as well as our full year 2011 results. Let me begin by reviewing the highlights, after which Don and I will take your questions.

Turning to the specific numbers, diluted GAAP earnings per common share were $1.04 for the fourth quarter of 2011 compared with $1.32 earned in the third quarter of 2011. Net income for the recent quarter was $148 million compared with $183 million in the linked quarter.

Earnings for the recent quarter were impacted by four items I would like to highlight. We reported a $79 million pretax other than temporary impairment on our 20% minority investment in Bayview Lending Group, or BLG. This amounts to $49 million on an after-tax basis or $0.39 per common share. This reduces M&T's investment in BLG to an estimated fair value of $115 million. This charge is reflected in other cost of operations in the income statement.

In 2008, M&T Bank Corporation filed a lawsuit against Deutsche Bank Securities Inc. and several other parties seeking damages arising from a 2007 investment in collateralized debt obligations. The lawsuit alleged, among other things, that the quality of the investment was not as represented. This matter has now been fully settled, and as part of that settlement M&T received $55 million. This equates to $34 million -- a $34 million after-tax benefit or $0.27 per common share.

Subsequently, M&T made a $30 million contribution to the M&T Charitable Foundation. As most of you know, we have long articulated the view that healthy communities are the foundation of successful businesses. This belief lies at the heart of M&T's community banking business philosophy. Grants made to not for profit agencies by the foundation are focused on improving the quality of life in our communities and increasing economic opportunities for customers and employees where our customers and employees live and work.

Lastly, we recorded a $25 million other than temporary impairment charge on certain securities in our portfolio of nonagency MBS. This equates to $15 million after-tax or $0.12 per common share. Taken together, these four items reduced both GAAP and net operating income by a net $48 million after-tax or $0.38 per common share in the fourth quarter.

M&T consistently provides supplemental reporting of its results on a net operating or tangible basis, from which we exclude the after-tax effect of amortization of intangible assets as well as expenses and gains associated with mergers and acquisitions. Included in GAAP earnings for the fourth quarter of 2011 were merger-related expenses of $16 million related to the Wilmington Trust acquisition, amounting to $10 million after tax or $0.08 per common share. This compares with $16 million after-tax or $0.13 per common share in the prior quarter. After-tax expense from amortization of intangible assets was also $10 million or $0.08 per common share in the recent quarter compared with $11 million or $0.08 in the third quarter.

M&T's net operating income for the quarter, which excludes those items, was $168 million compared with $210 million in the linked quarter. Diluted net operating earnings per common share were $1.20 in the recent quarter compared with $1.53 in the linked 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.

Next I would like to cover a few highlights from the balance sheet and the income statement. Taxable equivalent net interest income was $625 million for the fourth quarter of 2011, up slightly from $623 million in the linked quarter. The net interest margin contracted during the fourth quarter, averaging 3.60%, down 8 basis points from 3.68% in the third quarter. Some 4 basis points of its decline can be attributed to lower prepayment penalties and lower interest on nonperforming loans. The remaining 4 basis points amount to what I would characterize as core margin compression as $1.5 billion of average loans and investments securities came onto the balance sheet at yields lower than the book overall. The lower yields were partially offset by lower borrowing cost and a higher proportion of noninterest bearing deposits.

In both the third and fourth quarters we held large balances of excess liquidity at the Fed, $1.85 billion in the fourth quarter and $1.7 billion in the third quarter, with very modest yield. In both quarters this excess liquidity diluted the net interest margin by some 9 basis points. The deposits that were the source of that excess liquidity, primarily trust related, have now been withdrawn or used to fund late fourth-quarter loan growth. Funds held that the Fed as of December 31 were just $155 million.

I will discuss our outlook for the margin balances and net interest income in a few moments. As for the balance sheet, average loans for the quarter increased by approximately $900 million or an annualized 6% to $59.1 billion from $58.2 billion in the third quarter. On that same basis compared with 2011's third quarter, changes in average loans by category were as follows. Commercial and industrial loans grew by an annualized 10%. Loans to auto dealers to finance inventory within that category grew by $217 million while all other C&I loans increased by $168 million or an annualized 5%. Commercial real estate loans grew at an annualized 2%. Residential real estate loans grew at an annualized 27% and consumer loans declined by 3%, driven by lower indirect auto loans and closed-end home equity loans.

On an end-of-period basis, loan growth was somewhat stronger. Total loans at the end of 2011 increased by some $1.7 billion or 12% annualized from September 30. Put another way, we enter 2012 with loans already more than $1 billion higher than 2011's fourth quarter average. Average investment securities grew by approximately $600 million to $7.6 billion. This growth includes purchases over the course of the third quarter which were not fully reflected in the third quarter average as well as additional purchases during the fourth quarter.

Average core customer deposits, which exclude foreign deposits and CDs over $250,000, increased in the fourth quarter by approximately $2.2 billion or an annualized 15% from the third quarter. To summarize, core organic growth in both loans and deposits was robust during the recent quarter.

Turning to noninterest income, including securities gains and losses, the $55 million benefit received from the CDO settlement I mentioned, noninterest -- excuse me. Excluding the securities gains and losses and the $55 million benefit received from the CDO settlement I mentioned, noninterest income was $368 million for the recent quarter compared with $378 million in the linked quarter. The $10 million decline was attributable to the implementation of the so-called Durbin amendment, which caps pricing on the card interchange fees. Those fees declined by about $17 million compared with the third quarter. Service charges on deposit accounts, which include debit card interchange, were $104 million during the recent quarter, down from $122 million in the linked quarter.

Mortgage banking fees were $41 million for the quarter, up from $38 million in the linked quarter. The increase is due to higher income from mortgage servicing and from commercial mortgage banking operations.

Turning to expenses, operating expenses excluding merger-related expenses and the amortization of intangible assets were $706 million for the fourth quarter. Included in this figure is the $79 million pretax other than temporary impairment loss on our equity investment in Bayview Lending Group. Also included in this figure is the $30 million contribution to the M&T Charitable Foundation. Excluding those two items, operating expenses were down from the third quarter of 2011.

Salaries and benefits were down $13 million to $313 million in the fourth quarter as compared with the linked quarter. The decline is largely due to lower salaries and benefits related to our merger with Wilmington Trust. This reflects the benefits arising from the banking system's consolidation completed in late August but which had not yet materialized in the third quarter. The efficiency ratio, which excludes securities gains and losses as well as intangible amortization and merger-related expenses -- gains and expenses, was 67.4% for the fourth quarter compared with 61.8% in the third quarter of 2011. The aggregate impact of the $79 million impairment charge related to BLG, the $55 million litigation settlement and the $30 million charitable contribution increased the efficiency ratio by some 7 percentage points in the fourth quarter.

Next let's turn to credit. Overall, credit trends continue to show modest improvement. Nonaccrual loans decreased to $1.1 billion or 1.83% of total loans at the end of 2011 from $1.11 billion or 1.91% of total loans at the end of the previous quarter. Other nonperforming assets, consisting of assets taken into foreclosure of defaulted loans, were $157 million as of December 31 compared with $150 million as of September 30.

Net charge-offs for the quarter were $74 million compared with $57 million in the third quarter of 2011. As we have noted on more than one occasion, at this comparatively low-level of charge-offs a single loan can make a difference between an increase or a decrease in any quarter. In this case we charged off approximately $19 million on a single residential development project located in Northern Virginia. Annualized net charge-offs as a percentage of total loans were 50 basis points, up from 39 basis points in the linked quarter but very much in line with the full-year net charge-off ratio of 47 basis points.

The provision for credit losses was $74 million in the fourth quarter compared with $58 million in the linked quarter. The provision matched net charge-offs, and as a result the allowance for loan losses was $908 million at the end of 2011. The ratio of allowance -- credit losses to total loans was 1.51% compared with 1.56% in the linked quarter. So the loan-loss allowance as of December 31, 2011 was 3.4 times net charge-offs for the past year.

We disclosed 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 is a low risk of principal loss. Loans 90 days past due, excluding acquired loans that had been marked to fair value at acquisition, were $288 million at the end of the recent quarter. Of these loans, $253 million or 88% are guaranteed by government-related entities. Those figures were $240 million and $210 million, respectively, at the end of September.

M&T's estimated tier 1 common capital ratio was 6.86% at the end of 2011. At the same time, M&T's tangible common equity ratio was 6.40% at the end of the fourth quarter, and this reflects higher retained earnings offset by slightly larger end of quarter -- end of quarter balance sheet as well as a higher committed loss and other comprehensive income.

Last week we submitted our capital plans to regulators as required under the terms of the 2012 capital plan review. And as with other participants, we expect to receive comments by the end of the first quarter.

Before we turn to our outlook, I would like to highlight some of what we accomplished in 2011. We consummated the Wilmington Trust merger and took a major step in integrating the process by completing the conversion of the Wilmington Trust branches and the back office to M&T's core banking system.

Simultaneous with the merger we purchased and retired Wilmington Trust's $330 million of TARP preferred stock from the Treasury Department as well as retiring an additional $370 million of M&T's own TARP preferred. We were able to take advantage of an open window in the capital markets in the second quarter by issuing a new series of perpetual preferred stock that we viewed as an attractive fixed-rate -- attractive at a fixed rate of 6.875%. This offering served us as both a source of financing for the repurchase of the TARP preferred as well as to partially fill the hole created by the coming disallowance of trust preferred stock as an element of the tier 1 capital structure starting in 2013.

We saw continued improvement in credit trends with net charge-offs for the year down 23% to $265 million or 47 basis points of average loans and provisioning for loan losses down 27% to $270 million. And we continued to build our capital ratios, particularly the risk-weighted regulatory ratios. As I noted, the tier 1 common capital ratio was an estimated 6.86% at the end of 2011, up 35 basis points from 6.51% at the end of 2010, all while absorbing Wilmington Trust without a secondary common equity offering and accommodating loan growth.

For the full year 2011, diluted earnings per share were $6.35, an increase of 12% over $5.69 in 2010. Net income for 2011 was $859 million, which represents a 17% increase over the $736 million in 2010. GAAP basis net income for the full year 2010 (Sic- See Press release) expressed as a rate of average assets and average common shareholders' equity was 1.16% and 9.67%, respectively, improved from 1.08% and 9.3% in 2010.

Included in GAAP earnings for 2011 was a net after-tax merger-related gain from the Wilmington Trust acquisition of $13 million or $0.10 per common share, and this compares to $16 million or $0.14 per common share after-tax merger per common share net of after-tax merger related gain in 2010 related to the K Bank transaction. Also included in these earnings for the past year was after-tax expense from the amortization of intangible assets amounting to $38 million or $0.30 per common share compared with $35 million or $0.29 per share in 2010.

Net operating income for 2011, which excludes those items I just mentioned, was $884 million, an increase of 17% from $755 million in 2010. Diluted net operating income per share was $6.55 for 2011, an increase of 12% from $5.84 and per common share in 2010. The rate of return on average tangible assets and average tangible common shareholders' equity was 1.26% and 17.96%, respectively, for 2011 compared with 1.17% and 18.95% in 2010. These high-teen returns are particularly notable.

Lastly, as most of you know, we don't offer much in the way of earnings guidance but we will share our thoughts on our general outlook. Our balance sheet continues to be positioned for slight downward pressure on the net interest margin as a result of new loans and securities coming onto the balance sheet at lower yields than those maturing. That said, the fourth quarter net interest margin of 3.60% could likely prove to be abnormally low, given the lower levels of cash we currently hold at the Federal Reserve as well as the lower levels of prepayment penalties and interest on nonperforming loans that we saw in the recent quarter.

Overall, we expect the full year net margin for 2012 to be modestly lower than the 3.73% reported for the full year of 2011. When combined with mid-single digit loan growth, we anticipate continued growth in net interest income throughout 2012. We remain very focused on expenses, both on the day-to-day cost of operating the business as well as on achieving the remaining cost savings opportunities arising from the Wilmington Trust integration. And realizing those opportunities should materialize throughout the year with the majority of the impact to occur in the second half, following our planned second quarter trust systems conversion. In addition, I would expect a limited amount of additional merger-related expenses, approximately $10 million, to be incurred over the first half of 2012. Combined with the $84 million of merger-related expenses incurred to date, this should keep us below the $100 million we outlined back on September 12.

We remain cautious with our outlook for credit and for all of our bankers. The economy is growing, albeit slowly, but unemployment still remains high and the housing sector is unsettled. We expect continued slow, steady improvement in criticized and nonaccrual loans with credit costs improving over a long time horizon.

Lastly, I will remind you that M&T's first quarter results have tended to be seasonally low, reflecting fewer days and higher expenses associated with the FICA reset, accelerated recognition of equity compensation expense and the 401(k) match. Of course, all of 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 Jackie will briefly review the instructions.

(Operator instructions) Matthew Clark, KBW.

As it relates to the seasonal increase in comp you tend to experience in the first quarter, can you give us a sense for whether or not that might be different this time around in terms of the magnitude, partly since I would assume you still have some cost savings coming through from Wilmington? I guess, asked another way is, can you give us a sense for how much in the way of cost saves you got this past quarter?

Yes, let me answer you two ways. I just tend to -- there's never a lot of big change in sort of what we are doing around comp. So my sense is that you're looking back to what happened in the fourth to first quarter last couple of years is a good gauge, maybe. Maybe on its own, it's a little higher because we were a little bit bigger, right, but not significantly larger.

And then as I think about where we are, we are pretty pleased with what we have been able to achieve to date. We talked about the trend down in expenses. You saw what happened to the salary and benefit line. And my sense is, if you move your way out, we are probably halfway through the work to get to the overall expense saves that we have. So, said another way, if you were to sort of annualize the benefits you saw from the third to the fourth quarter and then looked at the full-year impact on that next year, I'd say that number is probably about half of what we will be able to realize.

So you got 10 of the 20 in the run rate?

You know, I think probably a little more. Much of the salary and benefits decline that we talked about, the $13 million, is, I think, probably a decent gauge of the impact from Wilmington. It might not all have come in salaries, but generally that's a pretty good gauge.

Just to clarify, that would be the quarterly running rate.

Correct, okay, and then on the credit side of things, can you give us -- it looks like it was the 90 days past due. I know a lot of that is government guaranteed, but still I think up roughly $40 million or so. Just anything going on there? And then, as a follow on, just how much classified assets improved or may have gone the other way?

Yes, I would have to look at the classified assets. I believe that that trend was positive, but let me get back to you for a second. The 90-day issue is just the purchase of -- the Ginnie Mae repurchases. So remember, we think it makes a lot of economic sense to buy those government guaranteed loans out of servicing because at the end of the day, the economics are better if we do that. So that's all that really is.

Give me one second. So we are down slightly again. I think, if you look at from our Qs, the decline that you saw in each of the last several quarters, you will see a similar decline when we publish our Q. So steady improvement or a reduction in the classified loan balances.

Okay, and just housekeeping on the tax rate -- a little lower this quarter. I'm assuming we bounce back a little bit here.

Yes, I think that's right. I think, obviously, when you have some of the net lower effect of the items we mentioned, you still have a fixed tax credit. So that will come up. And then we had probably some slight benefit from some small tax settlements we did with the state that went in our favor. But generally speaking, I think what you will see is it will come up a little bit as the earnings come up.

Thanks.

Marty Mosby, Guggenheim Securities.

I wanted to just touch base a little bit on the extraordinary items, kind of taking the $1.04, you obviously have taken $0.38 out. That gets you up to about $1.42. And then when you start to adjust out the integration cost, I heard about $0.08 there. So like $1.50 was including still the intangible amortization, so kind of $1.50 is kind of, in my mind, kind of an operating number.

Your math seems good.

Okay. And given that, we kind of came into the acquisition of Wilmington Trust with about $1.60 in earnings power. How you see us recapturing that as we go forward? Is it really still just based into the fact that we're starting to hold more of those mortgages so we get the benefit of that next year, we get the integration cost still coming out? But kind of give us just a feel for how we go back towards the earnings level we were pre-the acquisition.

Well, it's just two things that come to mind. I think you're right, in the idea that we think it's beneficial to hold mortgages now. So obviously that benefit will accrue to us in the future. I think, for just by way of example, I think the fee income that was forgone this past quarter was about -- between $14 million and $15 million. So all that comes to you down the road in the form of net interest income.

But I think what we can't lose sight of is what tends to happen is we've had a lot of change in regulation. So by way of example, we were just looking at some of our numbers. And if we go back to, say, the second quarter of 2010, so six quarters ago, and we look at the impact of Durbin, overdraft changes, the higher calculation of the FDIC insurance premiums, looking at the second quarter of 2010 versus this quarter, that's almost a $40 million difference.

So said another way, annualized $160 million, $150 million to $160 million. So what has really been happening is we have sort of been running the bank and you haven't noticed that because our earnings have held up. But we've, you know, through Wilmington and other ways have been offsetting what has been a really, really heavy regulatory burden. And I think along with other banks, over time we are going to have to figure that out.

What I do is I focus on the efficiency ratio. And if you look at where our efficiency ratio is, and I think in large part because of all the changes, it's higher than it normally is. And what we will do is we will start thinking about how we move that efficiency ratio back to a level that we like and are comfortable with because we think it's a big part of the strength of the bank overall. People talk about capital a lot, but at the end of the day the strength of your operating earnings and the quality of those earnings are your first line of defense.

So I think that's that. It's hard to answer your question any more specifically, Marty, but we are working on it.

And just as a curiosity, if you look at the $30 million that you put into the charitable foundation, have you done that in the past? Is this something you typically pre-fund the next year's expenses? In my mind, typically when you have something that's unusual, you can take that and put it into the charitable foundation as a good benefit. But right now, we are trying to build your capital up. Would it not have been more efficient to keep the $30 million and just pay for it as you go because you get the benefit in the capital ratio up front?

You know, I think a couple -- I can look at it -- answer that a couple different ways. We feel very, very comfortable about our capital generation. If you look at the quarter and what we did and we supported $1.7 billion of loan growth and had our adjustment to the value of Bayview, and at the end of the day I think our tier 1 common moved down 1 basis point. So, we're generating capital very quickly.

I also think that if you look back at the history, we've just sort of had a history whenever you see a bit of a windfall like we saw with the Deutsche Bank situation, that we tend to look at our ability to fund the charitable -- make a funding to the charitable foundation. And that's what we did.

I think really explicitly, in this case we talk a lot about how the health of our communities is really important to the health of M&T Bank. And I also think in this case there has been a link between Wall Street and what has gone on to the health of the communities out there. So we felt very -- we thought it was the right thing to do when we got the $55 million in cash. We turned around and funded the charitable contribution.

So I don't know how to describe it any differently. We feel very comfortable about all the items you mentioned -- capital generation, our commitment to the communities. I don't think we thought about it as much as maybe -- as you might think.

And what percent of your annual community budget is funded out of the charitable foundation?

Most of what we do -- not all, but most of what we do is managed through the foundation.

Okay, all right, thanks.

Ken Usdin, Jefferies.

Rene, I was wondering if you could give us a little bit more color on the NIM comments you made. So I understand well your points about the excess liquidity, but just trying to get a little bit of a gauge in terms of is it that 9 basis points of excess liquidity that basically you get back going forward from a magnitude perspective, and then the margin kind of is positioned to drip from there? I just want to understand the progression and kind of the magnitude of the get back from that excess liquidity being now utilized in loan growth.

Yes, we quantify that going from the $1.8 billion that we have been running at to down to 155 was 9 basis points impact. And I guess the way I look at it is, the first point I would make is that with Wilmington Trust as part of M&T and the opportunity from time to time to get cash, you're going to see a little bit of noise from time to time in the printed net interest margin percentage.

But when I step back, we started with a slight borrowing position before the Wilmington Trust transaction. We inherited on the merger day, I think it was $2.6 billion of cash and we have been carrying that. And now what you have seen is we have been able to put that to work. It has taken some time, but with the securities growth, the loan growth, right, we have been able to sort of utilize that position now.

So I think that's a change. And then just as I look at the trends as to where we are headed, there's sort of no guess. I just saw that we were a little low on some of the other cash items versus where we have been in past periods. So, as I think about it, I think there's clearly some core margin compression that's embedded in our numbers. And I think that that would accelerate if you saw really continued elevated levels of loan and balance sheet growth, right, because it's just sort of new stuff rolling on and replacing at a lower yield.

With a little bit more normalized loan growth from period to period, I think maybe that margin compression might be a little less. And then that sort of is offset by a little bit of repricing that's left on the liability side.

So to summarize, the 360 seems a little low. We are going to be lower than we were in the full year last year. That's kind of what we think.

But again, just to confirm, then, so the premise is that maybe you get the pop in the first just from excess liquidity now being utilized, and then underneath that, past that point, the natural direction would be to be slightly down from there?

I don't know about the timing, but I think the natural position is slight downward pressure on our margin. And I guess what I was worried about is that when I look at where we see ourselves headed, our starting point probably is not the 360 that we posted this quarter.

Okay, that's fair. My second question is just with regards to the growth that you have seen on the balance sheet, and you mentioned continuing to want to retain mortgages. Obviously, that was almost $1 billion of sequential growth. Does the pipeline that you have in terms of originations continue to support that type of growth in the mortgage balances?

Yes. I think we did -- for our portfolio. we originated last quarter something like a little under $800 million. And then this quarter we did, I think, a little under $700 million. So just give me one second and I'll see where I am there. And the volume probably slowed a little bit as of late with rates up, but there's probably a pretty decent clip. When we started this thing, I guess I was thinking we would do about $500,000 a quarter. And we have been running ahead of that because of -- because the way the rate environment has been.

So specifically, if you look, locking for our -- or sort of originating for our portfolio, locking for our portfolio was, in the third quarter, 791. We did 680 in the fourth quarter, right. And so I think we are well above our target of $500,000.

Okay, and my final question is tangible book value was down a little bit because of the unrealized swing. I was wondering if you could just characterize what parts of the portfolio you are still seeing the spread widening in, and how much of that portfolio, I guess, is still left that's probably the resulting in some of that OTTI that you booked this quarter?

Okay, separate -- I meant to break those into two parts. So really the drop that we saw or the increase in our other comprehensive income was relative to the pension plan, which was lowering our discount rate by about a point, given where rates are, looking at sort of the -- use a -- use a corporate bond yield, and look at that at the end of the year. So that was the big change. I think that was a change of almost $200 million pretax. So that's why that was down.

When we look at our OTTI, we were just under $10 million last quarter. We are at $25 million this quarter. I guess the way I would characterize that is if we kind of look out and look at the performance of the bonds and then, more importantly, think about the time horizon in which it will take for roll rates to get better and for housing to get better, we sort of extended our outlook a little longer out on that basis. So not necessarily a change in the performance of the underlying bonds, but a change in our outlook on how long the current environment will stay as it is today.

Okay, got it, great. Thanks, Rene, appreciate it.

John Pancari, Evercore Partners.

Rene, can you talk a little bit more about the drivers of loan growth this quarter, where you really saw some of the growth in the C&I book? And then also can you give us a little bit of color around loan demand, where your line utilization is and also the trend in commitments?

Yes, you sure, sure, I'm happy to do that. We saw -- let me just give you some numbers. We saw, on the 6% -- if you think about the average loan growth, the 6%, we saw 5% growth in upstate New York and western New York. We saw in our metro region, which is Philly, Westchester, New York, New York metropolitan area, we saw 11% growth in total loans. And we saw a decline, a slight decline in PA and a decline of about 8% in the mid-Atlantic. In the mid-Atlantic, that was sort of funding of construction loans which kind of went -- after having funded construction loans, they moved over to permanent, and we syndicated those out of our book. So reflecting fees there, but generally what's happening is we are kind of making sure we don't keep more than the amount of exposure that we want there.

So activity in the mid-Atlantic was pretty strong as well. So if you kind of look at it, I'd say it's relatively across the board. We continue to be really encouraged by our performance in upstate New York. We really do feel that we have an unprecedented opportunity to gain market share in upstate, given the disruption that has gone on, in particular, with HSBC. That seems to be going very well.

And then overall, I'd just say that there was a nice uptick in the activity. If you look at -- exclude Wilmington and you look at from the fourth quarter of last year to the fourth quarter of this year, I'd say we had about 4% growth, core growth. And the current trends and the activity feel a little bit more positive than they did a year ago.

So those are my comments. I don't know if you have any other follow-up questions.

Well, just on the line utilization, do you have what it was for the quarter?

I haven't really looked at it, but it was up a bit. It ticked up a bit the last two quarters.

Okay, good. And then, on TARP, can you -- I know you just mentioned that you obviously submitted under CCAR the capital plan. Can you talk to us about your updated thoughts about -- around the timing of the payment of your remaining slice of TARP?

As I said before, we'll do it as soon as is practical. And it's not something that's sort of -- it involves others, it involves the Federal Reserve and so forth. So our objective would be to do it as soon as practical because we kind of view it as a bit of a drain on our tangible generation. So that's our position, hasn't really changed. I guess I will leave it at that.

All right, thank you.

Robert Ramsey, FBR.

Just along the lines of loan growth, could you talk about with resi mortgage loan growth, is that mostly ARMs? And what is the yield that you all are putting new loans on your books at?

The yield is sort of at 4%, maybe a little below 4%. And it's a sort of a mix of 30 and 15-year. I'd say more than half of that, maybe 60% of it, is 15-year agency mortgages.

Okay, okay, and then just a quick question on credit. You mentioned the $19 million charge off in the mid-Atlantic. Was that fully reserved for, or was some of this quarter's provision related to that credit?

We had a specific reserve for that loan. So there wasn't a big surprise with respect to it.

Okay.

(multiple speakers) portfolio. I think, in fact, I think it's something that was from that original mid-Atlantic portfolio that we have been talking about for several years, which is now down to, shall I say, de minimis amounts. I think I looked at the balances the other day, and the on-balance sheet from that original sort of mid-Atlantic original portfolio was something like $170 million.

Okay, and then sort of as we think about provisioning going forward, should we expect charge-offs and provision to sort of match as you work down specific reserves and then replace it as you think about provisioning for growth? Or net-net, are you thinking you can release reserves or build, or how are you thinking about it?

I think it depends. If we did -- I don't see an improvement in the overall economy and the levels of nonperforming and criticized loans -- so we like the trends. Right? But having said that, they are still very -- the levels are very abnormally high, at least for us. And until we see significant change there, it would be hard to think about taking down the allowance.

Having said that, at the same time we are booking a lot of loans. Right? So when you put on $1.7 billion of new loans you've got to provide for those as well. So it's -- I think our trend is -- when I look to the future, I look to what we have done in the past. Right?

All right, thank you Rene.

Erika Penala, Merrill Lynch.

My first question is clarity on the tier 1 common ratio that you gave of 686. It's on a Basel I basis?

Yes.

Do you have what it would be on a Basel III basis?

No. And again -- I said this before -- sort of speculating on how the regulation is going to come out and what the rules of the game are going to be. We just haven't spent much time doing that. So (multiple speakers) all of our -- you got it?

Go it. I guess my follow-up question to you is, we are getting mixed messages in terms of what the regulators are looking at in the CCAR for 2012. Some banks have told us that don't be so naive to think that Basel III doesn't matter. But it sounds like -- you know, you've have submitted your capital plan that it's, given what you said, we still don't know what the final rules are. Basel I will continue to be the focus for the regulators. Is it your sense that they are not looking at Basel III for the capital plan for 2012?

Well, we just follow the rules. I mean, they've got a process. They tell you what to look for, what to use. And we have gone through that process. And to the extent that we are required to go out and do something under a new set of rules, we would do that when the time comes. But it's just a lot of energy to be spending time trying to hit on what those prospective rules might come out to be.

The other thing I think about is we think about the capital planning here at M&T. We don't think about it any differently because we have been asked to do a capital plan review than we have done in the past. And I think it's kind of helpful to remember with M&T why our capital ratios are where they are. We started out in the middle of a really poor economic environment in 2009 and we bought Provident, then we did a couple of FDIC-assisted deals and helped them out with another. And then we bought Wilmington. And every single time that you go through that you've got to be approved. And so we submit plans and capital plans and, in several cases, stress test and all that through the process. And if the regulators are comfortable with those plans, then you move forward as it is.

So when you look at that under a fair amount of scrutiny, what we have done is we've taken a lot of our capital generation and used it to support the stability of the banking industry by not letting those institutions come down. We bought them on as part of M&T. Our ability to generate capital as you kind of look at that is really, really high. So when we look at it, we have been through a lot of stress testing. We kind of took the same process and presented what we would do in the same way. And from our perspective we are not too concerned.

Got it. And just my second question -- I wanted to follow up on some of the guidance you gave on the expense side. If I'm looking at the number correctly, and please let me know if I'm looking at it incorrectly, excluding some of the noise and excluding the intangible amortization expense, it looks like the quarterly run rate for expenses would be $603 million for the fourth quarter. And if I'm looking at an annualized rate of $2.4 billion in core expenses for 2012, how much is left to take out of that $2.4 billion number? And I'm wondering because you mentioned there could still be 50% of cost saves remaining to realize from Wilmington Trust, but you mentioned last quarter that there could be reinvestment going into the legacy franchise that could be going on as well. How should we think about the puts and takes?

Numbers aside, the way you're thinking about it is exactly right. We've talked about -- initially, we talked about $80 million in expense saves from the Wilmington transaction. I don't know; maybe if you annualized the $13 million, we are up around $40 million to $50 million, and I think we're 50% of the way there. So we feel very, very good about that. And those are pretty much absolute numbers.

But then you've got to bring them into M&T, and the way we think about M&T, particularly after receiving a lot of this pressure on fees and things from the regulation, is that we have to have a positive revenue expense spread. That means expenses will grow, but we just want to make sure that they grow at a slower rate than the revenues. So I kind of look at the two separately. But when I look at it overall, expenses should be very well controlled in total as we move forward.

Got it. Thank you for taking my questions.

Matt O'Connor, Deutsche Bank.

This is actually [Adam] (inaudible) calling in for Matt. I just had a quick one on, I guess, the expenses in 4Q, the extraordinary expenses in 4Q. It looks like mostly sort of a cleanup quarter. I don't know if that's fair to say. But what do those impairment charges mean for securities, OTTI losses going forward, and also the Bayview run rate losses?

Well, with respect to the securities, what you're trying to do is you're trying to look out into the future and predict your cash flows. And to the extent that you think you're going to have some credit impairment, you've got to take that and mark those securities down to fair value. So if we've done that the right way and we don't see any change in the economic environment on a particular security, we think we've taken care of it.

Having said that, in any quarter you could get a different set of securities that could come up and you've got to look at them each quarter.

With respect to the Bayview thing, remember that what we did this quarter takes down our basis. But the structure is such that our initial and original investment, BLG or Bayview Lending Group, we have a 20% equity interest in. And in that particular piece we use equity accounting, so we record our share of the losses of that business. And while it's no longer originating small balance commercial securities, it still has operating cost is the best way to put it. And so I would expect very little change in what you have been seeing quarter over quarter there. The remaining -- most of the value that you have that supports our current market value is related to the parent company, Bayview Financial, and our 20% interest in all of it is cash flows. It's not 20% ownership, but it's interest in the upside.

Okay, that's helpful.

Yes. In terms of clear, that cleanup word is kind of weird to me, but it -- it doesn't register with me.

Okay, just one other quick one, on the trust income, revenues were flat Q over Q. We thought that revenues might have seen a little bit of a balance in 1Q. I think, in 3Q, you might have said -- you said that revenues were weak by $5 million to $8 million based on lower valuations in the equity markets. So when do we start seeing a rebound there, since we have seen an improvement in the financial markets? I know it's a temporary thing, but is that really the driver of that revenue?

Well, I think what you're talking about there is all related to the trust and investment income. And in that space, that's where the $5 million to $8 million was. We saw some of that come back. Fees and -- total trust fees were relatively flat quarter over quarter, and part of that was because of some of the uptick in market values. I think it might take a couple of quarters to get that back.

Having said that, when you look at the underlying business, you've got to look at each of the components. And so, for example, in the global capital markets portion of the business, Wilmington is the trustee for a lot of the securitizations that are out there. And so you get a lot of -- the uptick in revenue comes with a lot of issuances of debt and those types of things. That market was -- dropped heavily in the third quarter. I think the amount of issuances were even lower on the fourth quarter and are at some sort of record low for the last several years. So when that happens, their income is going to be down a little bit in that particular part of the business.

I think generally speaking, overall, we expect modest growth. We're taking our time and we think there's probably a lot of upside, but it's hard to protect exactly when that occurs.

Okay, thank you.

Steven Alexopoulos, JP Morgan.

I want to start -- I wasn't clear on your answer to Erika's question. Should we now be modeling $100 million of cost saves from Wilmington?

I don't know. I feel like we are at about half where we were. So we are at least half of the 40. We've done the work to get half of the 40; maybe it's a little higher. I'm just kind of looking at where we are running, and I'd say we would probably have expense saves from Wilmington that have been baked in and on an annual basis or $40 million to $50 million, and I think we are about halfway there.

All right, so we should take it up a bit, I'm assuming.

(laughs) that's up to you.

In terms of the margin --

A lot of moving parts in the whole expense base, you know.

Yes. In terms of the margin, you said debt prepay fees decline. Can you break it what the dollars of prepaid fees were here in the fourth quarter so we know how much of that might be at risk in future quarters going away?

You know, I'd rather not. But let me give you this context. It's a couple of million bucks, so a basis point is less than $1 million or something like that. Right? So that's why you can kind of tell when it gets down to a negligible amount that that's not consistent. Right?

Okay, and then finally, in terms of this excess liquidity, how do you think about the right amount of cash you should be holding? And are you expecting to move some of that into a securities portfolio to offset some of this margin pressure over the next few quarters?

I think our securities -- let me think of a way to start on that. First of all, I think our securities book is probably one of the lowest among the regional banks. The last I looked, we were probably half the size, relative to our size, of a securities book. And for the time being we will continue to purchase securities and hold mortgages. So that probably would be a source of offset, to the extent that we see continued growth in deposits and liquidity. But I feel -- in a very macro sense, I feel pretty good that we were able to take the $2.6 billion that we got from Wilmington -- it took us six months -- and to begin to utilize it. I would guess that the average balances going forward -- we typically don't carry that much cash.

But should we think of it that you continue to hold the liquidity or that you draw that down into the securities portfolio?

Well, what we did is we drew that down into liquid securities. Right? So the word liquidity is interesting; right? As long as you are keeping high-quality securities you are maintaining the liquidity and you have that for future dates, for whatever reason. Right? But you're just earning money on it as opposed to having it sit with the Fed.

Got you, got you. Any thoughts on the operating expense sides, to offset margin pressure beyond Wilmington?

We are going to be very diligent on expenses. And it's hard to say, but I think the way we look at it -- we'll probably talk a little bit about it in our annual report -- we've got a lot of work to do to offset sort of the changing banking environment because the rules of the game have changed. And so part of that is going to be a focus on expense outside of what goes on with Wilmington.

And there will also be the other side. So what I'm talking about is the fact that we've got to have a much wider revenue expense spread than we have been running at in the past. So efficiency is probably key for us.

Great, thanks.

Craig Siegenthaler, Credit Suisse.

Just looking at the 12 basis point decline in loan yields quarter over quarter, can you give us the impact between what was actually driven by spread, what was driven by rate and if there's any derivative or swap impact?

No swap impact. Could you ask me that question in a different way?

Sure. Most the impact, I'm assuming, is from putting new loans on at lower yields with higher-yielding loans rolling off. So what is the impact from that, which is really spread? And the other impact was, for all your variable rate loans, what was the impact in this shift in rates?

Okay. So I would say that if our core margin compression that I talked about was 4 basis points, I would say at least half of that was volume of loans coming on, probably a little bit more, maybe a little bit as a result of if you look at the Wilmington book it's got a higher mix of variable rate in that. So when you bring that on, there was a little bit of margin compression from normal margin compression as well.

So the majority of the 4 basis points, in my mind and the majority, therefore, of the 11 points in the asset side is going to be from the volume. But there is, I don't know, 1, 2, 3 basis points, 3-4 basis points of the 11 that is just normal -- I would guess, is normal yield compression.

Remember, when we talk about lower prepayment penalties and those things, that's also a component of the 11 basis points that you're looking at.

And then finally, what I will say is you can see the change in the book. Some of that is lower rates on deposits and time deposits running off. But I mean that -- I don't know; on the deposit side, I wouldn't expect the change to change dramatically.

Got it, and then Rene, just one follow-up. If you look at your pretty strong loan growth from last quarter and assumed -- and I don't mean too short-term focus here, but assume that the first quarter ended last Friday and you annualized that. I'm just wondering -- how is loan demand trending in the first quarter versus the fourth quarter? And can you also discuss any expected seasonality?

I don't know. I think activity seems to have picked up. Let's go back. We had, actually, a pretty robust quarter a year ago. And that tailed in -- last year, that tailed into January and February, and then it got a little quiet. And then, of course, with the downgrade of the US and Europe falling off the charts, everything seemed to get very quiet. I think that really affected our third quarter.

Having said that, in the third quarter of this year, even though our balances were low, we saw a lot of underlying demand. And a lot of that materialized over the last, say, four months of the year. And so it's hard to protect what will happen. But I do kind of feel like it's a sort of deja vu where we were last year. And if we can get some stability out there, then maybe that will all translate into an uptick in the total level of year-over-year loan growth.

But, given what happened last year, I feel pretty comfortable that what we were able to last year we should be able to do again this year. And that's kind of how I look at it.

Got it, great, thanks Rene.

John Fox, Fenimore Asset Management.

Most of my questions have been answered, but I have two quick. Rene, the mark to market on the pension plan -- did you say that was $200 million pretax?

Something like that, up in that range.

Okay, and what was the amount of preferred dividends in the quarter?

I think it's in the release, but give me a second.

I backed into $17.9 million. Is that right?

Won 2nd, and I'll tell you. That seems high.

It seems high to me, which is why I'm asking.

$16 million, maybe?

$16 million?

Yes. You know, you've got the -- in that number, you've got the amortization of the -- $2 million is amortization of the TARP discount.

John, some of the other analysts include the net income attributable to invested restricted stock, and so you may be thinking of that as being preferred dividend, even though it's not technically is, but it is part of the difference between GAAP net income and net income for EPS purposes. And I believe that's another 2.

All right, great. And somebody at another bank mentioned to me that the bank has no interest in getting -- collecting deposits at this point because everyone has so much liquidity. What are your thoughts on that comment?

One of my peers on the management group says we call those customers. So we are more than happy to help everybody with their liquidity.

All right, thank you.

Collyn Gilbert, Stifel Nicolaus.

Just want to follow up. You've hit a lot of these things, but just on the loan yield side, as we look at the differentiation between what's rolling off and what you are putting on, I know you said it's lower. Can you quantify it, sort of how much lower? And I'm just trying to reconcile when that churn really starts to slow, because you guys already seem like you're sitting at a fairly low kind of weighted average loan yield, anyway. And I would just think you're probably closer to a bottoming -- and maybe that's what you mean on your margin comment, but just trying to reconcile those numbers a little bit more.

Okay, one, I don't think I can quantify it. I'll think about it. And if we decide to do some more of that, we will disclose it somewhere in our Q and so forth. But the way I think about it is, if you think about last quarter, the linked quarter, we actually had some uptick in our loan yields. Right? And that was because we had higher prepayment and nonaccrual interest on those loans. And my sense is that they would have been flat to slightly down the previous quarter as well. And then that trend would have continued this quarter. This quarter, you had a flip in those sort of cash items. Right? I don't, off the top of my mind, know -- that's like maybe 3 -- give me one second -- maybe 2 to 3 basis points, 4 basis points on the loan yields. Maybe that's the 4 that I talked about.

And then -- so that would leave you with something like 7 to 8. And a lot of that, I think, was a little abnormally high because we had so much volume of loan and securities on our book. So there's a natural number in there. I haven't really exactly quantified exactly what that natural number is.

Okay, that's helpful. And then just a little bit of color on the loan side, the loan growth that you're seeing. I know you broke it out geographically. But do you have a sense at all of what types of businesses are borrowing and where you are seeing the demand just from kind of an economic sector standpoint?

Yes, yes. We saw -- let's take a look by [stick] code and all that. There's really no one particular trend. It seems to be in all types of commercial customers. We did have, as we spelled out in our press release, the fact that we got a rebound in the inventories on the auto floor plan. But aside from that, you can't really see -- in the real estate world, you saw that come back for the first time. We have been running slightly down. I think all the activity was there, but probably the runoff of the book -- remember, we've got Wilmington in there as well.

But there's no specific spike. I would say we've got growth in a lot of categories. The other thing I would point out is that, since the acquisition, the Wilmington loan book has actually been coming down. But we saw, even in Delaware, we saw C&I growth for four consecutive months, right, for the first time, so that turned. And, in total, the amount of runoff that we've seen in that book has actually slowed a bit.

So there's some encouraging signs and it would be nice to have a quarter where every one of the regions has grown. And that has not happened yet. But I think the trend is headed in the right direction.

Okay, that's helpful. And then just finally, just curious -- and maybe it was your comments about your outlook, just being cautious as to the time line that we are going to sit in this environment. But why now did you change your course on Bayview? For years you guys have been badgered on this line item. I'm just curious why now you opted to pull the trigger.

Well, you've kind of got to go back. Right? So other than temporary impairment requires a view that says over the passage of time, if something stays below its fair value for a long period of time, you've got to really think hard about saying that that's not a temporary decline. And so if you think about what happened over time, in 2008 Bayview -- BLG stopped doing its origination of loans. And then what we did in 2008 is we restructured that investment so that we received an interest on all the cash flows of the parent, Bayview Financial.

And if you look at where we are today, much of the valuation that we have today is based on the sort of asset management business. If you go back to our Q, when we were extending out our view of our ability to collect our book value, all of our calculations said that in our estimates that our present value of the cash flows that we thought we would be able to collect were about 106% of the book value of our investment.

What has kind of changed is, as you kind of think about -- what has changed, really, is our thinking about that timing. And so as you think about the business that they're in, Bayview's asset management business is a business which sort of manages capital for investors in the distressed mortgage space through either asset purchases or through servicing. And what I guess we would say is it's kind of ironic in a sense because what we like is the prudence at which they seem to be managing that business. And what that means is that when asset prices or servicing prices are high, they chose not to deploy a lot of money so that they could keep their returns high. And, as opportunities and prices drop and they think they are fair, we have the ability to grow assets under management by deploying that cash much faster.

If you kind of just think about that discipline, what it says to us is that if they keep doing that, the business is actually growing, it's doing well. But our ability to predict the timing, sort of schedule of the timing of when we would receive those cash flows, is less. So as we looked at it, we were somewhere around -- our cash flows we suggested were somewhere in and around the book value. And we said, look, what's our ability to really predict the timing to a great degree of accuracy?

So we decided to take a look at the fair value and write it down to fair value at the time, which is what is required with an OTTI analysis.

So really, the underlying business -- we see a lot of growth and a lot of favorable things that are going on. But what has really changed is our view of the timing of when we would be able to recover the investment.

Okay, that was all I had, thanks.

Mike Turner, Compass Point.

Sorry to kind of beat the dead horse, but just a follow up to earlier questions. What is your average loan yield on C&I loans in the quarter?

Give me 2 seconds, and I'll give you that. In total we were somewhere around -- average loan yield was 3.78%.

Okay, for consolidated all products or just C&I?

C&I.

Okay. How does that compare -- the Fed survey shows it's around 2.5%. What's the main, I guess, discrepancy? I know you historically have very low losses -- just how you are getting over 100 basis points more than the industry norm?

Well, let me -- give me a second. Let me give you some -- if you look at how we have managed the business, one, I think, if there is a difference, we are not doing a lot of large syndicated credits with investment grade companies. Right? And I think that's how you would get margins, I would say, or yields that are that much lower on your C&I book. But to give you some sense, if you look at a spread from swaps, our margins are routinely above 3% on the businesses that we actually bank, a lot of which are smaller, small businesses and middle market companies. So we are something like the sixth largest SBA lender in the US, third-largest east of the Mississippi. Right?

So we are banking much smaller business credits. The one thing I would say is that it's interesting what you see when you look at the volume of business that we do over the last four or five quarters, the margin has held up steady, right, in and around 3%, slightly higher when you look at it relative to the swaps curve. And so I think, really, when you think of the bank's margin, what's really happening is banks have hit a floor on the deposit side. But when you look at the underlying business, if we are booking it at an appropriate spread, that really tends to be quite a bit of upside if the interest rate environment were to normalize.

So I'm not sure. C&I spreads -- that seems really, really low for the type of business we would be in. So I don't know exactly what everybody else would be doing.

Okay, that's helpful. So the 3.78% looked like, actually, the rate for the average for the quarter. But you are saying what you originated is still -- are you saying it's in the ballpark of what's on the books right now?

If you look at what we originated in the last two quarters, it's above 3% relative to the swap rate. So maybe, I don't know, what is that, 3.23%, 3.25%, 3.30%? Somewhere in that range.

Okay, thank you, that's very, very helpful; that's all I had.

Marty Mosby, Guggenheim Securities.

Back for seconds, Marty?

I am, but it's more of a concept on an earlier question about the Basel III. When we do the calculation, we put all the enterprise (inaudible) risk into our models. M&T Bank actually doesn't have much of an adjustment. So all I was getting at is, because you don't -- because of the great risk management that you've had in the past, there's not much of an adjustment between Basel I and Basel III. So, really, there's not the haircut that you see in all the other banks, which would make it so important for them to do the calculation versus you all being able to -- be able to equate at least without any unknown changes that you are pretty much in line with where Basel III would be.

I like what you're saying. My problem is I don't -- thank you very much.

(Laughter). I'm just saying, in general, the risk management practice has limited the impact of Basel III. So that way, your capital plan can kind of get away without having to formally calculate that.

I think it's very, very important that capital management has got to be about capital and risk.

Thanks. I was just going to put that out there so you kind of reconcile why other banks are probably having to have more emphasis on that.

Thanks, Marty.

Sure.

That was our final question. I would now like to turn the floor back over to Mr. MacLeod for any closing remarks.

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