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Executives

Donald J. MacLeod – Director of Investor Relations

Rene F. Jones – Chief Financial Officer

Analysts

Ken Zerbe – Morgan Stanley

Jennifer Demba – SunTrust Robinson Humphrey

Craig Siegenthaler – Credit Suisse

Steve Alexopoulos – JP Morgan Securities

Ken Usdin – BofA/Merrill Lynch

Bob Ramsey – FBR Capital Markets

Matthew Clark – KBW

Collyn Gilbert – Stifel Nicolaus

Heather Wolf – UBS

Amanda Larsen – Raymond James

Todd Hagerman – Collins Stewart

Christopher Nolan – Maxim Group

M&T Bank Corporation (MTB) Q1 2010 Earnings Call April 19, 2010 9:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to today's first quarter 2010 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Don McLeod, Director of Investor Relations. You may begin your conference.

Donald J. MacLeod

Thank you and good morning. This is Don McLeod. I would like to thank everyone and welcome them to M&T Bank Corporation's first quarter 2010 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, on our website at 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'd like to introduce our Chief Financial Officer, Rene Jones.

Rene F. Jones

Thank you, Don, and welcome everyone. Thank you for joining us on the call today. Some of you may have noticed that we've departed from a long tradition today by announcing first quarter earnings on the day before our annual meeting of stockholders instead of on the same day. Hopefully this change will allow investors to assimilate our results in advance of the meeting instead of during the meeting. So, let's get to the highlights.

The first quarter of 2010 diluted earnings per common share were $1.15, up from $1.04 in the previous quarter and $0.49 in the first quarter of 2009. Net income for the recent quarter was $151 million compared with $137 million in the linked quarter and $64 million in last year's first quarter.

Included in our GAAP earnings for this year's first quarter was after-tax expense from the amortization of intangible assets amounting to $10 million or $0.08 per common share. This compares with $10 million or $0.09 per common share in the linked quarter and $9 million or $0.09 per common share in the yearago quarter. There were no merger-related expenses in the first quarter of 2010, but we did incur after-tax merger related expenses of $4 million or $0.03 per common share in the fourth quarter of 2009 and $1 million or $0.01 per common share in last year's first quarter.

Net operating income, which excludes the amortization of intangibles as well as merger-related items, was $161 million or $1.23 per common share for the first quarter of 2010 compared with $151 million or $1.16 per common share in the linked quarter and $75 million or $0.59 per common share in last year's first quarter.

In accordance with SEC guidelines, this morning's press release contained a tabular reconciliation of GAAP and non-GAAP results including tangible assets and equity. Turning to the balance sheet and the income statement, tangible equivalent net interest income was $562 million for the first quarter, down from $565 million in the linked quarter and up 24% from $453 million in the first quarter of 2009.

The linked quarter decline relates to the lower day count in the first quarter as compared with the fourth. The net interest margin continued to expand during the first quarter, rising to 3.78% from 3.71% in the fourth quarter of 2009 and up significantly from 3.19% in last year's first quarter.

Taking a simple view, the improvement in the margin from the fourth quarter can be attributed to the following factors. Approximately 3 basis points of the margin expansion came from repricing on consumer time deposits. An additional 3 basis points came as a result of the reduced day count compared with last quarter. The remainder of the expansion came from a shift in our funding mix with a higher nonmaturity savings and DDA balances replacing time deposits.

From a broader perspective, credit spends on new and renewed commitments remain higher than we've seen over the past several years. As a result, despite the drop in funding rates, asset yields have remained relatively stable. Looking forward, our view of the margin remains consistent with our remarks on the January conference call, which is to say we'd expect the margin to be relatively stable with only a slight bias to the upside for the remainder of the year.

As for the balance sheet, average earnings assets declined by $120 million or less than 1% annualized as compared with the fourth quarter of 2009. Earnings assets were not materially impacted by our adoption of new accounting requirements related to off balance sheet entities at the beginning of 2010. The result was the addition of approximately $416 million of resident mortgage loans partially offset by a $355 million decline in investment securities.

After adjusting for the impact from the adoption of the new accounting rules, average loans for the first quarter declined by an annualized 4% as compared with last year's fourth quarter. The change in average loans for each of the loan categories as compared with the fourth quarter of 2009 were as follows.

Commercial and industrial loans declined an annualized 4%. Commercial real estate loans declined an annualized 2%. Residential real estate loans, after adjusting for the new accounting rules, declined by an annualized 10%, primarily the result of lower mortgage loans held for sale. Consumer loans declined an annualized 7% driven by a lower level of indirect auto loans reflecting both the continued runoff in the off footprint part of that portfolio as well as our decision to slow originations within our footprint in response to very aggressive price competition.

For some time, we've been discussing several loan portfolios that we were not looking to grow and which, by design, are being allowed to run off. These include obviously residential construction, the Alt-A mortgage portfolio, and, as I just mentioned, our indirect portfolio, particularly the portion outside of our core markets. Excluding these portfolios as well as the impacts of the accounting change I referenced, average loans declined just 1% annualized.

This compares quite favorably with the trends experienced nationally as seen through the Fed's H8 releases which indicate that loans industry-wide declined about 7% in the first quarter. Thus it appears that we are outpacing the broader economy, and we are likely gaining share within some of our core markets.

We continue to see growth in core deposits, but at a somewhat lower pace than last year. Average customer deposits in the first quarter, which exclude foreign deposits and CDs over $100,000, increased by an annualized 6% from the fourth quarter and included a very healthy 11% annualized growth in demand deposits.

Turning to noninterest income, noninterest income was $258 million for the recent quarter and included $26 million of securities losses. This compares with $266 million in the linked quarter which included $34 million of securities losses. In both periods, the securities losses primarily reflected additional other than temporary impairment charges on our available for sale securities portfolio relating to privately issued residential mortgage-backed securities.

Mortgage banking fees were $41 million for the quarter compared with $50 million in the linked quarter. Origination volumes were lower and, at the same time, we experienced a slight decline in the gain on sale margins. That said, gain on sale margins remained wide compared to where they've been historically.

Service charges on deposit accounts were $120 million during the quarter compared with $127 million in the linked quarter. The decline came primarily on the consumer side and was attributable to a seasonal decline in customer transaction volumes as well as fewer processing days in the first quarter as compared to the fourth quarter.

M&T share of the operating results of Bayview Lending Group, or BLG, was a loss of $5.7 million compared to a loss of $10.6 million in the linked quarter.

Turning to expenses, operating expenses which exclude the amortization of intangible assets and merger-related expenses were $473 million compared with $455 million in the linked quarter.

This quarter's results reflect our usually seasonally high salary and benefits cost which includes accelerated recognition of equity compensation expense for certain retirement eligible employees as well as higher FICA expense, unemployment insurance, and expenses related to our 401K match. In aggregate, the expense from these items was some $21 million higher than in the linked quarter. This is consistent with our experience in each of the past four years.

The quarter's results include no material change in the valuation allowance for capitalized mortgage servicing rights compared with a $4 million reversal from the valuation allowance in last year's fourth quarter.

All other categories of expense were well controlled, essentially unchanged from the linked quarter. The operating efficiency ratio which excludes securities gains or losses as well as merger-related items and intangible amortization was 55.9% in the first quarter of 2010 compared with 52.7% in the linked quarter. It was improved by 2.8 percentage points from last year's first quarter.

Next let's turn to credit. Overall credit trends were positive. Nonaccrual loans increased to $1.34 billion or 2.6% of total loans at the end of the recent quarter, up just $8 million from $1.33 billion or 2.56% of loans at the end of the previous quarter, an increase of less than 1%.

Loans acquired in connection with the Provident and Bradford transactions classified as nonaccrual and which have already been marked to fair value increased by $35 million, while nonaccrual loans associated with the legacy M&T portfolio declined by $26 million.

Other nonperforming assets consisting of assets taken in foreclosure or defaulted loans were $95 million as of March 31, unchanged from December 31 and down $5 million from last year's first quarter.

Net chargeoffs for the quarter were $95 million, down from $135 million in the fourth quarter of 2009. Annualized net charge-offs as a percentage of total loans were 74 basis points, improved from 1.03% in the linked quarter.

Net charge-offs for commercial and industrial loans were $18 million in the first quarter, down from $31 million in the linked quarter. Net charge-offs for residential builder construction loans were $22 million for the recent quarter compared with $40 million in the previous quarter. Net charge-offs for all other commercial real estate loans were $8 million, down from $11 million in the fourth quarter.

Net charge-offs on residential real estate loans were $15 million in the first quarter, down from $21 million in the linked quarter. Net charge-offs on consumer loans were $31 million in the first quarter compared with $32 million in the linked quarter.

Provision for credit losses was $105 million for the first quarter compared with $145 million in the linked quarter. The allowance for loan losses increased to $891 million at the end of the first quarter. The ratio of allowance for credit losses to legacy M&T loans, which excludes acquired loans against which there is a credit mark, was 1.86%, up 3 basis points from 1.83% in the linked quarter.

The loan loss allowance as of March 31, 2010, was 2.3 times annualized net charge-offs for the recent quarter, up from 1.7 times net charge-offs for the full year of 2009. Put another way, the allowance at the end of March was sufficient to absorb more than 2 years of net charge-offs at our current annualized loss rate.

We disclosed loans past due 90 days 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 minimal risk of principal loss. In our case, that's particularly true. Although loans 90 days past due were $203 million at the end of the recent quarter, they included $195 million of loans guaranteed by government-related entities. Those figures were $208 million and $193 million, respectively, at the end of last year.

M&T's tangible common equity ratio was 5.43% at the end of the first quarter, an increase of 30 basis points from 5.13% at the end of December. The majority of the improvement was the result of earnings well in excess of dividends combined with a flattish balance sheet. An additional 10 basis points came from the continued improvement in unrealized losses on our securities portfolio. Recall that since unrealized losses on securities are already deducted from capital, the other than temporary impairment charges in our income statement do not result in further reductions of capital.

Turning to our outlook, we have clearly seen a number of signs that the economy is improving across most of our business segments; but the pace of economic recovery is slow as seen in the decline in loan activity being reported at a national level. We've heard anecdotal evidence that manufacturers are starting to build inventories, but that doesn't appear to be reflected in the numbers yet; and we will need to see a turnaround in the second half of 2010 to realize loan growth for the full year.

Our outlook for net interest margin is unchanged which is to say wider for 2010 than for 2009. We are pleased with the consistent credit results that we have reported over the past several quarters. That is particularly true for these first quarter figures. The continued decline in criticized loans is also encouraging. Which respect to future quarters, it's important to remind you that credit performance can be lumpy from quarter to quarter.

The uptick in the efficiency ratio this quarter as compared with the linked quarter was entirely related to seasonal factors and, in fact, improved nicely from last year's first quarter which contained the same seasonal factors. We remain focused on improving that ratio as we move forward.

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 to call to questions.

QuestionandAnswer Session

Operator

(Operator Instructions) Your first question comes from Ken Zerbe – Morgan Stanley.

Ken Zerbe – Morgan Stanley

Something you can just give us a brief update where you stand with the regulators and your desire to repay TARP and also if you can make any comments. In these discussions, do you feel any indirect or even direct pressure to potentially increase your capital ratios?

Rene F. Jones

Good question. Our position on the TARP hasn't really changed. Our desire is to pay it back, but really there are sort of two things that we're looking to in the future. Obviously, we're very pleased with our first quarter results; but problem loans and nonperforming assets still remain pretty high in the industry. We'd like to see more evidence that there's a turn in the economy.

Two, we said for some time that it would be helpful to have some clarity as to where things are going to go on the regulatory front before we make changes to our capital structure. Why I think we have to ability to do that is because we actually are growing capital. We're doing it sort of by generating it. As long as we continue to do that, I think that helps us. But our view would be that if we're going to change our capital structure, we would like to do it once. That's the efficient way to do it. And to do that, we have to sort of get a little bit more clarity around what some of the pending regulation will be. I would expect that's not all that far off on the horizon.

Ken Zerbe – Morgan Stanley

The other question I had just on the OTTI, that's been fairly consistent, or at least present I guess in your income statement for some time. Any thoughts there in terms of what is going to turn the corner there in terms of being able to reduce the OTTI going forward?

Rene F. Jones

I think very specifically there are a whole host of assumptions that we have to make. For example, if you look at the charges we took this quarter, they were on about 20 private label mortgage-backed securities. There's 20 different issuances. Really the issue there is that to the extent that there's not a lot of improvement in the economy, then as time passes, you get further into it. We've not actually seen a principal writedown on any of those securities.

As the housing prices have stabled, the thing that really hasn't changed until recently is the roll rate. On the 30-day delinquent roll rate, they're rolling from 30 to 60. Having said that, in the last few days we've begun to see in our portfolio that we've had nice improvements in the 30-day delinquencies.

I would guess what needs to happen is you need to see a change in the roll rates in a positive direction and you need to see unemployment, you know we need to actually see some employment that affects the consumer in a positive way.

Operator

Your next question comes from Jennifer Demba – SunTrust Robinson Humphrey.

Jennifer Demba – SunTrust Robinson Humphrey

Thank you. Good morning. I was wondering if you could give us some more color around what you're seeing in the commercial real estate portfolio. Your net charge-offs in that sector are still really very low. I was wondering if you could give us some color there.

Rene F. Jones

I would say on the whole there was not much new news this quarter. As we've talked about, we continue to manage that portfolio very closely doing numerous reviews. I think what you see is that when we look at the quarter, we did have a couple, beyond what I have mentioned, a couple of, a few more loans that rolled into our criticized loan catalog. That catalog, remember, is on a scale of 1 to 15 is our loan grades. When something goes from 10 to 11, it rolls into the catalog.

There were a few, but at the end of the day I think what the broader issue seems to be is that the number of things that, dare I say, are being teed up and actually being cured on the C&I side is actually a much greater issue than the number of, than any weakness we might see in CRE. In fact, it seems to be dwarfing the issue.

One of the things that we did do this quarter is we finished, our credit guys finished, the base work for our stress testing work. What you can kind of see in the portfolio when you look at all of our real estate across all of our footprints, take out the owner occupied, which is really C&I, take out the construction, which we kind of look at a little bit separately, and you've got just under $10 billion there.

I would say the loan to values of that book are in the low 60s. I would say debt service coverage is somewhere almost as high as 2.5%. So, at the end of the day, the way we underwrote that portfolio has a lot to do with sort of why it's performing pretty well. Even as we see problems that sort of roll into the portfolio in terms of payment problems, we continue to think that the loss content is on the lower side.  Not a lot of new news.

Operator

Your next question comes from Craig Siegenthaler – Credit Suisse.

Craig Siegenthaler – Credit Suisse

Thanks, good morning. First just on the restructured loan trends. Saw a big drop in the quarter. Wondering how much of this was kind of from yearend clean up of accruing loans that have been accruing for 6 months or so? How much of it was from newer activity, if that was a factor there, too?

Rene F. Jones

You are going to have to restate your question. In restructured loans declined a lot?

Craig Siegenthaler – Credit Suisse

I believe it was down 220 from over 300. I believe it was 301 in the prior quarter down to 221 in the first quarter.

Rene F. Jones

My numbers are that it was 213 at the end of 2009 and it's 221 now.

Craig Siegenthaler – Credit Suisse

Got it. Okay. So, in you view, there's no decline there, no yearend clean up. So if there's no yearend clean up, I guess new activity pretty slow there, too?

Rene F. Jones

Yes, that's true.

Craig Siegenthaler – Credit Suisse

What was the driver of that?

Rene F. Jones

Of the activity that was there?

Craig Siegenthaler – Credit Suisse

Of the less activity quarter over quarter.

Rene F. Jones

I think you think about how long, it's kind of funny now, how long we have been working on that all day book that started off at $1.3 billion. That's down to about $800 million, maybe under that. I think we sort of have gotten through a lot of the more difficult credits there. We have done a lower number of modifications of recent versus what we were doing early on. I think we sort of got on that issue very early. I want to say May of 2008. So we're just doing less.

Craig Siegenthaler – Credit Suisse

Got it. Then just a followup on compensation expenses. This first quarter includes a bunch of seasonal items. You said it netted to about $21 million. Should we expect that sort of decline into the second quarter? And is $20 million, would you say it's a pretty average step up when we think about fourth quarter to first quarter going forward?

Rene F. Jones

I think for all the expenses in total, they seem to perform very similar to what we've seen in the first quarter of the last four years. I didn't see anything unusual there.

Craig Siegenthaler – Credit Suisse

The only difference would be the addition of two acquisitions.

Rene F. Jones

That's a good point. But much of that was in place in the fourth quarter. I think going forward we probably have some room left to go on synergies from those deals. I think your trends are pretty normalized at this point.

Operator

Your next question comes from Steve Alexopoulos – JP Morgan Securities.

Steve Alexopoulos – JP Morgan Securities

We've seen some of your peer banks recording provisions for repurchase of mortgage loans that they originated and sold back in 2006 to 2008, that time frame. They're now being put back to them for rep and warranty violations. You don't seem to talk about this anywhere. Is this just not a factor for you guys?

Rene F. Jones

You said a couple different things there. You are talking about provisions for mortgage repurchases?

Steve Alexopoulos – JP Morgan Securities

Exactly.

Rene F. Jones

The topic came up for us first; I think it was the first quarter of 2007 when we did a little pre-announcement. We provided for that. Any time we have seen the two sort of components, we have a reserve. There are two components. Any time we've seen someone make a request to us, we have estimated an amount and set that aside in accrual for a specific repurchase. We have a whole process around that.

But somewhere in mid-2007, what we also did is we said, you know what, we have learned something about the structure of the mortgage business; and every time we originated a mortgage, we are going to set aside a reserve, a small reserve, on the chance that that could be repurchased. We have those two components. For example, in the quarter as we originated loans we set aside an amount for those loans that we originated this quarter in the event that they would be put back.

When you look, for example, at our results from the fourth quarter to the first quarter, I don't know, maybe that sort of standard accrual went up a couple million dollars, but nothing significant. I don't think you have seen much there because we've been doing it now for almost 3 years.

Steve Alexopoulos – JP Morgan Securities

That's actually real helpful. Are there any updates you can share in terms of where in the process AIB might be in terms of selling their stake?

Rene F. Jones

Well, you all know the issues; and AIB has been very public about what their intentions are. Due to the difficulties they're having on the capital front, they've announced their intention to sell assets; and one of those assets is M&T. From our perspective, nothing really has changed there. We've said publicly that we stand ready to help them execute a transaction in the most efficient and orderly way to the extent they want to do that. But all of that and the timing is all up to them.

Steve Alexopoulos – JP Morgan Securities

Have you seen them move forward with this at all yet?

Rene F. Jones

There are steps that have to take place out there; shares have to be registered on those types of things. I think it's pretty transparent.

Operator

Your next question comes from Ken Usdin – BofA/Merrill Lynch.

Ken Usdin – BofA/Merrill Lynch

Can you also just touch on just what you are seeing in your early stage delinquency trends? You mentioned the 90s are pretty darn good, especially without the government guarantees. Can you touch on the early stage?

Rene F. Jones

Yes, I can. I am looking at something. Overall, early stage delinquencies were down maybe, I will give you an estimate, I think when we released our FR Y-9C, we will go from something like 92 basis points down to 86, something like that.

If you look at it by area, give me one second. On the consumer side, consumer improved a fair amount. Let me see. Let me give you a couple of things. If you look, for example, let's start with our core mortgages. Our 30-day on our core mortgages was 3.2%. I'm sorry, it was 3.6% at the end of the year. It dropped to 2.8%. So pretty significant drop.

On our total consumer book, which was indirect auto, home equity, all that, we went from 1.74% in the fourth quarter down to 1.60%. That 1.60% was about 5 percentage points higher than last year, this time last year. So pretty stable and slight improvement into the first quarter.

Ken Usdin – BofA/Merrill Lynch

Great. And then the followup to that is as you start to see both of the buckets of delinquencies improve, maybe there's a little bit of mixing and matching in the criticized classifieds. Are you pretty much at the point where reserve build is going to be a thing in the past? You built it a little bit this quarter, but with such low charge-offs and flat NPAs and improving delinquencies, what's your outlook for what you might have to do as far as reserve build or even match or release?

Rene F. Jones

I think a couple of things. If you look at, we have talked about two quarters of improvement in the classified or criticized book. But it's still at historical highs, right? I just think we will have to wait and see. You can't really answer that question today. You got to look at it every month as you move forward. But we still remain pretty cautious with unemployment where it is. I am not sure the economy is fully out of the woods yet. I think we remain relatively cautious.

Ken Usdin – BofA/Merrill Lynch

Okay. Then last quick one just on service charges in mortgage banking. Do you have any thoughts about how much you might be impacted by the Reg E on the service charges and on the mortgage side what your outlook is for just that business?

Rene F. Jones

The service charges, I apologize, I really don't. I think we'll have an impact, but my ability to quantify it just isn't that great. We're now running pilot programs. What I mean by that is we're contacting people, and we're looking at how easy or difficult it is to get a response from them. I think by the time I get to this call next quarter, we will start to have some sense of what that impact might be. But I don't have more than that today on that front.

On the mortgage, really much of the decline in our mortgage was driven by lower volume. Like applications went from $2 billion down to $1.7 billion in the quarter. Closed volume went from $1.25 billion down to less than a billion, so 25% or so, 22% drop. I think that's going to just move along with what happens with rates and volume. I will say that the gain on sale margins are still very, very wide, very wide compared to where they would be historically.

Operator

Your next question comes from Bob Ramsey – FBR Capital Markets.

Bob Ramsey – FBR Capital Markets

Good morning. First question, with the AIB shares. I know you all talked about it earlier. If AIB does decide to publicly place the shares, would you all consider placing enough extra to repay TARP or do you really want to wait until you have got better clarity on 503 and future regulatory requirements?

Rene F. Jones

In our view, the situation with AIB, one, it's unfortunate I think for them. It really has no impact on us and doesn't influence our thinking on any other topic of running M&T. They are separate issues for us.

Bob Ramsey – FBR Capital Markets

Okay. In terms of nonaccrual loans, they were pretty flat in total. Were there any significant movements between the different buckets?

Rene F. Jones

There were a few credits that moved in. I think we had a real estate development credit, residential development credit move in. Then we had a whole host of things cure. I think we sort of alluded to this in my comments. If, for example, you look. Give me one second. If you were to look at, just remove Provident and Bradford, the nonaccrual loans were down $3 million in C&I, $16 million in commercial real estate, down $4 million in residential real estate, down $3 million in consumer, so down everywhere.

So nothing big, and nothing that really surprised us. But we did have, what you are seeing is still a migration of credit actually into the nonperforming, into the classified loan book, but you are having a much greater volume of cures.

Bob Ramsey – FBR Capital Markets

That's helpful. Last question I've got for you guys. Do you have the dollar amount of the preferred dividend expense in the first quarter?

Rene F. Jones

We can probably get it for you, as long as somebody else has another question.

Bob Ramsey – FBR Capital Markets

That's great. Thank you.

Operator

The next question comes from Matthew Clark – KBW.

Matthew Clark – KBW

Good morning. Can you talk about whether your appetite for Fed-assisted deals has changed given the change in loss-sharing arrangement? And then maybe any update on your view of maybe non-Fed assisted deals and whether or not you think those might start to pick up at some point?

Rene F. Jones

I have noticed, we haven't played around with it much. I have noticed the series of changes that they've made which I think from an industry standpoint probably makes sense. It does change the economics to us. I think I would say that really for us to focus on anything in that space, it's going to have to be something in our footprint that kind of makes sense to us strategically as opposed to just sort of chasing cheap assets. Other than that, not a lot of new news there. Do you have a second part of that question?

Matthew Clark – KBW

Just on traditional M&A, whether or not you think that related activity might pick up, whether or not you have any interest.

Rene F. Jones

Sort of the same old thing at M&T. If somebody calls us, we always answer the phone. We are through much of the integration stuff related to the past two deals. We are available to do that. We are always interested. At the end of the day, for us to do something, it has to be attractive to our preexisting shareholders and has to make sense in the franchise.

If I can just go back and answer Bob Ramsey's question, if you take a look at page 10 of the press release, you will see that there's $12,614,000 of the preferred stock dividend.

Matthew Clark – KBW

Just lastly on the classified assets, is there any way you can quantify in dollars or percent how much that is and how much it might have been down from the last two quarters?

Rene F. Jones

It's something like, I am going to do this roughly. Last quarter, I think maybe we were down 200, a couple hundred million dollars. This quarter we were down $100 million. So I think the issue in my mind, and this tells you a lot about that provision question, it's more that it actually is not growing and it's coming down slightly. It's more so than the magnitude. We are still at a place in the economy where on the whole those levels are high.

Matthew Clark – KBW

Great. All my other questions have been answered.

Operator

Your next question comes from Collyn Gilbert – Stifel Nicolaus.

Collyn Gilbert – Stifel Nicolaus

Good morning. I have just a couple followups on some of the things that you had said. You guys have done a really good job of offering kind of color and comfort as to what the loss content is in your NPA book. You've touched on now that you're starting to see some loans cure. Any color at all can you give on potential timeline of resolution of your NPA book? Or maybe what kind of catalyst we need to see to shorten the timeline or any color there from that standpoint?

Rene F. Jones

No. When I think of your question, I think of [inaudible], what he tells me about his experience with these types of things. Let's go in reverse order this time. Starting with the commercial real estate side, from the time you identify a problem to the time it actually gets cured, it's pretty long. Nine months would not be unusual, maybe longer. I think on the C&I side that's probably true, too.

So these things take their time. I think it's just a normal workout process. It makes it very difficult to be making a prediction of a time. I think it takes time, from my past experience several years to work those books back in the other direction.

Collyn Gilbert – Stifel Nicolaus

Okay. That's helpful. Then also on the AIB front. I know you just said you look at it separately from the business. Is there any kind of, in an ideal world, do you all have a preference to where that ownership stake would go in terms of another whole bank or private ownership? I will leave it at that.

Rene F. Jones

No. I will say it again. I think we're pretty plain vanilla. What we say is we always try to do things that are in the interest of our preexisting shareholders. Sometimes we can; sometimes we can't. That's how we think. I will leave it at that.

Collyn Gilbert – Sifel Nicolaus

Then finally on the M&A front. I think you had said after the Partner's Trust deal that was the type of acquisition that you all would be interested in perhaps making again. Kind of this overcapitalized thrift that didn't have a lot of asset issues, had a good funding base that you guys could lever into. Would that type of transaction still be of interest to you or given the change in the market has your view of that type of deal changed as well?

Rene F. Jones

I don't know. I think that we think about mergers in the way that we think about running the bank in terms of the sense of the community nature of it. To the extent that institutions have a good customer base in a market that we know, either where we are already at or where we had share, then that's something that we would consider. It's not necessarily the nature or form of the entity that matters. It's its health. History has said to us that we tend to do partnerships more than we buy institutions.

In the case that you mentioned, that was somebody who wanted to continue to own M&T shares as a group of shareholders when they joined us. Those are more the characteristics. I would say nothing is really off the table.

Collyn Gilbert – Stifel Nicolaus

Okay. That's very helpful. That's all I had, thanks.

Operator

Your next question comes from Heather Wolf – UBS.

Heather Wolf – UBS

Good morning. Two quick questions. On the margin, was there any impact from purchase accounting to the margin?

Rene F. Jones

I don't believe we've changed. Well, nothing new. There's always a purchase on accounting accretion, but we didn't change anything with respect to our [inaudible] or anything like that.

Heather Wolf – UBS

Okay. And that accretion is pretty small?

Rene F. Jones

Yes. I mean relative to the size of [inaudible], yes, definitely, relatively small. I think we reference it in our K and Q.

Heather Wolf – UBS

Then just on commercial real estate, you mentioned debt service coverage of two and a half times. Can you tell us what portion of that portfolio is floating rate and what kind of stress tests you've done for a rising rate environment?

Rene F. Jones

Let me see if we can figure, I don't know if I have that at my fingertips. But in terms of the second part of your question, particularly in New York City, at origination we have always done stress tests and look at what the credit can absorb in terms of rate shocks, and we do that during the underwriting.

What we've most recently done, think of it this way, we have got a very robust process that is all geared towards identifying problems very quickly. It's based on an RM coming to us and saying something doesn't seem quite right or I am a little bit concerned here. It's tied to our grading system.

What we've done with our stress tests is, on top of all of that process, we have said let's stress for drop in values by each community. I am not sure if we did rate. We did repayment risk, maturity risk, and valuation drops. We also did revenue drops at the property. Then what we do is we see if anything falls through the cracks in these screens, and then we go back and look if we've already seen it or not. In the cases where new things crop up, then we'll go and do a specific dive on that property. We're always doing a fair amount of stress tests, but think of it as a risk management tool that backs up our overall risk capture process.

With respect to the portfolio, that's a tough question. I have it on total loans, but I don't think that's what you are looking for.

Heather Wolf – UBS

I was looking just for the commercial real estate book.

Rene F. Jones

I just don't have it at my fingertips. I would guess the majority of our commercial real estate book, I would be surprised if, let me just say the majority of it is a fixed rate book. And the portion of it that is variable, a large percentage of that is actually has a swap against it. In essence, it's fixed. That was sort of one of the clear things that you saw when we were running the stress tests, that our exposure to movements in interest rates was relatively low, probably even lower than I thought.

Heather Wolf – UBS

Got it. That's very helpful. Thank you.

Operator

Your next question comes from Amanda Larsen – Raymond James.

Amanda Larsen – Raymond James

You mentioned that certain loan balances were down in the quarter due to more competitive pricing but that your footprint still compares favorably with the national average. Can you just comment on competition? I mean are some of your competitors that were ailing in 2008, 2009 stepping back up to the plate? Can you just comment on demand and how you expect to position yourself in the future for growth?

Rene F. Jones

We will start off, if you look at the Federal Reserve data, it's pretty telling both in terms of the decline in loan demand, the fact that it's across all categories, and the fact that it's consistent almost every single week. Start there with that knowledge, what we refer to is particularly is in the commodity like spaces with indirect auto, where, how do I say this? People aren't coming to us because of the M&T name. It's more the price when they go to the dealer. That's where we've actually seen the most competitiveness. I think because it's a two-year relatively very creditworthy asset, and it's easy for people to go after. We've seen price competition there.

I will point out that what I noticed that quarter in our commercial book, we keep pretty robust data on a summary of everything that goes to the committee in the quarter. When you look at it, the number of deals that went to our credit committee that quarter versus last really didn't change much. It was down a couple of deals. The total commitments that went to the committee was maybe up 5%. Even though there are fewer borrowers, they were borrowing a little bit more. And if you were to look at the margin on those, it did drop about 11 basis points, the sort of new origination margin.

What struck me is we also look at based on the grade and the structure and the collateral content of the deal. We have a risk-adjusted measure. The risk adjusted return on these deals went up. What that means is that the people we were extended credit to this quarter were structurally more sound and better rated credit on the whole. That's probably why the margin was a little bit lighter. I think you're seeing that because my guess is that there are very few people borrowing, and everybody is chasing those same individuals. It's a bit anecdotal, but that's my guess.

Operator

Your next question comes from Todd Hagerman – Collins Stewart.

Todd Hagerman – Collins Stewart

Good morning. I just want to follow up on your comments previously on the Reg E issue and deposit service charges. The core deposit growth again this quarter was quite good. I was just wondering if you could give us a better sense in terms of where M&T is in terms of kind of household growth and how that's factored in the number?

Then importantly, just kind of remind us of the split between kind of commercial deposits versus consumer deposits and whether or not there was any either pricing changes made in the current quarter or planned in the coming quarters as it relates to the pending Reg E changes?

Rene F. Jones

With respect to the deposits, I think the most robust percentage growth was in the DDA. What struck me this quarter is that I think we participated both on the consumer side as well as the commercial side. The past several quarters has been largely driven, sort of outweighed, by the commercial side. When I look, I will find it here somewhere, on the DDA, our consumer DDA was up an annualized 17% and our commercial DDA was up an annualized 6.8%. That combined for the 11% that we had talked about, both spaces.

Could you just re-ask your question again on the second part?

Todd Hagerman – Collins Stewart

Right. Just thinking about that, again, very positive growth coming from both segments. But M&T, again, kind of traditionally has been kind of overweight on the commercial segment versus its consumer franchise in terms of deposits. I am just thinking about in the Reg E and the change, how potential pricing changes may kind of roll through given the growth and whether or not there was anything in the first quarter above and beyond the core growth that you continue to see, and how we should be thinking about it in the coming quarters, whether there's any pricing changes?

Rene F. Jones

First of all, let's start, the Reg E regulation is consumer only, as I think you are pointing out. All of the sort of business side of things are not affected by that in any way, shape, or form. That part of the business, the commercial part of the business is much more a factor of what's happening with rates in my mind. I think people, because they've not yet started investing, they're holding on to a lot of cash.

But on top of that, much of the money that at one point was housed in the money fund has actually moved back into the bank. The people are not able to sort of get more than one basis point in the money fund. I think we'll see as part of the overall turn, if the economy turns, we'll begin to see, that's where you will begin to see it. You will begin to see it in behavior on commercial balances and movements there.

On the other side, again there's nothing really all that unusual in what we've seen so far in the consumer side. It's just too early to tell what the impact will be on the NSF thing because it depends on the behavior of the consumer, whether they decide to opt in or out.

Over the long term, it's not something that I worry about in the sense it's an industry-wide thing. Our job over the next two quarters is to educate our workforce so that they can educate the consumer and that we can have good customer service through this pretty big change in the industry. At the end of the day, people need banking services. We provide pretty good ones, pretty good service, so I think we'll come out fine.

Operator

Your next question comes from Christopher Nolan – Maxim Group.

Christopher Nolan – Maxim Group

Good morning. I have a quick question on Bayview earnings. The loss this quarter was down relative to the prior two quarters. Can you give a little color on that please?

Rene F. Jones

I think if you look at the components of the loss, the thing that struck me was the provisioning was the majority of our portion of the net loss. But not much else is going on there in terms of, there were no other sort of big write-downs or anything like that.

Christopher Nolan – Maxim Group

So looking forward for Bayview, should we sort of assume a $6 million loss run rate going forward or less or?

Rene F. Jones

You can assume what you would like, Chris. Think about it this way. To the extent that you have a balance sheet there and to the extent that you take provisions and those types of things, it could bounce around from time to time. I think past performance is what I tend to look to. It's been a little volatile and pretty lumpy because of the nature of what they do to the securitizations and securities that are on the books.

Operator

This concludes the question-and-answer session portion of today's conference. I will now turn the conference back over the management for closing remarks.

Donald J. MacLeod

Again, thank you all for participating today; and as always, if clarification of any of the items in the call or the news release is necessary, please contact our investor relations department at area code (716) 8425138.

Operator

Thank you. This concludes your conference. You may now disconnect.

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Source: M&T Bank Corporation Q1 2010 Earnings Call Transcript
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