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M&T Bank Corporation (NYSE:MTB)

Q2 2010 Earnings Call

July 21, 2010; 10:30am ET

Executives

Rene Jones - Chief Financial Officer

Donald MacLeod - Administrative Vice President & Director of Investor Relations

Analysts

Steve Alexopoulos - JPMorgan Securities

Ken Zerbe - Morgan Stanley

Bob Ramsey - FBR Capital Markets

Matt O’Conner - Deutsche Bank

Matthew Clark - KBW

Ken Usdin - Bank of America

Collyn Gilbert - Stifel Nicolaus

Al Savastano - Macquarie

Operator

Good morning. My name is Christine. I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank second quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session (Operator Instructions).

I’d now turn the call over to Don MacLeod, Administrative Vice President and Director of Investor Relations. Please go ahead, sir.

Donald MacLeod

Thank you Christine, good morning everyone. I’d like to welcome everyone to M&T second 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 from our website at www.mtb.com and by clicking on the investor relations link.

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

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

Rene Jones

Thank you Don, and welcome everyone. Thank you for joining us on the call today. I know that there have already been several earning calls this morning conducted by our peers, so you will certainly have a lot to digest. Let me cover the highlights briefly, after which I’ll your questions.

For the second quarter of 2010, diluted earnings per common share were $1.46, up from $1.15 in the previous quarter, and $0.36 in the second quarter of 2009. Net income for the recent quarter was $189 million compared with $151 million in the linked quarter and $51 million in last year's second quarter.

You’ll recall that our GAAP results for the second quarter of 2009 included $40 million of after-tax merger related expenses arising from the Provident acquisition. There were no merger related expenses in this year’s first or second quarters.

Our results for the second quarter of 2010 included after-tax expenses from the amortization of intangible assets amounting to $9 million or $0.07 per share. This compares with $10 million or $0.08 per common share in the linked quarter and $9 million or $0.08 per common share in the year-ago quarter.

Net operating income, which excludes the amortization of intangibles as well as the merger-related expenses in last year’s second quarter was $198 million for the recent quarter, up from $161 million in the linked quarter and $101 million in last year's second quarter.

Diluted net operating income per share was $1.53 for the second quarter of 2010, up 24% from the $1.23 per share in prior quarter and up 94% from the $0.79 per share in the second quarter of 2009. In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP to non-GAAP results including tangible assets and equity.

Turning to the balance sheet and income statement, taxable equivalent net interest income was $573 million for the second quarter, up 2% from $562 million in the linked quarter and up 13% from $507 million in the second quarter of 2009. The net interest margin expanded slightly during the second quarter rising to 3.84% from 3.78% in the first quarter of 2010 and was up significantly from 3.43% in last year's second quarter.

In comparing this year’s second quarter with the linked quarter, there were a lot of moving parts, but the six basis point increase could be simplified down to a few factors. More of our margin expansion came from the asset side this quarter. The higher average one-month LIBOR rate combined with higher prepayment penalties, some feels and interest received on pay downs and payoffs of non-accrual loans, all contributed to an eight basis point increase in the loan yield as compared with the linked quarter.

This was dampened by higher wholesale funding costs, also primarily driven by higher one and three months LIBOR rates. There was also a modest negative impact from a one additional day in the quarter.

Our comments earlier this year indicated a stable outlook for the net interest margin from the first quarter levels with a small bias to the upside. That outlook was based on the forward curve, which indicated action by the Fed to increase short-term rates in the second half of the year. What we saw during the second quarter was no action by the Fed, but nevertheless an increase in short-term LIBOR rates in the marketplace, which led to slightly more upside in the margin for the quarter, given our asset-sensitive position.

As for the balance sheet, average earnings assets declined by $520 million or about 3.5% annualized as compared to the first quarter of 2010. A $203 million increase in investment securities was more than offset by a $670 million decline in average loan balances. On an end of period basis, total loans for this year’s second quarter declined by $383 million. The majority of that decline resulted from the pay down, payoff, charge-off or foreclosure of non-accrual loans during the quarter, which I’ll discuss in more detail in a moment.

Overall, the 3% annualized decline compares slightly favorable to the annualized 3.8% decline for the entire banking sector as indicated by the Fed’s AJ reports for the second quarter. On the same basis by category, commercial and industrial loans declined by $203 million on a annualized 6%, commercial real estate loans declined by $111 million or 2%, consumer loans declined by $134 million or 5% driven primarily by lower indirect auto lending, while residential real estate loans grew by $65 millions or 5% annualized.

Growth in core deposits also continued, but at a slower pace. Average core customer deposits in the second quarter, which excludes foreign deposits in CDs greater than a 100,000 increased by an annualized 4% from the first quarter, and included 10% annualized growth in demand deposits.

Turning to non-interest income, non-interest income was $274 million for the recent quarter, up from $258 million in the linked quarter. The recent quarter’s results included $22 million of securities losses compared with $26 million in the prior quarter. The securities losses for the recent quarter included $12 million of other than temporary impairment charges related to the American Depository Shares or ADSs of Allied Irish Banks.

Prior to its acquisition by M&T in 2003, Allfirst granted equity compensation to certain employees, which was linked to the U.S. ADS for our Allied Irish Banks. As a hedge against this obligation, Allfirst owned the ADSs directly at the time of the acquisition by M&T. The securities are held and M&T is available for sale securities portfolio and had previously been marked to fair value in accordance with GAAP. This quarter’s action recognizes the other than temporary nature of the loss in value.

Mortgage banking fees were $47 million for the quarter compared with $41 million in the linked quarter. Origination volumes were up 12% during the quarter, reflecting in part the near record low interest rates, gain on sale margins remain relatively wide.

Service charges on deposit accounts were $129 million during the recent quarter compared with $120 million in the linked quarter. The increase reflected a return to normal levels of activity following seasonally low levels we experienced in the first quarter. M&T share of operating results in Bayview Lending Group or BLG, was a loss of $6 million unchanged from the linked quarter.

Turning to expenses, operating expenses, which exclude the amortization of intangible assets and merger related expenses were $461 million compared with $473 million in the linked quarter. Recall that the first quarter results included seasonally high compensation and benefit expenses, which declined over the remainder of the year.

Our operating expenses for the second quarter of 2009 were $482 million and included $33 million special one-time FDIC assessment. This year’s second quarter results included a $2 million addition to the impairment allowance for capitalized mortgage servicing rights, compared with no charge to the valuation allowance in the first quarter. Last year’s second quarter results included a $13 million reversal of the impairment allowance.

Excluding the impact of changes to the impairment allowance, as well as the special FDIC assessment from operating expenses in the second quarter of 2009, operating expenses actually declined by $3 million or 1% on a year-over-year basis. The efficiency ratio which excludes securities gains or losses, as well as merger related items and intangible amortization was 53.06% in the second quarter of 2010, improved from 55.8% in the linked quarter, which included the seasonally high compensation and benefit expenses that I mentioned earlier.

Next, let’s turn to credit. Overall credit trends continue to be positive. Non-accrual loans declined to $1.09 billion or 2.13% of total loan at the end of the recent quarter, down $250 million from $1.34 billion or 2.60% of total loans at the end of the previous quarter.

During the second quarter, our largest non-performing loan was reclassified to foreclosed assets. The net result of this action was $104 million reduction in non-accrual loans and then $98 million in the foreclosed property. The difference, of course is charge-off reflecting the appraised value, less the cost of disposition of that property.

The non-performing asset ratio, which is a non-performing assets divided by total loans, plus real estate and other foreclosed assets was 2.50% as of June 30, 2010, improved from 2.78% at March 31.

Net charge-offs for the second quarter were $82 million dollars, down from $95 million in the first quarter of 2010. Annualized net charge-offs as a percentage of total loans were 64 basis points, improved from 74 basis points in the linked quarter. Net charge-offs for commercial and industrial loans were $13 million in the second quarter, down from $18 million in the linked quarter.

Net charge offs for residential builder construction loans were $17 million for the recent quarter compared with $22 million in the prior quarter. Charge-offs for all other commercial real estate loans were $15 million including $7 million charge related to the property that I mentioned earlier, and that all compares with $8 million of charge-offs in the first quarter for all other real estate.

Net charge-offs on residential real estate loans were $13 million in the second quarter, down from $15 million in the linked quarter, and net charge-offs on consumer loans were $24 million in the second quarter, compared with $31 million in the linked quarter. The provision for credit losses was $85 million for the second quarter compared with $105 million in linked quarter. The allowance for loan losses increased to $895 million as of the end of the second quarter.

The ratio of allowance to credit losses to legacy loans, which excludes acquired loans, which were marked-to-fair value at acquisition, was unchanged at 1.86% as compared with the linked quarter. The loan loss allowance as of June 30, was 2.7 times annualized net charge-offs for the recent quarter and 2.5 times annualized net charge-offs for the first half of 2010. Put in another way, the allowance at the end of June was sufficient to absorb more than two and a half years of net charge-offs at our annualized loss rate.

We disclosed loans past due 90 days, but still accruing separately from non-accrual 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.

Loans 90 days past due were $203 million at the end of the recent quarter, of these loans $188 million or 93% are guaranteed by government related entities. Those figures were $203 million and $195 million respectively at the end of March. M&T’s tangible common equity ratio was 5.75% at end of the second quarter, an increase of 32 basis points from 5.43% at the end of March.

Turning to our outlook, while we continue to see improvement across most of our business segments, the pace of economic growth recovery remains low and customers are managing their financial position conservatively. This is reflected in the modest demand for loans and the continued growth in deposits. Our outlook regarding the full year net interest margin for 2010 is still consistent with the view we expressed on the January earnings call and that seems to be holding up which is to say, we’d be surprised if the full-year margin was much higher than 380 to 385.

We’ve seen signs of improvement on the credit side and virtually all of our portfolios. One is attempted to be optimistic regarding the charge-offs in non-performing asset formation, however the economy is turning around slowly, unemployment remains very high and we are still at a point where a single large credit relationship can cause an increased in the net charge-offs, despite generally improving trends.

I know many of you are also wondering how the new overdraft rules will impact us, since we haven’t reached the changeover date for most customers, it’s still too soon to say exactly what the impact on our revenues will be. We’ve been engaged in a fairly robust outreach program to our customers, particularly those who are frequent users of overdraft services. Generally, of those who you’ve spoken to, more customers are opting in that not with slightly higher opt-in rates for frequent users. However, I wouldn’t be surprised if we saw a decline in our service charge revenue of 10% to 15% in the third quarter.

As to the longer term, we continue to have a positive view on the deposit business generally and are continuing to spend and invest to enhance our product offerings around deposits and payment services. The combination of these last two factors makes it difficult to see near term improvement in our efficiency ratio and that said, we’ll continue to manage the bank as we always have, scrutinizing discretionary, spending closely and seeking opportunities to transform our processes so as to improve efficiency ratio over time.

Of course, all of these projections are subject to a number of uncertainties and various assumptions regarding nationals 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’ll now open up the call to questions, before which Christy will briefly review the instructions.

Question-and-Answer Session

Operator

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

Rene Jones

Good morning, Steven.

Steve Alexopoulos – JPMorgan Securities

Good morning, Rene. There’s a topic that’s been in the press recently. I guess we typically don’t hear one company comment publicly that they are just in the merger with another company. But, I’m sure you saw that the Vice Chairman of [Inaudible] appeared to comment directly on interest in a merger with you guys. Just curious, could you comment on this and indicate your interest level. What it is you might look for in a potential transaction with them?

Rene Jones

Steve, you know from time to time, and I guess sometimes frequently over the last couple of years we’ve seen speculation in the media to what M&T may or may not do, and as you well know as a result, we sort of maintain a long standing policy of not commenting on media reports. So, that’s not going to change today.

If your question is about how we think about M&A, I mean, it’s pretty well documented. Our thought process is that we tend to not do anything that doesn’t put the pre-existing M&T shareholders first and we focus on trying to big in the markets that we serve. A lot of times, that means we want to be in adjacent markets, but in no way or shape we want to be in a market in a small way, but other than that, other than general comment there is not much more I can expand on your question.

Steve Alexopoulos – JP Morgan Securities

Okay. I know you typically wouldn’t comment on rumors, it seemed to be a little more direct than I guess just a media report, but maybe a change in direction, looking at the AIB stake, Rene would you guys disclose if you did refuse the sale of the stock to a single buyer? I’m just curious if you did see them selling any stock in the quarter?

Rene Jones

Well, I mean the shares would have to be registered. So we’ve addressed that before. So I mean I would guess that, I think generally most of the questions related to AIB are best directed towards AIB, especially since they’ve kind of said that they are going to do something by the end of the year. So, there is still six months left, but one technical step in the process is that the shares would have to be registered. So it’s not as if you’d see something dribbled out without seeing a registration statement.

Steve Alexopoulos – JP Morgan Securities

If you guys refuse to sell to a single party, would that be disclosed by you guys or not necessarily?

Rene Jones

I’ve never even thought about it.

Steve Alexopoulos – JP Morgan Securities

Okay. Maybe just one final one. Could you size the, maybe debit interchange fees at risk from this new regulation?

Rene Jones

Well, we haven’t disclosed our debit interchange fees per se, and I guess part of it the, all of the debit, well I’m sorry new topic. I don’t know, do we have that out there?

Donald MacLeod

No. Because, we are still waiting for rule making and we don’t know what the rules will be. It’s virtually impossible to quantify at this time.

Rene Jones

And it’s just too far away. I was getting confused with the NSF thing, but yes that’s just too far away and we’ll probably have more on that as we get closer, but that could be as much as a year out before we find something out.

Steve Alexopoulos – JP Morgan Securities

Fair enough. Thanks.

Rene Jones

Sure.

Operator

Thank you. Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe – Morgan Stanley

Just actually going back to your comments on the NSF/OD, there is 10% to 15% decline in deposits and service charges that you mentioned, just to be clear on that, I’m assuming that you’ve not sort of pre-opted in all of your existing customers as of July 1, some banks have and then if that’s the case, should we expect sort of a 20% to 30%, sort of two quarter decline in fourth quarter?

Rene Jones

Okay. It’s a good question, Ken. I mean, well I don’t know about pre-opted in. So, the way I understand it is that unless the customer opts in there, they are out. So, what you’ve got is on July 1, for new customers, the new rule kicked in and then you go for the remaining customers that occur on August 15.

So, if you think about what the process is, is it really for us anyway a massive outreach program where we are calling customers, asking if they understand the services, and what you’ve seen is we are pretty pleased with the percentage of customers who we actually get a hold of, who actually opt in and then, you are right, you get a normalizing effect as you get to the fourth quarter, but remember, because the customer opts, if you don’t contact them, they actually opt out.

There is probably only upside as you move beyond the fourth quarter, right. So, it’s so hard to tell because what will likely happen is somebody who we tried to contact and couldn’t get a hold of will not have noticed the change in payment behavior, and because what we are finding is that the majority of people who we do speak to understand the service and are saying, yes, okay I’ll opt in, I think you get some sort of normalizing effect starting post-August 15 which is a positive factor.

So, it’s really, really hard to tell. I mean, technically you’re right; you are going to get more of an effect in the fourth quarter, but you are not necessarily considering everything, so it’s hard to say.

I’d also point out that the transaction volume was up, when you look at second to third and when you look at year-over-year second quarter. So, that’s the other piece that’s pretty hard to predict.

Ken Zerbe – Morgan Stanley

Okay. Yes, I guess I was referring to CBSH that basically opted out everyone as of July 1, unless you would explicitly opted in. They weren’t waiting until August 15, but I understand, it’s hard to tell right now. The other question I had, just maybe you can provide some comments on your capital position given that the rules are changing on how regulators you trust preferred. I know we got a few years ago before we see any big changes, but I think that doesn’t impact you guy a little more materially than some of the other banks?

Rene Jones

Yes. Ken a couple of things on capital. I mean, I think one; we are very pleased with where our capital is and where it’s headed, and we often sort of get labeled as having, being on the lower end of the peer group. But I mean, if you look at the Texas ratio, which compares to non-performing loans or if you look at charge-offs, because of restrictive nature, we are very well capitalized.

Then, as you sort of get to the new regulations, which we’ve been all sort of waiting to hear about, I mean what we really heard doesn’t help us much because what it told us is one form of capital that we use which is regulatory capital is now going to be disallowed in the future, but what we don’t know is how much core common equity we need, and as you follow the bank for a long time, every decision we make is on tangible equity.

So, we don’t really know more than we knew before, but what we are very pleased with is just the capital generation rate of M&T has really never stopped, right and so we are generating capital very quickly and as you start to think the time that it will take to actually change the regulations, I’d be surprised if capital is just not sort of one of the things that we are worried about today.

Ken Zerbe – Morgan Stanley

All right, great. Thank you.

Operator

Thank you. Your next question comes from the line of Bob Ramsey with FBR Capital Markets.

Bob Ramsey - FBR Capital Markets

Thank you. Hey, good morning. I appreciate the color on the improvement in non-performing loans, particularly in that one large loan. Could you just maybe tell us what type of loan that was and talk about some of the other improvement you are seeing, given that that was less that half of the overall improvement in M&T has of non-performing loans?

Rene Jones

Yes, sure. Let me just grab some data, but then I’ll just first describe. The loan that we took was the one we mentioned in the recent quarter. I can’t remember whether it was last quarter or two quarters ago, but it was our Manhattan property and we had talked a fair amount about that property, and so we are just moving it through the process, right nothing new real there.

Other than the fact that, as we talked about, when you charge that down and move, you can kind of see that the loss content is low and it’s probably characteristic of what we have in the portfolio.

Then much of the rest were actually pay down. So, we had a $100 plus million of loans that were non-performing previously that just paid down, and they sort of fell in several categories. Do give me one second, I have a sheet here somewhere, yes, so if you kind of look through C&I accounted for maybe $77 million of the drop quarter-over-quarter, commercial real estate was $170 of which $100 was that one credit and we also saw in the consumer side was down as well with no change really in residential real estate, maybe $3 million up, some small number.

So generally, we saw positives across the board and a lot of the improvement came from pay-offs and pay-downs. Why that’s important to me is the drop that we are seeing in our loan balances is on loans that aren’t paying us. So, it’s a fact that’s also contributing to the higher margin, right. So it’s a net positive.

Bob Ramsey - FBR Capital Markets

Right. And could you also touch on sort of way you are seeing in terms of loan demand out there. Obviously, you said that the payrolls contributed to the loan contraction this quarter, just sort of net-net you think about performing loans. Are you are seeing much of any demand out there?

Rene Jones

I mean most of the trends on; let’s start with C&I. I mean we see a lot of people that are not utilizing much of their lines. We had in Mid-Atlantic a number of customers who have sort of low cost lines. They went unutilized in the quarter. It’s not as if we actually see much of a drop in demand or change, but it just hasn’t gotten any better and I would say that’s pretty much across the Board, which is interesting because we tend to get a lot of questions on our capital and what we are thinking about capital.

The reality is, is that the market is really flush with capital from all the issuances. The market’s also flushed with liquidity relative to the past, but customers just are not necessarily having great demands for borrowing. So, probably more important than the volume of loans which we really can do much about is that you are beginning to see competitive pressure on pricing.

So, I think that’s probably the biggest story out there, but no change in demand I guess is probably the way I would put the loan side.

Bob Ramsey - FBR Capital Markets

Okay. Great. Thank you very much.

Operator

Thank you. Your next question comes from the lines of Matt O’Conner with Deutsche Bank.

Rene Jones

Hi Matt.

Matt O’Conner - Deutsche Bank

Hi Rene. If I could just follow up on the charge-offs coming down so much, I mean they are very impressive low level pears and obviously the decline in non-performers, it doesn’t seems like there is a lot of lost content maybe from what you can see, but I did just want to try and get a sense of what your outlook is on the charge-offs.

I can appreciate things can be lumpy, but just based on what you’re seeing in the portfolio right now, is this kind of be reasonable starting point going forward?

Rene Jones

I don’t know, in my mind, somehow I’m thinking of using rolling averages. I mean, you know the positive is that that almost every category improved linked quarter basis, the ones that didn’t were flat, and I would say that I’m not surprised on the consumer side. We’ve been talking a fairly long time about the fact that we got in front of losses on the residential mortgages and the fact that the way our vintages fall on indirect auto and those types of paper that we would have expected to see improvement over time.

I think the trend generally is positive. I just think that you could still get a fair amount of lumpiness. So, I don’t know that I would pick any one quarter as a starting point, but I might look at the general trend over several quarters and think about it from that perspective.

Matt O’Conner - Deutsche Bank

Okay. That’s fair. And then just separately, the OTTI or the security of losses, those continue to trend down, how should we think about that going forward?

Rene Jones

Yes, if you sort of move out sort of the AIB shares out of that discussion, the OTTI charges were down this quarter, maybe $10 million, last quarter they were 26 and the thing that we saw in March, April timeframe was a big improvement in the roll rates, in the 30-day plus roll rates.

So, people were migrating in the right direction and more people were paying. So that was a positive trend and I think that’s what we’re going to have to watch, I think that the extent that that tolls up it would be great, but as you know you just don’t hear a lot of great news around the consumer improving, they are not getting worse, but if that were to happen maybe we continue to have some charges, but if things were to stay down in terms of people continuing their payment patterns being on a positive basis in terms of delinquencies, I think we are pretty pleased. In that respect, we think that the overall risk is kind of low.

Matt O’Conner - Deutsche Bank

Okay. All right. Thanks, Rene.

Operator

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

Rene Jones

Hi, Matt.

Matthew Clark – KBW

Hey good morning. Can you update us on your classified assets? I think last quarter you had mentioned that you saw about a $100 million improvement sequentially. I am just curious as to, is the migration there and then if you could update us on that 30 to 89 day bucket as well?

Rene Jones

Yes, they improved again by maybe, I don’t know $150 million. So, to me it looks like this is a third consecutive quarter of improvement in our classified assets, so very positive trend there.

I’m going to give you some numbers, but I recall that there’s been not much change in the level of delinquencies. I can run through some numbers, but when I look at the total consumer book, 30 day plus was around 1.6% this quarter, same as last quarter. A year ago, that was probably 1.59, so almost no change there, and then I guess overall we are up slightly overall, which means that we got a little bit more on the commercial side, much of which is driven by a number of residential development projects.

Remember, on the residential development projects, you are going to get stuff from the portfolios that we purchased, right. So, there are already marked to full value. So, much of stuff that was originally M&T we’ve dealt with, and I things that we acquired from Provident and from Bradford we’ve marked a fair value, but they still come through the delinquency report as the property is going to move through the process. So, it seems pretty quiet to me, I guess is what I’d say.

Matthew Clark – KBW

Okay. Great. And then as an extension to the question on capital with the accounts, I mean, has it always the TARP. Can you update us there on your view, the time of repayment and if you feel any increase in need to do it?

Rene Jones

There is no change. I mean, we would be happy to pay the TARP back, we don’t think we necessarily need it, but as you know especially just think with what just happened in terms of the new regulation, it just changes frequently and changes the thought process on what you might do and when you might do with the TARP. We think our capital ratios are flushed and so I think we’ll probably just wait and see.

Matthew Clark – KBW

Great. Thanks.

Operator

Thank you. Your next question comes from the line of Ken Usdin with Bank of America.

Ken Usdin - Bank of America

Hey Rene. Two quick questions, following on the positive comments about credit quality M&T delinquencies, its continuation of mobile trends. When do we start actually seeing the reserve come down, you actually did add to the reserve a little, but that seemingly was in contrast for all the positive news underlying and how much of that -- you answer the first one.

Rene Jones

Sure Ken. I mean, I guess, when you think about it over from a historical perspective, is a whole bunch of factors that you look at and I guess it depends on what happens typically if you are getting loan growth that doesn’t mean that you are necessarily releasing reserves, because the portfolio you have is you got new loans in and it needs the allowanced on cover that.

So, I think in my mind, its sort of, we are traditionally pretty conservative there. We’ll watch trends and I guess you’d have to see something like no return of loan growth or declines in loans and big improvements in classified assets, but my sense is that we’ll be pretty consistent with what we’ve been doing recently.

Ken Usdin – Bank of America

Okay, any designation of what model is that not reserved connected all, kind of a late fee on where capital has to be?

Rene Jones

I mean, our allowance is specifically related to the lost content that we see in our loan book, nothing else.

Ken Usdin – Bank of America

Right. Okay. My second question is just quick one on expenses, so typically second quarter expenses and versus the first is everywhere in this quarter, but do you think we do see second to third increase if I look back over the industry, is it back again this quarter or was there anything in the second quarter that was abnormal at all?

Rene Jones

I can’t think of anything…

Ken Usdin – Bank of America

I specifically meant on the salaries line, I am sorry.

Rene Jones

Oh yeah, no, little more days in the third quarter. So, you should see an uptake in salaries simply because of that fact, but there was nothing I can think of that was unusual in the second quarter in the salary lines. So, I would expect a small uptake in the salaries just given the number of days, pay days and so forth.

Ken Usdin – Bank of America

Okay great. Thanks a lot.

Operator

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

Collyn Gilbert – Stifel Nicolaus

Good morning, Rene, how are you?

Rene Jones

Great.

Collyn Gilbert – Stifel Nicolaus

Good. Just to take a step back and maybe ask two kind of big picture questions. You talk about loan demand and admittedly, there’s not a whole lot you all can do about that. As you think about the kind of the revenue drivers of your business and the pressure is obviously that’s down the pipe from the regulatory standpoint. Where is the focus of your organization, I mean where do you think the opportunity is to really build out the revenue base either in the near term or a long term?

Rene Jones

This are two spaces and the first one is we were really bullish on deposits. So, today, there is a lot of discussion about NFS and legislation and all of that, but at the end of the day, what I think we have learned especially from the crisis is the strength of the franchise is all about your deposit base. I think that’s probably also true when it comes to thinking about over long term period what your revenue growth looks like.

So, we have been spending and we’ll begin even more so to spend a lot on things that are related to deposit services, payment services because we think that sort of what you can -- it’s hard to grow much more than you grow than your deposit base without actually taking outsize risk on your loan portfolio.

So, if you keep your deposit base fine and nothing is happening there on the revenue side, I guess the economy can come back and you can lend more. I guess you can get more aggressive and risky and the types of loans you are lending and put more yield on and more volume, but as you see that doesn’t work, right. So, from our perspective, it’s all about the deposit.

The second thing is we don’t look at revenue growth. We look at revenue growth per share. So it’s why we are very conservative and thoughtful around how we treat our capital base, and you kind of see that today. I mean if think of the fact that we’ve been growing our capital overtime organically, had we done a big capital raise, now that there’s no demand for loans, that would be more of a hit to revenue growth per share than the actual loan issue, but today, when it comes back we’ll deal with it and if we need capital because we need growth for some reason, acquisitions, we’ll do that.

Collyn Gilbert – Stifel Nicolaus

Okay, that’s helpful. Then just on the M&A front, in terms of the market that you are seeing around you, are you seeing any change in the view point of the sellers, I mean kind of maybe give also your overarching view on consolidation and where we are in that cycle?

Rene Jones

I don’t know that I have any specific evidence of change in the views of the sellers, but I got to imagine that if the current environment stays the way it is today, I mean unless you’ve got really talented employees and you’re sort of very thoughtful about the way you’ve built your business, it’s just going to be harder.

Think about the idea again, people are flushed with capital and flushed with liquidity if demand doesn’t come back over the course of a year or so it doesn’t really matter to us, we’ll keep building our franchise, but to a lot of people that’s the pretty tough environment when you compound that with the new regulations and so forth.

I got to believe overtime, there will be an acceleration of consolidation in the industry.

Collyn Gilbert – Stifel Nicolaus

Does that change the way you are behaving now or forget about consolidation today given what you might see 12 months out?

Rene Jones

No, I don’t think so.

Collyn Gilbert – Stifel Nicolaus

Okay. Okay. That’s all I had. Thanks.

Rene F. Jones

Sure.

Operator

Thank you. Your next question comes from the line of Al Savastano with Macquarie.

Al Savastano – Macquarie

Good morning guys, how are you?

Rene Jones

Morning

Al Savastano – Macquarie

Just checking to see if you have changed your loan growth or running asset, growth assumptions for 2010 versus what you said in the beginning of the year?

Rene Jones

If I say nothing, is that an answer? I don’t know. I don’t know I mean I would say that the decline we saw in the second quarter was lower than what we saw in the first so it seems to be trending in that direction but timing, who knows, right? Not much change in our overall outlook there yet.

Al Savastano – Macquarie

Okay, then can you talk about pipelines from your commercial customers in terms of discussions, in terms of if they are going to start borrowing again?

Rene Jones

Yes, I mean when I answer your first question it sort of comes from there and don’t see big changes in our pipelines and I think we would start to, if we were going to see it in third quarter we would probably be able to tell you that we’d see changes in our pipeline, but there hasn’t been much it’s very quiet. It makes me think that it could be sometime before we get a noticeable turn in loan demand.

Al Savastano – Macquarie

Great. Thank you.

Christine

Your final question comes from the line of Amanda Larsen - Raymond James.

Amanda Larsen – Raymond James

Hey, Rene.

Rene F. Jones

Hey, Amanda. How are you?

Amanda Larsen - Raymond James

Very good, thanks. I was wondering about your Canada branch and how that’s going? Is it ahead of schedule for loan and deposit gathering and what you expect for origination volumes in the loan side there?

Rene Jones

I don’t have the volumes that we expect, but I mean I think first feed is we actually got it done. I’m very pleased with that. It’s something that we wanted to do for a long time. We have a number of Canadian customers that we service over time, but this is the first time, based on sort of change in the rules and the appetite over there that we are actually able to sort of set up an office, but everything is on track.

I think quite frankly when you take that and then you add in the fact that this quarter we launched our credit card offering which is sort of a return to the credit card business from 12-years ago, you can kind of get a sense for the types of things that we are doing at M&T with sort of all normal business and we are making decisions that will help us grow the franchise over time.

Amanda Larsen - Raymond James

Alright. Thanks so much.

Christine

Thank you. I’ll now turn the call back over to Mr. McLeod for closing remarks.

Donald McLeod

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

Operator

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

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Source: M&T Bank Corporation Q2 2010 Earnings Call Transcript
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