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M&T Bank (NYSE:MTB)

Q1 2011 Earnings Call

April 18, 2011 1:30 pm ET

Executives

Donald MacLeod - Vice President and Assistant Secretary

René Jones - Chief Financial Officer, Executive Vice President, Chief Financial Officer of M & T Bank and Executive Vice President of M & T Bank

Robert Wilmers - Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of the Board of M&t Bank and Chief Executive Officer of M&t Bank

Analysts

Todd Hagerman - Sterne Agee & Leach Inc.

Craig Siegenthaler - Crédit Suisse AG

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

L. Erika Penala

Kenneth Usdin - Jefferies & Company, Inc.

John Pancari - Evercore Partners Inc.

Gerard Cassidy - RBC Capital Markets, LLC

Marty Mosby - Guggenheim Securities, LLC

Bob Ramsey - FBR Capital Markets & Co.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

Unknown Analyst -

Steven Alexopoulos - JP Morgan Chase & Co

Ken Zerbe

Operator

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank First Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now turn the conference over to Don MacLeod, Director of Investor Relations. Please go ahead.

Donald MacLeod

Thank you, Melissa, and good afternoon. This is Don MacLeod, and I’d like to thank everyone for participating in M&T's First Quarter 2011 Earnings Conference Call both by telephone and through the webcast. If you've not read the earnings release we issued this morning, you may access it along with the financial tables and schedules from our website, www.mtb.com, and by clicking on the Investor Relations link.

Also before we start, I 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.

René Jones

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

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

Turning to the specific numbers. For the first quarter of 2011, diluted earnings per common share were $1.59, unchanged from the prior quarter and up 38% from the $1.15 in the first quarter of 2010.

Net income for the recent quarter was $206 million, compared with $204 million in the linked quarter and $151 million in last year's first quarter. M&T's results for the first quarter include the impact of a repositioning of our balance sheet, leading up to the merger of Wilmington Trust. During the recent quarter, M&T sold investment securities, predominantly including $484 million of agency pass-through securities, resulting in an after-tax gain amounting to $24 million or $0.20 per common share.

As we included in our November 1, 2010 investor presentation announcing the Wilmington deal, we have targeted post-closing capital ratios at a level that will approximate those in place as of September 30, 2010, before announcement of the deal. Also included in our GAAP earnings for this year's first quarter was after-tax expense from the amortization of intangible assets amounting to $7 million or $0.06 per common share. This compares with $8 million or $0.07 per common share in the linked quarter and $10 million or $0.08 per common share in the year-ago quarter.

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

Net operating income, which excludes the amortization of intangibles as well as merger-related items, was $216 million or $1.67 per common share for the first quarter of 2011, compared with $196 million or $1.52 per common share in the linked quarter and $161 million or $1.22 per common share in last year's first quarter. Excluding the securities gains I just mentioned, net operating income was improved by 20% from the year-ago quarter.

In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.

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

Next, I'd like to cover a few highlights from the balance sheet and the income statement. Taxable equivalent net interest income was $575 million for the first quarter of 2011, up 2% from $562 million in the first quarter of 2010. But due to a lower day count, down from $580 million in the linked quarter. The net interest margin widened during the first quarter, averaging 3.92%, an increase of seven basis points from 3.85% in the sequential quarter. Five basis points of the improvement came as a result of the lower level of money market assets in the first quarter as compared with the fourth quarter. Recall that in the fourth quarter, we had an average of almost $800 million of reversed repurchase agreements on the balance sheet to collateralize the seasonal inflow of municipal deposits. The low yield on those balances had a downward impact on the net interest margin in the fourth quarter. Those balances were virtually zero in the first quarter. Our use of reverse repurchase agreements will fluctuate from time to time based on seasonal levels of municipal deposits which require authorization.

The day count of 90 days in the first quarter versus 92 days in the linked quarter accounted for an approximate three basis points increase in the margin as well.

As for the balance sheet, average loans in the first quarter increased by approximately $830 million, for an annualized 7% to $52 billion compared with the fourth quarter. This reflects the surge of lending activity which came on late in the fourth quarter and which wasn't fully reflected in the average loans for that quarter. On an end-of-period basis, loans grew by $128 million or 1% annualized. Compared with last year's fourth quarter, changes in end-of-period loans by category were as follows: Commercial and industrial loans grew by an annualized 13%. This reflects continued demand by auto dealers to finance inventory. This is consistent with the stronger demand for automobiles noted recently in the business press. All other C&I loans grew an annualized 11% -- at 11% annualized rate reflecting the improved demand across various industries and regions.

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

Consumer loans declined by an annualized 9%, reflecting the lower level of indirect auto loans, as well as weak demand for home equity loans and lines. Residential real estate loans grew an annualized 16%, reflecting a $425 million increase in mortgages held for investment since year-end and an $811 million increase since September 30 of 2010. These increases were the result of a decision we made at the end of the third quarter to retain a higher proportion of our conforming mortgage originations. In light of the growth we've seen in C&I lending and also as part of our actions to position the balance sheet in advance of the merger, late in the first quarter we decided to resume selling the majority of our conforming mortgage production to the agencies. We continue to see a favorable mix shift with core deposits replacing wholesale borrowings. Within core deposits, we're also seeing a favorable mix shift with non-interest bearing deposits replacing time deposits. Demand deposits as of March 31 increased an annualized 18% from December 31 of last year.

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

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

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

Turning to expense. Excluding merger-related expenses and the amortization of intangible assets, operating expenses were $483 million for the first quarter, compared with $455 million in the fourth quarter of 2010. The first quarter's results included higher compensation expense, reflecting seasonally higher salary and benefits costs, which include the accelerated recognition of equity compensation expense for certain retirement-eligible employees, as well as higher FICA expense, unemployment insurance expense and expenses related to the 401(k) match. In aggregate, the expense from these items was some $23 million higher than in the linked quarter. This is consistent with our experience in each of the past 5 years.

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

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

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

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

The ratio of allowance for credit losses to legacy M&T loans which excludes the acquired loans against which there's a credit mark was 1.81%, down slightly from 1.82% in the linked quarter. The loan loss allowance as of March 31, 2011 was 3x annualized net charge-offs for the recent quarter.

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's a lower risk of principal loss. Loans 90 days past due worth $264 million at the end of the recent quarter. Of these, $215 million or 81% are guaranteed by government-related entities. Those figures were $270 million and $214 million, respectively, at the end of December.

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

Turning to our outlook. As I noted at the beginning of the call, the trends for the quarter are generally in line with what we've seen over the past three to four quarters. Loan demand overall appears to be improving, although it's stronger on the commercial side. Deposit flows are continuing. The net interest margin is relatively stable and the credit continues to improve. In light of this, we don't see anything to alter our outlook for the remainder of the year. If events play out as we expect, we'll close the Wilmington Trust merger sometime this quarter. And this will likely result in the net interest margin for the combined company to be slightly lower than the stand-alone M&T.

In addition, we'll have a larger portfolio of impaired loans in the run-off mode, which may subdue reported loan growth for the combined company. Of course, all these projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth, changes in interest rates, political events and other macroeconomic factors which may differ materially from what actually unfolds in the future.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Matthew Clark of KBW.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

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

René Jones

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

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

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

René Jones

I guess you kind of asked the question that's on everybody's mind. For myself, I guess, we would have hoped to have been able to sort of talk about the fact that we had approval for the deal at this point. But I think these things are just taking a little bit longer than we expected. But once we do that, as we've said before, once we understand where we are with the Wilmington transaction and then, we would be able to sort of address questions on the whole capital structure of the bank and what we need to do, TARP and those types of things. So once we get through this first step, I think we'll be able to say more on that. We don't see anything that -- we've answered all the questions. We think we're -- we would be -- we would guess that we would hear something relatively soon, we just haven't heard yet.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

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

René Jones

Yes. I mean, I guess the one thing that Don and I had been saying for several quarters is that we think that our credit picture would be somewhat lumpy. And I think that that's probably still the case, but I guess one change that we see is that as we look at our classified loan books and relative to a year ago or maybe even 18-months ago, the size of the credits are smaller that we've been dealing with. So I do think that's one nice sort of bit that as you get into a space where you look at your -- not the size of your classified loan book, but the size of the individual credits, it becomes a little bit more predictable. So if that helps.

Matthew Clark - Keefe, Bruyette, & Woods, Inc.

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

René Jones

Yes, I mean, so we won't -- because we're putting this in our Q, we'll have to give a final number there. But they were down, I would say somewhere in the neighborhood of $100 million or maybe a little bit more, so that was encouraging. I think the other thing that was encouraging was that when you kind of looked at where the improvement came from, it didn't come from one sector of the economy. You saw improvements in transportation, a number of transportation companies. You saw, obviously, some improvement in real estate and development which was -- those were more from things that we did to work out the process. But also media-related companies, consumer, retail companies. So it was actually nice to just kind of look through the classified loan book by client and type of industry, and you got some sense that the improvement wasn't sort of just centered in one space.

Operator

Your next question comes from Steven Alexopoulos of JPMorgan.

Steven Alexopoulos - JP Morgan Chase & Co

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

René Jones

Well, yes. The time we did -- at the time that we had the announcement, you described that pretty well, so we were November 1. What we provided in that presentation was, just to be clear, was our expectation of credit losses over the life of the loans. So we didn't do a mark. We didn't have an interest rate mark in all that in there. And then what we did is we went back and I think we spent another 11 or 12 days in the month of December and we took another look and sort of set everything up, but we didn't see any change in our expectations, really, at that point in time. So what we've been doing ever since is just watching as Wilmington goes through their process, we're able to look at, for example, at what they charge off and try to get some sense of whether those are the same credits that we saw -- that we would have predicted would've had some difficulty. And I would say we haven't had any big material change in what we're thinking. Obviously, they had a fair amount of charge-offs in the fourth quarter and so that's a little accelerated. But in terms of total content, there's nothing, really, that we've seen that's materially different.

Steven Alexopoulos - JP Morgan Chase & Co

I mean, regarding your comments that we should expect capital ratios post-Wilmington deal to be somewhere where they were before you announced it, should we be focusing more on regulatory capital ratios, PCU ratio? Just where should we be focusing on that?

Robert Wilmers

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

Steven Alexopoulos - JP Morgan Chase & Co

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

René Jones

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

Steven Alexopoulos - JP Morgan Chase & Co

Yes.

René Jones

I don't know. I think our margin outlook is very stable. I think you're right on the liability side. The thing that we have seen, though, is we've actually been able to continue to eke out small improvements, in part because the time deposit portfolio is repricing. But also, wholesale rates have been down, right? They've been markedly down. But I think the other thing when I step back and look at the margin as a whole, for a very, very long time, we had put on loans and replacing run-off that we're at a much higher margin. And then I'd say, the peak of that was probably somewhere around the first to second quarter of 2009. And since that time, from a match-funded basis, we've put on a fair amount of loans, right? At a much wider margin that was embedded in the existing portfolio already. So you kind of see there's no shrinkage of the asset side in terms of yields, but I think our margin's going to be pretty stable for a while, sans the Wilmington transaction.

Operator

Your next question comes from Erika Penala of Bank of America, Merrill Lynch.

L. Erika Penala

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

René Jones

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

L. Erika Penala

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

René Jones

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

L. Erika Penala

Okay, and in terms, I guess to just not talk about...

René Jones

Erika, let me just go back. If you go back over time, we've been very consistent, right? As you go back with the -- as we look at where we think we're going to head, we make our estimates. And so generally, without some event happening, we tend to do a pretty decent job of sort of managing to what we say. The biggest issue you saw there is why -- that's one of the reasons why we repositioned some of the securities portfolio, right? To sort of manage to those levels.

L. Erika Penala

And just trying to figure out what the tail risks could be on the credit side, how has the re-default rate on your loan modification portfolio been trending?

René Jones

We have talked about for a very long time that when you compare our statistics to what you get in the OCC's sort of nationally published statistics, that actually has fared pretty well, and that hasn't changed. So for example, one second, if you look at our total re-default rate, just got to make sure I'm looking at the total loans here, that from 2008 to 2010, it would be something like 35%, 35.2%. And then if you look at non-agency and then if you do a comparison to sort of with the OCC, for example, and we take various quarters, right? So if you look at the average of the quarters from '09 through the second quarter of 2010, so those are seasoned, we would be -- we'd be at 25% versus the -- I'm sorry, we'd be at 10% versus the OCC at 25%. And that's just after 6 months of experience. So very much the same as what we've been tracking before. The absolute numbers, I think, are up a little bit, but still very good in comparison to what the national averages seem to be.

Operator

Your next question comes from Craig Siegenthaler of Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG

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

René Jones

I mean, I guess it all depends on what happens with rates. But if rates were to stay flat, right, then it's hard to find a lot of catalysts for margin expansion, right? And the thing that I said then and that I still believe is if you were going to show outsize loan growth, demand is picking up, for example, in the C&I space. But for anybody to produce outside loan growth, I think there's a fair amount of pricing competition there and you might actually begin to see some margin compression. The only exception to that is if somebody has a boatload of securities sitting on their books and they're repricing it too. But for a relatively balanced portfolio, I think it would be hard to create margin expansion today.

Craig Siegenthaler - Crédit Suisse AG

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

René Jones

Well, what we said back in January is that we thought that our net interest margin for the full year of 2011 wouldn't be materially different from what it was in 2010. And I think we're still there. I think that if I look at where we are at in the quarter, maybe it's a little stronger than I had, had thought. And then when you bring in Wilmington for half a year, let's say, that's going to have some dampening effect. But again, I don't expect it to be all that material. Having said that, when we sit here talking about the third quarter, we'll get a better picture of what the run rate is, right, from the impact of Wilmington. And that could be down some. So we'll have to take a look and see.

Craig Siegenthaler - Crédit Suisse AG

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

René Jones

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

Operator

Your next question comes from Ken Zerbe of Morgan Stanley.

Ken Zerbe

Great. Thanks. Just a question in terms of reserve release. Obviously, M&T's run at a fairly high level of reserves, consistently over the last many years. When you think about the environment going forward and kind of where you are now, how much leverage do you have to potential reserve release excluding the impact of Wilmington, of course? Or are you kind of already there? Thanks.

René Jones

Well, yes, sure. I mean, I think two things. I think we summed it up as best we could in the press release is that while we've seen signs in our book that there's some improvement, it's hard to ignore the fact that relative to the last 20 years, we're at an all-time high in our non-performing book, and I would guess as well in our classified book. So when you look at that, you saw some turnaround mid-last year and people were asking, "Was that the turnaround?" And then we actually had a couple of upticks, right? And now we're coming down a little bit. So I think that we're cautiously optimistic, but to noticeably take the allowance down when you're at an all-time high somehow just doesn't seem to make much sense to us at all.

Ken Zerbe

No, I would agree. I guess, maybe then...

René Jones

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

Ken Zerbe

No, I know. Understood. And then just a quick question on the rising mortgages. I heard your comment that you said you've stopped -- or you stopped portfolio-ing those. Are you now done portfolio-ing those going forward now that Wilmington's close to close or is that something you may reconsider in the future?

René Jones

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

Operator

Your next question comes from Bob Ramsey of FBR.

Bob Ramsey - FBR Capital Markets & Co.

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

René Jones

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

Bob Ramsey - FBR Capital Markets & Co.

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

René Jones

There was no impact on average this quarter, you're right. But yes, that's right. You'll see it, so just take the average asset and then you can start from there when you think about the second quarter.

Bob Ramsey - FBR Capital Markets & Co.

Okay, and then last question, just on the credit front. Were there any large or notable items that you could share any color on, either in terms of charge-offs or non-performers, new non-performers?

René Jones

No. There wasn't anything to our comment about the size of credits. There were still inflows into non-performing, but more outflows. But nothing really notable.

Operator

Your next question comes from Marty Mosby of Guggenheim Partners.

Marty Mosby - Guggenheim Securities, LLC

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

René Jones

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

Marty Mosby - Guggenheim Securities, LLC

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

René Jones

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

Marty Mosby - Guggenheim Securities, LLC

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

René Jones

Well, this quarter, as you look where it was -- I've got to be careful -- there's two different things that you're looking at there. There's private label residential mortgages, which were more of what generated the OTTI in the fourth quarter. And then these were a different set of securities. Also sort of residential mortgage-based CMOs that we took charges on, but it's a different set of securities, right? So as you look at it, the total -- if you look at the private label which has generated most of the charges, that's actually come down over time. And I would guess that might have been somewhere around $4 million or $5 million relative to what you saw last quarter. And then this other group of securities came in. So it's hard to say, it depends on how long we see the weakness in the housing market.

Marty Mosby - Guggenheim Securities, LLC

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

René Jones

Well first of all, in M&T our time horizons are very long, so I'll caveat this with that. But I mean we've been through a very long period trying to see what it will be, where our margins that we're getting on originations are just higher because the capital markets shut down. And I would say that if you look, for example, since maybe the first or second quarter of '09, take C&I or take all of the commercial lending, that's actually -- those origination margins have come down steadily, but they're still -- they're still, I would say, almost in some cases 90 basis points higher than what we were running in 2006 and 2007, right? So I think that's a fundamental change for some time. Now guess what? When the economy heats up and the capital markets come back, I wouldn't be surprised to see more margin pressure then.

Operator

Your next question comes from John Pancari of Evercore Partners.

John Pancari - Evercore Partners Inc.

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

René Jones

Yes. I mean, I don't know if I can add anything to what we've said in the past, but I can talk about kind of how it works. And I would say that if you think about it from a simple GAAP perspective versus a regulatory perspective, we'll be able to -- our view is that we'll be able to realize a lot of the deferred tax items that they lost, so to speak. I can't tell you the exact amount, in part because of the fact that your allowance or disallowance, I forgot which one it is, is dependent upon the price of the deal and where our share price is at the close. But I can say it's fair to say that we'll recapture a fair amount of that. But when you look at the point of the close of the deal from a regulatory perspective, you can only look out one year in your earnings capabilities. And with all the onetime expenses and other types of things to convert, it sort of limits in the first year your amount that you can use for your regulatory ratios. You obviously, over time, get a lot of that back, but it's somewhat limited.

John Pancari - Evercore Partners Inc.

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

René Jones

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

John Pancari - Evercore Partners Inc.

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

René Jones

Let me tell you what I can say. I mean, the way in which we monitor our capital levels, we don't just look at the ratio. Obviously, with the new ratio coming out there being 7% Tier 1 common, obviously, we have to focus on that. But underlying what we do is we look at the quality of our loan book in particular and the other risks that are in our balance sheet, and we look at that relative to the capital that we have. And if we saw that we had a weakening credit or a worse position, obviously we'd have to hold higher capital. When we think about where we are today, and we said this for some time, we're generating capital very, very quickly, right? So if you take our estimate that we gave you of Tier 1 common and just exclude Wilmington for a minute, we're already at 6.78%, somewhere in that neighborhood, right? So a 1/4 or 2, you're at 7% and then you're quickly kind of getting yourself well above, right? So when we think about it, obviously we'll have to be above the regulatory guidance. But what the number is, is going to be really dependent on any given time by the quality of our loan book and what we see underneath. The other thing I would say to you is that you're not really looking at normalized numbers yet. I mean, you see that a number of people out there, some larger than us, some are -- particularly are showing 2 numbers. They're showing that maybe they'll be at 9% or 10% today, but if you converted that down to Basel III, particularly a number of people with their derivative books and those types of things, that they're closer to 7%, right? So my sense is that you're going to have to keep some sort of cushion above the 7%. And the size of that cushion will change over time, depending on what you see in the quality of your loan book. But I don't think we're an outlier, especially when you kind of consider the remaining pending rules that are out there.

John Pancari - Evercore Partners Inc.

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

René Jones

I don't have the same. I mean, what I can tell you is at about -- I'll grab that for you in a minute, but about half of the improvement we saw this quarter on an asset basis came from improved line utilization and half came from just new customers or new balances. We were up slightly. A utilization that we track was 49.3 versus 48.7. And then the total commitments were up from year-end, but down from September 30.

Operator

Your next question comes from Ken Usdin of Jefferies.

Kenneth Usdin - Jefferies & Company, Inc.

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

René Jones

Well, yes. I mean, obviously, I can't comment on their earnings, right? That's in their core. And I guess I can say that there's nothing that I see that surprises us from any of the original works that we did. We didn't see anything materially different. Obviously, they've got a number of run-off portfolios and whether that be through just normal run-off of those portfolios or through -- on the loan book or through charge-offs, right? Balances keep coming down. You probably saw that at the end of the fourth quarter, though.

Kenneth Usdin - Jefferies & Company, Inc.

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

René Jones

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

Kenneth Usdin - Jefferies & Company, Inc.

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

René Jones

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

Kenneth Usdin - Jefferies & Company, Inc.

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

René Jones

Exactly, yes.

Kenneth Usdin - Jefferies & Company, Inc.

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

René Jones

Good question. Well, I guess the way I'd say it is that the most of the decline that you saw this quarter came from the lower repurchase costs. And those numbers were something like, last quarter was about $14 million and this quarter, it was somewhere around $3 million. So you're kind of -- I guess the good news is, you're kind of at a low point there, right? So it's relatively clean. And I would then say that if you look at the impact from changing the repurchase, well maybe that was a smaller amount. I guess, I don't know how to say it, but if you just assume most of the change there was from the repurchase risk, I think you're probably at a pretty good starting base.

Kenneth Usdin - Jefferies & Company, Inc.

Right, but when we go back last quarter, you wouldn't have sold much. In this quarter, you would be selling more. So technically, all things equal, wouldn't you have more mortgage banking revenues next quarter?

René Jones

Yes, but I mean, you got most of -- I mean, how do I say this? It might have been about $7 million impact or something like that this quarter of a positive, right? So that's a pretty big positive. So you remember, when you look at our average mortgage banking income, right? You got three big items: you got residential mortgage service originations, you've got commercial mortgage originations and you've got servicing. Servicing's a big piece as well. So a $7 million swing tells you that you got a fair amount of the impact, a pretty good impact in the first quarter. I guess maybe it's a little larger as you go to the second quarter, but I kind of think of it as a relatively normal quarter. The first quarter being the relatively normal.

Operator

Your next question comes from Gerard Cassidy of RBC.

Gerard Cassidy - RBC Capital Markets, LLC

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

René Jones

It's a good question. I'll try to get too far to it. One, when you take Basel III and you kind of run through it and assuming we would be under it, we just, based on the types of business we're in, we don't have a really significant impact. The example I'd give you is maybe we're at mortgage servicing rights, which is one of the issues. Maybe it's in the three-ish range of our capital, nowhere near 10, right? We don't have a lot of trade derivative trading. So I don't expect there to be any big material impact even if we were under it. The real question that's out there is more on the last topic to come, which is sort of liquidity, right? And liquidity coverage ratios. And given that we're a predominantly deposit-funded institution, right? That's going to be the big question out there and whether they treat everybody equal. And as you well know, as you went through the storm and as we went through past storms, our deposit portfolio holds up pretty well. And I think that's an area where we're out there asking questions and seeing if we're all going to be treated as one. But there really isn't much of an answer yet.

Gerard Cassidy - RBC Capital Markets, LLC

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

René Jones

Yes. I mean, I think much of what you see that's holding that down a little bit is probably years of nonperformance or payoffs, right? You've got a couple of run-off portfolios there. I would say that, how do I say this? We haven't seen big growth. If you were focused on looking for growth and doing transactions, there's plenty of it out there at decent margins. But generally, it's been pretty slow. The positive news, I think, in the real estate space is that there are transactions happening. Investors are in the market. So that really helps you in terms of when someone's looking to refinance or whether you have to restructure a transaction. That's been the most positive thing that we have heard. The other thing I think that's been out is the sort of resurgence a little bit of some of the conduits and we've heard rumors of that, or they've come back a little bit and they're expecting to do some volume. But I'll give you a sense. We asked -- we have a survey of our customers that we do. And on the CRE side, we asked, "How do you feel about the availability of CRE financing over the next 6 months?" And 57% of those customers ranked it as sufficient when they're thinking about regional banks. And in July, that was just 45%. And then 53% said it was sufficient, up from 41%, when the talks about the capital markets. So generally, people are feeling that credit is more available, they're interested in doing things. It just hasn't resulted in a lot of loan growth, I think, because I think there's still a lot runoff in the overall portfolios that are in properties being worked out. And if I were a real estate investor, I would go for the low-hanging fruit first.

Gerard Cassidy - RBC Capital Markets, LLC

No doubt. And then, one final question. On the commercial loan book, you've referenced utilization rates improving. Two questions: one, geographically, within your footprint, are you seeing more demand for commercial loans in Upstate New York versus the Maryland versus the Pennsylvania market? And then second, what yields are you putting commercial loans on the book at today if your average yield, if I'm reading it correctly here, is 3.93%? What's the new -- what are the new loans coming in on at this time?

René Jones

Well, let me answer the last question first. I'm not going to give you a ton of specifics there but I mean, we fund -- primarily the C&I loans are funded with LIBOR. So LIBOR, our spreads are to LIBOR. So look at 25 to 30 basis points is really what really one month's LIBOR should be, somewhere in that range over time. So pretty healthy margins when you kind of come to the yield. We've seen loan growth that's kind of -- we've seen loan growth that's been strong kind of across-the-board. I mean, if I look at our middle market space, we had -- and if I look at it as an asset basis, we kind of get rid of the big fourth quarter year-end effect there, we had loan growth that was pretty decent in Upstate New York. We had it in what we call our Metro region, which is sort of everything from Tarrytown to New York, Philadelphia. We had growth in the Baltimore and Chesapeake area. So just about everybody is participating. If you look at the average growth, I'll give you another example. We had 9% growth on an average basis in Upstate New York, 21% in Metro annualized growth, 7% in PA, 3% in the Mid-Atlantic. And then if you look at what types of companies, they cover the gamut. So service companies, media-type businesses, distribution businesses. I mentioned transportation earlier. So it covers the gamut.

Operator

Your next question comes from Collyn Gilbert of Stifel Nicolaus.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

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

René Jones

Yes, sure. I mean, there's no change from what we would do in the past. And I guess my comment would be that our loan growth, but for on the CRE side a little bit in the fourth quarter, has been relatively subdued. And that's not because we couldn't do transaction-type stuff if we wanted to, it's just not where we operate. So we tend to focus on our pre-existing customers and people that we've known for a very, very long time. And I would suggest that -- but for the end of last year, the loan growth hasn't been that great and it really hasn't been that much of a change in sort of, actually, there hasn't been any change in the way we think about it.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

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

René Jones

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

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

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

René Jones

No, the average was up almost $1 billion, right? It was $830 million, I think it was. And of course, as we -- relative to where we were on November 1, those numbers are even higher than that, right? And then when you consider the fact that we had put on $800 million of resis [residentials], right? We have a fair amount of loan growth, I guess. I guess I would say we'd have more loans that we probably would have anticipated back when we were sitting there on November 1.

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Okay, you said...

René Jones

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

Collyn Gilbert - Stifel, Nicolaus & Co., Inc.

Okay, okay. I got you. That was year-over-year. That's what threw me. Okay, okay. That's all I had, thanks.

Operator

Your next question comes from Todd Hagerman of Sterne Agee.

Todd Hagerman - Sterne Agee & Leach Inc.

Rene was kind of beating the capital question to death. But I want to ask a couple of questions more from an M&A perspective. A number of the foreign banks seem to be heating up speculation in terms of potential acquisitions returning here to the States, whether it's some of the European banks or Canadian banks. It seems like there are an increasing of opportunities potentially coming your way in your footprint, if you will. So I guess on the one hand, how do you size -- given kind of what you guys have done over the last 12 to 18 months, a number of transactions, but how do you now view kind of or size future opportunities post-Wilmington within your respective markets per se? And then secondarily, as everyone asked a capital question, does it change your view at all? I mean, as long as I've been following you, it's always been about capital formation. But yet, the opportunities on the M&A side seem to be increasing, not diminishing, for the likes of an M&T. What does that potentially mean in terms of how you view capital?

René Jones

Yes, I guess I'd start off by agreeing with you and the fact that in this broad environment, and as kind of has been proven, right? That there's more opportunities that are out there. And then within that opportunity set, you've got to think about what types of things does M&T typically do. And what I keep saying is that, at least history has shown, and probably our preferred way to do things is with partnerships where people kind of stay in to the pre-existing organization. You saw that with Provident and Gary Geisel being on our board and on all stock kind of transactions. So when you kind of think about that, the idea that you might stock up and store capital because you're going to go out and buy something really doesn't fit that type of profile, right? Our thought process is that if we would happen to need capital at the time, and the opportunity was that attractive, then we'd go out and get it. But at the end of the day, if our shareholders weren't giving us capital for the transaction, I guess we'd probably better think twice before doing it, right? So I think you're right, the environment is there, there's a lot -- the population is large, but as we kind of move forward and try to look for people who are looking to sort of continue on with a stronger combined organization, we think that generally, the capital issues have, at least historically, tended to take care of themselves.

Todd Hagerman - Sterne Agee & Leach Inc.

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

René Jones

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

Todd Hagerman - Sterne Agee & Leach Inc.

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

René Jones

No. I mean I think, I'll say it again in a different way, but the idea that we would be able to bring on Wilmington and have our capital ratios not be materially different, right? I think, gives you the answer. And the idea that we would do two or three of those at once doesn't really make too much sense because we've got to do it right, right? So we'll focus on Wilmington. We've got to get it closed, then we've actually got to get it converted. And that's what our sort of big task is today. And then what we've seen over time is that we can do that relatively quickly, so it doesn't take us off the table for what might come next.

Operator

Your final question comes from Matt O'Connor of Deutsche Bank.

Unknown Analyst -

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

René Jones

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

Unknown Analyst -

You gave a guidance figure of 15% of Wilmington's, I guess, non-interest expense for their full year percentages.

René Jones

Yes.

Unknown Analyst -

In terms of like what's included in that figure, Wilmington had around $70 million of OREO expense alone, which was 10% of their expense base. Was that something that was specifically looked at when you came up with that 15%?

René Jones

No. We wouldn't look at that. We wouldn't do anything with that. We would just look at the core infrastructure of the institution when we're coming up for the costs.

Unknown Analyst -

So that 15% would just be taken right off the top or if that would be removed first...

René Jones

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

Unknown Analyst -

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

René Jones

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

Unknown Analyst -

Okay. That's pretty much it for me.

René Jones

Great.

Unknown Analyst -

Thanks, guys.

Operator

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

Donald MacLeod

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

Operator

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

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