April 15 (Reuters) - M&T Bank ( MTB ) posted a 25% drop

in first-quarter profit on Monday as higher deposit costs

reduced its interest income, and a turmoil in the commercial

real estate (CRE) industry prompted it to set aside more

rainy-day funds.

Regional lenders have had to pay higher interest rates on

deposits to prevent customers from fleeing to higher-yielding

alternatives, such as money market funds.

Buffalo, New York-based M&T Bank's ( MTB ) net interest income - the

difference between what a bank earns on loans and pays on

deposits - fell 8% to $1.68 billion in the first quarter from a

year earlier.

Net income available to common shareholders fell to $505

million, or $3.02 per share, for the three months ended March

31, from $676 million, or $4.01 per share, a year earlier.

M&T, which has a substantial exposure to CRE loans compared

to its regional banking peers, set aside $200 million as

provisions for credit losses, compared with $120 million a year

earlier.

Changing patterns of remote work have affected demand for

commercial properties, while reduced property prices and

elevated interest rates have raised the prospect of loan

defaults.

The lender, however, has been working on shrinking its CRE

portfolio.

"We are off to a solid start in 2024 as we were able to grow

certain sectors of our commercial and consumer loan portfolios,

while continuing to shrink our commercial real estate exposure,"

Chief Financial Officer Daryl Bible said.

Last month, ratings agency S&P Global downgraded its outlook

on five U.S. regional banks including M&T Bank ( MTB ) to "negative"

from "stable" due to the possibility of CRE market stress

hurting their asset quality.

Separately, M&T Bank ( MTB ) also booked an expense of $29 million

in the quarter tied to the replenishment of a government deposit

insurance fund, which was drained after Silicon Valley Bank and

Signature Bank failed last year.

(Reporting by Arasu Kannagi Basil in Bengaluru; Editing by

Shinjini Ganguli)