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M&T Bank (NYSE:MTB)

Q3 2008 Earnings Call

October 21, 2008 10:00 am ET

Executives

Donald MacLeod – Director of Investor Relations

Rene Jones - Executive Vice President and Chief Financial Officer

Analysts

Ken Zerbe - Morgan Stanley

John Fox - Fenimore Asset Management

Steven Alexopoulos – JP Morgan

Ed Najarian - Merrill Lynch

Bob Hughes - KBW

Collyn Gilbert - Stifel Nicolaus

Gary Paul – Private Investor

Tom Persill - Viking

Operator

I would like to welcome everyone to the M&T Bank’s Q3 2008 earnings call. (Operator Instructions) I would now like to turn the call over to Don MacLeod, Director of Investor Relations. Sir, you may begin.

Donald MacLeod

Thank you and good morning. I’d like to thank everyone for participating in M&T’s third quarter 2008 earnings conference call, both by telephone and through the webcast. If you have not read the earnings release we issued earlier 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.

Before we start, I’d like to mention that comments made during this call may 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 filed on Forms 8-K, 10-K and 10-Q for a complete discussion of forward-looking statements.

Now I would like to introduce our Chief Financial Officer Rene Jones.

Rene Jones

Thank you, Don and welcome everyone. Thank you all for joining us on the call. There are few items in the quarter’s results that I’d like to discuss before I respond to questions.

Diluted earnings per share, which include the amortization of core deposits and other intangible assets, were $0.82 in the third quarter of 2008 compared with $1.83 in the third quarter of 2007 and $1.44 in the linked quarter.

Net income for the recent quarter was $99 million compared with $199 million in the third quarter of 2007 and $160 million in the linked quarter. The amortization of core deposits and other intangible assets amounted to $0.09 per share in the third quarters of both 2008 and 2007 as well as in the linked quarter. There were no merger-related costs reported in the third quarter of either 2008 or 2007, or in this year’s second quarter.

Diluted net operating earnings per share, which exclude the amortization of core deposits and other intangible assets, were $0.91 per share compared with $1.92 in the third quarter of ‘07 and $1.53 in the linked quarter. In accordance with SEC guidelines, this morning’s press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. M&T’s net operating income for the quarter was $101 million compared with $209 million in the third quarter of 2007 and $170 million in the linked quarter.

Items of particular note that impacted the quarter’s results included the following:

First, as we previously disclosed in an 8-K filing on September 12, we recognized an other than temporary impairment charge on our holdings of Fannie Mae and Freddie Mac preferred stock. The total pre-tax charge was $153 million which amounted to $97 million or $0.88 per share after tax.

Also during the third quarter, we resolved certain tax-related issues in various jurisdictions. This resulted in a benefit of $40 million income tax expense or $0.36 in earnings per share.

Also, as we’ll mention later, we continued to demonstrate our commitment to the communities we serve by making a $3 million contribution to the M&T Bank Charitable Foundation.

Turning to the balance sheet and income statement highlights, taxable equivalent net interest income rose to $493 million for the third quarter, up slightly from $492 million in the linked quarter and up $22 million from $473 million in the third quarter of 2007.

The net interest margin was 3.39%, unchanged from the second quarter. We benefited from a wider LIBOR Fed funds spread and from the run-off of some higher yielding CDs during the quarter. This was offset by the impact of an additional day during the quarter and the non-payment of the Freddie Mac dividends.

Average loans for the third quarter were $48.5 billion compared with $49.5 billion in the linked quarter. The primary reason for the decline was the conversion of some $875 million of residential mortgage loans into Fannie Mae guaranteed mortgage securities. This occurred in two transactions, one late in the second quarter and the other early in the third. We retained the securities in our available for sale investment securities portfolio.

Including those securitizations, average loans were down 2% from the linked quarter. Compared with the linked quarter, average commercial and industrial loans grew an annualized 2%, commercial real estate loans grew 1% and consumer loans declined 5%. Excluding the normal seasonal decline in auto loans in the third quarter as dealers reduced their inventories in preparation for the new model year, the remainder of the C&I portfolio grew at an annualized 8%.

As we referenced in our second quarter earnings call, we are focused on relationship lending within our core footprint and have limited appetite for transactional-type business such as in direct consumer. For example, annualized linked quarter growth in average loans across our community bank footprint averaged 5% and ranged from 4% in upstate New York to 8% in the mid Atlantic region. Indirect auto loans declined at an annualized rate of 14%.

Average core deposits which excludes foreign deposits and wholesale time deposits were up an annualized 1% from the linked quarter and up 11% from the third quarter of 2007. End of period core deposits were up an annualized 7% in the linked quarter as we appear to have been the beneficiary of the September turmoil. Average money market deposit accounts and demand deposit accounts experienced the strongest growth, partially offset by a decline in CDs.

Turning to non-interest income, non-interest income was $114 million for the recent quarter. This compares to $271 million in the linked quarter and $253 million in the third quarter of 2007. Excluding the securities loss on the GSE preferred stock, non-interest income for the third quarter of 2008 was $267 million.

Service charges on deposit accounts were $110 million during the recent quarter, unchanged compared with the linked quarter. Mortgage banking fees remained quite resilient at $38 million for the quarter, also unchanged from the linked quarter.

The quarter’s results also include a $14 million pre-tax loss from our investment in Bayview Lending Group. This compares with the $13 million figure in this year’s second quarter. As we discussed in July’s earnings call, these amounts include M&T’s pro rata portion of the severance and similar expenses related to the downsizing BLG’s infrastructure in the current environment. We expect BLG’s operating losses to be lower in this year’s fourth quarter.

Unrealized pre-tax losses on the available for sale securities portfolio recognized through other comprehensive income were $558 million as of September 30, 2008 compared with $403 million at June 30th. Our tangible common equity ratio was 4.93% at the end of the third quarter. Our estimated tier 1 capital ratio as of September 30 increased by 15 basis points to approximately 7.91%, up from 7.76% as of June 30th.

Operating expenses, which exclude the amortization of intangible assets, were $419 million compared with $375 million in the third quarter of 2007 and $403 million in the second quarter of 2008. The third quarter results include a $1 million addition to the valuation allowance for capitalized residential mortgage servicing rates compared with a $9 million reversal from the allowance in the second quarter of 2008. There were no valuation adjustments in the third quarter of 2007.

Also during the quarter, as we mentioned, we made a $3 million contribution to the M&T Bank Charitable Foundation. These two items accounted for $13 million of the increase from the linked quarter and excluding those items, operating expenses grew at an annualized rate of just 2%.

We are continuing to fund our core initiatives such as additional branches in the mid-Atlantic; in other words, we are not using the environment as an excuse to reduce spending in areas crucial to our future growth.

Let’s turn to credit. Non-performing loans increased to $710 million at the end of the recent quarter compared with $587 million at the end of the previous quarter. That increase includes $19 million of residential developer and homebuilder credits. Non-performing loans in the remainder of the commercial portfolio increased by $49 million, including $26 million in loans to operators of recreational facilities which are collateralized by real estate.

Non-performing residential real estate loans increased by $42 million. This included $32 million of proactive loan modifications which under the accounting rules qualify as troubled debt restructuring. The non-performing loan ratio was 146 basis points at the end of the third quarter compared with 120 basis points at the end of the linked quarter and 83 basis points at the end of the third quarter of 2007. Other non-performing assets, predominantly consisting of assets taken into foreclosure of defaulted loans, were $85 million compared with $53 million at the end of the linked quarter. This compares to $22 million at the end of the third quarter of 2007.

Net charge-offs for the quarter were $94 million, down slightly from $99 million in the second quarter, resulting in an annualized charge-off rate of 77 basis points of total loans. This compares with 81 basis points in the linked quarter. Residential construction and development loans accounted for $33 million of net charge-offs for the quarter, compared with $38 million in the linked quarter.

Consumer loans accounted for $31 million of net charge-offs in the recent quarter compared with $27 million in the linked quarter. This included a $2 million increase in charge-offs on indirect auto loans. Alt-A loans, both first and second lien, accounted for $15 million of net charge-offs, unchanged from the linked quarter.

The provision for credit losses in the third quarter of 2008 was $101 million. This compares with $100 million in the linked quarter and $34 million in the year earlier quarter. The allowance for credit losses at the end of the quarter was $781 million, an increase of 1.60% of total loans at the end of September 30, 2008, up from 1.58% at the end of the linked quarter and 1.52% at the end of last year’s third quarter.

Loans past due 90 days and accruing were $96 million at the end of the recent quarter compared with $94 million at the end of the sequential quarter. This included $90 million and $89 million respectively of loans that are guaranteed by government-related entities.

In summary, aside from the other than temporary impairment charge on the GSE preferred stock and the benefit from the tax settlement, the quarter’s results were consistent with both our expectations and last quarter’s performance. As we observed on the July call, our revenue stream which does not have a large market sensitive component, hasn’t been significantly compromised by the downturn. In addition, expense growth remained moderate; as a result, pre-tax, pre-provision profitability remained strong.

Consistent with our outlook since January we continue to expect overall percentage loan growth for 2008 to be in the mid to upper single-digit range. This of course excludes the impact of the securitizations mentioned earlier. We also continue to expect a relatively stable net interest margin, although with some bias towards the upside in the fourth quarter.

While charge-offs improved in the second quarter, we have likely not reached the peak of the credit cycle. We expect continued increases in delinquencies and non-performers, though at manageable levels, particularly in the consumer portfolio. In addition, residential builder don’t deteriorate in uniform fashion and the non-performers and net charge-offs in that portfolio will continue to be somewhat lumpy and are difficult to predict in any given quarter. However, we would expect losses in this portfolio to persist for the next several quarters.

All of these projections, of course, are subject to a number of uncertainties and various assumptions regarding national, regional economic growth and changes in interest rates and political events and other macroeconomic factors which may differ materially from what actually unfolds in the future.

We’ll now open up the call for questions.

Question-and-Answer Session

Operator

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

Ken Zerbe - Morgan Stanley

My first question is on Bayview. So it looks like they took your portion of losses, the $14 million. I think this has been going on for several quarters. Could you just review your thought process in terms of when you might need to writedown your investment in Bayview?

Rene Jones

Sure Ken. Let me go back, I think on September 8th we discussed our thoughts on this on a webcast and our thinking on the valuation of BLG. The logic here, we walked through the facts. The management has really consistently met all of the projections for implementing their contingent liquidity plan. Earlier in the year what we had pointed to was that there would need to be either a return of liquidity in the securitization market or we would have to have seen a modification in their operating model that we had a lot of confidence in. If you look at where we stand today, I mean clearly the markets are not likely to return anytime soon.

Our investment in BLG today has been modified such that in addition to the normal 20% ownership interest that we have in BLG we also have a 20% economic interest in all of the activities of Bayview Financial. That’s an economic interest that goes to BLG. If you think about that, when we look at the value of those businesses, the assets and those cash flows that they generate that tends to generate significant value that supports the valuation of the investments that we have on our books.

So, I think if you look at where we were maybe a couple of quarters ago, we’ve laid out that uncertainty and we had a number of things that we were looking at. But since then we have gotten very comfortable and have seen evidence to the fact that there is significant value in the way that our BLG investment is structured.

To try to just make it a little bit more clear, the next thing I’d like to say is that you have to remember, first and foremost, that we have a passive investment in a private company. We cannot talk about things that the institution hasn’t disclosed on its own. Having said that, you know the business that they’re in. They have a significant amount of residual values on securities that they’ve issued probably over the last ten years and those have significant economic value.

In addition, they’ve recently, towards the end of July, announced another event which was centered around their expertise in the scratch-and-dent loan business which is namely the set up of their asset management company in which an outside party made an equity investment.

So there are a number of public things that you can actually go out and point to that show you what we are looking for in terms of value. Today we are much less reliant on a return to the securitization market for the origination business.

Directly to your point, there would have to be some sort of significant event that we don’t know about today in order to have any sort of a partial writedown of that business. The last thing I’ll say is we are pretty candid and we tend to raise issues way before they come up. Today we think the investment is properly valued.

Ken Zerbe - Morgan Stanley

Forgive me, I may have forgotten this. You have the 20% equity interest in BLG and it sounded like you just said that you have increased your ownership to include 20% ownership of all Bayview Financial activities. When did that increase happen? Did I just misunderstand that?

Rene Jones

That’s not technically correct. What I said is that we have our 20% equity ownership interest in BLG and we have an economic interest in all of the cash flows of Bayview Financial. So the more significant issue is not necessarily that item, but the management team’s certainty that those actually produced cash flows. We’ve gotten much more comfortable with that since early in the year this year, based on certain transactions that they have publicly disclosed.

Ken Zerbe - Morgan Stanley

Understood. The second question I had in terms of the non-performing loans, obviously that has been increasing at a fairly healthy clip, I think over 20% quarter on quarter this quarter. Your reserve to non-performing loan ratio is at 110 which I believe you point out in the press release. That’s been coming down quite substantially over the last several quarters. At what point do you feel that you might need to build reserves to help offset this? Or does it matter? Could this get down to 20%?

Rene Jones

It’s a great question. Let me just step back. Cosmetically you do worry about it. You look at it and you think about it. But when you build your allowance you are not necessarily looking at the cosmetics, you’re looking at the loss content.

One of the great examples is we’ve kind of mentioned these troubled debt restructurings that we had in our portfolio this month, $32 million of the increase in non-performing loans. So a substantial portion of the increase was related to loans that we modified. What we’re seeing is if you think about what we did, we changed our charge-off policy in the fourth quarter. Essentially we moved it back to 150 days so we would get at problems quicker. Then we spent a fair amount of time working through things that were delinquent loans in that $1 billion Alt-A book.

Now what’s actually happening is we’ve developed risk profiles so that we understand the type of customer that is likely to miss their first payment and we are going out and proactively doing loan modifications to make sure that we keep those customers in their homes, even though they may have never missed a payment. Under the guidelines, that represents a non-performing loan and you’ve got to put a FAS 115 mark on that institution.

So here we think we’ve defined and we are adequately reserved on our Alt-A loans, but the way in which we continue to go through and mitigate losses results in non-performing loans; it doesn’t necessarily mean the loss comes as a result. So in this environment we’re very, very focused on the individual loss content that we see. We’ve been relatively conservative and it’s one of the reasons why we keep pointing to the ratio of reserves to losses. Through the first three quarters of this year we’re still at 2.5 times our charge-off levels in terms of our reserve which you might be able to find two or three other institutions that are at that level, but that’s about it.

Ken Zerbe - Morgan Stanley

From our perspective, rising NPLs is probably one of the best or only things that we can look at in terms of future loss content. I do appreciate your answer. Thank you.

Operator

Your next question is from Steven Alexopoulos – JP Morgan.

Steven Alexopoulos – JP Morgan

What was the thought process behind the $875 million of mortgage loans that were converted to securities? Why the third quarter and should we expect more of that?

Rene Jones

I think there are a number of reasons. In this environment, starting actually back in the third or fourth quarter of last year, with the disruptions in the markets in August we began to look at our liquidity plan. Part of the liquidity plan is helpful to have the guarantee on the Freddie and Fannie paper for those securities and so we did about $1 billion in December. All those loans are from the partners transaction and now we are getting up to close to another $1 billion worth which actually provides you with strength in terms of liquidity and it also provides you with a guarantee.

As we look back and think about that $1 billion that we did out in December, the guarantee that we bought, I think we paid 14 of 15 basis points for that guarantee. If you’re looking at the environment today, I think that was money well spent.

In particular, if you look at what we’re seeing we have had, for example, on our residential Alt-A portfolio, which is now just over a billion, for seven months, we have seen the lower delinquencies. Seven months in a row we’ve seen lower delinquencies of 30 days or more.

Having said that, the whole portfolio has actually seen a slight rise in delinquencies because prime mortgages that no one was worried about a year ago are now actually having slightly higher delinquency rates, albeit from small levels. I think the guarantee plus the additional liquidity was attractive to us.

Steven Alexopoulos – JP Morgan

Can you talk about your appetite here to issue this preferred stock as [inaudible]? What are your thoughts there?

Donald MacLeod

I think everything that we have read suggests that it’s a very attractive program and I think clearly the intent is to incent institutions to go out and to resume making loans, which would ramp up the level of loans they’re making to domestic institutions. As we understand it, we have until November 14 to come to our conclusion as to what we’re going to do so we are still evaluating that but I don’t have anything negative to say about it. I think it’s a great program.

Operator

Your next question is from John Fox - Fenimore Asset Management.

John Fox - Fenimore Asset Management

Do you have the total for the loan balances for the homebuilder development loans and the alt-A loans at the end of the quarter?

Rene Jones

I think we do. The Alt-A loans were $1.047 billion. The homebuilder I will get for you in a second. Just $2 billion.

John Fox - Fenimore Asset Management

And then thinking about loan growth, do you expect the residential lines to grow at this point or do you continue to use securitization and how should we think about that?

Rene Jones

We are not adding anything significantly to our held for investment portfolio. The balances are down because of the continued run-off in the alt-A portfolio but they’re also down because warehouse lines are down and should mortgage rates decline you might see a slight pick up in that warehouse balance portion. But other than that I think the balances there would be relatively steady. It would be based on demand.

Remember that we have historically on the held for investment portfolio simply used that as a technical substitute for investment securities. We manage that, say $4 billion portfolio along with the investment securities book and we have actually been running down investment securities.

John Fox - Fenimore Asset Management

What is the amount of the Bayview investment at this point?

Rene Jones

$280 million is the book value of our investment.

John Fox - Fenimore Asset Management

Other expenses looked higher to me in the expense. I know you have the charitable contribution you mentioned, but is there anything unusual in the other expense line?

Rene Jones

Anecdotally, clearly in this environment you have higher collection costs and you have higher ORE-related expenses. We have discontinued our investments -- we’ve not discontinued our investments in things like the branches in the mid-Atlantic that we’ve talked about. We had talked about for some years doing loan systems optimization. We spent a fair amount of money moving that project forward in the course of the quarter.

Much of it is in continued investments, the clear item obviously is this $10 million spread in the impairment, right?

John Fox - Fenimore Asset Management

Right.

Rene Jones

If you take that out and you take out the charitable contribution, you get a more normalized level.

Operator

Your next question is from Ed Najarian - Merrill Lynch.

Rene Jones

Hi, Ed.

Ed Najarian - Merrill Lynch

Obviously on the charge-off ratio you actually were down 4 basis points but pretty much remaining in that 80 basis point range for two quarters now. Is that something that you feel like you can maintain, something in that range? Or do you feel like based on a weaker economic outlook and some higher losses in areas where you really haven’t seen very high losses such as the commercial side of the portfolio, that that loss ratio ought to go up over the next several quarters?

You indicated that you expect the net interest margin to be flat with an upward bias in 4Q. Does that outlook of flat to an upward bias include an outlook that the Fed will be cutting by another 50 basis points sometime in the near future?

Rene Jones

Let me just do it in reverse because I think it is easier. Ed, we still use the forward curve. So whatever percentage of the rate cut embedded in the forward curve is absolutely there. I would say upward bias because with the disruptions in the markets we’re getting wider spreads from Fed funds LIBOR today and so it is a positive. I’m just cautious about it, but it looks like we have a positive bias because of those two events in there. So it’s considering the forward curve.

If you jump back to the charge-offs, the best way for me to do it is to walk through the portfolio. We are seeing increases in delinquencies and maybe charge-offs in each portfolio but we are really benefiting from the fact that our $5 billion home equity portfolio I believe was probably still at 30 basis points of loss this quarter and so its rise is very modest. The indirect auto portfolio has higher delinquencies and will move, but again it’s moving like a consumer portfolio so you can watch the increase. There are no big surprises in that movement and that’s all folded with indirect auto and other indirect lending is about another $4 billion or $5 billion.

Obviously the environment is weighing a little bit on the C&I book and so we have seen for several quarters a migration there. I would expect somewhat of an upward migration in C&I but again, I don’t expect a lot of big shocks. Normal real estate -- not backed by land, so we are dealing with rent -- continues to perform very, very well. In the near term we don’t see any issues there on real estate.

The issue to your point of “are we going to hover around 80 basis points” all goes back to the $2 billion in residential builder books. In any given quarter you could have one or two large credits that make your charge-off ratio jump. The way I think about that is that when you go over average of the next two or three quarters in that book there will be a lumpiness, but I think until we get through the next say several quarters on the builder construction portfolio, we’ll probably have an upward bias in terms of the charge-off rates that we’re going to see.

I think again we’re just fortunate that it’s only 4% of our loan book and I don’t think it’s anything that we can’t manage ourselves through.

Ed Najarian - Merrill Lynch

That was a pretty complete answer. Just one more question on the NIM if I might. If we do have further rate cuts, it looks like your deposit rates are running at pretty low levels. What do you view as your ability to continue to drop deposit rates in light of potential future Fed fund rate cuts?

Rene Jones

That’s another great question. My thought is that you’re looking at average rates that are in the books and what I do is I have to take myself back in time to when we saw Fed funds and rates go down to 1%. So we have a nice track record as to what we would expect our customer behavior to be if rates actually went that low.

I think today we and other banks are probably not at that inflection point where we can’t pass a rate decrease through. If we were at 1% Fed funds we would probably start to be approaching that and that is what happened, I don’t know when it was now, four years ago or so; 2002 maybe.

I’m not really worried about that today. I think the other factor that you have, even if deposit rates stay flat which there is some sense that we would like them to because we think that the deposit generation is very important to us, is that on the loan side that margins continue to widen across every single portfolio. And I don’t mean that just in terms of the stress scenario. It’s that customers are getting comfortable with just the simple fact that the market for loans out there requires higher spreads given the risk that is out there. So I think that bias over, say a year, should help us as the loan portfolios begin to roll.

Operator

Your next question comes from Bob Hughes - KBW.

Bob Hughes - KBW

BLG in the quarter probably cost you close to $0.10 and that does include the carrying costs in the investment, I guess. I think you mentioned that there were some restructuring costs embedded in that number in the quarter at BLG? I was wondering if you could give us a little bit more color to frame what your share in the ongoing expense base of this company might be going forward after these restructuring charges?

Rene Jones

Let me just say that it was the majority of the expenses, the loss in the last two quarters were associated with taking large amounts of severance, making sure that the selling off of inventory of loans getting down to zero or clearing out warehouse lines that weren’t needed. Most of that work is done.

Underlying that is a normal operating number that we haven’t yet seen, probably because we have just gotten done with the liquidity plan. I would expect it to be substantially lower in the fourth quarter and then from there on I think we’ll probably have much more clarity as to what that will be going forward.

Bob Hughes - KBW

Not suggesting that revenues are picking up dramatically, just that the fixed expense base is curtailed a little bit?

Rene Jones

Yes. There were a lot of one-time expenses associated with that liquidity plan that you saw in the last two quarters.

Bob Hughes - KBW

I am curious to hear your thoughts also, Rene, on consolidation. I think at some point in November I am guessing that we will see some increased separation between the wheat and the chaff, there’s going to be some companies that are not qualified for TARP capital injections. Do you think we’re going to see an acceleration in M&A activity? Would you potentially be putting some of that TARP capital to use in the form of M&A?

Rene Jones

I think that relative to where we were say two or three years ago things have changed dramatically. The cost of borrowing has gone up. Notwithstanding the cost of capital has gone up. I would expect that as we get a year out the cost of regulation is going up. So if you are not an efficient operator it’s going to be hard, as a smaller institution particularly, regardless of credit quality and all that stuff to operate in that environment. I think we are entering an environment where the natural synergies outside of credit issues are just going to be higher for some time.

As you know, the bank stock prices are actually much lower than they were two years ago, maybe some would say more rational. I think the environment is right, but again from our perspective we can’t predict anything. If something comes up we are ready.

Operator

Your next question is from Collyn Gilbert - Stifel Nicolaus.

Collyn Gilbert - Stifel Nicolaus

I just wanted to clarify on the loan modifications that you mentioned, I think it was the $32 million, was that just in the residential mortgage portfolio?

Rene Jones

Yes, most of it was in that Alt-A book that we have been talking about for some time.

Collyn Gilbert - Stifel Nicolaus

Have you done much in the way of modifications in the C&I or any of the commercial portfolios?

Rene Jones

No, nothing significant.

Collyn Gilbert - Stifel Nicolaus

Do you anticipate doing some? How do you view that and manage that?

Rene Jones

If we get to the point where a loan moves into our classified loan book in the normal course of things that’s what you would naturally do, right? So for a troubled credit you would naturally go through that and you obviously would have your FAS 114 that would apply to those credits, so you see some of that.

It’s very, very different from what we are seeing on the residential side. In the residential side there are two groups: the one I described where we are proactively looking at customers who haven’t missed a payment yet but we feel fit the risk profile that they are likely going to be under stress and we are calling them.

There are also other individuals who maybe have missed the first or second payments who are calling us and telling us proactively that “I think we’re going to run into some problems, I lost my job” and so forth. So it’s very different than what you would experience on the C&I side, but you really don’t get into any kind of modification unless you are trying to actually restructure the loan because it’s actually gotten down into your classified loan book.

Collyn Gilbert - Stifel Nicolaus

And in terms of your comment that the expectation within the resi development portfolio has the potential to have lumpy losses, can you walk through that rationale of why that is? I guess I would have anticipated losses in those portfolios to be a little bit more transparent because you see the developments, you see the drawdowns of the lines, you see what’s going on in the real estate markets around these specific projects. Can you just talk a little bit more about that?

Rene Jones

Your thinking is spot on. If you were to remove the size of the credit and look at just total projects, you probably would see a steady deterioration in residential homebuilders. If you think about the price of housing matters, but as the economy remains weak it starts to stress builders’ cash flows so in some cases you may be on projects that are not selling, but where the builder has a lot of wherewithal. As you move a year out or two years out, you get a steady migration of the weakening of those cash positions.

The issue we are talking about is one credit might be $1 million and another might be $30 million. So I can’t predict the timing of any given credit and unlike the rest of M&T’s books, these will tend to be larger credits. We have a very, very granular portfolio but when you look at the size of some of these builder credits as we talked about them in the past, they are just larger.

Collyn Gilbert - Stifel Nicolaus

Finally, if you could just give us a little bit of the economic outlook or what’s happening in the different regions of your franchise, mainly give us a little bit of color on what’s going on in upstate New York and how that’s differentiating? I mean the obvious one is on the real estate side, but stripping that out from the discussion to this point in terms of commercial activity or borrower activity. If you are seeing differences among the different regions of your franchise?

Rene Jones

Yes. I mean I will first say that as we’ve gone through particularly this past quarter and then particularly in September with all the noise, sometimes it’s hard to separate what is actual weakening of the economy versus just people being very, very nervous in their behavior, whether they are looking at the lines that they have available to them and so forth.

But I think aside from that, what we tend to see is that things that existed a year ago where institutions have maybe pulled back on credit, I mean, you saw a lot of announcements, for example, in the indirect auto space this quarter where people are pulling back; even some of the large auto manufacturers and their financing arms decided to pull back.

We are clearly beginning to see the stress from that but from our perspective, you probably see less of that stress and that general stress on the consumer in upstate New York and in Pennsylvania. As you move your way through the commercial book, we’ve probably seen a little bit more stress in the Pennsylvania credits. Everything that’s again related to housing, but even maybe more so as it relates to businesses that you are relying on the collateral or somehow tied to that.

It’s almost hard to distinguish. I think that what we’re going to see is that our upstate New York markets and our Pennsylvania markets are going to hold up very, very well even though we’re likely to move our way into a recession.

I think that we’ll probably fare okay in the mid-Atlantic but there’ll be maybe a little bit more stress for us there just simply because of the faster growing markets and there may be more issues there.

I don’t know. I mean, I think all of the government intervention, all of the things that have happened are huge events that will actually help us down the road but I think those things take time and it will be a while before you begin to see those types of things take hold.

I don’t know if I have any more specific color for you there. Clearly on the consumer side though the events that have happened over the last 12 months are going to weigh on the consumer.

Operator

Your next question is from Gary Paul, a private investor.

Gary Paul

I assume that the investment in Bayview Financial was a $20 billion investment from a former-now-public private equity investment company?

Rene Jones

You mean the thing that happened recently in the third quarter?

Gary Paul

Yes.

Rene Jones

Just say it again?

Gary Paul

I’ll be more specific. I read in the Financial Times of London -- though I never saw it in the Wall Street Journal -- that either Blackrock or Blackstone, I can never keep in my own mind which one is the investment manager and the other private equity investor, had made a $20 billion investment in Bayview Financial.

Was that the investment you were referring to or is that a different company?

Rene Jones

That is the investment I am referring to; I’m not sure if your amount is right. The amount seems high.

Gary Paul

In any event, what leads to my question is, that doesn’t dilute your 20% economic interest in Bayview Financial?

Rene Jones

No. We had the economic interest before such investment was made.

Gary Paul

Okay, so that’s pretty good. Your original investment in Bayview was more than $280 million, wasn’t it? So are you applying the losses, or is my memory wrong, to a writedown of the investment and then hitting the income statement that way, rather than operating?

Rene Jones

Yes, you have essentially got it. The operating losses that occur at the company reduce the equity and therefore the 20% ownership interest. We record our share of the income on our income statement or loss on our income statement, that’s right.

Gary Paul

But it also works to write down your Bayview investment?

Rene Jones

Yes.

Gary Paul

Finally on your building credits in the mid-Atlantic, my experience is that a lot of builders set up separate short-term subs for different projects. I gather from the way you say some companies are much stronger than others that in general your loan is either from the high-level company or guaranteed by the high-level company?

Rene Jones

I think probably historically that’s true, but what we’ve seen over the last two quarters are what people are terming these “global solutions”. So if you were to go back to the first quarter you might have a builder with a couple of projects whether they sit in different [inaudible] or not and your project might be fine. What you are sitting there saying is maybe you have a project that’s fine and there’s another project that you have that they are a little bit weaker, but combined the two projects create enough cash flow so everything is be fine and payments can be made.

When there is a global dissolution and the company declares bankruptcy, all projects -- not just those two -- are lumped together and the best projects are no longer available for the weaker project.

I think what we’ve seen over the last four months, let’s say, is there is a lot more of these global solutions as banks basically just say look, we’re folding our cards, we’re going to put you under a fair amount of stress. So the old rules I think are a little bit gone there.

Gary Paul

How is anything fine that’s in construction right now in the mid-Atlantic?

Rene Jones

It is a fascinating thing. You go zip code by zip code, even two parties across the street; one will be selling and the other one will not be. I think it’s a matter of where you are. The other thing to look at Gary, there are certain counties where things are just completely overbuilt. There is just too much inventory.

Gary Paul

So there is that much disparity?

Rene Jones

Yes.

Gary Paul

Because certainly in what I see in the west there is disparity, but it’s disparity between how bad, not some good.

When was the last time you increased the dividend?

Rene Jones

The third quarter 2007.

Gary Paul

If you followed your normal pattern, which you may or may not do, you would increase this quarter?

Rene Jones

We have not made any determination on the dividend.

Gary Paul

I just said if. This would be the typical quarter on the five-quarter basis if you did it -- and the key word is “if”.

Rene Jones

Typically when our board meets we make a determination on the dividend.

Gary Paul

But this is the fifth quarter then?

Rene Jones

This is five quarters from the third quarter.

Gary Paul

Okay, fine. I’m not asking you whether you are or aren’t, I’m just asking if this is the fifth quarter?

Rene Jones

I very much appreciate it.

Operator

(Operator Instructions) Your next question is from John Fox with Fenimore Asset Management.

John Fox - Fenimore Asset Management

On your slides from September 8 you showed the investment portfolio with 2% in trust preferred securities. I am just curious, if you go through who are the issuers, are those other banks trust preferred? How are those faring in terms of the marks in the third quarter?

Rene Jones

Let me think. If you take that portfolio which I think at that date had a market value of about $200 million, I would say that maybe something like two-thirds of that portfolio came back in 1997 or 1998 when we put them on a bit of a hedge against our own trust preferred issuances. Those were a number of names. A lot of those banks don’t exist today because they were swallowed up by some of the larger entities that are out there. And then there’s probably another maybe $60 million or so that is of more recent vintages.

The marks vary all across the board. Some are gains, some are in gain positions depending on the institutions and some are at negative mark situations. But as we evaluate all of those we think that what we’re seeing is probably what we would expect to see in terms of the valuation declines during a bottom of this credit cycle. We think of those payback papers as very, very long dated paper and so small movements in rates would result in a really big change in price.

From our perspective, as we go through our work on the securities book and look at things like other than temporary impairment, we just come to the conclusion that we’re going to get paid. There is nothing that I am overly concerned about in there. We haven’t had any significant defaults of any kind.

We had no defaults, I should say.

John Fox - Fenimore Asset Management

That’s even better. Somebody asked about the TARP earlier in terms of the capital raising which you answered very clearly. My second question is about potentially selling assets into TARP. I mean obviously we have been talking about these homebuilder and development loans for a number of calls, it has been a source of a problem. Why not sell them, put this behind us, use capital to make regular C&I real estate loans going forward?

What’s your reaction to that, Rene?

Rene Jones

What we do when we look at the builders as we work our way through them we look at the economics. Not discounting the value of the government’s program, but to the extent that if we could sell them today, we’d sell them today. In some cases we probably have actually taken that route in selling down a project as it gets to the idea that we’re going to have to choose between actually becoming developers or selling it off.

I’m just not aware that there is any significant extra value versus what you get in the market. If it is existed maybe we would consider it, but it’s not really something that we have focused on.

John Fox - Fenimore Asset Management

So you feel that you can make economic decisions on all those loans even without the government program, or sell them or whatever you need to do?

Rene Jones

This is my personal view of how it works. There are certain assets that are in a difficult position, they are not paying. A bad asset is a bad asset, whether it’s the government, no one is going to pay you a great price on that asset.

The issue where I think the TARP program probably helps is that there are a whole slew of assets that are just misvalued, where there is a lot of difference between the economic value and the liquidity marks that you’re seeing out there today. In those cases, I would expect those would be the ones where there might be some incentive for government or somebody else to actually pay true value for those that are different than the current market. That’s not the case in the builder construction space.

Operator

Your next question is from Tom Persill - Viking.

Tom Persill - Viking

I was on the Fifth Third call earlier and the question was put to them in the context of whether or not they would participate in the capital raising part of the TARP, how they felt about their tangible equity which was 5.2 versus the tier 1 ratio of 8.5 and the TARP obviously would have the tier 1, but not the tangible equity.

I guess I would put the same question to you guys. How do you feel about tangible equity and is your participation in the TARP at all impacted by the difference between tier 1 and tangible equity ratios?

Rene Jones

As you know, we’ve long held that tangible equity is probably, in our minds, some of the most important form of capital. In that hypothetical scenario you presented, we would be focused on making sure that we had adequate tangibles on capital. One of the things that we would think about is that you can’t just lever up the institution and only focus on tier 1 and take down intangibles. I mean that’s pretty irrational. I think that’s an open item that anybody participating in a large way probably should think about. But that is the way we think; not everybody thinks that way.

Tom Persill - Viking

A lot of banks have put out a target corridor for tangible equity to tangible assets. Do you guys have one of those targets you can share with us?

Rene Jones

For a very long time we have had a target of 5.4 and a range of 5.2 to 5.6 and we were at about 5.01 when we closed the two transactions in the first week of December. We closed two transactions, Partners Trust and a First Horizon branch deal and we put them to 5.01. We have pretty much stayed there, so ultimately when we look at our targets, we haven’t change that range; we would like to be back in that range. We have generated a fairly significant amount of capital. The difference there is probably is the FAS 114.

Again the marks on the securities really are quite far apart from what we believe the economic value of those securities are. When you see that, if you look at our tier 1, we have now had since December about a 101.1% increase, percentage point increase in our tier 1 ratio even though our tangible has stayed the same. That’s because the regulators recognized that distinction between what you’re marking those securities at and what the true economic value is.

So I don’t think we’re concerned about it and I think we have actually been able to absorb a lot of those securities losses and use our capital generation to keep us at about 5%. But ultimately down the road, you would probably see us back in that range.

Tom Persill - Viking

One another question on Bayview because there were earlier questions on it. If Bayview has sold a significant amount of its assets and it sounds like it has laid off a significant amount of its staff, I guess I wonder how they can possibly get to earnings levels that maybe were contemplated in early ‘07 when the investment was made now? Because it sounds like there has been a pretty significant change in the business model there.

Rene Jones

You said a lot there but I don’t think you’re thinking about it the right way. BLG has not been selling off assets. They have taken down their securities and that operation is running at a very, very low level of originations. So if you just add that on a standalone basis, obviously you would produce less income. But the value that we have is also based on the value of their other businesses and the cash flows that those other businesses generate.

So just because you paid $300 million for something it doesn’t mean that it’s worth $300 million to start with. At the end of the day, you have got to make sure you’re generating enough cash flows and enough asset value to be able to justify that investment.

Operator

At this time there are no further questions. Are there any closing comments?

Donald MacLeod

As usual, I would like to thank everybody for participating today and as always, if any clarification on any of the items in the call or the news release are necessary please contact our Investor Relations department at area code 716-842-5138.

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