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M&T Bank (NYSE:MTB)

Q4 2008 Earnings Call

January 22, 2009 10:00 am ET

Executives

Donald MacLeod - Director of IR

Rene Jones - Executive VP and CFO

Analysts

Matthew Clark - KBW

John Fox - Fenimore Asset Management

Steven Alexopoulos – JP Morgan

Collyn Gilbert - Stifel Nicolaus

Gary Paul – Private Investor

Operator

Ladies and gentlemen, this is the operator. Today’s conference call is scheduled to begin momentarily. We request that you please refrain from pressing * 1 in order to pose a question until prompted by the operator. If you have already done so, please press the # sign at this time. If you experience difficulties during today’s call, please press * and an operator will assist you. Thank you for your patience. [inaudible] will be placed on hold until the conference begins.

Good morning, my name is Melissa, and I will be your conference operator this morning. At this time, I would like to welcome everyone to the M&T Bank Fourth Quarter and Full Year 2008 Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session.

If you would like to ask a question during this time, simply press *, then the number 1 on your telephone keypad. If you have already done so, please press the # sign now, then press * 1 again to ensure your question is registered. Thank you. Mr. McCloud, you may begin your conference.

Don McCloud

Thank you, Melissa, and good morning everyone. I’d like to thank everyone for participating in M&T’s Fourth Quarter 2008 Earnings Conference call, both by telephone, and through the web cast. If you have not had a chance to read the earnings release we issued earlier this morning, you may access it, along financial tables and schedules, from our website www.mtb.com, and by clicking on the investor’s relations link.

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

Rene Jones

Thank you Don, and welcome everyone. Thank you all for joining us on the call this morning. I know all of you are quite busy today. There are a few items from this morning’s release that I’d like to discuss before I respond to questions.

In a somewhat turbulent environment, M&T earned a profit in the full year of 2008, reporting net income of $566 million dollars. This compares with net income of $654 million dollars in 2007.

Diluted earnings per share in 2008 were $5.01, compared with $5.95 for 2007. The return on assets for 2008 was 85 basis points and the return on common equities was 8.6%.

The after-tax expense from the amortization of intangible assets amounted to $41 million dollars and 36 cents per share in 2008, compared with 40 million or 37 cents per share in 2007. In addition, we incurred after tax merger-related expenses of $2 million dollars, or 2 cents per share in 2008, and $9 million dollars, or 8 cents per share, in 2007.

Now operating income that excludes the amortization of intangibles, as well as merger-related charges, was $599 million dollars, or $5.39 per share for 2008, compared with $704 million, or $6.40 per share for 2007. In accordance with the SEC’s guidelines, this morning’s press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. On the same net operating basis, the return on assets was 97 basis points, while the return on tangible equity was 19.6%.

After dividends, M&T retained $247 million dollars in earnings to build our capital base in 2008. Turning to the results for the 4th Quarter, deluded earnings per share were 92 cents for the 4th Quarter of 2008, improved from 60 cents in the 4th Quarter 2007, and 82 cents earned in the link quarter.

Net income for the recent quarter was $102 million dollars, up from $65 million dollars in the fourth quarter of 2007, and $91 million dollars in the link quarter. The amortization of core deposits and other intangible assets amounted to 8 cents per share in the fourth quarter of 2008, and 9 cents in the 4th Quarter of 2007, as well as the link quarter.

There were no merger-related costs related to the 3rd and 4th Quarters of 2008. There were merger-related costs of $9 million, or 8 cents per share during the 4th Quarter of 2007.

Deluded net operating earnings per share, which exclude the amortization of core deposits costs, as well as merger-related charges, was $1 for the recent quarter, up from 77 cents in the 4th Quarter of 2007, and 91 cents in the link quarter. And net-operating income in the incoming quarter was $112 million dollars, up from $84 million in the 4th Quarter of 2007 and $101 million in the linked quarter. The results for the 4th Quarter include two notable items.

As a result of continued close scrutiny of our investment portfolio during the 4th Quarter, we recorded other than temporary impairment charges amounting to $21 million dollars pre-tax, on certain of our investment securities. This included $12 million dollars relating to two of our remaining mortgage securities backed by option arms. As of year-end, we have written down three or four option-backed mortgage bonds. Our remaining exposure to this type of security is $7 million dollars of book value and $2 million dollars of market value of the entire $8 billion dollar securities portfolio.

The other component included a $12 million dollar write down on three full bank-trust preferred CDOs, which we acquired in the partner’s trust acquisition. Our remaining exposure to this type of security is limited to a book value of 16 million dollars and a market value of $2 million dollars as of year-end. Because of previous marks taken through other comprehensive income, the charge is taken through the income statement this quarter, had minimal impact on tangible common equity.

The second notable item I’d like to point out is a $19 million dollar addition to the valuation allowance for capitalized mortgage servicing rights that we recorded in the 4th Quarter. This addition to the allowance came as a result of the sharp drop in mortgage rates as of 2008.

As you recall, M&T does not hedge mortgage servicing rights because of the natural heads provided by our origination franchise. Taken together, these two items

go ahead provided by our origination franchise. Taken together, these two items reduce net income for the fourth quarter by $26 million dollars and 24 cents per share. Next I'd like to cover a few highlights on the balance sheet and the income statement tax equivalent. Net interest income was $491 million dollars for the fourth quarter compared with $493 million dollars in the second quarter, and up $15 million dollars and $476 million dollars in the fourth quarter of 2007. That interest margin was 3.37%, down slightly from $3.39 percent that we reported in the third quarter. The primary factors in the margin compared to the link quarter with a non-payment of the FannieMae's preferred stock dividend in the fourth quarter and the impact from the rapid reduction in interest rates during December. and the concurrent downward resizing of assets.

Average loans for the fourth quarter were $48.8 billion, compared with $48.5 billion in the link order. Compared with a link order, average commercial industrial loans grew an annualized 9%.

Commercial real estate loans grew at 2% and consumer loans declined an annualized 2%. As we discussed through most of last year, we remain focused on relationship lending within our community bank footprint and have limited appetite for transitional site businesses, such as indirect consumer, and pretty much anything else that's outside our natural markets. In fact, we experienced long growth in all four of the principle regions in which we operate. This included annualized growth and loans in excess of 10% in both upstate New York and the mid-Atlantic region. On the deposit side, we experienced our fifth consecutive quarter of deposit growth. We believe that customers saw M&T somewhat of a safe harbor amidst the volatility in the marketplace during the fourth quarter.

Core deposits, which exclude wholesale and foreign deposits, were up an annual 18% from the link quarter and up 11% for the full year. We experienced deposit growth in all four of our principal geographic regions, as well as from our multi-region commercial customers.

Turning to non-interest income, excluding securities gains and losses, non-interest income was $265 million dollars for the region this quarter. This compares with $266 million in the linked quarter, and $288 million in the fourth quarter of 2007.

Service charge and deposit accounts, $106 million during the quarter, compared with $110 million in the linked quarter. We think this reflects a modest seasonal impact on the commercial service charges having to do with lower number of processing days; a lower level of consumer charges appears to have resulted from a general flow down from consumer spending.

Mortgage banking fees remain strong at $40 million dollars for the quarter, compared with $38 in the linked quarter. Continued strong gain on sale volume and margins are likely to add a natural offset to the lower valuation on our residential mortgage servicing right.

Recorder’s results also included a $9 million dollar pre-tax loss from our investment … lending group, reflecting the remaining impact from right-sizing the BLG enterprise in response to the current environment.

Operating expenses, which include the amortization of intangible assets, were $431 million dollars, compared with $15 million dollars in the 4th Quarter of 2007 and $419 million dollars in the 3rd Quarter of 2008. As I mentioned previously, the 4th Quarter’s results included a $19 million dollar addition to the valuation allowance for capitalized residential mortgage servicing rights, compared with a $1 million dollar addition to the allowance in the 3rd Quarter of 2008. There was a $2 million dollar addition to the allowance in the 4th Quarter of 2007. Excluding the addition of MSR evaluation, operating expenses declined $6 million dollars from the linked quarter. As we did in the 3rd Quarter, we made a $3 million dollar contribution to the M&T 25 largest banking holding companies.

Residential construction and development accounted for $25 million of net charge offs for the quarter, down from $33 million in the linked quarter. Consumer loans accounted for $30 million dollars net charge offs in the recent quarter, compared with $31 million in the linked quarter. Substantially all of the increase related to indirect auto loan. Charge offs of some home-equity lines were flat for the third consecutive quarter, at $4 million dollars. All day loans, both first and second lean, accounted for $12 million dollars of net charges, down from $15 million dollars in the linked quarter. Net charge offs for the total residential mortgage portfolio, with $21 million, compared with $16 million in the 3rd Quarter, reflecting an up kick and charge offs in both the core mortgage portfolio and the one closed instruction portfolio.

Net charge offs for the commercial to an industrial portfolio were $61 million dollars compared with $8 million dollars in the linked quarter. These related primarily to a collection firm and two publishing companies. The provision for credit losses in the 4th Quarter 2008 were $151 million dollars and exceeded net charge-offs by $7 million dollars. This compares with $101 million dollars for both a link quarter, and a year earlier.

The allowance for credit losses at the end of the quarter, with $788 million, an increase to $1.61% of total loans through December 31st, up 1 basis points from the link quarter, and up three basis points from last year’s 4th Quarter. In the allowance as of year and covered net charge ups by more than two times, we would expect it to compare favorably to the industry average in the range of one to one-and-a-half times.

Loans past due 90 days, but still accruing were $159 million at the end of the region of the quarter, compared with $96 million, at the end of the sequential quarter; this included $114 million, and $90 million dollars respectively, of loans that are guaranteed by government-related entities.

Turning to capital, M&T’s tangible common ratio was 4.59% at the end of the 4th Quarter. Unrealized pre-tax losses on the available for sale securities portfolio, recognized through the other comprehensive income, for $806 million dollars as of December 31st, 2008, which reduced M&T’s tangible common ratio by 75 basis points. This compared with $558 million on September 30th, which reduced M&Ts standard common ration by 52 basis points at the end of the 3rd Quarter. The vast majority of these unrealized losses relate to our portfolio of private label mortgage securities. We believe the price declines are largely of a result of a disruption in the market and generally reflect continued lack of liquidity for non-government guaranteed mortgage securities, as opposed to actual credit losses.

Under the accounting rules, the securities are required to be measured at liquidation value, as opposed to economic value, which would largely be based on credit expectations. Our estimated tier one capital ratio, as of September 31st, 2008, increased to approximately 8.83%. Turning to our outlook, at this point, we expect the net interest margin for the full year 2009 will be consistent with 2008. However, we expect downward pressure from the first quarter, until the balance sheet re-prices in response to the very large, very rapid decrease in interest rates in December. That natural re-pricing will lead to a rebound to a new margin in the second quarter and beyond.

We obviously expect a credit cost to remain elevated on the coming year, and as we said, last year’s 3rd Quarter Earnings Call, we continue to expect a certain level of volatility in the char dust of any single quarter.

Remarkably, thirty days or more delinquencies in the consumer loan portfolio at year-end 2008, were relatively unchanged from year end 2007. In addition, after almost two years of work, we feel we’ve gotten ahead of the curve in our portfolio of all day mortgages, as evidenced by the stable delinquencies they’ve charged us since the 2nd Quarter. Overall, the awkward trend in credit costs will continue, but with losses shifting to the commercial. With that said, this credit performance compares favorably to the industry in 2008, and we would anticipate it comparing favorably to the industry in 2009 as well. With a difficult credit environment, M&T remains very focused on expenses. While arbitrary, across the board expense cuts are not consistent with our culture, we do continue to review opportunities to improve efficiency.

All of these predictions are of course, subject to, of course, uncertainties and various functions 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.

Now, we’ll open up the call to questions. Before this, Melissa will briefly review the instructions.

Question-and-Answer Session

Operator

At this time I would like to remind everyone, if you would like to ask a question, please press *, then the number 1 on your telephone key pad. We’ll pause for just a moment to compile the …. [inaudible] roster.

Your first question comes from Matthew Clark, with KBW.

Matthew Clark

Hi this is Matt. Just first on the top proceeds – did you guys pay a dividend there and recognize any in the 4th Quarter? It looks like it was embedded in the total number…

Rene Jones

No, that dividend would have to be declared for the first quarter and then now paid for the first quarter.

Matthew Clark

And then on the mortgage-related re-negotiated loan, that are not accrual. Can you update us or let us know what your policy is in terms of how long it must take while they stay current on P&R before they return to accrual?

Rene Jones

In that case, the answer is pretty simple, once we modify the loan for someone who has missed a payment, we would require at least that they make at least six consecutive payments before we rolled that out of non-accrual.

I think we’ve been modifying loans probably May- March time-frame, so that gives you sort of some sense of what’s going on there. A lot of the loans that we’ve modified in the recent quarter actually have been current and are paying, so they never roll into nonperforming. So they’ve been making their payments all along, but what we’re trying to is to be really pro-active there and help people stay in their homes and sort of avoid outsides risk in the future.

Matthew Clark

And what has your experience been, in terms of, given that you’ve been doing in term of subsequent delinquencies in terms of what you’ve renegotiated.?

Rene Jones

You need, probably, six months of experience, so you can only have maybe a quarter or so of experience, so the things that have seasoned out the six months were probably in the 40s, who would admit, 40s range, that we default, which we think is better than what we’re hearing in the industry.

I think the primary reason is because our book of residential mortgages is so small that we have actually been able to deal with individuals on a person-to-person basis. Our view is that modifying a loan probably makes sense as long as that number doesn’t get above 60 or 70%.

Matthew Clark:

On the … the insurance premium increase, can you .. there in terms of the ramp we might see here throughout 2009?

Rene Jones

If you look at the industry, they're at 1 to 1.5 times. You can't sort of look at that and say, "Okay, we'll say it too". What we're really doing is we're looking at our book, and probably relative to others, we're probably more pessimistic on the environment, over all. That's why today, we're sitting at two times coverage, because we're looking at our books and we're seeing that migration on the commercial side. Really, what I think you would expect to see is that unless we change our outlook from that rather pessimistic view, I don't think that we would need to do anything there. I would guess that what you will see, as we finish this year, is that we'll be probably in the top two, three highest reserve, on that basis.

One of the things that some folks have been asking us is "Last time there was a downturn in the credit cycle, how come you had a higher allowance?" Really, one simple thing is that last time we had a major economic recession, in the early 1990's, we had a credit card portfolio, as well. If you start looking at coverage ratios, I think that gives you a better sense of what we're going to do. The short answer is "Not necessarily".

Matthew Clark

Okay, and when you talk about coverage rations being two to one, I guess you're looking at full year charge offs, if I compare just the 4th Quarter level, it's about 1.4?

Rene Jones

Yes, and I would guess everybody – on that basis, because I don't know where anybody is. It's hard to look at. If you look at it, we were 77 basis points in the 3rd Quarter, if you average the two in the last six months – I'm just making this up, maybe that's 97 basis points. Clearly, the second half charge offs were rising. 97, maybe that's 1.7 times coverage. It's still relatively high.

Matthew Clark

Okay, I guess, from my point of view, it seems like the economy is weakening significantly. It's not just you, but for everybody. As they think about charge offs, going forward, there should be some net increases. That coverage ratio will probably approach 1% in a couple of quarters.

Rene Jones

Matt, we don't forecast. We were relatively pessimistic when we were not booking loans in New York City, when everybody else was. We've been kind of pessimistic for some time and that's why we never took our reserve.

Matthew Clark

Okay, that's fair enough. Separately, you're one of the few banks that are earning their dividends, if not the only bank among the bigger banks. A payout ratio is high. Capital looks a little light, after the Provident deal, and obviously, the economy is just very weak. At this point, how important is paying the dividend versus building a little more capital, to be opportunistic or to play (deep)?

Rene Jones

Matt, I think you spelled it out very well. If you look at the coverage, you have to look at net operating income, to exclude the amortization of intangibles. In 2008, our earnings were twice our dividends. We feel pretty good about that. We've not gone into any quarter with a loss, despite an environment where you're seeing a lot of losses. I think we handily covered our dividend, this quarter, as well. That's just not something that is on our minds, today.

Operator

Your next question comes from Steven Alexopoulos, with JP Morgan.

Rene Jones

Hi, Steven.

Steven Alexopoulos

First question – are aware if AIB reduced their position during the quarter? Could you just review the process for them to sell on the open market?

Rene Jones

No, I'm not aware of that.

Steven Alexopoulos

Okay, there is an orderly process if they're going to go to the open market. Is that right?

Rene Jones

Yes, there is an orderly process. The only reason I won't spell it out, step-by-step here, is it's out there publically. I'd be happy to get a copy of that thing out there, again. Essentially, it requires right of first refusal. After that, if we choose not to do that, it requires an orderly distribution and time period, and under a number of provisions. One individual can't own more than a certain amount of the individual shares from that distribution. You're right. It does require an orderly distribution.

Steven Alexopoulos

Rene, since you guys announced the Provident deal, your stock's been under a lot of pressure. You did make comments, at the time, that you probably would issue more common equity. As that stock continues to slide, here, you're decreasing the eventual dilution, day-by-day. How quickly do you think you might get out there and try to get an equity raise done? Or, do you try and wait for recovery in the stock price?

Rene Jones

On the call, what we actually said is that we did not see the need to raise capital for that deal. You see that we closed with a ratio of 4.59. The way we think about it, our capital ratio has always been historically low. There is a good reason for that. We think we've sort of built a business model that is appropriate for the level of capital that we maintain.

If you think about it, Alex, if you go through and look at the volatility of businesses – I may have shared this with you before, volatility of earnings over the last eleven years, I don't think you'll find a bank whose earnings volatility is lower. That's not because we're good; it's because of the business model we built. We're a deposit-oriented institution. We've never had much mark-to-market - I'm sorry, Steven. I said "Alex". We've never had much mark-to-market exposure. The biggest exposure we have, today, is in this OCI adjustment, because of our private label Morgan Securities.

When we think of that, it's a very different world. Clearly, everybody out there has the facts to understand that the reduction in our tangible ratio is due to the illiquidity in those markets. If you look at the pricing on those securities, what you get is after you remove all credit, they're pricing as if you need an 18% yield.

We make loans and we buy securities to hold them. We don't tend to sell them at exit prices. From our perspective, there's no economics there. If you look back at that – I think we said it was 75 basis points. You're back right where we've comfortably always been.

From our perspective, we don't think we need to raise capital related to that deal, or at this point, for any other reason. Having said that, at some point in time, if there is some opportunity, we probably are not going to be doing any opportunities without doing capital. When we're thinking about capital, today, it’s all from an opportunity perspective.

If you think of the Provident deal we did, it was a stock-for-stock deal. Those are my thoughts.

Steven Alexopoulos

Okay, that's helpful, thanks.

Operator

Your next question comes from John Fox, with Fenimore Asset Management.

John Fox

Hi, I have a couple of questions. On a going forward basis, could you comment on Bayview, and number one, the level of operating losses expected? Number two, what is your valuation of the asset? Thanks

Rene Jones

Yes, we added a $9 million dollar operating loss in the quarter, down from $14 million dollars. I guess it was a little bit higher than I expected when we were on the 3rd Quarter call. Essentially, sort of the unwinding of some assets and some things to get it into its steady state mode, there were some remaining of those.

Let me just say; I expect it to be lower than the $9 million dollar loss that you saw this quarter. Other than that, there is no real change. They're still originating a very small amount of mortgages. At the end of the day, much of the valuation of the business is now based on the totality of the cash flows from the broader Bayview businesses.

John Fox

Okay, it looks like the tax rate was low in the quarter. Can you talk about that and what you expect it to be, for 2009?

Rene Jones

There are two things there. We did receive some amount of sales tax rebates in the quarter. The other thing that is quite interesting; I don't know if it's a good thing; our earnings are lower. We have a fair amount of fixed tax credits. The tax rate naturally goes down when the earnings are lower. There is sort of a floor, there.

John Fox

Okay, how about 2009?

Rene Jones

I'd say just look at the effective tax rate for 2008, and take out - there was a benefit, I think – I'm missing it. We had an item that we mentioned on one of the calls. I just can't remember what it was.

Donald MacLeod

It was the work out on closing one of the returns incorrectly.

Rene Jones

Oh, yes, we did have a onetime benefit in the 3rd Quarter, that we had mentioned, for somewhere around $40 million dollars. You would have to take that out and normalize it.

John Fox

Okay, in terms of capital, I'm hearing you saying, "We have these currently illiquid MBS, and we think they're worth more than the mark, etc." What is the duration on those? Presumably, I don't know if you're right, we should be getting par, over time. That should accrete to book value. How long does that take? When will we start to see the collections come in, and we'll be able to mark that up?

Rene Jones

There is something like $2.7 billion dollar of private label, mortgage-backed securities. The lion's share of those have the most senior position. The payments, in the second half of the year, were probably something like – potential pay downs were something like $30 million dollars a month. Now, with the lower rates, I would expect to see some acceleration in that. That's exactly how we think about it. It's sort of a natural amortization into our capital base. I think the key point, there, is that we didn't buy them to sell them. We have no intention of selling them, so that's what is going to happen. If we thought there was a problem with them economically, we'd have to take an OTTI charge, right. We haven't.

John Fox

Right, I'm not implying that you should write them off. I'm saying, "Okay, we've taken this huge hit, through AOCI, and presumably that should come back, over time, as you get par". I'm just trying to gauge how fast does that happen. If you're saying $30 million dollars a month, let's say it goes to $40 million dollars because the rates are down. That's $480 million dollars …

Rene Jones

Four or five years, four years, is that right?

John Fox

So, we should see some accretion of that in 2009?

Rene Jones

Yes, and you are seeing it, right? You actually saw some in 2008, but what you cosmetically don't see it is because the discounted yields are going up.

John Fox

Right, and that number that we see has gotten bigger – wider, each quarter.

Rene Jones

Yes, underlying this $30 million dollars a month of amortization, if you say that that loan – let's say – I forget what it is; 65 cents on the dollar, or something like that. 35 cents of the thirty is coming in, right?

John Fox

Exactly, okay, thank you.

Rene Jones

You're welcome.

Operator

Your next question comes from Gary Paul, private investor.

Rene Jones

Good morning, Gary.

Gary Paul

I have questions on three topics. The first one relates to Bayview. I have a couple of questions. You mention that Bayview has relatively limited production, yet, as I go through the 10K (previews), quarter-by-quarter, M&T keeps buying. What portion of their production are you buying? Would the losses be significantly greater if you weren't?

Rene Jones

We are not buying – okay, I see where you're going. We're not buying, and have not bought the VLG Production. What we did do in the 3rd Quarter, I believe, is we purchased a bond from Bayview Financial, which is a different product. It's a residential mortgage-backed product that was a AAA-rated security, and where we have the first and sole position.

Gary Paul

Are you saying this is being bought from the parent?

Rene Jones

Yeah, it's being bought from the parent, and it's not small balance, commercial stuff. We're not buying things from our own subsidiary.

Gary Paul

Okay, so it has no effect, really, on the size of the losses?

Rene Jones

That's right, none whatsoever.

Gary Paul

My second question, given that you have not taken any other than temporary losses on Bayview, and have indicated that that is based on the stream from, in essence, the parent, largely; can you give us any indication as to what that stream of cash flow is?

Rene Jones

What it comes from?

Gary Paul

No, more of like the dollar size.

Rene Jones

No, we haven't talked about that, at all. Think about what you have. You have two main things, outside of BLG. You have residual values from the securities that they've generated, probably over the past ten or twelve years. As those pay down, the first cash flows go to reduce the debt securitized by them. As that debt goes away, what then happens is that the cash flows go to the parent and to us.

The second piece is Bayview Asset Management, which by now, you may have read about. It's up and running. They're buying assets. They get a management fee for buying the asset, a management fee for servicing the asset, and they also get a return beyond a certain nominal return. They get 20% of the profits, beyond a nominal return.

One of the things I think is really interesting, Gary, is if you think about what's happening in our private label mortgage securities, where after you stress for cash flows and remove the credit costs, there is an implied 18% to 20% yield out there that people are getting. That is the type of paper that Bayview Asset Management is buying. In a simple buy and hold strategy, today, the returns on the funds that they set up are likely to be 20%, without any recovery and housing prices. They get 20% of those.

The key is that you've got to go out and fully invest that, and set it up. You don't want to buy, fully put your investments in too early because you'd be worried about buying all of your assets and filling up your fund, while housing prices still have some way to go.

Gary Paul

Okay, and my last question is related to Bayview, and then I have two other topics that are only one question each. You had indicated, on the last conference call, that you are taking your Bayview right down through the investment, which is why it was down from 300 to 280, and I assume is now down to 271?

Rene Jones

Yes, it's a partnership interest. The incomes in partnerships are not taxed. It just flows to the partners, and it would reduce the basis, absolutely. The loss would reduce the basis – the (public of increase) the basis.

Gary Paul

So, you had increase in basis before they started having losses?

Rene Jones

Yes, I think it was up to 310 or 308…

Gary Paul

Okay, I was having problems reconciling the amount of losses that you'd taken quarter after quarter, and echoing down. That explains it, okay.

Second question is a pretty simple one, which is excluding stuff that's non-performing, already, how much is left in your construction portfolio?

Rene Jones

Excluding things that are non-performing, what's left in our builder construction portfolio, the whole thing or the mid Atlantic? Which one are you thinking?

Gary Paul

I'm thinking about the total construction, including the Pacific Northwest.

Rene Jones

Give me a second, here. Where is my …

Gary Paul

And ballpark is good enough.

Rene Jones

Sure, give me a second. $1.7 billion, I think, when we started talking about it, we were at $2.2 billion.

Gary Paul

Okay, and my last question is on your last Q, on Page 37, you mentioned these VRDB's. I understand that they're distinctly different from SIV's, but what can you tell me to convince me that there is not any risk, assuming that's the case, of the VRDB's being backed by the bank if anything goes wrong?

Rene Jones

I think the one major difference is with the remarketing agents. We essentially are providing a line of credit, but we don't have to take the bonds in, by the way the things are structured. We don't have to take the bonds in to inventory. That's a choice of M&T. I think that's a fundamental difference. You don't have the issue with having to bring things, on balance sheets, like the SIV's. In fact, in a broader question, that's one of the other things that sort of distinguishes us. We don't have a lot of stuff hanging off our balance sheet.

Gary Paul

No, other than this, I haven't seen anything.

Rene Jones

We don't have a conduit. The small conduit that we had in 2008, we didn't think provided much, if any liquidity. We got rid of it.

Gary Paul

Okay, that's the end of my questions.

Rene Jones

Thank you, Gary.

Operator

Your next question comes from Morris Segall, with SPG Trend Advisors.

Morris Segall

Good morning.

Rene Jones

Good morning.

Morris Segall

I wanted to ask you that your strategy with regard to capital adequacy in the loan-loss reserving, is taking full account of the Provident acquisition, and what might be in that portfolio?

Rene Jones

Could you refine that a little bit?

Morris Segall

I know you're scrutinizing and going to do due diligence on Provident's book of business. To the extent that as we go through this year, and the shift runs from consumer to commercial real estate, I'm wondering how comfortable you are running a lean operation, in regards to capital adequacy and loan-loss reserving, giving that new acquisition and what might be in there?

Rene Jones

Let me just start off with I wouldn't characterize our reserving as "lean". I would characterize it as one of the top three or four highest reserves in the industry, based on the loan book that we have. We've already had our comments on capital reserve.

I think, with respect to Provident, we did a pretty thorough job on that. If you look at the 650 million in marks, on a small institution like that, we think we've got our hands around that. Once we do that, it means there are no charge offs in that entity and it's sort of a bank that produces cash flow.

Essentially, what we have to do is to put those two banks that are on top of each other in Baltimore, and make them efficient. What you're going to see is we take the marks; there will be no charge offs going forward, and then it will produce a significant amount of cash flows out and about, and probably starting in the first six to twelve months. Again, I think we're pretty well reserved, when you consider the size of our reserve, and the marks that we're contemplating with Provident.

Morris Segall

Would you be inclined, if things deteriorated to a greater extent as we go through 2009, to reapply for more TARP money?

Rene Jones

No, we see no need to do that.

Morris Segall

Okay, thank you very much.

Rene Jones

You're welcome.

Operator

Your next question comes from Ken Easton, with Bank of America.

Rene Jones

Hey, Ken

Ken Easton

Hey, Rene. Just one quick question. Could you just talk a little bit about the ninety-day past due bucket? What types of migration are you seeing behind the surface, what we're necessarily seeing in NPA's this quarter, but just how the rest of the book is acting behind the surface, a little bit?

Rene Jones

Yes, I'll give you a quick answer. Don, do you want to..

Don MacLeod

Other than the usual GNMA buy out stuff, and the export/import bank stuff that's government guaranteed; there is one credit in there that is reasonably sizeable, that's going to be restructured. That's why it's not non-performing. It will be restructured here, in the next thirty days, and should drop out of there.

Rene Jones

Yeah, and still paying interest.

Ken Easton

One just quick follow-up, just to wrap up the whole discussion about capital adequacy, unrealized losses, etcetera. I want to make sure I'm understanding your comment that because the "unrealized" is the main culprit on the TCE, given the reduction that we're going to get through the Provident deal, that you're still comfortable running at a TCE ratio, which I guess could be proforma now as low as 4%? Do you see any need to have to raise additional capital?

Rene Jones

No, Ken I don't see a proforma at 4%.

Ken Easton

Wasn't it 4.9%, going to 4.4% or 4.5%? That was the (terms) that you provided in the (stack)?

Rene Jones

That’s a good point, good clarification.

Ken Easton

So, I'm saying from 4.5%, kind of down to 4.0%, is my analysis.

Rene Jones

Yes – our conference call, I think, was on the 19th of December. We kind of knew where all the marks were. Everybody was a little nervous about saying it went to 4.4%. A big chunk of that was because we already saw what had happened to the unrealized losses.

Ken Easton

Okay, what you're saying is that …

Rene Jones

It's built into the estimate.

Ken Easton

Sorry?

Rene Jones

A chunk of what you see, going from 4.90% to 4.59%, probably a little more than half of that was already baked into our estimates when we said 4.4%.

Ken Easton

If the deal closed today, what would proforma TCE be?

Rene Jones

I don't have a different answer. I'm saying it's 4.40%. If I forecasted fifty different times – the answer to your question is since December, when the government started talking about buying assets again, the marks improved, probably $100 million dollars.

Ken Easton

Okay

Rene Jones

It moves all around. I think our message is that we're not managing our business based on the silliness of the markets. We're going to manage it based on cash flows.

Ken Easton

Okay

Rene Jones

Okay?

Ken Easton

So, in that concept, you feel very comfortable with where capital ratios are?

Rene Jones

We feel comfortable, today.

Ken Easton

Okay, thanks a lot

Rene Jones

You're welcome.

Operator

Your next question comes from Collin Gilbert, with Stifel Nicolaus.

Rene Jones

Good morning, Collyn.

Collyn Gilbert

Good morning, Rene, how are you?

Rene Jones

Great

Collyn Gilbert

Good – I have just a quick question. In the event that they bring back some version of TARP 1, are there any assets on your books or Provident's books that maybe you would look to participate through that hypothetical TARP?

Rene Jones

You know, I think there are two steps to that answer. First of all, if they went back to TARP 1 and they start buying assets, you will probably, automatically see some rebound in those unrealized losses. Almost 100% of the drop, from the 3rd Quarter to 4th Quarter came on November 12th, when Secretary (Folsom) said that he was not going to buy assets anymore. You're seeing it come back.

That automatically, if you care about this OCI adjustment, would increase capital ratios. Then, I think you have to think about it. There has been some talk. (Frank Guitner) had mentioned this whole "good bank, bad bank". Quite frankly, this gets at the essence of what's going on in the capital markets.

If a private bank were set up that were buying assets based on cash flows, and they said, "After credit, we'll use a discount rate of 13%," as soon as that is announced, most of the banks will get a huge infusion of capital from the OCI (reversing) Think about the idea of a bank – let's say it's the government, buying assets at 13%. 13% after tax is 8%. That's a better deal than giving out TARP money, at 8% dividend, to a bank that's not doing well.

I think it has merit. I think it would help – to your specific question, we'd have to look. One or two assets here and there, I don't know; I think if we participated, it would probably be more about helping the process.

Collyn Gilbert

Okay

Rene Jones

I think it's too hard to say. The lions share – we'll keep.

Collyn Gilbert

Okay, that's helpful, thank you.

Operator

Our final question is a follow-up, from John Fox, with Fenimore Asset Management.

John Fox

My question was answered, thank you.

Operator

Are there any closing remarks?

Rene Jones

Again, I'd like to thank everybody for participating, today. As always, if clarification of any of the items in the call or the news release is necessary, please call our Investor Relations Department, at 706-842-5138. Thank you, and good bye.

Operator

This concludes the M&T Bank, 4th Quarter and Full Year 2008 Earnings Conference Call. Thank you for participating. You may now disconnect.

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