M&T Bank Corp (MTB) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Pam and I will be your conference operator today. At this time I would like to welcome everyone to the M&T Bank second quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you.

It is now my pleasure to turn the floor over to your host, Don MacLeod, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Pam, and good morning. This is Don MacLeod. I'd like to thank everyone for participating in M&T's second quarter 2007 earnings conference call both by telephone and through the webcast.

If you've not read our earnings release, you may access it along with the financial tables from our Web site www.mandtbank.com and by clicking on the Investor Relations link.

Also, 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 M&T Bank Corporation. M&T encourages participants to refer to our SEC filings found on Forms 8-K, 10-Q, and 10-K for a complete discussion of forward-looking statements.

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

Thank you, Don, and good morning, everyone.

Before I respond to questions, I'd like to highlight and expand upon a few items from this morning's earnings release. Diluted earnings per share, which include the amortization of core deposit other intangible assets, were $1.95 in this year's second quarter compared with $1.87 earned in the second quarter of 2006 and $1.57 earned in the linked quarter.

Amortization of core deposit and other intangible assets amounted to $0.09 per share in the second quarter of 2007 compared with $0.06 per share in the second quarter of 2006 and $0.10 per share in the linked quarter.

Recall that last year's second quarter results included $2 million of after-tax merger-related expenses amounting to $0.02 per share. There were no merger charges in the recent quarter or in the first quarter of 2007.

Due to net operating earnings per share, which exclude the amortization of core deposit other intangible assets, as well as merger-related expenses in last year's second quarter, were $2.04 compared with $1.95 in the second quarter of 2006 and $1.67 in the linked quarter. As is our custom, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.

Net income for this year's second quarter was $214 million compared with $213 million in the year earlier quarter and with $176 million earned in the sequential quarter. Net operating income was $224 million compared with $222 million in the second quarter of 2006 and $187 million in the linked quarter.

Return on average assets was 1.49% compared with 1.54% in the second quarter of 2006 and 1.25% in the first quarter of 2007. Net operating return on average tangible assets was 1.65% compared with 1.69% in the second quarter of '06 and 1.4% in the sequential quarter.

The return on average common equity was 13.92% compared with 14.35% from last year's second quarter and 11.38% in the linked quarter. Net operating return on average tangible common equity was 29.35% compared with 30.02% in the second quarter of '06 and 24.11% in the linked quarter.

Turning to the income statement. The net interest margin in the second quarter was 3.67%, up from 3.66% in the second quarter of last year and 3.64% in the linked quarter. This reflects taxable equivalent net interest income for the quarter of $467 million on an earnings asset base of $51 billion.

The change in the margin from the linked quarter breaks down as follows: There was a 2 basis point decline resulting from one more day in the second quarter, an additional 1basis point decline reflects the full quarter run rate of funding the Bayview lending transaction.

Recall that in the first quarter's results, they included just under two months of carry on that investment. Offsetting those items was a positive 4 basis point impact from a $5 million increase in prepayment penalties and interest received on non-accrual loan.

Finally, there was a 2 basis point expansion in the core margin, reflecting the trend of lower rates on consumer non-maturity deposits begun late in the first quarter. Another factor that contributed to the expansion was the runoff of higher rate consumer time deposits that were originated in mid 2006.

Average loans for the second quarter were $43.6 billion compared with $43.1 billion in the linked quarter giving an analyzed growth rate of 4%. Average loans grew 6% from the second quarter of 2006.

Average C&I loans were up 8% from last year's second quarter and grew at an analyzed rate of 14% from the first quarter of 2006. Commercial real estate loans were up 5% on a year-over-year basis and grew at an analyzed rate of 3% from the linked quarter.

Average consumer loans were up 1% compared with last year's second quarter and on an analyzed basis from the linked quarter. This reflects continued softness in home equity lines of credit, offset by strength in auto loans. Average residential real estate loans declined an analyzed 4% from the linked quarter due in part to the reduced volumes of Alt-A loans in our mortgage pipeline.

Turning to credit. Non-performing loans totaled $296 million at the end of the recent quarter compared with $273 million at the end of the last quarter and $156 million at June 30, 2006.

The non-performing loan ratio was 68 basis points at the end of June compared with 63 basis points at the end of the first quarter. That ratio was 38 basis points at the end of June 2006.

The $23 million increase in non-performing loans from the linked quarter was primarily due to a $34 million loan to a residential homebuilder and developer in the mid-Atlantic region. Partially offsetting that were several repayments, including full repayment of the commercial real estate loan, which had been moved into non-performing status last quarter.

All other changes, both positive and negative, for the non-performing loan category in the second quarter were due to smaller credit and don't represent any patterns with respect to industry or geography.

Net charge-offs for the quarter were $22 million, representing an analyzed rate of 20 basis points on average loans. And that compares with $17 million, or 16 basis points in the linked quarter and $10 million, or 10 basis points in the second quarter of 2006.

The provision for credit losses is in the second quarter of 2007 of $30 million exceeded charge-offs for the quarter by $8 million and resulted in allowance for credit losses of $668 million, or 1.53% of total loans at the end of June, up from 1.52% at the end of the first quarter, but down from an allowance level of 1.55% at the end of June 30, 2006.

Loans past due 90 days or more but still accruing interest were $135 million at the end of the recent quarter compared with $118 million at the end of the linked quarter and $101 million at the end of June 30, 2006. At the end of the recent quarter this category included $70 million in loans that are guaranteed by government-related entities.

Turning to fee income. Non-interest income was $283 million in the second quarter compared with $263 million in the second quarter of last year and $236 million in the linked quarter. We saw strength in several of our fee-related businesses.

Mortgage banking revenues were $36 million compared with $42 million in the year ago quarter and $14 million in the linked quarter. The largest factor in the linked quarter comparison relates to the $18 million of Alt-A mortgage-related charges taken in the first quarter.

This quarter's mortgage results included $8 million of gain on sale from the residential mortgage origination business, $18 million of residential mortgage servicing income, $7 million from commercial mortgage origination and servicing, and $3 million from ancillary fees.

As we noted last quarter, our changed business practices with respect to the Alt-A loans only impact our residential origination business. The remaining parts of our mortgage business, like servicing, remained very stable.

Loans closed during the quarter were approximately $1.4 billion compared with $1.1 billion last quarter. That's residential mortgages. Applications were flat at $2.7 billion in each period.

The strong equity markets had a positive impact on our investment businesses. We experienced good growth in trust fees, up 8% from last year's second quarter, and brokerage fees, up 15% from the same period.

Service charges on deposit accounts were $105 million for the quarter compared with $96 million in last year's second quarter and $95 million in the first quarter of 2007. Recall that the first quarter is typically our seasonal low point and the linked quarter increase represents a return to seasonal normal levels of activity.

Other revenues from operations were $73 million in the second quarter. This compares with $70 million in last year's second quarter and $71 million in the sequential quarter. The quarter's results included a nice uptick in advisory fees compared with last quarter, partially offset by lower gains on student loans.

Our pro rata share of the results from the Bayview Lending Group partnership were $8 million in the quarter. When combined with the carry on the investment, the BLG investment was accretive to M&T's results by $0.02 per share in the second quarter compared with $0.03 dilution from the first quarter.

During the quarter BLG completed a $425 million securitization, small balanced commercial mortgages and ended the quarter with approximately $549 million of commercial real estate loans held for sale.

Turning to expenses. Operating expenses, which exclude the amortization of intangibles and merger-related expenses, were $373 million for the recent quarter compared with $362 million in the second quarter of 2006 and $381 million from the linked quarter. The recent quarter results include a $5 million partial reversal of the allowance for capitalized residential mortgage servicing rights compared to a reversal of $8 million in last year's second quarter and a $1 million reversal in the linked quarter.

I'd note that as of June 30th, we have about $4 million remaining in our valuation allowance for capitalized residential mortgage servicing rights. That's the maximum amount that could be reversed in future periods if long-term interest rates continue to rise.

Excluding the MSR reversal, operating expenses for the quarter were flat with the linked quarter with a $12 million decrease in salaries and benefits being offset by a $12 million increase in other expense categories. The increases were primarily in advertising and professional services related to various technology initiatives.

During the second quarter, M&T repurchased just under 2 million shares of its common stock at an average cost of $109.77 per share. These shares were acquired under the prepurchase program authorized by the Board of Directors in February of 2007 and there are approximately 3 million shares remaining on that authorization.

Turning to our outlook. While our results for the second quarter were significantly improved from the first quarter, in general our outlook remains consistent with the one we gave you in April. For the net interest margin, our continued expectation is that the full-year margin will be in the range of 360 to 370, including the 3 basis point negative impact from the BLG transaction.

While the modest deepening of the yield curve is a positive for the long-term, in the short-term it may slow prepayments in our investment portfolio. These prepayments have been a benefit to our net interest margin as of recent.

Our outlook for loan growth is unchanged and remains consistent with recent experience: mid single-digit percentage growth in the aggregate with higher single-digit commercial loan growth, particularly commercial and industrial loans, partially offset by low single-digit growth in consumer loan. Recent trends in the commercial real estate are sluggish.

The outlook for our fee revenue remains unchanged consistent with this quarter's results with the caveat that the certain categories such as [BOLI] revenues, gain on leased equipment, investment banking, and loan syndication fees will likely have some variability from quarter-to-quarter.

Our full-year outlook on expense is for modest controlled growth. Expenses should be stable for the remainder of 2007.

Our outlook on credit is also unchanged. We continue to expect credit costs to trend upward. We're watching our residential construction portfolio carefully as the industrywide slowdown has impacted even some of the strongest developers and builders.

While our portfolio is largely within our banking footprint, pressure on real estate prices has been a nationwide phenomenon. Although customers in this portfolio have generally been able to maintain their debt service, we're seeing declines in appraisals in certain markets.

There's no change in our approach to capital management and our target ratio of tangible equity to assets, the tangible capital ratio as a tangible capital ratio approaches our targeted range, [we've] purchased capacity should be more in line with the amount of tangible capital that we generate in any given quarter.

All of these projections are, of course, subject to a number of uncertainties, various assumptions regarding national, regional, economic growth and changes in interest rates, political events and other macro economic factors which may differ materially from what actually unfolds over the course of 2007.

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

(OPERATOR INSTRUCTIONS) Your first question is coming from Jason Goldberg with Lehman Brothers.

Thank you. Good morning. A couple questions.

First, with respect to deposit trends, I guess you were able to take down some deposit rates this quarter. Was that, I guess, more of a function of kind of being too high last quarter and now you're back to parity or do you kind of think there's more room to work that down?

And then secondly, I guess where do you think we are in terms of running off last year's kind of time deposits?

I think, Jason, our expectations on deposits are that the pricing will maintain relatively stable, assuming that the competition sort of behaves. Having said that, I think that in the first quarter our deposit costs were rising a bit. We saw much of the competition actually not doing the same and so we were able to ease a bit at the end of the first quarter.

I guess in hindsight, it would have been nice to do it about four weeks earlier, but that's what you saw there. I don't sort of foresee any big changes in deposit pricing or strategy. I guess it's probably better to think about it in terms of the way in which we approach our customers and much of that's dependent upon what the competition does.

I think a couple of other points on deposits. You're seeing that we had a 4% analyzed growth in non-maturity deposits. And the runoff that causes the total deposits to be negative mostly came in the time accounts, and most of those were sort of the higher yielding 5.50 type yielding accounts. So the net of that was actually a positive to our margin.

And then the other thing you see in there is that the DD&A growth was down a bit. I think DD&A growth was down some $80 million, about $90 million of that was commercial DD&A. So all from our middle market and business banking activities.

And there what you're seeing is that there's continued -- the balances are being used to fund investment and then whatever's leftover is being reinvested into sweep accounts. So it's one of the reasons why we had a stronger quarter in service charges because either we get, they pay us in the form of balances, or if not, they pay us in the form of the fees for the services we provide. I don't see much of a change in the way of deposit trends from what we've seen in the most recent couple of quarters.

Okay.

And then I guess you had a $34 million MPA come on, which seems, I guess, like a pretty large loan. I guess maybe just get a better sense in terms of how many MPAs are that big that you have. I [couldn't] imagine you have many of that size.

And then two, I guess in terms of just reserves or write-downs related to that.

You're right. That is our largest non-performing loan. I'll give you in a minute.

I think we have something like 10 loans or less that are of $5 million or greater and this would be our largest. Give me one second. We have six credits that are $5 million or greater. So most of our non-perform portfolio's relatively granular.

What we're seeing here is a residential development loan in the mid-Atlantic that, really, the issue is that the credit is still paying but that the appraised values of the properties have declined, and as a result, we were sort of had to reevaluate the credit based on the loan to value. It's still paying. It's a project that that lots are ready to go and they have not yet begun selling the properties and so we won't really get a good sense of what's going on with respect to that property until we get further into the fall in that credit.

I think in general, though, what we're seeing is that we have a portfolio of residential construction loans that's about $2 billion of outstanding. It's a little under 5% of our total outstanding. And I think we're beginning to see as we're not immune to the effects of what's going on in the overall mortgage market and there's a bit of softness there.

And as home prices -- as homes begin to -- the number of home sales decline, I think that will continue to put a little bit of pressure on that sector. Overall, I think we feel pretty good about it.

In terms of our credit process, we've reviewed that portfolio above and beyond our normal credit process last September, and then again this May, much like almost two years ago when we told you that we were starting to review heavily our floor plan portfolios. I think we're on top of it and the loan is as of a nature that are higher, larger-sized credit than the normal-sized credit that you see in our portfolio.

Okay. That's helpful.

And then just lastly, I know there's seasonality to employee expenses and they're typically down in Q2. It just seems like they were down a bit more than prior Q2s and then I think you said you can kind of hold expenses stable for the rest of the year. Anything in particular there or just kind of tightening expenses in light of a relatively tougher revenue environment?

No, nothing in particular. There was about $8 million of the decline was from the options and the FAS 123R. Another 4.5 was from FICA and then another 2 was from unemployment insurance.

And I think that if you were to hold hiring flat, not saying we're doing that, but if you were to hold it flat, you'd generally see a slight downward trend in the second half because the FICA continues to play out. So I think, you know, you wouldn't expect, I think things should be relatively stable there, offset maybe slight hiring in the mid-Atlantic.

Did I get your question or was there another part to it?

No, that was perfect. Thank you.

Thank you. Your next question is coming from Sal DiMartino with Bear Stearns.

Hi. Good morning, guys.

Hi, Sal.

Just two quick questions.

First on the mortgage banking revenue line. I think last quarter you mentioned that on a go-forward basis you would be selling more conforming versus non-conforming. So can you give us a the breakout there and what kind of pricing you saw? And also, did you sell any Alt-A loans out of the portfolio?

And the second question is can you give us an updated outlook on Bayview? I guess originally, you said it was going to be dilutive in the first half but accretive beginning in the second half and, clearly, looks like you're ahead of schedule?

Yes, sure, Sal, give me one second.

Sure.

Yes, if you look at the -- I gave you the overall volume numbers but if you sort of take that closed volume that I gave you of, 4.9% of that was Alt-A loans and it's the same. It's 4.7% of the applications that we did were Alt-A.

And if you remember, what we had said is that in 2006 that number was around 35%, and then back at the beginning of this year it was probably down to about 25. So we've sort of done what we said. We've tightened up there and we are selling loans on a loan-by-loan basis.

So with respect to bulk sales, there were no bulk sales of Alt-A loans and you would not expect to see any more of those in the recent future. We did have some small sales through our new process and on those, the volume is -- the pricing is actually holding up pretty nicely on the Alt-A, say a gain on sale levels of about 100 basis points, but again, it's only 5% of our volume now.

When you look at the traditional agency-type product, we had gain on sale margins that were, you know, call it between 65 and 70 basis points. So pretty close to what I had mentioned.

You've heard some others talk about margin compression, we didn't see any in the quarter in what we sold, but we actually see it now. We probably are thinking that there's maybe as much as 10 basis points of margin compression out there in the volume of applications that we're taking today. So I would expect that to have a little bit of downward pressure on mortgage in the next two quarters.

Okay.

In terms of the Bayview, you're right, we somehow we got it right. We were slightly dilutive in the first half. Things seem to be going right on track with the Bayview investment and I would suggest that our expectations are that it will be accretive in the second half of the year.

I think the things to watch there are, you know, the Bayview recognizes income when they complete a securitization, but most of the economics, a lot of the economics are determined when they're booking the loan. And that's why we mentioned the level of the pipeline that is outstanding. I think it's important to watch that metric to get a good sense of what our future prospects are likely to be.

The other thing, Sal, I'll remind you of is that those are public securitizations so you can understand the economics of them as they get released. And that'll be before we actually talk about the numbers and the performance on these calls.

Okay. Thanks. Good quarter.

Thanks.

Thank you. Your next question is coming from Todd Hagerman with Credit Suisse.

Good morning, everybody. A couple questions for you, Rene.

Just to make sure I understood the previous question. Just in terms of the Alt-A, did you say that of the roughly $1 billion that you had retained on balance sheet last quarter, there were no sales of that portfolio in the quarter? No bulk sales, is that what you said?

No, we've moved those into our healthy maturity portfolios. So I wouldn't expect to see any sales of those.

Okay.

And then, again, just roughly on the Bayview securitization in the quarter, is that, I think you mentioned just somewhere north of $300 million.

It was, the securitization was for $424 million of loan.

Okay.

And that given where the held for sale volumes moved in the quarter, your expectation that's probably going to remain relatively stable? Or how should we think about the variability within their securitization activity?

(Inaudible) think about the variability of the-- I think, you know--

Just in terms, again, your pro rata share.

Yes, relative terms I think there are two things that I would do. I will provide you with where the pipeline is at any given point in time and so you should be able to get a sense. So now you know that in the pipeline is slightly more than we securitized last time.

And the only question is whether the timing of that Bayview chooses to execute those securitizations is depending on what's going on in the market. So I mentioned that because to the extent that for some reason they choose that they want to delay the timing of the sale or something because it makes sense to do so, that income might be a little lumpy. But your assessment is right.

The other thing I would say is that today when we look at the Bayview bonds, they tend to trade pretty close to the CMBX markets. So they're trading like commercial loans and that can give you some sense of pricing and value.

Okay. That's helpful.

And then just finally, just on the credit side, could you just give us an update in terms of the commercial floor plan and your non-performers? If there were any kind of material movement there in the quarter kind of where that stands as you guys continue to monitor that portfolio?

Yes, I'll just turn to charge-offs first. But in terms of charge-offs, we saw about $2 million -- we saw about $2 million of charge-offs related to that portfolio this quarter. [Upon] three different credits and nothing unusual so that's (inaudible) that's getting its way through the cycle, right?

In terms of addition, we had one addition of a credit in upstate New York that went to out of trust position for a little over $3 million. So I think the stuff that's coming into the bucket in terms of a non-performer seems to have slowed.

And that's not surprising because we've scrubbed that portfolio for some time now and then you're beginning to see a little bit of relief on the way out. So we probably had reductions to the non-performers of one, two, three, four, five, five credits either through payoffs or charge-offs. So that gives you a sense of where we are in the cycle on that with respect to non-performing loans.

No, that's helpful. Thank you.

Thank you. Your next question is coming from Bob Hughes with Keefe, Bruyette & Woods.

Hey, good morning, guys. I had a follow-up question on deposits, Rene.

If I look at spot balances your DDAs and other domestic deposits are down and deposits at foreign offices were up pretty considerably. Again, just looking at the spot balances, does that bode for some higher deposit costs and presumably some incremental margin pressure going into the third quarter?

Well, think of the foreign deposits as fed funds or wholesale.

Right.

And I think, if I'm not mistaken, I don't have it in front of me, but I think the rates were a little favorable on those, maybe a couple of basis points favorable to fed funds. So that's all that is.

And it's really, again, on the DDA, we've been pretty stable on the consumer side. It's really all of the activity we're seeing on the commercial side and the large movement into sweeps.

So I would suggest that that will have a little downward pressure on our margin that runoff in DDA. You should actually see it come back into the fee income categories, and that's why we had such a strong, one of the reasons we had a strong quarter on fee income.

Okay.

And I hate to ask this, but could you repeat your comments on the steepening of the curve and the impact it's having on, say, your commercial real estate operation? And then perhaps give us the level of prepay income this quarter versus last quarter?

Yes, I'll do both of those. Hang on one second. I think my point is that everybody's been waiting for the curve to steepen. I think there have been some good notes out there on the fact that that's not necessarily a panacea.

But what will likely happens in the long-term is that the positive force, because a lot of our loans are priced off of LIBOR and a nice spread between wholesale money and LIBOR actually helps us out quite a bit. You also saw the 10-year swap spread move from 50 basis points to 65 basis points, that's a positive for us in the long-term.

Having said that, what will happen, though, when those long rates move up is you'll see a slowing of the runoff in our investment portfolio. And keep in mind that that investment portfolio is underwater relative to fed funds and so that's been helping us.

And so as prepayments slow on, not on the commercial real estate business, but on the mortgages in our discretionary portfolio, I would expect to see a little bit of a loss of that positive that we were having there.

In the end, am I worried about it? No, I think it makes sense. We're keeping the mortgages that we bought in the first place but that's not a big deal. But it will put a little bit more downward pressure on the margin.

In terms of prepayment penalties, we had $6.4 million of prepayment penalties primarily on commercial real estate loans and that compares to $3.6 million in the first quarter. And then we had $3.4 million of interest received on non-accrual loans because all of the credits we're paying off and that paid off coming out of non-performance. That 3.4 compares to 1.3 in the first quarter.

One of the things, Bob, that I think is kind of interesting is that if you take this category, non-accrual interest and prepayment penalties and rather than look at it per quarter, if you look at it in the first six months of the year, that amounted to $20.6 million.

If you look at the previous six months or the second half of 2006, the number's something like $20.4 million. And if you look at the first six months of 2006, that number's $21.8 million. So the change in prepayments has not actually slowed at all, it's just lumpy from quarter-to-quarter in terms of timing.

Okay. Great. And if I could ask one final question.

We're seeing a few more distressed opportunities out there, Rene, do you think you guys are getting any closer to jumping back into the consolidation game?

I think pricing discipline is as important as ever today. You're seeing a lot of movement in bank stock coming down. But I think we tend to just continue to look at it in a very, very disciplined way and to try to focus on not overpaying for something. So no big change.

Okay. In terms of criteria would you be largely focused on in-market deals or do you, can you remind us of if there are any geographies you'd be interested in expanding into?

(Inaudible) tend to be opportunistic so we don't focus on going somewhere we wait to see what those opportunities bring us. But at the end of the day, opportunities tend to make more economic sense when they're close in or close to our footprint.

All right. Very good. Thank you.

Thank you. Your next question is coming from John Fox with Fenimore Asset Management.

Yes, hi. Good morning. Most of my questions have been answered.

But I do want to ask on the real estate consumer, the decline in those balances from the first quarter, is that basically a change in the Alt-A business or is there anything else going on there?

No, we think that's pretty much what it is but there's nothing else going on. The amount of loans that we hold of what we originate we hold that we actually hold a small portion, that hasn't really changed. So I think it's the Alt-A issue.

Okay. Thank you.

Thank you. Your next question is coming from Ken Usdin with Banc of America Securities.

Thanks. Good morning, Rene. Two questions.

First of all, related to your outlook that you stated in your prepared remarks, in the first quarter you had talked about that giving you confidence that you'd be at least able to kind of match if not meet the 737 you guys had earned last year. Is that still consistent with the guidance you're giving today?

We have no change in our guidance. No change in our outlook.

Okay.

And secondly, then, on the -- I want to ask you about provisioning expense. The second quarter in a row where you've meaningfully over provisioned in relation to charge-off levels.

I'm just wondering if you can tell us about, is that a similar expectation going forward and what the over provisioning is specifically related to as far as whether it's the migration, how the migration patterns are working through or if it's specific loan related?

Well, we said we expected the non-performers to go up. That just happened very much in lock step and you haven't seen that level off yet. So we are pretty famous for being very consistent in our approach and as those non-performers tick-up we tend to move directionally consistent with our allowance levels.

The real big factor, I think, this quarter was that we had 14% analyzed growth in C&I, right? So we have in order to maintain our allowance levels on those loans, you're going to get excess provision.

So the over provision was almost more related to growth this quarter than it was necessarily to migration patterns of either problem loans or potential problem loans?

I think, yes, most, yes, I'd say maybe at least a little of both, half and half. And the other thing is that I guess if you were to see large growth in something like residential real estate or categories, for example, you wouldn't provide as much, right, because the loss (inaudible) much lower.

Right. Okay.

And lastly, Rene, can you run through the geographic breakdown of your loan growth this quarter?

Yes, sure. We had, and these are analyzed numbers. We had 3.5% growth in upstate New York, 9% growth in our metro region, which again, is (inaudible) in the Hudson Valley area.

And we had in Pennsylvania we saw 10% growth in loans, the mid-Atlantic saw 4%, I'm sorry, 5% growth, 7.5% growth in loans, and if you look underneath the mid-Atlantic, it was somewhere around, bear with me for a second, 8% growth in both C&I and real estate offset by a little slowness and a little runoff in the consumer side in the home equity business there.

Thanks a lot, Rene.

You're welcome.

Thank you. Your next question is coming from Matt O'Connor with UBS.

Good morning.

Hi, Matt.

Couple of follow-up questions here.

On the expense side you've been very good about keeping expense growth pretty limited while continuing to invest in some mid-Atlantic franchises. Can you just give us a sense of where some of the maybe pruning is coming from and how much more flexibility you might have on the expense side?

Well, I guess the first thing I would say is if you take a look at our salaries and benefits, they're growing at about 5%. So if you think about people costs, that's where it will continue to grow.

And what is sort of bringing us down, I think if you take out the (inaudible) we're 3 to 3.5% growth this quarter over last year quarter. It's getting offset by slow growth in non-salary-related areas.

And I think that becomes harder to do in terms of actually getting, you know, lowering the growth rate in your non-salary. But I think as we began the year, we said we still thought we had some momentum from our smart spend initiatives and kind of working our way through much of our vendor contracts.

I don't know, I think going forward that you're going to start to begin to see more normalized growth in those categories. With respect to the second half of the year, I think things would be relatively stable there.

Okay. And when you say normalized growth, would that be like 3 to 4% range or?

We'll target a revenue expense (inaudible). You saw 5% growth or something like that in revenues this quarter. We had 3% growth in expenses. If we keep doing that, we'd be happy in this environment.

All right. And just separately, another follow-up on the M&A side.

You know, more and more banks are talking about being open to merger of equals just given the increasing importance of scale and I'm just wondering if you could comment on that in terms of how you think you might be positioned and if you want to be positioned in that.

I think it's [a] clear sign that it's a tough banking environment. We've been talking about it for some time. I think in some sense, while we had a nice rebound from the first quarter, we made not much more money than we did a year earlier, and I think that gives you some sense of how tough the environment is. So it doesn't surprise (loss of audio).

Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold and the conference will resume momentarily. Thank you for your patience.

Hello?

Your next question is coming from Paul Delaney with Morgan Stanley.

Good morning, guys.

Hi, Paul, sorry for the delay.

No, no problem. Just two quick questions.

One, I was just curious when in the $2 billion construction portfolio how recently the loans have been appraised or reappraised? You mentioned that you'd reviewed the portfolio.

You know, we have a process where we review every credit at least annually so that's the normal process. But we went back in September and we did a full review of the portfolio because of the sort of changing dynamics in the mortgage market, and of course, the slowdown in home sales and those types of things and then we did it again in the month of May. So recently. And I think part of what you're seeing with the one credit that we took to non-performing was the result of that review.

I see. So the appraisal process threw that up as the only one that was significantly needed a significant adjustment?

Yes, it was the only one at that stage, that level that warranted a non-performer.

Okay.

And we'll watch all of those very closely so we have a good handle on what's in our pipeline in terms of the classified loans (inaudible).

Great.

And then my second question was related to deposit service charges. They're out strongly year-over-year, and I guess that's, you mentioned seasonality. You also mentioned sweep accounts and I guess there's a positive impact from the city branches as well. Is there anything else at play there?

I'm glad you mentioned. Well there is, actually, but I'm glad you mentioned the city branches are one of the things that's helping us on that front.

The other thing is is that we have a network and a relationship of where we provide, allow our customer base to use the ATMs free of charge and that is actually driven quite a bit of volume. There's over 350 ATMs under that network out there.

And that movement to not charging at the ATMs has actually driven up transaction volume quite a bit. And then you also recall that we added something like nine ATMs in the fall at the BWI airport. We added another seven in February.

We've added a total in the last 12 months of 60 or so, probably more than 60 in the mid-Atlantic. And all of those are producing increased customer activity.

Great.

So a lot of core things seem to be working for us on that front.

Yes. That's very helpful. Thanks very much.

Thank you. Your next question is coming from [Guerez Patancar] with [Sonova] Capital.

Morning, Rene. Congratulations for the quarter.

Thank you, Guerez. Nice to hear from you.

Likewise.

Quick question on the $2 billion in residential construction portfolio. Can you provide us some color on the geographical breakdown of that portfolio?

Yes, sure. I'd be happy to. Just give me one minute here.

We had it broken down into a couple of different footprints. We have, in what we call M&T East, which is sort of Buffalo, Rochester, Hudson Valley or our traditional areas, we have about $160 million outstanding. And our mid-Atlantic growth there's about $650 million outstanding. That's Northern Virginia, Maryland, Delaware, D.C.

And then we've got in our West portfolio, which is the group that we sort of inherited and has been working with us for some 12 years now, in that West portfolio we have about $280 million. And then the remaining $1 billion is across all of our footprints with, mostly with smaller residential developers.

If you think about from a national -- our exposure to sort of national homebuilders on direct exposure is relatively small, maybe a little over $200 million. With a lot of indirect exposure, a little bit more indirect exposure, (inaudible) up at $400 million, which is (inaudible) they've got options on our contract for below the actual borrow. (Inaudible) In terms of (inaudible) markets, not very much.

Okay. That's helpful. Just have a quick follow-up.

In terms of the deposit pricing you [related] to some easing up in terms of competitive pressures. Which footprint did that ease up a little bit? Was it more the [legacy] footprint or was it the mid-Atlantic?

I don't know how technically right I'll be here, but I'll give you a feel for it. I thought we were seeing a lot of deposit pricing pressure, actually, in upstate New York and I don't think that's changed all that much, but I think we saw some relief across the rest of our footprints. Having said that, a couple of basis points.

Cool. Thank you.

Thank you. Your next question is coming from Michael Rogers with Conning Asset Management.

Yes, good morning.

Just a little bit more on the residential construction portfolio. Could you refresh me on the original underwriting criteria that you employed when you put that book of business on the books?

When we put the $2.1 billion?

Yes. I mean originally are there LTV guidelines and other things that you stick pretty stringently to or just a better picture there please?

Yes, there are and I think the way to think about it, though, is that in the sense while they're all managed under one credit culture, the portfolios are actually a little different. So, for example, if you look at our portfolio in the East, that's a portfolio that is somewhat insulated from some of the negative trends because a lot of it is concentrated in age-restricted housing. And so you're dealing with some second homes type areas with individuals who tend to have a lot of equity in the home.

If you look at that portfolio, for example, the up front equity injection is pretty high, neighborhood of, you know, an average in the neighborhood's around 30% (inaudible). So the standards there sort of fit our typical (inaudible). We tend not to be high loan to value lenders on that front.

If you go into out West, for example, that portfolio actually looks a little bit different. In some sense what you've got there are loans -- I've got that mixed up a little bit.

In our mid-Atlantic, what we have is exposure to a lot of move-up single-family homes with minimal condominium exposure. And we tend to think that some of the bigger problems would be in the high-end home, (inaudible) process, right? So where the market seems to be a little bit more stable with those first-time home buyers.

But again, our culture doesn't change much. You're not going to get -- [we] tend to have high equity content in each of the projects that we focus on.

Are you concerned that the conditions that are starting to emerge here might be similar to the conditions we saw in the late 80s, early 90s when things certainly in the middle Atlantic and New England got pretty depressed for a while?

Well, I guess I would say there's a couple of people out there that have really called interest rates are up. First thing you see is you see home (inaudible) and home sales coming down.

And you see it's very logical that when you start looking at the large national homebuilders, you've already seen, as they release their earnings, they've been taking down appraised values and writing off properties. And so the next logical flow is that would come into, that would start to come into sort of the bank and the loan portfolios.

There's been a lot of talk about the fact that maybe this is concentrated from Detroit (inaudible) Michigan. I'm sure that the toughness of those economies is causing issues there, but you see it everywhere. You see it in Atlanta, you see it in our footprint in terms of the Maryland footprint.

I don't know that you would see something that we saw in the late 80s unless you had a big turn in unemployment. I mean there are actually a lot of things that are actually moving in a positive way with respect to the real estate cycle. Hard to say.

Okay. I appreciate that. Last question here.

Commercial real estate construction portfolio, could you refresh me on the size of that and, again, the original underwriting criteria that you tend to employ on that type of loan?

Yes, our commercial construction portfolio was relatively small. I don't know if I have that number off the top of my head. Give me one second.

It's about $1 billion in total commercial construction. And if you sort of look at where that is, that actually was about 600 in the mid-Atlantic and New York is $170 million and in the West commercial construction was under $300 million. So it's a relatively small portfolio.

Again, I think what you're seeing there in the mid-Atlantic is a portfolio that we've inherited. We've actually got pretty good experience on that. Those are mostly (inaudible) folks that are running that business. They have a good track record, the loss levels are low.

I don't have in front of me our stats on what we focus on there but I think the loss content is actually relatively low.

Okay. So thank you very much.

Thanks.

Thank you. Your last question is coming from Phillip Gutfleish with Elm Ridge Capital Management.

All my questions have been answered. Thank you.

Thank you. You do have another question coming from Gary [Paul], as private investor.

Hi, Rene.

Hi, Gary.

Two questions. One is the Alt-A loans that you held in portfolio rather than sale, I gather they are performing in terms of delinquencies, charge-offs, et cetera, about in line with your normal held for portfolio loans?

That's a good question, Gary. The answer to that is no.

Think about this. We chose to take a portfolio of some $883 million of Alt-A loans and mark them to market and then keep them on our books. We did that because those loans had higher delinquency characteristics than the loans that were typically held in our portfolio.

But the issue was that that the price was just, in our view, relatively irrational. So when you mark those loans, as you know, you've got it covered, but clearly, the expectation would be that you start out with higher delinquencies on those portfolios and you probably, even if you were right in your decision process, will see some elevated level of charge-offs over time on the residential portfolio.

So the answer to that is no. These would have high delinquencies and higher charge-off rates by their nature than a typical residential that we'll have in portfolio.

But they are then --

Probably important, Again, I think it's probably important there is that you would see that. You'd see that and not under the category of loans labeled 90 days -- over 90 days delinquent but not accruing. And even when you look in that portfolio, you do see some uptick, which is essentially a reflection of those mortgages.

I would assume, then, that they are at least performing in line with your expectation?

That's a very good assumption. That is true. That is true.

Okay.

My second question is really one more anecdotal for the economy. You mentioned that your commercial real estate loan growth is weak relative to what others have been, other [tech] categories of loans.

Since commercial construction is largely being credited with why there hasn't been a big drop off in construction employment and whether it's sales of commercial properties or sales of real estate investment trusts in takeovers, pricing has been robust. Are you seeing a weakness developing that hasn't been there up until now in the commercial real estate?

Commercial real estate overall, not just construction, right?

Right.

Yes, I think a couple of things. As I mentioned, the construction portfolio that we have on the commercial side is mainly from our mid-Atlantic footprint and with respect to us, we've not really deepened that because essentially that's a tough portfolio to grow because things roll off and pay out as the projects complete and then you may put on another, but it's very difficult in our minds to get that kind of growth in construction lending where you're not taking on the (inaudible) at the end of the project.

I think that in general, from what our folks tell us in each of our three major regions that even when pricing is okay in commercial real estate, the structures just aren't there. This continues to be this increasing trend on both not putting in prepayment language on loans and even in the current book of people, you know, a lot of pressure on people saying I'd love to waive prepayment penalties because the market out there is actually waiving that.

That and other types of structure issues seem to be the primary issue. The pricing game has been out there for a very long time. I don't see a change there. But it is a surprising to me that people are going deeper in structure given sort of all of the noise in the credit markets today.

Thank you.

That's our (inaudible). Thanks, Gary.

Thank you. There appears to be no further questions at this time. I'd like to turn the floor back over to you, Mr. MacLeod, for closing comments.

Again, we'd like to thank all of you for participating today. And as always, if any clarification of any the items on the call (inaudible) is necessary, please call our Investor Relations department at 716-842-5138. Thank you and good-bye.

Thank you. And this concludes today's M&T Bank's second quarter 2007 earnings conference call. You may now disconnect your lines and have a pleasant day.