M&T Bank Corp (MTB) 2007 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the M&T Bank third-quarter 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 IR. Sir, you may begin.

Thank you, Natasha, and good morning, everyone. This is Don MacLeod, and I would like to thank everyone for participating in M&T's third-quarter 2007 earnings conference call, both by telephone and through the webcast. If you have not read our earnings release, you may access it along with the financial tables from our website, www.MTB.com, and by clicking on the investor relations link.

Also, before we start, I would like to mention that comments made during this call 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 found on Forms 8-K, 10-Q, and 10-K for a complete discussion of forward-looking statements. Now I would like to introduce our Chief Financial Officer, Rene Jones.

Thank you, Don, and good morning, everyone. Thank you for joining us on the call. I am sure you have had a chance to review this morning's press release. I would like to highlight and expand on a few items from this morning's release before I respond to questions.

Diluted earnings per share, which include amortization of core deposits and other intangible assets, were $1.83 in this year's third quarter compared with $1.85 earned in the third quarter of 2006, and $1.95 earned in the linked-quarter. Higher credit costs and the impact of our investment in Bayview Lending Group were the primary factors that dampened M&T's performance in the recent quarter; and we will touch on each of these items in a few moments.

Amortization of core deposit and other intangible assets amounted to $0.09 per share in the third quarter of 2007 compared with $0.10 per share in the third quarter of 2006, and $0.09 per share in the linked-quarter. Recall that last year's third-quarter result included $1 million of after-tax merger-related expenses, which amounted to $0.01 per share. There were no merger-related charges in the recent quarter or in the second quarter of 2007.

In addition to the merger charges, last year's third quarter featured several non-core items. These included a gain which arose from the call of a Federal Home Loan Bank advance; tax refunds and interest received, which arose from the resolution of preacquisition Allfirst tax returns; and a tax-deductible cash contribution to The M&T Charitable Foundation. As you will recall, taken together these three items had little or no impact on the bottom line in last year's third quarter.

Diluted net operating earnings per share, which exclude the amortization of core deposit and other intangible assets, as well as merger-related expenses in last year's third quarter, were $1.92 compared with $1.96 in the third quarter of 2006 and $2.04 in the linked quarter. As is our custom, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results include tangible assets and equity.

Net income for this year's third quarter was $199 million compared with $210 million in the year-earlier quarter and with $214 million in the sequential quarter. Net operating income was $209 million compared with $223 million in the third quarter of 2006 and $224 million in the linked quarter.

Return on average assets for the third quarter of 2007 was 1.37% compared with 1.49% in both the third quarter of 2006 and in the linked quarter. Net operating return on average tangible assets was 1.51% compared with 1.67% in the third quarter of '06 and 1.65% in the sequential quarter. Return on average common equity was 12.78% compared with 13.72% in last year's third quarter and 13.92% in the linked quarter. Finally, net operating return on average tangible common equity was 26.8% compared with 30.22% in the third quarter of '06 and 29.35% in the linked quarter.

Turning to the net interest margin, our net interest margin in the third quarter was 3.65%, down just 2 basis points from 3.67% in the linked quarter and down 3 basis points from 3.68% in the third quarter of last year. This reflects taxable equivalent net interest income for the quarter of $473 million on an earnings assets base of $51.3 billion. The change in the margins in the linked quarter was entirely due to the impact of one more day in the third quarter.

In terms of our loan book, average loans for the third quarter were $43.8 billion compared with $43.6 billion in the linked quarter, giving an annualized growth rate of 2%. Our average loans grew 5% in the third quarter of 2006.

Taken by category, on a linked-quarter basis average commercial and industrial loans grew by an annualized rate of 3%, while average commercial real estate loans declined at an annualized 3%. Average consumer loans were up an annualized 6%, and average residential real estate loans were up an annualized 3%.

Following the disruption in the credit markets in early August we saw a surge in loan growth late in the quarter. End of period loans as of September 30 were up $1 billion or an annualized rate of 9% from levels at June 30, 2007. Taken again by category on an annualized end of period basis, C&I loans grew 7%, commercial real estate loans grew an annualized 11%, as did consumer loans grew an annualized 11%, and residential real estate loans grew at an annualized rate of 8%.

With respect to credit quality, nonperforming loans totaled $371 million at the end of the recent quarter, compared with $296 million at the end of last quarter and $180 million at September 30, 2006. The nonperforming loan ratio was 83 basis points at the end of September compared with 68 basis points at the end of the second quarter. That ratio was 43 basis points at the end of September 2006.

The $75 million increase in nonperforming loans from the linked-quarter was primarily due to two factors. First, a $42 million increase in nonperforming loans to residential developers and builders primarily in the mid-Atlantic region. The largest of these is a $31 million loan to a developer and builder of single-family homes on the Eastern Shore. Second a $26 million increase in the nonperforming residential mortgages, the majority of which relate to the portfolio of alternative residential mortgage loans transferred to M&T's held-for-investment portfolio in March of 2007.

Net charge-offs for the quarter were $22 million, representing an annualized rate of 20 basis points on average loans. Both the dollar amount of chargeoffs and the ratio of chargeoffs to loans were unchanged from the second quarter. Net charge-offs were $17 million in the third quarter of 2006, amounting to an annualized 16 basis points on average loans.

The provision for the credit losses in the third quarter of '07 of $34 million exceeded chargeoffs for the quarter by $12 million and resulted in an allowance for credit losses of $680 million or 1.52% of loans at the end of September. Loans past due 90 days or more but still accruing interest were $140 million at the end of the recent quarter compared with $135 million at the end of the linked quarter and $112 million at September 30, 2006. At the end of the recent quarter, this category included $70 million of loans that are guaranteed by government-related entities.

Turning to fee income, non-interest income was $253 million in the third quarter compared with $274 million in the third quarter of last year and $283 million in the linked quarter. The results for the third quarter of 2006 included a $13 million gain realized from the call of the FHLB advance that I mentioned earlier.

Mortgage banking revenues were $32 million compared with $36 million in the linked quarter and $37 million a year ago. This quarter's mortgage results included slightly lower contributions from both residential and commercial originations, with servicing and other mortgage fees little changed from the second quarter.

Residential mortgage loans closed during the quarter were approximately $1.3 billion compared with $1.4 billion last quarter. Applications were $2.9 billion, up from $2.7 billion in the linked quarter. Nonagency loans represented less than 1% of that volume.

Service charges on deposits were $104 million for the quarter compared with $100 million in last year's third quarter and $105 million in the second quarter of 2007. Other revenues from operations were $68 million for the third quarter. This compares with $73 million in the sequential quarter and $81 million in last year's third quarter, which included the FHLB gain.

The primary reason for the linked-quarter decline was a $4 million reduction in advisory fees. As we have said before, our investment banking unit is small, and the limited number of transactions that they engage in tend to result in somewhat choppy revenue from quarter to quarter.

M&T's pro rata equity income from Bayview Lending Group was a loss of $11 million in the third quarter. This compares with profit of $8 million in the second quarter. When combined with the carry on the investment, the BLG investment has been dilutive to M&T's results by $0.09 per share for both the third quarter and for the year-to-date. As we have said in the past as well as in today's press release, the results from M&T's investment in BLG will fluctuate from quarter to quarter depending on the timing of loan sales and securitizations conducted by BLG. In fact, BLG has executed two small-balance commercial mortgage securitizations totaling $862 million that will be reflected in our fourth-quarter results.

Operating expenses, which exclude the amortization of intangible and merger-related expenses, were $375 million in the recent quarter compared with $376 million in the linked quarter and $388 million in the third quarter of '06. The figure for the third quarter of '06 includes an $18 million contribution to The M&T Charitable Foundation, which again I referred to earlier.

The recent quarter's results include no change to the valuation allowance for capitalized residential mortgage servicing rights. This compares with an impairment charge of $5 million in last year's third quarter and a $5 million reversal in the linked-quarter. As of September 30, we continue to have about $4 million remaining in our valuation allowance for capitalized residential mortgage servicing rights.

Excluding last quarter's MSR reversal, operating expenses for the quarter were down $6 million from the linked quarter, with a $4 million decrease in salaries and benefits and a $2 million decrease in other expense category.

During the third quarter, M&T repurchased 675,000 shares of its common stock at an average cost of $105.28 per share. These shares were acquired under the repurchase program authorized by the Board of Directors in February of '07. There are over 2 million shares remaining on that authorization.

Now I would like to share our thoughts regarding the trends we are seeing in the income statement and balance sheet. At this point in time, our outlook for loan growth is in the mid single digit range. However, we were encouraged by wider credit spreads, signs of more disciplined underwriting by competitors, and a surge in loan demand in September. We expect the net interest margin to be relatively stable, consistent with the past several quarters. Our interest rate sensitivity position is essentially neutral, and we should see minimal impact from any further changes in the Fed funds rate.

We continue to expect growth in the fee income categories, with the usual caveat that certain categories such as BOLI revenue, gains on lease equipment, investment banking fees, loan syndication fees, and other income from BLG will have some variability from quarter-to-quarter. Our full-year outlook on expenses is for modest, controlled growth.

With respect to credit, we continue to expect credit cost to trend upward, as evidenced by the rising trend in nonperforming loans. Specifically, we are monitoring 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, as you well know the pressure on real estate prices has occurred nationwide. If the current conditions continue to deteriorate, we would expect to see a commensurate increase in nonperformers and credit losses. A 20 basis point chargeoff ratio that we experienced in the second and third quarters is still low by historical standards, and we would expect chargeoff ratio to continue to approach our long-term average of 30 to 35 basis points.

There is no change in our approach to capital management, and our target ratio of tangible equity to tangible assets. In the near term, we are managing the share repurchase program in the context of maintaining our capital ratios while completing the Partners Trust and First Horizon transactions, possibly as early as the fourth quarter.

All of these projections are of course subject to a number of uncertainties and various assumptions regarding the national and economic growth, changes in interest rates, political events, and other macroeconomic factors which may differ materially from what actually unfolds in the future. We will now open up the call to questions, before which Natasha will briefly review the instructions.

(OPERATOR INSTRUCTIONS) K.C. Ambrecht of Millennium Partners.

That was quick. Thanks for taking the question. Could you just discuss your -- could you give us a little bit more color around your residential homebuilder book along the mid-Atlantic?

Also, you know, if your net charge-off -- if we go back to your long-term net charge-off trends of 30 to 35 basis points, what that kind of would imply for your -- how we should think about your reserve to loans and where you would like to take that.

Yes, let me take the second part of that question first. I mean, you know, typically, what you will see is that we have consistently -- we have maintained a pretty consistent approach with our allowance for loan losses. So as you see credit quality move up, our allowance has typically been higher.

So if you think about how it works, as we see credits migrate through our process, as they work their way into the criticized loan book and then on their way to performance -- to nonperformings -- throughout that process they are having higher levels of allowance on those credits as they start to deteriorate.

So in my view, as we see the credit cycle sort of continue to trend back to historical norms, I would expect to see our allowance levels increase.

Before you move on, though, when you say that, your reserve to loans have kind of hovered around -- I mean, they have trended down the last six quarters, it looks like, from 155 to 152; but your net charge-offs have kind of gone up; and your NPAs have certainly gone up. So if your net charge-offs get back to 30 to 35 bps, where do you think your reserve to loans need to go to? Like 175?

It will depend on the loss content within the portfolio. There is not a number that you can predict a year out in that circumstance.

Okay.

It depends on the makeup of your loan book and what types of loss content you think you have in each credit.

If they're like homebuilder related, though -- okay? So [spreads] and actual book in mid-Atlantic, though.

Well, let me go back to the first part of your question and I think maybe I can get that. If you look, we have talked about our homebuilder portfolio, which is about $1.8 billion. Then if you add another $400 million, which is the loans secured to individuals, where the house is actually being built and there is a loan to an individual, that gets you to about $2.2 billion. While we don't have any material exposure to the sort of hot markets like Florida, California, or the Midwest, we do expect to see much slower project sell-out and absorption rates in our markets.

In the near term, we believe that most of our developers and builders have the wherewithal in the secondary sources of liquidity to sort of do well in this market. But if the market continues to soften we, like everybody else, would expect to see higher nonperformers.

If you look at the mid-Atlantic -- and specifically what we have in the mid-Atlantic are -- most of our exposure is in move-up single-family homes. The slowdown that we saw in 2006 and then in the early part of 2007 has yet to abate. And during that period of time, the sales and absorption rates have declined pretty significantly.

Anywhere where we have seen improvement in projects, it has been where there has been a lowering of sales prices, and other -- where the builders are offering other incentives. That tends to sort of whittle down the inventory overhang, and it really actually has had a positive impact.

So you get the sense that pricing, and where the market pricing is nationally and on a specific project, is really what is driving the performance.

Having said all that, while the discounted land values have declined due to the changing market in the mid-Atlantic, on most projects the loan-to-value remains at acceptable levels. We have received updated appraisals on all of these projects. As have said before, we started that process in the fall of '06; we did a wholesale review in the spring; on an every six-month basis we're reviewing all of the credits in that portfolio.

I think I sort of mentioned the appraised value because I think what you have to start out with is sort of think about how one of these transactions will work. If you have an appraised value on a property of say $40 million; and maybe you have 28, $27 million outstanding, so you have 70% loan-to-value, what you have to see is if someone's ability to pay gets impaired, the first step is to go (technical difficulty) appraisal.

So as long as you have a fair amount of cushion in that process, the loss content is somewhat mitigated even though you have taken this whole credit of $20-some-odd-million into nonperforming.

So in some of these cases, in the scenario that I was talking about, as long as you have a 70% loan-to-value, somewhere in that range, you would really have to have a pretty significant shortfall, maybe a 50% drop in appraised values, to have significant loss content that is commensurate with the size of the loan that you put into nonperforming. So as we see those credits move through our classified book, we are increasing our allowance for that purpose.

Okay, thank you very much.

Bob Hughes of KBW.

Good morning, guys. A couple questions. Loan growth was quite strong in the quarter; much of it came late in the quarter. I'm just wondering, Rene, if any of that growth was bought versus originated?

No, it was all originated. All originated. What we saw, we saw uptick in almost every region, but with the most -- a larger growth in September in the Metro region, New York region, as well as in the mid-Atlantic. In most cases it was all customers who were sort of coming back, who had gotten shut out either from the capital markets, or who had gotten -- where the bank was sort of rebidding, looking to rebid. So as you know, we tend to do pretty well in that environment, because we price through the cycle.

Okay, are you talking about multi-family commercial real estate specifically, or more C&I?

Both C&I and real estate. Nothing -- no concentration in either one. I think it was pretty even, with the exception that the mid-Atlantic was probably more C&I.

Okay. Then on BLG, they completed a securitization in the third quarter as well, didn't they?

Well, they went out and executed a securitization. But, Bob, the way that it works is, depending on the structure of the securitization, in order for it to be a true sale there are certain requirements. The simplest way to talk about that is that you have to sell a certain percentage, a high percentage of the loans have to be executed.

So when you saw the disruption in the market in August, that is actually when they went out. They went out in the height of that process. So the good news is they were able to get two transactions actually done. What we saw is that it just sort of took a little longer to execute those transactions, to fully execute them.

So for our purposes, as they report their results to us, you would see the impact of those gains in the fourth quarter.

Okay, okay. Then, so then the loss in the third quarter coming from the BLG stems specifically from what?

You know, you get a nice look into BLG, what you actually see there is 8 or $9 million of operating expense, because you have got -- our share of their operating expenses. So what you have got is you have got a big loan origination engine, where you are paying people to originate mortgages over time, and you're underwriting those mortgages, and getting them ready for sale. So most of what you see in those results are simply their core operating costs.

Okay, great. I will re-queue. Thanks.

John Fox of Fenimore Asset Management.

Hey, good morning, everybody. A couple questions. Just to follow-up on Bayview, so are you basically saying -- let's say $9 million, just to take the high end of 8 to $9 million, is kind of the run rate operating costs? And there basically was very little gain on sale of revenue to offset that in the quarter, or --? Just trying to understand from the plus-8 to the minus-11 what happened.

That is exactly correct.

Okay, but they did a securitization and third (multiple speakers) took so long the recognition is really in the fourth quarter?

That is how it will materialize, that is correct.

Then there were two additional small securitizations in the fourth quarter, or planned for the fourth quarter?

There were two done in the third quarter, and it remains to be seen what will happen in the fourth quarter, but we would expect them to have a pool of loans large enough to securitize.

Okay, so there should be significant increase in revenue then, fourth quarter versus third.

Absolutely.

While you are on the subject, I will say that from our perspective, if you think about what happened -- first of all, M&T has very little capital markets exposure prior to sort of its investment in BLG. If you think of what happened in the market specifically in August, and which actually we are still experiencing today, one of the things that we think is actually -- despite the fact that we wish the markets were more stable, as along with everybody else -- one of the things that we are encouraged by is that they actually were able to take this paper, which trades like CMBS, and actually execute those securitizations.

It took a little longer. But from the perspective of a 20% investor, we think that it's important that they were able to get them done, and that they were able to not have to go into any sort of backup liquidity plans. It really sort of speaks to the profitability and the value of their franchise.

Right, okay. Thank you for that. The second question is around -- can you just describe your Alt-A business today? First, what do you have on the balance sheet?

Number two, are you originating anything at all at this point? Just talk about where that business stands today.

Yes, I mean, if we -- how do I say this? If you look at nonagency -- I mean, if you look at Alt-A, the Alt-A portfolio, our Alt-A exposure is what we talked about for some time now. It is $1.3 billion. $883 million of it is what we took to held-for-investment in March; and another $400 million of that is loans that we actually invested in during the course of 2006. Okay? So that is the extent of our exposure there.

If you look at our originations, our nonagency -- so paper that is not saleable to the agency either because of documentation or some other issue -- is down to 1% of our applications. So most of that is going to be some sort of exception.

Okay, so anything you do do, you can sell to (multiple speakers)?

That's right.

Okay. I noticed securities went up in the quarter. I heard, Rene, you made some comments at some of the conferences about the math is getting a little better on that. Could you just talk about how you think about buying securities and return on equity at this point? Do you think that balance will continue to grow?

Yes, I mean just to sort of reiterate, what I said is that we were at a place where --. Let me start off by saying that we tend to use a securities book, one, for managing our interest rate risk position; two for liquidity; and then third, we use it sort of as an offset to look through the asset classes and make sure that we are having sound return on investments. So they're trade-offs.

Where we were for the past two years is that we carry about a target tangible ratio of 5.4; and when you can take a AAA security and you can get a margin of 20 basis points, that results in a return that is single digit. So it just doesn't make any sense. If you are using that -- it is a very costly way to manage your liquidity and your interest rate position.

What we saw during the disruption is that you could get very, very highly rated securities, super-senior AAA securities, for over LIBOR plus 125. In some cases, 140. And in some cases, actually higher. When you look through the underlying quality of that paper, you were actually able to get pretty significant return.

The way to think about that is at the time, and actually into September, the margins on those securities were actually still better than an unrated commercial real estate loan in New York City. Right? So it made no sense whatsoever to book a commercial real estate loan in the third and fourth -- in August and September to the extent that you were getting LIBOR plus 125. It just didn't make any sense.

So I think that you will now see our ability to grow that portfolio, if we choose to, at the same level as our earnings assets over time. We will have to watch that from quarter-to-quarter.

Okay, thank you very much.

Paul Delaney of Morgan Stanley.

Good morning. Switching gears a little bit, just looking at the deposit base, just wondering what is going on with savings, which were down about $119 million and yet the yield was up a little bit. Just wondering what, if there is anything going on there.

Then secondly, the time deposits were down a lot. But the yield or the cost is only down 3 basis points. Just wondering if you could give us some more color there.

Yes. Let me start with the time deposits. If you remember a year ago, August, was our 150th anniversary. We put out some special time deposit rates out there that at the time, thinking where rates were, were at about 5, [550] for a one-year CD. So you see a lot of runoff in time from those programs. Actually, given today's rate environment, that is a net benefit to the margin. Right?

Then, I think what we really have is very sluggish, really no growth in our non-maturity areas. That is a reflection of sort of where we have been with our pricing. So I think what you will see is as we move our way towards 2008 and into 2008, you will see a lot of focus from M&T on deposits. And that is not just in terms of sort of pricing, but products and distribution and those types of things.

Because in our view, as we see a return to more normal loan growth, it would result in a fair amount of margin compression if we're not able to grow deposits. So I think competitive pressures remained high, probably still remain high; and you know, there is no sort of trend in any one region. It is pretty similar across all the regions.

Great, thanks.

Matthew O'Connor of UBS.

Hi, guys. Can you talk a little bit more about, when you decide to move a loan to nonperforming, do you take an additional write-down? I know it could be a little case-by-case. But often we find it's hard to compare NPAs from bank to bank. Some NPAs can still be performing, some get written down right away. So any color you can shed on that; and obviously the hot topic is the commercial real estate side.

Yes, first of all, I think one of the differences that you will get, first major difference you get from your nonperformers to chargeoffs is whether you're a secured lender or now. We are almost -- we are 99% a secured lender. We don't have a credit card portfolio.

When you think about the commercial book, it also varies, if you think of the loss content. It varies by the type of, the nature of the loan. So auto is different than a homebuilder is different than a typical operating loan, a C&I loan to a customer.

But our process is fairly consistent throughout all of those things. As I said, we sort of watch these credits. In particular, if you look at the builder real estate, we have been watching that since mid '06 and conducting much heavier reviews. Each time we do that -- so normally we review a credit on an annual basis, but in these cases, we are doing it at least every six months. So as we see them migrate -- we have a 15-grade system. As we see them migrate up that credit scale, particularly as they get into the classified loan book, we tend to add to the allowance based on that deterioration in credit.

So if you think about what is happening today in the builder space, there are three particular credits that we have really in that space today. One is simply that the appraised values are down. Okay? The customer is still paying. So in that case, we're at the point where we have taking them to nonperforming, because we are sort of questioning their ability to pay and the appraisal is down. You know, we will take a loss; but as I said earlier, unless that appraised value is really drastically reduced, the loss content as well. But at that point in time, we would reflect what we think the loss content is in the book.

If you are looking at this stuff constantly over time, I wouldn't expect to take -- to have a large loss content all of a sudden. If you think about what we are talking about here in the residential builder space, these are people who -- let's pick an example, someone has 35 homes that they are building. Right? You can kind of tell from month-to-month and quarter-to-quarter whether the homes are selling. You could wait until the end of the year and realize that it's too late, they are not going to do sell any, and then you'd probably have to take a big hit. But if you're looking at these constantly, I would expect the adds to provisions to be slower. That seems to be sort of what you are seeing with us here at M&T. I don't know if that helps.

No, that is helpful. Then just reference of one of the three credits where the appraisal, the appraised value is down but the customer is still paying, is that the big 31 or $32 million loan that you referenced earlier?

It was actually the -- I was referencing the one that we mentioned in the second quarter.

Okay. Then how about the stuff that you moved to NPA this quarter, is any of it still performing?

The $31 million loan that I think we referenced is actually not paying; and that was less of an appraised value issue. We think it is an ability to pay issue. So again, now we -- as we look, what we would do, we would look to the appraised values and what the loss content is after taking it through disposition, for example. But in that case, it's ability to pay.

As you look at each of the credits, we may have, I don't know, two, three, four, five credits in this space in our classified book or nonperforming. It differs. It differs in region. It is not concentrated in northern Virginia. It is in Pennsylvania. It is across the board, and each circumstance is a little bit different.

Okay, all right. Thank you.

Ken Usdin of Banc of America.

Hey, thanks. Good morning, Rene. If I could follow up on your credit comments one more point, you just mentioned about that not expecting severity to all of a sudden come out suddenly and spike up. But I am just wondering if you can box from a time frame perspective, you know, 20 basis points this quarter; your talk about getting more back towards your normalized 30 to 35 basis points. Is that extremely gradual? Do you have an understanding right of when you expect peak losses to come? Whether that is an '08 or an '09 thing? Any color you can provide on that would be helpful.

Yes, sure. This quarter, on the commercial side, we had one chargeoff that was greater than $300,000; and that number was less than $1 million. So what you're seeing in our chargeoff profile are primarily consumer type or consumer oriented loans.

If it were the other way around, I would probably say it would be pretty gradual. But what you have got to expect is that as you start to see -- if you start to see the commercial side get weaker, those come -- those are a little chunkier. Right?

But as of now, we have not really seen a high volume of commercial chargeoffs. The commercial side appears actually pretty good.

So what that leaves you with is sort of that consumer book. Clearly, what we are seeing with that Alt-A or nonagency portfolio, as you saw, the nonperformers rose there. You're going to continue to see that feed into the chargeoffs over the next, I don't know, 18 months or more. That process should be rather gradual.

I think the same is true of the other consumer categories. There, while we have seen some higher delinquencies, it has actually been relatively slight. They are up slightly and pretty modest levels. But I would expect that given what we are seeing that those will start to trend up as well.

So I look at this as almost like a normal credit cycle where housing was the weakest spot; and we haven't seen much happen to date on the commercial side. But if that comes it will be a little chunkier.

So 30, 35 could still be quite some time away, not necessarily anytime soon?

I wish I knew.

Okay. My other question is on the net interest margin, just on your comments on the margin being stable. Obviously there's a lot of working parts there, moving parts. I wonder if you can walk us through it.

On the surface, you have good loan growth on one side, but weak deposit growth on the other. You mentioned widening credit spreads too. So can you just kind of walk through what you're seeing as far as ability to keep the margin flat vis-a-vis all the moving parts?

Yes, yes. I think, we are matched. I think this quarter -- this year has actually been a good example of the fact that we are matched. I was complaining to my guys that when the Fed cut rates we didn't get any expansion. But that is because we are neutral.

I think what you would expect is that on a marginal basis, we are wholesale funded. Right? So our loans are going faster than our deposits. So what you will get with the wider credit spreads and the lower-cost of wholesale funding is that, on a marginal basis, the next loan you will have will actually be better than it was. Right? You will have some experience. So that puts some positive upward pressure on the margin over time.

But the other thing that has also happened is that it has become more attractive, actually, to stop running off your securities book. If we were to hold that flat or add a little bit, while it is profitable it is still relatively low margin stuff. So I would expect all of any positive benefit that we get from the wider credit spreads and the steeper curve to be offset by asset growth. That is sort of where we get back to our neutral position.

Clearly, there would be more compression than I just sort of outlined if we weren't able to grow deposits. If we saw declining deposits next year, then that would mean a little bit more pressure.

One follow-up on that point, Rene. Everyone did a great job of lagging deposit pricing on the way up. But with it being so competitive out there, how much room do you have -- aside from the CD roll off that you pointed to before -- how much room, now that the Fed is cutting, can you start pulling down deposit pricing today?

Little if any. Little if any. I think that was our comment in my notes that we are not going to be affected by movements in Fed funds.

Okay, thanks a lot.

Jason Goldberg of Lehman Brothers.

Good morning. I guess on the 860-somewhat million dollars securitization that I guess will benefit you in Q4 to Bayview, any sense in terms of what kind of gain we should expect on that?

No, I think what you're going to have to do, Jason, and as this gets going and we see more and more securitizations, you start benchmarking one after the other. But you will be able to get a sense of it after we get through a couple of quarters of the investment. But at this point, it would not be really -- make much sense for me to try to dimension that.

So you know, if you benchmark yourself off of the second quarter, and you saw the transaction, you saw where we stood there, that is probably the best place to be.

What would the secur --?

We did $424 million -- BLG securitized $424 million in the second quarter; it fell into our second-quarter results. Then, again, the number that we mentioned was 800 -- Don, do you remember?

62.

$862 million that they have completed since.

Right, okay, roughly double so far. Okay. Then, I guess earlier this year, I guess you made the comment that you expected to grow earnings in 2007. I guess in light of what happened with Bayview this quarter, do you think that is still possible or probably going to be tough to accomplish?

I'm not going to do change my comments at this point. But you, along with everybody else, recognizes that with what we saw in August and September in the [valta] and the markets, there's a fair amount of uncertainty there. I simply think that our results are pretty much what we expected them to be, but for the timing of the Bayview transaction. I don't see much of a change.

Fair enough, thank you.

Todd Hagerman of Credit Suisse.

Good morning, Rene. Just a couple of follow-ups. One, just as you mentioned the mid-Atlantic and the housing there, could you just better quantify for us just on average what kind of price depreciation you have seen, kind of in that mid-priced or mid-tier housing segment?

Did you say price appreciation?

Depreciation.

Okay, I was going to say. You know, I think what I can say is that you can't sort of look at necessarily home prices per se and get a benchmark of it. What really happens is that you have got a group of appraisers out there, where when prices start dropping I think they tend to get relatively conservative.

But quite frankly, that is where we go to get our pricing and to benchmark what we do with our allowance in nonperformers. So I would say it depends on the project. It depends on what stage the project is in. Clearly, if you actually have some vertical construction going on and you can drop prices, if you are close enough to that point where you can drop prices, it helps.

But you can look at national averages and see where you are. I would basically say that you might want to go a little bit deeper than what you are hearing in the newspapers because of the conservatism in terms of appraised value.

Okay, and generally speaking, your policy requirement on the construction piece would be about 70% LTV?

Yes, if I look at the credits that I have looked at in the classified book before we go -- before we have got the reappraisal, they were in that range, 70.

Okay. Then just secondarily, could you give us a better sense of possibly the offset in the quarter in terms of the nonperformers with respect to the commercial auto floor plan? Was there any movement there?

The activity there is slow, but give me one second. In terms of adds, we had one credit there for maybe $4 million that went into nonperforming. We had one, two, three, four, five that went out. Right? Smaller credits that went out.

So it really seems as though we have gotten through much of that. While we will continue to watch what happens with the auto industry, the fact that we have sort of scrubbed especially these single product line domestic dealers seems to have sort of gotten ourselves at an inflection point.

So you remain somewhat optimistic still on that portfolio, just in terms of the workout and the progress you are making?

Yes, I think we have done our work. We have got good controls. We are doing all of the audits, and we are right on top of anything that goes wrong.

I think now what you have to see is you have to look to what happens in industry. If it got significantly worse than then, which has been pretty bad, I think maybe we would see a resurgence. But right now, we don't see much. We think we are actually kind of across the inflection point there.

Great, thank you.

Joe Fenech of Sandler O'Neill.

Good morning, Rene. Not to harp too much here on Bayview, but they are Florida-based and I think it is Miami, actually, where their headquartered, and we all know what seems to be happening down there. But from your comments, really it just seemed as though it was a timing issue as opposed to anything that might be happening specifically in and around the markets where they're headquartered. Can you just talk about that a little bit?

Yes, first of all, it's interesting that they actually -- their headquarters are in Florida, but their business is throughout the United States. There is no real concentration in any given states. So if you think of where the activity have been in terms of mortgage volume, that is what they look like across the United States.

Than they also have business in Canada and the UK, with the UK being smaller. They just entered that over the past year. So it is not a Florida -- it is based in Florida, that is where they live and work, but it's not where the business is.

Just to give you an example, their last securitization only 12% of the loans were in Florida.

So I think, really, you have got good quality loans. Think of it as commercial mortgages. They trade like CMBS. In fact, through the cycle, they have traded like CMBS. So the disruption that you sell for everybody in the securitization markets, where actually absolutely everything shut down, is what they were dealing with. And in fact, they were actually able to sell their paper.

Got it. Thanks.

Sal DiMartino of Bear Stearns.

Hey guys. Most of my questions have been answered. But if I can just ask two quick questions. One, you continue to do a great job on expenses and they were down again, especially salaries. But can you add a little bit of color what is going on in terms of costs there and what the trends are going forward?

Yes, I thought that on the salary side it was split between benefits and salaries. The benefits part are things that we have talked about; FICO coming down, being seasonal in the second half of the year; some other medical type benefits as well coming down.

That was on the benefits side. On the salary side, we had a little bit of lower incentives and commissions. But really, one of the things that we have got there is some of the businesses that you could imagine are having a tougher time this year are actually sort of addressing headcount issues and looking at where things stand. But no big change there.

I think that our expenses were a little lighter than I thought they would have been in the third quarter. I would not expect to see another decline like that in the fourth. Maybe they rebound a bit. Advertising was a little low; that won't continue.

So again, I think what you will look for is a positive spread as you go into '08. Maybe that is 2%, 3%, 4% expense growth.

Okay. Then, just a follow-up question on the indirect auto. Can you just remind us of the footprint of that business?

Yes, the footprint is predominantly our footprint that you know. We also have relationships in New England, Massachusetts, Rhode Island, Connecticut. We go out a little bit to Ohio and then down into Virginia. So it is predominantly in our footprint. That is where all the volume is. Then we have sort of expanded out into those bordering areas.

But we have been in each of the states that I have mentioned sometime. Massachusetts, I would gather for three, four years at least, five years maybe.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Bob Hughes of KBW.

Thanks, guys. Two additional questions, I guess. The $26 million increase in NPLs you saw related to the Alt-A book, were those predominantly from the '06 vintage or '07 vintage that you put on in the first quarter?

Is it concentrated in any one? I don't think it is concentrated in any one. But I think the way to think about that, Bob, is what is a little different in our mortgage portfolio is that we take residential mortgages to nonperforming after 180 -- '07 apparently has a little higher.

We take mortgages to nonperforming after 180 days. We do that because our experience has been that as you get closer to foreclosure a lot of these things, in the past, tend to work themselves out. So, it's no coincidence that you see a higher increase in the third quarter after what we did in the first quarter. Right?

Yes, yes.

So you see that big lump there; and you will continue to see more added to the portfolio. I think if you look at it, Bob, in the $2.3 billion, there is about $200 million of loans that are either scratch-and-dent loans -- which are loans that couldn't be sold to a third party for a particular reason, they missed their first payment or what have you. And then there are probably a portion of second mortgages that we are focused on.

Within that $200 million, what we have actually had to do is set aside and hire additional services. We have hired 20 services to service that loan book. Because what we are finding is sort of working through that process and collecting on those loans is a little bit different from a traditional mortgage.

Okay. Then as a follow-up to that, the loans that were put on in the first quarter, were marked down at this time, so I would presume that deterioration in those portfolios wouldn't necessarily drive higher provisioning requirements for a while. Is that a correct way to think about that?

Well, you are seeing it. I mean, yes, again, with those residentials it is no different from what I described in the other portfolios. To the extent that -- well, you write down the value because you're saying that you think -- the market is basically saying that you're going to have higher delinquencies and chargeoffs. So as it moves through the cycle, then you are providing for that.

Clearly if you think of a residential mortgage, you should be able to figure out what is going to happen within a year to 18 months, right? As you see those things go delinquent and (multiple speakers). So that is what would be reflected in our allowance.

Okay, okay. Then with respect to construction loans on nonaccrual, that are current or accruing, are those generally still just paying out of the interest reserve? Or are you seeing builders paying out of their own pocket?

I think it is the former.

Okay, all right. That's it. Thank you, guys.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Don MacLeod for any closing remarks.

Again, we thank all of you 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 716-842-5138. Thank you and goodbye.

Thank you. This concludes today's conference call. You may now disconnect.