M&T Bank Corp (MTB) 2007 Q4 法說會逐字稿

Good morning. My name is Elsa and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank fourth-quarter and year-end 2007 earnings conference call.

(OPERATOR INSTRUCTIONS). 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, Elsa, and good morning, everyone. This is John MacLeod, and I'd like to thank everyone for participating in M&T's fourth-quarter and full-year 2007 earnings conference call, both by telephone and through the webcast.

I hope everyone has had an opportunity to read our earnings release issued this morning. If you have not read our earnings release, you may access it along with the financial tables and schedules from our website, www.MTB.com and by clicking on the Investor Relations link.

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, including those found on Forms 8-K, 10-K and 10-Q for a complete discussion of forward-looking statements.

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

Thank you, John, and good morning, everyone. No doubt most of you have read our press release and by now have seen that we had quite a busy quarter with a number of notable items. I would like to provide some color on those items as well as give you my thoughts on the past year and the coming year and then I will take your questions.

Diluted earnings per share, which include the amortization of core deposits and other intangible assets, were $0.60 in the fourth quarter of 2007 compared with $1.88 in the fourth quarter of 2006, and $1.83 earned in the linked quarter. Amortization of core deposits and other intangible assets amounted to $0.09 per share in the third and fourth quarters of 2007 and $0.10 per share in the fourth quarter of 2006. In addition, after-tax merger-related costs of $9 million or $0.08 per share, which relate to the Partners Trust acquisition and the First Horizon branch transaction, were recorded in the fourth quarter of 2007.

Fourth-quarter diluted net operating earnings per share, which exclude the amortization of core deposits and other intangible assets, as well as the merger-related costs I mentioned, were $0.77 compared with $1.98 in the fourth quarter of 2006 and $1.92 in the linked quarter. This morning's press release contains a tabular reconciliation of GAAP and non-GAAP results including tangible assets and equity.

Net income for the fourth quarter of 2007 was $65 million compared with $213 million a year earlier and $199 million earned in the sequential quarter. Net operating income for the quarter was $84 million compared with $225 million in the fourth quarter of 2006 and $209 million in the linked quarter.

During the fourth quarter, we took action to reduce our exposure to a few areas of heightened concern specifically relating to the turmoil in the residential real estate market. In our press release, we noticed four items that lowered net income for the fourth quarter. In the first quarter of 2007, as many of you are aware, we purchased three mezzanine ABS CDO securities totaling $132 million. The newly created CDOs were purchased roughly at par, but reflected the wider spreads in place after the initial sub-prime related sell-off in late 2006 and early 2007. The asset-backed securities underlying the three CDOs include a mix of prime, mid-prime and sub-prime residential mortgage-backed securities, commercial mortgage-backed securities and education loans.

Two of the three CDOs have been downgraded by the rating agencies and although all three are still current as of the end of 2007, we have come to the conclusion that the impairment in the market value of the securities is other than temporary. Accordingly, a $78 million after-tax or $0.71 per share unrealized loss on the CDOs has been recognized through the income statement in the fourth quarter. This action leaves us with only $4.4 million of exposure to CDOs backed by residential mortgages.

During the fourth quarter, VISA completed a global restructuring of its legal entities and reached a settlement with American Express with respect to certain antitrust litigation. But several other antitrust lawsuits are still pending. As a member of VISA, M&T is required to share in the current and future losses with respect to such litigation. As a result, M&T has recognized an after-tax charge in the fourth quarter of $14 million or $0.13 per share, representing our share of the current and estimated future losses with respect to the multiple antitrust lawsuits.

As I alluded to earlier, we completed the acquisition of Partners Trust this quarter, as well as the purchase of First Horizon mid-Atlantic retail banking franchise. We recorded after-tax merger-related charges of $9 million or $0.08 per share during the quarter as a result of these two transactions. There may be limited amounts of additional merger-related expenses relating to these acquisitions in 2008 as well.

Also, as noted in the press release, prior to 2007, M&T's practice was to sell substantially all of the Alt-A mortgages that we originated. In March 2007, we transferred $883 million of Alt-A loans to our held for investment portfolio rather than sell them at depressed prices. Higher levels of delinquencies and charge-offs in this portfolio led us to reassess our accounting policies and to adopt what we believe is a more conservative accounting posture with respect to the recognition of non-performing loans and charge-offs on residential mortgages. Specifically, we have changed our policy such that residential mortgages will be moved to non-performing status at 90 days instead of 180 days. And charge-offs will be recognized at 150 days instead of at foreclosure.

The primary impact of this change is to move $84 million of 90 plus days past due residential mortgages, the majority of them from our non-agency portfolio to non-performing status. This change also resulted in accelerated recognition of approximately $15 million of charge-offs, the majority of which also relate to the non-agency mortgages. The bulk of these loans have been carried as 90 days past due and still accruing as of September 30. Collectively, we believe the actions we've taken regarding our exposure to residential real estate are consistent with M&T's long-standing approach to identifying issues and quickly dealing with them.

Now, turning to the income statement, taxable equivalent net interest income was $476 million for the fourth quarter, up from $473 million in the linked quarter. The net interest margin declined 20 basis points in the fourth quarter of 2007 to 3.45% compared with 3.65% in the linked quarter.

The items contributing to that decline, some of which were temporary, are as follows -- 3 basis points of the decline related to the reversal of interest previously accrued on residential real estate loans, principally the loans that were moved to non-performing status under the policy change that I just mentioned. An additional 3 basis points relates to a temporary increase in short-term investments needed to collateralize municipal deposits. These investments were liquidated by the end of the quarter.

Another 3 basis points of the decline related to the impact of Partners Trust and First Horizon transactions, both of which have narrow net interest margins than the pre-merger M&T. The full run rate impact on the margins from the two acquisitions should be about 8 basis points.

Lower levels of prepayment penalties in our commercial real estate loan portfolio, roughly half the level of the third quarter, caused a further 3 basis points of the decline.

Finally, 6 basis points of the decline related to loan growth, which has been quite strong, and a higher level of investment securities that were added near the end of the third quarter. The bulk of that growth was funded by wholesale borrowings.

Turning to loan growth, as we mentioned in the press release, this growth was one of the real bright spots of the fourth quarter, continuing the trend that began in September. Average loans for the fourth quarter were $46.1 billion, including $742 million of average loans added through the two acquisitions. Excluding the impact of acquisitions, average loans grew by $1.6 billion or an annualized rate of 14% from the third quarter of 2007. By category, annualized loan growth compared with the linked quarter and excluding the impact of acquisitions, is as follows -- average commercial and industrial loans grew at an annualized rate of 8%. Average commercial real estate loans, including owner-occupied, grew at a rate of 22%. As you might expect, the strong commercial real estate growth was driven by the disarray in the securitization and conduit markets, which has brought business back to balance sheet lenders like M&T. Spread structures and returns have all improved significantly.

The strongest growth came in our metro region, which includes New York City, and in the mid-Atlantic. Almost all of our commercial activity for the past quarter came from customers with whom we have done business in the past. The average residential real estate loans grew about 6% with mortgages originated for investment partially offset by a decline in the residential mortgages held for sale. Average consumers loans grew by 14%, including strong growth in auto loans and consumer goods and services. Home equity loans and lines of credit were essentially flat.

The end of period loans as of December 31st, 2007 were $48 billion, including $1.5 billion of loans acquired through the acquisition. Excluding the impact of acquisitions, end of period loans grew an annualized 16% from the end of the third quarter. Not included in these figures are $950 million of mortgages obtained in the Partners deal that was securitized near the end of the quarter.

In terms of credit, the provision for credit losses in the fourth quarter of 2007 was $101 million and exceeded charge-offs by $48 million. The provision in excess of charge-offs is intended to bolster reserves for the residential mortgage portfolio, particularly the non-agency segment, and for two already non-performing residential development loans in the mid-Atlantic. Our remaining portion of the excess provision is intended to conform our loan loss allowance with the significant loan growth that we've seen over the past four months.

Non-performing loans totaled $447 million at the end of the recent quarter compared with $371 million at the end of the previous quarter and $224 million at the end of 2006. Substantially all of the increase for the linked quarter relates to the policy change on residential mortgages and the resulting transfer of the $84 million of mortgages to non-performing status from the 90 days past due classification. As we noted in the press release, only four of our non-performing loans are over $5 million, which we believe is an indication of the granularity of M&T's loan portfolio.

The non-performing loan ratio was 93 basis points at the end of 2007 compared with 83 basis points on the linked quarter and 52 basis points at the end of 2006. Excluding the policy change, the non-performing loan ratio at the end of 2007 would have been 76 basis points, down 7 basis points from the linked quarter.

Net charge-offs for the quarter were $53 million, representing an annualized rate of 46 basis points of total loans. Excluding the $15 million of charge-offs relating to the policy change, the net charge-off ratio was 33 basis points. This compares to 20 basis points in the linked quarter. The allowance for credit losses increased to $759 million or 1.58% of total loans as of December 31st, 2007, reflecting the $48 million provision in excess of charge-offs, as well as the allowance acquired with Partners Trust. This compares with an allowance ratio of 1.52 at the end of the linked quarter and 1.51% at the end of 2006. Loans past due 90 days but still accruing were $77 million in the end of the recent quarter compared with $140 million at the end of the third quarter of 2007, reflecting the impact from the policy change. At December 31st, 2007, loans 90 days past due included $72 million in loans that are guaranteed by government-related entities.

Turning to non-interest income, excluding the securities loss on the CDO, non-interest income for the fourth quarter of 2007 was $288 million compared with $256 million in the fourth quarter of 2006 and was $253 million in the linked quarter. The strong results reflect growth in trust fees, advisory fees, and gain on lease residuals. Also contributing to the non-interest income for the quarter was $15 million of equity income from the Bayview Lending Group partnership. This compares with a loss of $11 million in the third quarter. The Partners Trust and First Horizon transactions contributed $2 million of non-interest revenue for the quarter.

Operating expenses, which exclude merger-related charges and amortization of intangible assets, were $415 million compared with $365 million in the fourth quarter of 2006 and $375 million in the third quarter of 2007. In addition to the $23 million pretax charge related to the VISA antitrust litigation, the fourth-quarter results included a $2 million addition to the valuation allowance for capitalized residential mortgage servicing rights compared to no charge in the third quarter of 2007 and a $1 million addition in the valuation allowance in the fourth quarter of 2006. The two acquisitions contributed $5 million of operating expense during the recent quarter.

Before we turn to questions, let me briefly review some of the highlights related to the full year. Diluted GAAP earnings per share were $5.95 compared with $7.37 in 2006. Net income for the year was $654 million. Diluted net operating earnings per share were $6.40 compared with $7.73 in 2006. Net operating income was a $704 million.

This brings us to our outlook. We were encouraged by the robust loan growth we've experienced over the past quarter. But expect it to moderate a bit from current level. Our most likely scenario is for loan growth in the mid to high single digit range for 2008. We will continue to manage the net interest margin as we always have with as close to a neutral sensitivity position as possible. Ultimately, the direction of the margin will be driven by earnings asset growth with the loan growth being partially offset by runoff in investment securities. For the full-year 2008, our fourth-quarter margin of 3.45% is a better starting point than the 3.60% that we had for the full year. The events of 2007 vindicated our view that there is still such a thing as a credit cycle and that it was turning. Don and I have been talking about loss rates approaching historical norms for some time now and excluding the impact from the policy change, our charge-off ratio of 33 basis points in the fourth quarter was almost spot on with our long-term average since 1991 of 32 basis points. While it is difficult to predict the depth and breadth of the current credit cycle, at this time, we would expect credit costs to fall within a reasonable range around our historical experience.

With respect to expenses, we continue to scrutinize expenses very closely. We have some investment spending that we want to fund, particularly for expansion in the mid-Atlantic, but as we typically do, we have budgeted for a positive revenue expense spread in 2008.

I would like to touch on Bayview for just a moment. Despite the significant widening of spreads in the market for commercial mortgage-backed securities, Bayview continues to sell their production, resulting in no significant inventory overhang. While commercial mortgage-backed security spreads remain at current levels, we would not expect a significant contribution from this investment.

Turning to capital, the combination of the two acquisitions, the CDO and the VISA charges and the robust loan growth reduced our tangible common equity ratio to 5.01% as of December 31st. With our strong capital generation rate, we would expect to have our tangible common equity ratio back within our usual range of 5.2 to 5.6 by the second quarter. Accordingly, our share repurchase program will be on hold through the first quarter.

Finally, I would note that we typically see weakness in deposit service charges in the first quarter of every year relating to the post holiday slowdown in spending, as well as seasonal increases in expenses, particularly salaries and benefits. All of these projections are, of course, subject to a number of uncertainties, 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'll now open up the call to questions before which, Elsa will briefly review the instructions.

(OPERATOR INSTRUCTIONS). Jason Goldberg, Lehman Brothers.

Just some clarity, with respect to charge-offs, I guess you said around 30, 35 basis points is a normal area and that's kind of where you expect to be?

Well, what I said was that our long run historical average is around 32 basis points. And we have been running about 20 basis points for the last three quarters. I think our average over the last three quarters was 19 basis points. And internally, we sort of could see that given the level of nonperformers, that a more normalized growth rate for what we were seeing in the nonperforming book was somewhere in the '30s. I would suggest that typically our fourth quarters tend to be a little higher than the average. So, somewhere around in the 30s, in that historical range.

At this point in time, it's very tough to tell because, as you know, you and other folks out there all have current scenarios, recession scenarios; some of you have four scenarios. So what we're going to attempt to do is to tell you what we see today. And then, and not try to predict what's going to happen with the economy. But I would say somewhere in the 30s is what we would expect today.

All right, and then I guess as a follow-up, I guess how should we think about provisionings relative to charge-offs? Do you anticipate these kind of reserve builds going forward or should provision become closer to charge-offs?

I would say that the loan growth was very unusual. I mean we had 16, 17% growth in loans and that's not a typical quarter. But as you know, we typically provide for that loan growth. I would suggest that the other items that we've talked about are -- I would consider them to be a bit unusual and unless there was some other event that we found out going forward, I think I would sort of revert back to what you typically see from M&T, which is providing for loan growth and excess provision tends to be a little bit above charge-offs.

Very helpful. Thank you.

Steven Alexopoulos, JPMorgan.

Good morning, everyone. Rene, I'm curious, with the margin outlook you just gave, your 345 a good starting point, are you suggesting that you think you could hold a margin flat here?

I think if you kind of work through the items I gave you, there were a number of unusual items. So I would say that the temporary items are going to be offset by the full-quarter impact of Partners and First Horizon. And then, again, I guess our forecast is that we don't see that same significant levels of loan growth that we had in the past. If we were to do that, I would guess that you would continue to see some degree of margin compression because we're being funded primarily with wholesale funds on the margin.

But having said that, if things stay much like they were in 2007, our margins were very, very stable until we saw that loan growth, right? And so I would expect more of the same.

The other point that I'll mention is that if you just take a quick look at the yield curve, one of the things -- the yield curve is inverted. So, there is, in the fourth quarter, on average, the spread between Fed funds and two-year LIBOR, was negative 25 basis points. Right? So if you think of our lending in terms of, for example, indirect auto, we are lending to the curve, we much fund it two years, but the funds that we are borrowing with today because of the inversion in the curve actually are costing us a little bit more. And until that normalizes, I think you've got additional margin compression from that factor. The Feds thinking that they might cut 50 basis points helps a lot.

Okay. That's helpful. What was the dollar amount of the securitizations for Bayview this quarter?

I think the dollar amount was between 1.2 and $1.3 billion of securitization. And 880, 890 of that were items that we had mentioned previously, I think on the last call and then at a conference we did in November. The final securitization, which was somewhere around $370 million, went off and they sold the entire book, but it was at much higher spreads. And to understand that, you can simply look at the market for CMBS, right? Spreads are much wider. So I think what we like there is that they continue to sell their inventory. But having said that, with the cost of funding as high as it is right now, I would expect that the profit will be very little in terms of securitizations going forward.

And just a final quick question, why was the tax rate so low this quarter?

Because part of a bank's income taxes are derived from tax credit. And when you -- your income goes down as much as it did in the fourth quarter, the credits stay the same, right? So you naturally get a lower tax rate.

Perfect.

Hopefully we won't see that again.

Thanks.

John Fox, Fenimore Asset Management.

I have a number of questions. First, Rene, I'm trying to understand you are saying on Bayview. Because as I understand, if they don't securitize like in the third quarter, they ran at a I think an $11 million loss through the fee income area. And then when they securitize, obviously then it had a nice fee income. So when you say you don't expect to make any money on that investment, is that line just breakeven for '08 or what are you trying to say there?

I'll say -- let me go back through the whole thing. In the third quarter, what we were talking about was timing. So the transactions were completed. There were no transactions that were completed in our reporting quarter. That's a simple thing.

Right.

In the most recent transaction that they've done, if you sort of look at the market, look at the -- just as a bit of a proxy for the disruption, look at BBB spreads on CMBS. And as that has risen, all commercial mortgage-related paper, the cost of funding that, has gone up.

Right, sure.

And it's gone up significantly enough to erode your profit. So, first thing is most important did you get it sold. They did. That's unusual. Most of what's happening in the commercial mortgage-backed space is that you're seeing a backlog of inventory and banks are having to put those loans on their books and fund them. Okay?

In Bayview's case, because their profit model is so strong, they were actually able to get it off, but to do so, they used up most of their profit on that last transaction. And I would expect more of that to be the case going forward until that disruption in the market actually clears up.

Interestingly enough, if you think about it, there's a correlation here between the fact that our loan growth surged when the capital market shut down and then income from Bayview actually got less. So what you're seeing there is that somewhat of a natural hedge.

Okay. And then I had a question. Can you just talk about why you feel good about the reserves on Alt-A and on the home builder loans, given kind of the continuing declining environment?

Yes, let me take the residential mortgages first. The change is that we had never had Alt-A mortgages on our balance sheet in the past.

So if you go back, and I'll give you a couple of numbers here. 2002, when we had our normal core held for investment portfolio, our charge-offs were $5 million on that book of about 2 or $3 billion. In 2003, it was $4 million. In 2004, it was $4 million. In 2005, it was $1.8 million. In 2006, it was $4 million, and in 2007, it was $4 million. Nothing has changed with the core book.

If you look at the whole, excluding the acceleration, the $15 million charge we took, we had $15 million of charge-offs on that whole book. So it's really clear that this book that we took in, most of which we took in, in March, right? Is of a different nature and a lower credit quality than what we had typically. So one, we can isolate it to that specific portfolio, which is a portfolio of $1.2 billion.

But probably more specifically than that, there are about $150 million within that portfolio where most of the charge-offs are coming from. And these relate to a portfolio of scratch and dent first and a portfolio of scratch and dent second mortgages that we had put on our -- kept on our balance sheet and moved to held for investment.

So the issue is fairly isolated and we have a good ability to track that. We have added quite a few collectors and we have good information on the portfolio. So I think that's the best way for me to sort of dimension for you that the problem is fairly isolated and allows you to sort of predict what's going to happen.

If I could just follow up, the $4 million that you gave for '07, that was on residential book X, the 1.2 Alt-A?

Yes.

Okay, thank you.

If you go to the -- to your question on the builder, I think on the builder construction, what I will say is that we completed our third semiannual review of that portfolio in the beginning -- ended at the beginning of December. And we reviewed about 65% of that book, so that's a book that includes the mid-Atlantic; it includes the East somewhere around 50-mile radius around New York City. It includes our portfolio out West, I think of Portland. And it includes another portfolio of loans throughout our footprint.

And when we threw that in review, we had just four loans that we moved to our classified loan book, so that's the sort of early stages before you get to nonperforming. And interestingly enough, one of them was in the mid-Atlantic. One was in Pennsylvania. One was in New York and one was in Portland. We had another land in the mid-Atlantic that got classified up out of that classified loan book and actually the credit improved.

I think what we know is that as we sit today, we've adequately provided for the projects that have had problems, but I would argue that this is going to be an issue that plays out for a very long time and the most important thing is how long and how deep is the cycle in residential mortgages? So until you sort of get your way through some of these projects and you get a little bit more information, I would say that we think we are adequately reserved today. We're not saying that we think builder construction has improved from last time we spoke.

When is the next time you will do your semiannual review?

I think we are likely to do at least three, maybe four, if we can get it done, in the course of the year, so we are stepping that up.

Right, right.

Almost on a quarterly basis if we can get that done.

Okay. And I apologize if I missed it in the release, but do you have a total non-performing assets at the end of the quarter?

Yes, one second. Total non-performing assets were $447 million at the end of the quarter.

Sorry, Rene, that's loans. Assets is $487 million.

$487 million.

$487 million. Okay. Thank you very much.

Ken Usdin, Banc of America Securities.

Thanks. Good morning. Rene, I was winning if you could just also talk about other parts of the portfolio where you're not currently seeing any stress and give us some indications of why specifically either in the rest of the home equity book and across the C&I portfolios, are you seeing any signs of weakness of small business middle market slowdowns, that sort of thing?

Yes, let me just start with the home equity portfolio that you mentioned. We have seen a bit of a weakening trend in home equity, but remember, these are coming from very, very low levels, and on average we have a book that is of very high credit quality. Okay? So for example, on our home equity line of credit portfolio, which is about $4, $4.2 billion, a year ago, maybe we saw 5 basis points of loss and this year we're maybe at 9 or 10 basis points. Okay?

And if you look at our home equity loan portfolio, maybe last year that was 3 basis points of loss. This year it's gone to 5. Okay?

The reason for that is that if you sort of look -- just give me a minute and I'll share with you sort of some of the makeup of our portfolio. In that total $5 billion book of home equity loans, loans with a loan-to-value of less than 85% represent 84% of that loan book. So there is very little, if anything, that are in high loan to value segments. Also, if you look for example at the problem vintages, where folks with 2005 and 2006, something like 78 to 80% of our loans were above 700 credit scores. Right, so we never got into any of the brokered issues. All of the loans that we have were underwritten by us unless we acquired them, like, for example, through some of the acquisitions. So we have a very high credit quality book. So we see some of the trends, but again, we're starting from a very conservative base. If you look at indirect auto, again, you can see from our Qs, you are seeing that there are rising delinquencies there, but if you compare our numbers to the average of the industry, they are somewhat lower.

I think what helped us there is if you remember, for two years, we said that we did not like the economic returns on that paper. So, for example, if we have an auto lending of $3.5 billion, maybe something less than 20% is from the 2006 vintage. When we work with our credit folks, where we see the vintage that is sort of non-performing as well as everything else is the 2006 vintage.

So in essence, what we were saying two years ago is that we were pricing for this current credit cycle and, therefore, it didn't make much sense to book loans because you couldn't get margins that were high enough. And as a result of that, we avoided some of those vintages that are turning out to be a little bit poorer than they have historically been. I think those are the two things that are helping us probably the most.

Also, as you know, we've got a large commercial real estate book, where the delinquencies are negligible and things are pretty -- holding up pretty well. That in part has to do with the fact that our underwriting standards are pretty conservative. As an indication of that, I think our loan-to-value in our New York City book, which is, Don, 4 billion? Is about 54%. Right?

So I think -- I'm not saying that we won't have problems as we move through the course of the year and new things won't arise, but from what we see today, we think we've identified most of the areas of concern that are apparent, and most of that centers around the residential real estate arena.

Okay thanks.

Ed Najarian, Merrill Lynch.

I know this has been asked to some extent, but I would like to come back to the margin outlook a little bit if possible. When I just compare your average balance sheet and rates in the third quarter to the fourth quarter, your loan portfolio, the average yield in your loan portfolio declined by 33 basis points. And I know some of that had to do with the acquisitions which you have outlined. But I would expect that a good chunk of that also had to do with the decline in the prime rate. And it seemed like then when we flip over to the liability side, and especially look at your deposit rates, there was a very minimal decline. In fact, some of your deposit categories rates went up, and then the outlined a few onetime items there. But it just seemed like such a large discrepancy between the decline and the average loan yields versus the decline in the core deposit rates, kind of gives you a little consternation as to what might happen to the margin if the prime rate continues to decline. Could you speak to that a little bit?

Yes, sure, Ed. you are -- what you have sort of outlined is spot on, but let me just make it a little clearer. I talked about the prepayment penalty. So first you've got to normalize for that. If you put that just on the loans, it's a pretty big number. I don't have the effect on the yield in front of me, but you will see that that's depressed the yield somewhat. If you normalize for those things and Partners, absolutely, the loan yields are coming down as Fed funds drops and the prime rate drops. And then we've held our deposit pricing flat.

And if you go back over the last three or four quarters, we have been -- the spread from wholesale funding to our cost of funds has been sort of at an all-time high. Right? So what we did this quarter by not adjusting deposit pricing, is that we sort of reset ourselves a bit. Wholesale rates have come down quite a bit in the last six months. And I think what you've got is that we are much better positioned than we were then over the last three quarters to have another tool to maintain a neutral position. Right? So we bought something, by not dropping those rates. But what you are seeing is, you are spot on.

Shouldn't, in light of that, shouldn't the decline in prime and Fed funds that we got at the end of the fourth quarter and that we potentially might get at the end of January, have the same impact though, or at least have more of an impact because it's going to come on a full-quarter basis as opposed to a partial quarter basis in the fourth quarter?

I don't expect it to have more of an impact. I think that you'll have some ability to reset prices if the Fed moves, for example, by 50 basis points. And remember, what's happening is you've got that inversion in the yield curve, right? So what's not priced in yet is that we are still paying up quite a bit relative to say two-year LIBOR and three-year LIBOR. A lot of what we put on, for example, is actually shorter-term two, three, four-year deals in terms of the real estate structure. So I think that the abnormal shape of the curve, we wouldn't expect, if you look at the future, to sort of last that way, and that will give us a little bit more relief on the short end. But again, all of that is based on the curve sort of performing as the forward rates would suggest.

Okay, thank you very much.

Ed, if I could just give you one other thing. If you look at our position from the forward, if it goes down 200 basis points more, so that would be let's say Fed funds in our scenario is 350 by the end of next year. So a 200 basis point ramp-down from there, we lose 1%, $21 million, right? So you are right in your direction, but the magnitude is not that big of a deal.

Okay, all right, thanks.

Collyn Gilbert, Stifel Nicolaus.

I know you've gone through this, but if you wouldn't mind just hitting the metrics again on the Alt-A portfolio in terms of what you have on your books, how much of that is in the reserve, and then what the NPAs are. And I think you were pretty clear on the charge-offs were $15 million. But I just want to make sure I understand the metrics in that portfolio.

The portfolio of Alt-A mortgages is $1.2 billion. I talked about the fact that of the -- excluding the $15 million from the acceleration, that we had charge-offs on that portfolio of about $15 million. On the total portfolio of about $15 million, so 11 of which was on that Alt-A portfolio.

Okay. And you had said of the increase in the reserve this quarter, a reserve in excess of charge-offs, of that $48 million, a lot of that had to do with Alt-A, and then you also mentioned too to the residential developer portfolio. Can you just (multiple speakers)

Sure. On the residential developer portfolio, we added about $14 million related to two developers. Those two developers were the one that we add -- that we took the nonperforming in the first quarter and then another that we took in the third quarter. What we saw on the one in the mid-Atlantic was essentially that the lot takedowns that occurred at slightly lower prices, so we took a charge-off of about $2 million on that property, and then, we readjusted the appraised value.

The good news and what is sort of holding that up is the national builder that is sort of supporting that property is still there and willing to continue with the project. The other project we've provided of the $14 million, $11 million was associated with lower appraised values. What we've seen is that the appraisers are getting a bit skittish. In fact, on that particular property, the appraised values were below what we've been able to take down some of the lots on. But at the end of the day, you've got to stick with the appraisal.

Okay, okay. And then, just on the resi developer portfolio, what percent of that is -- I'm sorry, could you just give sort of the numbers that are out of footprint?

Yes, hang on one second.

Specifically in the West; I know you referenced Portland, but --?

We have $196 million in the East. In the mid-Atlantic, we have $595 million. In the West, we have $292 million developers. We have about 770. So total of $1.8 billion.

Okay. And then of the $1.8 billion, what was the number of that that's on non-accrual right now?

That is 84 or $85 million.

Okay. And then just one more breakdown on that. So of the 84, 85, how much of the non-accruals are out of footprint?

(technical difficulty) the majority are -- I would say essentially none, but the majority or almost all -- I'm not doing the math, but almost all are in footprint.

Okay. Great. That's very helpful. Thank you.

Todd Hagerman, Credit Suisse.

Good morning. Most of my questions were answered. Just quickly, Rene, you mentioned the Partners for securitization at the end of the quarter. Again, what was the residual impact of that securitization or would we expect something in the first quarter?

No, I don't think -- what you are going to see is -- you slightly, but not noticeable lower NII, but it will flip the fee income. We were able to securitize that $950 million and the guarantee costs were something like 14 basis points. So it just made a lot of sense to do.

So you didn't have a negative mark or anything that ran through in the quarter?

No, it was a pristine portfolio.

Okay. And then, just on a go-forward basis, how do you guys look at the Partners first portfolio in terms of the mortgage? Any anticipated changes in terms of their business model as it relates to mortgage and how -- in the conformance with M&T?

I mean we will be -- we retained a number of people in the mortgage unit and I would expect that we will run that mortgage program much like we run the rest of our footprint. I wouldn't see anything different from what M&T typically does.

Okay. And then just, I don't know if you mentioned this earlier, just -- can you give us a sense in terms of production numbers in the quarter as it relates to agency, non-agency production in the fourth quarter? For the Company?

There's essentially no non-agency production. Closed loans in the quarter were $1.3 billion, the same as in the third quarter. Bear with me. Applications were $2.8 billion. In the third quarter, they were $2.9 million. So it was down slightly from the third quarter. Let me just check the other question you had, which was on the agency, everything was agency.

Okay, great. I appreciate it. Thank you.

Bob Hughes, KBW.

A couple questions. With respect to growth in commercial real estate, obviously very strong in the quarter. Generally, I would assume you would be, given the current market conditions, funneling a lot less production to Bayview I guess for securitization and that's one of the reasons we're seeing better portfolio growth?

No, we adopt -- how do I say this? Those are two separate businesses, is the best way to say it. So we don't have a conduit. We, as you know, we sort of could never really figure out how to get into it without cannibalizing our overall portfolio, so we don't have a traditional commercial real estate conduit.

Okay. So you are not using Bayview in that way.

No, not at all. And Bayview is small balance commercial mortgages where the average mortgage is $350,000.

Okay. And then, I was curious about your comments, particularly in the metro New York area where you are now seeing shorter structures -- a lot of two, three, four-year deals versus I guess the traditional product would be the five-year fixed product in this market. Is that accurate?

That's accurate. And the other little piece I didn't mentioned, Bob, was most of the deals were variable. So what you've got is the disruption in the market and people are sort of coming back to us, but the thought is that they want to see what happens going forward for longer-term financing, so they stayed short and they've kept it variable.

That's interesting. So variable is new in this market and is that an M&T phenomenon or is that a market phenomenon?

I think it's a market phenomenon. I mean most of our -- we have -- historically we have had a large fixed-rate portfolio in New York City, so I think it's a market phenomenon.

Okay. And very -- now that these loans are variable, they were typically priced off the five-year. What were they repriced off of going forward? Are you -- the question is that most of these were fixed at five years, written off the five-year CMT, I think. That's the best attrition product in the market; are these now LIBOR-based loans or what? How are these (multiple speakers)

They are LIBOR-based loans, but I couldn't -- obviously the term would vary by each one, right? So we would typically run a duration model and sort of match it.

Okay. And within that traditional Metro New York market, multi-family has been a decent sized piece of that. Have you guys seen any stress or any cracks in the metro New York market so far?

No, we haven't. Delinquencies are nonexistent. I haven't seen any change.

Okay. One clarification. When you talked about mid to high single-digit loan growth I think, in 2008, were you talking average over average? Were you talking period end?

I guess it will come out to be the same, but I was probably -- you can use it as a linked quarter over the next three or four quarters.

Okay. And then just one final question, having completed some deals recently yourselves, I would imagine that there's no shortage of sellers in the environment. Can you give us some sense of how you're thinking about M&A going forward?

We don't think about it any different than we have in the past. I think there probably are a number more of candidates out there that are thinking about it. But having said that, a lot of people are working through their issues. So I wouldn't say there's any big pickup in volume there.

But with respect to M&T, we tend to do our work. And so to the extent that we had a chance to do due diligence on a company and spend the time there, there's nothing that would prevent us from looking at them.

Sure.

You've just got to do your credit work.

Okay, thanks, guys.

Sal DiMartino, Bear Stearns.

Most of my questions have been answered, but just a little bit of clarification. The big pickup this quarter in the securities portfolio, how was the securitization?

We had -- we put on some securities in the last couple of days of September, so that obviously affected the average, but then the securitization would have been like in the last two days of -- last two or three days of December.

Okay, and then in the first quarter, it should come back down?

I don't know what you mean by that -- it will just stay there, so.

Oh, so it will stay at the close to $9 billion level?

Yes, I mean whatever is there is from the acquisitions. We put on $1 billion from Partners. And then we securitized almost another $1 billion into that, right? And I would guess that one of the things that we will do is we typically keep a very, very low investment securities book, is that we will run that down to the extent that we see loan growth. The one caveat to that is that you heard the question that Ed Najarian asked, and to the extent that we need to sort of use a little bit more fixed-rate assets, we may have put on a little bit. Because typically we would be receiving somewhat of a hedging benefit from the fact that the New York City loan growth would be fixed. But now that that's variable, we may need to do a little bit in terms of investment securities. But if you look over the longer term, I would expect that book to start to run down.

Okay. Thanks, Rene.

There appear to be no further questions. I'll turn the floor back over to you.

Again, we'd like to thank you all for participating today. As always, if clarification of any items on the call or the news release is necessary, please call our Investor Relations Department at area code 716-842-5138. Thank you and good bye.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.