M&T Bank Corp (MTB) 2008 Q2 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 second-quarter 2008 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)

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

Thank you, Elsa, and good morning. This is Don MacLeod. I would like to thank everyone for participating in M&T's second-quarter 2008 earnings conference call both by telephone and through the webcast. If you have not read the earnings release we issued earlier this morning, you may access it along with the financial tables and schedules from our website www.mtb.com and by clicking on the investor relations link.

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, Don, and good morning. Thank you all for joining us on the call. As usual let me begin by highlighting a few items from this morning's press release before I respond to questions.

Diluted earnings per share, which include the amortization of core deposits and other intangible assets, were $1.44 in the second quarter of 2008 compared with $1.95 in the second quarter of 2007 and $1.82 earned in the linked quarter. Net income for the recent quarter was $160 million compared with $214 million in the second quarter of 2007, and $202 million in the linked quarter. Recall that the results for the first quarter of 2008 included an after-tax $29 million, or $0.26 per share, benefit relating to the Visa IPO.

Amortization of core deposits and other intangible assets amounted to $0.09 per share in the second quarters of both 2008 and 2007, and $0.10 per share in the linked quarter. There were no merger related costs recorded in the second quarter of either 2008 or 2007 while such costs totaled $2 million, or $0.02 per share, in this year's first quarter. Diluted net operating earnings per share, which exclude the amortization of core deposits and other intangible assets as well as any merger related costs, were $1.53 compared with $2.04 in the second quarter of 2007 and $1.94 in the linked quarter.

In accordance with the SEC guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. Net operating income for the quarter was $170 million compared with $224 million in the second quarter of '07 and $216 million in the linked quarter.

Obviously credit was a key factor in this quarter's results so let's start there. Nonperforming loans increased by $92 million to $587 million at the end of the recent quarter compared with $495 million at the end of the previous quarter. That increase includes $67 million of residential developer and homebuilder credits. Nonperforming loans in the other commercial portfolios increased by $22 million. Taken together nonperforming consumer loans and residential mortgages were essentially flat relative to this year's first quarter. Nonperforming loans were $296 million at June 30, 2007.

The nonperforming loan ratio was 120 basis points as of the end of the second quarter, compared with 100 basis points at the end of the linked quarter and 68 basis points at the end of the second quarter of '07. Foreclosed property, predominantly consisting of other real estate owned, was $53 million, flat compared with the linked quarter. This compares with $18 million at the end of the second quarter of 2007.

Net charge-offs for the quarter were $99 million, up from $46 million at the end of the first quarter for an annualized charge-off rate of 81 basis points of total loans compared with 38 basis points in the linked quarter. Out of the $53 million total increase in net charge-offs from the linked quarter, $36 million came from the residential development and homebuilder portfolio relating to three credits in our mid-Atlantic region. A provider of workforce solutions and a publishing company accounted for another $11 million of the increase.

As has been our practice over the past year, we continue to closely monitor and conduct frequent reviews of our residential builder portfolio. The results of our most recent review indicate continued pressure in certain counties largely within our mid-Atlantic footprint. We have seen that the performance and valuation of each project within those counties varies widely and, as a result, additions to nonperforming and charge-offs have been a bit chunky.

We would expect further migration of a portion of these credits through our classified nonperforming loan book. However, outside of the mid-Atlantic region we are fortunate to have little exposure to some of the high risk or problem markets around the country as much of our lending was contained within our core footprint.

Taken together charge-offs on consumer loans and residential mortgage loans remained relatively stable from this year's first quarter. The provision for credit losses in the second quarter of 2008 was $100 million, slightly exceeding net charge-offs. This compares with $60 million in the linked quarter and $30 million in the year ago quarter.

The allowance for credit losses was $774 million and increased to 1.58% of total loans as of June 30, 2008, up from 1.57% at the end of the linked quarter and 1.53% at the end of last year's second quarter. Loans past-due 90 days but still accruing were $94 million at the end of the recent quarter compared with $81 million at the end of the sequential quarter. This includes $89 million and $77 million, respectively, of loans that are guaranteed by government related entities.

Now turning to other parts of the income statement, taxable equivalent net interest income rose to $492 million for the second quarter, up from $485 million in the linked quarter giving an annualized increase of 7%. The net interest margin increased by 1 basis point in the second quarter of '08 to 3.39% compared with 3.38% in the linked quarter. There were no significant items impacting the comparison of the margin with the first quarter.

Average loans for the second quarter were $49.5 billion, an increase of $947 million for an annualized 8% growth from the linked quarter. By category, annualized loan growth compared with the linked quarter was as follows. Average commercial industrial loans grew at an annualized rate of 15%. Average commercial real estate loans grew at a rate of 11%. Average residential real estate loans grew at an annualized rate of 3%.

Late in the quarter we securitized $545 million of seasoned held-for-investment residential mortgages into Fannie Mae pass-through securities. We executed a similar transaction for some $330 million early in July. Average consumer loans declined annualized 3% with a slight increase in home-equity lines of credit offset by a slight decrease in auto loans.

End of period loans, as of June 30, 2008, were $49.1 billion, down an annualized 1% from the linked quarter due to the mortgage securitization I just mentioned. Excluding that securitization, end of period loans grew by an annualized 3%.

As we discussed three months ago, our determination to focus on lending to core banking relationships within our footprint while avoiding out of footprint or transactional type businesses, or business, has moderated our loan growth from the rate we experienced in the first quarter.

Deposits were another highlight of the quarter. Average non-wholesale deposits grew at an annualized rate of 10% as compared with the linked quarter with money market, savings, and demand accounts all showing good growth, partially offset by runoff in time accounts. Through the past two quarters we have lowered deposit rates more slowly than the overall decline in the marketplace as one component of our overall effort to grow deposit households.

Turning to non-interest income. Non-interest income for the second quarter of '08 was $271 million compared with $283 million in the second quarter of 2007 and with $280 million in the first quarter of '08, exclusive of the $33 million of securities gains that arose in the first quarter from the Visa IPO.

Service charges on deposit accounts increased to $110 million in the recent quarter compared with $105 million in the second quarter of '07 and $103 million in the first quarter of '08. The majority of the linked quarter increase came from a return to normalized levels of consumer service charges from seasonally low levels in the first quarter. In addition, service charges for commercial customers were higher compared with the linked quarter, reflecting the reduced earnings credits being offered in today's lower interest rate environment.

Mortgage banking fees remained quite resilient at $38 million for the quarter, compared with $36 million in the second quarter of 2007 and $40 million in the linked quarter. The quarter's results also included a $13 million pretax loss from our investment in Bayview Lending Group. This figure includes M&T's pro rata portion of severance and similar expenses related to downsizing BLG's infrastructure in the current environment. We expect additional such expenses next quarter.

Bayview is riding out the storm, so to speak, by contracting its level of loan originations and employing its contingency liquidity plans, as suggested at the time of our last conference call and which we further described in our first quarter 10-Q. Considering these actions, and for the reasons we described in detail in our first quarter 10-Q, we have again concluded that it is not appropriate to consider the investment in Bayview to be other than temporary impaired at this time.

Included in securities losses for the quarter was a $6 million other than temporary impairment charge on one of our available for sale investment securities. These impairment charges related to our very small holdings of mortgage-backed securities that have optioned ARMs as collateral.

Unrealized losses on the available for sale security portfolio recognized through other comprehensive income were $403 million as of June 30, 2008, compared with $277 million at March 31. Despite the increase our tangible common equity ratio rose to 5.03% at the end of the second quarter compared with 4.94% at the end of this year's first quarter.

Operating expenses, which exclude amortization of intangible assets, were $403 million compared with $376 million in the second quarter of '07 and $404 million in the first quarter of 2008. The results for the first quarter of 2008 include a pretax $15 million benefit related to the Visa IPO.

The recent quarter's results include $236 million of salary and benefits expense, a $16 million decline from the seasonally high expenses recorded in the first quarter. This is consistent with our past experience.

The second quarter's results also include a $9 million partial reversal of the valuation allowance for capitalized residential mortgage servicing rights, compared with a $5 million reversal in the second quarter of 2007 and a $5 million addition to the allowance in the first quarter of '08.

The efficiency ratio calculated on a tangible basis, that is excluding intangible amortization, was 52.4%, improved slightly from the linked quarter.

This brings us to our outlook. The thing that gives us the most comfort in the current environment is the fact that the nationwide housing crisis hasn't really impacted our ability to generate income. The areas that we have exited, such as the mortgage offices we took over from another regional bank in 2005, or the origination of Alt-A mortgages, which we discontinued in 2007, were never important contributors to our top line.

Our pretax, pre-provision profitability remains strong and should enable us to navigate through the current credit crunch. The fundamentals of our business remain solid and we don't expect significant changes from the recent patterns we have experienced. We expect full-year loan growth to remain in the mid to upper single-digit range with slower growth in the second half compared to the first half.

The net interest margin should be relatively stable, but could fluctuate by a few basis points in any given quarter. We may see a moderation in mortgage banking revenues as the increase in long-term interest rates have slowed refinancing activity. Overall, however, this should have a modest impact on our non-interest income.

Expenses will continue to be closely scrutinized. The primary risk we see is that the housing slowdown and the rising energy prices continue to represent a drag on the broader economy causing credit to continue to deteriorate in areas beyond the housing industry.

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

We will now open up the call to questions, before which, Elsa will briefly review the instructions.

(OPERATOR INSTRUCTIONS) Steve Alexopoulos, JPMorgan.

Good morning, everyone. Rene, could you talk quick about your exposure to Fannie, Freddie securities? What was it at the end of the second quarter?

At June 30 we have about $190 million of unsecured debt with Fannie and Freddie and $162 million of preferred stock. As you know, all of those things are marked to market, so I think our exposure on that front is somewhat limited. We have, of course, out of our $9 billion investment book, we have $3.5 billion of mortgage-backed securities that in some way shape or form have to carry government -- or carry GSE guarantees. But I think, on that front, everybody there is pretty much in the same boat.

Could you just talk quick about the credit performance of your consumer auto loans in the quarter?

Yes, I think, on the whole, relatively speaking, that is a pretty good story. If we look at our delinquencies, they are only up slightly from a year earlier on that indirect auto book. You will recall that we have about a $3.6 billion portfolio of auto loans there. The charge-offs continue to rise but albeit at a reasonable pace. I think relative to everything else we think it is going pretty well.

Clearly, there has been stories out there about the lower values of the autos. I would expect, as you go through the auction process, that the severity on losses gets a little bit greater. But quite frankly, I think we have done a pretty decent job of managing that, so it's not our top concern overall.

Maybe just one final one, could we talk about what you see as your capital needs over the next couple of quarters?

Yes, I mean I think we are doing -- we are marching along as planned. I think we are doing a pretty good job of generating growth improvements in our tangible capital. I think one of the things that sort of bodes well for us, as I mentioned, is that we are still able to absorb losses and produce pretty strong growth.

I think our tangible equity, common equity -- tangible ROE was 22%, which probably puts us somewhere around 13% in capital generation rates and we will count on that. As long as our asset growth actually remains relatively low, we will be able to build back into our range of 2.6 to -- I'm sorry 5.2 to 5.6.

Perfect. Thanks.

Matthew O'Connor, UBS.

Good morning. Can you just talk a little bit more about how you decide whether or not to write down BLG? I mean it seems like there has been a loss in three, I think, of the last four quarters. You mentioned the business has been significantly downsized and we are just not seeing too many deals getting done. So just kind of walk through how you evaluate whether it is permanently impaired or still temporary.

Yes, sure. I mean I think the place to start is with our comments from the last call. Bayview seems to be doing all of the right things and is on track with slowing down the business in a way that really protects the franchise value. In April, I think I said that the market -- if the market didn't come back in a year from now, Bayview would need an alternative business approach that is not solely dependent upon the securitization market.

Really when you think about it, there are two major factors which you would consider in the process. One is that, first and foremost, there has to be a demand out there for small balance commercial lending. We believe that definitely still exists.

Then Bayview has to have access to cash flow to be able to continue those operations and to fund that growth. And to the extent that they get that, either from the securitization market or some other fashion, then clearly the business is not impaired.

We can't rule out anything in the future, but at 6/30 we don't believe the investment was other than temporary impaired.

Okay. Then during my visit about a month ago, you had implied that, even if you did have to write-down the investment, that alone would not be enough to have to raise capital.

I mean I think you can kind of do the math. You have seen our performance over the last couple of quarters. We generate a fair amount of tangible capital generation, so I don't see capital raising as an issue at this time.

Okay. Then just separately on the deposit side, it seems like you let some of the higher cost CDs roll off while you had some good growth in the savings side. Can you just give us a little more color on what the strategy in the deposit side and funding side overall is?

Yes, we have talked about this for some time. The way I would like to focus on it is that if we look back over several quarters, several historical quarters, one of the things that we saw that we didn't like was that we weren't getting enough deposit growth in terms of core accounts, particularly in the mid-Atlantic. So over the past year we have begun to focus on a number of things that we think will better position us over time.

One of the most obvious things you see is that starting in the fourth quarter of last year, we didn't lower rates as much as everybody as the market rate started to come down, so that obviously helped. But on the commercial side we are doing a lot in the way of rounding out our suite of cash management products and making sure that we are up to date there.

We have done a number of things on the consumer side in terms of renovating branches and, as you know, we have added -- plan to add de-novo branches this year. I believe we have completed three of those through June 30 and probably are headed to do another three in the second half.

So we are doing a number of things, including advertising and other things, that are all pointed towards getting continued growth in our deposit households. So we are pretty pleased, with a relatively stable margin this quarter and 10% deposit growth, we think the process is working.

Great. Thank you.

Ken Zerbe, Morgan Stanley.

My question really is on reserve build. I guess with provisions increasing both sequentially, year-over-year, charge-offs rising, the environment not getting any better for anybody, can you just walk me through your logic? Why are you holding your reserve build constant when, for the most part, every other bank is sharply increasing their reserves in the face of a challenging environment?

You know I think to answer that question, Ken, you have got to go back to our process. So as we migrate loans through the book, through our different stages of our 15-grade system, we are adding provision, an allowance I should say, as the credits migrate through the system.

So case in point, you know you saw an uptick in nonperformings, primarily related to four credits that were in the builder space. You also saw an uptick in the charge-offs. But much of that book, as we have been saying for some time, we have been doing three to four reviews annually on those portfolios which began back even more than a year ago. So a lot of that loss content is already inherent in the book, in the allowance that we have today.

If you think about the builder space, we have talked about for some time that we have this about $2 billion portfolio of outstandings for residential homebuilders. I would think today that in our criticized loan book about 25% of that book is already in our criticized loan book. Half of that is in our mid-Atlantic portfolio. So with the work that we keep reporting on and the deep dives that we have taken into the book, we are trying to get at the loss content early.

If you look back over time what you would see is that we never really dropped our reserves in 2005, because we saw a lot of issues on the front. Remember that we were slowing our loan growth because we didn't like the structures on deals in New York City. We didn't like the pricing; quite frankly, we just didn't like what we saw. So much of what we were doing all of that time was building up our reserves over time on the credits, on many of the credits that you see today.

Okay. I may have to follow up with this a little bit later, because I guess I just look at your reserve ratio and it's up just 6 basis points year-over-year give or take, 5 basis points year-over-year. So we really have seen a lot in the last year but--.

Keep in mind, the other things I would guess I could point you to is that you are going to see big increases in the industry in reserves. We have a secured book. We do not have a credit card portfolio. So look at things like coverage ratios.

Of course, of course.

The loss content that you are trying to get at, we can't sock away reserves just for the sake of socking away reserves. It's all about identifying specific loss content that you have and reserving appropriately for it.

Okay. The other question I had, just on your Alt-A portfolio, can you just comment about the trends there? I think you saw $13 million or so of losses. I think that was mostly related to Alt-A. How is that trending?

Okay, I think just to sort of clarify, if you take the way the press release was written, take the $13 million that we mentioned and the $5 million in seconds, all of that comes from our Alt-A portfolio, so the number was $18 million. That was flat with the first quarter.

We have actually seen a relatively leveling off of the loss content in that portfolio. We have begun to see, in the last two or three months, a slight downtick in the delinquencies in that portfolio. So I think the best thing that we can say is that we really feel that we have got our hands around that process. We have been at it for some time now, over a year. I think we think we have got our hands around it and we have done our work there.

I would expect to see a continuation of those trends. Loss estimates up or down a bit, but pretty much I would expect the loss content, the loss trends, to continue there for a number of quarters.

All right, great. Thank you very much.

Bob Hughes, KBW.

Good morning, guys. I guess a couple follow-ups. Rene, could you give us an update on the balances of Alt-A firsts and seconds that you guys have at quarter end?

I can try. I think we are down to $1.1 billion -- $1.1 billion now.

That is inclusive of both?

Yes, that is inclusive of both. Don, do you happen to have the seconds? You know, Bob, I just don't want to give you a wrong number. I want to give you one consistent -- I think last we presented at the first quarter we had about $67 million -- in the $60 million number on the seconds. Now that is down to about $50 million and the remainder is firsts.

Okay, that's helpful. Another follow-up, Rene, on auto. I know it's a space you guys have been watching closely for some time now. Have you seen -- I guess two parts. Number one, have you seen anything concerning in the floor planning segment? Can you give us an update on how big that portfolio is?

Then secondly, could you talk a little bit about SUV and pickup exposure and how you might stand relative to the industry from a concentration perspective?

Just to follow up on that last one, the numbers on the seconds is $47 million, Bob.

First with the floor plan portfolio. It's really interesting, time flies. We have been talking about that portfolio for almost three years now. I didn't realize it was that long. And because of that, through the first six months, we are in a net recovery position. The nonperforming loan book, related to the floor plan, is also down.

So I think there, despite the fact that that industry continues to weaken, I just think we have done our work there. I can't rule out that as oil prices continue to go up and the economy remains a bit slow that we won't see things get a little worse there. But I think we have really done our work in cleaning out that portfolio.

In terms of the -- I have already talked a little bit about -- actually, if you look at our losses on auto floor plans, actually our nonperforming loans, we were at about $25 million in the first quarter. That is down to $16.5 million on that book. I think I have already talked about -- Bob, can you repeat the second half of your question?

The second half was just really around SUV and pickup exposure for the indirect book. From a concentration perspective, where do you stand? Is it both below the industry level in general?

I have got those numbers; I will give them to you in a second. They clearly, from the work that we have been doing, that position has migrated downward. Because if you think about it, if you think about it, we saw that two years ago that people were getting stuck with a lot of inventory in these cars they couldn't get sold because of the gas prices moving up.

If I look at where we were in May, we had about 31% of our loan book in the SUV space and 19% in the truck space. A year ago that was -- it's about flat 30% and 20%, so it has remained relatively flat from that perspective. In terms of the used versus new, of our portfolio is actually on the used side. I think two-thirds of our portfolio is used auto.

Okay, great. I will stop there. Thanks guys.

Jason Goldberg, Lehman.

Thank you, good morning. Rene, you gave us, I think, a good job in terms of your expectations for kind of loan growth, margin, expenses, fee income, etc. Just any thoughts in terms of what happens with respect to charge-offs as the back half of the year plays out?

Well, I think, as I said, we are kind of pleased on the consumer side. The charge-off contents, including the residentials, were relatively flat. I would think that there would be a slight migration upward in consumer, just because of the state of the economy. Then, of course, remember as we get to roughly the late third and fourth quarter, you do see a seasonal uptick in consumer charge-offs. But I think it is easy for you to get at that by just looking at year-over-year trend on the consumer side.

One of the things that was unique, I don't want to say different, about this quarter, if you remember on the call I said that charge-offs had to go up simply because we had no commercial charge-offs in the first quarter. Very little. And so you saw what I would consider to be a more normal view of a quarter with a significant amount of commercial charge-offs.

I think it's going to be hard. We have done a lot of work on the builder space. So we have a fair amount of loans that are in our classified loan book, but those projects are performing very different on a project-by-project basis. So what I would guess is that we will see some chunkiness from time to time.

It's very difficult for me to predict exactly what is going to happen with charge-offs. But I think that, on an overall basis, I wouldn't expect charge-offs or nonperforming levels to abate significantly.

Okay. Then do you have what your tier one capital ratio was for 2Q?

I can give you an estimate. I think what I have estimated it, tier one, at 776. So up -- I don't know, we were probably at 760 or something like that then -- at the end of the first quarter.

Thank you.

John Fox, Fenimore Management.

Hello, good morning, everybody. Rene, could you just repeat -- when you were talking about NPLs, I think you gave the increase for the residential builders and the other and then the total for residential mortgages. So could you just repeat that information, please?

Yes.

Are you talking about residential building and developers up $67 million?

Hang on one second. I have got to find my notes here. What we said is that, yes, we had -- so $67 million of the $92 million increase was in the residential developer and homebuilder credits.

Right.

Then the other commercial portfolios increased by $22 million. Then there was virtually no change in the consumer and residential mortgages combined.

Okay, and you gave a number, $296 million. That is the total amount of NPLs in --?

A year ago, a year ago.

A year ago.

A year ago. So at the end -- at 6/30 it was $587 million, up from $495 million at March 30.

Okay. What were nonperforming assets, June 30?

I have that as well. Total nonperforming assets were $640 million, up from $547 million at the end of the first quarter.

Right. I have that. In terms of Bayview on the income statement, is this the run rate? Is there something unusual? You mentioned there was some severance. What is the run rate at this point for Bayview?

Good question. I think that as they work their way to getting down to a steady state level that they can continue to operate at, we should probably see -- next quarter should look a lot like this quarter that we have seen. But all of that is -- includes loss content that has worked to get them to a lower loss rate. So I think by the time you get to the fourth quarter, you will see a more normalized run rate for the company.

Okay, that would be a loss rate but at a lesser amount.

That's a good guess.

Okay. Thank you.

Ken Usdin, Banc of America Securities.

Thanks, good morning. Rene, I was wondering if you could just go a little bit deeper into the outlook for credit. Not so much on a provision or charge-off basis, but just how are you guys thinking about the broader economy in terms of the non-builder exposure? What are you seeing by way of small businesses, middle market companies, non-residential real estate? Just how deep are we getting here and to the extent those problems are really just going to start to occur that haven't to date?

Yes, okay. Good. Setting builders aside -- let's set the residential aside, because we have talked a lot about that. You know I think we have seen in the business banking space, or in the smaller C&I credits, a steady migration up in those portfolios. Not different from what anybody else has been talking about in the industry, albeit though I think we are starting from slightly lower levels.

My guess is that -- that tells me that, particularly with the price of oil and inflation out there, I think that you are going to continue to see that migrate up. I think you will probably see something, more migration in the C&I loan book, although we haven't seen a big move in that as of late. So that is probably out there on the horizon.

If we were sitting here six months from now and talking about a move in our classified loan book or in our nonperformers, we would then be looking at loss content in '09. But we haven't seen it yet, but I wouldn't be surprised to see that.

The commercial real estate space has been, outside of builder, has been very solid to date. We, again, are pretty pleased with the underwriting that we did over the years there.

Okay, and just one more follow-up. On the nonresidential, so you are not really seeing any leakage into even housing-related type of areas, like retail or office?

Not at this time.

Okay. On the builder book, you mentioned the $2 billion; you have gone through the $2 billion book quite a few times. But how far along do you think or in terms of really recognizing the NPLs?

I guess the question is just what do you think is through the book -- what proportion of the book do you feel is really through the book versus pending NPLs? So where is that book as far as its migration status as far as you think from getting from point A to point B?

I guess the best way for me -- let me give you a couple of points here. You saw the three charge-offs that we had. Two of those were on credits that we had talked about in the past. Really what the issue was on those two credits was that the amount of spring sales was even slower on the last couple of months than our base case was. So across the board we are seeing slower sales and that means that there have to be price adjustments down in order to hit a price point where they are going to be able to move the properties.

The third, and if you look at the third -- I'm giving you color on the types of things that are in the book. The third large charge-off was really a land acquisition and predevelopment loan. So you have got unimproved -- raw and unimproved land there. Really what you are looking at on those particular cases is if the builder doesn't have the wherewithal to support the project, then land values are pretty low these days, maybe 40% to 50%.

So we have kind of taken all of that into account. We have just completed in May our most recent review. To put that into perspective, we reviewed primarily the mid-Atlantic portfolio, which at 6/30 was $586 million of outstandings. Half of that book is criticized. We reviewed primarily focused on our East portfolio, which is $195 million of outstandings. That actual portfolio has held up much better.

So I think what you are going to see is that, clearly, you will learn more -- you will see more charge-offs, you will see more nonperformers. But from our perspective in going through that review in May, from our internal perspective, we didn't see a lot of new credits. It's just that a lot of things got a bit weaker. I would guess that we are going to have to see a couple of quarters like the one we have seen. It will take some time to get ourselves through that book.

But keep in perspective, I said 25% of that book has already been classified. That number represents just 1% of our loan book. So we are going to see this, it will take some time. I don't know --- two, three quarters. We will slug through it, just liked we slugged through the auto. But on the whole, relative to the size of M&T, we don't think it will be -- it's anything to be overly concerned about.

Okay, and just to clarify, the numbers are again 25% of the whole builder book is classified? I just want to make sure that I have that number right. You said half of mid-Atlantic is criticized, but then you said 25 --

Yes, let me be real specific on that. If you look at our about $2.1 billion of total outstandings there, 25% of that book is in our criticized loan book. Almost all of that is in the subset, the $1 billion that we sort of call -- that is managed out of our mortgage division, and 50% of that classified loan book is in the middle -- 57%, sorry, 47% of that book I am talking about, of the criticized loan book, is in the mid-Atlantic. So it is very concentrated.

Okay, great. Last quick question, with the build up in the unrealized losses this quarter, you mentioned you only had one security that was temporary impaired. Can you give us the outlook of what it really takes as far as spread movements to cause these temporary unimpairments to go to more of a permanent status?

Sure, let me tell you what we do. We have got a $9 billion securities book. We take on every security, we look at all of the underlying collateral. We take a look at the delinquencies 30-/60-/90-days and apply some expectation of what will happen to that underlying collateral. We have gotten pretty good at that, because it's one of the side benefits of having that residential mortgage book. We have gotten pretty good at being able to predict what is going to happen when a loan goes into its 30-days delinquent.

So we take those estimates and we run out what we believe to be a lifetime loss on the securities book, on the collateral, and then we compare that against the enhancement. In our internal rules, any security that has less than 2.5 times coverage, so its enhancement is less than 2.5 times the expected loss rate, we put that on our watch list. At June 30, that -- actually at June 30 that watch list was just about $77 million out of a whole book of $9 billion and this $6 million came from that.

So if you look at it, what is interesting about it is, if you look at the loss content on that for this particular bond with $6.5 million, it was trading at $0.10 to $0.15 on the dollar and the collateral -- it was collateralized with a pool of option ARMs. Interestingly enough, they were high FICO, they were low LTVs, however, the delinquency rate on that pool was really increasing dramatically, particularly over the last few months.

So our coverage on that particular bond was probably as low as I think it might be 0.7%, so below 1% overall coverage. What is helpful to us is that out of that entire book, we only have about $19 million of mortgage-backed securities that have option ARMs as collateral. So $19 million out of a $9 billion book, so we feel pretty good about it. But as the coverage ratio drops on those projections, even though there is no loss content today, we would consider taking the investment other than temporary impaired.

Again, in this case, this particular case, there hasn't been any lapse in payment.

Got it. Thanks a lot, Rene.

Collyn Gilbert, Stifel Nicolaus.

Good morning. Thanks guys. Just a quick question, Rene. I think you had said at one point you guys were combing through the loan portfolio and trying to assess the balance of borrowers that are somehow tied to real estate, whether it would be plumbing or whatever the industry that would be tied to real estate. Have you finished that process and if so, or can you give us any color as to what that exposure might be?

Well, I think we are still in the process of doing that. We actually want to go through and look at our residential exposure by ZIP code. But really I think today a good estimate of that would be $2 billion to $2.5 billion in terms of residential.

Okay, great. That was all I had. Thank you.

Ed Najarian, Merrill Lynch.

Good morning, Rene. My question was answered. Thank you very much.

Jeff Davis, FTN Midwest Securities.

Good morning. Has the institution been contacted by the FDIC or other regulators regarding M&T being approved to acquire failed institutions? If so, do you all have any interest in doing so?

Then thirdly, three-part question is, are you expecting much within your footprint that might become available?

You know it sounds kind of funny, but it is almost a standard wild rumor from the [discussions]. Nobody is calling. So the answer there is no. But we are always ready. We would be cautious. We think today -- in today's environment you would have to do your work and you do diligence, but the idea of a potential opportunity, if it were to come our way, we would be interested in.

Okay, I was thinking more of just a straight deposit assumption type deal, as opposed to having to take the credit risk on the left-hand side of the balance sheet.

Yes, no calls today.

Okay. Very good. Thank you.

Al Savastano, FPK.

Good morning. Two questions. Can you give us some color on what the severity on the homebuilder portfolio has been and do you expect that trend to continue?

Then secondly, on the Bayview investments, the securities you have, can you give us an idea of what the collateral is and what the market is on that as well?

Sure. On the first part, it really varies on a case-by-case basis. One of the things we also did this quarter is we did a hard review of all of our appraisals. In some cases, the case where you have got a troubled project and it's raw and unimproved land, you could be looking at $0.40 to $0.50 on the dollar for those bids. Having said that, the appraisals that we have seen have been all over the board.

If you look at projects that are in basically the same county or the same proximity, you are getting valuations that vary widely, based on -- I guess based in part based on the performance of the project. But it's also, in some cases, I think we have got some pretty conservative appraisals that are out there. But the most severe march would be on unimproved land that is out there.

I think with respect to Bayview, we have -- I don't have it in front of me -- but we probably have somewhere in the neighborhood of $400 million in outstanding bonds. The largest of those is something that we purchased in the fall of -- last fall -- which was a security backed mostly by residential mortgages, some subprime, some Alt-A, some normal prime credits. That was for about $300 million at that point in time. Those loans have paid down considerably. I think we probably, on that one particular case, are down to somewhere around $230 million in just that first six or seven months. So they seem to be performing very well. They have a very high level of coverage.

The other small portions that we have were, prior to our relationship with -- our equity relationship with Bayview Lending Group, we had purchased a number of their small balance commercial securities. I am going to say that that's in the neighborhood of $100 million or less that we have there. All of those are performing well, and that collateral is very similar to the types of collateral that BLG is issuing today -- types of securities that they are issuing today.

Great. Just to clarify in Bayview, there is no straight debt, it's all secured by some kind of real estate?

I believe that is true. Yes, that's true.

Just going back to the --

Yes, absolutely that is absolutely the case. So most of your risk is just simple underlying collateral there.

Great. Just going back to the severities, can you give us some color on the residential construction side on the severity you have seen this quarter?

Could you repeat that one more time?

You gave us the land, you said the land severities can be anywhere from $0.40 to $0.50 on the dollar in terms of value. How about on the residential construction side?

It just depends. It's all over the board. There is no consistency whatsoever. In particular, the way we have -- in my comments I talked about that we were seeing some difficulty in a number of counties. As you move from one county, which might be completely oversold, to another that is not, the valuations could be standing up very, very well.

So it really is on a case-by-case basis and you have to get right down to the county level to be able to distinguish anything there.

Al, back to your other question. We do -- outside of Bayview Lending Group, we do have -- we have an unsecured, a secured -- I'm sorry, we have a secured loan to Bayview Financial, which is the 80% owner of BLG. That is also secured by residential real estate and/or residuals.

Thank you.

Todd Hagerman, Credit Suisse.

Thanks, my questions have been answered. Thank you.

[Tamecia Anderson], Dreyfus.

Thank you, good morning. I was wondering, can you just give a comparison of the homebuilder book in terms of exposure in nonperformers and charge-offs from the linked quarter and from the year-ago quarter?

Yes, just give me -- okay. If you were to look at the charge-offs, we had $38.3 million in charge-offs this quarter. Last quarter that would be $3 million and in the fourth quarter that would have been about $4 million. Nothing before that.

On the nonperformers, we are currently at about $163 million in nonperforming loans. Last quarter that was about $95 million and a year ago that would have been about $37 million.

Okay, thank you.

There appear to be no further questions at this time. I will turn the floor back over to you.

This is Don MacLeod. Again, I would like to thank you all 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. Goodbye.

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