M&T Bank Corp (MTB) 2008 Q3 法說會逐字稿

Good morning. My name is Beth, and I will be your conference operator today. At this time, I would like to welcome everyone to the M&T Bank third quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you. I would now like to turn the call over to Don MacLeod, director of investor relations. Sir, you may begin.

Thank you, Beth, and good morning. This is Don MacLeod I'd like to thank everyone for participating in M&T's third 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'd like to mention that comments made during this call may contain forward-looking statements relating to the banking industry and to M&T 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 welcome, everyone. Thank you, all, for joining us on the call. There are a few items in the quarter results I'd like to discuss before I respond to questions. Diluted earnings per share, which include the amortization of core deposits and other intangible assets, were $0.82 in the third quarter of 2008 compared with $1.83 in the third quarter of 2007 and $1.44 in the linked quarter. Net income for the recent quarter was $99 million(Sic-see press release) compared with $199 million in the third quarter of 2007 and $160 million in the linked quarter. The amortization of core deposit and other intangible assets amounted to $0.09 per share in the third quarter of both 2008 and 2007, as well as in the linked quarter. There were no merger-related costs recorded in the third quarter of either 2008 or 2007, or in this year's second quarter. Diluted net operating earnings per share, which exclude the amortization of core deposits and other intangible assets, were $0.91 per share compared with $1.92 in the third quarter of '07 and $1.53 in the linked quarter. In accordance with SEC guidelines this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity..

M&T's net operating income for the quarter was $101 million compared with $209 million in the third quarter of '07 and $170 million in the linked quarter. Items of particular note that impacted the quarter's results included the following. First, as we previously disclosed in an 8-K filing on September 12th we recognized an other-than-temporary impairment charge on our holdings of Fannie Mae and Freddie Mac preferred stock. The total pretax charge was $153 million, which amounted to $97 million, or $0.88 per share after taxes. Also during the third quarter we resolved certain tax-related issues in various jurisdictions. This resulted in a benefit of $40 million to income tax expense, or $0.36 in earnings per share. Also, as we'll mention later, we continue to demonstrate our commitment to the communities we serve by making a $3 million contribution to the M&T Bank Charitable Foundation.

Turning to the balance sheet and income statement highlights, taxable equivalent net interest income rose to $493 million for the third quarter, up slightly from $492 million in the linked quarter and up $22 million from $473 million in the third quarter of 2007. The net interest margin was 3.39%, unchanged from the second quarter. We benefited from a wider LIBOR fed funds spread and from the runoff of some higher-yielding CDs during the quarter. This was offset by the impact of an additional day during the quarter and the nonpayment of the Freddie Mac dividend. Average loans for the third quarter were $48.5 billion compared with $49.5 billion in the linked quarter. The primary reason for the decline was the conversion of some $875 million of residential mortgage loans into Fannie Mae guaranteed mortgage securities. This occurred in two transactions; one late in the second quarter and the other early in the third. We retained the securities in our available-for-sale investment securities portfolio. Including those securitizations average loans were down 2% from the linked quarter. Compared with the linked quarter, average commercial and industrial loans grew an annualized 2%, commercial real estate loans grew 1%, and consumer loans declined by 5%.

Excluding the normal seasonal decline in auto (inaudible) plan loans in the third quarter, as dealers reduced their inventory in preparation for the new model year, the remainder of the C&I portfolio grew at an annualized 8%. As we referenced in our second quarter earnings call we're focused on relationship lending within our core footprint and have limited appetite for transactional-type business, such as indirect consumer. For example, annualized linked quarter growth and average loans across our community bank footprint averaged 5% and ranged from 4% in upstate New York to 8% in the Mid-Atlantic region. Indirect auto loans declined an annualized rate of 14%. Average core deposits, which exclude foreign deposits and wholesale time deposits, were up an annualized 1% from the linked quarter and up 11% from the third quarter of 2007. End-of-period core deposits were up an annualized 7% from the linked quarter as we appear to have been a beneficiary of the September turmoil. Average money market deposit accounts and demand deposit accounts experienced the strongest growth partially offset by decline in CDs.

Turning to noninterest income, noninterest income was $114 million for the recent quarter. This compares with $271 million in the linked quarter and $253 million in the third quarter of 2007. Excluding the securities loss on the GSB preferred stock noninterest income for the third quarter of 2008 was $267 million. Service charges on deposit accounts were $110 million during the recent quarter, unchanged compared with the linked quarter. Mortgage banking fees remain quite resilient at $38 million for the quarter, also unchanged from the linked quarter. The quarter's results also include a $14 million pretax loss from our investment in Bayview Lending Group. This compares to the -- with the $13 million figure in this year's second quarter. As we discussed in July's earnings call, these amounts include M&T's pro rata portion of the severance and similar expenses related to downsizing BLG's infrastructure in the current environment. We expect BLG's operating losses to be lower in this year's fourth quarter.

Unrealized pretax losses on the available-for-sale securities portfolio recognized through our -- through other comprehensive income were $558 million as of September 30, 2008, compared with $403 million at June 30. Our tangible common equity ratio was 4.93% at the end of the third quarter. Our estimated tier 1 capital ratio as of September 30th increased by 15 basis points to approximately 7.91%, up from 7.76% as of June 30th. Operating expenses, which exclude the amortization of intangible assets, were $419 million compared with $375 million in the third quarter of 2007 and $403 million in the second quarter of 2008.

The third quarter results include a $1 million addition to the valuation allowance for capitalized residential mortgage servicing rights compared with a $9 million reversal from the allowance in the second quarter of 2008. There was no valuation adjustment in the third quarter of 2007. Also during the quarter, as we mentioned, we made a $3 million contribution to the M&T Bank Charitable Foundation. That's two items accounted for $13 million of the increase from the linked quarter, and excluding those items operating expenses grew at an annualized rate of just 2%. We are continuing to fund our core initiatives, such as additional branches in the Mid-Atlantic. In other words, we're not using the environment as an excuse to reduce spending in areas crucial to our future growth.

Let's turn to credit. Nonperforming loans increased to $710 million at the end of the recent quarter compared with $587 million at the end of the previous quarter. That increase includes $19 million of residential developer and homebuilder credits. Nonperforming loans in the remainder of the commercial portfolios increased by $49 million, including $26 million in loans to two operators of recreational facilities, which are collateralized by real estate. Nonperforming residential real estate loans increased by $42 million. This included $32 million of proactive loan modifications, which under the accounting rules qualify as troubled debt restructuring. The nonperforming loan ratio was `.46 -- was 146 basis points at the end of the third quarter compared with 120 basis points at the end of the linked quarter and 83 basis points at the end of the third quarter of 2007. Other nonperforming assets, predominantly consisting of assets taken into foreclosure of defaulted loans, were $85 million compared with $53 million at the end of the linked quarter. This compares to $22 million at the end of the third quarter of 2007.

Net charge-offs for the quarter were $94 million, down slightly from $99 million in the second quarter, resulting in an annualized charge-off rate of 77 basis points of total loans. This compares with 81 basis points in the linked quarter. Residential construction and development loans accounted for $33 million of net charge-offs for the quarter compared with $38 million in the linked quarter. Consumer loans accounted for $31 million of net charge-offs in the recent quarter compared with $ 27 million in the linked quarter. This included a $2 million increase in charge-offs on indirect auto loans.

Alt-A loans, both first and second lien,, accounted for $15 million of net charge-offs unchanged from the linked quarter. The provision for credit losses in the third quarter of 2008 was $101 million. This compares with $100 million in the linked quarter and $34 million in the year-earlier quarter. The allowance for credit losses at the end of the quarter was $781 million, an increase of 1.60% of total loans at the end of September 30, 2008, up from 1.58% at the end of the linked quarter and 1.52% at the end of last year's third quarter. Loans past due 90 days, but accruing, were $96 million at the end of the recent quarter compared with $94 million at the end of the sequential quarter, and this included $90 million and $89 million respectively of loans that are guaranteed by government-related entities.

In summary, aside from the other-than-temporary impairment charge on the GSE preferred stock and the benefit from the tax settlement, the quarter's requirements were consistent with both our expectations and last quarter's performance. As we observed on the July call, our revenue stream, which does not have a large market-sensitive component, hasn't been significantly compromised by the downturn. In addition, expense growth remained moderate. As a result, pretax preprovision profitability remains strong. Consistent with our outlook since January we continue to expect overall percentage loan growth for 2008 to be in the mid to upper single-digit range, and this, of course, excludes the impact of the securitizations mentioned earlier. We also continue to expect a relatively stable net interest margin, although with some bias towards the up side in the fourth quarter.

While charge-offs improved in the second quarter we have likely not reached the peak of the credit cycle and we expect to continue -- we can expect continued increases in delinquencies and nonperformers, though at manageable levels, particularly in the consumer portfolio. In addition, residential builder credits don't deteriorate in uniform fashion and the nonperformers in net charge-offs in that portfolio will continue to be somewhat lumpy and are difficult to predict in any given quarter. However, we would expect losses in this portfolio to persist for the next several quarters. All of these projections, of course, are subject to a number of uncertainties and various assumptions regarding national, regional economic growth and changes in interest rates and 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 Beth will briefly review instructions.

(OPERATOR INSTRUCTIONS) Your first question comes from Ken Zerbe with Morgan Stanley.

Great, thanks. My first question is just on Bayview. So it looks like they took another $14 million -- you're portion of loss was the $14 million, I think this has been going on for several quarters. Could you just review your thought process in terms of when you might need to write-down your investment in Bayview?

Yes, sure, Ken. Let me go back to -- I think on September 8th we discussed our thoughts on this on a webcast, and our thinking on the valuation of BLG. And I guess the logic here is that -- we kind of walk through the fact. The management has really consistently met all the projections for implementing their contingency liquidity plan, then earlier in the year what we had pointed to was that there would need to be either a return of liquidity in the securitization market or we would have to have seen a modification in their operating model that we had a lot of confidence in. If you look at where we stand today, clearly the markets are not likely to return any time soon.

But our investment in BLG today has been modified such that in addition to the normal 20% ownership interest that we have in BLG, we also have a 20% economic interest in all of the activities of Bayview financial and that's an economic interest that goes to BLG. And if you think about that, when you look at that time value of those businesses and the assets in those cash flows that they generate, that tends to generate significant value that supports the valuation of the investment that we have on our books. So I think if you look at where we were maybe a couple quarters ago, we laid out that uncertainty and we had a number of things we were looking at, but since then we have gotten very comfortable and seen evidence to the fact that there's significant value in the way that our BLG investment is structured.

To try to just make it a little bit more clear, the next thing I'd like to say is that you've got to remember, first and foremost, that we have a passive investment in a private company, so we tend not to talk about things that the institution hasn't disclosed on their own. Having said that, you know the business that they are in. They have a significant amount of residual values on securities that they've issued probably over the last ten years and those have significant economic value. And in addition, they've recently, at the end -- towards the end of July, announced another event which was centered around their expertise in the scratch and dent loan business, which is mainly the setup of their asset management company in which an outside party made an equity investment [in them].

So there are a number of public things that you can actually get out and point to that show you where we're looking for in terms of value, and today we're much, much less reliant on a return to securitization markets for the origination business. Right -- directly to your point there would have to be some sort of significant event that we don't know about today in order to have any sort of partial write-down of that business. But I guess the last thing I'll say is we're pretty candid and we tend to raise issues way before they come up, and today we think the investment is properly valued.

Okay. Forgive me, I may have forgotten this but you had the 20% equity interest in BLG and it sounded like you just said that you have in increased your ownership to include 20% ownership of all Bayview Financial activities. When did that increase happen or did I just misunderstood that?

That's not technically correct. What I said is that we have a 20% ownership interest -- equity ownership interest in BLG, and we have an economic interest in all of the cash flows of Bayview Financial. So the most significant issue is not necessarily that item, but it's the management team's certainty around -- that those rights actually produce cash flows, and we've gotten much more comfortable with that since, say, earlier in the year this year, based on certain transactions that they publicly disclosed.

Okay, understood. The second question I had, just with -- in terms of the nonperforming loans, obviously that's been increasing at a fairly healthy clip, I think over 20% Q on Q this quarter. Your reserve to nonperforming loan ratios at $110 million, which I believe you pointed out in the press release, that's been coming down substantially the last several quarters. At what point do you feel that you might need to build reserves to help offset this or does it matter? Could this get down to 20%, and you wouldn't --?

That's a great question. Let me just step back. Cosmetically you do worry about, right? You look at it and you think about it. But when you build your allowance you're not necessarily looking at the cosmetics, you 're lacking at the loss content. One of the great examples is we mentioned these troubled debt restructurings that we had in our portfolio this month, so there was $32 million of the increase in nonperforming loans, so a substantial portion of the increase was related to loans that we modified, right? So what we're seeing is that -- if you think about what we did, we changed our charge-off policy in the fourth quarter and essentially we moved it back to 150 days so we would get at problems quicker. Then we spent a fair amount of time working through things that were delinquent, loans in that Alt-A book -- that $1 billion Alt-A book..

Now what's actually happening is we've developed rink profiles so that we understand the type of customer that is likely to miss their first payment, and we are going out and proactively doing loan modifications to make sure that we keep those customers in their homes, even though they may have never missed a payment. And under the guidelines, that represents a nonperforming loan and you've got to put a FAS 115 mark on that institution. So here we think we've defined and we're adequately reserved on our Alt-A loan, but the way in which we continue to go through and mitigate losses results in nonperforming loans. It doesn't necessarily mean the loss content is up. So in this environment we're very, very focused on the individual loss content that we see. We think we're relatively -- we've been relatively conservative and it's one of the reasons why we keep pointing to the ratio of reserves to losses. Through the first three quarters of this year we're still at 2.5 times our charge-off level in terms of a reserve, which you might be able to find two or three other institutions that are at that level, but that's about it.

No, understood. I appreciate the answer. I guess from our perspective --

It's a great question.

Yes. From our perspective rising MPLs is probably one of the best or only things that we can look at in terms of future loss content, but I do appreciate your answer. All right, thank you much.

Your next question is from Steven Alexopoulos with JPMorgan.

Good morning, everyone.

Morning, Steve.

Rene, I'm curious, what was the thought process behind the (inaudible) to $75 million of mortgage loans that were converted to securities? Why the third quarter, and should we expect more of that?

I think there's a number of reasons. in this environment, starting actually back in the third or fourth quarter last year we really began -- with the disruptions in the markets in August we began to look at our liquidity plan, and part of the liquidity plan is it's to helpful to have the guarantee on the Freddie and Fannie paper for those securities and so we did about $1 billion in December. All those loans were from the partners transaction and now we've done -- getting up to close to another $1 billion worth, which actually provides with you strength in terms of liquidity and it also provides with you with a guarantee.

As we look back and think about that $1 billion that we did in out in December, that guarantee that we bought I think we paid 14 basis points for that guarantee -- 14 to 15 basis points and if you're looking at the environment today I think that was money well spent. And particularly, if you look at what we're seeing we have had, for example, on our residential Alt-A portfolio, now just over $1 billion we have seen -- for seven quarters we've seen lower delinquencies because that portfolio has -- I'm sorry, seven months in a row we've seen lower delinquencies of 30 days or more. Having said that, the whole portfolio has actually seen a slight rise in delinquencies because prime mortgages that no one was worried about a year ago are now actually having slightly higher delinquency rates, albeit from small levels. So I think the guarantee plus the additional liquidity was attractive to us.

Final question. Can you talk about your appetite here to issue the preferred stock as part of TARP. What are your thoughts there?

I think everything that we've read suggests that it's a very attractive program and I think clearly the intent is to incent institutions to go out and to resume making loans, or to ramp up the level of loans they're making to domestic institutions. As we understand it we have until November 14th to come to our conclusion as to what we're going to do so we're still evaluating that, but I don't think anything negative to say about it. I think it's a great program.

Thanks.

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

Hi, good morning, everybody. Most of my big questions have been already asked but I have a couple more. Do you have the total for the loan balances for the homebuilder development loans and the Alt-A loans at the end of the quarter?

Yes, I think we do. The Alt-A loans were $1.047 billion 47 and the homebuilders I can get for you in a second there.

Okay.

Just $2 billion.

Okay.

Yes, $2 billion, yes.

$2 billion. Okay, great. And then thinking the about loan growth, do you expect the residential line to grow at this point, or do you continue to use securitization or how should we think about that?

We are not adding anything significantly to our held-for-investment portfolio. The balances are down because of the continued runoff in the Alt-A portfolio, but they're also down because warehouse lines are down and with -- should mortgage rates decline, right, you might see a slight pickup in that warehouse balance portion, but other than that I think the balances there would be relatively steady and it'll be based on demand. Remember that we have historically on the held-for-investment portfolio simply use that as a technical substitute for investment security, so we manage that $4 billion portfolio along with the investment securities book and we've actually been running down investment securities (inaudible).

Right. Okay. What is the amount of the Bayview investment at this point?

I believe the amount of our investment is $280 million -- $280 million is the book value of our investment.

Okay, great. Other expenses looked really -- it was the only thing that looked high to me in the expense, and I know you had the charitable contribution you mentioned, but is there anything unusual in other expense line?

I just want to give it to you anecdotally. Clearly in this environment you have higher collection costs and you have higher ORE-type related expenses. And then we've not stopped making -- we've not continued to -- we've not discontinued our investments and -- we've not discontinued our investments in things like the branches in the Mid-Atlantic that we've talked about. We had talked about for some years on doing loan systems optimization. We spent a fair amount of money moving that project forward in the course of the quarter. So much of it is a continued investment. The clear item, obviously, is the $10 million swing in the impairment, right?

Right.

So if you take that out and you take out the charitable contribution it looks like you get a more normalized level.

Right. Okay, thank you.

Yes, sure.

Your next question is from Ed Najarian with Merrill Lynch.

Hi, Ed.

Good morning, Rene.

Morning.

Two questions. I guess first question is, obviously on the charge-off ratio you actually were down four basis points, but pretty much remaining in that 80ish basis point range for two quarters now. Is that something that you feel like you can maintain something in that range, or do you feel like based on a weaker economic outlook and some higher losses in areas where you really haven't seen very high losses, such as the commercial side of the portfolio, that that loss ratio ought to go up over the next several quarters? That's question number one. And question number two would be, you indicated that you expect the net interest margin to be flat with an upward bias in 4Q. Does that outlook of flat to an upward bias include an outlook that the fed'll be cutting by another 50 basis points sometime in the near future?

Let me just do it in reverse, because I think it's easier. Ed, we still use the forward curve. so whatever percentage of the rate cut is embedded in the forward curve is absolutely there. I guess I would say that I'd say upward bias because with the disruptions in the markets we're getting wider spreads from fed funds LIBOR today, and so it is a positive. I'm just cautious about it, but it looks like we have a positive bias because of those two events that's in there. So it's considering the forward curve.

If you jump back to the charge-offs, the best way for me to do it is to walk through the portfolios, right? So we're seeing increases in delinquencies and maybe charge-offs in each portfolio, but we really -- we're really benefiting from the fact that our $5 billion home equity portfolio I believe was probably still at 30 basis points of loss this quarter, and so its rise is very modest. The indirect auto portfolio has higher delinquencies and will move, but again, it's moving like a consumer portfolio so you can watch the increase. There's no big surprises in that movement, and that, all told, with indirect auto and other indirect lending is about another $4 billion or $5 billion. We're beginning to see -- obviously the environment is weighing a little bit on the C&I book and so we've seen for several quarters a migration there, so I would expect somewhat of an upward migration C&I, but again, I don't expect a lot of big shock.

Normal real estate not backed by land, so we're dealing with rent, continues to perform very, very well, and so on a near term we don't see any issues there on real estate. The issue right to your point of are we going to hover around 80 basis points all goes back to the $2 billion in residential builder book and any given quarter you could have one or two large credits that make your charge-off ratio jump. So I think the way I think about that is that when you [really] go over average of the next two or three quarters in that book there'll be lumpiness, but I think until we get through the next, say, several quarters on the builder construction portfolio, we'll probably have an upward bias in terms of the charge-off rate that we're going to see. I think, again, we're just fortunate that it's only 4% of our loan book, and I don't think it's anything that we can't manage ourselves through.

Thanks, that was a pretty complete answer. Just one more question on the NIM, if I might. If we do have further rate cuts it looks like your deposit rates are running at pretty low levels. What do you view as your ability to continue to drop the deposit rates in light of potential future fed funds rate cuts?

That's another great question. I guess my thought is that you're looking at average rates that are in the book and what I do is I kind of have to take myself back in time to when we saw fed funds and rates go down to 1%. And so we have a nice track record as to what we would expect our customer behavior to be if rates actually went that low. So I think today we and other banks are probably not at that inflection point where we can't pass a rate decrease through.

If we were at 1% fed funds we'd probably start to be approaching that, and that's what happened, I don't know when it was now, four years ago or so, 2002 maybe. So I think I'm not really worried about that today. I think the other factor that you have, even if deposit rates stay flat, which there is some sense that we would like them to because we think that the deposit generation is very important to us. is that on the loan side that margins continue to widen across every single portfolio. And I don't mean that just in terms of a stress scenario. It's that customers are getting comfortable with just the simple fact that the markets alone out there requires higher spreads, given the risk that's out there. So I think that bias over, say, a year should help us as the loan portfolios begin to roll.

Okay, great. Thank you.

Your next question comes from Bob Hughes with KBW.

Hi, Bob.

Good morning. Rene, a quick question. So BLG in the quarter probably cost you close to $0.10, which seems -- and that doesn't include the carrying cost in the investment -- so I think you've mentioned there were some restructuring costs embedded in that number in the quarter at BLG. I was wondering if you could give us maybe a little bit more color to frame what your share in the ongoing expense base of this company might be going forward after these restructuring charges?

Gee, I don't -- it was -- let me just say that it was the majority of the expenses in -- the loss in the last two quarters were associated with taking large amounts of severance, making sure that the selling off inventory of loans, right, getting them down to the levels -- get them down to zero or clearing out warehouse lines that weren't needed and all of the work -- most of that work is done. So underlying that is a normal -- how do I say this -- operating number that we haven't yet seen, frankly because we've just gotten done with liquidity plans but I would expect it to be substantially lower in the fourth quarter, then from there on I think we'll probably have much more clarity as to what that will be going forward.

Okay. And that was not suggesting that revenues are picking up dramatically, just that the fixed expense basis has curtailed a little bit?

Yes, just that a lot of -- there were a lot of one-time expenses associated with that liquidity plan that you saw in the last two quarters.

Okay. Curious to hear your thoughts also, Rene, on consolidation. I guess -- I think at some point in November I'm guessing that we'll see some increased separation between the wheat and the chaff, there's going to be some companies that are not qualified for TARP capital injections. Do you think we're going to see an acceleration in M&A activity? Would you potentially be putting some of that TARP capital to use in the form of M&A?

Tell you what you think. I think that relative to where we were two or three years ago things have changed dramatically. The cost of borrowing gone up. Notwithstanding the TARP, the cost of capital has gone up. I would expect that as we get a year out the cost of regulation is going up. And so if you are not an efficient operator it's going to be hard, and the smaller institution particularly, regardless of credit quality and all of that stuff to operate in that environment, and I think we're entering an environment where the natural synergies, outside of credit issues, right, are just going to be high for some time. And as you know, with the bank price -- bank stock prices actually much lower than they were two years ago, maybe some would say more rationale. So I think the environment is right, but again, from our perspective we just -- we can't predict anything. If something comes up, we're ready.

Okay, great. Thanks, Rene.

Your next question is from Collyn Gilbert with Stifel Nicolaus.

Thanks. Good Morning, Rene.

Morning, Collyn. Just wanted to clarification on the loan modifications that you mentioned, I think it was $32 million, was that just in the residential mortgage portfolio? Yes, most of it was in the Alt-A -- in that Alt-A book that we've been talking about for some time.

Okay. Have you done much in the way of modifications in the C&I or any of the commercial portfolios?

No. No, nothing significant.

Do you anticipate doing some or how do you view that and manage that?

We would -- if we get to the point where a loan moves into our classified loan book, and the normal course of things that's what would you naturally do, so for a troubled credit you would naturally go through that and you obviously would have your FAS 115 would apply, so you're seeing -- you see some of that. But it's very, very different from what we're talking about on the residential side. FAS -- I'm sorry, FAS 114, I misspoke. It's very, very different from what we're seeing on the residential side. On the residential side there's two are groups.

The one I described, where we're proactively looking at customers who haven't missed a payment yet but we feel fit the risk profile that they are likely going to be under stress, and we're calling them. And then there are other individuals who maybe have missed the first or second payment who are calling us and telling us proactively that, I think we're going run into problems, maybe I lost my job and so forth. So it's very different than what would you would on a C&I side which you really don't get into modifications unless you're trying to actually restructure the loan because it's actually -- it'ad gotten down into your classified loan book.

Okay, okay. And in terms of your comment that the expectation within the resi development portfolio has the potential to have lumpy losses, can you just walk through that rationale or why that is? I guess I would have anticipated losses in those portfolios to be a little bit more transparent because you see the developments, you see the draw-downs of the lines, you see what's going on in the real estate markets around these specific projects. Can you just talk a little bit more about that?

Yes, you're thinking is spot on. If you were to remove the size of the credit and to look at just total projects you probably would see a steady deterioration in residential homebuilders, which if you think about -- the price of housing matters, but as the economy remains weak it starts to stress builders' cash flows. So in some cases may be on projects that are not selling but where the builder has a lot of wherewithal. As you move a year out or two years out you get a steady migration of them weakening those positions. The issue we're talking about is one credit might be $1 million and another might be $30 dollars, all right, and so I can't predict the timing of any given credit. And unlike the rest of M&T's books these tend to be larger credits. We have a very, very granular portfolio, but when you look at the size of some of these builder credits, as we've talked about them in the past, they're just larger.

Okay, okay. And then just finally, if you could just give us a little bit of maybe the economic outlook or what's happening in the different regions of your franchise, mainly give us a little bit of color what's going on in upstate New York and how that's differentiating. The obvious one is on the real estate side, but stripping that out from discussion for this point is just in terms of commercial activity or borrow activity and if you're seeing differences among the different regions of your franchise.

Yes. I'll first say that as we've gone through particularly this past quarter, and particularly in September with all the noise sometimes it's hard to separate what are actual weakening of the economy versus just people being very, very nervous and their behavior, what are their -- looking at the lines that they have available to them and so forth. But I think aside from that, what we tend to see is that things that existed a year ago, where institutions have maybe pulled back on credit. You saw a lot of announcements, for example, in the indirect auto space this quarter where people are pulling back, even some of the large auto manufacturers and their financing arms decided to pull back. You're clearly beginning to see the stress from that. But from our perspective, you probably see less of that stress in that general stress on the consumer in upstate New York and in Pennsylvania.

As you move your way through the commercial book we've probably seen a little bit more stress in the Pennsylvania credits, everything that's, again, related to housing, but even maybe more so as it relates to businesses that you're relying on the collateral or somehow tied to that. It's almost hard to distinguish. I think that what we're going to see is that our upstate New York market and our Pennsylvania markets are going to hold up very, very well even though we're likely to move our way into a recession. And I think that we'll probably fair okay in the Mid-Atlantic, but there'll be maybe a little bit more stress for us there just simply because of their faster growing markets there may be more issues there. I don't know. I think all of the government intervention, all of the things that have happened are huge events that will actually help us down the road, but I think those things take time and it'll be awhile before you begin to see those things -- those types of things take hold. I don't know if I have any more specific color for you then.

That's helpful.

Clearly on the consumer side, though, the events that have happened over the last 12 months are going to weigh on the consumer.

Yes, okay. All right, that's great. Thank you.

Your next question is from Gary Paul, private investor.

Hi, Gary.

Hi, Rene, how are you?

Great.

I assume that the investment in Bayview was a 20 -- Financial was a $20 billion investment from a former now public-private equity investment company?

Paul, you mean the thing that happened recently in the third quarter?

Yes.

And just say it again. You assume --

I'll be more specific. I read in the Financial Times of London -- though I never saw it in the Wall Street Journal -- that either BlackRock or Blackstone -- I can never keep in my own mind which one's the investment manager and the other private equity investor -- had made a $20 million investment in Bayview Financial. Is that the investment you were referring to, or is that a different company?

That is the investment we're referring to. I'm not sure if your amount is right.

Okay.

The amount doesn't -- the amount seems high.

Okay. In any event what leads to my question is, that doesn't dilute your 20% economic interest in Bayview Financial?

No, we had the economic interest before such investment was made.

Okay. And it wasn't something where an investment does. Okay, so that's pretty good. Your original investment in Bayview was more than $280 million, wasn't it, so are you applying the losses -- or is my memory wrong -- to a write-down of the investment and then hitting the income statement that way rather than operating?

Yes, you've essential got it. The operating losses that occur at that time company reduce the equity and therefore 20% ownership interest, and we record our share of the income on our income statement, or loss on our income statement, that sort of thing.

Okay, but it also works to write-down your Bayview investment.

Yes, it's a -- yes, it's an ordinary --

Okay. And finally, on your building credits in the Mid-Atlantic my experience is that a lot of builders set up separate short-term subs for different projects. I gather from the way you say some companies are much stronger than others that, in general, your loan is either from the high-level company or guaranteed by the high-level company?

I thank probably, Gary, historically that's true but what we've seen over the last two quarters what people are terming these global solutions, right, so if you were to go back to the first quarter you might a builder with a couple projects, whether they set in different subs or not, right, and your project might be fine. And so what you're sitting there saying is maybe you have a project that's fine and there's another project that you have that's a little bit weaker, but combined the two projects create enough cash flows for everything to be find and for payments to be made. But when there's a global solution and the company declares bankruptcy all projects, not just those two, are lumped together and the weakest projects are no longer -- the best projects are to longer available for the weaker projects, right?.

Right.

AndI think what we've seen over the last four or five months --four months, let's say, is there are a lot more of these global solutions as banks basically just say, look, we're folding our cards, we're going to put you under a fair amount of stress. So the old rules, I think, are a little bit gone there.

How is anything fine that's in construction right now in the Mid-Atlantic?

It's a fascinating thing. You go zip code by zip code, even two projects across the street, one will be selling and the other will not be, all right, it's just a matter of where you are. The other thing to look at, Gary, is that if you look at -- there are certain counties where things are just completely overbuilt.

Okay.

There's just too much inventory.

So there is that much disparity?

Yes.

Okay. Because certainly in what I see in the west there's disparity but it's disparity between how bad, not some good. Okay. And my last question is just one -- when was the last time you increased the dividend?

Do we have the date for that? Third quarter '07.

So if you followed your normal pattern, which you may or may not do, you would increase this quarter?

We've not made any determination on the dividend.

Yes, I just said if -- this would be the typical quarter on the five quarter basis if you did it, and the key word is if.

We've just -- typically when our board meets we make a determination on the dividend --

Okay, but this is the fifth quarter then?

Yes, this is five quarters from the third quarter of '07.

Fine. I'm not asking you whether you are or aren't, I'm just asking if this is the fifth quarter.

Appreciate it, very much appreciate it.

Okay, thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) Your next question is from [Van Fouts] with [Cinamore Asset Management].

Yes, hi, I have two questions. The first one is on your slides from September 8th, you showed the investment portfolio with 2% in trust preferred securities. I'm just curious if you go through who are the issuers? Are those other bank trust preferred and how are those fairing in terms of the marks in the third quarter?

We have -- I guess you take that portfolio, which I think at that date had a market value of about $200 million, I would say that about maybe two-thirds of that portfolio -- maybe something like two-thirds of that portfolio came back in 1997 or 1998 when we put them on a bit as a hedge against our own trust preferred issuances and those were a number of names. A lot of the banks don't exist today because they were swallowed up by some of the larger entities that are out there. If you -- and then there's probably another maybe $60 million or so that's more recent vintages. The marks vary all across the board.

Some are gains -- some are in gain positions depending on the institution, and some are at negative mark situations. But as we evaluate all those we think that what we're seeing is probably what we would expect to see in terms of the valuation declines during a bottom out in a credit cycle. You think of those paper -- that paper as very, very long dated paper, right, and so small movements in price would result in a big -- sorry, small movements in rates would result in a really big change in price. And from our perspective, as we go through our work on the securities book and look at things like other-than-temporary impairment we just come to the conclusion that we're going to get paid. So there's nothing that I'm overly concerned about in there and we haven't had any significant defaults of any kind.

Okay. And then my second question is on --

We had no defaults, I should say.

Okay, that's even better. Somebody asked about the TARP earlier in terms of capital raising, which you answered very clearly. My second question is about potentially selling assets into the TARP. Obviously we've been talking about these homebuilder and development loans. For a number of calls it's been a source of problem.. Why not sell them, put this behind us, use capital to make regular C&I real estate loans going forward? What's your reaction to that, Rene?

I guess what we do when we look at the builders, as we work our way through them we look at the economics and not discounting the value of the government's program, but to the extent we could sell them today we'd sell them today, and in some cases we probably have actually taken that route in selling down a project as it gets to the idea that we're going to have to choose between actually becoming developers or selling it off. So I think -- I don't know that -- I'm just not aware that there's any significant extra value versus what you get in the market. If it existed, maybe we'd consider it, but it's not really something that we focused on.

Okay. So you feel that you can make economic decisions on those loans, even without the government program, and sell them or whatever you need to do if you (inaudible)?

Yes, this is my personal view of how it works. There are certain assets that have difficult -- are in a difficult position,they're not paying. A bad asset's a bad asset, whether it's the government or (inaudible) no one's go going to pay you a great price on that asset. The issue where I think the TARP program probably helps is that there are a whole slew of assets that are just misvalued, where there's a lot of difference between the economic value and the liquidity marks that you're seeing out there today.

Right, sure.

In those cases I would expect those would be the loans where there might be some incentive for government or somebody else to actually pay true value for those that are different than the current mark. That's not the case in the builder construction space.

Right. Okay, thank you.

Your next question is from Tom Purcell with Viking.

Hi, guys.

Hi, Tom.

I was on the Fifth third call earlier and the question was put to them with respect -- kind of in the context of whether or not they would participate in the capital raising part of the TARP, how they felt about their tangible equity, which is 5.2, versus the tier 1 ratio of 8.5 and the TARP, obviously, would add the tier 1 but not tangible equity. I guess I'd put the same question to you guys. How do you guys feel about tangible equity and is it at all -- is your participation with TARP at all impacted by the difference between tier 1 and tangible equity ratios?

We've long -- as you know we've long held that tangible equity's probably in our mind, some of the most important form of capital, and so we would in that scenario you -- that hypothetical scenario you presented we would be focused on making sure that we had adequate tangible capital. One of the things that we would think about is that you can't just lever up the institution, only focus on tier 1 and take down tangible. That's pretty rationale. So I think that's an open item that anybody participating in the large way probably should think about. But that's the way we think. Not everybody thinks that way.

Okay. And just to follow up on that, a lot of banks will put out a target corridor for tangible equity to tangible assets. Do you guys have one of those targets you can share with us?

Oh, yes. For a very long time we've had a target that we -- we've had a target of 5.4 and a range of 5.2 to 5.6 and we were at about 5.01 when we closed the two transactions in December. First week of December we closed two transactions, Partners Trust and a First Horizon branch deal and we went to 501. So we've pretty much stayed there. So ultimately when we look at our targets we haven't changed that range. We would like be back in that range and we've generated a fairly significant amount of capital. The difference there is probably -- is the FAS 115. And again, the marks on the securities really are quite far apart from what we believe the economic value of those securities are.

When you see that is, if you look at our tier 1 we have now had, since December, about a 130 -- no, 120 -- 110 -- 1.1% increase -- percentage point increase in our tier 1 ratio even though our tangible has stayed the same. And that's because the regulators recognize that distinction between what you're marking those securities at and what the true economic value is. So I don't think we're concerned about it, and I think we've actually been able to [avoid] a lot of those securities losses and use our capital generation to keep us at about 5%. But ultimately down the road you'd probably see us back that in range.

Okay. One other question on the Bayview, because there were earlier questions on it. If Bayview has sold a significant amount of its assets and it sounds like has laid off a significant amount of its staff, I guess I wonder how they can possibly get to earnings levels that maybe were contemplated in early '07 when the investment was made now, because it sounds like there's been a pretty significant change in the business model there?

You said a lot there, but it's not -- I don't -- with all due respect I don't think you're thinking about it the right way. We've -- what we've -- Bayview has not been selling off -- BLG has not been selling off assets. They've actually sold debt. They have taken down their securities and that operation is running at a very, very low level of origination. So if you just had that on a stand-alone basis obviously you'd produce less income, but what the value that we have is also based on the value of their other businesses and the cash flow that those other businesses generate. So just because you paid $300 million for something doesn't mean that it's worth $300 million to start with, and at the end of the day you've got to make sure you're generating enough cash flows to be able to -- and enough asset value to be able to justify that investment.

Okay, thank you.

At this time there are no further questions. Are there any closing comments?

No, thank you, Beth. As usual I'd like to thank everybody for participating today, and as always if any clarification of any of the items in the call or the news release are necessary please contact our investor relations department at 716-842-5138.

Thank you for participating in today's conference call. You may now disconnect.