M&T Bank Corp (MTB) 2008 Q4 法說會逐字稿

Good morning. My name is Melissa and I will be your conference Operator today. At this time I would like to welcome everyone to the M&T Bank fourth quarter and full year 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 session.

(Operator Instructions)

Thank you. Mr. MacLeod, you may begin your conference.

Thank you, Melissa. Good morning, everyone.

I would like to thank everyone for participating in M&T's fourth quarter 2008 earnings conference call, both by telephone and through the webcast. If you have not had a chance to 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. Welcome, everyone. Thank you all for joining us on the call this morning. I know all of you are quite busy today.

There are a few items from this morning's release that I would like to discuss before I respond to questions. In a somewhat turbulent environment, M&T earned a profit for the full year of 2008, recording net income of $556 million. This compares with net income of $654 million in 2007. Diluted earnings per share for 2008 were $5.01 compared with $5.95 for 2007. The return on assets for 2008 was 85 basis points, and the return on common equity was 8.6%.

After the - the after tax expense - the after tax expense from the amortization of intangible assets amounted to $41 million or $0.36 per share in 2008, compared with $40 million or $0.37 per share 2007. In addition, we incurred after tax merger-related expenses of $2 million or $0.02 per share in 2008, and $9 million or $0.08 per share in 2007. Net operating income, which excludes the amortization of intangibles as well as merger-related charges, was $599 million or $5.39 per share for 2008, compared with $704 million or $6.40 per share in 2007.

In accordance with the SEC's guidelines, this morning's press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity. On the same basis, net operating on the same net operating basis, the return on assets was 97 basis points, while the return on tangible equity was 19.6%. After dividends, M&T retained $247 million of earnings to build our capital base in 2008.

Turning to the results for the fourth quarter, diluted earnings per share were $0.92 for the fourth quarter of 2008, improved from $0.60 in the fourth quarter of '07 and $0.82 earned in the linked quarter. Net income for the recent quarter was $102 million, up from $65 million in the fourth quarter of 2007 and $91 million in the linked quarter. The amortization of core deposits and other intangible assets amounted to $0.08 in the fourth quarter of 2008, and $0.09 in the fourth quarter of 2007, as well as the linked quarter. There were no merger-related costs related to the third and fourth quarters of '08. There were merger related costs of 9 million or $0.08 per share in the fourth quarter of '07.

Diluted net operating earnings per share, which exclude the amortization of core deposits and other intangible assets, as well as merger-related charges, was $1 for the recent quarter, up from 77 - up from $0.77 in the fourth quarter of 2007 and $0.91 in the linked quarter. The net operating income for the quarter was $112 million, up from $84 million in the fourth quarter of 2007 and $101 million in the linked quarter.

The results for the fourth quarter include two notable items. First, as a result of continued close scrutiny of our investment portfolio during the fourth quarter, we recorded other than temporary impairment charges amounting to $24 million pretax on certain of our investment securities. This included $12 million relating to two of our remaining mortgage securities backed by option ARMs. As of year end, we have written down three of four option ARM-backed mortgage bonds. Our remaining exposure to this type of security is $7 million of book value and $2 million of market value out of the entire $8 billion securities portfolio.

The other component included a $12 million writedown on three pooled bank trust preferred CDOs which we acquired in the Partners Trust acquisition. Our remaining exposure to this type of security is limited to a book value of $16 million, and a market value of $2 million as of year end. Because of previous marks taken through other comprehensive income, the charges taken through the income statement this quarter had minimal impact on tangible common equity.

The second notable item I would like to point to - point out is a $19 million addition to the valuation allowance for capitalized mortgage servicing rights that we recorded in the fourth quarter. This addition to the allowance came as a result of the sharp drop in mortgage rates as of the end of 2008. Recall that M&T does not hedge its mortgage servicing rights, because of the natural hedge provided by our origination franchise. Taken together, these two items reduced net income for the fourth quarter by $26 million and $0.24 per share.

Next I would like to cover a few highlights from the balance sheet and the income statement. Tax equivalent net interest income was $491 million for the fourth quarter, compared with $493 million in the linked quarter, and up $15 million from $476 million in the fourth quarter of 2007. The net interest margin was 3.37%, down slightly from 3.39% that we reported in the third quarter. The primary factors in the decline - in the margin compared to the linked quarter were the nonpayments of the Fannie Mae preferred stock dividend in the fourth quarter, and the impact from the rapid reduction in interest rates during December, and the concurrent downward repricing of assets.

Average loans for the fourth quarter were $48.8 billion compared with $48.5 billion in the linked quarter. Compared with the linked quarter, average commercial industrial loans grew an annualized 9%, commercial real estate loans grew 2%, and consumer loans declined an annualized 2%.

As we discussed through most of last year, we remain focused on relationship lending within our community bank footprint, and have a limited appetite for transactional-type business such as indirect consumer, and pretty much anything else that's outside our natural markets. In fact, we experienced loan growth in all four of the principal regions in which we operate. This included annualized growth in loans in excess of 10% in both upstate New York and the Mid-Atlantic region.

On the deposit side, we experienced our fifth consecutive quarter of deposit growth. We believe that customers saw M&T as somewhat of a safe harbor amidst the volatility in the marketplace during the fourth quarter. Core deposits, which exclude wholesale and foreign deposits, were up an annualized 18% from the linked quarter, and up 11% for the full year. We experienced deposit growth in all four of our principal geographic regions, as well as from our multi-region commercial customers.

Turning to noninterest income, excluding securities gains and losses noninterest income was $265 million for the recent quarter. This compares with $266 million in the linked quarter and $288 million in the fourth quarter of '07. Service charges on deposit accounts were $106 million during the quarter, compared with $110 million in the linked quarter. We think this reflects a modest seasonal impact on the commercial service charges, having to do with a lower number of processing days. A lower level of consumer charges appears to have resulted from a general slowdown in consumer spending.

Mortgage banking fees remained strong at $40 million for the quarter, compared with $38 million in the linked quarter. Continued strong gain on sale volumes and margins are likely to act as a natural offset to the lower valuation on our residential mortgage servicing rates. The quarter's results also included a $9 million pretax loss from our investment in Bayview Lending Group, reflecting the remaining impact from right-sizing the BLG enterprise in response to the current environment.

Operating expenses, which exclude the amortization of intangible assets, were $431 million, compared with $415 million in the fourth quarter of 2007 and $419 million in the third quarter of '08. As I mentioned previously, the fourth quarter's results included a $19 million addition to the valuation allowance for capitalized residential mortgage servicing rights, compared with a $1 million [valuation] allowance in the third quarter of '08. There was a $2 million addition to the allowance in the fourth quarter of '07. Excluding the addition of the MSR valuation, operating expenses declined $6 million from the linked quarter. As we did in third quarter, we made a $3 million contribution to the M&T Bank charitable foundation.

Nonaccrual loans increased to $755 million or 1.54% of loans at the end of the recent quarter, compared with $688 million or 1.41% at the end of the previous quarter. Of that, 6 -- of that $67 million increase, 29 million related to residential developer and home builder credits and nonaccrual loans in the remainder of the commercial book increase ted by $18 million.

During 2008, in an effort to assist borrowers, M&T modified residential real estate loans with outstanding balances of $162 million as of year end. These were largely from our Alt-A - from our portfolio of Alt-A mortgages. Of the $93 million - of the total, $93 million included in the nonaccrual - were included in the nonaccrual loans as of December 31st. After a period of demonstrating performance, they may return to accrual status. The remaining $69 million of modified loans were classified as renegotiated, and were accruing interest as of the 2008 year end.

Other nonperforming assets, consisting of assets taken into foreclosure and default, were $100 million compared with $85 million at the end of the linked quarter, and this compares with $40 million at the end of the fourth quarter of 2007. Net charge offs for the quarter were $144 million, compared with $94 million in the third quarter, resulting in an annualized charge off rate of 1.17% of total loans, compared with 77 basis points in the linked quarter. Net charge offs for the full year of 2008 amounted to 78 basis points of average loans, which we believe will compare favorably with the top 25 largest US bank holding companies. Residential construction and development accounted for $25 million of net charge offs for the quarter, down from $33 million in the linked quarter.

Consumer loans accounted for $34 million of net charge offs in the recent quarter, compared with $31 million in the linked quarter. Substantially all of the increase related to indirect auto loans. Charge offs of home equity lines were flat for the third consecutive quarter at $4 million. All day loans, both first and second lien, accounted for $12 million of net charge offs, down from $15 million in the linked quarter. Net charge offs for the total residential mortgage portfolio were $21 million, compared with $16 million in the third quarter, reflecting an uptick in charge offs in both the core mortgage portfolio and the one closed construction portfolio. Net charge offs for the commercial industrial portfolio were $61 million, compared with $8 million in the linked quarter. These related primarily to a collection firm and two publishing companies.

The provision for credit losses in the fourth quarter of 2008 was $151 million, and exceeded net charge offs by $7 million. This compares with $101 million in both the linked quarter and a year earlier. The allowance for credit losses at the end of the quarter was $788 million, an increase to 1.61% of total loans as of December 31st, up one basis points from the linked quarter and up three basis points from last year's fourth quarter. The allowance as of year end covered net charge offs by more than two times. We would expect this to compare favorably to the industry average in the range of 1 to 1.5 times.

Loans past due 90 days but still accruing were $159 million at the end of the recent quarter, compared with $96 million at the end of the sequential quarter. This included $114 million and $90 million, respectively, of loans that are guaranteed by Government-related entities.

Turning to capital, M&T's tangible common ratio was 4.59% at the end of the fourth quarter. Unrealized pretax losses on the available for sale securities portfolio, recognized through the other comprehensive income, were $806 million as of December 31st, 2008, which reduced M&T's tangible common ratio by 75 basis points. This compared with 559 - $558 million at September 30th, which reduced M&T's tangible common ratio by 52 basis points at the end of third quarter.

The vast majority of these losses - these unrealized losses relate to our portfolio of private label mortgage securities. We believe the prices - the price declines are largely the result of the disruption in the markets, and generally reflect continued lack of liquidity for non-government guaranteed mortgage securities, as opposed to actual credit losses. Under the accounting rules, the securities are required to be measured at liquidation value as opposed to economic value, which - economic value would largely be based on credit expectations. Our estimated Tier 1 capital ratio as of December 31st, 2008 increased to approximately 8.83%.

Turning to our outlook, at this point we expect the net interest margin for the full year of 2009 will be consistent with 2008. However, we would expect downward pressure in the first quarter until the balance sheet reprices and responds to the very large, very rapid decrease in interest rates in December. That natural repricing will lead to a rebound in margin in the second quarter and beyond.

We obviously expect credit costs to remain elevated throughout the coming year, and as we said in last year's third quarter earnings call, we continue to expect a certain level of volatility - volatility in the charge offs in any single quarter. Remarkably, 30-day plus or more delinquencies in the consumer loan portfolio at year-end 2008 were relatively unchanged from year-end 2007. In addition, after almost two years of work, we feel we have gotten ahead of the curve on our all day - our portfolio of all day mortgages, as evidence by the stable delinquencies and charge offs since the second quarter.

Overall, the upward trend in credit costs will continue, but loss - but with losses shifting to the commercial side. That said, M&T's credit performance compares favorably to the industry - compared favorably to the industry in 2008, and we would anticipate it comparing favorably to the industry in 2009 as well. With the difficult credit environment, M&T remains very focused on expenses. And while arbitrary across-the-board expense cuts are not consistent with our culture, we do continue to review opportunities to improve efficiency.

All of these projections are, of course, subject to a number of uncertainties and 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'll now open up the call to questions, before which the Operator will briefly review the instructions.

(Operator Instructions)

Your first question comes from Matthew Clark with KBW.

Hi.

Hi, Matt.

Just first on the TARP proceeds, did you pay a dividend there, a related dividend, and recognize any more amortization in the fourth quarter? It looks like it was embedded in the total equity number?

No, you know, that would - dividend would have to be declared in the first quarter and then paid in the first quarter.

Okay. And then on the - the mortgage-related renegotiated loans that are in nonaccrual, can you update us or let us know what your policy is there in terms of how long it must take while they, you know, stay current on P&I before they return to accrual?

Yes, sure. In that case, the answer is pretty simple. Once we modify the loan for someone when who has missed a payment, we would require that they make at least six consecutive payments before we roll that out of nonaccrual. I think we have been modifying loans since probably the March - May/March, March timeframe, so that gives you sort of some sense of what's going on there. A lot of the loans that we have modified in the recent quarter actually have been current, and they are paying, and so they never roll into nonperforming, all right? So they have been making their payments all along, but what we are trying to do is be really proactive there and help people keep - help people stay in their homes, and sort of avoid outsized risk in the future.

What has your experience been I guess so far, given that you have been doing this since March, in terms of subsequent delinquencies on those you have renegotiated?

It is interesting. So you need probably six months of experience so you can only - we only have maybe a quarter or so of experience, but for the things that have seasoned out to six months, we are probably in the 40s, mid-40s range that redefault, which we think is better than what we are hearing in the industry. I think the primary reason is because our book of residential mortgages is so small that we have actually been able to sort of deal with individuals on a person-by-person basis. And so, you know, our view is that modifying the loan probably makes sense as long as, you know, that number doesn't get above 60% or 70%.

Okay. And then on the FDIC insurance premium increase, can you update us there in the term of the ramp we might see here throughout 2009?

I believe the impact that I saw in the fourth quarter was about $5 million, and that includes everything, you know, the higher amount over 250 as well as the normal increase.

You think that's - so you think that's fully in the run rate then? Or should it be more?

Good estimate.

Okay.

It is a good estimate, yeah.

Okay. I will leave it there. Thanks.

Your next question comes from Matthew O'Connor with UBS.

Hi, Matt.

As we start to see a shift in charge offs from consumer to commercial, should we expect more reserve build going forward, as P&I tends to be a lumpier and a little harder to project?

You know, I guess the answer to that would be - would be no. We just have to think about how - you have to think about how we think about the - the reserve. I mean the way to think about it, Matt, is that the allowance for loan losses really needs to reflect the incurred losses that you kind of see in your loan book. So as we kind of move along, we are looking at the classified loan book, and we are still looking out into that, into the next year, and sort of as far out as we reasonably can look, with some expectation of what losses might be in the book. And for us, if you simply look at the coverage ratio, we are at about 2.1 times what the total loss rate on the book is.

If you look at the industry, they're at 1 to 1.5 times, so you can't - you can't sort of look at that and sort of say, okay we will stay at 2. What we are really doing is we are looking at our book and probably relative to others, we - we are probably more pessimistic on the environment overall. And that's why we are today sitting at two times coverage, because we are looking at our books and we are seeing that migration on the commercial side. Really what I think you will expect to see is unless we change our outlook from that pessimistic view, I don't think that we would need to do anything there. I would guess that's what you will see as we finish this year, is that we will be probably in the top two, three highest reserve on that basis.

One of the things that some folks have been asking is why isn't your - you know, last time there was a downturn in the credit cycle, how come you didn't -you had a higher allowance? Really one simple thing is that last time we had a major, you know, economic recession in the early 90s, we had a credit card portfolio as well. If you start looking at coverage ratios, I think that sort of gives you a better sense of what we are going to do. So the short answer is, not necessarily.

Okay, and when you talk about coverage ratios being two to one, I guess you are looking at full year charge offs? If I compare to just the fourth quarter level, it is about 1.4?

Yes, and that will - I would guess everybody is probably - on that basis, I don't know where anybody is. It is hard to look at. If you look at - we were at 77 basis points in the third quarter. If you average the two, in the last six months maybe that's - I am just making this up, maybe that's 97 basis points. So clearly, the second half charge offs were rising, right? And you know, 97 maybe that's 1 - 1.7 times coverage? It's still relatively high.

I guess from my point of view it seems like the economy is weakening significantly, and it is not just you but for everybody, as I think about charge offs going forward, there should be some net increases to that coverage ratio, it will probably approach 1% in a couple of quarters.

Matt, we don't forecast, you know, I mean we were relatively pessimistic when we were not booking loans in New York City when everybody else was. We have been kind of pessimistic for some time, and that's why we never took our reserve down.

Okay, fair enough. Just separately, you are one of the few banks that's earning their dividend, if not the only bank among the bigger banks, but the payout ratio is high. Capital looks a little light after Provident deal, and obviously the economy is just very weak. So at this point, how important is paying the dividend versus maybe building a little more capital to be opportunistic or to play deep?

I think you spelled it out very well. I mean we covered - to look at the coverage you have to look at net operating income, right, to exclude the amortization of intangibles, and in '08 we our earnings were twice our dividend. We feel pretty good about that. You know, we have not sort of gone into any quarter with a loss, despite an environment where you are seeing a lot of losses. I think we handily covered our dividend this quarter as well. So that's just not something that's on our minds today.

Your next question comes from Steven Alexopoulos with JPMorgan.

Hi, Steven.

First question, are you aware if AIB reduced their position during the quarter, and maybe can you just review for us the process for them to sell on the open market?

No, I'm not aware of that.

Okay. And there is an orderly process if they're going to go to the open market, is that right?

Yes, there's an orderly process out. The only reason I won't sort of spell it out step-by-step here is because it is out there publicly, and I would be happy to get a copy of that thing revised - out there again. But essentially it requires, you know, right of first refusal, and then after that, if we choose not to do that, then it requires an orderly distribution and time period. And under a number of provisions, you know, not more than - one individual can't own more than a certain amount of the individual shares from that distribution. So, it - you are right, it does require an orderly distribution.

Okay. Since you guys announced the Provident deal, your stock has been under a lot of pressure, and you did make comments at the time that you probably would need to issue more common equity. As the stock continues to slide here, you are increasing the dilution - or eventual dilution day by day. How quick do you think you might get out there and try to get an equity raise done, or do you try to wait for a recovery in the stock price?

I mean on the call what we actually said is that we did not see the need to raise capital for that deal. You see that we closed with a ratio of 4.59. And the way we think about it is, you know, our capital ratio has always been historically low, and there's a good reason for that. You know, we think we have sort of built a business model that's appropriate for the level of capital that we maintain.

You know, if you think about it, Alex, if you go through and look at the volatility of businesses, I may have shared this with you before, the volatility of earnings over the last 11 years, I don't think you will find a bank whose earnings volatility is lower. And that's not because we are good, it is because of the business model we built, right? We are a deposit-oriented institution, we have never had much mark-to-market type of -- I'm sorry, Steve, I said Alex. We've never had much mark-to-market exposure. The biggest we have today is in this OCI adjustment, because of our private label mortgage securities.

So when we think of that, it is a really different world. Clearly, everybody out there has the facts to understand that the reduction in our tangible ratio is due to the - is due to the illiquidity in those markets. And, you know, if you look at the pricing on those securities, what you get is after you remove all credit, they're pricing as if you need an 18% - 18% yield. We buy - we make loans, and we buy securities to hold them. We don't tend to sell them at exit prices. And so from our perspective, there's no economics there. If you look at that, adding back I think we said it was 75 basis points, you know you're back right where we have comfortably always been.

So from our perspective, we don't think we need to raise capital related to that deal, or at this point for any other reason. Having said that, you know, at some point in time if there's some opportunity, we probably are not going to be doing any opportunities without the - without doing capital, right? So when we are thinking about capital today, it is all from an opportunity perspective. If you think of the Provident deal we did, it was a stock-for-stock deal. Those are my thoughts.

Okay. That's helpful. Thanks.

You're next question comes from John Fox with Fenimore Asset Management.

Hi. I have a couple of questions. One, on a going forward basis, could you comment on Bayview, and number one, level of operating losses expected? And number two, your valuation of the asset? Thanks.

Yes. We had a $9 million operating loss in the quarter, down from $14 million. It was a little bit higher than I guess I expected, you know, when we were on the third quarter call, but essentially it is sort of the unwinding of some assets and things that sort of get us into a steady-state mode, you know, there were some remaining of those. So, I think I would expect - let me just say I expect it to be lower than the $9 million loss that you saw this quarter, and other than that there's no real change. They're still originating a very small amount of mortgages, and at the end of the day, much of the valuation of the business is - is now based on the totality of the cash flows from the broader Bayview businesses.

Okay. And it looks like the tax rate was low in the quarter. Can you talk about that and where you expect it to be for '09?

Yes, there are two things there. We did receive some amount of sales tax rebates from - state sales tax rebates in the month in the quarter. The other thing that is quite interesting, I don't know that it is a good thing, is that our earnings are lower, right? So we have a fair amount of fixed tax credits. So the tax credit goes - the tax rate naturally goes down when the - when the earnings are lower.

Thanks.

It is sort of a floor there.

How about 2009?

Look at - I would say just look at the effective tax rate for 2008 and take out the - there was a benefit, I think, from - I'm missing it - we had an item that we mentioned on one of the calls, I just can't remember what it was.

It was the work out on closing one of the returns.

Oh yes, we did have, we had a one-time benefit in the third quarter that we had mentioned for, for somewhere around $40 million, I think. So you would have to take that out and normalize it.

Okay. And then, in terms of capital, I hear you say well, we have these currently illiquid MBS, and we think they're worth more than the mark, et cetera. So what is the duration on those, and presumably if you are right we should be getting par over time, and that should accrete to book value. So, how long does that take? When will we start to see the collections come in and we can be able to mark that up?

There's something like $2.7 billion of private label mortgage-backed securities. The lion's share of those have the most senior position, okay. The payments in the second half of the year were probably something like - [central] paydowns were something like $30 million a month. And you know, now with the lower rates I would expect to see some acceleration in that. But that's exactly how we think about it, right? It's sort of a natural amortization into our - into our capital base.

But I think the key point there is that we didn't buy them and sell them. We have no intention of selling them, so that's what's going to happen. If we thought there was a problem with economically, we would have to take an OTTI charge, and we haven't.

Right. No, I am not implying that you should write them off. I am saying, okay, we have taken this huge hit through AOCI, and presumably that should come back over time as you get par. So I am just trying to gauge how fast does that happen, and if you are saying $30 million a month, let's say it goes to $40 million, because rates are down, that's $480 million.

Four or five years, four years; is that right?

So we should see some accretion of that in 2009?

Yes, and you are seeing it, right? I mean you actually saw some - you saw some in - in 2008, but what - you cosmetically don't see it because the discounted yields are going up, right?

Right. And that number that we see have gotten bigger, wider each quarter.

Yes. And underlying, there is $30 million a month of - of amortization. So if you say that that loan is booked, let's say it's - I forget what it is but $0.65 on the dollar, or something like that, $0.35 of the 30 is coming in, right?

Exactly.

Yes.

Okay. Thank you.

You're welcome.

Your next question comes from Gary [Paul], private investor.

Morning, Gary.

I have questions on three topics, but the first one relates to Bayview, and I have a couple of questions. You mentioned that Bayview has limited production, yet as I go through the 10-Qs quarter by quarter, M&T keeps buying. Would you be - what portion of their production are you buying? Would the losses be significantly greater if you weren't?

We are not buying - we are not buying - okay, I see what you are talking about. We are not buying and have not bought BLG production. What we did do in I believe the third quarter, is we purchased a bond from Bayview Financial, which is a different product, it is a residential mortgage-backed product that was a AAA-rated security, and where with we have the first and sole position.

When you said - are you saying this is being bought from the parent?

Yes, it is being bought from the parent, and it is not small balance commercial stuff. We are not buying things from our own subsidiary.

Okay, so it has no effect, really, on the size of the losses?

That's right, none whatsoever.

Second question. Given that you have not taken any other than temporary losses on Bayview, and have indicated that that is based on the stream from, in essence, the parent largely, can you give us any indication as to what that stream of cash flow is?

What it comes from?

No, more like the dollar size.

No, I mean we haven't talked about that at all, but I mean, think about what you have. You have two main things outside of BLG, you have residual values from the securities that they have generated probably over the past ten to 12 years, and as those pay down the first cash flows go to reduce the debt securitized by them, and as that - as that debt goes away, what then happens is - is that the cash flows go to the parent and to us. And then the - the second piece is Bayview Asset Manager, which by now you may have read about. It is up and running, they're buying assets, and where they get a management fee for buying the assets, a management fee for servicing the assets, and they also get a return beyond a certain sort of nominal return, they get 20% of the profits beyond a nominal return.

One of the things that is really interesting, Gary, is if you think about what's happening in our private label mortgage securities, where after you stress for cash flows and remove the credit, you know - stress the cash flows and remove the credit cost, there's a - there's an implied 18% to 20% yield out there that people are getting. That is the type of paper that Bayview Asset Management is buying. So in a simple buy and hold strategy today, the - the returns on the funds that - that they set up are likely to be 20%, without any recovery in housing prices, right? And they get 20% of those, right?

So the key is that you have got to go out and fully invest that, set it up. You don't want to buy and fully put your investments in too early, because you would be worried about - you would be worried about buying all of your assets and filling up your funds while housing prices still have some way to go.

Okay. My last question related to Bayview, and then I have two other topics that are one question each, you had indicated on the last conference call that you are taking your Bayview writedown through the investment, which is why it is down -was down from 300 to 280, and I assume is now down to, what, 271?

Yeah, it is a partnership interest, right? So, partnerships, the income in the partnership is not taxed. It flows to the partners. And then it would reduce the basis, yes, absolutely.

The losses did --

A gain would increase the basis.

The total loss - oh, so you had increase in basis before they started having losses?

Yes, yes, I think it was up to 310 or 308 or -

Okay, because I was having problems reconciling the amounts of losses that you had taken quarter after quarter and it going down. That explains it. Okay. Second question is a pretty simple one, which is excluding stuff that is nonperforming already, how much is left in your construction portfolio?

Excluding things that are nonperforming, what's left in our builder construction portfolio, the whole thing, the Mid-Atlantic? Which one are you think of?

Well, the total construction, including the Pacific Northwest.

Yes, give me a second here. So -- where is my --

And ball park is good enough.

Yes, sure. Give me a second. $1.7 billion. I think when we started talking about it, we were at 2.2.

Okay. And my last question is on your last Q on page 37 you mention these VRDBs, and I understand they're distinctly different from SIVs, but what can you tell me to convince me that there's not any risk, assuming that's the case, of the VRDBs being backed by the bank if anything goes wrong?

I think the one major difference is, you know, we are the remarketing agent. So we essentially are providing a line of credit but we don't have to take the bonds in. By the way the things are structured, we don't have to take the bonds into inventory, that's a choice of M&T. I think that's a fundamental difference. So you don't have, you know, the issue where the - with the sort of, you know, having to bring things on balance sheet like the SIVs. In fact, in a broader question, you know, that is one of the other things that sort of distinguishes us, we don't have a lot of stuff hanging off our balance sheet.

Other than this, I hadn't seen anything.

We don't have a conduit. There was a small conduit that we had in '08 we didn't think provided much, if any, liquidity, so we got rid of it.

Okay, that's the end of my questions.

Thank you.

Your next question comes from Morris Segall of SPG Trend Advisors

Good morning.

Good morning.

I wanted to ask you that - your strategy in regard to capital adequacy in the loan loss reserving is taking full account of the Provident acquisition and what may be in that portfolio?

Just - could you just refine that a little bit?

Well, I know you scrutinized and did due diligence on Provident's book of business.

Right.

But to the extent that as we go through this year, and the shift runs from consumer to commercial real estate, I am just wondering how comfortable you are running a lean operation in regards to capital adequacy and loan loss reserving, given that new acquisition and what might be in there?

Let me just start off, I wouldn't characterize our reserving as lean. I would characterize it as one of the top three or four highest reserves in the industry, based on the loan book that we have. We have already had our comments on capital reserve.

I think with respect to Provident, we did a pretty thorough job on that. I think you look at the $650 million in marks on a small institution like that, we think we have got our hands around that. Once we do that, that means that there are no charge offs in that entity, and it is sort of a bank that produces cash flows, and essentially what we have to do is just to put those two banks that are on top of each other in Baltimore, right, to make them efficient. What you are going to see is we take the marks, there will be no charge offs going forward, and then it will produce a significant amount of cash flows out in, in about, you know, into probably starting in the first six to 12 months, right? So, I think we have - again, I think we are pretty well reserved, when you consider the size of our reserves, and when you consider the - the marks that we are contemplating with Provident.

Would you be inclined, if things deteriorated to a greater extent as we go through '09, to reapply for more TARP money?

No, no. We see no need to do that.

Okay. Thank you very much.

You're welcome.

Your next question comes from Ken Usdin with Banc of America.

Hi, Ken.

Hey, Rene. Just one quick question. Can you talk a little bit about the 90-day past due bucket, and what types of migration are you just seeing, you know, behind the surface of what we are not necessarily seeing in MPAs this quarter, but just how the rest of the book is acting kind of behind the surface a little bit?

Sure. A quick answer. Don, do you want to -

Other than the usual free or Ginnie Mae buyout stuff, and the Export/Import Bank stuff that's Government guaranteed, there's one credit in there that's reasonably sizable that's going to be restructured, so that's why it's not nonperforming. It will be restructured here in the next 30 days and should drop out of there.

Yes, and it's still paying interest.

All right. One just quick follow-up. Just to wrap up the whole discussion about capital adequacy, unrealized losses, et cetera, so are you - I just want to make sure I am understanding your comments that because the unrealized is the main culprit on the TCE, that given the reduction we are going to get through the Provident deal, that you are still comfortable running at at a TCE ratio which could be, I guess, pro forma now as low as 4%, and you don't - do you see any need to have to raise additional capital?

One, Ken, I don't see a pro forma of 4%.

Wasn't it 4.9% going to 4.4% or 4.5% that was - that you provided in the [deck]?

Good point. Good clarification.

So I'm saying - so now from 4.5% kind of down to 4%, right? I am -- my analysis.

Yes. Our conference call, I think, was on the 19th of December. We kind of knew where all the marks were. So - so everybody, I think, was a little nervous about saying it went to 4.4%. A big chunk of that was because we already saw what had happened to the unrealized losses.

Okay. So what you are saying is that --

It built into the estimate.

Sorry?

A chunk of what you see going from 490 to 459, probably a little more than half of that was already baked into our estimates when we said 4.4%.

Okay. So if the deal closed today, what would pro forma TCE be?

I don't have a different answer.

Okay.

I'm just saying it is 4.4%. If I forecast it 50 different times - you know, to answer your question, since December, when the Government started talking about buying assets again, the marks improved probably $100 million.

Okay.

So it is just - it moves all around, and I think our message is we are not managing our business based on the silliness of the markets; we will manage it based on cash flows.

Okay.

Okay?

Okay. So then in that concept, you feel comfortable with where capital ratios are?

We feel comfortable today.

Okay, thanks a lot.

You're welcome.

Your next question comes from Collyn Gilbert with Stifel Nicolaus.

Good morning, Collyn.

Good morning, Rene. How are you?

Great.

Good. Just a quick question. In the event that they bring back some version of TARP 1, would you - are there any assets on your books or Provident's books that maybe you would look to participate through that hypothetical TARP?

You know, let me take this - I think there's two steps to that answer. I think first of all, if they - if they went back to TARP 1 and they start buying assets, you will probably automatically see some rebound in those unrealized losses. Almost 100% of the drop from the third to fourth quarter came on November 12th, when Secretary Paulson said he was not going to buy assets anymore, all right? And you are seeing it come back. So that automatically, if you care about the this OCI adjustment, right, would increase capital ratios.

Then I think you have to think about it. I think there was a - there has been some talk, I think Geitner had mentioned this whole good bank/bad bank, and quite frankly, this is gets at the essence of what's going on in the capital markets, right? So it is - if a private bank were set up that were buying assets based on cash flows, and they said after credit we will use a discount rate of 13%, right? As soon as that is announced, most of the banks will get a huge infusion of capital from the OCI reversing, right? Think about the idea of a bank, let's say it is the Government, buying assets at 13%. 13% after tax is 8%. That's a better deal than giving out TARP money at 8% dividend to a bank that's not doing well.

Yes.

Right? So I think it has merit. I think it would help us - to your specific question, we would have to look one or two assets here and there, I don't know. I think if we participated, it would probably be more about helping the process, right?

Okay.

But it is too hard to say. The lion's share we will keep.

Okay. That's helpful. Thank you.

Our final question is a follow up from John Fox with Fenimore Asset Management.

Hi, my question was answered. Thank you.

Are there any closing remarks?

Yes. Just, again, I would like to thank everybody for participating today. As always, if any clarification of any of the items on the call or the news release is necessary, please call Investor Relations Department at (716) 842-5138. Thank you and goodbye.

This concludes the M&T Bank fourth quarter and full year 2008 earnings conference call. Thank you for participating. You may now disconnect.