M&T Bank - 10-Q quarterly report FY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9861

M&T BANK CORPORATION

(716) 842-5445
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [x] Accelerated filer [ ] Non-accelerated filer [ ]

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [x]

Number of shares of the registrant’s Common Stock, $0.50 par value, outstanding as of the close of business on April 25, 2007: 108,239,890 shares.

M&T BANK CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 31, 2007

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET (Unaudited)

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M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME (Unaudited)

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M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

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M&T BANK CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

CONSOLIDATED SUMMARY OF CHANGES IN ALLOWANCE FOR CREDIT LOSSES (Unaudited)

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NOTES TO FINANCIAL STATEMENTS

1. Significant accounting policies

The consolidated financial statements of M&T Bank Corporation (“M&T”) and subsidiaries (“the Company”) were compiled in accordance with the accounting policies set forth in note 1 of Notes to Financial Statements included in the Company’s 2006 Annual Report, except as described below. In the opinion of management, all adjustments necessary for a fair presentation have been made and were all of a normal recurring nature.

2. Earnings per share

The computations of basic earnings per share follow:

The computations of diluted earnings per share follow:

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

3. Comprehensive income

The following table displays the components of other comprehensive income:

Accumulated other comprehensive income (loss), net consisted of unrealized gains (losses) as follows:

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

4. Borrowings

M&T Capital Trust I (“Trust I”), M&T Capital Trust II (“Trust II”), and M&T Capital Trust III (“Trust III”) have issued fixed rate preferred capital securities aggregating $310 million. First Maryland Capital I (“Trust IV”) and First Maryland Capital II (“Trust V”) have issued floating rate preferred capital securities aggregating $300 million. The distribution rates on the preferred capital securities of Trust IV and Trust V adjust quarterly based on changes in the three-month London Interbank Offered Rate (“LIBOR”) and were 6.36% and 6.21%, respectively, at March 31, 2007 and 6.37% and 6.22%, respectively, at December 31, 2006. Trust I, Trust II, Trust III, Trust IV and Trust V are referred to herein collectively as the “Trusts.”

Other than the following payment terms (and the redemption terms described below), the preferred capital securities issued by the Trusts (“Capital Securities”) are substantially identical in all material respects:

The common securities of each Trust (“Common Securities”) are wholly owned by M&T and are the only class of each Trust’s securities possessing general voting powers. The Capital Securities represent preferred undivided interests in the assets of the corresponding Trust. Under the Federal Reserve Board’s current risk-based capital guidelines, the Capital Securities are includable in M&T’s Tier 1 (core) capital.

The proceeds from the issuances of the Capital Securities and Common Securities were used by the Trusts to purchase junior subordinated deferrable interest debentures (“Junior Subordinated Debentures”) of M&T as follows:

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

4. Borrowings, continued

The Junior Subordinated Debentures represent the sole assets of each Trust and payments under the Junior Subordinated Debentures are the sole source of cash flow for each Trust. The financial statement carrying values of junior subordinated debentures associated with preferred capital securities of Trust III, Trust IV and Trust V at March 31, 2007 and December 31, 2006 include the unamortized portions of purchase accounting adjustments to reflect estimated fair value as of the date of M&T’s acquisition of the common securities of each respective trust. The interest rates payable on the Junior Subordinated Debentures of Trust IV and Trust V were 6.36% and 6.21%, respectively, at March 31, 2007 and 6.37% and 6.22%, respectively, at December 31, 2006.

Holders of the Capital Securities receive preferential cumulative cash distributions on each distribution date at the stated distribution rate unless M&T exercises its right to extend the payment of interest on the Junior Subordinated Debentures for up to ten semi-annual periods (in the case of Trust I, Trust II and Trust III) or twenty quarterly periods (in the case of Trust IV and Trust V), in which case payment of distributions on the respective Capital Securities will be deferred for comparable periods. During an extended interest period, M&T may not pay dividends or distributions on, or repurchase, redeem or acquire any shares of its capital stock. The agreements governing the Capital Securities, in the aggregate, provide a full, irrevocable and unconditional guarantee by M&T of the payment of distributions on, the redemption of, and any liquidation distribution with respect to the Capital Securities. The obligations under such guarantee and the Capital Securities are subordinate and junior in right of payment to all senior indebtedness of M&T.

The Capital Securities will remain outstanding until the Junior Subordinated Debentures are repaid at maturity, are redeemed prior to maturity or are distributed in liquidation to the Trusts. The Capital Securities are mandatorily redeemable in whole, but not in part, upon repayment at the stated maturity dates of the Junior Subordinated Debentures or the earlier redemption of the Junior Subordinated Debentures in whole upon the occurrence of one or more events (“Events”) set forth in the indentures relating to the Capital Securities, and in whole or in part at any time after the stated optional redemption dates (January 15, 2007 in the case of Trust IV, February 1, 2007 in the case of Trust I, Trust III and Trust V, and June 1, 2007 in the case of Trust II) contemporaneously with the optional redemption of the related Junior Subordinated Debentures in whole or in part. The Junior Subordinated Debentures are redeemable prior to their stated maturity dates at M&T’s option (i) on or after the stated optional redemption dates, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of one or more of the Events, in each case subject to possible regulatory approval. The redemption price of the Capital Securities and the

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

4. Borrowings, continued

related Junior Subordinated Debentures upon early redemption will be expressed as a percentage of the liquidation amount plus accumulated but unpaid distributions. In the case of Trust I, such percentage adjusts annually and ranges from 104.117% at February 1, 2007 to 100.412% for the annual period ending January 31, 2017, after which the percentage is 100%. In the case of Trust II, such percentage adjusts annually and ranges from 104.139% at June 1, 2007 to 100.414% for the annual period ending May 31, 2017, after which the percentage is 100%, subject to a make-whole amount if the early redemption occurs prior to June 1, 2007. In the case of Trust III, such percentage adjusts annually and ranges from 104.625% at February 1, 2007 to 100.463% for the annual period ending January 31, 2017, after which the percentage is 100%. In the case of Trust IV and Trust V, the redemption price upon early redemption will be equal to 100% of the principal amount to be redeemed plus any accrued but unpaid distributions to the redemption date.

Allfirst Preferred Capital Trust (“Allfirst Capital Trust”) has issued $100 million of Floating Rate Non-Cumulative Subordinated Trust Enhanced Securities (“SKATES”). Allfirst Capital Trust is a Delaware business trust that was formed for the exclusive purposes of (i) issuing the SKATES and common securities, (ii) purchasing Asset Preferred Securities issued by Allfirst Preferred Asset Trust (“Allfirst Asset Trust”) and (iii) engaging in only those other activities necessary or incidental thereto. M&T holds 100% of the common securities of Allfirst Capital Trust. Allfirst Asset Trust is a Delaware business trust that was formed for the exclusive purposes of (i) issuing Asset Preferred Securities and common securities, (ii) investing the gross proceeds of the Asset Preferred Securities in junior subordinated debentures of M&T and other permitted investments and (iii) engaging in only those other activities necessary or incidental thereto. M&T holds 100% of the common securities of Allfirst Asset Trust and Allfirst Capital Trust holds 100% of the Asset Preferred Securities of Allfirst Asset Trust. M&T currently has outstanding $105.3 million aggregate liquidation amount Floating Rate Junior Subordinated Debentures due July 15, 2029 that are payable to Allfirst Asset Trust. The interest rates payable on such debentures were 6.79% at March 31, 2007 and 6.80% at December 31, 2006.

Distributions on the SKATES are non-cumulative. The distribution rate on the SKATES and on the Floating Rate Junior Subordinated Debentures is a rate per annum of three-month LIBOR plus 1.50% and three-month LIBOR plus 1.43%, respectively, reset quarterly two business days prior to the distribution dates of January 15, April 15, July 15, and October 15 in each year. Distributions on the SKATES will be paid if, as and when Allfirst Capital Trust has funds available for payment. The SKATES are subject to mandatory redemption if the Asset Preferred Securities of Allfirst Asset Trust are redeemed. Allfirst Asset Trust will redeem the Asset Preferred Securities if the junior subordinated debentures of M&T held by Allfirst Asset Trust are redeemed. M&T may redeem such junior subordinated debentures, in whole or in part, at any time on or after July 15, 2009, subject to regulatory approval. Allfirst Asset Trust will redeem the Asset Preferred Securities at par plus accrued and unpaid distributions from the last distribution payment date. M&T has guaranteed, on a subordinated basis, the payment in full of all distributions and other payments on the SKATES and on the Asset Preferred Securities to the extent that Allfirst Capital Trust and Allfirst Asset Trust, respectively, have funds legally available. Under the Federal Reserve Board’s current risk-based capital guidelines, the SKATES are includable in M&T’s Tier 1 Capital.

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

4. Borrowings, continued

Including the unamortized portions of purchase accounting adjustments to reflect estimated fair value at the acquisition dates of the common securities of Trust III, Trust IV, Trust V and Allfirst Asset Trust, the junior subordinated debentures associated with preferred capital securities had financial statement carrying values as follows:

5. Segment information

Reportable segments have been determined based upon the Company’s internal profitability reporting system, which is organized by strategic business units. Certain strategic business units have been combined for segment information reporting purposes where the nature of the products and services, the type of customer and the distribution of those products and services are similar. The reportable segments are Commercial Banking, Commercial Real Estate, Discretionary Portfolio, Residential Mortgage Banking and Retail Banking.

The financial information of the Company’s segments was compiled utilizing the accounting policies described in note 21 to the Company’s consolidated financial statements as of and for the year ended December 31, 2006. The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to generally accepted accounting principles. As a result, the financial information of the reported segments is not necessarily comparable with similar information reported by other financial institutions. As also described in note 21 to the Company’s 2006 consolidated financial statements, neither goodwill nor core deposit and other intangible assets (and the amortization charges associated with such assets) resulting from acquisitions of financial institutions have been allocated to the Company’s reportable segments, but are included in the “All Other” category. The Company has, however, assigned such intangible assets to business units for purposes of

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

5. Segment information, continued

testing for impairment. Information about the Company’s segments is presented in the following table:

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

5. Segment information, continued

6. Commitments and contingencies

In the normal course of business, various commitments and contingent liabilities are outstanding. The following table presents the Company’s significant commitments. Certain of these commitments are not included in the Company’s consolidated balance sheet.

Commitments to extend credit are agreements to lend to customers, generally having fixed expiration dates or other termination clauses that may require payment of a fee. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, whereas commercial letters of credit are issued to facilitate commerce and typically result in the commitment being funded when the underlying transaction is consummated between the customer and a third party. The credit risk associated with commitments to extend credit and standby and commercial letters of credit is essentially the same as that involved with extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s assessment of the customer’s creditworthiness.

Financial guarantees and indemnification contracts are oftentimes similar to standby letters of credit and include mandatory purchase agreements issued to ensure that customer obligations are fulfilled, recourse obligations associated with sold loans, and other guarantees of customer performance or compliance with designated rules and regulations. Included in financial guarantees and indemnification contracts are loan principal amounts sold with recourse in conjunction with the Company’s involvement in the Federal National

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

6. Commitments and contingencies, continued

Mortgage Association Delegated Underwriting and Servicing program. The Company’s maximum credit risk for recourse associated with loans sold under this program totaled $986 million and $939 million at March 31, 2007 and December 31, 2006, respectively.

Since many loan commitments, standby letters of credit, and guarantees and indemnification contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows.

The Company utilizes commitments to sell real estate loans to hedge exposure to changes in the fair value of real estate loans held for sale. Such commitments are considered derivatives in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and along with commitments to originate real estate loans to be held for sale are generally recorded in the consolidated balance sheet at estimated fair market value. However, in estimating that fair value for commitments to originate loans for sale, value ascribable to cash flows that will be realized in connection with loan servicing activities has not been included. Value ascribable to that portion of cash flows is recognized at the time the underlying mortgage loans are sold.

The Company has an agreement with the Baltimore Ravens of the National Football League whereby the Company obtained the naming rights to a football stadium in Baltimore, Maryland. Under the agreement, the Company is obligated to pay $5 million per year from 2007 through 2013 and $6 million per year from 2014 through 2017.

The Company also has commitments under long-term operating leases.

M&T and its subsidiaries are subject in the normal course of business to various pending and threatened legal proceedings in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending against M&T or its subsidiaries will be material to the Company’s consolidated financial position, but at the present time is not in a position to determine whether such litigation will have a material adverse effect on the Company’s consolidated results of operations in any future reporting period.

7. Pension plans and other postretirement benefits

The Company provides defined benefit pension and other postretirement benefits (including health care and life insurance benefits) to qualified retired employees. Net periodic benefit cost consisted of the following:

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NOTES TO FINANCIAL STATEMENTS, CONTINUED

7. Pension plans and other postretirement benefits, continued

Expense incurred in connection with the Company’s defined contribution pension and retirement savings plans totaled $9,169,000 and $7,831,000 for the three months ended March 31, 2007 and 2006, respectively.

8. Income taxes

Effective January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” FIN No. 48 prescribes the accounting method to be applied to measure uncertainty in income taxes recognized under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” FIN No. 48 established a recognition threshold and measurement attribute for the financial statement recognition and measurement of an uncertain tax position taken or expected to be taken in a tax return.

The Company’s federal, state and local income tax returns are routinely subject to examinations from various governmental taxing authorities. Such examinations may result in challenges to the tax return treatment applied by the Company to specific transactions. Management believes that the assumptions and judgment used to record tax-related assets or liabilities have been appropriate. Should determinations rendered by tax authorities ultimately indicate that management’s assumptions were inappropriate, the result and adjustments required could have a material effect on the Company’s results of operations. The Company’s federal income tax returns for 2004 through 2006 are subject to examination by the Internal Revenue Service. The Company also files income tax returns in over thirty state and local jurisdictions. Substantially all material state and local tax matters have been concluded for years through 1998. Some tax returns for years after 1998 are presently under examination. As of January 1, 2007, the Company had accrued approximately $67 million, net of available benefits of approximately $36 million, for various unrecognized tax benefits in various federal, state and local tax jurisdictions within which the Company operates. If recognized, those benefits would affect the Company’s effective tax rate. If any tax return examination by federal, state or local tax authorities is concluded during the next twelve months, it is possible that the amount of the accrued liability for uncertain tax positions could change. It is not possible to estimate the amount of any such changes. The Company recognizes interest and penalties related to unrecognized tax benefits in income taxes in the Consolidated Statement of Income. Included in the accrual noted herein was $9 million for such item. The adoption of FIN No. 48 did not result in any change to the Company’s liability for uncertain tax positions as of January 1, 2007.

9. Acquisition of deposits and banking offices

On June 30, 2006, M&T Bank, M&T’s principal banking subsidiary, acquired 21 banking offices in Buffalo and Rochester, New York from Citibank, N.A. in a cash transaction. The offices had approximately $269 million in loans, mostly to consumers, small businesses and middle market customers, and approximately $1.0 billion of deposits. The transaction did not have a significant effect on the Company’s results of operations during 2006 or in the first quarter of 2007. There were no significant acquisition-related expenses associated with the transaction in the first quarter of either 2007 or 2006.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Net income for M&T Bank Corporation (“M&T”) in the first quarter of 2007 was $176 million or $1.57 of diluted earnings per common share, representing decreases of 13% and 11%, respectively, from $203 million or $1.77 of diluted earnings per common share in the year-earlier quarter. During the fourth quarter of 2006, net income was $213 million or $1.88 of diluted earnings per common share. Basic earnings per common share were $1.60 in the initial quarter of 2007, compared with $1.82 and $1.93 in the first and fourth quarters of 2006, respectively.

     The annualized rate of return on average total assets for M&T and its consolidated subsidiaries (“the Company”) in the recent quarter was 1.25%, compared with 1.49% in the first quarter of 2006 and 1.50% in 2006’s final quarter. The annualized rate of return on average common stockholders’ equity was 11.38% in the initial quarter of 2007, compared with 13.97% and 13.55% in the first and fourth quarters of 2006, respectively.

     The Company’s financial results for the first quarter of 2007 were adversely impacted by changing market conditions in the residential mortgage lending sector. Well-publicized problems in the subprime residential mortgage lending market had a negative effect on the rest of the residential mortgage marketplace, specifically with regard to alternative (“Alt-A”) residential mortgage loans that the Company actively originates for sale in the secondary market. Alt-A loans originated by the Company typically include some form of limited documentation requirements, as compared with more traditional residential mortgage loans. Unfavorable market conditions and lack of market liquidity impacted the Company’s willingness to sell Alt-A loans in the first quarter. During March 2007, an auction of such loans received fewer bids than normal and the pricing of those bids was lower than expected. As a result, $883 million of Alt-A loans previously held for sale (including $808 million of first mortgage loans and $75 million of second mortgage loans) were transferred in March to the Company’s held-for-investment residential mortgage loan portfolio. In accordance with generally accepted accounting principles (“GAAP”), loans held for sale must be recorded at the lower of cost or market value. Accordingly, prior to reclassifying the Alt-A mortgage loans to held for investment, the carrying value of such loans was reduced by $12 million in the first quarter of 2007, which resulted in an after-tax reduction of net income of $7 million, or $.07 per diluted share. The loans were reclassified to the held-for-investment portfolio because management of the Company believes that the value of the Alt-A residential mortgage loans it holds is greater than the amount implied by the few bidders presently active in the market.

     In addition, the Company is contractually obligated to repurchase previously sold Alt-A loans that do not ultimately meet investor sale criteria, including instances when mortgagors fail to make timely payments during the first 90 days subsequent to the sale date. As a result, during the first quarter of 2007, the Company accrued $6 million to provide for declines in market value of previously sold Alt-A mortgage loans that the Company may be required to repurchase. That loss reduced the Company’s net income by $4 million or $.03 per diluted share.

     The Company has initiated changes in its origination and sales practices as they relate to Alt-A lending that will likely result in lower originations of Alt-A mortgage loans in future quarters.

     On February 5, 2007, M&T invested $300 million to acquire a minority interest in Bayview Lending Group LLC (“BLG”), a Florida-based privately-held commercial mortgage lender that specializes in originating, securitizing and servicing small balance commercial real estate loans in the United States, and to a lesser extent, in Canada and the United Kingdom. The investment

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will be accounted for using the equity method of accounting. BLG was a going-concern when M&T made its investment, but started out with a minimal amount of loans in its portfolio. As a result, BLG is expected to incur modest operating losses until a sufficiently significant volume of loans are originated and securitized. M&T’s pro-rata portion of BLG’s operating results did not have a significant impact on M&T’s results of operations in the first quarter of 2007.

Supplemental Reporting of Non-GAAP Results of Operations

As a result of business combinations and other acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $3.1 billion at March 31, 2007, $3.0 billion at March 31, 2006 and $3.2 billion at December 31, 2006. Included in such intangible assets at each of those dates was goodwill of $2.9 billion. Amortization of core deposit and other intangible assets, after tax effect, was $11 million ($.10 per diluted share) during each of the first quarter of 2007 and the fourth quarter of 2006, and $8 million ($.07 per diluted share) in the first quarter of 2006.

     Since 1998, M&T has consistently provided supplemental reporting of its results on a “net operating” or “tangible” basis, in which M&T excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts, when calculating certain performance ratios) and expenses associated with integrating acquired operations into the Company, since such expenses are considered by management to be “nonoperating” in nature. Although “net operating income” as defined by M&T is not a GAAP measure, M&T’s management believes that this information helps investors understand the effect of acquisition activity in reported results.

     Net operating income declined 11% to $187 million in the initial quarter of 2007 from $211 million in the year-earlier quarter. Diluted net operating earnings per share for the first quarter of 2007 were $1.67, down 9% from $1.84 in the similar 2006 quarter. Net operating income and diluted net operating earnings per share were $225 million and $1.98, respectively, in the fourth quarter of 2006.

     Net operating income in the recent quarter represented an annualized rate of return on average tangible assets of 1.40%, compared with 1.64% and 1.67% in the first and fourth quarters of 2006, respectively. Net operating income expressed as an annualized return on average tangible common equity was 24.11% in the first quarter of 2007, compared with 29.31% in the year-earlier quarter and 28.71% in the final quarter of 2006.

     Reconciliations of GAAP results with non-GAAP results are provided in table 2.

Taxable-equivalent Net Interest Income

Taxable-equivalent net interest income increased to $456 million in the first quarter of 2007 from $452 million in the corresponding 2006 quarter, but was down from $472 million in the fourth quarter of 2006. The improvement in the recent quarter as compared with the first quarter of 2006 reflects a $1.6 billion, or 3%, increase in average earning assets that was largely offset by a nine basis point (hundredths of one percent) narrowing of the Company’s net interest margin, or taxable-equivalent net interest income expressed as an annualized percentage of average earning assets. The recent quarter’s decline in taxable-equivalent net interest income as compared with 2006’s final quarter resulted from a similar nine basis point narrowing of the net interest margin that was only partially offset by an increase in the average balance of earning assets.

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     Average loans and leases rose $2.6 billion, or 6%, to $43.1 billion in the recently completed quarter from $40.5 billion in the first quarter of 2006, and were up $639 million from the $42.5 billion average in the fourth quarter of 2006. Contributing to the growth in average loans in the recent quarter as compared with the first quarter of 2006 were higher average outstanding balances of commercial loans, commercial real estate loans and residential real estate loans. Average commercial loans and leases rose $718 million or 7% to $11.8 billion in the initial 2007 quarter from $11.0 billion in the year-earlier quarter. Commercial real estate loans averaged $15.5 billion in the recent quarter, up $796 million or 5% from $14.7 billion in the first quarter of 2006, due largely to a rise in construction loans to developers of residential real estate properties. The Company’s residential real estate loan portfolio averaged $5.9 billion in 2007’s first quarter, up $1.3 billion or 29% from $4.6 billion in the corresponding quarter of 2006. Included in that portfolio were loans held for sale, which averaged $1.8 billion in the recently completed quarter, compared with $1.3 billion in the first quarter of 2006. Excluding such loans, average residential real estate loans rose $897 million from 2006’s initial quarter to the first quarter of 2007. That increase was largely the result of the Company’s decision to retain higher levels of residential real estate loans in light of modest loan growth in other loan types and the lack of availability of investment securities to acquire that met the Company’s desired characteristics and provided suitable returns. As already noted, during March 2007 the Company transferred $883 million of Alt-A loans previously held for sale to its held-for–investment portfolio. That transfer increased the recent quarter’s average balances of residential real estate loans held for investment by approximately $90 million. Partially offsetting the loan growth described above was a decline in average consumer loans and leases of $283 million, or 3%, in the recent quarter as compared with the year-earlier period due to lower average automobile loan and lease balances outstanding, reflecting the Company’s decision to allow such balances to decline rather than matching interest rates offered by competitors. However, during late 2006 the interest rate environment relating to the Company’s automobile lending business improved and outstanding balances of such loans have increased slightly since September 30, 2006.

     The Company experienced growth of 2% in average commercial loan balances in the recent quarter as compared with the fourth quarter of 2006, while average commercial real estate loans were relatively unchanged. In dollar amount, average commercial loans increased $230 million. Average residential real estate loans in the recent quarter rose $401 million, or 7%, from 2006’s fourth quarter, while average consumer loans outstanding were up slightly from the final 2006 quarter, as higher automobile loans were largely offset by lower average outstanding balances of home equity lines of credit. The accompanying table summarizes quarterly changes in the major components of the loan and lease portfolio.

AVERAGE LOANS AND LEASES
(net of unearned discount)
Dollars in millions

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     Average balances of investment securities aggregated $7.2 billion during the first quarter of 2007, compared with $8.4 billion in the year-earlier quarter and $7.6 billion in the fourth quarter of 2006. The declines in such securities from both the first and fourth quarters of 2006 reflect net paydowns of mortgage-backed securities and collateralized mortgage obligations. The Company has allowed the investment securities portfolio to decline as the opportunity to purchase securities at favorable spreads, that is, the difference between the yield earned on a security and the rate paid on funds used to purchase it, has been limited. The investment securities portfolio is largely comprised of residential and commercial mortgage-backed securities and collateralized mortgage obligations, debt securities issued by municipalities, debt and preferred equity securities issued by government-sponsored agencies and certain financial institutions, and shorter-term U.S. Treasury notes. When purchasing investment securities, the Company considers its overall interest-rate risk profile as well as the adequacy of expected returns relative to risks assumed, including prepayments. In managing its investment securities portfolio, the Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, or credit risk associated with a particular security, or as a result of restructuring its investment securities portfolio following completion of a business combination. The Company regularly reviews its investment securities for declines in value below amortized cost that might be other than temporary. As of March 31, 2007 and December 31, 2006, the Company concluded that such declines were temporary in nature.

     Other earning assets include deposits at banks, trading account assets, federal funds sold and agreements to resell securities. Those other earning assets in the aggregate averaged $365 million in the recently completed quarter, compared with $139 million and $205 million in the first and fourth quarters of 2006, respectively. The increase in such assets in the recent quarter resulted from purchases of investment securities under agreements to resell. The weighted-average term to maturity of such agreements, which averaged $281 million during 2007’s initial quarter and aggregated $400 million at March 31, 2007, was approximately 4 years. Those resell agreements are accounted for similar to collateralized loans, with changes in the market value of the collateral monitored by the Company to ensure sufficient coverage. Similar agreements averaged $100 million during the fourth quarter of 2006, while there were no such agreements outstanding during the initial quarter of 2006. The amounts of investment securities and other earning assets held by the Company are influenced by such factors as demand for loans, which generally yield more than investment securities and other earning assets, ongoing repayments, the level of deposits, and management of balance sheet size and resulting capital ratios.

     As a result of the changes described herein, average earning assets increased 3% to $50.7 billion in the first quarter of 2007 from $49.1 billion in the similar 2006 quarter. Average earning assets aggregated $50.2 billion in the fourth quarter of 2006.

     The most significant source of funding for the Company is core deposits which are comprised of noninterest-bearing deposits, interest-bearing transaction accounts, nonbrokered savings deposits and nonbrokered domestic time deposits under $100,000. The Company’s branch network is its principal source of core deposits, which generally carry lower interest rates than wholesale funds of comparable maturities. Certificates of deposit under $100,000 generated on a nationwide basis by M&T Bank, National Association (“M&T Bank, N.A.”), a wholly owned bank subsidiary of M&T, are also included in core deposits. Core deposits averaged $28.6 billion in the first quarter of 2007, compared with $27.8 billion in the corresponding quarter of 2006 and $28.7 billion in 2006’s final quarter. A June 30, 2006 acquisition of branch offices in upstate New York added approximately $900 million of core deposits on that date. The increase in average balances of time deposits less than $100,000 in the current quarter as compared with the similar 2006 period largely reflects customer response to higher interest rates being offered on those products, resulting in a shift of funds from savings and noninterest-bearing

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deposit accounts to time deposits. The following table provides an analysis of quarterly changes in the components of average core deposits.

AVERAGE CORE DEPOSITS
Dollars in millions

     Additional sources of funding for the Company include domestic time deposits of $100,000 or more, deposits originated through the Company’s offshore branch office, and brokered deposits. Domestic time deposits over $100,000, excluding brokered certificates of deposit, averaged $2.9 billion during the quarter ended March 31, 2007, compared with $2.6 billion in the first quarter of 2006 and $3.0 billion in 2006’s fourth quarter. Offshore branch deposits, primarily comprised of accounts with balances of $100,000 or more, averaged $3.7 billion, $3.4 billion and $3.8 billion for the quarters ended March 31, 2007, March 31, 2006 and December 31, 2006, respectively. Brokered time deposits averaged $2.8 billion during the recently completed quarter, compared with $3.7 billion and $3.0 billion in the first and fourth quarters of 2006, respectively. In connection with the Company’s management of interest rate risk, interest rate swap agreements have been entered into under which the Company receives a fixed rate of interest and pays a variable rate and that have notional amounts and terms substantially similar to the amounts and terms of $325 million of brokered time deposits. The Company also had brokered money-market deposit accounts which averaged $84 million during the first quarter of 2007, compared with $66 million in the year-earlier quarter and $75 million in the fourth quarter of 2006. Offshore branch deposits and brokered deposits have been used by the Company as alternatives to short-term borrowings. Additional amounts of offshore branch deposits or brokered deposits may be solicited in the future depending on market conditions, including demand by customers and other investors for such deposits, and the cost of funds available from alternative sources at the time.

     The Company also uses borrowings from banks, securities dealers, various Federal Home Loan Banks (“FHLBs”), and others as sources of funding. Short-term borrowings averaged $4.9 billion in the initial 2007 quarter, compared with $4.6 billion in the year-earlier quarter and $4.8 billion in the final 2006 quarter. Included in short-term borrowings were unsecured federal funds borrowings which generally mature daily and averaged $4.1 billion in the recent quarter, compared with $3.8 billion and $4.0 billion in the first and fourth quarters of 2006, respectively. Overnight federal funds borrowings represent the largest component of short-term borrowings and are obtained daily from a wide variety of banks and other financial institutions. Also included in short-term borrowings is a $500 million revolving asset-backed structured borrowing secured by automobile loans that were transferred to M&T Auto Receivables I, LLC, a special purpose subsidiary of M&T Bank, the principal bank subsidiary of M&T. The special purpose subsidiary, the loans and the borrowings are included in the consolidated financial statements of the Company.

     Long-term borrowings averaged $7.3 billion in the first quarter of 2007, compared with $6.3 billion in the similar 2006 quarter and $6.2 billion in the fourth quarter of 2006. Included in average long-term borrowings were amounts borrowed from the FHLBs of $3.5 billion in the initial quarter of 2007 and $4.1 billion and $3.4 billion in the first and fourth quarters of 2006, respectively, and subordinated capital notes of $1.7 billion in the most recent quarter, $1.2 billion in the first quarter of 2006 and $1.4 billion in 2006’s final quarter. M&T Bank issued $500 million of subordinated notes in December 2006, in part to maintain appropriate regulatory capital ratios. Junior subordinated debentures associated with trust preferred securities that were included in average long-term

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borrowings were $713 million in each of the first quarter of 2007 and the fourth quarter of 2006, and $712 million in 2006’s first quarter. Information regarding trust preferred securities and the related junior subordinated debentures is provided in note 4 of Notes to Financial Statements. Also included in long-term borrowings were agreements to repurchase securities, which averaged $1.4 billion during the first quarter of 2007, $284 million in the corresponding 2006 quarter and $612 million in the fourth quarter of 2006.

     Changes in the composition of the Company’s earning assets and interest-bearing liabilities as described herein, as well as changes in interest rates and spreads, can impact net interest income. Net interest spread, or the difference between the taxable-equivalent yield on earning assets and the rate paid on interest-bearing liabilities, was 3.03% in the first quarter of 2007 and 3.18% in the year-earlier quarter. The yield on earning assets during the recent quarter was 6.93%, up 47 basis points from 6.46% in the first quarter of 2006, while the rate paid on interest-bearing liabilities increased 62 basis points to 3.90% from 3.28%. In the fourth quarter of 2006, the net interest spread was 3.09%, the yield on earning assets was 6.92% and the rate paid on interest-bearing liabilities was 3.83%. During the first half of 2006, the Federal Reserve raised its benchmark overnight federal funds target rate four times, each increase representing a 25 basis point increment over the previously effective target rate. Those interest rate increases resulted in a more rapid rise in rates paid on interest-bearing liabilities, most notably short-term borrowings, than in the yields on earning assets and contributed to a general flattening of the yield curve. The decline in the Company’s net interest spread during the recent quarter as compared with the first quarter of 2006 resulted from several factors, including lower fees from customer prepayments of commercial real estate loans, higher rates paid on consumer deposits and the impact of funding the Company’s investment in BLG. The decline in net interest spread from the final quarter of 2006 to the recent quarter was due, in part, to lower commercial real estate loan prepayment fees, higher rates paid on deposits, the impact of two less days in the recent quarter and the funding of the BLG investment.

     Net interest-free funds consist largely of noninterest-bearing demand deposits and stockholders’ equity, partially offset by bank owned life insurance and non-earning assets, including goodwill and core deposit and other intangible assets. Net interest-free funds averaged $8.0 billion in 2007’s initial quarter, compared with $8.2 billion and $8.4 billion in the first and fourth quarters of 2006, respectively. Goodwill and core deposit and other intangible assets averaged $3.1 billion during the quarter ended March 31, 2007, $3.0 billion in the first quarter of 2006 and $3.2 billion in 2006’s final quarter. The cash surrender value of bank owned life insurance averaged $1.1 billion in each of the first quarter of 2007 and the fourth quarter of 2006, and $1.0 billion in the first quarter of 2006. Increases in the cash surrender value of bank owned life insurance and benefits received are not included in interest income, but rather are recorded in “other revenues from operations.”

     The contribution of net interest-free funds to net interest margin was .61% in the recent quarter, compared with .55% in the year-earlier quarter and .64% in 2006’s fourth quarter. The increase in the contribution to net interest margin ascribed to net interest-free funds in the recent quarter and 2006’s fourth quarter as compared with the first quarter of 2006 resulted largely from the impact of higher interest rates on interest-bearing liabilities used to value such contribution.

     Reflecting the changes to the net interest spread and the contribution of interest-free funds as described herein, the Company’s net interest margin was 3.64% in the first quarter of 2007, down from 3.73% in each of the first and fourth quarters of 2006. Future changes in market interest rates or spreads, as well as changes in the composition of the Company’s portfolios of earning assets and interest-bearing liabilities that result in reductions in spreads, could adversely impact the Company’s net interest income and net interest margin.

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     Management assesses the potential impact of future changes in interest rates and spreads by projecting net interest income under several interest rate scenarios. In managing interest rate risk, the Company utilizes interest rate swap agreements to modify the repricing characteristics of certain portions of its portfolios of earning assets and interest-bearing liabilities. Periodic settlement amounts arising from these agreements are generally reflected in either the yields earned on assets or the rates paid on interest-bearing liabilities. The notional amount of interest rate swap agreements entered into for interest rate risk management purposes was approximately $1.0 billion as of March 31, 2007 and December 31, 2006, and $717 million as of March 31, 2006. Under the terms of these swap agreements, the Company receives payments based on the outstanding notional amount of the swap agreements at fixed rates of interest and makes payments at variable rates.

     As of March 31, 2007, all of the Company’s interest rate swap agreements entered into for risk management purposes had been designated as fair value hedges. In a fair value hedge, the fair value of the derivative (the interest rate swap agreement) and changes in the fair value of the hedged item are recorded in the Company’s consolidated balance sheet with the corresponding gain or loss recognized in current earnings. The difference between changes in the fair value of the interest rate swap agreements and the hedged items represents hedge ineffectiveness and is recorded in “other revenues from operations” in the Company’s consolidated statement of income. In a cash flow hedge, unlike in a fair value hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in “other revenues from operations” immediately. The amounts of hedge ineffectiveness recognized during the quarters ended March 31, 2007 and 2006 and the quarter ended December 31, 2006 were not material to the Company’s results of operations. The estimated aggregate fair value of interest rate swap agreements designated as fair value hedges represented losses of approximately $12 million and $13 million at March 31, 2007 and 2006, respectively, and $15 million at December 31, 2006. The fair values of such swap agreements were substantially offset by changes in the fair values of the hedged items. The changes in the fair values of the interest rate swap agreements and the hedged items result from the effects of changing interest rates.

     The weighted-average rates to be received and paid under interest rate swap agreements currently in effect were 5.63% and 6.20%, respectively, at March 31, 2007. The average notional amounts of interest rate swap agreements entered into for interest rate risk management purposes, the related effect on net interest income and margin, and the weighted-average rates paid or received on those swap agreements are presented in the accompanying table.

INTEREST RATE SWAP AGREEMENTS
Dollars in thousands

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     As a financial intermediary, the Company is exposed to various risks, including liquidity and market risk. Liquidity refers to the Company’s ability to ensure that sufficient cash flow and liquid assets are available to satisfy current and future obligations, including demands for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. Liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. M&T’s banking subsidiaries have access to additional funding sources through borrowings from the Federal Home Loan Bank of New York, lines of credit with the Federal Reserve Bank of New York, and other available borrowing facilities. The Company has, from time to time, issued subordinated capital notes to provide liquidity and enhance regulatory capital ratios. Such notes qualify for inclusion in the Company’s total capital as defined by federal regulators. In December 2006, M&T Bank issued $500 million of subordinated notes. The notes bear a fixed rate of interest of 5.629% for ten years and a floating rate thereafter, at a rate equal to the three-month London Interbank Offered Rate plus .64%. The notes are redeemable at the Company’s option after the fixed-rate period ends, subject to prior regulatory approval. As an additional source of funding, the Company maintains a $500 million revolving asset-backed structured borrowing which is collateralized by automobile loans and related assets that have been transferred to a special purpose subsidiary of M&T Bank. That subsidiary, the loans and the borrowing are included in the Company’s consolidated financial statements. As existing loans of the subsidiary pay down, monthly proceeds, after payment of certain fees and debt service costs, are used to obtain additional automobile loans from M&T Bank or other subsidiaries to replenish the collateral and maintain the existing borrowing base.

     The Company has informal and sometimes reciprocal sources of funding available through various arrangements for unsecured short-term borrowings from a wide group of banks and other financial institutions. Short-term federal funds borrowings aggregated $3.3 billion at March 31, 2007, $2.3 billion at December 31, 2006 and $3.6 billion at March 31, 2006. In general, those borrowings were unsecured and matured on the following business day. As already noted, offshore branch deposits and brokered certificates of deposit have been used by the Company as an alternative to short-term borrowings. Offshore branch deposits also generally mature on the next business day and totaled $4.8 billion, $3.2 billion and $5.4 billion at March 31, 2007, March 31, 2006 and December 31, 2006, respectively. Brokered certificates of deposit have longer maturity terms. At March 31, 2007, brokered time deposits totaled $2.3 billion and the weighted-average remaining term to maturity of such deposits was 11 months. Certain of these brokered time deposits have provisions that allow for early redemption.

     The Company’s ability to obtain funding from these or other sources could be negatively impacted should the Company experience a substantial deterioration in its financial condition or its debt ratings, or should the availability of short-term funding become restricted due to a disruption in the financial markets. The Company attempts to quantify such credit-event risk by modeling scenarios that estimate the liquidity impact resulting from a short-term ratings downgrade over various grading levels. Such impact is estimated by attempting to measure the effect on available unsecured lines of credit, available capacity from secured borrowing sources and securitizable assets. In addition to deposits and borrowings, other sources of liquidity include maturities of investment securities and other earning assets, repayments of loans and investment securities, and cash generated from operations, such as fees collected for services.

     Certain customers of the Company obtain financing through the issuance of variable rate demand bonds (“VRDBs”). The VRDBs are generally enhanced by direct-pay letters of credit provided by M&T Bank. M&T Bank oftentimes acts as remarketing agent for the VRDBs and, at its discretion, may from time-to-time own some of the VRDBs while such instruments are remarketed. When this occurs, the VRDBs are classified as trading assets in the Company’s consolidated balance sheet. Nevertheless, M&T Bank is not contractually obligated to purchase the VRDBs. The value of VRDBs in the Company’s trading account totaled $26 million

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at March 31, 2007, $61 million at March 31, 2006 and $6 million at December 31, 2006. The total amount of VRDBs outstanding backed by M&T Bank letters of credit was $1.7 billion at March 31, 2007, March 31, 2006 and December 31, 2006. M&T Bank also serves as remarketing agent for most of those bonds.

     In the normal course of business, the Company enters into contractual obligations which require future cash payments. Such obligations include, among others, payments related to deposits, borrowings, leases, and other contractual commitments. Off-balance sheet commitments to customers may impact liquidity, including commitments to extend credit, standby letters of credit, commercial letters of credit, financial guarantees and indemnification contracts, and commitments to sell real estate loans. Because many of these commitments or contracts expire without being funded in whole or in part, the contract amounts are not necessarily indicative of future cash flows. Further information about these commitments is provided in note 6 of Notes to Financial Statements.

     M&T’s primary source of funds to pay for operating expenses, shareholder dividends and common stock repurchases has historically been the receipt of dividends from its banking subsidiaries, which are subject to various regulatory limitations. Dividends from any banking subsidiary to M&T are limited by the amount of earnings of the banking subsidiary in the current year and the two preceding years. For purposes of the test, at March 31, 2007 approximately $147 million was available for payment of dividends to M&T from banking subsidiaries without prior regulatory approval. These historic sources of cash flow have been augmented in the past by the issuance of trust preferred securities. Information regarding trust preferred securities and the related junior subordinated debentures is included in note 4 of Notes to Financial Statements. M&T also maintains a $30 million line of credit with an unaffiliated commercial bank, of which there were no borrowings outstanding at March 31, 2007 or at December 31, 2006.

     Management closely monitors the Company’s liquidity position for compliance with internal policies and believes that available sources of liquidity are adequate to meet funding needs in the normal course of business. Management does not anticipate engaging in any activities, either currently or in the long-term, for which adequate funding would not be available and would therefore result in a significant strain on liquidity at either M&T or its subsidiary banks.

     Market risk is the risk of loss from adverse changes in market prices and/or interest rates of the Company’s financial instruments. The primary market risk the Company is exposed to is interest rate risk. Interest rate risk arises from the Company’s core banking activities of lending and deposit-taking, because assets and liabilities reprice at different times and by different amounts as interest rates change. As a result, net interest income earned by the Company is subject to the effects of changing interest rates. The Company measures interest rate risk by calculating the variability of net interest income in future periods under various interest rate scenarios using projected balances for earning assets, interest-bearing liabilities and derivatives used to hedge interest rate risk. Management’s philosophy toward interest rate risk management is to limit the variability of net interest income. The balances of financial instruments used in the projections are based on expected growth from forecasted business opportunities, anticipated prepayments of loans and investment securities, and expected maturities of investment securities, loans and deposits. Management uses a “value of equity” model to supplement the modeling technique described above. Those supplemental analyses are based on discounted cash flows associated with on- and off-balance sheet financial instruments. Such analyses are modeled to reflect changes in interest rates and provide management with a long-term interest rate risk metric.

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     The Company’s Risk Management Committee, which includes members of senior management, monitors the sensitivity of the Company’s net interest income to changes in interest rates with the aid of a computer model that forecasts net interest income under different interest rate scenarios. In modeling changing interest rates, the Company considers different yield curve shapes that consider both parallel (that is, simultaneous changes in interest rates at each point on the yield curve) and non-parallel (that is, allowing interest rates at points on the yield curve to vary by different amounts) shifts in the yield curve. In utilizing the model, market implied forward interest rates over the subsequent twelve months are generally used to determine a base interest rate scenario for the net interest income simulation. That calculated base net interest income is then compared to the income calculated under the varying interest rate scenarios. The model considers the impact of ongoing lending and deposit-gathering activities, as well as interrelationships in the magnitude and timing of the repricing of financial instruments, including the effect of changing interest rates on expected prepayments and maturities. When deemed prudent, management has taken actions to mitigate exposure to interest rate risk through the use of on- or off-balance sheet financial instruments and intends to do so in the future. Possible actions include, but are not limited to, changes in the pricing of loan and deposit products, modifying the composition of earning assets and interest-bearing liabilities, and adding to, modifying or terminating existing interest rate swap agreements or other financial instruments used for interest rate risk management purposes.

     The accompanying table as of March 31, 2007 and December 31, 2006 displays the estimated impact on net interest income from non-trading financial instruments in the base scenario described above resulting from parallel changes in interest rates across repricing categories during the first modeling year.

SENSITIVITY OF NET INTEREST INCOME
TO CHANGES IN INTEREST RATES
(dollars in thousands)

     The Company utilized many assumptions to calculate the impact that changes in interest rates may have on net interest income. The more significant assumptions included the rate of prepayments of mortgage-related assets, cash flows from derivative and other financial instruments held for non-trading purposes, loan and deposit volumes and pricing, and deposit maturities. In the scenarios presented, the Company also assumed gradual changes in rates during a twelve-month period of 100 and 200 basis points as compared with the assumed base scenario. In the event that a 100 or 200 basis point rate change cannot be achieved, the applicable rate changes are limited to lesser amounts such that interest rates cannot be less than zero. The assumptions used in interest rate sensitivity modeling are inherently uncertain and, as a result, the Company cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude and frequency of changes in interest rates and changes in market conditions and interest rate differentials (spreads) between maturity/repricing categories, as well as any actions, such as those previously described, which management may take to counter such changes. In light of the uncertainties and assumptions associated with the process, the amounts presented in the table and changes in such amounts are not considered significant to the Company’s past or projected net interest income.

     The Company engages in trading activities to meet the financial needs of customers, to fund the Company’s obligations under certain deferred compensation plans and, to a limited extent, to profit from perceived market opportunities. Financial instruments utilized in trading activities have included forward and

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futures contracts related to foreign currencies and mortgage-backed securities, U.S. Treasury and other government securities, mortgage-backed securities, mutual funds and interest rate contracts, such as swap agreements. The Company generally mitigates the foreign currency and interest rate risk associated with trading activities by entering into offsetting trading positions. The amounts of gross and net trading positions, as well as the type of trading activities conducted by the Company, are subject to a well-defined series of potential loss exposure limits established by management and approved by M&T’s Board of Directors. However, as with any non-government guaranteed financial instrument, the Company is exposed to credit risk associated with counterparties to the Company’s trading activities.

     The notional amounts of interest rate contracts entered into for trading purposes totaled $8.1 billion at March 31, 2007, compared with $6.8 billion at March 31, 2006 and $7.6 billion at December 31, 2006. The notional amounts of foreign currency and other option and futures contracts entered into for trading purposes were $678 million at March 31, 2007, compared with $1.2 billion and $613 million at March 31, 2006 and December 31, 2006, respectively. Although the notional amounts of these trading contracts are not recorded in the consolidated balance sheet, the fair values of all financial instruments used for trading activities are recorded in the consolidated balance sheet. The fair values of all trading account assets and liabilities were $154 million and $61 million, respectively, at March 31, 2007, $201 million and $82 million, respectively, at March 31, 2006, and $137 million and $65 million, respectively, at December 31, 2006. Included in trading account assets were assets related to deferred compensation plans totaling $45 million at each of March 31, 2007 and December 31, 2006, and $43 million at March 31, 2006. Changes in the fair values of such assets are recorded as trading account and foreign exchange gains in the consolidated statement of income. Included in other liabilities in the consolidated balance sheet at March 31, 2007 and December 31, 2006 were $49 million of liabilities related to deferred compensation plans, compared with $48 million at March 31, 2006. Changes in the balances of such liabilities due to the valuation of allocated investment options to which the liabilities are indexed are recorded in “other costs of operations” in the consolidated statement of income.

     Given the Company’s policies, limits and positions, management believes that the potential loss exposure to the Company resulting from market risk associated with trading activities was not material, however, as previously noted, the Company is exposed to credit risk associated with counterparties to transactions associated with the Company’s trading activities.

Provision for Credit Losses

The Company maintains an allowance for credit losses that in management’s judgment is adequate to absorb losses inherent in the loan and lease portfolio. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. The provision for credit losses in the first quarter of 2007 was $27 million, compared with $18 million in the year-earlier quarter and $28 million in the fourth quarter of 2006. Net loan charge-offs were $17 million in each of the first quarters of 2007 and 2006, compared with $24 million during the final quarter of 2006. Net charge-offs as an annualized percentage of average loans and leases were .16% in the first

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quarter of 2007, compared with .17% and .23% in the first and fourth quarters of 2006, respectively. A summary of net charge-offs by loan type follows:

NET CHARGE-OFFS
BY LOAN/LEASE TYPE
In thousands

     Loans classified as nonperforming, which consist of nonaccrual and restructured loans, rose to $273 million or .63% of total loans and leases outstanding at March 31, 2007 from $143 million or .35% a year earlier and $224 million or .52% at December 31, 2006. The increase from the end of 2006’s first quarter was due in part to the addition of $40 million of loans to automobile dealers, the majority of which were classified as commercial loans. Also contributing to that increase as well as the rise from the 2006 year-end nonperforming loan total was the first quarter 2007 addition of commercial loans and commercial real estate loans to two relationships totaling $40 million. The first relationship totaling $22 million represents loans to a manufacturer of residential heating equipment. The second relationship for $18 million involves loans to a commercial real estate project in New York City in which the principal owner passed away unexpectedly.

     Accruing loans past due 90 days or more totaled $118 million or .27% of total loans and leases at March 31, 2007, compared with $109 million or .27% at March 31, 2006 and $111 million or .26% at December 31, 2006. Those loans included $71 million, $86 million and $77 million at March 31, 2007, March 31, 2006 and December 31, 2006, respectively, of loans guaranteed by government-related entities. Such guaranteed loans included one-to-four family residential mortgage loans serviced by the Company that were repurchased to reduce associated servicing costs, including a requirement to advance principal and interest payments that had not been received from individual mortgagors. The outstanding principal balances of the repurchased loans are fully guaranteed by government-related entities and totaled $61 million and $66 million as of March 31, 2007 and 2006, respectively, and $65 million at December 31, 2006. Loans past due 90 days or more and accruing interest that were guaranteed by government-related entities also included foreign commercial and industrial loans supported by the Export-Import Bank of the United States that totaled $10 million at March 31, 2007, $20 million at March 31, 2006 and $11 million at December 31, 2006.

     Commercial loans and leases classified as nonperforming aggregated $113 million at March 31, 2007, $38 million at March 31, 2006 and $79 million at December 31, 2006. The increase in such loans from March 31, 2006 was, in part, due to the previously noted loans to automobile dealers, which added $35 million to this category. Continued slowing of domestic automobile sales has resulted in a difficult operating environment for certain automobile dealers, leading to deteriorating financial results. Also contributing to the year-over-year increase, as well as comprising the majority of the rise in nonperforming commercial loans from December 31, 2006 was the recent quarter’s addition of outstanding commercial loans to the two previously described relationships totaling $25 million.

     Nonperforming commercial real estate loans totaled $64 million at March 31, 2007, $37 million at March 31, 2006 and $57 million at December 31, 2006. The rise in such loans from the end of the first quarter of 2006 was due in part to the recent quarter addition of $5 million of commercial real estate loans to automobile dealers and $15 million of commercial real estate loans

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to the two relationships already discussed. That latter addition to the nonperforming commercial real estate loan total at December 31, 2006 was partially offset by a $10 million commercial real estate loan classified as nonperforming at the 2006 year-end that was paid off in January 2007.

     Residential real estate loans classified as nonperforming were $50 million at March 31, 2007, compared with $30 million at March 31, 2006 and $42 million at December 31, 2006. Residential real estate loans past due 90 days or more and accruing interest totaled $96 million at March 31, 2007, compared with $82 million a year earlier and $92 million at December 31, 2006. As already noted, a substantial portion of such amounts relate to guaranteed loans repurchased from government-related entities.

     Nonperforming consumer loans and leases totaled $46 million at each of March 31, 2007 and December 31, 2006, compared with $38 million at March 31, 2006. As a percentage of consumer loan balances outstanding, nonperforming consumer loans and leases were .47% at March 31, 2007, compared with .38% and .46% at March 31, 2006 and December 31, 2006, respectively.

     Assets acquired in settlement of defaulted loans were $15 million at March 31, 2007, compared with $10 million at March 31, 2006 and $12 million at December 31, 2006.

     A comparative summary of nonperforming assets and certain past due loan data and credit quality ratios as of the end of the periods indicated is presented in the accompanying table.

NONPERFORMING ASSET AND PAST DUE LOAN DATA
Dollars in thousands