thereafter at a rate of 9% per year. The senior preferred securities may not be redeemed for three years except with the proceeds of a "qualifying equity offering." After three years, the securities may be redeemed, in whole or in part, at par value plus accrued and unpaid dividends. The senior preferred securities are non-voting and they qualify as Tier 1 capital for regulatory reporting purposes. Treasury will also receive warrants to purchase the common stock of the participating financial institutions having a market price of 15% of the amount of senior preferred securities on the date of investment with an exercise price equal to the market price of the participating institution's common stock at the time of issuance, calculated on a 20-trading day trailing average. The warrants have a term of ten years and are immediately exercisable, in whole or in part. For a period of three years, the consent of the Treasury will be required for participating institutions to increase their common stock dividend or repurchase their common stock, other than in connection with benefit plans consistent with past practice. Participation in the capital purchase program also includes certain restrictions on executive compensation. The minimum subscription amount available to a participating institution is one percent of total risk-weighted assets. The maximum subscription amount is three percent of risk-weighted assets. At September 30, 2008, M&T's risk-weighted assets were approximately $57.6 billion. Financial institutions have until November 14, 2008 to decide whether to apply for participation in the capital purchase program.
Following a systemic risk determination pursuant to the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation ("FDIC") announced a Temporary Liquidity Guarantee Program ("TLGP"), which temporarily guarantees the senior debt of all FDIC-insured institutions and certain holding companies, as well as deposits in noninterest-bearing deposit transaction accounts, for those institutions and holding companies who do not elect to opt out of the TLGP by December 5, 2008. To further increase access to funding for businesses in all sectors of the economy, the Federal Reserve Board announced a Commercial Paper Funding Facility ("CPFF") program, which provides a broad backstop for the commercial paper market. Beginning October 27, 2008, the CPFF began funding purchases of commercial paper of three-month maturity from high-quality issuers. 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 $3.4 billion at each of September 30, 2008 and December 31, 2007, and $3.1 billion at September 30, 2007. Included in such intangible assets was goodwill of $3.2 billion at each of September 30, 2008 and December 31, 2007, and $2.9 billion at September 30, 2007. Amortization of core deposit and other intangible assets, after tax effect, totaled $10 million ($.09 per diluted share) during each of the third quarters of 2008 and 2007, and during the second quarter of 2008. For each of the nine-month periods ended September 30, 2008 and 2007, amortization of core deposit and other intangible assets, after tax effect, totaled $31 million ($.28 per diluted share).
M&T consistently provides supplemental reporting of its results on a "net operating" or "tangible" basis, from 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) and expenses associated with merging 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 was $101 million in 2008's third quarter, compared with $209 million in the year-earlier quarter. Diluted net operating earnings per share for the recent quarter were $.91, compared with $1.92 in the third quarter of 2007. Net operating income and diluted net operating earnings per share were $170 million and $1.53, respectively, in the second quarter of 2008. For the first three quarters of 2008, net operating income and diluted net operating earnings per share were $487 million and $4.39, respectively, compared with $620 million and $5.62 in the corresponding 2007 period.
Net operating income expressed as an annualized rate of return on average tangible assets was .65% in the recently completed quarter, compared with 1.51% in the third quarter of 2007 and 1.10% in 2008's second quarter. Net operating income expressed as an annualized return on average tangible common equity was 13.17% in the recent quarter, compared with 26.80% in the third quarter of 2007 and 22.20% in the second quarter of 2008. For the nine-month period ended September 30, 2008, net operating income represented an annualized return on average tangible assets and average tangible common stockholders' equity of 1.05% and 21.10%, respectively, compared with 1.52% and 26.74%, respectively, in the first nine months of 2007.
Reconciliations of GAAP amounts with corresponding non-GAAP amounts are provided in table 2.
Taxable-equivalent Net Interest Income
Taxable-equivalent net interest income was $493 million in the third quarter of 2008, 4% higher than $473 million in the year-earlier quarter, but little changed from $492 million in the second quarter of 2008. The rise from 2007's third quarter resulted from higher average earning assets, which increased $6.6 billion, or 13%, to $58.0 billion from $51.3 billion in the third quarter of 2007, partially offset by a 26 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 Company's net interest margin was 3.39% in each of the second and third quarters of 2008, compared with 3.65% in the third quarter of 2007. Average earning assets in the second quarter of 2008 totaled $58.5 billion.
For the first nine months of 2008, taxable-equivalent net interest income was $1.47 billion, up 5% from $1.40 billion in the similar period of 2007. Growth in average earning assets of $7.0 billion, or 14%, was the leading factor contributing to that improvement. Partially offsetting the positive impact of average earning asset growth was a decline in the Company's net interest margin of 28 basis points to 3.38% in 2008 from 3.66% in 2007. Earning assets obtained in the fourth quarter 2007 acquisition transactions related to Partners Trust and First Horizon at the respective acquisition dates were $3.1 billion and $214 million. Included in those amounts were loans aggregating $2.4 billion, including $259 million of commercial loans and leases, $343 million of commercial real estate loans, $1.1 billion of residential real estate loans and $690 million of consumer loans. Of the $1.1 billion of residential real estate loans acquired, approximately $950 million were securitized into Fannie Mae mortgage-backed securities in December 2007.
Average loans and leases rose $4.7 billion, or 11%, to $48.5 billion in the recently completed quarter from $43.8 billion in the third quarter of 2007. Average commercial loan and lease balances grew $1.6 billion, or 13%, to $13.9 billion in the recent quarter from $12.2 billion in 2007's third quarter. Commercial real estate loans averaged $18.6 billion in the third quarter of 2008, up $3.1 billion or 20% from $15.5 billion in the year-earlier quarter. Average outstanding residential real estate loans declined $951 million or 16% to $5.0 billion in the recently completed quarter from $5.9 billion in the

third quarter of 2007, largely due to securitization transactions in late June and early July 2008, which aggregated approximately $875 million. In those transactions, residential real estate loans were securitized into Fannie Mae mortgage-backed securities which now are held in the Company's available-for-sale investment securities portfolio. The securitizations were completed to improve the Company's liquidity and to enhance regulatory capital ratios. Consumer loans averaged $11.1 billion in the third quarter of 2008, $953 million or 9% higher than $10.1 billion in the year-earlier quarter.
Average outstanding loan balances declined $1.0 billion from the second to the third quarter of 2008, largely due to the June and July 2008 residential real estate loan securitization transactions noted above. Relatively modest increases or decreases were experienced in the other loan categories during the third quarter of 2008 as compared with 2008's second quarter. The following 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

                                                          Percent increase
                                                          (decrease) from
                                       3rd Qtr.      3rd Qtr.         2nd Qtr.
                                         2008          2007             2008
         Commercial, financial, etc.   $  13,882            13 %              1 %
         Real estate - commercial         18,557            20                -
         Real estate - consumer            4,964           (16 )            (18 )
         Consumer
         Automobile                        3,498            15               (4 )
         Home equity lines                 4,517             9                3
         Home equity loans                 1,038            (6 )             (5 )
         Other                             2,021            10               (4 )

         Total consumer                   11,074             9               (1 )

         Total                         $  48,477            11 %             (2 )%

For the first three quarters of 2008, average loans and leases aggregated $48.9 billion, up 12% from $43.5 billion in the corresponding 2007 period. Growth of 13% in commercial loans and leases, 18% in commercial real estate loans and 12% in consumer loans were significant contributors to that growth.
The Company's portfolio of investment securities averaged $9.3 billion in the recent quarter, 28% higher than $7.3 billion in the year-earlier quarter. That growth was predominantly the result of the 2007 and 2008 securitization transactions previously noted. In December 2007, approximately $950 million of residential real estate loans obtained in the Partners Trust acquisition were securitized into Fannie Mae mortgage-backed securities, and in June and July 2008, approximately $545 million and $330 million, respectively, of residential real estate loans were also securitized into Fannie Mae mortgage-backed securities. The securities created in each of the securitizations are guaranteed by Fannie Mae and there is no credit recourse to the Company. The Company recognized no gain or loss on the transactions as all of the securities were retained and are held in the available-for-sale investment securities portfolio. The securitizations were completed to improve the Company's liquidity position and to enhance regulatory capital ratios. Average investment securities balances in the third quarter of 2008 were up 6% from $8.8 billion during the second quarter of 2008 due to the June and July securitizations. For the first nine months of 2008 and 2007, average investment securities were $9.0 billion and $7.1 billion, respectively.
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 and federal agency notes. When purchasing investment securities, the Company considers its overall interest-rate risk profile as well as the adequacy of expected returns relative to the risks assumed, including credit and prepayment risk. In managing the investment securities portfolio, the Company occasionally sells investment securities as a result of changes in interest rates and spreads, actual or anticipated prepayments, credit risk associated with a particular security, or as a result of restructuring its investment securities portfolio following completion of a business combination.
During the recent quarter, the Company purchased a $142 million AAA-rated private placement mortgage-backed security that had been securitized by Bayview Financial Holdings, L.P. (together with its affiliates, "Bayview Financial"). Bayview Financial is a privately-held company and is the majority investor of Bayview Lending Group LLC ("BLG"). M&T owns 20% of BLG. Upon purchase, the security was placed in the Company's held-to-maturity portfolio, as management determined that it had the intent and ability to hold the security to maturity. Management subsequently reconsidered whether certain other similar private placement mortgage-backed securities securitized by Bayview Financial and held in the Company's available-for-sale portfolio should more appropriately be in the held-to-maturity portfolio. Concluding that it had the intent and ability to hold those securities to maturity as well, the Company transferred private collateralized mortgage obligations having a fair value of $298 million and a cost basis of $385 million from its available-for-sale investment securities portfolio to the held-to-maturity portfolio.
The Company regularly reviews its investment securities for declines in value below amortized cost that might be characterized as "other than temporary." As previously discussed, during the third quarter of 2008 the Company recognized an other-than-temporary impairment charge of $153 million related to its holdings of preferred stock of Fannie Mae and Freddie Mac. An other-than-temporary impairment charge of $6 million was also recognized in the second quarter of 2008 on one collateralized mortgage obligation backed by option adjustable rate residential mortgages that had an amortized cost of $7 million. Finally, during 2007's fourth quarter, the Company recognized other-than-temporary impairment charges of $127 million related to $132 million of collateralized debt obligations. As of September 30, 2008 and December 31, 2007, the Company concluded that the remaining declines associated with the rest of the investment securities portfolio were temporary in nature. That conclusion was based on management's expectations about future cash flows associated with individual investment securities as of each respective date. A further discussion of market values of investment securities is included herein under the heading "Capital." 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 $191 million, $315 million and $173 million for the quarters ended September 30, 2008, September 30, 2007 and June 30, 2008, respectively. Reflected in those balances were purchases of investment securities under agreements to resell which averaged $90 million, $236 million and $88 million during the three-month periods ended September 30, 2008, September 30, 2007 and June 30, 2008, respectively. Agreements to resell securities, which aggregated $90 million at September 30, 2008 and matured on the next business day, are accounted for similar to collateralized loans, with changes in the market value of the collateral monitored by the Company to ensure sufficient coverage. For the nine-month periods ended September 30, 2008 and 2007, average balances of other earning assets declined to $192 million from $401 million due to lower average balances of agreements to resell securities. 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, collateral requirements for certain deposit, borrowing or interest rate swap agreements, ongoing repayments, the levels of deposits, and management of balance sheet size and resulting capital ratios.
As a result of the changes described herein, average earning assets rose 13% to $58.0 billion in the third quarter of 2008 from $51.3 billion in the similar quarter of 2007. Average earning assets were $58.5 billion in the second quarter of 2008 and totaled $58.0 billion and $51.0 billion for the nine-month periods ended September 30, 2008 and 2007, respectively.
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 banking subsidiary of M&T, are also included in core deposits. Average core deposits totaled $31.6 billion in the third quarter of 2008, compared with $28.3 billion in the year-earlier quarter and $31.6 billion in the second quarter of 2008. The Partners Trust and First Horizon acquisition transaction in 2007's fourth quarter added approximately $2.0 billion of core deposits at acquisition. The following table provides an analysis of quarterly changes in the components of average core deposits. For the nine-month periods ended September 30, 2008 and 2007, core deposits averaged $31.3 billion and $28.4 billion, respectively. Core deposits totaled $32.6 billion at September 30, 2008, compared with $32.3 billion at June 30, 2008 and $30.7 billion at December 31, 2007.

AVERAGE CORE DEPOSITS

      Dollars in millions                                   Percent increase
                                                             (decrease) from
                                         3rd Qtr.       3rd Qtr.         2nd Qtr.
                                           2008           2007             2008
      NOW accounts                       $     484              4 %             (5 )%
      Savings deposits                      18,012             22                -
      Time deposits less than $100,000       5,438             (3 )             (2 )
      Noninterest-bearing deposits           7,673              4                1

      Total                              $  31,607             12 %              - %

Domestic time deposits of $100,000 or more, deposits originated through the Company's offshore branch office, and brokered deposits provide additional sources of funding for the Company. Domestic time deposits over $100,000, excluding brokered certificates of deposit, averaged $2.4 billion in the third quarter of 2008, compared with $2.5 billion and $2.2 billion in the year-earlier quarter and the second quarter of 2008, respectively. Offshore branch deposits, primarily comprised of balances of $100,000 or more, averaged $3.8 billion for the most recent quarter and $4.3 billion for each of the three-month periods ended September 30, 2007 and June 30, 2008. Brokered time deposits averaged $1.5 billion in the recent quarter, compared with $1.8 billion in the third quarter of 2007 and $1.4 billion in 2008's second quarter. 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 $70 million of brokered time deposits. The Company also had brokered money-market deposit accounts which averaged $179 million during 2008's third quarter, compared with $87 million and $124 million during the corresponding quarter of 2007 and second quarter of 2008, respectively. 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 those deposits, and the cost of funds and/or maturities associated with alternative funding 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 $5.4 billion in the recently completed quarter, compared with $5.2 billion in the third quarter of 2007 and $6.9 billion in the second quarter of 2008. Included in short-term borrowings were unsecured federal funds borrowings, which generally mature daily and averaged $4.4 billion in the third quarter of 2008, $4.5 billion in the year-earlier quarter and $5.0 billion in the second quarter of 2008. 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 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 special purpose subsidiary, the loans and the borrowings are included in the consolidated financial statements of the Company. Average short-term borrowings in 2008's third quarter included $239 million of borrowings from the FHLB of New York, compared with $16 million and $729 million in the third quarter of 2007 and second quarter of 2008, respectively.
Long-term borrowings averaged $12.7 billion in the recent quarter, compared with $8.7 billion and $11.4 billion in the third quarter of 2007 and 2008's second quarter, respectively. Included in average long-term borrowings were amounts borrowed from the FHLBs totaling $7.7 billion in the recent quarter, $4.5 billion in the third quarter of 2007 and $6.5 billion in the second quarter of 2007, and subordinated capital notes of $1.9 billion in the two most recent quarters and $1.5 billion in the third quarter of 2007. M&T issued $400 million of subordinated notes in December 2007, in part to maintain appropriate regulatory capital ratios. Junior subordinated debentures associated with trust preferred securities that were included in average long-term borrowings were $1.1 billion in the two most recent quarters and, $714 million in the quarter ended September 30, 2007. During January 2008, M&T Capital Trust IV issued . . .