Non-performing loans and foreclosures contributed to a 25% drop in net income for M&T Bank ( MTB).

The Buffalo, N.Y.-based bank, which posted second-quarter results Monday, is the first in a line of regional banks reporting and its report could serve as an indicator of what's to come from the sector during the earning's season.

M&T was able to report a profit of $1.44 a share as opposed to a losing quarter like the major banks posted, but it was still a far cry from last year's $1.95 a share and the results missed analyst expectations of $1.50 a share, according to Thomson Reuters. Net income came in at $160 million, vs. $214 million for second quarter 2007.

CFO Rene Jones observed in a company statement, "While M&T is not immune to the effects of the higher credit costs evident throughout the banking industry as we move through the current credit cycle, we, nevertheless, recorded significant profits during the quarter."

It also recorded significant late loans, which jumped to $587 million from $296 million a year ago. The bank insisted that the numbers grew as a result of an accounting change that makes the bank recognize non-performing loans as those that are 90 days late as opposed to waiting until the loans were 180 days past due. But it did concede that loans to residential builders that were late in making payments also contributed.

M&T also has had to digest some $53 million in assets taken in foreclosure, a huge increase over last year's $18 million, also attributed to residential real estate loan defaults. The provision for credit losses increased to $100 million in the second quarter of 2008, from $30 million in the year-earlier quarter.

Some $38 million of the net charge-offs recorded in the recent quarter were related to loans to builders and developers of residential real estate, while there were no such loans charged off in the year-earlier quarter and just $3 million in the first quarter of 2008.

In addition to the loan charge-offs were the associated home equity loans and lines of credit against homes, which totaled $9 million in the recent quarter and included $5 million related to Alt-A second mortgage loans. That compares to charging off only $2 million last year for the second quarter.

On a positive note, M&T had total assets of $65.9 billion at the end of the second quarter, up from $57.9 billion last year. Growth in average loans and leases, which rose 14% to $49.5 billion in the recent quarter from $43.6 billion in the second quarter of 2007, was the most significant contributor to the improvement. The bank paid $2.60 in dividends in 2007 and made no mention about future dividends in the earnings release.

The stock has dropped 37% in value over the last 12 months, but the drop is not as severe as some other regional banks. Mid-cap bank KeyCorp ( KEY) has plunged 72% in value over the last year and is reporting its earnings next week. Small-cap bank PacWest ( PACW) will be reporting its numbers on Monday and should give the markets a glimpse into the situation on the West Coast. PacWest is off by 74% for the year.

M&T Bank was dropping in recent trading Monday, losing $11.05, or 15.9%, to $58.65.

Standard & Poor's analyst Erik Oja, who has a hold rating on the bank and an $85 price target for the stock, believes that the profit outlook may begin to improve in the latter half of 2008. He thinks that several regional banks will not need to raise additional capital or cut their dividends.

"For most banks, we also expect the growth of nonperforming loans to slow, which we think would be a positive for the industry," wrote Oja.

The large-cap banks haven't fared as well as some of the regional banks, with firms like Citigroup ( C) and Wachovia ( WB) turning in losses for the first quarter and not expected to do much better in the second.

On M&T's conference call, Jones said that commercial real estate had been fairly solid. He also noted that he doesn't expect charge-offs to abate anytime soon. "I expect that we'll have a couple of quarters like we've seen. Two, three. We're slogging through it."