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IT'S LONELY OUT THERE -- BUT M&T HAS NO PLANS TO CHANGE ITS 9.75% PRIME

M&T Bank's move to lower its prime rate a quarter percentage point was expected by some banking industry watchers to help establish a trend toward lower rates nationwide.

Now, a week later, M&T remains one of just three financial institutions to have dropped their prime rate, the interest rate charged to their best customers, to 9.75 percent from 10 percent.

Many analysts now feel the trio could be alone in their rate decrease for the foreseeable future, citing the tremendous pressures on the banking industry's collective bottom line as forcing other banks to stick to the higher rate.

"I think other banks will go kicking and screaming into lowering their prime rate," said Don Kauth, a banking analyst with First Albany Corp. "The banks are trying to maintain their spreads, and the pressure on their bottom lines is so great they will continue to charge a premium to those looking for loans."

On Dec. 7, just hours after the government announced that the national unemployment rate had jumped to 5.9 percent in November, the Federal Reserve Bank went into the money markets and purchased $1.5 billion worth of Treasury securities, adding funds to the banking system and signaling its intention to push rates lower.

As a result, the federal funds rate, the overnight rate at which banks lend funds to each other, dropped a quarter-point, to 7.25 percent. The spread between the fed funds rate and the prime thus increased to 2.75 percent -- historically unusually high.

M&T joined Southwest Bank of St. Louis, which historically is a leader in reducing rates, and New Jersey-based First Fidelity Bancorp, the nation's 20th-largest banking company, in the move to the lower prime rate.

M&T Senior Vice President Gary Paul said his institution has no plans to return to a 10 percent prime despite the fact that nobody else is following its lead. It certainly has no pressures on its overall financial position; its parent, First Empire State Corp., recently was ranked as the safest banking institution of 86 measured by Shearson Lehman Brothers.

"The spread for us between the Fed funds rate and prime is 2.5 percent," Paul said. "We've passed on to our customers some of the spread we're enjoying."

A lower prime also may allow M&T to grab quality business from its competition, although Paul said it is too early to determine if that had yet been the case.

First Albany's Kauth said he doesn't see any bank following the lead of M&T, Southwest or First Fidelity before fourth-quarter earnings are released, pointing to those as a reason to retain the 10 percent prime.

"Banks will try to hold on to the spreads for as long as they can," Kauth said. "Many are loath to add loans; in fact, they're trying to downsize (shed loans) rather than increase the size of their portfolio."

While the prime rate applies to a bank's best corporate customers, it also influences consumers via such products as home equity loans that are tied to the rate.

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