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M&T profits rise 4 percent Loan growth helps boost earnings

M&T Bank Corp. said fourth-quarter profits rose 4 percent, as higher loans in the Mid-Atlantic, more low-cost deposits in Upstate New York, and cost control overcame bad loans and problems among car dealers.

The Buffalo-based banking company reported earnings of $213.3 million, or $1.88 per share, up from $205 million, or $1.78 a share, a year earlier. That matched the expectations of Wall Street analysts.

Profits for the full year rose 7 percent to $839 million from $782 million in 2005. Per-share earnings rose 10 percent, to $7.37 per share from $6.73 per share. Total assets increased 3.6 percent to $57.1 billion.

"From our perspective, there were really no surprises," said M&T Chief Financial Officer Rene Jones. "Ten percent growth in a year when there's been a lot of noise about the tough environment for banks is doing pretty well."

He expects conditions to remain generally the same in 2007, with similar, modest growth in loans and revenues. "This will require us to carefully manage our expenses," he said.

Shares fell $1.26 to $121.42.

"It looked like a pretty good quarter. We were pretty encouraged by the results," said Adam C. Barkstrom, managing director of financial services research at Stifel Nicolaus & Co.

Most banks have been struggling for several quarters because of an unusual situation in which short-term rates have risen faster than long-term rates. Banks make money by borrowing or paying interest on deposits in the short-term and lending long-term, so profit margins have tightened considerably.

Still, M&T was able to increase its net interest margin slightly, because prepayment penalties on loans more than doubled from the third quarter to $7.5 million and the bank had a better mix of high-rate loans and low-cost deposits. So net interest income from taking indeposits and making loans rose 4 percent to $471.8 million.

Average loans during the quarter rose to $42.5 billion in the three-month period, up 7 percent annualized from the end of the third quarter and up 5 percent from a year ago, led by a 38 percent annualized increase in consumer mortgages. Annualized means the quarterly rate of increase is multiplied by four to reflect a full year's pace.

Seasonal paydowns of credit lines and slack demand for car dealer floor plan loans kept business loan growth to 3 percent annualized, while commercial real estate rose 6 percent. The pipeline of commercial loans rose to $1.6 billion from $1.4 billion at the end of the third quarter. Consumer loans fell 2 percent, as home equity and products dependent on variable rates remained slow.

At the same time, the bank allowed some high-rate certificates of deposit from an earlier acquisition to run off, contributing to a 15 percent annualized drop in CDs. An expected shift of money by consumers from CDs into more fluid savings and money market accounts also started a quarter earlier than M&T expected.

"It just makes less sense for them to shift money into time deposits and lock it up for a while because there's uncertainty about where interest rates are going," Jones said. "It's a very natural shift."

While the company posted its 13th straight year of double-digit profit hikes, it set aside $28 million for loan losses and wrote off $24 million as uncollectible, up from a year ago. Bad loans rose 43 percent to $224 million, led by $41 million in four loans to car dealers.

Two of them, to New York dealers, went sour in the fourth quarter, adding $13 million to bad loans. The other two, in Pennsylvania, went bad in the second and third quarters. "We realize that it's a tough time for some of the auto dealers because of some of the slow sales of domestic cars," Jones said.

Loans for $14 million to two assisted-living facilities in New York also went bad during the quarter, but one of those, for $10.6 million, was paid off in January.

"It's indicative of generally more broad deterioration in the markets," said Jennifer Thompson, analyst at Oppenheimer & Co.

"We've said for some time now that things have been extremely positive on the credit side, and that couldn't continue," Jones said. "By historical standards, credit quality is very strong."


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