Shares of both lenders fell.
The problems may foreshadow weakness at other large U.S. banks, nearly all of which are expected to report lower fourth-quarter results this month.
Some are expected to post losses, including the largest U.S. bank, Citigroup
Buffalo, New York-based M&T, which counts Warren Buffett's Berkshire Hathaway
Results were hurt by losses of $78 million, or 71 cents per share, to write down collateralized debt obligations tied to mortgages, and $29 million, or 27 cents per share, for other credit losses.
Excluding several items, profit was $1.52 per share, 33 cents below the average analyst forecast, according to Reuters Estimates.
"Turmoil in the residential real estate market" hurt results, Chief Financial Officer Rene Jones said on a conference call. "It is difficult to predict the depth and breadth of the current credit cycle."
Philadelphia-based Sovereign, the second-largest U.S. savings and loan, announced $1.58 billion of write-offs. It wrote down $600 million of goodwill tied to consumer lending, and $800 million of goodwill related to its 2006 purchase of Brooklyn, New York's Independence Community Bank, where revenue and deposit growth has been slower than expected.
Sovereign also wrote down $180 million for preferred stock investments in mortgage financiers Fannie Mae
"We're significantly increasing our reserves to prepare for what we think could be weakening credit in 2008," Chief Financial Officer Mark McCollom said in an interview.
M&T has $64.9 billion in assets and more than 650 branches in seven mid-Atlantic states and Washington, D.C. Sovereign had about $86.6 billion of assets as of Sept 30 and operates 750 branches in eight northeast and mid-Atlantic states.
Both also have large foreign investors. Allied Irish Banks
Berkshire owned a roughly 6.3 percent stake in M&T as of Sept 30, according to Thomson ShareWatch.
In morning trading on the New York Stock Exchange, M&T shares fell $2.22, or 3 percent, to $71.53, while Sovereign shares fell 53 cents, or 5 percent, to $10.15.