It is our custom to begin these meetings with the news of the day—and that has historically meant the quarterly earnings report. But the postponement of this meeting from its usual date in mid-April means that we are now in mid-quarter and there are no new numbers to present. In their place, however, there is other news—and that involves the progress we are making in our latest, and largest, acquisition, which I’ve just mentioned, that of Allfirst.
So important is this step to the future of the company that we held off convening this meeting until it was concluded. I am happy, therefore, to report, that, after obtaining the necessary approvals from shareholders and regulators, the Allfirst acquisition was, indeed, completed on April first. I have previously noted but would remind you today of the magnitude of this transaction. Because of it, M&T, which was the 32nd largest publicly-traded bank holding company based in the U.S., is now ranked among the top 20. We have added 269 branches to our network. Indeed, Allfirst alone was bigger than was the whole of M&T as recently as March of 1998.
The process of integrating Allfirst into M&T is now well underway. Our goal, of course, is to join the M&T approach to doing business with the historic strengths of Allfirst, just as we have done previously with Keystone, Onbank, Premier and others. As we approach this task, we are well aware, and grateful, that, we are acquiring, in Allfirst, much more than branches and deposits.
The most important part of this deal is the experienced workforce which comes with it. Allfirst was built on the foundation of three of the most-respected banks in the mid-Atlantic region —The First National Bank of Maryland, The York Bank and Trust Company and Dauphin Deposit Bank and Trust Company. We are inheriting a workforce with long experience and deep roots in its communities. These employees are already proving their value to M&T and we welcome them.
We well understand, however, that we would do them no service by failing to provide guidance as to our traditions and procedures. To help in this merger of cultures, we have already relocated 35 M&T employees to Baltimore and other former Allfirst locations. These employees come from across the company—from departments such as credit, capital markets, loan review, human resources, consumer lending, the telephone banking center, M&T Securities and the Trust and Investment Services Division.
We expect to deploy at least one employee to help at each Allfirst branch, as well as deploying a corps of roving trouble-shooters, to help with the conversion process, which is set to begin July 4. The chief operating officer in M&T’s Mid-Atlantic division is Atwood Collins, who has previously served as president of our New York City and Hudson Valley divisions, and who has already moved to Baltimore to join the executive team led by former Allfirst Chairman Sheehy. Overall, then, I’m here to report that we’re off to a great start—and the best is yet to come.
One cannot discuss the general state of this company without distinguishing it from others about which we’ve heard a good deal lately. We live in a time in which we’ve learned that corporate shenanigans, and much worse, occur all too frequently. Deceptions and self-dealings of many kinds have victimized shareholders, customers and entire communities, including some of those we serve. I’d like to take this occasion to remind you that such practices have not had, and never will have, any place at this company. It is not enough, however, to have zero tolerance for bad practices.
We at M&T strive to follow the ¬best practices—to be good corporate citizens and to be constructive members of our communities, at the same time serving the interests of our shareholders and employees. In this man’s admittedly less-than-objective view, I think we’re doing well on all counts. Let me try to cite some of the justifications for making such a claim.
Our corporate governance and accounting are second to none—and, at the same time, they continue to improve as times and expectations change. We have never engaged in the adoption of anti-takeover provisions, such as the staggered elections of board members or establishing different classes of common stockholders with differentially-weighted voting rights. We have, in fact, specifically opted-out of the New York State anti-takeover law, thus forswearing even those anti-takeover strategies permitted by state law.
In another area of great current interest, we have taken care to limit executive compensation. In recognition of the fact that the company’s results last year, although better than those at many of our peer institutions, nonetheless came up short compared to plan, neither M&T Bank president Bob Sadler nor I received increases in salary or bonus, nor were we granted any new stock options. Furthermore, M&T does not allow for the repricing of previously-granted options should share price decline. We have, moreover, never issued any so-called restricted stock, which, in contrast to stock options, effectively guarantees those employees who receive it some profit upon resale, even if the share price has declined.
As you know, we have begun, as of January 1, to account for the value of stock-based compensation as an operating expense. Although 15 of the top 30 banks in the United States have also decided to adopt this practice, we are the only ones doing so retroactively. In other words, we will not only account for expenses related to current year stock option grants but also for those options granted in previous years that vest in the current year. And we will restate prior years’ results to reflect the expense that would have been recognized in those years had the same method been used. We believe these steps, taken together, represent the best way to help the investment community make well-informed comparisons about our year-to-year performance.
Important changes such as these reflect the fact--and this is crucial--that we continue to consider, and re-consider, what the right ways are to conduct business. We’re currently engaged, for instance, in a friendly internal debate--I like to call it a Cartesian dialogue--as to whether we should continue to provide earnings guidance for those who follow our stock professionally. Should we continue to provide annual guidance for the investment community, as we have? Should we go farther and provide such guidance quarterly? Or should the possibility of providing faulty guidance, or that even sound guidance might be misinterpreted, lead us to abandon the practice altogether?
A dramatic change in our practice is unlikely—but my larger point here is to underscore the fact that vigorous and open debate about such matters typifies the M&T culture. This helps guard against the sorts of manipulations we have, sadly, seen elsewhere.
As important as is our responsibility for honest and transparent governance and accounting, we have other corporate responsibilities, as well. Notable among these is our responsibility to the communities we serve. We must keep in mind that M&T is simply not a small company any longer. We are among the very largest corporations headquartered in the upstate New York region—the second largest as measured by market capitalization.
To put this in some perspective, remember that, in 1982, our market cap represented a mere six percent of the total for publicly-traded companies headquartered in western New York; at the beginning of this month, it represented 67 percent. Put another way, M&T’s market capitalization was greater than Corning, Bausch & Lomb and National Fuel Gas combined. We are the fourth-largest bank headquartered in the state of New York—and when you keep in mind that that includes New York City, you quickly realize that we’re running in some fast company.
We’re confident that we are ready to play in this league, having taken the steps necessary, over many years, to assemble the best possible team in the U.S. banking industry. To remain at this high level, we know that, first and foremost, we must never fail to encourage and reward the talented and ambitious who are already in our ranks, no matter at what level they currently work. Those who know our customers and our systems are in the best position to tell us how to improve the latter to better serve the former.
At the same time we look to promote from within, however, we know, too, that new blood can bring with it new ideas and new approaches. With that in mind we have invested more than $25 million over the past 20 years on executive recruiters and relocation expenses, an investment that helped bring in top banking professionals from around the country. And we have successfully recruited some of the best and brightest university graduates—both from leading national and regional schools—into our management ranks. We’ve hired each year, on average, 12 to 15 MBAs and two to three dozen BAs, specifically for our management development programs. Such recruitment is ongoing.
Even as we take pride in our growth, however, we recognize that size and success bring with them other responsibilities, as well. First, there is the obligation to serve all communities in our market area—and our outstanding Community Reinvestment Act rating reflects our commitment to doing so. But we also understand the need to serve our communities in ways that go beyond the manner in which we do business. Because of that, we encourage M&T employees to play leadership roles in their communities. More than 1,600 M&T employees have volunteered their services in support of more than 2,000 community and not-for-profit organizations in M&T’s markets in New York State, Pennsylvania, West Virginia and Maryland.
Our employees provide volunteer labor for organizations that feed the hungry, discourage drug use, protect historic sites, and improve the environment. All our employees can be assured of the enthusiastic support of this company in their outside volunteer work. What’s more, the company itself, through its corporate philanthropy, last year provided $8.l million to 1,507 not-for-profit organizations. And we recognize that we have inherited important philanthropic responsibilities as part of the merger with Allfirst, which, last year, itself provided $4.8 million to 1,158 non-profits.
At the same time we encourage employees to assist our communities, we understand that M&T itself is a community. In fact, when we last checked¬, there were more than 200 M&T employees who have members of their families also working at the company. This is just one of many indicators that tell us that our employees find M&T to be a good place to work, a place they are willing to recommend to others, a place they would like their children to work, as well.
Indeed, we strive to make the company as employee-friendly a workplace as we can. It is that goal that has led us to initiate what we call the M&T Commitment, our pledge to try to make M&T one of the best companies in America for which to work. That initiative formally began in early 2001 with a survey of employee opinions and concerns. The results did not just sit on the shelf; they have already led to new programs. For instance, more flexible work schedules have begun to help our employees balance their personal and professional lives.
As of the end of last calendar year, 686 M&T employees have taken advantage of the chance to work a flexible or compressed work schedule. Another key part of the M&T Commitment, the employee stock purchase plan we initiated in September of last year, has already helped make it possible for more than 2,400 M&T employees to use payroll deductions toward the purchase of shares in the company, at a ten percent discount.
The M&T Commitment is not a one-time project. Being employee-friendly is a continuing process. We will shortly re-survey employees to gauge the impact of our efforts to date—and to solicit new suggestions as to how we can improve the work environment of our employees.
Of course, as important as it is to be an employee-friendly firm, we are all-too- familiar these days with those which have been too employee friendly—or at least too friendly to a few employees, at the expense of shareholders. This has not been the case at M&T. The honest and transparent governance mentioned previously is just one way in which we are not only employee-friendly but shareholder-friendly.
Appreciation in the value of shares is, of course, another way. Allow me to put this in some perspective. If you had been so fortunate as to invest $4,400 in M&T shares in 1980, your investment would today be worth more than one million dollars. Among all US companies which have been publicly-traded continuously since 1980, our rate of stock appreciation, 25.5% compounded per annum, including dividend reinvestment, ranks 9th, as of the end of the first quarter of this year. Among publicly-traded bank holding companies, our stock appreciation ranked second.
Another way to look at these figures is this: a great many of our employees own our stock and our stock has appreciated a great deal, making for a virtuous circle. Employees have an incentive to do their best—and, thanks to stock performance, they have been rewarded for doing so.
This talk would not be complete were I not to address issues which transcend the company, however. I have, as many of you know, long taken a special interest in our headquarters city of Buffalo. I’d be less than candid were I not to admit that some of my colleagues cringe when I start to express my views on matters of local governance and politics, lest I alienate either elected officials or customers. But as Dante wrote, that one of the hottest places in hell is reserved for those who take a position of neutrality in a time of crisis. And this is, without a doubt, a time of crisis in Buffalo. For indeed, Buffalo today faces financial difficulties of historic proportions.
On the surface, it may appear that bold steps are being taken to address this problem. Some, I know, would argue that much is being done, noting that were the Common Council to adopt next year’s recommended budget without change, the result would be a city government with 800 fewer positions than that of ten years ago. They will point, as well, to the fact that many full-time employees have been replaced by part-time, seasonal workers, or that expenses have been reduced by replacing high-cost employees with those of lower cost.
This is all well and good. But facts are facts. And the fact is that city government continues to be too big and too costly—and would continue to be so even if proposed budget reductions are approved. For over the past 10 years, even as the population of the city has continued its decline, city government has remained big and grown ever more costly.
In June of 1992, when the city’s population was just 323,000, there were 3,722 city employees, or 1,152 employees for every 100,000 residents. By June 2002, Buffalo was a city of an estimated 284,500 but still had 3,429 employees—or 1,205 per hundred thousand residents. That’s an increase of 4.6 percent per capita. During the same ten-year period, payroll expenses rose 28.8 percent--while city tax revenues were increasing by only 12.2 percent.
Little wonder there’s a budget deficit. Keep in mind that during that same 1992 to 2002 time period, the productivity of American business increased by more than 2 percent annually. Which means that if Buffalo city government had matched the productivity of the nation as a whole, it would now be delivering the same services with 450 fewer employees, and at far lower costs.
That may seem to be setting a high standard—but we haven’t even come close. In fact, over the course of the past 25 years, only 17 city of Buffalo employees have actually been laid off. Worse still, only two have been fired for cause. We all know that there are many capable, dedicated public servants in government—but we also know that, in any organization, there are those who don’t pull their weight and who must be asked to leave, lest they infect the morale of others. It’s hard to believe that, in 25 years, city government had reason to take such action in only two instances.
It’s tough to lay people off and no one likes to do it. But in the Allfirst deal alone, M&T has been forced to lay off some 1,100 people. Let me underscore that we don’t like to have to take such steps. But it’s what we must do to maintain M&T’s independence and to serve the interests of our shareholders and our employees. And if we don’t do it, our failure could cost Buffalo many jobs. Instead, as a result of the Allfirst deal, M&T will add 300 new jobs here in the Buffalo area. In fact, from 1995 to 2002, M&T added 1844 full-time jobs to the economy of western New York. That’s close to all net new private sector jobs in the region. And, there’s no reason not to think that our operations in Maryland and the other former Allfirst areas will not experience growth, as well.
My point is this: if Buffalo is to prosper in the long run, city government, too, must restructure. Yes, the city has announced plans to lay off 94 employees in the coming year. But, frankly, more must be done. We all know there are elderly and retired Buffalo residents who are struggling today to pay their most basic expenses, such as health insurance. Is it fair to ask them to pay higher and higher taxes to support a bloated local government?
As a city’s population gets smaller, so must its complement of public employees. Otherwise, it risks imposing an impossible tax burden on its citizens and employers. To date it has failed to take adequate action to avoid just such an eventuality. Instead, officials continue to seek short-term fixes, to deal with a looming budget deficit. Balancing a $275 million budget by borrowing $29 million in the bond market and putting off $15 million in pension payments is an irresponsible way to finance operations—and avoids the hard decisions which must be made.
Just as American business constantly takes steps to improve its efficiency, city government must do the same. Let’s look to examples such as JetBlue, the airline which has helped improve service to western New York. The American airline industry is in terrible financial condition but JetBlue has found an approach that allows it to be profitable and to increase the service it provides.
That’s an approach the city of Buffalo would do well to emulate. Let’s set out together to make Buffalo the JetBlue of American cities--to lower the tax burden and improve efficiency. Doing so would not only save money but would help distinguish us from our competitors. We’d show the country we have an innovative and imaginative government—and that, in turn, would help us to attract and spawn new businesses.
As disappointing as city government’s response to its budget crisis has been to date, it’s important to note that the city has been helped down the road to ruin by other officials, as well. In particular, city government has been handicapped by a lack of cooperation from Buffalo’s own public school system. Public education and the relationship between the Board of Education and city government are crucial to the vitality of Buffalo.
Recognizing this, M&T has made a special commitment to the improvement of Buffalo’s schools, through our substantial investment to help upgrade the Westminster School, including $5.7 million in financial assistance to improve teaching and to recruit and retain talented leadership. Which has made all the more dispiriting recent revelations, such as those highlighted in a report by the Council of Great City Schools, about the inadequacy of the financial management of the Buffalo Public Schools.
Sadly, these revelations came as no surprise to those of us familiar with that financial control system and those responsible for it—and who sadly recall the school system’s decision to spurn an offer to bring in an outside accounting firm, at no cost to the system. The problems of the school system have made city government’s job even harder. Too often, the schools seem to operate in isolation—and fail to provide the city with the consistent, meaningful and timely information essential for accurate cash flow forecasts and firm budget projections, making it extremely difficult for the city to manage its finances. There is a larger lesson here. We in Buffalo must work together on our common problems—or we have no hope of solving them.
As a firm, M&T has committed itself to change—in order to grow. Unless Buffalo city government makes its own commitment to change—fundamental change—growth, prosperity, and the chance for our children to stay and raise their own families here, will continue, sadly, to be elusive.
Robert G. Wilmers
Chairman of the Board,
President and Chief Executive Officer