The year which has passed since I last addressed this meeting has been a momentous one for M&T. We continued, throughout the year, the effort, begun with the announcement of our merger in September 2002, to integrate our operations with those of the former Allfirst.
This has been the most ambitious merger in our history, one which has asked much more of our employees than I could ever recount in a short speech. It has been a year in which time and again, the many moving parts of M&T have worked, painstakingly, with their counterparts at Allfirst.
The credit committees and commercial lending groups have worked to ensure that the standards and practices of the former Allfirst are consistent with those of M&T. The retail division has worked to guard against the disruptions to customer service that arise with the conversion of systems. Indeed, this entire speech might be given over to a discussion of all the crises faced and overcome by our information technology employees—or to a listing of the challenges which, we know, still lie ahead as we go forward with this merger.
It is a merger which has brought us into the ranks of the top 20 banking corporations in the United States. Indeed, over the past six years, as a result of our mergers with OnBank, Keystone, and now Allfirst, both our assets and our number of branches have more than tripled. This has not gone unnoticed.
At the close of business this past February 26, M&T stock was included in the Standard and Poor’s 500 index. That milestone is testament to the dedication and imagination of our employees, who are the ones responsible for the realization of the company’s ambitions.
This marks only the second time ever that a company headquartered here in Buffalo has been included in the S&P 500 and the first for any major local employer. Indeed, no Buffalo-based firm has been included in the S&P 500 at all since 1996 and the only previous Buffalo firm in the index had only 50 employees in Buffalo.
It is worth keeping in mind that such success was far from inevitable. Indeed, it is no exaggeration to think of M&T as a survivor in an era of unprecedented change and consolidation in the American banking industry. Some of you here may remember such institutions as the Western New York Savings Bank or the Finger Lakes National Bank.
Our employees in Baltimore would surely remember such institutions as the First National Bank of Maryland and the York Bank and Trust. All have one thing in common—they are all the names of institutions which have been incorporated, through mergers and acquisitions, into what is now M&T. Indeed, through our mergers, as well as the previous mergers of institutions with which we later merged, we count no fewer than 138 formerly independent banks which have, since 1980, become part of M&T. You heard that right—138 antecedent institutions amalgamated into just one. This one.
In light of that history, both satisfying and sobering, it’s worth reminding ourselves how this happened. I’d like to focus on some crucial elements of our business strategy which have helped bring us to this point and on which we will have to rely if we are to remain independent, acquisitive and, indeed, successful. The pillars of our strength are these: the priority we place on satisfying our customers, our role as community bankers, our commitment to our employees and our dedication to providing value for our shareholders.
Let’s take customers first—because we must always put them first. The past year was one of new and, frankly, daunting challenges for those in the bank who deal directly with our customers. The integration with Allfirst brought with it not only financial assets but a great many customers who were unfamiliar with M&T and had no particular reason to maintain their relationship with us.
We inherited, from Allfirst, no less than 476,000 consumer households and 42,000 small business banking relationships and 1,800 commercial customer relationships. We identified nearly 100,000 retail customers who required special, personal attention, lest we lose them during the transition period, when, should dissatisfactions arise, the risk of defection was high. Our branch bankers spent nearly three months, in the sensitive period prior to conversion, personally contacting each of these customers. We not only told them what to expect but also answered their own personal questions. In other words, they got more than a card in the mail. They heard from us personally.
And so did more than 11,000 former Allfirst small business banking customers. We talk often about the efficiencies we must realize to make mergers work. But we know well that there are times when new investments of resources must be made, as well, lest mergers fail. That’s why we now have nearly three times Allfirst ’s number of small business bankers, working directly with business owners in our new markets. Those owners had not chosen to bank with M&T. We had to earn their trust in order to keep their business. There’s no doubt that those personal contacts, undertaken by so many hundreds of our employees, help explain our high level of customer retention.
We well understand that we must work with our customers as individuals to retain their loyalty. But, at the same time, we understand, too, that we must pay attention to the communities in which they live. Being a community banker means several things. It means, first, that even though we have grown a great deal, we must strive to remain a local bank, a hometown bank—not just in some but in all the communities we serve.
We must never forget that we are a bank which cares about the small customer as well as the bigger one, the bank which consumers should feel is approachable and attentive to their needs—whether for a car loan, a mortgage or small business expansion.
Being a community bank means, too, that as part of both our business strategy and our corporate responsibility, we must and will be engaged in local affairs. It is with that in mind that, in 2003, M&T made charitable donations to more than 2,800 civic, educational, cultural and social service organizations in the regions where we do business. Those donations totaled $12.6 million. But money is just a small part of this story.
I’m proud to say that M&T employees are volunteering their time and professional expertise, as well. Our employees, for instance, currently serve on the boards of directors of nearly 1000 community non-profit organizations. Others can be found coaching youth sports, mentoring disadvantaged students or feeding the hungry. This sort of volunteer work is even more important than money. That is why on March 11 of this year, I urged all M&T employees, in the memo I sent them, to “find an organization that interests you or that supports a cause you feel strongly about, and take the initiative to offer them your time and talent. The end result will be a stronger community and, ultimately, an even stronger, more successful bank.”
Put another way, at M&T, volunteer work will always be considered a good excuse for getting back a little late from lunch.
Meeting our competitive challenges, just like doing good works in our communities, will depend more than anything else on the talents and dedication of M&T employees. Which is why we have initiated and will continue what we have called the M&T Commitment. The program is management’s effort to stay in touch with the attitudes of employees and to solicit and, indeed, implement, their ideas about how to make M&T a better place to work.
As a result of our first M&T Commitment Employee Survey, conducted in 2001, we’ve put into place a range of important new employee benefits, including the Flexible Work Arrangements program, to help employees balance their work lives with their personal lives and a new, more finely-tuned Performance Management System designed to make sure managers are aware of and reward the extraordinary efforts many employees make. The M&T commitment has also included the Employee Stock Purchase Plan, which gives employees the option to purchase shares of the company’s stock on favorable terms. Nearly one quarter of eligible M&T employees are now participating in the plan.
It is no coincidence, then, that, in the 2003 M&T Commitment re-survey, that the percentage of employees with a favorable view of their jobs and the company had risen fully seven percent, exceeding the goal of our external consultant. I believe that increase reflects both the steps we’ve taken to improve the structure and incentives of work life at M&T—and the fact that employees understand that they are working for a growing, ambitious employer, one with aspirations not just to protect our share of the market but to increase it, as we have.
In an industry in which consolidation, acquisition and reductions in force have been relentless, M&T has demonstrated that we are a firm which offers the prospect of long-term employment and career advancement. Of course, we will not be satisfied until 100 percent of employees surveyed have a favorable view of the life at the company. For that, indeed, is in the interest of the company and all our employees. In short, there is a virtuous circle here. Committed employees allow the company to grow; growth, in turn, inspires commitment among employees. So, to our employees, let me say this: please keep those proposals coming to our suggestion program, M&T Ideas@Work.
The past year has also seen us take new steps to build shareholder value. In part, that has meant living up to new, federal standards for corporate governance. In keeping with our own unswerving commitment to sound governance, we have begun the process of implementing the requirements of the historic Sarbanes-Oxley Act of 2002, much of which took effect this past year.
It should go without saying that M&T has done its utmost to come into full compliance with the new law—and that doing so does not represent any change in our historic corporate culture. At the same time, you will not be surprised to learn that I am not altogether pleased with this new generation of regulation and the costs that come with it. The new legislation has caused our compendium of corporate governance standards to grow from a listing on two pages to a published program fully half an inch thick.
Currently, the talents of select employees in the office of the chief financial officer and our internal audit division are being devoted nearly full-time to demonstrating, as per Section 404 of Sarbanes-Oxley, something of which we are already confident: that our internal controls over financial reporting are effective. Nonetheless, costly software will likely be required for compliance, and higher audit fees are inevitable.
In other words, legislation inspired by the corporate wrongdoing of a few firms has had the effect of imposing significant costs on the overwhelming majority of firms which have been open and honest. At M&T we estimate that the overall cost of complying with all federal and state regulations exceeded $50 million in 2003. That represented about four percent of the company’s operating expenses.
Our commitment to provide value for shareholders has also led us to resume our stock buyback program and to increase our quarterly dividend by 33 percent, from 30 cents to 40 cents per share. Once again this year M&T has been included on the Keefe, Bruyette and Woods Honor Roll, a list of U.S. banks that have delivered 10 consecutive years of increased earnings per share to investors. The most recent such list includes only 21 banking institutions. Indeed, over the past 3, 5 and 10 year-periods, M&T’s stock has outperformed the Standard and Poor’s Bank Index by 8.4, 11.5 and 9.4 percent, respectively.
Our return on investment has compared favorably not just with other banks but with the many other investment options our shareholders have. Since 1980, through March 31, 2004, M&T’s total return to shareholders, when compared with all other U.S. companies which were publicly traded over that 24-year period, ranked 16th. Including dividend reinvestment, M&T common stock has, in the period from 1980 through this year’s first quarter, provided a compound annual rate of return of 25.46 percent. For the same period, cash dividends to stockholders have increased at a compound annual rate of 23.55 percent.
Nonetheless, any celebration of our growth and continued independence must be tempered with caution. It will be no easy task to continue to survive and thrive in today’s banking industry. We remain cognizant of the ongoing need to bring down the cost of operations throughout the entire company, while at the same time maintaining the highest quality of customer service.
We well understand that, in Baltimore, northern Virginia and the District of Columbia, we have entered what are not only the most affluent but also among the most competitive markets in which we have ever done business. What’s more, we not only face major competitors but we do so at a time when, despite the nascent economic recovery, the business environment remains challenging.
Specifically, the demand for commercial and industrial loans remains lower than might be expected, in light of the levels of corporate profits. Our own research has found, for instance, that, on a national basis, even as short-term business spending has increased over the past year, demand for commercial and industrial loans has not kept pace and remains sluggish.
Indeed, as of March 31, the use of commercial lines of credit by our long-term middle market customers was only 45% of total commitments. That’s the same, low level we saw at the end of 2003 and is down significantly from a high of 54% in early 2001, immediately before the start of the recession. We believe this reflects the fact that, even as profits have improved, many firms have chosen, over the past two years, to retain earnings, rather than to invest in what they viewed as a fragile recovery. As a result, they are flush with cash and can self-finance new investments, thus meeting their capital needs without help from financial institutions.
Nonetheless, we continue to increase commitments with new and existing customers, putting us in good position to benefit from higher usage rates when and if they develop. We believe, however, it will take time and sustained recovery for firms to work through their liquidity and for line usage and loan demand to increase significantly. In the interim, it will remain all the more important for us both to continue to control costs and identify new sources of revenue.
Yet at the same time we are careful and cautious, it is not inappropriate to look back proudly on what we have accomplished in the past year, particularly as it relates to the integration of Allfirst. We have taken on our biggest such challenge yet and the early returns are extremely good. For that I extend my personal thanks to the almost 14,000 M&T employees.
Thank you very much.
Robert G. Wilmers
Chairman of the Board
and Chief Executive Officer