By now, you have undoubtedly read about our first quarter earnings through news reports or our press release, yesterday. Diluted earnings per common share for the quarter were $1.59, unchanged from the fourth quarter of 2010 and up 38% from the first quarter of last year. The quarter's earnings reflect higher net interest income, resulting from a wider net interest margin, a lower provision for credit losses and higher noninterest income.
Overall, the trends are in line with what we’ve seen over the past 3 to 4 quarters; loan demand appears to be improving, with stronger demand from commercial customers than from consumers, deposit inflows are continuing, the net interest margin is relatively stable, and credit continues to improve incrementally, in line with the gradual improvement in the economy.
It is always a source of some pride to be able to announce such positive results. At the risk of corporate immodesty, one cannot help but point out that this is the 139th consecutive quarter without reporting a loss. This has allowed us to continue to pay our regular quarterly dividends at a time when many other financial institutions—including some considerably larger than M&T—must ask government permission to begin paying a dividend once again and have seen that request refused.
One cannot help but wonder whether too big to fail is actually a way of saying too big to succeed! It is worth noting as well that we are the only bank amongst our peer group of the 14 largest regional and super-regional banks to not dilute our long-term investors through a common equity issuance since 2007, when the financial crisis first emerged. Excluding shares issued for acquisitions, the number of outstanding shares for our peer group has increased by 61.2%, on average, compared to just 3.6% for M&T. In fact, the average increase for the largest four banks, not included in our peer group, was 165.2%.
Such observations aside, good results must never inspire complacency or over-confidence. M&T operates in an industry characterized by intense competition and rapid change—both in our markets and our regulatory environment. As my colleagues Mark Czarnecki and Mike Pinto pointed out in their January message to M&T employees, “we must remember that challenging times are far from over.” And that the problems of high unemployment, low real estate values, deferred private investment and record-high government debt and deficits continue to linger.
As we contemplate that “challenging” environment, we continue to believe in the goals set out in that January message. We must find ways to continue to attract deposits, make sound loans and grow in accordance with our historic credit quality standards, notwithstanding changing capital and liquidity requirements.
Central to our effort will be the project which has occupied so many of M&T’s employees over the past several months: the successful integration of Wilmington Trust. I’ve discussed before, including in the annual report, the great promise which this acquisition, the second-largest in our history, holds. It will allow us once again to enter a new market of a kind with which we are familiar—indeed, one which is contiguous to our existing presence in the Mid-Atlantic. And it allows us again to enter as a significant, even leading, institution in that new market. Even that which is unusual about this acquisition to this point bodes well.
The addition of Wilmington Trust’s highly regarded wealth advisory and corporate client services division brings us assets measured both in dollars and, just as important, expertise. The latter will allow us to extend a new range of sophisticated services to M&T customers who had not previously had such access.
As important as it is to look forward to the prospective gains this acquisition may bring, it is equally important to recognize the extraordinary efforts of those hundreds of M&T employees who have risen to the challenges it has posed—including the due diligence represented by our assessment of Wilmington Trust’s condition and prospects, the expertise required to craft a winning bid, and the ongoing integration and assimilation of its branches and employees.
A few numbers help tell this story. In this past October alone, 140 M&T employees spent more than 11,500 hours on due diligence. They came from across the company—from credit, finance, legal, audit, treasury, risk management, central technology, operations, human resources and each major business segment. Between November 1 and the end of February, M&T employees spent more than 1,000 hotel nights in the Wilmington area.
As necessary as such hard work is, it’s not enough to ensure that our 23rd acquisition since 1987 will be as successful as we anticipate. That success will be built, yes, on long hours and dedicated employees—but, crucially, it will depend on the good judgment that experience brings. I’ve spoken before at this annual meeting of the importance of employee tenure at M&T—and our pride in the fact that we retain the loyalty of our workforce at a rate notably higher than that of our industry peers.
The typical M&T employee has been with the Bank for 10.7 years, compared to an average of 4.8 years for financial services companies. This is especially important, however, in the context of acquisitions. Experience matters in so many ways—in assessing whether it is prudent to put in a bid, in the nature of that bid, in taking stock of the ways in which two institutions best fit together and in making the myriad choices about branches, staffing levels and much more. The wisdom of experience allows us to sense opportunity—but also to avoid mistakes, in part because we might well have made them before and learned from them.
Hundreds of M&T employees bring deep experience into play. In fact, a review of the record shows that, for our 70 most senior people, the Wilmington Trust merger is, on average, the 12th such deal on which they’ve worked. Indeed, there are thirteen senior M&T executives who have worked on all 23 mergers and acquisitions undertaken in the past 23 years. One cannot know for certain—but we believe this is a level of background and experience unmatched in our industry.
It showed itself in the work of a wide range of the bank’s activities, under time pressure. I think here of the Finance department, which over the course of just two weeks in October, had to help make the key decision: whether or not to enter a bid. That meant working nights and weekends digging into another bank’s books and coordinating the work of other M&T departments. Finance, both before and after our bid was accepted, relied on the intelligence provided by other departments such as Loan Review, where a group of 14 spent the three weeks before Christmas in Christiana, Delaware doing its utmost to assess the loss potential for the portfolio we would inherit.
I’ve spoken on a number of occasions about the importance of Wilmington Trust. But in order to assess its value, we had to familiarize ourselves with the full range of services and lines of businesses it offered, in order to answer a central question: could it fit in with the M&T way of doing business? Obviously, we think the answer is yes.
As we move ahead, we face the crucial task of integrating 41 full-service bank branches into the M&T network. In this, we rely on those in our retail division, who have embedded themselves in the former Wilmington Trust branches, sitting in on their management meetings in order to answer the key question: how do you do this at M&T? Making the answers clear is what will ensure that more than just the signs will change at those offices.
A great many of our 13,307 employees have put in long hours to make sure this acquisition, like those which have preceded it, goes well. I extend my personal thanks to all of you. But don’t take my word for how well you have handled it. Consider the words of Wilmington senior vice-president Rebecca Laporte who, in a message to Mark Czarnecki, wrote: “Your staff has been wonderful in how they have handled the communications with my team and me throughout the past several months. I just wanted to take a minute to highlight some things that I found particularly impressive and hope that you will as well.”
She goes on to mention employees who have “been extremely responsive to any questions or concerns that I have presented… and who “made a huge positive impression on my staff… M&T’s employees have been respectful and have shown genuine interest in hearing about what my team does and has accomplished. They have also been very generous in sharing their experiences, practices and accomplishments.” This is high praise from someone who went out of her way to offer it. Thanks Becky—and thanks to all of you.
One year ago at the time of the last annual meeting, the roster of M&T shareholders was notably different than it is today. I refer specifically to the fact that, at that time, some 22.4 percent of our shares were owned by AIB, Allied Irish Banks—based in Dublin. Since that time, AIB’s holdings have been efficiently sold to over 4,150 institutional and individual investors, without discernible impact on the market for M&T shares. I bring this up, however, not so much to discuss that process, pleased as I am that it went smoothly, but, rather, to take note of the reasons for it—and the implications of that situation, not just for AIB and Ireland but for the United States.
AIB, with which we were pleased to work for more than seven years following our acquisition of its Allfirst subsidiary in Baltimore, did not sell its M&T shares for normal business reasons. It did so, rather, in the wake of what can only be called the meltdown of Ireland’s economy—a collapse so severe that AIB needed billions in government assistance, which was somewhat offset by the sale of its M&T shares. The cause: years of lending imprudence throughout Ireland’s banking sector which led to an economic bubble that has now burst, sharply decreasing tax revenues and leaving Ireland with a government debt that grew from 25 percent of its Gross Domestic Product in 2007 to a staggering 114 percent currently.
What’s more, in order to lure reluctant bond investors, the country must pay a burdensome 8.9 percent interest rate just to borrow for maturities of two years. To make matters worse, the great bulk of its debt today is owed to foreign creditors. That state of affairs has led to a virtual takeover of the country’s fiscal decision-making by the European Union, which may, it’s been suggested, begin to dictate to Ireland even such policies as the country’s own corporate tax rate. Such is the fate of a nation which has lost control of its destiny.
Ireland is not alone in this sort of fix. Both Greece and more recently Portugal find themselves, for their own reasons, in similarly bad fiscal situations. In Greece, years of slow economic growth caused by imprudent government policies, including an overpaid, bloated government workforce, made it impossible for the government to make good on over-generous promises of public pension plans for state workers. Its public debt has climbed to 152 percent of Gross Domestic Product. In Portugal, successive years of government projects, covered by borrowings in the international market, left the country swamped by debt when the economic crisis hit and tax revenues plummeted. Its debt has reached 91 percent of GDP—and like Greece and Ireland, Portugal must turn to the European Union for a bailout, inevitably with strings attached. The free market has turned thumbs down at its bond auctions.
My point here is not to expound on the economies and politics of other countries—but, rather, to express my deep concern that the United States of America may be on the same, calamitous path. We have a heard a great deal in recent weeks, both from President Obama and leaders of the Republican Party, about the extent of our looming deficit and debt. In my own view, they are right to be addressing it—and it’s about time that they’re doing so. Permit me, however, to review a few key facts in this regard.
In the United States currently, total federal government debt, including that owed to the Social Security trust fund, amounts to fully 100 percent of projected 2011 GDP—which puts us in the very same economically bad neighborhood as Ireland, Greece and Portugal.
Only a decade ago, federal debt obligations amounted to just 57 percent of total U.S. output.
A good case can be made that we are making many, if not all the mistakes that we find in those countries —combining a financial crisis with pension promises that overwhelm our state budgets and public education systems that fail to graduate hundreds of thousands of our next generation. Taken together, this is a situation made even worse by the fact that no less than 47 percent of U.S. government debt is now held by foreign creditors.
How did we get here? Spending dictated by fighting two wars and the onset of the Great Recession has, without doubt, been a major contributor. But so too, has the growth in the most significant portions of our federal budget. For the upcoming 2012 budget year, total spending is projected to reach $3.7 trillion. Medicare, Medicaid and Social Security will consume 44 cents of every dollar—and by 2016, that will increase to a projected 49 cents. Interest payments on the federal debt will consume 6.5 percent of 2012 spending, but are expected to rise in future years, reaching 12.6 percent by 2016. Spending on national defense will account for 20 percent of the 2012 budget, up from 17.9 percent in 1995.
Combined, spending on just these four areas—mandatory health care, Social Security, defense and interest—will account for $2.6 trillion or 70 percent of total 2012 outlays, outstripping total revenues of $2.5 trillion. When you include all other spending categories, the 2012 shortfall will be approximately $1.2 trillion. This will be the fourth consecutive year in which deficits exceed one trillion dollars, adding $5 trillion to our national debt in just this short period alone. The flood of red ink has caused borrowing to skyrocket, to the point where our total national debt now stands at $14.2 trillion.
Why do we face such towering debt? The National Commission on Fiscal Responsibility and Reform, the so-called Simpson-Bowles Commission appointed by President Obama, in its December report, warns that a very few large programs of increasing cost are central to the problem. Overall health care spending represents 17 percent of GDP—far more than the 11 percent spent in France, whose healthcare spending is the second highest amongst the developed nations. If unchecked, this number is expected to double to 34% of GDP by 2040.
For its part, the Social Security program is set on an unsustainable course of spending more on beneficiaries than it collects in revenue. This reflects the fact that there are today, just 3 active workers for every retiree. In 1950, that ratio was 16-to-1. When President Roosevelt signed the Social Security Act into law in 1935 and set the retirement age at 65, average American life expectancy was just 64. Today, we are living 14 years longer—but retire 3 years earlier. As a result of these socioeconomic changes, the social security trust fund is on track to be completely exhausted by 2037.
To all this we can add the fiscal problems of our state governments: taken together, 44 states and the District of Columbia project $112 billion of budget shortfalls. That figure pales in comparison to the unfunded liabilities of state and local retiree pension plans—a shortfall which, by some calculations, totals $3.6 trillion.
All this means there will have to be still more borrowing and increased debt to come. Indeed, the Simpson-Bowles Commission has estimated that interest alone on the debt could rise, as soon as 2020, to nearly $1 trillion— a figure larger than the entire budget for national defense. By 2040, some forecasts suggest that interest payments could consume as much as $4 trillion or 35 percent of the federal budget.
In a solvent nation, the payment of interest is not discretionary; it will mean that we will have less for all the other things for which we rely on government—from defense to education. And, crucially, there will be less capital available to be lent to those who would start the entrepreneurial new ventures on which future prosperity will depend. It is for such reasons that Admiral Mullen, the head of the Joint Chiefs of Staff, recently observed that “the greatest long-term threat to our national security is our national debt.”
Our fiscal problems reflect not only the fact that we are spending so much—but that our engine of growth and prosperity, the ultimate source of the money on which government relies, has stalled. Our level of private sector employment still has not returned to what it was at its peak in 2001. Unemployment and underemployment combined stand at 15.7 percent. And tax revenue, when measured as a percentage of GDP, is at the lowest level since 1950. These bleak figures reflect the fact that too much of our public spending leads to poor results. I think particularly of our public education system that fails to graduate nearly one third of those who enter high school.
This is particularly troubling given the growing importance of education on the ability to secure a job in today’s economy. For example, the Center of Education and the Workforce at Georgetown University projects that the United States will create some 47 million job openings through the year 2018. Nearly two-thirds of these jobs, in the Center’s estimation, will require that workers have at least some post-secondary education.
The Center projects that applicants with no more than a high school degree will fill just 36 percent of the job openings, or half the percentage of jobs they held in the early 1970s. While the labor market has become more demanding, our ability as a nation, to prepare our young adults to lead productive and prosperous lives is on decline. During the 1970s, a higher percentage of U.S. students graduated from high school than those of any other industrialized country. Today, we rank 13th, behind nations like Canada, South Korea and Sweden.
The situation right here in our home market is at the heart of the problem. In 2010, New York State as a whole ranked 46th of 50 states in mean score on the Scholastic Aptitude Test—the SAT—the basic screening tool for college entrance. An analysis of New York State testing results reveals that on average more than 50% of the students in the public schools of Buffalo, Rochester and Syracuse, in grades 3 through 8, have lower scores in English Language Arts and Math than the students in New York State as a whole. This same group lags New York City by a considerable percentage as well. With such dismal academic training, how can upstate New York ever turn the economic corner if so few of our city’s children are prepared to participate in the workforce of the future?
Nationally, we are failing to devote public resources to the industries of the future. Our investment in research and development, which reached 30 percent of total federal spending during the 1960s, has plummeted to just 15 percent today. It will require sustained and effective investment in both education and research to reduce our deficit and debt and put us back on a path toward a healthy economy, the only way we can truly cure our fiscal ills.
President Obama, Republican Congressman Paul Ryan, and the Simpson-Bowles deficit Commission each has plans for how to deal with those ills. It is worth noting they all agree that it is necessary, desirable and practical to reduce the projected federal deficit, one way or another, by fully $4 trillion between now and 2020. The only good news in all this is that at least we have started what appears to be a serious national dialogue about how to do so.
If we actually do begin to address our fiscal problems, it will be a welcome contrast to what we’ve been doing recently: wasting precious time on new laws which fail to resolve the problems they ostensibly address. I think, naturally, of the Dodd-Frank bill, whose 2200 pages and 217 new regulations have, in the words of Neil Barofsky, the former special inspector for the Troubled Assets Relief Program, “clearly failed” to end the expectation that a handful of the largest banks have the implicit backing of the federal government and could again have to be bailed out. In the meantime, however, we at M&T are forced to compete with these government-guaranteed institutions for talent and capital. Put another way, when it comes to financial services, even the fix has been a problem.
It is heartening, yes, that the President, House Republicans and the “Gang of Six” Senators are discussing the combination of spending restraint and increased tax revenue that we will need to climb out of the hole we’ve dug. Let us hope they can put partisanship aside. Working together is, quite simply, our only hope. Describing our goal as a nation in general terms can make it sound easy to achieve and hard to oppose. But the truth is far different.
For us to control our deficit and debt, we will have to change our expectations of government in myriad ways. America must be prepared for an end to the special deals and arrangements to which it has become accustomed. Everything must be on the table: spending, tax rates, tax loopholes. We will need them all to lay the foundation for the renewed economic growth we so much need. I am encouraged by the recent economic trends, which show signs of modest but gradual recovery, and have faith in the American system to take the right measures for preserving long-term prosperity and health of America.
Still, the sound advice of one political observer in particular comes to mind. “The budget should be balanced, the treasury should be refilled. Public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed. Lest Rome become bankrupt.” The author of those words: Cicero, in 55 BC.
Robert G. Wilmers
Chairman of the Board
and Chief Executive Officer