Yesterday, we announced our earnings results for the first quarter of 2012. Net Income amounted to $206 million and marked the 143rd consecutive quarter in which M&T reported positive earnings. Diluted earnings per common share for the quarter were $1.50, up from $1.04 in the fourth quarter of 2011. The quarter's earnings reflect higher net interest income, a lower provision for credit losses and generally strong fee revenues.
Although earnings were down from $1.59 per share in last year’s first quarter, recall that last year’s results were bolstered by gains on the sale of investment securities, which arose from repositioning our balance sheet in advance of the merger with Wilmington Trust Corporation.
The demand for loans continues to grow, while at the same time our percentage of loans on non-accrual status, those on which we aren’t earning interest, is down to 1.75%, the lowest level since the end of 2008.
We recently completed our semi-annual survey of commercial customers, and while those who believe the US economy is doing better than it was six months ago has more than doubled, they number less than half of those surveyed.
In recent years, in this forum and others, I have spoken about my concerns regarding the factors that led to the 2008 financial crisis. As we continue to struggle toward recovery, many of these factors have been neither addressed nor corrected.
It will not surprise you to know that I remain concerned about these matters—not just the sharply-increased cost of regulatory compliance for firms like M&T, but also the extent to which Main Street banks are not distinguished from the near-oligopoly of Wall Street banks by regulators or the public, and, most importantly, the effects these costs and attitudes have had on the availability of credit.
This morning, however, I will not focus on these issues but, rather, on another sector which is crucial to economic recovery.
American small business remains today, as it has always been, a bulwark of our economy. Small businesses, defined as firms with fewer than 100 employees, represent 98 percent of all businesses in America and employ more than 60 million people. By that measure and others, it is a sector whose health and potential for growth merits the attention of economists, policy analysts and the financial services industry. Today, moreover, it’s a sector that is in trouble—and that should be of concern to all of us.
Why am I raising this topic? To explain, some perspective is in order. The most important economic challenge facing our nation today is that of creating new jobs. Despite the recent decline in the unemployment rate, the U.S. has some five million fewer jobs today than before the recession. Some 12.7 million adults remain unemployed.
This figure does not include the 7.7 million who are underemployed for economic reasons—those who are working part-time because their hours have been cut back or because they cannot find full-time employment. Nor does it include more than two million working age adults who have decided to drop out of the workforce entirely. In total, that’s nearly 23 million Americans whose skills and talents are underutilized. Such numbers reflect, in part, the extent to which mature small businesses are not growing and hiring, and start-up businesses are having difficulty getting off the ground.
At M&T, we have always viewed small business lending as the heart of our overall community banking portfolio—and, for that matter, as vital to the economic health of the communities we serve. In the year past, we made 7,486 new small business loans. The overall value of our portfolio of small business loans outstanding is $5.2 billion.
That ranks us as the 11th largest small business lender in the nation.But if one were to judge by comparing the value of small business loans to total assets, of the top fifteen small business lenders, we would rank first.
We have also long-embraced lending through the loan-guarantee programs administered by the U.S. Small Business Administration. We rank as the third-largest SBA lender east of the Mississippi, the sixth-largest nationally and the leading such lender in seven of our eight major markets.
And, because there is a difference between lending a lot and lending well, we are proud to be recognized as a best-in-class small business bank in Greenwich Associates 2011 Small Business Banking Study. M&T won a total of 14 Greenwich Excellence Awards for Small Business Banking garnering the most small business awards of any of the 750 banks in the survey.
Because we serve small businesses, we are in a good position to see how much they are struggling. It is no surprise to us that small business-related job creation has slowed in established, mature small businesses, as well as in start-ups. Indeed, the sad reality is the small business growth engine has been slowing for some time. The recent recession and lethargic recovery has only magnified a problem that has been brewing for decades.
Consider that in the 1980s, firms with fewer than 100 employees created 57 percent of total net new private sector jobs. This figure decreased to 48 percent in the 1990s and fell again to 37 percent during the first decade of the new millennium. From a practical standpoint, that means that each small business created 2.3 net new jobs over the course of the 1980s. That number declined to 1.8 net jobs during the 1990s, and barely managed a half a job per small business during the last decade.
The trend is not abating. In fact, it’s getting worse. In the current decade, small businesses have contributed only 33 percent of total net job growth based on the most recent data available.
In particular, smaller, mature businesses have found it difficult to continue to grow. A recent study of 32,000 companies over 30 years revealed that small businesses in existence for at least five years cut more jobs than they added in a typical year, while their larger brethren have hired more than they cut. The pattern is reflected by the results of a recent survey by the National Federation of Independent Businesses, which found that just seven percent of those asked felt the next three months would be a good time to expand.
This might not be a problem were new jobs provided by start-up firms substituting for the hiring of established firms. But the news is not good on this front either. Prior to the recession, America generated more than 660,000 new start-ups per year. The number of start-ups in 2011 was just over 530,000, a 20 percent drop from 2006 levels. Furthermore, the number of jobs created from a typical start-up has fallen steadily since the mid-1990s, dropping nearly three jobs per new company. Fewer companies are being born today and they’re hiring fewer employees.
To answer the important question—why the decline in small business growth and confidence? —One must look to a multiplicity of factors. These include large ongoing economic trends, such as the consolidation of businesses and the formation of a few large industry leaders. I think here of the recent National Public Radio story about New York City’s Natuzzi Brothers Ice Company, run as a family business for three generations—but now competing in a wholesale ice market dominated by just three national giants. As NPR put, “Big Business Freezes Out New York Ice Company.”
We should not, however, view the decline of small business and entrepreneurialism as inevitable. Not at all. This morning I will focus on two specific ways we can do more to assist federal policies, which affect both small business lending and the quality of our public education systems as they, in turn, affect the quality of our labor force.
It is common for our leaders to express their support for America’s small businesses and, what’s more, there are long-established government efforts to assist them. Unfortunately, promises in this area often outstrip performance. For instance, although no fewer than 228 bills drafted in the name of helping small business were introduced in the current Congress, only 12 have been passed—almost all of them simple renewals of existing policy, not significant new sources of support or incentives.
Key priorities of small business trade groups, such as increased certainty as to the future structure of the tax code—crucial to small business plans—have languished. So have imaginative policy ideas to reform the corporate tax in ways that would assist small business formation and growth.
Even when Washington makes a concerted, long-term effort, however, its performance falls short. I think especially of the cumbersome rules and inadequate funding which hamper that part of government whose core mission is to help small employers—the Small Business Administration.
Since 1953, the SBA has provided loan guarantees to participating banks to promote lending to small businesses. Through a Fiscal Year 2011 outlay of $6.2 billion, the SBA supported $30.5 billion in new loans and is credited with assisting or creating over 700,000 jobs.
As a result of the bureaucratic complexity of SBA loans, only one-third of banks are active SBA lenders and the majority of SBA loans are made by a small number of banks, including, as I noted earlier, M&T. Indeed, only 725 banks, in total, made 10 or more SBA loans.
Consequently, SBA lending represents a trivial share of total small business lending in the U.S., approximately three to five percent. But, despite the minor role it plays, the SBA is the embodiment of public commitment to small businesses. Fortunately, there is reason to think the SBA outlook can be improved were Washington to learn the lessons of efforts it has undertaken.
Under a temporary measure included in the American Recovery and Reinvestment Act of 2009, the so-called fiscal stimulus bill, the SBA eliminated borrower fees and increased loan guarantee percentages. The result was a nearly a two-fold increase in SBA lending volume. This indicates that there may be some benefit from further loan program enhancements and other changes.
Indeed, a permanent overhaul of such loan programs merits serious consideration. As matters stand, borrowers and lenders are buried under piles of forms and hundreds of pages of regulation. Streamlining and simplifying the many specialized loan programs would reduce the burden on borrowers and lenders alike, bolstering bank participation and making needed capital more accessible to borrowers.
Rather than improving existing SBA programs, however, $30 billion was allocated to a new and unproven initiative—the Small Business Lending Fund. The results have been disappointing. Although supporters of the new Lending Fund predicted it would be popular among the nation’s 7,258 community banks, in practice only 332 banks were approved to receive $4 billion in funding—and half of those funds were used to refinance their own TARP obligations. The program is now expired, with $26 billion of the original allocation going unfunded.
This is not to say that SBA-backed lending can, or should, be the major source of small business financing. It is important, however, that we not allow an inefficient and poorly-designed SBA to frustrate small business and deter potential bank lenders.
Consider SBA’s procedures. The printed protocols for the three different aspects of small business lending total 998 pages. At M&T, a recent $90,000 SBA loan extended to a firm with ten employees and less than $2 million in sales nonetheless required nine different forms, which needed to be signed in 24 different places.
To make matters worse, most of the information required by the SBA has already been gathered by the bank itself in the course of the underwriting process—something the agency might know were it to consult with banks in the course of designing its application process and requirements. In other words, if we are to have a Small Business Administration—and we should—it must be guided more by common sense and less by red tape.
Even an improved SBA will not guarantee small business vitality. All successful businesses rely, ultimately, on the talents and contributions of their employees. I can say without hesitation—and with enthusiasm—that such is the case here at M&T. In this regard, small business today has an additional problem: finding qualified employees.
That’s the inescapable conclusion that emerges from the survey of 596 commercial banking customers which M&T conducted in January. We did find some reason for optimism. Commercial clients appear to be slowly ramping up their hiring plans relative to previous survey findings—and that could lead to slightly faster employment growth during the first half of this year. But a significant percentage of firms appear to be having greater difficulty filling skilled technical and trades positions than in 2011, causing the hiring process to be delayed or extended.
Indeed, among firms looking for qualified applicants with specialized technical skills, such as computer programming, 38 percent reported having more difficulty than a year ago. A similar percentage, 37 percent, reported difficulty filling openings for skilled trades such as electricians and machinists, and will into the future. The insufficient size of the applicant pool for both white collar and blue collar positions will likely be a drag on economic growth over the course of this year. The problem, I should note, is acute in Upstate New York, where more than half of M&T clients reported an increase in the amount of time needed to fill job openings, compared to 2011.
These findings are in line with those of the survey conducted by the National Federation of Independent Businesses, which found that nearly a third of small business owners reported there were few or no qualified applicants for open positions.
Such problems are not limited to small businesses. A recent survey by Deloitte LLP for The Manufacturing Institute found that American manufacturing companies generally cannot fill some 600,000 open jobs, mainly skilled production positions, notwithstanding current high levels of unemployment.
One can understand why this is so by looking at data about American high school age students. Nationally, according to the federal Department of Education, more than 25 percent of ninth-grade students do not go on to graduate from high school. Many of those who do graduate high school are not prepared for future studies or training.
New York is one of 14 states which now gauge how many high school graduates are ready for college-level work. Only 23 percent of all New York City graduates were judged, based on test results, to be college-ready and just 16 percent in Buffalo and five percent in Rochester were. At Baltimore City Community College—where incoming students are largely educated by the Baltimore public schools—95 percent of first-time students require remedial education before undertaking a full college-level curriculum.
The problem goes beyond any one region or year. We are accustomed to discussing the lack of basic literacy and numeracy skills of high school students. But the surveys and data to which I have referred point to an even more complex problem: the mismatch between those who need jobs and the type of employee needed by the contemporary economy.
It’s important to keep in mind that the greatest portion of U.S. GDP growth since 2000 has been driven by value-added or “knowledge-driven” industries. Similarly, during the same period, college graduates have had the strongest employment gains—even as those with a high school degree or less have seen demand for their skill-level decline. Looking ahead, moreover, it’s anticipated that some 63 percent of new jobs will need employees with at least some post-secondary education—including 33 percent which will call for either a bachelor’s or a master’s degree.
To meet this challenge, our high schools must do a much better job with instruction in basic skills, to ensure that students graduate and to direct them, through effective guidance offices, toward post-secondary education of all kinds. Young people must be especially encouraged to consider science, technology, engineering and mathematics courses which provide the sort of preparation vital to our economy today.
A sustained economic recovery, in other words, is neither automatic nor inevitable. Growth will require a qualified workforce. The problems of small business today, in the context of continued high unemployment, remind us of how far we have to go achieve those goals.
We at M&T are undertaking to do our part. It is our honor to be playing a role in bringing to fruition a major new initiative in Buffalo aimed at changing for the better the lives of 3,119 children living in one of the city’s poorest neighborhoods. Let me underscore that this is more—much more—than an M&T project. It is, rather, part of an effort led by the White House itself to do something new—and effective—in breaking the cycle of inter-generational poverty.
It’s called the Promise Neighborhood program and I am proud and humbled to say that the proposal we, through the Westminster Community Foundation, put together to qualify for the program was one of just five out of 339 applications nationwide to be chosen for federal funding: $6 million over the next five years. We have pledged to lead the way in matching that and more. With the help of a great many community partners, notably including the John R. Oishei Foundation, we will lead the effort to raise up to an additional $8.6 million.
The Buffalo Promise Neighborhood will bring a new approach to what has seemed to be the intractable problem of urban poverty. It will span from “cradle to career,” starting to prepare children to succeed even before they start school—through a new early childhood education center —and staying with them until they graduate, ready for college or prepared for a good job.
Make no mistake: the challenge is great. In the Promise Neighborhood, zip code 14215 on Buffalo’s East Side, 88 percent of students attending Promise Neighborhood schools qualify for a free or reduced-price lunch (a common definition of poverty) and most children are raised by single mothers. Only eight percent of kids enter high school proficient in both math and English language arts, and only six percent, in fact, graduate ready for college or career. We hope to change that, building on our nearly two decades of successful partnership with the neighborhood's Westminster Charter School.
Our many partners in this effort include one of the nation’s premier universities, Johns Hopkins, which will bring its "talent development" program to the two Promise Neighborhood K though 8 schools and to its high school.
This is an effort in which I take the deepest possible personal interest and about which I promise M&T itself will be just as serious as we are about the business of the bank. It is our view—my view—that we must not fail in such efforts to prepare the next generation of Americans for the jobs we will have to fill if we are to remain strong and prosperous. I call on others, in both public and private life, to do their part as well.
Robert G. Wilmers
Chairman of the Board
and Chief Executive Officer