As has become our practice, we announced yesterday our earnings for the first quarter of 2016. Net Income amounted to $299 million and diluted earnings per common share were $1.73. We earned a net operating return on tangible common equity of 11.62%. Growth remained solid for commercial and industrial loans, commercial real estate loans and auto loans. This growth was somewhat offset by our planned run-off of the residential mortgages acquired through our merger with Hudson City Bancorp. Credit performance remained strong in the recent quarter, with net charge-offs as a percentage of average loans outstanding amounting to 0.19%, a level that matched each of the past two calendar years and which is well below our long term average of 0.36%. Revenues, expenses and more importantly, net income and earnings per share, all increased from last year’s first quarter as a result of the merger with Hudson City Bancorp. Professional services expenses incurred in connection with our BSA/AML work have declined meaningfully from last year as most of those work streams reached completion. Looking forward, we still have some infrastructure and technology initiatives we're working on that will absorb some of those savings over the remainder of 2016 and likely into next year as well.
With the annual stress testing and capital planning cycle conducted by the regulators having been pushed forward by three months, we won’t know if this year’s capital plan has received an objection until late June. However, in connection with our 2015 capital plan, which extends through June 30, we resumed repurchases of our stock in the first quarter. In total, we purchased $100 million of M&T common at an average price of $105.42. We have capacity under the Plan to repurchase an additional $154 million by the end of the second quarter.
Now that we’ve covered our financial results, I’d like to offer a broader perspective on the work we do and the reason we’re here. A chief executive at a podium such as this is typically expected to report, one hopes optimistically, on that company’s business prospects. This has often led me to discuss the forces affecting the banking industry—which, in turn, affect M&T. Today, however, I’d like to turn the camera around, if you will—and look at how banks like ours serve their communities, the factors that are affecting their capacity to do so—and the ways in which M&T has served Buffalo, both as a financial institution and as a corporate citizen.
Indeed, in Buffalo, and in all the cities and towns across our footprint, M&T has had a profound impact on the lives of our neighbors alongside whom we live and work. Consider, for example, the role we play in the formation and financing of small businesses, long considered an engine of new job growth in our country. Between 2010 and 2015, we’ve provided a total of nearly $63 billion in financing to companies across the Northeast. We are proud of our status as the nation’s seventh largest Small Business Administration (SBA) lender. Today, we count 162,140 small businesses among our customer base. In Western New York alone, we provide services to 19,806 small business clients employing 164,390 of our friends and neighbors.
We know small business. We believe deeply in the role that small businesses play in driving job growth, and it’s from this perspective that we see signs of trouble. I noted in my Annual Letter to Shareholders that the creation and growth of new small businesses—so often with the backing of community-focused banks—are slowing. Once a leading source of job creation, small business continues to shrink—contraction that, if not addressed, will have profound long-term economic consequences. Unfortunately, this has been a trend long in the making.
During the 1980s, small businesses were the job engine on which our economy thrived. Back then, entrepreneurs generated 58% of net new jobs, but that figure slipped to 49% in the 1990s. Prior to the start of the Great Recession, there were signs the downward trend had abated, with small businesses maintaining their share of net job growth. But today they are generating just 31% of net new jobs—a dramatic decrease that emphasizes how far small businesses have fallen over the last decade.
Additionally, the post-recession period has yielded the lowest average pace of new start-up formation in the 22 years the Bureau of Labor Statistics has tracked such data. Start-ups peaked in 2006, creating 3.6 million new jobs. Since the beginning of the recovery, the average number of new small businesses per year has declined, creating only 2.8 million annually. Start-ups today are employing fewer workers than in 2006. Comparing pre- and post-Great Recession averages suggests that nearly 1.5 million fewer jobs are being created each year as a result of fewer start-ups and smaller initial employment levels.
New businesses cannot form or grow in significant numbers without access to affordable capital. However, credit—the lifeblood of economic prosperity—has never recovered for small businesses. Credit extended, as measured by Community Reinvestment Act data for loans less than $1 million, remains 34.9% below 2007 levels, a near $115 billion decline.
The SBA, the government’s primary vehicle for promoting the growth of small business in America, appears to be deviating from its core mission. Today, the SBA supports half as many small businesses, a decline of over 40,000, and two-thirds as many jobs, as it did prior to the recession. Instead of making small loans to small businesses, the fastest growing SBA loan segment has been for loans over $2 million—growing 91% since 2012. Now, nearly a third of the SBA’s annual lending authority goes towards supporting these large loans, ostensibly at the expense of smaller dollar lending.
Banks participating in SBA loan programs are governed by 528 pages of requirements. In addition, the SBA regularly releases policy notices that modify the rules banks must adhere to. Just last year, there were 13 such notices. Given this administrative burden, it is not surprising that small, community banks appear to be opting out of the SBA program, potentially reducing access to capital for small businesses. Since 2012, the agency’s loan programs have seen a 13% reduction in bank participation—the equivalent of 324 such institutions. Much work needs to be done in order to remove the barriers that prevent banks from participating in the program if the SBA is to fully realize its stated mission of assisting small businesses and lifting the economy.
Of course banks are not the only sources of capital. Non-bank lenders—free of expensive regulatory infrastructure, restrictive capital requirements and bulky government lending programs—are providing more small business loans than ever—often through web portals that promise speedy turnarounds, but at higher rates. The Federal Reserve estimates that non-bank financing to small businesses has doubled every year since mid-2000.
Does that mean that small businesses—and communities broadly—need not be concerned? No, it does not. Unfortunately, not all forms of financing are created equal. The biggest and most important difference between traditional bank lenders and non-bank lenders is that non-banks do not and cannot provide the kind of hands-on, local and lasting support provided by community-focused banks. Non-banks’ virtual presence means that they are not truly of or for any particular community, and the formulaic algorithms upon which they rely to render high-speed credit decisions turn customers into mere numbers. There is no way for an “app” to understand an entrepreneur, his or her business, and its customers, suppliers and employees. Neither will an app be there to support a company if a loan is successful, nor to share in the risks and responsibilities of the loans that go bad.
The role of a community-focused bank extends far beyond providing loans to local businesses and individuals. It means understanding the volatility that debt introduces to a community, but also the economic prosperity it can nurture when deployed prudently. And it’s that economic prosperity community-focused banks are both enablers of and dependent upon. Credit well-extended helps create viable new small businesses, which means new jobs, filled by people who buy homes and cars, open checking accounts, save for college and retirement, go to football games, zoos and museums, pay taxes and give to charities.
We’ve supported small business in Buffalo for decades, and we continue to be proudly counted as the region’s top Small Business Administration lender, just as we have for the past 21 years. At M&T, we are resolute in our purpose and committed to our goal. We’re here for our customers when they need us—not when we need them. We’ve been here for Buffalo because that’s who we are and how we work. We know no other way.
So it is that, by funding and encouraging economic growth, we fuel our own prosperity. I’ve long said that the success of M&T is dependent upon the success of the markets we serve. But lending money is just one way we support our communities. Community-focused banks help support worthy local causes ranging from the arts to education. They champion philanthropic aims and their employees sit on not-for-profit boards, engage in public service roles and volunteer countless hours each year.
It is one thing to fashion slogans around community service. It is quite another to be able to point to a long track record of consistent and dedicated involvement. Community banking isn’t a matter of writing big checks to charities. It’s not about sound bites or billboards. Rather it’s about immersing a company and the thousands of brand ambassadors that comprise its employee ranks into the very fabric of a city—doing what needs to be done to make that place one that can be stronger and more successful for all who inhabit it.
I have several times used this platform to offer a number of pointed observations about our local economy and its prospects for future growth. Western New York’s economy has not, over the years since I assumed this role, inspired much optimism. I think I’ve found cause to make comments to that effect in 11 of my previous annual report letters. You’re probably tired of hearing that story…or tired, at least, of hearing me tell it. Today, I’m here to tell a different tale. The tide is turning. As I stand here with an eye toward the Buffalo skyline, I am optimistic, not just for our own company’s future, but for the city that has been our home and our headquarters since the day we were formed in 1856. I’m reminded that our stories are connected and I’m proud to know that M&T Bank has played a role in Buffalo’s resurgence just as the Queen City’s comeback has boosted our bank.
Business in Buffalo is, indeed, on the upswing. Western New York’s GDP has grown since 2007 at a rate that outpaces the national average. Governor Cuomo’s ‘Buffalo Billion’ program is helping to fund new construction projects in high growth sectors like health care and solar technology. These investments have meant a change to the city’s employment mix. The city’s workforce is becoming more educated. The percentage of residents between the ages of 25 to 64 with a bachelor’s degree or higher increased by 7% from 2010 to 2014. Today, manufacturing jobs are being replaced by high-paying positions to such a degree that the average weekly paycheck for a private sector employee has grown at a rate more than double the national average. Since 2009, private sector payroll income is up a total of $1.7 billion—a phenomenon that provides tremendous economic benefit for the community at large.
M&T’s own growth has paced the city’s. Our employee ranks have swelled from 2,649 in 1991 to 6,949 today. In fact, since 2008, M&T has been responsible for 40% of the net private sector job growth that has taken place in Western New York. And, of course, all those new employees need places to work so, over the past 25 years, we have almost tripled our use of downtown office space and now occupy more than one million square feet of real estate, playing no small part in our city’s renaissance.
That growth story has persisted for decades. A bank that was just the fourth largest in Buffalo back in 1983 is now the largest in Western New York, and holds more than 50% of the region’s deposits.
M&T has been good for Buffalo and Buffalo has been good for M&T Bank. We have certainly done our part to fund projects that have changed the landscape of this city and its comeback has been to our collective betterment. Some of the cranes you see reaching towards the sky were put there by customers whose businesses we helped to grow. M&T has provided a total of $4.7 billion in financing to Western New York companies, large and small, since 2010. Over that same time period, we’ve grown our business loan portfolio in our home market by 23.6%. Today, we do business with 44% of Buffalo’s business customers and are proud to serve as the primary bank for 76% of that population.
But our contributions to Buffalo go even beyond extending credit and opening accounts. M&T Bank has been, I believe, in the City of Good Neighbors, one of the very best. Because our prospects are so tethered to the city’s own, we have done everything we can to aid in its renaissance. That means funding the type of projects that support community growth, but it also means championing causes and volunteering our time. Beyond that, it means taking a leadership role, recognizing opportunities to bring local leaders together to affect positive, enduring change and realizing our obligation as a leading corporate citizen to improve an organization, a city and, ultimately, a region.
Ours is a city rich with character and tradition. Buffalonians have a fierce pride and loyalty for the things we believe distinguish us and bring our communities together—that give it its heart and soul. Whether it be football, the arts or architecture, M&T believes deeply in supporting that quality of life and preserving it for future generations. I’d like to give a couple examples of how we’ve made a big difference.
Twenty-five years ago, the Darwin Martin House, one of America’s foremost architect’s finest efforts, had fallen into severe disrepair. A once proud home stood vacant—on the brink of tumbling to the ground and away from memory. Seeing an opportunity to at once preserve history and impact the future of one of Buffalo’s most historic neighborhoods, M&T brought together local business leaders and helped launch a campaign to rescue the deteriorating landmark. We didn’t then just stand on the sidelines. We demanded participation from ourselves and others, issuing a challenge of sorts, stipulating that if $2.5 million were raised in support of the restoration effort, the M&T family would donate an additional $1.25 million.
It used to be that people felt there was no money in Buffalo and that these types of large-scale fundraisers just weren’t possible. We were proud to help prove otherwise. Today, after many subsequent fundraising efforts, the decades-long restoration of the Martin House is nearly complete, and Buffalo now boasts one of the finest examples of Frank Lloyd Wright’s architecture—one that serves as a reminder of our city’s heritage and its potential.
Consider also the story of the Buffalo Philharmonic Orchestra—an institution whose recent renaissance mirrors that of its home city. But in the early 1980s things weren’t going so well for Buffalo or its orchestra. The BPO, guided by a seemingly un-engaged board of directors, was in dire financial straits. Its musicians weren’t happy with their contract and it looked as though our renowned orchestra would inevitably fall silent. We saw an opportunity for change and engaged many to help save the BPO. The entire board was eventually transitioned and M&T managed the process of recruiting a new chairman. A new board was appointed and a new contract was swiftly negotiated with the musicians. These changes allowed the BPO to move forward on stable ground and build an audience and eventually a sizable endowment.
M&T Bank has been there the entire time. A succession of senior executives have been in service to the BPO for the past 30 years—contributing not just many hours of their time, but their professional skills, resources and vision. The M&T family has contributed $4.2 million to the BPO since 1992.
Today, our orchestra regularly fills Kleinhan’s Music Hall. In 2013, during a special guest appearance, it even filled Carnegie Hall in New York City. The BPO has gotten better and better but, like Buffalo, it has not yet reached a crescendo—so we’ll keep working.
Then there’s the story of our involvement with the Buffalo Zoo—an institution near and dear to the hearts of many families throughout the region. In the 1990s, the zoo was struggling—poorly funded and torn between a number of ill-conceived strategic plans. When a disgruntled board of directors fired its chairman, M&T saw an opportunity to fill a leadership void and take a leading role in reshaping the zoo and its future. The bank led an exhaustive executive search, ultimately identifying Donna Fernandes, a rare breed with business training to complement her background in zoology, to serve as Director.
The M&T family then donated more than $4 million to help the zoo regain its financial standing—monies that were eventually matched by both the county and the state. It then led the zoo’s first capital campaign, raising a grand total of $32 million. Leadership is more about action than words and we have always believed in setting the right example.
Today, the zoo is a cultural touchstone for our city—a place that continues to inspire child-like awe and wonderment and a place that unites children and adults alike. The Buffalo Zoo now regularly draws nearly 500,000 people per year—a 60% increase in attendance from those troubled days of years past. An active, involved board of directors led, in part, by M&T executives, has raised over $50 million since Donna first assumed her post, solidifying the zoo’s present and burgeoning its future. The zoo’s landscape is now more varied than Buffalo’s. In just a few short steps, you can venture from a tropical rainforest to the edge of the Arctic tundra.
I could tell you similar stories about the Albright Knox and Burchfield-Penney Art Galleries, the Buffalo Museum of Science and Shea’s Performing Arts Center and so many others. In each case, M&T’s leadership, involvement and financial support contributed to the preservation and prominence of important local institutions that serve as both bonding agents and sources of pride for local residents.
In some instances, we have saved a community treasure from being knocked to the ground, but in others we’ve built something great from the ground up. Our commitment to education has been both groundbreaking and transformative. The Buffalo Prep program we helped to found in 1989 to provide middle school children from low-income households with the tools to build a better future has grown by an order of magnitude from its humble beginnings. What was once an annual class of ten has mushroomed to 500.
In 1993, a partnership was formed between Buffalo Public School #68 and M&T Bank. We are proud that in a span of just three years, one of the city’s worst performing schools became one of its best. Since then our efforts to enhance educational opportunities for city children have matured and multiplied. After 18 years at School #68—a building since rechristened as the Westminster Community Charter School—M&T began looking to build on its success and applied for and ultimately received a $6 million Promise Neighborhood grant from the U.S. Department of Education—one of only five communities out of 339 total applicants to be so recognized. Not content with adopting a single school, we adopted an entire neighborhood located in the northeast corner of Buffalo’s east side—arguably the most disadvantaged zip code in the country’s fourth poorest city. We extended our commitment to education by providing services that would help a child from the proverbial cradle all the way to the time when they are ready to enter high school. It’s a story consistent with M&T’s philosophy to not just contribute dollars but to be truly involved, to take the lead and create positive, enduring change.
Today, I’m gratified to say that our Buffalo Promise Neighborhood program is making an enormous impact. Funding from numerous public and private partners now totals $45.5 million. Those dollars, stretched by the herculean efforts of 20 bank employees who work full-time for the program and 200 more who have volunteered their time over the last 12 months, have driven a great deal of positive progress in a neighborhood that was once the very embodiment of urban blight. In 2013, we opened a brand new $3.5 million Children’s Academy for pre-schoolers—a place where neighborhood children can receive the support they need to be kindergarten-ready when they ultimately matriculate into Westminster Community Charter School, where we’re still leading the way all these years later, or Highgate Heights, where we assumed a leadership mantle as a result of our commitment to the neighborhood.
But our work in Western New York goes far beyond things easily seen. What truly distinguishes our bank and our way of doing business is the way in which our thousands of local employees immerse themselves in the community. These are the stories you may not be familiar with. You probably don’t know about the M&T employee who began mentoring a student in fifth grade and developed a life-long friendship, or the impactful, behind the scenes ‘backpack’ program the bank has facilitated to provide nutritious food to children over the weekend when they’re not in school. We never told you about the bank’s support of the Saturday Series program at NativityMiguel Middle School where M&T employees educate underserved children on matters ranging from personal finance to personal wellness. You probably aren’t aware of ‘Writing With Light’—an educational writing and photography curricula offered through a collaboration between two local arts organizations and designed to serve the academic, social and creative needs of disadvantaged children that we’ve supported since its inception. One participant, a 14-year old refugee from war torn Sierra Leone, said of her involvement, “I write to share my thoughts and feelings and so I won’t forget.”
Each of these stories is about an employee and an idea. Each is, in its own way, impactful. At M&T Bank, we support the passions and pursuits of our employees and recognize the impacts they have on our communities. Operating far from the limelight, countless M&T bankers graciously give their talents and time because they believe in a cause and in its potential to change a community. These are but a few examples of a philosophy—a credo, really—that has defined our mission and our character. During our 2015 employee volunteerism survey, M&T employees in Western New York reported serving on 573 boards and volunteering 118,752 hours at 1,722 organizations. Over the past 25 years, employees have spent more than 2.1 million hours in service to local not-for-profits. And over that same time period, M&T Bank has invested more than $100 million in support of thousands of local organizations.
At M&T, bankers’ hours mean an around the clock commitment. Community-focused banking has and will be our way. It’s an all-encompassing philosophy indicative, I think, of how we do things and who we are. It’s a philosophy we’ve steadfastly adhered to as our bank has grown. We are to Baltimore, to Wilmington, Delaware and, most recently, to New Jersey what we are to Buffalo—a leading corporate citizen of and for the community committed to making positive contributions to civic vitality.
It is, in short, the way we work. Community-focused banking isn’t something we do occasionally or speak of when it’s convenient. It’s our way of life. We know no other. We get involved. We stay involved. We try to affect the kind of positive change from which all citizens of a community can benefit. We do the little things and the big things and everything in between. No idea is too small or too large. We are M&T Bank and we are immensely proud of the way in which we are of and for our communities. We are prouder still when our communities flourish and our customers succeed. We’re proud that what was once a small company from Buffalo has grown into one of the largest banks in the country—one with the scale and reach to benefit customers and communities across the northeast.
But we’ll never forget where we came from and still are. We were built here and here we will stay. We are Buffalo’s bank and we are grateful for that status and ever aware of the mantle of leadership it carries along with it. We’re so gratified to have played a role in Buffalo’s comeback. We’ve been headquartered here for 160 years and we plan to be here long into the future, actively bringing about change to a community we hold dear.
Robert G. Wilmers
Chairman of the Board
and Chief Executive Officer