This letter cannot fail to discuss the unexpected and dramatic change that occurred this past December: the death of Robert G. Wilmers, Chairman and Chief Executive Officer. No other loss could be so central to our system of values — so core to the essence of who we are today. No amount of comment or reflection could capture the impact of an individual so influential. Yet, it is such reflection that helps us to comprehend where we are today and brings clarity to where we are headed.
There is no denying that, over the course of 35 years, Bob became synonymous with M&T. To a great extent, his success was our success, and his impact was broad, as he influenced banking, civic, and community leadership alike. Consider that the American Banker chose him as Banker of the Year just six years after recognizing him with a Lifetime Achievement award — or that diverse commentators looked to this very letter year after year for guidance as to where banking was headed — or quite possibly where it should. His civic and community recognition was diverse, ranging from Citizen of the Year in Buffalo to accepting one of France’s highest distinctions, the Officier de la Légion d'Honneur.
Leading an organization for three and a half decades — setting its standards for performance, its principles for how we approach serving our clients, colleagues, shareholders, regulators, and communities — is not a common occurrence. It would be only natural for each of our constituents, many different people — from many different places, to be concerned about our direction.
To understand fully why M&T will not only carry on, but carry on in the tradition of Bob Wilmers, requires one to see that which is not readily apparent. Permit me to explain. Underneath the surface at M&T there exists a continuous process — a process of self-selection — that, over time, has forged a unique culture. For many years, potential employees had to be willing to join a regional bank headquartered in Buffalo, marked by strong performance, but operating in slower growth, mid-tier cities in an area once described as the “rust belt.” Joining our team, uprooting one’s career and family, is a choice that not all were willing to make. Those who have chosen not only to join M&T, but to remain with us, have readily embraced our approach to banking itself. At its foundation, this approach is distinguished by careful underwriting and a broad understanding of, and involvement in, communities. In modeling and managing those principles, Bob Wilmers set in motion the best sort of succession plan, one based not on any single person, but on a team of colleagues who share a consistent approach to business grounded in a time-honored culture. It is a process that has repeated itself, time and again, at all levels in our company.
Bob’s skill at planning for the future was distinguished by an awareness that the growth and prosperity of M&T was never the product of one individual. To be sure, it has been and will continue to be influenced by the quality of our leadership, but it is no top-down enterprise. It stretches through layers of M&T and beyond to our advisors, and to civic, cultural, and political leadership throughout our communities. It transcends banking and is a partnership with other businesses in our markets. Preparing for the future, done well, is tackling the most important issues of the day, preparing for both internal and external changes.
Bob’s planning for the future started close to home, looking for top talent, whether it was found among business school graduates or English majors, to position M&T for success in a changing world. He established a culture in which emerging leaders were constantly presented with new challenges, most often through a seemingly unending stream of probing questions. Those who successfully navigated this process were afforded new opportunities for growth — whether through moving to a new market such as Baltimore or Poughkeepsie; taking on a new challenge such as responding to a regulatory requirement; or finding new talent oneself — all the while asking questions of our own. The fruit of these efforts over decades is an experienced senior leadership team, with an average tenure of 23 years with M&T. The three senior leaders who served as Vice Chairmen in recent years, and remain at the helm of M&T today, have a combined 83 years of experience with M&T — we each spent nearly half of our lives working side by side with Bob. He also realized that it would sometimes be necessary to reach beyond our own walls to secure the best talent in critical disciplines vital to M&T’s longterm success. Take the example of our wealth management practice. As our reach expanded, he recognized that the investment advisory capabilities that had served us well in our local markets no longer sufficed as we increasingly competed on a national and global scale. He promoted an effort to expand our capabilities to better serve these larger clients, an effort that yielded 19 new senior professionals including an experienced team of economists. Similarly, he ensured that we invested in risk management and compliance capabilities commensurate with our growing reach, adding 328 professionals throughout our risk management area over the past five years. A leader with more than 30 years of experience was brought in to direct this compliance area — just one among many examples through which our senior ranks were reinforced with new expertise. Bob’s planning touched every part of the organization.
His preparation did not overlook the importance of M&T’s Board of Directors to the company’s culture, growth, and character over the years. Understanding this deeply, he was active in ensuring that its makeup was well-suited for the challenges facing the company and its customers today. Six of the 15 non-management directors, or 40%, were elected within the last three years. These new members contribute a wealth of expertise in disciplines relevant to the future direction of M&T, ranging from advanced manufacturing, to healthcare, to cyber-security, to the science of banking and finance itself. They complement the rich experience of the entire Board, with an average tenure of 12 years and which includes four members with prior experience as chief executive
officers of banking institutions.
Recognizing that M&T’s prospects are tightly linked to its communities, for Bob, planning for the future extended outside the company into the leadership of the civic and cultural organizations that constitute the fabric of the regions that we serve. Such involvement reached far beyond financial contributions, as important as those can be, to cultivating the leadership of the various pillars of the community. In practice, supporting leadership could start with sponsoring a national search to find individuals with appropriate skills or assembling local business talent to serve on boards. From there, it blossoms into regular meetings where questions are asked, assumptions are challenged, and goals are established. If it sounds familiar, it should. In much the same way that talent is nurtured at M&T, so too is it developed in organizations spanning education, municipal and state government, business advocacy groups, museums, and the arts from Buffalo to New York City to Baltimore and beyond. Planning for the future, by necessity, is comprehensive, and Bob was never done.
These are but a few examples of preparations, some widely known and others far less visible, that have positioned M&T to prosper, whatever the future might bring. This understanding of succession is a long way from what might be called the formal, formulaic, or mechanistic approach on which regulators and even large shareholders do — and probably must — insist. But it’s the best sort of succession. It is what has been happening here for over three decades.
It is truly an honor and privilege for me to have been chosen to serve — but there are others who came before me who could have done the same, and there are colleagues today who equally stand ready to carry on the M&T way of doing business. The building of M&T, preparing for the future, is a constant effort, never finished. But my colleagues, my fellow Board members, and I have chosen to be part of this endeavor over many years. It is one to which we are deeply committed and well-prepared to continue in the interest of our clients, communities, and shareholders alike. So, yes, to all who are part of the M&T family, rest assured that Bob’s planning, his legacy, built a strong foundation for our prosperous future.
ABOUT THE MESSAGE
The M&T Message to Shareholders has a long, rich history. The title is Message to Shareholders, but its spirit is that of a message to one’s partners. For M&T, that also includes employees,customers, civic leaders, and the local markets we serve. Since the audience is broad, so too is the range of topics considered. No matter the topic, candor and honesty prevail above all else, even if the subject is unpopular. The reasoning is straightforward — events and issues that are important to our partners are, by definition, important to us.
The Message to Shareholders was extremely important to Bob. Throughout his career, he humbly did his work, quietly leading by example, without calling attention to himself. But every year, through this Message, we could count on him to become unusually visible and vocal about issues important to M&T and our partners. He realized that his experience and his position afforded him the opportunity to use these pages for a greater good. He conveyed information that was compelling, insights that were keen and warnings that were often prescient. Raising issues, in his eyes, raised awareness — spurring change, advancement, and progress in our business, in our industry, and in our markets. Said simply, being an advocate for one’s partners is the embodiment of being a good banker — a community banker.
Inside the company, the Message to Shareholders is simply referred to as “The Letter”; mention those words and everyone understands the reference. Its preparation is a team sport. Many colleagues are involved and countless hours are spent researching topics and trends as they emerge throughout the year. Each of these issues is assessed for its business impact and its worthiness for inclusion in these pages. Involvement, in any capacity, is a badge of honor. While the actual writing of the message occurs mainly in January and February, the work goes on all year, starting as soon as the ink is dry on the prior year’s message.
The annual Message to Shareholders is a tremendous source of pride for everyone at M&T. It is our privilege, in fact our duty, to continue to prepare the annual “Letter” in this tradition of candor, fulfilling the legacy that defines M&T.
FINANCIAL RESULTS
This past year marked the 35th and, sadly, final year of Bob Wilmers’ stewardship of M&T on behalf of its shareholders. Thirty-five! Many of us have experienced the rewards of entrusting our capital with him for well over three decades, benefiting from the prudent and conservative approach to banking that he espoused. Indeed, from the start of the second quarter of 1983, when Bob was named Chief Executive Officer, through the date of his passing, those who invested with him enjoyed a more than 126-fold appreciation in M&T’s stock price, which equates to a 15.0% compounded annual growth rate. The company was profitable in each of his 139 quarters at the helm. Earnings per share increased in 28 of 35 years, including 23 consecutive years spanning two recessions. Such growth was due, in no small part, to the fact that credit losses averaged 35 basis points and exceeded 1% of loans only twice throughout his tenure. Growth in earnings supported
growth in dividends, which increased for 26 consecutive years from 1983 to 2008. Those payments, which held steady even in the aftermath of the severe recession, resumed their ascent this past year.
Bob’s final year of stewardship was a capstone to his career and his track record, and yet another year in which we benefited from his extraordinary leadership. Let’s take a look at the numbers:
Net income surpassed that of any prior year in our company’s history. Net income was $1.41 billion last year, rising 7% from $1.32 billion in 2016. That net income represented diluted earnings per common share of $8.70 for the past year, an increase of 12% from $7.78 the previous year. Last year’s net income expressed as a return on average total assets and average common equity was 1.17% and 8.87%, respectively. Both figures were improved from the 1.06% and 8.16% scored in 2016.
Since 1998, M&T has consistently reported “net operating earnings,” which we believe provides investors with insight as to how mergers and acquisitions affect our financial performance. Net operating income for 2017 was $1.43 billion, increased from $1.36 billion in the prior year. Diluted net operating earnings per common share were $8.82 last year, a rise of 9% from $8.08 in 2016. Net operating income, expressed as a rate of return on average tangible assets improved year over year to 1.23% in 2017 from 1.14%, while the rate of return on average tangible common equity grew to 13.00% from 12.25% in 2016.
Taxable-equivalent net interest income, which represents the difference between what we earn on loans and investments and what we pay on deposits and borrowings, swelled by nearly $319 million or 9% and totaled $3.8 billion in 2017. That improvement was fueled by a widening of the spread between the average yield on earning assets and the average cost of funds that support those earning assets of 36 basis points (hundredths of one percent) that produced a net interest margin of 3.47%. That measure was 3.11% in 2016. Thoughtful management of interest rate sensitivity, not just in 2017 but in years prior, enabled us to benefit from the actions taken by the Federal Reserve last year to raise the upper end of its target range for the short-term Fed Funds rate to 1.5% with three increases, following just a single raise in each of the two preceding years.
Tempering the impact of the widened net interest margin, loan growth was somewhat muted in 2017. Strong growth in consumer lending, primarily loans to finance automobiles, recreational vehicles, and boats, was not enough to offset planned runoff in our portfolio of residential mortgage loans primarily acquired through our merger with Hudson City Bancorp, Inc. (“Hudson City”). Commercial loan balances decreased as new originations were insufficient to outpace unusually high levels of payoffs and paydowns.
Slow but steady economic growth, combined with lower unemployment and rising asset prices, continued to bolster our clients’ ability to service their loans from M&T. Net charge-offs as a percentage of average loans were just 16 basis points, down slightly from the previous three years and matching the levels last seen in 2006 and 2000. Otherwise, that net charge-off rate was the lowest level reported since 1987. Reflecting that strong repayment performance and other factors, the provision for credit losses totaled $168 million in 2017 compared with $190 million in 2016. The allowance for loan losses increased slightly from $989 million at December 31, 2016 to $1.02 billion at the end of 2017, representing 1.16% of outstanding loans compared to 1.09% at the end of 2016. That modest increase reflects the changing composition of our loan portfolio.
Non-interest income grew at a steady pace as well, increasing by 2% or $34 million after excluding $21 million of gains on investment securities in 2017 and $30 million in 2016. Mortgage Servicing, Wealth Management, and Institutional Client Services, the latter two of which we refer to and have branded as Wilmington Trust, were bright spots. Residential mortgage servicing saw the onboarding of 191,003 loans last year, adding some $39.4 billion of principal balance to our servicing platform. Trust income, primarily derived from our Wilmington Trust businesses, continued to grow steadily, rising 6% over 2016. That increase reflected the impact of balance growth from existing and new clients, both aided by robust capital markets activity.
Expenses remained well controlled, even though last year included elevated levels of legal-related costs that predominantly pertained to matters at Wilmington Trust prior to its acquisition by M&T in 2011.
Significantly, we reaffirmed our commitment to the communities that we serve by contributing $50 million to the M&T Charitable Foundation in 2017. That was up from $30 million in the previous year and represented the largest amount of annual giving in our nearly 162- year history. The charitable contributions in 2016 and 2017 extend a practice that dates back three decades, prior even to the Foundation’s establishment. Over that 30-year timeframe, contributions to community organizations have averaged 2.15% of our net operating income. The recent contributions will help to sustain our commitment to good corporate citizenship well into the future.
The results this past year produced an efficiency ratio, which expresses noninterest operating expenses as a percentage of revenues and which reflects the cost to produce a dollar of revenue, of 55.1%, improved from 56.1% in 2016. Generally speaking, a lower efficiency ratio is preferable.
The impact of the Tax Cuts and Jobs Act which, under the accounting rules, resulted in $85 million of additional income tax expense in the past year, paves the way for lower Federal income tax rates in the years ahead.
During 2017, we repurchased 7,369,105 shares of M&T common stock at an average price of $163.64 per share, returning $1.2 billion of capital to shareholders as well as an additional $457 million in the form of common stock dividends. This amounted to 123% of 2017’s net operating income after preferred stock dividends. Distributions notwithstanding, capital ratios improved. The Common Equity Tier 1 ratio, a measure of tangible common equity relative to risk-weighted assets and the capital ratio closely watched by our regulators, grew from 10.70% to 10.99%. Common shareholders’ equity per share improved from $97.64 to $100.03 while tangible common equity per share increased from $67.85 to $69.08.
TRENDS IN BUSINESS LENDING
Tempering our optimism from M&T’s improved earnings and profitability was the somewhat muted growth in loan balances. The decline in our commercial and industrial loan portfolio during a time of steady economic improvement is quite unusual, and initially counterintuitive. These loans, which finance the growth of middle market and small businesses within our markets, had increased at an annualized rate of more than 7% from the end of the financial crisis through 2016, as the economic recovery took hold. However, this trend slowed and then reversed in 2017, as our total balance of commercial and industrial loans declined by 4% during the year.
An examination of the wider banking sector suggests that this trend is not unique to M&T. The rate of growth in commercial and industrial loans by U.S. banks has gradually declined over the past three years, and remained barely positive in 2017, growing only 1.2% year over year. The same trend was evident for M&T’s regional bank peers, institutions of a comparable size and with a customer focus similar to our own. The median comparable loan growth rate for these peers was only 1% during the first three quarters of 2017, markedly slower than the 3% growth rate observed as recently as 2016. Deteriorating business loan growth during a sustained economic expansion is without historical precedent for banks. Since World War II, commercial and industrial loan growth by U.S. banks has declined to a 1% annual rate only during or in the immediate aftermath of recessions.
One might conclude that we are seeing weakened demand for credit, overall. Not so, however. Credit to businesses, broadly defined, increased in 2017 at a pace consistent with that in recent years. Yet, its source has changed. A growing share has migrated from banks to the capital markets — corporate bonds underwritten by investment banks and, increasingly, loans underwritten by a new breed of asset managers, often sponsored by private equity partnerships or hedge funds. These loans and bonds are generally not held by their underwriters, but instead resold to a variety of credit investors such as insurance companies, public mutual funds, private loan funds, and a plethora of other such vehicles. For investors, loans are but one of a multiplicity of investment options from which they may choose as they manage the constant tradeoff between perceived risk and potential returns. It is not surprising that this transition has occurred amidst a sustained period of placid market conditions, as the memories of the financial crisis of a decade ago recede. However, past experience suggests that benign conditions do not last forever. The differing model of credit investors may have significant implications for the businesses that have come to rely on them as a source of credit — implications which may only become fully apparent should conditions deteriorate.
Recent data highlights the extent of this change in the funding of companies. Growth in business credit totaled $412 billion in the first three quarters of 2017, the vast majority of which was through the capital markets. A full $250 billion of this growth, or more than 60% of the total, was in the form of corporate bonds, which have been the predominant source of new credit to businesses since the financial crisis. In contrast, lending by traditional U.S. commercial banks was, in aggregate, responsible for only $39 billion, or less than 10% of the total increase. Commercial and industrial loans extended by the 25 largest domestic banks, which hold more than half of all such loans by banks, or $2 trillion in total, grew only $5 billion in aggregate during this timeframe. The remainder of the growth in business credit was comprised of loans originated through the capital markets, and often held by credit investors. For instance, holdings of business loans by mutual funds alone increased by $13 billion, more than two and one half times the amount for large banks.
This trend represents a fundamental shift that impacts the bond between borrowers and the holders of their credit, particularly for middle market companies like those served by M&T and our peers. The relationships between borrowers and credit investors are more distant, and often more temporary, than those between borrowers and traditional commercial banks.
For banks like M&T, lending is not a one-time event but a longterm partnership. Inherent in our model is the expectation that, when we extend credit to a business, we will retain that loan through good times and bad — this links the fate of lenders and business owners. Our decisions are predicated on lending in a manner sustainable for both parties.
In contrast, the transactional nature of the capital markets yields a very different relationship between these new credit investors and businesses. Such investors seek flexibility to allocate capital among a range of alternatives, of which loans to businesses are but one of many. While these investors have played a growing role of late, there is no certainty that this will continue — either when returns in other areas of the economy prove more attractive, or when the perceived risk of investing in such loans becomes too great. This is amplified by the fact that those who invest in loans to businesses through vehicles such as mutual funds lack a direct relationship with or knowledge of the borrowers in whose debt they have invested. They rely instead on third parties that underwrite and structure the loans but have little ongoing interest in these businesses.
These trends have occurred against a sustained backdrop of stable market conditions, marked by exceptionally low volatility — a term that describes the fluctuations in financial markets, such as the prices of stocks or bonds. The low volatility of recent years suggests that investor sentiment has been favorable indeed — their worries remain distant. Measures of investors’ expectations for future bond market variability this past year were near a two-decade low. The average level of one gauge of stock market volatility during 2017 was half its average during the prior twenty years. Conditions have been so docile that, according to a recent analysis that stretches back to 1885 — the year that Grover Cleveland, a former mayor of Buffalo, became the 22nd president of the United States — stock market fluctuations last year were among the lowest over that 132-year period. In this environment, prices of U.S. financial assets, as measured through equity and bond indices, have increased almost without interruption since the depths of the crisis.
However, as in past economic expansions, low volatility can create complacency for both borrowers and lenders, as the memories of past crises fade and the road ahead looks clear. Businesses are able to access financing with terms that do not reflect the true extent of the risk incurred. Amidst easing credit conditions, borrowers may overstretch, taking on debt that may prove unsustainable in a downturn.
Against this backdrop we have observed, with concern, changes in lending to American businesses — notably, growing debt burdens and loosening credit standards. Businesses with access to financing have taken full advantage of the current benign conditions, borrowing more at historically low costs. U.S. corporations issued a record $1.6 trillion in bonds during 2017, with the volume of bonds issued by firms lacking an investment grade credit rating reaching a level more than double that prior to the financial crisis. The volume of new loans to companies with high levels of debt, or so-called leveraged lending, reached a new record of $1.4 trillion during 2017, also more than double the pre-crisis amount. As a result, total corporate debt has increased by $3.3 trillion, or 62%, since 2008.
This past year marked the second-highest number of acquisitions of middle market businesses by private equity partnerships, transactions that are largely financed with debt. We observed this trend among the middle market companies that we serve. The loans used to fund these acquisitions are sold to credit investors through structures including collateralized loan obligations and private credit funds. Such funds, which may be sponsored by the very same private equity partnerships, have grown to hold more than $600 billion of assets under management. In such acquisitions, the debt that these companies must support relative to their future earnings has reached the highest level since the financial crisis.
Credit investors have also become far more willing to forgo the protection offered by so-called covenants that, for example, limit borrowers’ ability to take on additional debt or require them to meet specified financial targets. There has been a steady drumbeat of new nomenclature marking this change: “covenant-lite,” “covenant-wide,” among many others — each ultimately a euphemism for an easing of credit standards. A growing share of new loans excludes covenants that were heretofore standard. Leveraged loans lacking such protections altogether, also known as “covenant-lite” loans, comprised less than 5% of issuance as recently as 2007, prior to the financial crisis; this increased to 75% in 2017. The relaxation in standards that began with the largest companies has recently extended to borrowings by smaller firms. For example, 36% of syndicated loans to middle market firms in 2017 were considered “covenant-lite,” up from 15% just one year prior. For many other loans, at least one of the typical standards is often waived, or the terms to which the borrower must adhere are eased. These so-called “covenant-wide” loans may offer the appearance of protection but, in practice, allow firms to operate with higher leverage than was historically the case.
As the economy continues to expand and corporate earnings continue to improve, the potential long-term repercussions of these changes are not yet visible. Credit conditions appear favorable. Delinquency rates on commercial and industrial loans for banks, and corporate bond defaults, are near the lowest levels in the last thirty years. Yet economic cycles are likely not things of the past. Inevitably, some unforeseen event will bring these favorable conditions to an end.
Of particular interest to M&T is the potential impact of these trends on businesses residing in our local markets and our portfolio should economic fortunes change. At all times, banks like M&T have a strong incentive to work with customers under duress to achieve the best possibleoutcome for both lender and borrower. Often, this requires flexibility and persistence as customers work their way through challenges, with the bank serving as not just a provider of credit but as a trusted advisor. While not every story ends in success, this patient approach generally yields the best possible outcome for all parties including the community at large. As distant credit investors take the place of community banks, it is very much unclear whether their decisions will, or even may, consider factors beyond those financial in nature. Such investors clearly cannot fill the advisory role played by banks, and seem unlikely to consider in their decisions factors such as a business’s vital role in its local economy. In some sense, the increase in volatility that appeared during the writing of this Message in February of 2018 is a welcome development — reminding businesses of the fickle nature of the capital markets in the face of changing investor sentiment. While we hope that the new lenders are never put to such a test, we cannot help but be concerned by the potential implications for businesses and communities of the type that we serve. Regardless of what the future may bring, our deep, long-standing local market knowledge will remain a key source of advantage, both in serving our customers and understanding emerging risks that we, and our clients, may face — knowledge that the capital markets will be hard-pressed to replicate.
We believe that we can best fulfill our duty to shareholders and clients alike by adhering to our long-standing underwriting discipline, informed by the insights gained through our businesses. Avoiding imprudent risk has allowed us to serve as a consistent source of credit to our customers in good times and bad. We will not jeopardize our ability to do so in the future by compromising our standards in pursuit of short-lived gains. The new terms such as “covenant-lite” will not enter our lending vocabulary. Viewed through this lens, our pace of loan growth in 2017 is more palatable.
OUR PROGRESS
The conditions of the past year have, however, also provided M&T with the opportunity to take stock and to plan for the future. It was a time to further advance projects started years ago and a time to begin new efforts, to sow the seeds for continued success. In an era of benign credit, an appreciating stock market, and rising interest rates — the proverbial good times for banking — it was the perfect time to prepare for what history tells us will eventually be a return to less favorable circumstances.
Understanding and managing risk, credit risk in particular, has been our historic source of strength. But this is hardly the time to be complacent. We fully recognize that the loans that would be tested by the next credit crisis already exist in our portfolio or will enter it in the coming months and years. It’s precisely why we continued to invest in our credit infrastructure this past year.
Our investment in 2017 spanned the credit life cycle — from the assessment that we perform on credit applications, to the monitoring of credit already on our books, to the way that we handle problems. Our credit teams used newly-developed, risk-based underwriting methodologies to concentrate their efforts where the risk might be considered greatest. This more efficient approach frees up resources to perform extensive what-if analyses on our portfolios. The credit administration team, whose ranks have grown by 44% to 184 individuals in the past three years, performed 9,815 different analyses on a population of 29,277 loans in 2017. We have refined our monitoring capabilities to capture changing market conditions, and redesigned risk monitoring reports to help better capture the changes in our risk exposures. Our experience reminds us that these new capabilities will one day prove useful.
The year also brought continued progress in building out our important New Jersey franchise, a legacy of our acquisition of Hudson City. Residential mortgage balances have declined at a pace consistent with our expectations when we agreed to the merger in 2012. Hudson City’s $28 billion of residential mortgage loans at that time have decreased to $12 billion today, contributing to our earnings while at the same time releasing capital. Returning more of this capital to our investors remains a top priority.
The other legacy of Hudson City was a branch network that provided an entrée to an attractive, contiguous market. Our investments in this region during the year continued our progress over the period since the acquisition. This past year we hired 15 branch managers within the state and, following an approach that has long served us well, relocated 15 additional branch managers from other corners of our footprint to help propagate our culture and way of doing business — creating a powerful combination of intimate market knowledge and tenured small business expertise. That group of branch managers, along with seven new business bankers, was put through the paces of a ‘boot camp’ designed to teach mastery of small business prospecting, product, and credit skills. This ongoing commitment to continuing education has helped grow our team of small business experts seven-fold to 145 since 2016. It’s clear that this ‘boots on the ground’ approach is working, facilitating our growth in the region. The newly-expanded team added over 300 new clients in 2017. In just a short time, we have put down roots in the Garden State and are already the state’s fourth-ranked Small Business Administration lender. Our 24 commercial lenders also continued to advance with momentum in this business, increasing the number of customers by 11% and average outstanding balances by 14% relative to the prior year. Progress in New Jersey is steady and measured — and will continue that way.
Also worthy of note is the progress of the businesses under our Wilmington Trust brand, which are closer to realizing their full potential after several years of investment. Their risk management and control environment has been upgraded. Significant efforts were made in talent and leadership development as well as enhancing our service offerings. Along the way, a few non-core businesses were divested — those that did not fit our blueprint — generating gains that funded additional investments.
Now, two core fee businesses — Wealth Management and Institutional Client Services — emerge poised to diversify our business, bring new clients, and add more value to the existing. Wealth Management provides private banking, fiduciary, investment management, and wealth planning advice to clients ranging from first-time investors to families whose wealth spans multiple generations. With a particular focus on business owners, the team partnered with Babson College to produce original research on business succession planning strategies and delivered 378 strategic wealth assessments to our clients in 2017. Institutional Client Services provides corporate trust, custody and retirement plan services to corporations and other entities — establishing and maintaining records, processing payments, and safe keeping collateral and securities. Its trustee market share for U.S. asset-backed and mortgage-backed securities increased to 13.3% in 2017, ranking fourth, a significant improvement from its 5.5% share in the prior year. In 2017, these businesses together contributed 34% of M&T’s total fee revenue. The positive momentum of these businesses during the year — with 6% growth in trust fee income, combined with greater operating efficiency as the investments of earlier years bore fruit — enhanced their operating leverage and earnings.
While there were many achievements in 2017 of which to be proud, the resolution of the Written Agreement with the Federal Reserve stands head and shoulders above all others. This past April, our regulators determined that our Bank Secrecy Act/Anti-Money Laundering (“BSA/ AML”) infrastructure was of a sufficient scale and quality to terminate that agreement which had been in place since June of 2013. This marks the end of a four-year journey that our firm has no desire to repeat — but one we will never forget. No other event in our history, including the financial crisis and 24 bank acquisitions, has had such a lasting impact on our operations and our psyche. To have our regulators recognize the significant investments and achievement in building a sustainable, scalable BSA/AML program is especially gratifying.
That period of time truly did prove costly and even restrictive on our ability to grow. Our spending on BSA/AML was a significant part of a broader investment in risk infrastructure that exceeded $1.7 billion over those four years. It is true that this investment will pay dividends in keeping us safe, and can be leveraged to better understand our customers. Our new risk management infrastructure and talent also position us extremely well for advancing our business approach and culture to new clients and adjacent markets. However, the cost of falling behind — the need to catch up at rapid speed — served to crowd out resources that were needed for critical investments in customer convenience and new services. Looking back, it is clear that we could have better served our constituents by not falling behind in the first place. That one is on us — but so are our plans for the future.
LOOKING FORWARD
Over the four months from May to August of this past year, we took it upon ourselves once again to reflect on the past five years and to look forward to the next five. Our efforts stem from a keen awareness that constant adaptation is needed to keep pace with the changing banking landscape. Economic conditions, the legislative and regulatory environment, competition, consumer preferences, and the pace of innovation are vastly different than they were even a few years ago. Ways of banking that were previously deemed revolutionary are now considered ordinary.
Against this backdrop we set priorities to focus on those areas with the greatest opportunity to bring value to our clients and for M&T to continue to differentiate itself in the face of increasing competition. Each of our businesses has a vital role to play in driving our evolution.
The heart of our commercial banking business has always been the extension of credit based on deep local market knowledge. However, a study conducted as part of our review identified several areas where we have the opportunity to better support the full needs of our clients. These results highlight ways for us to build upon our traditional lending relationships by presenting clients with a broader solution set, including specialty businesses ranging from payment processing, to insurance, to providing strategic advice on topics ranging from acquisitions to taxefficient structuring. As a foundation for this initiative, we will seek to both attract top product specialists in targeted areas and invest in additional product training so that our bankers are better equipped to “bring the whole bank” to our clients. Incentives matter as well — we will recognize and reward collaboration among our lenders and product specialists as they work together to broaden the client dialogue. The success of our work also depends on the quality of our supporting technologies. For instance, major upgrades to our commercial loan origination systems estimated to cost $69 million are currently underway with the aim of relieving administrative burdens, thereby enabling our teams to spend more time advising clients. We are also investing in tools to make it easier for businesses to manage their working capital. Upgraded technology and enhanced talent in our specialty commercial businesses complement our expertise in lending and local market knowledge, enabling us to meet the comprehensive needs of businesses that we serve.
It is easy to attribute our history of financial strength during the most difficult points of an economic cycle to our conservative approach to credit. However convenient, such attribution masks an equally important factor — the stability of our core deposit franchise and our customers’ affinity for sticking with M&T as their principal depository over long periods of time. In this light we examined our growth in new checking accounts, our most stable form of funding. Our research revealed that in recent years, 49% of new M&T checking accounts were opened by customers age 35 years or younger, compared to an average of 55% for an industry benchmark. Keeping pace with the changing preferences of our customers — both current and future — is essential to maintaining this principal advantage. Doing so will require augmenting our longtenured employees with additional expertise in digital, data analytics, and marketing. It will also require regular training and revised incentive structures to help accelerate adoption of the digital services we deliver. A steady stream of upgrades to our mobile application will assist customers not just with account opening and access, but with money movement and security. Notable among them will be the 2018 launch of Zelle, a consumerto-consumer mobile payment solution. As investments are made in digital capabilities and talent, the number and location of our branches and ATMs will continue to be evaluated against the pace of transition in our customers’ preferences.
The progress in our Wealth Management practice during 2017 positions this business for continued growth. Consider that slightly fewer than ten percent of our commercial customers avail themselves of our transition planning or wealth management services, or that an additional 165,000 consumers who utilize our retail banking services could be considered “affluent” based on the amount of money they have available to invest but do not currently use our planning services. By partnering with commercial bankers, Wealth Management professionals and their broad suite of offerings are perfectly suited to serve business owners contemplating ownership transition, preserving the wealth earned over a lifetime. These same professionals will also bring their expertise to the affluent consumers that we serve. Realizing the full potential of this business will require hiring additional experienced client advisors in key markets. The preparatory work of the last few years is ready to pay dividends.
Similarly, growth in our Institutional Client Services (ICS) business, both in revenue and capabilities, has established strong momentum. But, as with our other businesses, there is still upside. For instance, ICS realized the largest growth in market share among U.S. corporate bond trustees in 2017, but with a 4% share, significant opportunity remains. Similar potential for growth exists in the municipal bond, structured finance and loan agency markets. The industry is taking notice, enabling us to attract leading talent into each of these growing product areas, with 149 new hires in 2017 alone. We will seek to build upon this momentum in order to expand our capabilities, both nationally and internationally.
Our evaluation also revealed that our pace of developing and deploying new technology, particularly in the planning stages of projects, could be further refined. We identified an opportunity to become more nimble by shifting to agile development approaches — delivering new products and services more quickly and at a lower cost, shortening time to market and payback. The use of outside partners to deliver emerging technology solutions provides another means toward this end, leveraging their expertise to expand our capabilities.
Beyond all else, no factor has been more responsible for our longterm success than M&T’s commitment to consistently developing and maintaining a deep pool of talent. It is true, of course, that ensuring that our business model remains relevant requires a combination of growth in fees, prudent risk management, efficient capital and resource allocation, and cultural adaptation. However, not a single one of these is attainable without a continued investment in our colleagues — both existing and new. The process of reframing and refreshing our approach to talent, how the company attracts, retains, and develops employees to meet the changing environment, is the key to continuing to differentiate M&T long into the future.
We look forward to 2018 with great optimism. The financial results and the work done in 2017 lay the foundation upon which we can build on the successes of the past. As the company, the industry and indeed, the world evolve, so will our talent, our capabilities, and our business practices — just as we have done for the past thirty-five years.
OUR COLLEAGUES
I am particularly appreciative of the efforts of my 16,793 colleagues who come to M&T every day, to make a difference in the lives of our customers and our communities. It is they who are the real heroes, the difference makers, the ones who have made M&T so successful in the past and will carry us into the future. Our appreciation is more than just words. We are committed to helping our colleagues, across all generations and backgrounds, to grow their talents. Part of that growth will include exposure to broad and diverse experiences, equipping our colleagues to successfully navigate the full range of challenges they may face. But most of all our commitment means engaging and empowering our employees by creating an environment where everyone can thrive, where each of us has an equal opportunity to reach our full potential and to share in the success of M&T.
René F. Jones
Chairman of the Board and Chief Executive Officer
February 22, 2018