18 April 2017

Good morning. As has become our practice, yesterday we announced our earnings for the first quarter of 2017. Net income amounted to $349 million and diluted earnings per common share were $2.12. We earned a net operating return on tangible common equity of 13.05%. Growth of commercial and industrial loans, commercial real estate loans and auto loans remained solid but, like the industry, somewhat off of the pace set in 2016. Offsetting this growth was the continued planned run-off of the residential mortgage loans 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 an annualized 0.19%, a level in line with each of the past three calendar years and one that 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 growth in customer balances as well as the Fed’s actions to increase interest rates in December and March. Expenses remain an area of focus as we balance the amount we are investing in infrastructure and technology with the rate of revenue growth and the pace of the change we are introducing to the bank.

Last year marked the first time since 2007 that we engaged in share repurchases. Consistent with the capital plans approved by our Board and the regulators, we repurchased $641 million of M&T common stock in 2016 at an average price of $114.37 and paid dividends on common stock totaling $442 million. We continued our capital distributions in the first quarter of this year by purchasing an additional $532 million of common stock and by raising the quarterly dividend by five cents, to seventy-five cents a share. We have capacity under the Plan to repurchase an additional $231 million by the end of the second quarter.

It’s at a forum such as this that someone in my position is expected to speak directly about the condition of the company. I could, in fact, go on at some length about the progress we have made in serving more and more of New Jersey or the work we have done to build the foundation for renewed growth. But, with your permission, I’d like to speak less about M&T itself and more about a subject important to us, to the communities we serve and to me personally: the state of small business in America and what, precisely, should be done to restore it to the health so crucial to our economy. As bankers, we’ve seen first-hand its virtues. Entrepreneurs with big ideas have shaped and reshaped our world. Their ideas, fueled by courage and optimism, bring the world innovations that create jobs; the companies they form occasionally become quite large. Their bounty enriches communities and creates a better life for many. And, as we’ve come to see in the cities and towns throughout the communities we serve, a business’s contribution to society does not necessarily end even when it closes its doors.

This country was built on a foundation of small businesses. That’s as true for M&T as it is for Apple or Starbucks. We were established 161 years ago to serve the needs of manufacturers in Buffalo, NY and traders traversing the Erie Canal, and are now the second most valuable publically traded company in Upstate New York. Throughout our history, we’ve sought to help small businesses—and the communities we both serve—to thrive. Small businesses serve as the incubators of expanded employment and economic growth. And it’s these companies—flickers of an idea that become engines of job creation—that turn points on a map into rich communities.

For small businesses, when they succeed, do not stay small. Let me remind you, Apple, now the world’s most valuable brand, literally began in a California garage. Eastman Kodak, the company that harnessed the power of the camera and made it available to the masses, was founded by a high school dropout who, after long days working as a bank clerk, spent longer nights perfecting dry plate technology in his mother’s kitchen.

Stories like these demonstrate precisely why it’s so important to create an environment that promotes and rewards the formation of small businesses, and not one that encumbers and stifles them. There’s no way to predict which dream will become reality. In 1971, three former University of San Francisco students—one a writer, the others teachers—opened a single storefront to sell coffee beans. Today, Starbucks has more than 22,500 stores around the globe and serves some 60 million customers every week. You can bet the Seattle City Council never thought that coffee was the city’s next big thing.

The same dynamic has been at work in the communities we serve. Sixty-six years ago, three men rented space in an empty airplane hangar in East Aurora and formed a company selling a new device called a servovalve—a product that transforms tiny, electrical signals into precise and powerful motion control. Business developed slowly, but today the controls made by the company we’ve come to know as Moog have become standard equipment on military and commercial aircraft, satellites, space vehicles and high performance industrial machinery. The company employs 10,000 mostly technical personnel—2,500 in Western New York alone—and has annual total revenues that regularly exceed $2 billion—a long way from its first order of just four valves. We are proud to call Moog a customer. So too are we proud of such customers as New Era, which began as a family business on Buffalo’s Genesee Street, when Erhardt Koch borrowed $5,000—not from a bank, but from his aunt.  Today it has 1,200 employees and makes it possible to buy a Buffalo Bills cap—and quite a few others—in 80 countries around the world. There are similar stories to be told in the many markets we serve. Our customers in Baltimore include Under Armour, started in 1996 when 23-year-old Kevin Plank had an idea about using a new fabric technology for athletic clothing. With $4 billion in revenue today, the firm has outgrown his grandmother’s basement where it all started. It was Syracuse that launched retail furniture giant Raymour and Flanigan, which has grown from the single store owned by Bernard and Arnold Goldberg in 1947 to nearly 100 stores in seven states today—while still remaining family-owned.

It’s true, of course, that businesses come and go—but that, as they say in the Lion King, is part of the circle of life.  It’s worth noting that even businesses that have since closed their doors leave behind a legacy that continues to help their communities. I think of Buffalo’s Knox family. The Woolworth empire they founded may be gone—but the Albright-Knox Art Gallery remains, educating and inspiring the leaders of the future. And, of course, the legacies of once important local firms are still very much with us, providing community benefits through such important philanthropic organizations as the John R. Oishei Foundation. Endowed by the fortune built by Buffalo’s John Oishei at the Trico Corporation, which developed America’s first windshield wiper, the foundation has more than $300 million in assets and has distributed more than $15 million annually across Western New York over the last five years.

All told, that’s why we remain committed to our role as a small business lender, not only helping the established but the start-up. We are proud to have been the nation’s sixth largest SBA lender during the 2016 fiscal year and number one in Buffalo, Baltimore, Philadelphia, Washington, DC and all of Delaware.

In light of its importance, I wish I could say that all is well with America’s small business sector.  But I’m afraid the facts tell a different story. It used to be, back in the late 1970s, that small businesses employed 40.2% of the private workforce. Today, that number has fallen to just 34.3%. Since 2007, large businesses have seen employment grow by 2.4 million jobs, while small business employment is down by 1.9 million positions. Hundreds of thousands of small businesses have closed their doors—and they’re not being replaced. From 2003-2007, an average of 529,055 start-ups came into being each year. But during the time period from 2010-2014, that number declined by 25% to 399,483.

Those small businesses that remain open are often struggling to do so. The roughly 5.7 million main street small businesses that employed fewer than 100 employees during 2014 had annual sales that were 2.9% below 2007 levels when adjusted for inflation.

We recently surveyed a cross-section of our customers to better understand the challenges they’re facing. We reached out to folks in industries such as healthcare, retail and manufacturing; to companies that have been around for more than half of a century and to others just getting their start. Time and again, our inquiries reached the same conclusion—small business owners are frustrated.

Almost unanimously, they articulated three main obstacles that stand in their way as impediments to growth. First, they tell us of a climate where even entry-level labor is hard to come by. Second, they tell us that the cost of that labor continues to escalate as the effects of the Affordable Care Act, increases to the minimum wage and proposed rules governing overtime pay are digested. And finally, they tell us more broadly that burdensome regulation has, in addition to increasing their cost structure, taken them away from focusing on what’s really important—operating and growing their business.

It’s the last point that’s particularly disconcerting. Owning a small business is no easy venture in even the best of environments. Resources are often in short supply and the list of ‘to-dos’ is seemingly ever growing. The attrition rate is high. Those that survive often do so because of their investments in sweat equity—the extraordinary amount of time and effort they put into making their business work. Distractions can be dooming as can expense increases with no corresponding revenue. So when small business owners spoke, we listened.  When they told us regulation was taking them away from their shops, we sat down with owners from a variety of businesses to understand their personal experiences.

Entrepreneurs told us that simply understanding regulation requires immense amounts of their time and capital. In order to operate at all, they must first comprehend and adhere to the standards set forth by the applicable industry regulator, and then deal with agencies including the FDA, the EPA and the FCC. The list of rules is invariably lengthy and not, as one owner put it, “easy for an amateur to understand.”
Consider regulation as experienced by a promising high-tech, hospital-focused start-up with offices here in Buffalo. Its young founder, starting a business for the first time, tells us that even as he’s in “growth mode” with fewer than a dozen employees, he must already navigate the rules of two major federal agencies and that it’s not even clear how to identify the rules with which his product must comply. Asking the agency directly may not help, he says, “It can take months to get a response.” And hiring a consultant to better understand regulation—as he may wind up doing—will mean that less of his already limited capital can go toward supporting the sales force he needs to sell his product around the world.
Others spoke of employment regulation’s effect on the labor market—alluding to the litany of provisos governing matters from minimum wage to overtime pay. Increasing regulation has, in tandem with social program legislation like the Affordable Care Act, made it far more costly for small companies to do business.

Recent Department of Labor regulation that would potentially double the salary level at which overtime pay is required presents a quandary for the president of a prominent commercial real estate development and property management firm. It would be, as he put it, “a killer for service businesses” in general and for the property management arm of his firm in particular. This businessman, talented as he is, can’t control how much it snows in Upstate New York. He never knows when or for how long his snow removal crews will need to work.

The president of a retail chain with over 40 outlets echoed a similar sentiment. He described “endless meetings” to understand employment regulation and ensure compliance, but his larger concern was the time his senior management team had to spend off of the sales floor and away from the day-to-day operations of the business. It’s a circumstance that’s far from ideal for a company that uses service to differentiate itself from its big box competitors.

A seasoned entrepreneur, at the last company he ran, appointed his wife COO. Unfortunately, in a testament to the times we live in,  she was less focused on the business itself and more on becoming an expert in the Affordable Care Act—and how to comply with it.  Her training, he says, “cost us a fortune”—both out-of-pocket and in her time away from helping the business to grow. They even considered ways of breaking up the company into small concentrations of fewer than 50 employees—a move that would, of course, have absolved them from certain Affordable Care Act burdens.

Understanding the rules is, of course, just one part of the challenge. Complying with them is a different matter altogether. Scores of new regulations have added a host of data collection and reporting requirements. Regulatory watchdogs expect companies to implement the control structures necessary to monitor and report on their complicity, forcing even small businesses to invest heavily to implement new processes and complex IT infrastructures—in effect forcing even the smallest businesses to act like much larger ones, at a cost of time and money.

The owner of a fledgling medical device company, this one in Baltimore, describes dealing with regulation as “a huge piece of overhead” and notes that he’s been forced to invest in a costly risk management infrastructure just to demonstrate compliance—to “prove he isn’t doing anything wrong.” One of his four senior management positions—a role focused on regulatory affairs—is, as he termed it, little more than a “documentation job.”

The head of a manufacturing firm noted that the annual exercise to update his employee handbook was something he managed himself for the first 18 years of his firm’s existence. This time around, updating the handbook, he says, “required a total overhaul,” and had to be handled by an attorney.

Even our friend, the successful retailer with 40 outlets, who ran those “endless meetings” to better understand the regulatory expectations of his business, couldn’t solve his problems without additional personnel. He had to add a staff member to his HR department, purely to “keep up” with labor laws and, even at that, estimates his outside legal fees have doubled in the past year.

Small businesses aren’t, of course, operating in a static environment. Each and every day they face new challenges from new competitors. But rather than confront key questions concerning their strategic direction head on, small businesses are forced to spend precious time attending to regulatory-related matters. A growing mass of regulation unduly impacts small businesses. It slows them down. It adds expense. It makes it hard to grow.

It’s no wonder that in an environment where the deck is seemingly stacked against small businesses, fewer of them are growing or even forming. With regulation stymying them, it’s impossible to know what we’re missing—the successors to Moog, New Era and Under Armour that never had their chance.
It’s clear that small businesses are struggling and could use an advocate. One might naturally look to the Small Business Administration to play that role. Unfortunately for small businesses, the SBA—established in 1953 for expressly that purpose—is under-delivering on its mission to ensure the availability of capital to small businesses and strengthen their ability to contribute to the U.S. economy.

The SBA has 505 pages of its own regulations that govern processes and procedures pertaining to lending origination and servicing. These rules can change frequently, are often unclear and left open to interpretation, and can occasionally work to the detriment of the small businesses they purport to help. The SBA recently implemented changes to its process for approving loans to franchisees. This new approach, one that essentially mandates a “one size fits all” policy for franchise lending and limits the flexibility of the franchisor, has been heavily criticized by the industry and has led to major franchisors refusing to participate in SBA programs. The SBA has, through its tinkering, thusly removed a potential financing avenue for some small businesses. This policy update, it should be noted, was one of 14 the SBA issued in 2016. And with five additional such notices through just the first quarter, the SBA is on pace to surpass that total in 2017.

Rule changes like this, and the industry required to understand them, inflicts yet another wave of bureaucratic burden on the banks that would make capital available and on the small businesses the SBA was designed to promote. As bankers, we have experienced how regulation has held back small business lending. While total SBA lending is up over $1 billion through the first half of the 2017 fiscal year, a deeper look at the data suggests that the truly small businesses aren’t benefitting. The SBA recently adopted policies that are increasing a lender’s cost to originate loans under $150,000. Lenders are therefore forced to accept smaller returns, increase the cost to the borrower or pull back from small-balance lending altogether. Since enacting the changes in October 2016, new loans less than $150,000—funding to businesses that would by any reasonable designation be considered small—have fallen 12.5%.

So complex are the SBA and its lending requirements, that many banks are pulling out entirely. The number of lenders making at least one SBA loan decreased by 17.8%, or 442 institutions, over the five-year period that concluded in 2016.

The lenders that do continue to participate are focusing on making SBA loans in excess of $2 million—a threshold that allows them to generate the returns required to cover increasing program participation costs. Of course, the truly small business doesn’t need $2 million—it might need $200,000 or even $20,000 just to open its doors or fulfill that first big order.

The Small Business Administration is running counter to its name—the businesses it supports are increasingly not small at all. In 2007, a year that might be considered its high water mark, the SBA approved 99,603 loans at average size of $144,113. In recent times, the number of units approved has fallen by more than 35% to 64,073, while the average loan size has more than doubled to $376,536. Loan units and dollars originated at or above that $2 million threshold have more than doubled since 2012 and now comprise nearly a third of all SBA lending.

Taken in total, the SBA is making fewer loans, creating fewer jobs and supporting fewer small businesses than it was prior to the Great Recession. Despite the fact that loan origination volumes increased by 64.3% between 2007 and 2015, the SBA is supporting 38.2% fewer businesses and 19.7% fewer jobs. No wonder small businesses are stagnating. Their supposed advocate has strayed from its core mission.

It is quite extraordinary in light of all this adversity that we have recently begun to see small business owners take a turn toward optimism. The National Federation of Independent Business (NFIB), the country’s largest small business association, reports that its Index of Small Business Optimism recently reached its highest level since 2004, thanks to a December swell that featured the largest month over month optimism spike in the survey’s 31-year history. It’s a surge likely fueled by the belief that the new Administration will follow through on its promises to invest in infrastructure, reform the tax code and reduce regulatory burdens.  
  
But these feelings of optimism must be considered fragile, in light of what we’re hearing from real people grappling with a number of all too real problems. Their testimonials make it clear that we must, as a nation, do more than pay lip service to small business formation. We must take stock of how public policy is helping—or harming—it. We must acknowledge that we have created an environment that makes it very difficult for the going concern to keep going and all but impossible for a start-up to move forward.
I stand here as the voice of our customers. They will tell you that their burden is significant—and that change can matter. The importance of government policies that favor the formation of small businesses and cultivate the human capital to sustain them cannot be overstated. For the sake of our communities and for our future, it’s time to listen and it’s time for action.

Robert G. Wilmers
Chairman of the Board
and Chief Executive Officer
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