ROBERT WILMERS ENTERS AN upscale steak joint on the edge of downtown Buffalo, New York, just after 8:00 p.m., and though the crowd is sparse, it takes him 15 minutes to get to his seat.
First, the chairman and CEO of M&T Bank Corp. sees an old friend who wants to chat, and then there’s a client to schmooze. Near the entrance an M&T banker is sharing drinks with a group from IBM Corp., which just struck a new relationship with the bank. Wilmers is gently reminded of the banker’s name as he approaches, and easily engages in some small talk. The chance encounter with Wilmers, the 77-year-old dean of upstate New York banking, causes a small stir around the table.
With $78 billion in assets, Buffalo-based M&T is the U.S.’s 16th-largest bank, but Wilmers, its leader since 1983, still runs the place like a small community institution. And that means he never
misses an opportunity to connect with clients in a way that can both help build the business and determine if they’re worthy of a loan.
His officers keep his calendar filled with client lunches and dinners as he moves around the bank’s geographic footprint. On these trips he feels compelled to offer his thoughts, no matter how controversial, on key issues confronting local communities or the industry.
“Banking is more fun and more interesting when you know your clients,” says Wilmers. “And it’s a lot easier to not make a dumb loan when you’re lending to the guy next door.”
This is banking M&T-style. It might sound a bit hokey in an era of global megabanks and financial crises. Then again, if other big-bank chiefs were as grounded as Wilmers, we might not have the kind of financial troubles we’re experiencing today. But given Wilmers’s age, investors and other observers wonder who will follow in his footsteps. The last guy who tried didn’t fare so well. Wilmers stepped aside as CEO in 2005, handing over the reins to his handpicked successor, 22-year M&T veteran Robert Sadler Jr. He remained chairman but returned to the CEO job less than two years later after Sadler, then 61, decided he didn’t like the job. A short while later Wilmers set up an ongoing internal competition for his position between the bank’s president, Mark Czarnecki, who oversees retail banking, the investment group and the internal functions of finance, technology and operations, and vice chairman Michael Pinto, who is responsible for the mid-Atlantic region as well as the commercial bank, treasury and credit. Czarnecki and Pinto are both 56. No one, including Wilmers, will say who’s winning. “There are probably a half dozen guys here who could do the job better than me,” he jokes.
Although no one seems worked up over the succession, maybe someone should be, in light of Wilmers’s outsize profile. “Bob is a guy who has a very broad view,” says Czarnecki. “He spends a lot of time thinking about various problems in the world, and he has a lot of connections.”
On the surface M&T looks like another boring regional bank, the type struggling with the ongoing effects of the credit blowout and recession. Its 770-branch network — a swath stretching from upstate New York down through central and western Pennsylvania and into Baltimore and Washington — looks uninspiring and presents challenges. There hasn’t been any exposure to vibrant overseas markets, for instance, or a powerhouse fee business to add pop to the income statement. M&T doesn’t engage in the securities trading that has fueled many big-bank income statements in recent years.
Even so, M&T’s performance amid the crisis puts almost every other bank to shame. Largely on the strength of superior credit quality and a simple, well-executed business model, the company reported a profit in each quarter of the crisis and generated $859 million in net income during 2011, up 16.7 percent from 2010. For the year M&T reported diluted earnings of $6.35, up 12 percent from $5.69 in 2010. The fourth quarter was noisy, with increasing noninterest expenses — mostly as a result of the company’s May acquisition of Wilmington Trust Corp. — lost revenue from a slumping mortgage business and new government restrictions on fees.
Yet net interest income was up 5 percent from the year-earlier period, while trust revenue soared. Credit loss provisions for the fourth quarter were $74 million, up from $58 million a quarter earlier (as a result of bad loans from Wilmington Trust) but down from $85 million in the year-earlier period.
Even with the charges and integration costs, M&T’s 9.67 percent return on average common equity topped that of PNC Financial Services Group, a well-regarded Northeast competitor (8.69 percent), and fell just shy of that of JPMorgan Chase & Co., the country’s largest bank (10.48 percent).
The kicker: M&T is one of only two banks in the Standard & Poor’s 500 Index — Chicago-based asset manager Northern Trust Corp. is the other — that did not cut their annual dividends during the crisis. At $2.80 a share, the payout on M&T stock recently yielded a healthy 3.75 percent.
M&T has been an attractive story for investors who want relatively safe exposure to the banking industry, which in this case, at least, isn’t a contradiction in terms. At a recent price of $80, the company’s shares were trading about 8 percent higher than in early 2008. That’s about 2.2 times M&T’s tangible book value and about 12 times consensus 2012 earnings projections of $6.73 a share. PNC was recently trading at 1.35 times tangible book value and 9.6 times 2012 earnings projections. JPMorgan was going for 1.05 times tangible book and a 7.5 multiple of the 2012 consensus number.
M&T “looks expensive, but it’s really not, given their proven earnings power,” says David George, a St. Louis–based analyst with Robert W. Baird & Co. He has a neutral rating on the stock, with a 12-month target price of $88. “They deserve the premium they get,” he says.
Although M&T has had some loan-quality issues, mostly related to commercial real estate, they’ve been relatively mild. Nonaccruals peaked at just 2.31 percent of total assets in 2010 and were 1.83 percent at the end of 2011. Among regional banks in a peer group assembled by SNL Financial, a Charlottesville, Virginia, firm that tracks the banking industry, only two institutions — San Francisco–based UnionBanCal Corp. and Cleveland’s KeyCorp — registered lower rates of nonperformers for 2011.
Kevin St. Pierre, a regional bank analyst for Sanford C. Bernstein & Co. in New York, calls M&T “without a doubt the best bank that I follow,” adding, “There’s this groupthink among investors that says no one can be immune” to the effects of the real estate slump. “But M&T is” — or is as close to immune as any bank can get today.
The company has capitalized on its relative strength, buying two small failed banks from the Federal Deposit Insurance Corp. and two larger troubled institutions, adding nearly $18 billion in assets with those deals, as well as some new geographies.
The latest move came in May: the acquisition of Wilmington Trust, a respected wealth management outfit that got into trouble financing residential developments along the Delaware coast. The price of $351 million, just shy of tangible book value, was immediately accretive, and viewed in-house as a steal.
That M&T has been allowed to both maintain its dividend and buy banks even as it still holds $381.5 million in capital from the government’s Troubled Asset Relief Program is a testament to regulators’ faith in the company’s ability to generate capital, says John Pancari, an analyst with Evercore Partners in New York. The plan has always been for M&T to repay TARP out of earnings. There has been no big rush because the compensation pressures arising from the government’s role aren’t as great as they are at other banks.
Indeed, M&T has already paid off more than $700 million in government funds, which it either grudgingly took itself in 2008 or inherited from banks it acquired, without raising additional capital.
Regulators have “given them a green light to earn their way out of TARP,” Pancari says. “They’re being given credit for how well they’ve run the bank.”
THE COMPANY HAS REPORTED 140 CONSECTUTIVE quarters of profits, dating back to 1976. But although M&T’s conservatism plays well now, it has more-limited appeal during boom times, when investors seek out growth.
Management views the fact that M&T is built to perform better in a downturn than a recovery as a badge of honor, and an important part of its growth story.
Since the early 1990s, M&T has bought banks in the wake of every financial crisis. Five years before the most recent, when a rogue trader caused huge losses at Baltimore-based Allfirst Financial, M&T found its way into a market that today is its biggest. This time around, M&T has filled out its mid-Atlantic franchise.
“Banking tends to be very volatile. Bankers figure out ways to do imprudent things over time,” says the company’s chief financial officer, Rene Jones, who at 47 is considered by analysts to be too young to succeed Wilmers. “We just try to keep things clean and healthy so that when things go bad we can take advantage.”
Even so, today’s market presents challenges. M&T’s credit profile may be better than most banks’, but it’s not immune to pressures from a lackluster economy and new regulations.
The company lost $17 million in the fourth quarter from the Dodd-Frank Wall Street Reform and Consumer Protection Act’s so-called Durbin amendment, which caps debit card interchange fees at about 21 cents per transaction, down from 44 cents previously.
Yet the Wilmington Trust deal could change the income statement significantly. Not viewed as a major player in wealth management, M&T was considered a long shot to acquire the Delaware bank.
But M&T paid off Wilmington’s $330 million TARP bill and took a $700 million markdown on its $8.1 billion loan portfolio, which is expected to reflect the full extent of its losses, in return for a 50-branch franchise in Delaware with $8.3 billion in deposits, and a big new source of fee revenue.
Though Wilmington boasts a big corporate trust business, perhaps more promising is wealth management, targeted at clients with at least $10 million in assets. M&T has a small wealth management operation geared to the mass affluent with $200,000 or more to invest, but it doesn’t draw the big money.
The plan is to cross-sell Wilmington’s expertise throughout the M&T network. M&T’s customers include plenty of wealthy people, ranging from Manhattan real estate developers to more than 6,000 owners of sizable family businesses, Pinto says. In buying Wilmington Trust, M&T nearly quadrupled its assets under management, adding Wilmington’s $58.4 billion to its own $21.9 billion.
Bernstein’s St. Pierre says, “There are six things a regional bank can do well, and until the Wilmington deal, M&T did five of them”: attract low-cost deposits, underwrite loans well, maintain lending margins, be efficient and be a disciplined guardian of capital. “Now they have the sixth, fee income.”
Not much for conference calls or investor conferences, Wilmers makes his views known primarily through his annual shareholder letter.
Lately, he’s been using the bully pulpit afforded by M&T’s success to speak some hard truths about his bigger brethren and Washington’s response to the financial crisis. Congress blew it with Dodd-Frank, he says, not because of what the law does but because of what it doesn’t address, including too-big-to-fail banks that he says continue to engage in irresponsible practices and put the system at risk.
In a keynote address at an American Banker symposium in Washington in September, Wilmers derided the megabanks, which, he said, make most of their money from trading activities that turn their institutions into “virtual casinos” instead of the facilitators of commerce they’re intended to be.
In 2010, he noted in a letter to shareholders last February, the six largest U.S. banks reported trading revenue of $56.1 billion, or 74 percent of their combined pretax income.
Those banks use such gains to craft lavish compensation schemes that suck the best and brightest from other banks and from more-productive pursuits. In 2007, before compensation was capped for TARP recipients, the top six bank CEOs earned an average of $26 million — 516 times the U.S. median income. (That same year Wilmers took home $1.15 million.)
M&T’s CEO believes in the old notion that banking’s primary function is to grease the economy’s wheels. It’s a utility, a means to an end, not an end in itself.
“Should the chief executives of financial services firms logically earn more than those in the general economy that they are supposed to serve?” he asked in the investor letter.
What we’re left with is an industry “unmoored from its traditional role in the commercial economy,” he wrote. “It has . . . come to distort our labor and capital markets — and puts our economy at great risk.”
He added: “It is clear that the U.S., which once set the moral tone for financial standards and oversight of financial markets, has lost — or is at least at risk of losing — its moral high ground.”
Depending on whom you talk with, Wilmers is either the best thing to happen to Buffalo or the worst. An unabashed conservative, he is known for his fierce opposition to organized labor and fervor for budget cuts. Critics complain that he is an arrogant, heavy-handed union-buster, part of a cabal of city business leaders that has hijacked local government for its own benefit.
Or, almost conversely, that he likes to throw his weight around. In 2004 he offered to fund the search for a new Buffalo schools superintendent. A year later, as head of the search committee, he persuaded the school board to hire a controversial pro-charter-school candidate for superintendent who resigned this August in the face of poor test scores and the loss of federal funding.
Few locals lack an opinion on Wilmers, and he doesn’t seem to care. He’s a community banker, and bankers are supposed to speak their minds and fill any leadership void. “It’s important for people in positions of authority to take positions on the issues of the day and be involved,” he says.
He sits on several charitable boards, and M&T sponsors zoos, orchestras and inner-city schools. Among Wilmers’s greatest sources of pride is the 300,000 hours of community service M&T’s 15,000 employees logged last year.
At 77, Wilmers typically starts work at about 8:00 a.m. and wraps things up around 10:00 p.m., often with a client dinner. The first half of the week, he’s in Buffalo for management meetings and to touch base with clients. The latter part of the week is often spent in New York City, working with clients there. He lives in both Manhattan and Buffalo.
Born in New York City, Wilmers split his childhood between there and Europe, where his father worked as an executive for Sofina, a Belgian utility holding company that still exists today. He graduated from Harvard University with a degree in history and landed his first banking job as a loan officer for Bankers Trust Co.
In the 1960s he volunteered on John Lindsay’s mayoral campaign and served on a committee Lindsay formed to study the city budget. He impressed the new mayor and was offered the post of deputy finance commissioner.
At the end of Lindsay’s first term, Wilmers took a job with Morgan Guaranty Trust Co.’s international banking group. He landed a position in the firm’s Belgian operations and eventually ran them before returning to New York to head international private banking. In 1980, Wilmers set up an investment firm and began buying shares in First Empire State Corp., as the $2 billion-in-assets holding company that became M&T was then known. Three years later he took the helm.
Wilmers is not afraid to take risk if the potential returns justify it. In the early 1990s he paid $800,000 for three small New York City check-cashing operations, figuring M&T could clear $250,000 a year from those and build a business. “It was a big industry with no reputable players,” he recalls.
Robberies, inside theft and culture clashes doomed the initiative, and the bank sold the operation for a loss two years later. “We didn’t make money in any single month,” Wilmers says. “The thing we learned was, you should never go too far from your culture.”
Most of the risks he takes seem to pay off, however. In 2003, M&T doubled its size with the $3.1 billion acquisition of Allfirst, a franchise owned by Allied Irish Banks of Dublin that had lost $691 million the previous year as a result of improper foreign exchange trading. AIB had already shuttered the business by the time M&T bought the company. (M&T does not do any forex trades for its own accounts, only for clients.)
The deal itself felt comfortable to Wilmers. What didn’t sit right was his marketing team’s insistence on paying $75 million for the naming rights to the stadium of the National Football League’s Baltimore Ravens. “I said, ‘We’re not on an ego trip.’ They said, ‘You don’t realize that we’ve just bought a bank here and no one in Baltimore has heard of us.’ ”
Today the deal, and M&T’s relationship with the Ravens, form the foundation of the bank’s brand in the city, where M&T ranks a close No. 2 in deposit market share behind Bank of America Corp., well ahead of No. 3 PNC. “It was a phenomenal thing to do, and it was done over my dead body,” he says.
Few banks reflect the values of their leaders more than M&T does. But there’s more to the M&T story than risk-aversion. A weekly management-group meeting, along with a risk management review, is part of the glue that holds the expanding franchise together.
M&T separates its operations into 17 geographical regions, each with its own president and advisory board of local business leaders. They know the dynamics of their markets and the individuals involved, and make most of their own lending decisions.
The backbone is a strong corporate function. The company operates under one banking charter, uses one technology platform and boasts the same basic menu of products, services and expertise throughout its branches.
When the CFO of a middle-market business client had a question about swaps, August Chiasera, a senior vice president for deposits and lending, put him on the phone with M&T treasurer Scott Warman. “Scott spent ten minutes answering his questions,” Chiasera recalls. “A smaller bank wouldn’t have the capabilities, and a bigger bank wouldn’t have the time.”
Careful underwriting, combined with the ability to either sidestep or quickly exit some of the riskiest loan categories, was critical to M&T’s strong performance during the crisis. The company’s lending style blends sophisticated numerical analysis and modeling with the instincts of an ear-to-the-ground banker.
To be sure, the luck of its markets — upstate New York, and the Northeast in general, didn’t experience the steep run-up in real estate prices that other areas did — had something to do with M&T’s performance. But management was smart enough not to go chasing after business in Arizona or Florida like many of its regional bank peers. M&T doesn’t do much lending outside of its core five-state branch territory.
“We’ll take risks we think we can manage, but they’re in small bites, and none of them is big enough to knock over the bank,” says vice chairman Pinto.
Insiders own 21 percent of the company’s shares, and equity-based incentives are applied liberally from top to bottom, by Wilmers’s design.
Wilmers, either personally or through various foundations and investment vehicles, controls 7.92 percent of the company, a holding valued at roughly $700 million. (Warren Buffett’s Berkshire Hathaway owns about 5 percent of the company’s shares.)
Of course, equity-based incentive schemes did not keep big banks, including Lehman Brothers, from running off the rails. On the contrary, huge stock option rewards at the top, as well as big cash bonuses for star traders, encouraged wild risk-taking that produced short-term profits at the expense of long-term value.
M&T employees receive restricted stock and options, with a 50-50 cash-equity split for senior management, and more like 65-35 in favor of cash for frontline workers.
The incentives are based largely on group goals. A commercial loan officer’s incentives include customer retention, new customer acquisition, loan structure, credit quality and even community involvement. A regional president’s awards are based in part on credit quality in his or her area.
“It’s mostly about making sure you’re generating revenue for the company,” says Stephen Braunscheidel, the company’s human resources chief. “Woven into that is what we think distinguishes us over time: making sure we have a sound credit policy that everyone can understand. Making money for the bank means putting on good loans that aren’t charged off.”
As the equity holdings grow, the bond between company and employee does as well. The average M&T employee has logged more than ten years with the bank. Employees work harder because of the ownership stake and are more cautious about client selection. “We have senior decision makers on both the line and risk sides who are vetting clients with a view toward a long-term relationship,” says Robert Bojdak, M&T’s chief credit officer. “We’re not chasing deals.”
Loan underwriting is strict, but the decisions are local for anything below the $20 million level. Decisions are reached by consensus and with an eye to building profitable relationships.
“When we’re looking at a loan proposal, the last page is always about the long-term profit potential of the relationship,” vice chairman Pinto explains.
M&T’s culture isn’t just incentivized; it is also handed down and reinforced by the company’s leaders. The average tenure of the senior management team is more than 20 years. Most are company lifers. They recognize that banking is a competitive commodity business in which superior execution, common sense and opportunism all trump strategy. When it comes to mergers and acquisitions, for instance, there’s no pin-filled map of potential conquests hanging on a backroom wall.
“We don’t have big strategic plans, but we think strategically,” Pinto says. “We know who we are and what makes sense for us.”
This culture gave M&T the spine to hold firm in the mid-2000s when analysts criticized the company for not pursuing some opportunities and quickly slamming the brakes on others because it didn’t like the risk-reward equation.
In February 2007, just when the subprime mortgage problem was first coming to light, M&T tried and failed to sell $1.4 billion of so-called Alt-A mortgage loans — not quite prime, but not subprime either — to Wall Street.
“We reacted very quickly,” recalls president Czarnecki. “We ferociously shut down everything that had to do with the business, and by August we had the exposure nailed down.” When the bank saw signs of trouble, it stopped making new loans and held on to those it intended to sell. “It wasn’t that we were so visionary,” says Czarnecki. “It was, ‘My God, we screwed this up. What are we going to do about it?’ ”
The quick response may have saved M&T hundreds of millions in losses. Similarly, when competition for residential construction loans in New York City began to overheat in 2005, the credit team fashioned several “optimistic scenarios” to justify supporting client borrowing needs. In every one, “rents would have needed to rise sharply while expenses fell” for the deals it was considering to make sense, says chief credit officer Bojdak. The bank dramatically scaled back the business, despite criticism from clients and the Street.
“Great management team; nowhere to go” is how Czarnecki characterizes one analyst’s reaction. He also recalls fielding pointed questions about M&T’s home equity business, which was growing more than 2 percentage points below the industry average because the bank was unwilling to underwrite out-of-market loans through brokerages.
The charge-off rate on M&T’s home equity portfolio from 2007 through 2010 was just 1.7 percent, compared with 6.5 percent for its peers.
In recent months Wilmers has been spending time in Delaware, where the Wilmington acquisition has met with local suspicions of an outsider’s intentions and genuine anger over M&T’s plans to slash some 700 jobs in the back office.
In March Wilmers walked into the lion’s den as the keynote speaker at the New Castle County Chamber of Commerce’s annual dinner. “Let’s face it, there isn’t anyone in this room tonight, or in the state of Delaware for that matter, who’s happy about the reasons we’re here,” he told the crowd.
He talked frankly about Wilmington’s “overwhelming” capital and credit issues, and pledged to add a few dozen jobs to an operations center and to build a data backup facility in the state.
The crowd wasn’t satisfied. But Wilmers was sharp and blunt, an old-style community banker who gets involved, greases the local economy and, if he sticks to his knitting, generates an enormous amount of long-term value for himself and his shareholders as well as his community.
The question is whether Czarnecki, Pinto or anyone else can do the same. • •
