M&T’s new CEO sees unprecedented change in business borrowing

BUFFALO — In his first annual “Message to Shareholders,” M&T Bank’s new leader paid tribute to his predecessor and explained an unprecedented change in business borrowing.

M&T Chairman and CEO René F. Jones began the message acknowledging the legacy of Robert Wilmers, who died suddenly in December at the age of 83. “There is no denying that, over the course of 35 years, Bob became synonymous with M&T.” 

Jones shared one measure of Wilmers’ success. He wrote that people who invested in the bank’s stock in the second quarter of 1983, when Wilmers was named CEO, and held the shares until his passing, would have seen their investment grow at a 15 percent compounded annual rate over the decades. That would have produced a 126-fold increase in their original investment. An $8,000 investment then would be worth more than $1 million now.

Jones wrote that M&T was carrying on Wilmers’ banking tradition, explaining that there is a process of self-selection at the bank. “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.”

Jones also said the “Message to Shareholders,” a Wilmers innovation referred to as “The Letter,” would go on. “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.”

Discussing the bank’s results for 2017, Jones wrote that net income was up 7 percent to $1.41 billion. Additionally, net interest margin — the difference between the average yield on assets and the average cost of funds that support those assets — climbed from 3.11 percent to 3.47 percent.

Concern about commercial loans

Jones discussed in depth what appeared to be a weakness in the bank’s 2017 performance: a decline in commercial and industrial loans.

“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 percent 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 percent during the year.”

According to Jones, M&T’s results were not unique among banks. Overall bank business lending across the country was up just 1.2 percent. “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 percent annual rate only during or in the immediate aftermath of recessions,” he wrote.

It’s not that businesses aren’t borrowing, he said, but that they are going around banks and borrowing from capital markets. They are getting needed capital from corporate bond offerings and loans from private-equity partnerships and mutual funds.

“This 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 of which may only become fully apparent should conditions deteriorate,” he wrote.

The shift is large, according to Jones. Business credit grew $412 billion in the first nine months of 2017, $250 million of it — 60 percent — came as corporate bonds. Some $13 billion in new loans were made by mutual funds, Jones said, with shareholders who have no direct relationship with the borrowers.

“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,” he wrote.

While markets are strong, the problems this may create aren’t visible, Jones said. However, in tough times businesses sometimes turn to their lender as an adviser.

“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,” Jones wrote. “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.”

That may matter at some point, he said, adding that “economic cycles are likely not things of the past. Inevitably, some unforeseen event will bring these favorable conditions to an end.”

M&T Bank operates branches in New York, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia, and the District of Columbia. It ranks number one in deposit market share in the 16-county Central New York area.

BUFFALO — In his first annual “Message to Shareholders,” M&T Bank’s new leader paid tribute to his predecessor and explained an unprecedented change in business borrowing.

M&T Chairman and CEO René F. Jones began the message acknowledging the legacy of Robert Wilmers, who died suddenly in December at the age of 83. “There is no denying that, over the course of 35 years, Bob became synonymous with M&T.” 

Jones shared one measure of Wilmers’ success. He wrote that people who invested in the bank’s stock in the second quarter of 1983, when Wilmers was named CEO, and held the shares until his passing, would have seen their investment grow at a 15 percent compounded annual rate over the decades. That would have produced a 126-fold increase in their original investment. An $8,000 investment then would be worth more than $1 million now.

Jones wrote that M&T was carrying on Wilmers’ banking tradition, explaining that there is a process of self-selection at the bank. “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.”

Jones also said the “Message to Shareholders,” a Wilmers innovation referred to as “The Letter,” would go on. “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.”

Discussing the bank’s results for 2017, Jones wrote that net income was up 7 percent to $1.41 billion. Additionally, net interest margin — the difference between the average yield on assets and the average cost of funds that support those assets — climbed from 3.11 percent to 3.47 percent.

Concern about commercial loans

Jones discussed in depth what appeared to be a weakness in the bank’s 2017 performance: a decline in commercial and industrial loans.

“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 percent 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 percent during the year.”

According to Jones, M&T’s results were not unique among banks. Overall bank business lending across the country was up just 1.2 percent. “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 percent annual rate only during or in the immediate aftermath of recessions,” he wrote.

It’s not that businesses aren’t borrowing, he said, but that they are going around banks and borrowing from capital markets. They are getting needed capital from corporate bond offerings and loans from private-equity partnerships and mutual funds.

“This 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 of which may only become fully apparent should conditions deteriorate,” he wrote.

The shift is large, according to Jones. Business credit grew $412 billion in the first nine months of 2017, $250 million of it — 60 percent — came as corporate bonds. Some $13 billion in new loans were made by mutual funds, Jones said, with shareholders who have no direct relationship with the borrowers.

“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,” he wrote.

While markets are strong, the problems this may create aren’t visible, Jones said. However, in tough times businesses sometimes turn to their lender as an adviser.

“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,” Jones wrote. “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.”

That may matter at some point, he said, adding that “economic cycles are likely not things of the past. Inevitably, some unforeseen event will bring these favorable conditions to an end.”

M&T Bank operates branches in New York, Maryland, New Jersey, Pennsylvania, Delaware, Connecticut, Virginia, West Virginia, and the District of Columbia. It ranks number one in deposit market share in the 16-county Central New York area.