M&T Bank (pg. 2)

For all his talk of community, Wilmers, a soft-spoken, slender man with a dry wit who was educated at Harvard and spent part of his upbringing in Belgium, is not a typical Western New Yorker. He's not much for hockey or football, and in a town of Labatt Blue drinkers, Wilmers owns a winery in Bordeaux (its 2006 Haut Bailly garnered 95 points from wine expert Robert Parker). He spends part of every week in Manhattan, where he has been seen arriving by bicycle at the restaurant Daniel.

But for all his patrician leanings, Wilmers is revered by blue-collar Buffalonians for his ability to create jobs (M&T is now one of the largest private employers in the city), his aggressive support of Western New York business interests, and his philanthropic endeavors. The best known of those is probably M&T's 16-year sponsorship of a once-failing Buffalo K-8 school. Wilmers first became involved with the Westminster Community Charter School when he asked the city to allow the bank to work with its worst-performing school. M&T has spent almost $12 million on teacher training, curriculum reform, and new facilities, and has worked closely with parents. Today Westminster is ranked among the top 10 elementary and middle schools in the area.

Wilmers's preferred communications tool is his annual shareholder letter, a Buffett-esque essay in which he has often complained about the New York State tax system or bemoaned the state of public education. He is also a power player: He hosts dinners in the M&T offices for political and business leaders and recently became chairman of the Empire State Development Corp. "He has been one of Buffalo's leading corporate citizens and champions," says Byron Brown, Buffalo's mayor. "He's not shy about expressing his opinions, but it really comes from his desire to help."

Nor is Wilmers shy about owning up to his mistakes - although the bank has avoided the most disastrous results of others, it has not been perfect. As Wilmers writes in the 2008 shareholder letter, "It will not do, however, to claim that we've succeeded because we've avoided failure." He is referring to the fact that at the top of the market his company, looking for a boost after growth slowed in traditional markets and acquisitions became too costly, did succumb to a few exotic investments. In 2005 the management committee accelerated its origination of Alt-A (less than top-quality) mortgage loans. Two years later it purchased $131.7 million of CDOs and took a 20% stake in a Miami-based commercial mortgage company, Bayview Lending Group.

In early 2007, just as the mortgage crisis began to hit home, M&T abruptly announced that it had tried - and failed - to sell its Alt-A portfolio and would keep the $883 million of loans on its books, shocking analysts who had earlier criticized the bank for being too risk-averse. M&T later took a $127 million charge on the CDOs, and last year sued the seller, Deutsche Bank (DB), alleging that it had called the investment a "lay-up" while not disclosing problems with the loans (the case is wending its way through the courts). M&T has written down $29 million on Bayview so far.

Yet it turns out that being forced to work through those Alt-A loans has given the bank a lot of useful insight into the behavior of borrowers - lessons that may provide some guidance to other lenders embroiled in the crisis. In hopes of sharing the acquired wisdom, Wilmers dispatched nine M&T executives to the New York Federal Reserve in early February, where they presented their observations to vice chairman Bill Rutledge, and in March they met with the FDIC as well.

"We've spent 18 months thinking proactively about this," says Rich Gold, who heads up mortgages and consumer lending. Since kicking off the loan-modification program in March 2008, M&T has reduced the redefault rate on its portfolio to 17% of its loans - significantly below the average of 30% to 40% calculated by Hope Now - and modified 1,169 consumer mortgages worth $233 million. If that doesn't sound like a lot, compare it with the 752 that Congress's Hope for Homeowners program has completed since October, when it was launched with the goal of helping 400,000 borrowers.

For all M&T's helpful hints, Wilmers believes that modifying bank loans will solve only a part of the problem. That's because of a big shift in lending patterns. In 1978 commercial banks and thrifts held 71% of all private, nongovernment U.S. loans. By the third quarter of 2008, commercial bank loans made up just $6.9 trillion of the estimated $20.3 trillion in private U.S. financial-sector loans outstanding. "The key actors," Wilmers writes, referring to the current crisis, "were ... firms far outside the purview of federal or state regulators. Thus, regulators have continued to fix their gaze - indeed, to micromanage - traditional financial institutions such as banks, even as the ground has shifted beneath the entire industry." Regulators must focus on that "shadow banking system."

Wilmers is not sure that the TARP program is doing much good either: After a vociferous internal argument M&T decided to accept 1% of its risk-adjusted assets in government funds - less than the other 19 large banks, all of which took 3% - but Wilmers has regrets about participating at all. "We were concerned if we didn't have TARP [money], the markets would look at us askance because we couldn't get it. I think this whole TARP thing has been terrible for the image of the banking industry." When it is suggested to Wilmers that perhaps it was banks that have been the most terrible for the image of the banking industry, the CEO stiffens. "Investment banks did the damage," he says. "They sold the [loans], then provided the funds by slicing and dicing the stuff to provide people with the money to build and buy homes they couldn't afford. Then they pigged out."

As deft as M&T has been in dodging debacles, it is still vulnerable to economic winds - as seen in Moody's March 12 decision to put 23 regional banks, including M&T, on review for possible downgrade. Analysts are also watching the bank's exposure to homebuilders in the Mid-Atlantic region and in New York City commercial real estate. In the meantime, Wilmers and his team are focusing on what they can control, such as the acquisition of Provident Bankshares, which was valued at $401 million when the deal was announced in December. Although the price sounds cheap - 0.7 times book value - some analysts think M&T overpaid, given that Provident might have failed on its own. "The market argument is that the Provident deal is going to make M&T's capital position worse," says Al Sevastano, research analyst at investment bank Fox-Pitt Kelton. M&T CFO Ren Jones says the bank's tangible capital ratio of 4.55% is more than sufficient.

He also feels confident in M&T's acquisition "system," which has been honed over many years. It centers on a weekly meeting of 50-odd people from every part of the bank. That may seem bureaucratic, but officers interacting directly makes all the difference. "One would think it's unwieldy, but it works," says vice chairman Pinto. At the new branches, employees who work with the customer keep their jobs, because they are the link to the community. Then current M&T folks travel to the new location, working alongside them as "branch buddies" for the four weeks preceding the formal acquisition. It may not be sexy, but it makes sense, says Jason Goldberg, senior research analyst at Barclays Capital. "The guys who have gotten hit the hardest are those guys who have gotten away from their roots, and M&T just hasn't. Just plain-vanilla banking is good." Especially when the world is all topsy-turvy.  

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