A Great Letter From A Visionary CEO

CEOs who want to know how to write a worthwhile, informative annual letter to shareholders—I know, I know, it’s a small group—could do worse than read M&T Bank Corp. CEO Bob Wilmers’ letter to his shareholders this year. It is a classic.

Regular readers know I pay a lot of attention to CEO letters. Intentionally or not, they can say a lot about how a CEO views his company, his management approach, and his shareholders. Some CEOs (and Bob Wilmers is clearly in this group) tend to put a lot of time and effort into the project. That speaks volumes: it tells me the CEO is in the habit of thinking hard about how best to run his company and shape its long-term strategy. As a shareholder (or a potential one), I like that. Alternatively some CEOs seem happy to put out letters that were obviously written by the company’s PR department. That speaks volumes, too, and not in a good way.

As I say, Bob Wilmers can be counted on every year to write a letter that’s well worth reading. And he’s certainly worth listening to: Wilmers is among the most successful bank CEO’s of our lifetime. As he points out, since he became M&T’s CEO in 1983, M&T’s assets have grown to $122.8 billion from just $1.1 billion, while earnings have zoomed to $1.1 billion from $5.3 million. Over that time, M&T’s shares have grown at an annual rate of 14.8%, Since 1980, M&T’s annual rate of return, including reinvested dividends, is 18.7% not far behind Berkshire Hathaway’s 19.5%. (Perhaps not coincidentally, Berkshire is M&T’s ninth-largest shareholder.) And don’t forget that M&T’s footprint in upstate New York, which has been chronically depressed for decades, and the Rust Belt to the west.

So Bob Wilmers knows something about profitably running a bank, which makes it particularly rewarding every year when he shares his insights. Here are some highlights from this year’s letter:

Technology is changing the game. “Rapidly changing technology in combination with the need for continued expenditure on compliance infrastructure is creating a dual challenge for regional banks.” Wilmers writes. “Consumers demand the ability to seamlessly interact with banks from anywhere and on any number of devices.” Wilmers seems to understand better than most bank executives that the emerging technology environment in the banking industry is giving the biggest banks a huge competitive advantage. Consumers are more are more demanding (particularly regarding mobile access), post Dodd-Frank regulators are more demanding, and the cyber threat looms ever larger. Addressing these stepped-up needs his is hugely expensive–and the biggest banks seem to be responding fastest and most effectively. And their efforts seem to be paying off: Wilmers notes that the five biggest banks have seen their same-store deposits grow at twice the industry’s overall rate over the past five years.

M&A common sense. Wilmers writes that “M&T has long prided itself on a patient approach to mergers and acquisitions, entering into partnerships that made sense and which were additive to shareholder value. We are not motivated by growth for growth’s sake and, even while cognizant of gaps that may exist in our geographic footprint, prudence has always dictated that we wait for the right opportunities for expansion.” Ah, “additive to shareholder value.” That’s music to an investor’s ears. Wilmers’ M&A approach is an extreme exception. Whether they admit it or not, too often CEOs pursue deals in pursuit of growth for the sake of growth in order to build an empire for themselves. Shareholders are often relentlessly diluted in the process.

The regulatory onslaught. “There is sometimes a lack of coordination among different agencies,” Willmers notes, with some understatement. “Post-crisis regulation conferred new powers and created new governing bodies. Each agency is attempting to administer and exercise its granted authority. However, various regulatory organizations can have different criteria for assessing the same issue.” The lack of coordination among regulators can be daunting—and expensive. Wilmers notes, for example, that M&T underwent 36 different inspections by ten different agencies last year. At one point, eight exams were underway simultaneously. Wilmers doesn’t dispute the need for rigorous regulation. But regulators would likely do banks and taxpayers a favor if they went about their job in a less haphazard way.

Small banks’ dilemma. “Small business lending has long been the province of banks” Wilmers says. “There is a higher calling to banking—a mission to support community development and the collective betterment that accompanies it. In the wake of the crisis, the industry has perhaps been distracted from that mission and, despite the influx of new players in the lending space, the small business engine continues to sputter.” Wilmers expects community banks to step up and provide small-business lending the way they have in the past, but is perhaps more optimistic than he should be. As noted earlier, small banks will have a tougher time shouldering their increased regulatory- and technology-spending burden than their bigger competitors will, and may be permanently diminished in the marketplace. Wilmers notes, though that small banks play a crucial role in small-business funding.

The M&T letter is studded with insights like this and is well worth reading in full. Bob Wilmers writes a great CEO letter every year; this year’s surely didn’t disappoint.

What do you think? Let me know!