Almost everything about First Empire State Corp., except for its continuing profitability, is an enigma.
* It attracts well-regarded executives from big banks and new graduates of top business schools to its home in Buffalo, N.Y. -- a city renowned for snowstorms and Super Bowl losses.
* Its high stock price of around $140 a share and stingy dividend frustrate stockbrokers and analysts -- but its loyal universe of fewer than 5,000 stockholders enjoyed a compound growth rate over the past 10 ears of almost 30%.
That ranks First Empire among the five best-performing regional or money-center bank companies in the nation.
* It's not a razzle-dazzle company that seeks headlines or big acquisitions, says James L. Vardon, First Empire's chief financial officer, but its assets have more than tripled since late 1 987 -- from $3.3 billion to $10.5 billion at the end of this year's second quarter.
Profits have similarly thrived, rising to $98 million last year from $27 million in 1987 (excluding earnings of East New York Savings Bank, which it acquired the last week of that year).
CEO a Morgan Veteran
The key to First Empire's culture lies in its chief executive and largest stockholder, Robert G. Wilmers, according to people close to the company.
A former head of international private banking at Morgan Guaranty Trust Co. and a onetime senior finance adviser to New York City Mayor John V. Lindsay. Mr. Wilmers took on the persona of a Main Street banker in 1982 when he joined the board of the then-struggling Buffalo company. Its chief asset at that time was Manufacturers and Traders Trust Co.
He led an investment group that bought First Empire the following year, and has since lived out a business philosophy that could be a primer for sound banking: Know your markets and employees, watch credit quality relentlessly, don't gamble with interest rates, and focus on serving your community.
|Law of the Jungle'
"You control your destiny by having high credit standards," Mr. Wilmers, 59, said in a recent interview. "If we perform, the marketplace and the big banks will respect our desire to remain independent. If we don't, the law of the jungle takes over."
To hear him speak, one would think that this Manhattan native, who continues to spend his weekends and at least one business day a week in New York City, worked for the Buffalo Chamber of Commerce.
He sits in an expansive corner office in rubber-soled shoes. His sleeves are rolled above his elbows and he speaks in a halting manner that belies his cosmopolitan background and his strong views.
Knows What He Wants
But make no mistake. He knows what he wants and how to get it.
"As long as Bob's running the show, I don't have many concerns," said Stephen J. Paluszek, an executive vice president and analyst at M.A. Schapiro & Co., a New York City investment bank that has large holdings in First Empire.
"He's got a team of astute bankers who stick to the basics and have demonstrated clear profitability trends. They have a wonderful name that's deserved."
Mr. Wilmers, his board, and a core group of senior managers control almost one-third of the company's common stock.
Warren Buffett, the legendary investor and owner of The Buffalo News, owns preferred stock that can be converted into about 7% of First Empire's common (at a bargain conversion price of $78.91 a share.)
An Unusual Liberty
Such a limited universe of big investors gives Mr. Wilmers freedom to operate for long-term gains, an unusual liberty for a public company.
It also puts him in control of First Empire's future at a time when many of its peers are expected to fade from the scene as superregionals and community banks dominate banking.
"If somebody were to knock on their door." Mr. Paluszek said, "[a takeover] would happen only if Bob were ready to move on."
For the, time being, Mr. Wilmers -- who rewarded himself with a modest $550.000 in cash compensation while his company earned $97.9 million last year -- gives every indication that he likes running a bank in New York's second largest city,
He refuses to grant interviews in New York City, lest he appear to be turning his back on his company's western New York roots. And along with many of the bank's top executives (who sometimes remark that they spend more time working for nonprofit companies than at the bank), Mr. Wilmers is involved in highly visible local causes.
That focus has paid off. M&T Bank commands a market-leading 31% share of retail deposits in Buffalo, up from 12.5% three years ago. In Rochester, where First Empire has acquired three banks and thrifts in less than three years, the company has built a 12.5% share and hints that it is eager for much more through further acquisitions.
Acquisition Deemed a Success
First Empire's major move downstate and its first big expansion since Mr. Wilmers took over was its 1987 purchase of Brooklyn-based East New York Savings Bank, which has roots in inner-city neighborhoods. Despite the thrift's huge portfolio of commercial and residential real estate, analysts say the nondilutive acquisition has been a huge success.
Indeed, First Empire continues to boast strong returns. In the first half of this year, return on assets hit 0.97% and return on equity reached 15.66%. (Mr. Wilmers has set 17% as his ultimate goal for ROE.)
If there is one criticism about the executive, however, it is that he may be too conservative. He has been slow to draw down the company's fortress-like loan loss reserve and he is so deliberate that some analysts say he lets opportunities pass.
On the reserve front, for example, the company made a $20.2 million provision for possible credit losses last quarter despite the fact that it charged off only $9.3 million -- and was left with an allowance equal to 2.5% of all loans and 188% of nonperforming loans. Moreover, nonperforming assets have decreased by about 25% this year.
Big Impact on Earnings
Kevin Timmons, an analyst at First Albany Corp., estimated that First Empire's earnings would have been 10% to 25% higher in last year's third and fourth quarters if its provisions were in line with those taken by its peer group of banks.
Brent Erensel, who follows the company for UBS Securities, suspects that First Empire is building reserves to cushion itself against the loss of future revenue opportunities.
"Where will the earnings come from after the provisions come down, now that the easy way to growth through acquisition is gone," he asked. "The free money from Resolution Trust Corp. deals is no longer on the table, and they're now at a size where they can't get half of a good deal and see their stock price double."
Makes No Apology
He was referring to acquisitions of two failed Buffalo thrifts from the government in 1990 and 1991 that First Empire split with Albany-based Keycorp. The assisted deals for Empire of America Corp. and Goldome, an $11.4 billion asset company, secured First Empire's dominance in its local market.
Mr. Wilmers, for his part, makes no apology for the strong reserves, and adds a waspish comment about his critics. The big numbers, he said, are meant to quell the fears of analysts and investors they counsel.
"All those analysts who work in New York City and commute from somewhere else seem to feel that the real estate market there is awful because when they, go to lunch they see some empty buildings," Mr. Wilmers said.
He agreed that First Empire's $4.4 billion of commercial and consumer real estate loans, which represented almost 62% of total loans at the end of last year, is one of the larger concentrations in the industry.
But he added: "I'm not at all concerned about our portfolio. It is seasoned and well diversified."
Even some of his closest allies admit to moments of frustration over Mr. Wilmers' reputed indecisiveness and insistence on consensus among executives.
"It's how Bob would like to see this bank operate, and all of us do our best to Play," said William Buckingham, an executive vice president who joined First Empire in 1990 after running Manufacturers Hanover Corp.'s retail bank for many years.
Insiders say the prolonged decision-making can apply to everything from taking months to hire a vice president to endless debates about investment decisions.
Mr. Vardon, the company's point man on budgeting, expense control, and financing, said that the bank debated for months whether to sell mortgage-backed securities -- "and the metaphysical speculation could have lasted another six months" -- if the press of events had not intervened.
Seizing an Opportunity
First Empire grabbed the opportunity to buy Central Trust Co. in Rochester and, Endicott Trust Co. from Midlantic Corp. in 1992 at a bargain price, a decision that required shedding of the securities assets to maintain capital ratios.
Mr. Vardon also noted that the company's caution about spending -- as reflected in its admirable high 50s efficiency ratio -- has caused it to fall behind on developing systems and products to produce noninterest income. That situation, he promised, is being rectified. (The company just completed a $15 million project to upgrade its major computer systems.)
As for Mr. Wilmers, he's still cautious.
Ask him if he has a yen to keep growing, and he responds: "Up to, a certain size, a management runs the bank. Cross a certain line and the bank runs management, and you lose control."
Ask him if he's willing to sell, and he repeats his hope that others will respect his "desire for independence." But he hastens to point out that First Empire is the only New York-based bank he knows of that has "opted out" of a state anti-takeover law.
A Classic Response
Finally, ask him for his worst-case and best-case scenarios of what could happen to his company, and you get a classic response from a consummate banker:
"The worst that can happen: Will we make 'some stupid loans? Will we go out on the yield curve in some stupid way? Will there be a major defalcation."
And Mr. Wilmers' optimistic case? "In banking, you've got to concentrate on the downside. The upside takes care of itself."
