Inside M&T's $200M Effort to Fix Tech, Compliance Issues

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BUFFALO, N.Y. — M&T Bank (MTB) is having a very un-M&T-like year.

The $88.5 billion-asset company has long been known for its expense control. Lately, however, M&T has had a tough time keeping a lid on costs. Its first-quarter efficiency ratio rose 807 basis points to 63.95%, from a year earlier.

The higher costs are largely a function of M&T's twice-delayed, $3.7 billion acquisition of Hudson City Bancorp (HCBK) in Paramus, N.J. Regulators have said they want M&T to improve its regulatory controls, primarily its oversight of issues related to the Bank Secrecy Act. Among the fixes regulators told M&T that it needs to make are improving risk-management and establishing processes for identifying and reporting suspicious transactions. 

M&T has left nothing to chance, as it projects to spend about $180 million over a two-year period upgrading its anti-money-laundering regulatory processes. Meanwhile, M&T, like other banks, is spending more on technology, as it looks to improve its online banking and mobile banking platforms.

Mark Czarnecki, president and chief operating officer, and René Jones, chief financial officer, in a recent interview discussed how M&T executives are wrestling with adversity, trying to reconcile higher spending with revenue challenges like a 14% decline in mortgage income and searching for more customer benefits out of all these mandatory systems investments.

The following is an edited excerpt.

M&T has announced $20 million in upgrades to its mobile and online banking. Can you provide some additional color on what that is going toward?

Czarnecki: We're spending a lot of money on rebuilding our website, No. 1, rebuilding the whole way we end up delivering our services. Pretty much like everyone in the industry, we're investing in that space, trying to make sure that the bank is as current as it can be. I think we'll be spending in that space for a long time. All around the bank we've been investing in those kinds of things.

Is any of the $20 million technology spend earmarked toward Bank Secrecy Act compliance issues?

Czarnecki: Our tech spend is way more than $20 million. We have a whole other project aimed at [Bank Secrecy Act/anti-money laundering] and that kind of work. A board member asked a pretty good question today [at an M&T board meeting]: "Can you link those two? Is there a customer application to what you're doing?" There might be, but we're not there right now. We're managing... consumer spend, technology spend and regulatory spend at the same time.

Is a change in your core processor going to be part of either the Bank Secrecy Act/anti-money laundering initiative or the spending on mobile and online banking?

Czarnecki: No. I think you could see a day, though, where some of the thinking we need to do for [Bank Secrecy Act] now begins to influence how you offer consumer products. I'm not sure anybody is there yet in the industry. The board member [who asked the question at the board meeting] said, "I get you are building this for a specific purpose. But the sheer technology build as you described it sounds like it would work for customers, if you thought about it in a different way." We'd like to be there, but we're very mission-critical in making sure that we're good at this.

You said about 675,000 customers have signed up for your mobile banking. Is that more or less than you expected at this point?

Czarnecki: More people signed up than probably we thought would and they use it very specifically. I think the key long term for banks is to get it integrated into what people do, as opposed to signing up to check their balance or do basic things. I would say the early transactions are all very segmented. It's about whoever can put it together, make it work, make it integrated, make it easy to use.

Jones: It's a mistake to look at it as its own channel. You're really looking at all the investments we're making.

How much are you integrating technology into the branches, to the extent that you will be supplementing or replacing in-store personnel?

Czarnecki: I don't know that [technology] will replace them, but I think we see the day rather quickly where the online branch technologies are integrated in a way that both customers and sales people use them in the same way. That's a project that we're beginning. We're thinking very hard in that space.

What is your role in the company's Bank Secrecy Act/anti-money laundering upgrades?

Czarnecki: I chair the steering committee that meets twice a month. I'm pretty actively involved. It's got the highest level of visibility in this company that it can have. We have a managers' group meeting once a week. The management group comes to Buffalo and we start every meeting with [looking at] how the Bank Secrecy Act [project is coming along.] Everyone is actively involved. [M&T Chairman and Chief Executive] Bob Wilmers could tell you in some depth, more depth than you want to know, the 10 big issues in Bank Secrecy Act and what their status is.

Do you get the sense M&T is going to be setting the standard for how banks are judged in the future on Bank Secrecy Act compliance ?

Czarnecki: It's hard to say. I do know we are building something quite sophisticated. We have raging battles about whether we're going to be unique in the industry.

Jones: We often ask the question, "Who else does this in the industry?"

Czarnecki: I think we're in the leading position on it. The importance for us is not only to do it right for helping catch the bad guys, but to do it so that it works with our customers and our communities. So we're very focused on both ends. We've seen a lot of people do this quickly and not do it very good. We're long-term players and we're doing it well on both ends … but in a way that does not destroy our customer base.

Jones: The bar is rising in this space. To the extent you are working on your Bank Secrecy Act program today, you have to be at the evolution of what that is. The bar is rising simply because this is a program that I believe people in the government feel has worked. There are always people trying to influence the system.

Czarnecki: We willingly chose to build the best-in-class approach. We believed it was going to dominate the landscape. We've put a lot of effort into this. We thought it was something you had to do. We're also doing it in a relatively quick time period.

What does M&T need to do to deal with the decline in mortgage revenue?

Czarnecki: We have been growing our subservicing revenue. We think that will end up having our consumer mortgage business line hold up better in aggregate than the sheer industry on its own.

In terms of staffing, do you project additional changes because of the drop in mortgage revenue?

Czarnecki: We've made a lot of [changes] already and we took a lot of [those employees] into our Bank Secrecy Act/anti-money laundering project, [because it has] the same qualifications you need to put data together for a customer mortgage application. We've moved a lot of those people into customer research on Bank Secrecy Act. So I think we're in a pretty good spot.

Jones: We used a lot of outsourced professional services [in our mortgage business], more than other refinance cycles. We were able to shut that down and address a big chunk of the resources without touching the employee base. And then you add the Bank Secrecy Act moves and we were able to do it very quickly.

When the Hudson City acquisition closes, will residential mortgage become more important to M&T's loan book?

Jones: We think that as a Freddie Mac and Fannie Mae origination platform, and for a given rate environment, that will be bigger because we'll have 130 more branches. What Hudson City does as a product with jumbo mortgages, which is really not something that gets sold to Freddie and Fannie, we'll probably be bigger than we had been. Will we be in the jumbo space? We'll probably have to because of the demographics. The average home price in Buffalo [is much lower] than in New Jersey.

What is M&T's preferred outcome of the GSE reform bill?

Czarnecki: You are going to have a hard time in America not having a 30-year, fixed-rate mortgage. While it doesn't exist in some places, that's not the American lifestyle. I don't think there is any way that the government doesn't have some role in having that to happen.

Jones: There is no free market with regard to 30-year mortgages.

Czarnecki: If you don't have government playing a role in that space, then you won't have that. I think socially, Americans, there has to be a role for the government, if that's considered important in America and I think it is.

How has 'Operation Choke Point's' crackdown on banks' relationships with alternative lenders affected M&T?

Czarnecki: We don't have much exposure there. We're very vanilla. It's not in our communities. It just hasn't been a big material part of who we are.

Has M&T had any exposure to products aimed at underbanked markets?

Czarnecki: It's been limited, but we're thinking about it. Because a byproduct of regulation we think has been a significant number of people going outside the banking system for services. We're not positive that's a great social outcome. If we can play some role. ... the way we look at it, we don't have a lot of fancy approaches to stuff. We just need every dollar someone pays for financial services in Harrisburg (Pa.) or Syracuse (N.Y.) be paid to us. So if there's a big [underbanked] segment there, we'll try to do something. It's something we're talking about.

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