Bank compliance is about the implementation of effective internal controls. Unfortunately for M&T Bank Corporation (MTB) these controls may have been severely lacking in recent years.
The Consumer Finance Protection Bureau recently took action against MTB for deceptively advertising free checking accounts. Although the fine is small, this may be a sign of other internal control problems at the bank.
If you were not already aware, the CFPB is arguably the most powerful regulator in the U.S. Its creation stemmed from the financial crisis and is the consolidation of multiple consumer finance-focused departments that were previously spread out throughout different government regulators.
In addition, its funding is nearly limitless, with appropriations being garnered from the Federal Reserve via a fixed formula.
What Did M&T Bank Do?
The consent order stipulates that from 2009 to 2013, M&T Bank marketed “free checking” in various geographic regions. The accounts were marketed as not having any monthly service charges or fees and used the advertising language including:
- “Have you raised the green flag for free checking from M&T Bank? There’s no minimum balance requirement and no monthly service charge”;
- “Untangle yourself from monthly service fees. Get a free checking account at M&T. No strings attached”;
- “Free yourself from monthly service fees. Get free checking from M&T Bank”; and
- “M&T Totally Free Checking No Minimum Balance. No monthly service charge.”
When MTB customers opened a free checking account, they received a one-page document entitled: “Specific Features and Terms for Free Checking Accounts,” which disclosed that if the account had no activity for 90 days it would automatically convert to an M&T First account that charged a monthly maintenance fee ranging from $5 to $14 for combined account balances below $1,500. No other notification was provided to the consumer upon conversion.
Over the relevant period, 80,903 checking accounts were converted, affecting 50,041 consumers. About $2.9 million in fees were assessed and $2 million collected. The result: M&T Bank will provide $2.9 million in refunds to the approximately 59,000 consumers and a $200,000 penalty for the violations.
An Anomaly, or the Tip of the Iceberg?
For M&T Bank, the fine and refunds will barely register as even a blip on the radar, with M&T Bank producing net income last quarter of nearly $275 million. I think most consumers will agree that M&T Bank does not appear it was actively attempting to defraud or deceive consumers with the process, although there should have been better consumer communication, which I am sure the bank will fix going forward.
The real question is, is this an anomaly or the tip of the iceberg for MTB stock?
Recently, M&T Bank had to delay its acquisition of Hudson City Bancorp, Inc. (HCBK) again as M&T Bank continues to try to meet the Federal Reserve requirements related to anti-money-laundering requirements and the review of potential high-risk customers. M&T Bank has been dealing with this for almost two years now.
MTB is a very well-run bank, headed by a respected and conservative banker known for his candor and transparency. In today’s compliance driven world, a good bank must not only have a solid asset portfolio that produces great yield and few delinquencies, it must also have outstanding compliance with the reams of new regulations that now exist in the world today.
If they fail at the latter, the risk is not a downward spiraling stock price but worse, a complete blow-up.
The Bottom Line
Regardless of the risk, increased compliance costs affect the bottom line. M&T Bank’s efficiency ratio was 59.7% in the third quarter, 59.4% in the second quarter and 64% in the first quarter. Fluctuations have been driven by top line changes but also increased costs for professional services and salaries associated with Bank Secrecy Act/Anti-Money Laundering activities, compliance, capital planning and stress testing, and risk management initiatives.
If M&T Bank is able to prove that it can consistently meet regulatory demands and keep off the regulatory limelight, I think its MTB stock will continue to do well.
But if this becomes a trend, investors may find it best to cut and run to avoid the risk.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
