Furlong foresees return to profitability for M&I

M&I Bank

The formerly booming real estate markets in Arizona and Florida have acted as anchors during the Great Recession for Milwaukee-based Marshall & Ilsley Corp., pulling the bank further under water during the stormy economic conditions.

Last year, the parent company of M&I Bank had about $859 million in losses, and $1.3 billion in provisions for loan and lease losses.

However, those losses appear to be easing. The bank’s delinquencies on loans have steadily decreased over the last year, as have its non-performing loans. It has written down massive losses in its housing-related loan portfolios in Arizona and Florida. And it accepted $1.7 billion in TARP financing from the federal government.

Mark Furlong, president and chief executive officer of M&I, believes that the bank may return to profitability late this year or early next year. He recently spoke with BizTimes reporter Eric Decker about the bank’s go-forward strategy. The following are excerpts from that interview.

BizTimes: M&I accepted about $1.7 billion in TARP financing. What are the bank’s plans to repay those funds, and how has accepting the money affected how the bank does business?

Furlong: “Taking the TARP funds really didn’t change the business of running the bank at all. In terms of plans to repay, there’s an order to how this goes. Step one is get to profitability. We have a pretty good shot by the end of the year. We’ll be close if we’re not. The second step after that is pay off TARP. The third step after that is evaluate what the appropriate level for the dividend should be. We think we have a chance to start paying it off in steps probably at the end of 2011, extending it into 2013. Sometime after that, we would evaluate where the dividend should be.”

BizTimes: What is your view of the bank’s loan portfolio today?

Furlong: “We started to turn the corner about a year ago in terms of delinquencies. We’ve had declines in delinquency for four consecutive quarters. And we’ve had declines in non-performing loans for three consecutive quarters. The in-flows to non-performers also peaked in the second quarter of 2009 and have now begun to come down. Does that mean that every quarter, we’ll come down in perfect symmetry? Probably not. But if you look at any group of three or four or five quarters, you’re going to say absolutely yeah, this is a trend down.

“What’s behind all of that is a lot of work in the Florida portfolio early on when it struggled in 2008. And what followed right behind that was the Arizona portfolio. The Florida portfolio was very small, so we were able to work through that one relatively quickly. In Arizona, M&I got there in 1986. So we had a two-decade run to build a business there. If you look at M&I’s portfolio from 2004 and back, the portfolio is almost without loss. All the losses are in 2005, 2006 and the first half of 2007. What’s left (in Arizona) is the consumer portfolio. With 9.9 percent unemployment in the country, that’s going to take a period of time to work through.”

BizTimes: There has been a lot of talk about a potential bubble looming for commercial real estate. Is that threat still out there?

Furlong: “It’s impossible to have this level of devaluation and this kind of unemployment and not have some kind of risk out there. That risk probably sits out there for the better part of a couple of years. I think this portfolio will have a different performance metric than what we saw with construction on the housing side. It’s just like everything else – delinquency peaked in the first quarter of 2009 and came right back down.”

BizTimes: How likely do you think it is that M&I will be profitable this year?

Furlong: “We have a good chance to be profitable by the end of the year. That’s not set in granite. Losses will continue to march down during the year. We feel very confident that 2011 will be a profitable year. Just like every other bank, one of the biggest pieces that will have some effect on us will be the stage of the economy. The economy is clearly in a recovery, and let’s hope it’s in a recovery at the end of 2012 and early 2013.”

BizTimes: What is M&I’s appetite for commercial lending in today’s marketplace? Are there types of businesses or projects that the bank is no longer interested in?

Furlong: “When you get outside of housing, we have great interest. Nothing has really changed, in terms of our interest in the commercial businesses we have. There isn’t an industry that we’re not interested in. Most of our commercial customer base is privately held companies. and many of them are multi-generational companies. Today, the line of credit utilization we have with that group of customers is at its lowest level in probably a decade or more. They will ramp that back up once consumers go back to work, once demand comes back. And that’s probably still a few quarters away.”

BizTimes: Given everything that has happened in the Arizona and Florida markets, are those markets still desirable for M&I to do business in, and how do you grow those markets on a go-forward basis?

Furlong: “We have a good commercial business in both markets, and there will be more focus on that, more focus on the middle market and just a lot less focus on the real estate side. What we do on the real estate side there today, most of it will sell into the secondary market or sell it to someone who buys that business. We’re still an active home lender in Florida and Arizona, and we’ll continue to be a lender. We just probably won’t keep it on our balance sheet.”

BizTimes: Many of the banks within the TARP program have been encouraged by the FDIC (Federal Deposit Insurance Corp.) and other regulators to acquire other banks that are being shut down by federal and state regulators. Is that something that has been brought to M&I? Is it a tool that the bank would use to make acquisitions?

Furlong: “Everything that we’ve seen so far that has come up for sale have been things that we didn’t think that would add value to the bank. Frankly, job one is to finish up getting through the credit cycle and drive down non-performing assets. The second piece is, as we get to the end of the credit cycle, if there are some opportunities that make sense, we’ll give them some serious consideration.”

BizTimes: Given M&I’s non-performing assets, its liquidity position and its stock price, do you now feel or have you ever felt that it was a takeover target?

Furlong: “Liquidity has been very good for M&I. While other banks ran into some challenges with liquidity, you’ve seen some of our biggest peers enter into programs – they had some guaranteed debt issued. M&I didn’t have to do that. It’s not really a liquidity issue (with M&I). It’s a credit quality issue, isolated to credit quality in the housing sector, specific to construction.

“I’ve been here nine years. I think that if you asked all of my predecessors, they’d say that there was always talk about M&I or banks of our size being a takeover candidate. I hope that people keep talking about it, because if you’re not a takeover candidate and you don’t look attractive, the alternative is not very good. I think that’s always going to be the case. The bank isn’t for sale. The opposite side of that is we need to demonstrate solid performance and recovery from this cycle to warrant independence.”

BizTimes: There has been a lot of talk in Washington lately about reform to the financial services industry. What does Washington need to do in that regard, and what should they keep their hands off of?

Furlong: “First, we’re pro-reform. The general intent and where they’re headed is a good place. There are clearly some instances where consumer protection wasn’t as good as it could have been or should have been. I think they have found a place where they’re going to make changes that are needed and create reform where they need it, but not turn the industry upside down in a period of time when we need liquidity, we need capital, we need lending to be as robust as it can be, given the times, and we don’t want to disturb that. I think we’re pushing closer to that. If you asked me where I was in March, I wasn’t very optimistic. And here we are in May, and I am more optimistic that we are going to end up with some solutions that are much more reasonable than those that were bantered about earlier on.”