Too important to fail

Wisconsin’s two largest banks – Associated Bank and M&I Bank – lost a combined $982 million in 2009.

Battered by the Great Recession, the two banks, which employ more than 11,000 people at 660 branches between them, reported loan and lease loss provisions of more than $1.8 billion last year.

In recent years, M&I made the strategic decision to expand in the Florida and Arizona markets, where many of its older and wealthier clients had moved to retire.

M&I’s losses are largely related to the collapse of the housing markets in Florida and Arizona. For the past two years, M&I has written down large housing-related losses in both markets. While those write-downs have cost the bank hundreds of millions of dollars, the losses have started to ease, according to Mark Furlong, president and chief executive officer of Milwaukee-based Marshall & Ilsley Corp.

Associated Bank’s losses are related to complex commercial loans it made during the frothy financial markets of 2007, according to Phil Flynn, the newly appointed president and CEO of Green Bay-based Associated Banc-Corp. In the fourth quarter of 2009, the bank wrote down many of those loans, he said.

The CEOs of both Wisconsin banks believe they are now on course to return to profitability later this year or in early 2011. Once profitability is restored, the CEOs of both banks say they want to begin repaying the $568 million and $1.7 billion they accepted in Troubled Asset Repurchasing Program (TARP) financing from the federal government.

Bank analysts say M&I and Associated could be profitable by the end of the year.

“Associated could very well return to profitability later this year. We have them with a small loss for the fourth quarter, but it’s within reason for them to return to profitability,” said Jason Royer, a senior research associate with Raymond James & Associates Inc. who covers the Midwestern banking sector. “For M&I, we think that’s more of a fourth quarter item. Both companies we have turning profitable in 2011.”

In a late April research paper, Robert W. Baird & Co. Inc. analysts David George and Garrett Holland agreed on M&I.

“The company remains aggressive in dealing with problem credit and early-stage delinquency trends have declined for several quarters,” the pair’s report on M&I stated. “We expect elevated credit costs to weigh on shares in the near-term, but further declines in (net charge offs) and peaking reserve levels should help the company return to profitability.”

George and Holland are even more optimistic about Associated, according to a separate report also issued in late April.

“We believe recent weakness has provided a good buying opportunity on a compelling turnaround story with better capital levels and earnings power than most regionals,” the analysts wrote. “We expect the new management team to continue to make progress reducing the credit risk of the franchise, while driving solid longer-term earnings potential.”

However, George Reis, president of GVR Investment Management Inc., a Two Rivers-based investment management firm that specializes in bank-related investments, said he is not ready to begin re-investing his clients’ money in M&I or Associated stock.

“M&I has concerned me for some time. Sometimes I wonder if the bank is being run for the benefit of the management and directors rather than the shareholders,” Reis said. “I didn’t see any shakeup in the management because of (the losses incurred). To me, it’s a lot like a baseball team. When you keep losing, someone’s got to step up and be accountable.”

Reis said he would be willing to reinvest in M&I in the future, if he becomes convinced that the bank’s losses and write-downs are finished.

“My real question is, have they done the cleansing? If the cleansing is complete, I’ll take a whole different look at it. But I’m not convinced that that’s happened so far,” Reis said.

Reis said he is more bullish on Associated after meeting Flynn at the bank’s annual meeting in Green Bay.

“I think he’s refreshing new management there,” Reis said of Flynn. “Someone that has left the same bank where he was vice chairman and comes to a bank with some of the problems that Associated does is making a commitment.”

Reis is not buying either Associated or M&I stock now, but both banks are on his “watch” list.

“At this point, I’ve got to see a little more clarity,” he said.

Although there was plenty of speculation during the recession about troubled regional banks being the targets of takeovers by national banks, Royer said he does not believe the two largest Wisconsin banks will be acquired in the near term.

“Both of them are still dealing with their credit issues,” he said. “Associated is still a bit of a turnaround situation. There’s still a lot of credit issues to work out before any acquirer would come in and pay up for the company. They’re both attractive franchises. There are not many competitors in Wisconsin that have similar footprints. For the time being, it’s still the credit issues and how quickly both (banks) can resolve those issues.”

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