As of this week, Bank of Montreal (BMO-T) has more branches in Milwaukee than it has in Montreal, but the biggest problem the Canadian bank faces as it expands deeper into the United States is the lack of a profile.
With the closing of its $4.1-billion acquisition of Midwestern U.S. bank Marshall & Ilsley Corp. on Tuesday, BMO is attempting to fix that problem by opening up the lending taps with $5-billion (U.S.) of new loans.
In an attempt to make a splash in several of its newest markets – from Wisconsin to Missouri and Indiana – BMO wants to expand its lending book for small and medium-sized businesses. If successful, the boost would represent a 20-per-cent increase in M&I’s loan book.
The move is aimed at sending a signal to customers in Wisconsin-based M&I’s key markets that the bank is back in expansion mode after several lean years when it was clobbered by the economic crisis, forced to curtail lending and ended up taking a $1.7-billion bailout from the U.S. government.
“It’s a clear statement designed to differentiate us from the guys on the other corners,” BMO chief executive officer Bill Downe said of the injection of new commercial lending in those markets. “It puts a commitment behind the statement that we are going to be the commercial bank in the Midwest.”
BMO announced plans to buy M&I in December, making it the largest deal that Canada’s fourth-largest bank has done. BMO will now combine M&I’s operations with its U.S. banking business, Chicago-based Harris Bank, to form BMO Harris Bank south of the border. M&I CEO Mark Furlong will serve as president of BMO Harris Bank and will oversee the integration of the two U.S. operations.
The biggest task for BMO now will be retention of its customer base, an issue in any bank merger, and the shift into expansion mode for the operations formerly owned by M&I.
“I like the view that Bank of Montreal has which is they want to start out growing – today,” Mr. Furlong said. “Our bankers are dying to get back to doing what they were doing before this nasty cycle hit.”
With the closing of the deal, the U.S. Treasury Department announced that all of the funding M&I received through the Troubled Asset Relied Fund (TARP) has been repaid, with a positive gain of about $230-million paid to the government through dividends. As part of the takeover, BMO said it would buy back those shares.
In total, the U.S. government has so far received about $10-billion in dividend payments on approximately $245-billion worth of funding that has been paid back. By the time all of the TARP money is repaid by the banks that received the bailout funding, the Treasury estimates a positive return of about $20-billion.
The acquisition of 374 M&I branches more than doubles BMO’s network in the U.S. to about 700 locations, spread across several states including Wisconsin, Minnesota, Missouri, Indiana, Arizona and Florida. BMO has 900 branches in Canada.
BMO now has 96 branches in Milwaukee, where M&I is based, compared with 94 in Montreal, and more locations in Chicago (216) than it has in Toronto (202). The U.S. operations will have combined deposits of $92-billion and assets of $162-billion.
BMO first expanded to the U.S. in 1984, buying Harris Bank for $718-million (Canadian), but went decades without attempting to bulk up its operations.
In the summer of 2007, not long after Mr. Downe took over as CEO of the bank, BMO bought two small Wisconsin-based banks, starting with Ozaukee Bank for $190-million (U.S.) and then Merchants and Manufacturers Bancorp Inc. for $137.2-million.
M&I struggled in the economic downturn, in particular due to its exposure to real estate lending in Florida and Arizona, which were two of worst hit markets when the U.S. housing bubble collapsed. As part of the deal, BMO is also writing down M&I’s loan book considerably.
Mr. Furlong’s pay package has drawn criticism, including from unions in Wisconsin, since he and other executives will receive hefty payouts in the deal, due to change-of-control agreements in their contracts.
Labour groups protested the rich pay packages saying they were not deserved since M&I required a government bailout. Had BMO not repaid the TARP funding, the payouts would not have been allowed to kick in under U.S. rules.
Mr. Furlong will receive $24-million, including $18-million under a change of control clause in his contract, since the BMO deal represents a buyout of M&I, and another $6-million to oversee the merger of the operations, provided he is still in the job a year from now.
At BMO, Mr. Furlong will earn a base salary of $600,000 annually for the next three years, with a bonus of up to $800,000, and potential equity of more than $1-million, according to company filings.
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