M&A announcement

Dec 17, 2010

Slides

Good morning, and welcome to the BMO Financial Group conference call for December 17, 2010. Your host for today is Viki Lazaris, Senior Vice President of Investor Relations. Ms. Lazaris, please go ahead. Yes, thank you, and good morning, everyone, and welcome to BMO Financial Group's investor call to discuss the acquisition of Marshall & Ilsley Corporation, or M&I. Our agenda for today's investor presentation is as follows. We will begin with remarks from Bill Downe, BMO's CEO, after which Tom Flynn, our Chief Risk Officer, will discuss the financial parameters of the transaction and review the remainder of the presentation. After their presentations, we will have a short question and answer period where we will take questions from pre-qualified analysts. To give everyone an opportunity to participate, please keep it to one or two questions, and then please re-queue. Also with us this morning are BMO's Chief Financial Officer, Russ Robertson, Simon Fish, BMO's General Counsel, and Ellen Costello from our U.S. personal and commercial business. At this time, I would like to caution our listeners by stating the following on behalf of those speaking today. Forward-looking statements may be made during this call, and they are subject to a variety of risks and uncertainties. Actual results could differ materially from forecasts, projections, or conclusions in the forward-looking statements. You can find information about the material factors that could cause our actual results to so differ and information about the material factors and assumptions that were applied in drawing conclusions or making the forecasts or projections in these forward-looking statements on page 29 and 30 of our 2010 annual MD&A. With that said, I can hand things over to Bill. Great. Thank you very much, Viki, and good morning, everyone. As noted, my comments may include forward-looking statements. I appreciate you have only had a short period of time to review the materials this morning on the announcement, and I thank you very much for joining the call. Our discussion today is about a transaction that came together quickly, working together with M&I's board of directors and management, and it is a stock-based transaction to purchase Marshall & Ilsley Corporation for $4.1 billion U.S. dollars. This is a very exciting opportunity for BMO Financial Group, and it is clearly transformational for our U.S. operations. The combination of our two organizations crystallizes BMO's strategy of expanding our North American footprint and positions us for future growth. It transforms and strengthens our U.S. operations and allows us to pull the best from both organizations. It provides strong entry into new attractive markets, including Minnesota, Missouri, and Kansas, and at the same time, expands our existing footprint in Indiana and Wisconsin. We are bringing together highly complementary businesses that align well with our U.S. retail, commercial, and wealth management focus, and we both share a long history of supporting our customers. We also announced today a new leader in our company, Mark Furlong, who, upon closing, will become President and CEO of our U.S. P&C business. As some of you will know, Mark is an experienced executive, very close to customers, and is going to be very helpful in growing the business going forward. Ellen Costello will assume the role of CEO of Harris Financial Corp. and will be appointed U.S. country head. With governance oversight for our U.S. operations, Ellen will play an important leadership role in our U.S. businesses and in the integration effort of combining Harris Bank and M&I. Today's announcement meets all the criteria we set for assessing potential acquisitions, the ones we have discussed with you over the years, strategic, financial, and cultural fit. The timing is right. With greater regulatory clarity and an opportune economic and market environment, we are in a position to meaningfully advance our strategic agenda with attractive financial returns while maintaining BMO's strong capital position. As highlighted on slide 3, combining M&I with our U.S. operations represents an opportunity that is consistent with our strategy. We will be accretive within three years, has an internal rate of return in excess of 15%. Slide 4 provides a summary of the transaction. As I said earlier, it is a stock-based transaction with a total purchase price of U.S. $4.1 billion, and Tom Flynn is going to take you through the transaction details in a couple of minutes. Turning to slide 5, the addition of M&I expands and strengthens BMO Financial Group's market position in the context of the North American banking industry. As you can see from our combined North American footprint, we have bolstered our concentration of commercial and retail strength in the U.S. With the enhanced capabilities and scale that M&I brings, we are confident this will open up new channels and new opportunities to drive growth. Let me tell you a little bit more about M&I. M&I is a diversified financial services company headquartered in Milwaukee, Wisconsin, with over $50 billion in assets. It is well known to many of us, admired and respected in the Midwest and nationally. Founded in 1847, M&I is the largest Wisconsin-based bank and has a total of 374 branches, with most of the branches concentrated in profitable urban markets. With a strong personal and commercial franchise and an attractive wealth management platform, the combined businesses will expand BMO's U.S. operations and better position us in new markets. Turning to slide 7, our combined operations will create the 15th largest banking group by assets in the U.S. Assets under management and administration for BMO US will double to $196 billion, and personal and commercial branch network will also double to 695 branches. With that, I will turn the call over to Tom. Thanks, Bill, and good morning. Before I begin, I draw your attention to the caution regarding forward-looking statements on slide 1. I will start back on slide 4 to review the details of the transaction. As Bill said, we think the timing of this transaction is good. We have clarity on regulatory and capital requirements, attractive valuations, and a strong Canadian currency. The purchase price is CAD 4.1 billion in an all-stock deal with a fixed exchange ratio of 0.1257 Bank of Montreal shares for each M&I share. We will also repay $1.7 billion of TARP preferred shares and pay approximately $3 million to retire outstanding warrants. We expect to issue approximately 800 million of Bank of Montreal common shares prior to close to support a strong capital position. We see synergies of approximately $250 million U.S. over 3 years, phased in over this period. The transaction economics are attractive, with an IRR calculated at above 15%, accretion in year 2, which is 2013, and attractive valuation multiples. We expect the transaction to close in the third quarter of fiscal 2011, subject, of course, to regulatory and M&I shareholder approvals. I will now move forward to slide 8 on capital. BMO is well capitalized today and will remain so after giving effect to the transaction. On this slide, we show our pro forma capital ratios on both a Basel II and a Basel III basis. Our pro forma B2 common equity and Tier 1 ratios at October 31, 2010, are expected to be approximately 9.2% and 11.7%, respectively. On a B3 basis, the bank's pro forma common equity and Tier 1 common ratios, as at October 31, 2010, are estimated to be 6.7% and 8.9%, respectively. These position us well to meet the coming Basel III capital requirements. Our estimated pro forma ratios that I referred to above include both the impact of the acquisition and the anticipated offering of approximately $800 million of common shares prior to close. Moving to slide 9, we provide a breakdown of M&I's loan portfolio, which is comprised of approximately $40 billion with a footprint primarily in the Midwest. Retail makes up approximately 30% of the portfolio, or $11 billion. Commercial is 41%, or $16 billion, and is diversified across industries, regions, and customers. Commercial real estate makes up the remaining 30%, or $12 billion U.S., with the developer portfolio being about 9% of the overall portfolio, or slightly over $3.5 billion. The developer portfolio has steadily declined from 3 years ago when the portfolio was over $9 billion. Turning to slide 10, we lay out our credit due diligence process for this transaction and its results. BMO completed extensive due diligence on the portfolio. We had our entire senior U.S. risk management group on-site for the due diligence and involved many people from our Toronto group. We reviewed over 2,500 loan files and did so using a risk-based approach. We also completed detailed analytical work related to the consumer portfolios. Our internal BMO work was supplemented by analysis and loss estimates on the entire portfolio provided by 2 independent outside firms. The table on the right side of the page segments the portfolio and shows our estimates of future lifetime losses on the portfolio. As part of the purchase price accounting for the transaction, we will record a charge for these expected future losses on closing, net of provisions recorded by the company prior to close, and the company's allowance for loan losses. On the portfolio, we've estimated future losses at $4.7 billion, or just under 12% of the portfolio. I would note that M&I has been very proactive in managing its portfolio, and for example, as mentioned earlier, the developer portfolio has been actively reduced from over $9 billion three years ago to approximately three and a half today. Overall, based on the work that we've done, we're confident that we have prudently provided for the credit risk in the portfolio. With that, I'll turn it back to Bill. Okay, thanks very much, Tom. Before going to Q&A, let me sum up. The combination of Harris Bank and M&I is a perfect fit. It more than doubles the size of our branch footprint in the U.S., doubles our customer base in personal and commercial banking. It gives us a meaningful market position in additional cities in the Midwest and a market share in Wisconsin in excess of 18%, and it builds critical mass in our U.S. wealth management business and our private client group. We've begun building a focused integration plan that will draw on the depth of talent that exists in both of our organizations, and we feel great about this announcement and confident in our execution ability. With that, Vicki, let's move to questions. Sure. Let's take some questions now. Thank you. We will now take questions from the telephone lines. If you wish to ask a question, please press star one on your telephone keypad. If you're using a speakerphone, please lift the handset, then press star one. If at any time you wish to cancel your question, you may press the pound sign. Once again, please press star one on your telephone keypad at this time. There will be a brief pause while the participants register for questions. Thank you for your patience. Our first question is from Gabriel Dechaine from Credit Suisse. Please go ahead. Good morning. Just a couple of questions here. Why is this an all-stock transaction? I know you go below the 7%, but you do still have time before December 2012 to get to that 7% core Tier 1. Is this a regulatory-driven kind of decision? My next question is on the branch network. I know there's a fairly substantial presence in Arizona. What are you planning on doing with those? Your comments about Missouri and Kansas and expanding the footprint more closely to the Midwest. Is that saying anything about BMO's future plans for geographic expansion in the U.S.? That's it. It's Tom Flynn. I'll take the first part of the question related to the form of consideration. The transaction is all stock, as we've said. Essentially, we've structured the transaction that way to maintain the strong capital position that we've got. So it was driven by maintaining a strong capital position and delivering the capital ratios that you see in the deck. Okay. Let me pick up on the last part of your question, Gabriel. With respect to Arizona, we have a banking operation in Arizona now with a limited number of branches. It concentrates primarily on the wealth market. It in itself is a good business. The branch system that M&I has in Arizona is relatively small, around 50 branches. We have to do a little more work on looking at the match-up between our locations and those locations. I think it's a little bit, in a sense, it's early days. I would separate the way that we look at Arizona from the retail branch footprint and the workout loan portfolio. I think what we're planning to do is segregate those workout loans so that we can focus on the underlying retail and commercial operations. It's a little bit early days, and you can appreciate we have a fair amount of work to do yet with the management. As far as Missouri and Kansas goes, if you look at the Midwest market, it's been a natural for us to think about Missouri and Kansas. I would say that the size of the branch network in those two states, in Kansas is really a toehold, in Missouri is the beginning of a presence. Once again, it's early days. From our perspective, this solidifies our position in Wisconsin and Indiana. It really strengthens that part of the footprint. I think Missouri and Kansas is a little bit of a bonus. Okay. Then just the purchase price adjustment for future credit losses that are going to take place post-close. Beyond that, how should we think about your PCLs, in 2012, I guess. Would this materially increase BMO's expected credit performance post-close? The way the accounting works is on close, we will record a charge to reflect our estimate of the future loss in the portfolio. With that, we won't be recording the specific provisions that come in as the expected loss is realized over time. Specific provisions are reduced on this portfolio for a period of time because, in effect, they've been provided for in the purchase price adjustment. We will be building an allowance for new loans as they come in, and basically building a general allowance to support the portfolio as loans roll over and as we grow the book. Okay. Thank you. You are welcome. Thank you. Our next question is from Brad Smith from Stonecap Securities. Please go ahead. Great. Thanks very much. I had two quick questions. First of all, I was not sure, I did not hear you mention the amount of the TARP preferreds. I would like to know that. I also wanted to talk a little bit about the expense synergies of $250 million and put them in perspective with respect to the combined expense base here. As you noted, Bill, at the beginning, we have not had a lot of time to look at that, but that looks like about 10% of the combined expense base, and just wondering, where is that 250 coming from in terms of coming out of physical plant, branch closures, whatever? Thank you. Okay. Hi, Brad. It's Tom Flynn. On the TARP preferred, the number there is $1.7 billion, and it will be eliminated as part of the closing of the transaction. There are also warrants outstanding as there always are with institutions that have TARP. They're quite out of the money, and so the cost to eliminate those is small, at about $3 million. The synergy number we feel good about. We've done a lot of work across different parts of the organization. The number represents approximately 7.5% of the combined expense base of the two organizations, and 18% or 19% of the expense base of M&I. The savings will come really from many parts of the organization. They'll come from the functions in the head office, from management across the business units, and from putting together the technology and the operations areas of the two organizations. We've done a good amount of work on those, and we feel confident in the number. Tom, just since you have done more work than certainly I have on that, I'm just curious, if I look at the nine-month results for M&I, non-interest expense is running at $1.1 billion, revenue's running at $620 million. Can you help me out understanding, is there something unusual in that $1.1 billion number that's just immediately going away? I would've expected the synergies to be much higher than what you're indicating, unless there's something unusual in M&I's run rate expenses already. No, I don't think there's anything unusual in their expenses. One thing that might be contributing to your view is that the branch overlap here is relatively modest. There are about 20 branches that are located in close proximity to each other across the two networks. We like that, in fact, because it expands our distribution footprint, but there won't be any significant branch network synergies resulting from the transaction. So, I'll leave it here, but would you say that this is a revenue synergy-driven transaction then from the perspective of BMO? Well, I guess I'd say, to us, we're going to work hard to deliver what we think is a significant number of 250 million. Secondly, we have not factored into the numbers that we've talked about any revenue synergies. We do think there are opportunities there as we look to basically bring complementary product capabilities that the two organizations have to the different distribution systems, but we haven't baked that in. We think there's a good opportunity there, but it's not reflected in the numbers. Terrific. Thanks so much. Thank you. Our next question is from John Reucassel from BMO Capital Markets. Please go ahead. Thank you. Tom Flynn, just a quick question of clarification. The $4.7 billion that you have on slide 10, that is the numbers being deducted from the purchase price. Is that correct? The number that will be deducted in the purchase price accounting is that number, less the provisions that the company will record before close, because this number estimates the future losses basically from today. Okay. Also less the company's allowance. Okay. The number is probably closer to four or four and a half? Well, it will be a lot lower than that. The provision is a little over CAD 1 billion, and the run rate specific provision number on an annualized basis is rough numbers in the order of CAD 1.5 billion-CAD 1.6 billion. That is for a full year, so we will not have that full amount before close. Okay. Thanks for that. This loan book, the losses on this are a lot different than what BMO historically experiences. When you talk about synergies and accretion, I assume this loan book is going to have to change. You had a question on what the PCLs should look like going forward. If we are trying to estimate the potential earnings benefit year four or five, I think the historical credit experience at M&I is probably not a good indication of future credit experience. Is that a fair statement, Tom? Yeah, that would be absolutely a fair statement. This portfolio has more commercial real estate in it than we would be comfortable with, and the plan is to reduce that exposure over time and to end up with a credit risk profile that would not be significantly different from the profile that we would have in BMO. Sorry, two last questions. The C&I, how much of the $16 billion is secured by real estate? How much of it is secured, if any? The dilution in year one, could you put some numbers around that? About 25% of the C&I is secured by real estate, and that would be real estate used in businesses that are part of the C&I portfolio. The first year number. Let me get back to you on that one, John. Okay. I don't have it at my fingertips. Okay. Thank you. Thank you. Our next question is from André-Philippe Hardy from RBC Capital Markets. Please go ahead. Thank you. Just a few questions around the IRR. First, what do you think is the right denominator? Is it adding the common being issued, so that would be $4.9 billion plus the 1.7? In calculating the IRR, we have looked at the capital on sort of an economic basis, so the capital that would be required to support the transaction given our target capital ratios. So it is more based on a fundamental economic analysis of required capital than the capital that we are issuing in the transaction itself. How different is that number from the $6.6 billion that is being issued? We are not issuing 6.6. We are issuing the 4.1 to the shareholders plus approximately 800 in common. The TARP repayment will be made by using existing liquidity that we have got, so it is about 4.9. The economic number would be in the order of two billion higher. Okay. How do you account for the big DTA that is in Marshall & Ilsley? Well, the DTA it's relating both to timing differences from loan losses and from loss carry-forwards. Our analysis has shown that with profitability going forward, that will be recoverable over time, André, and it will take several years due to some of the limitations in U.S. tax law. But over time, we will be able to recover that DTA. Okay. But it will take quite a while. It will take a number of years, yeah. Thank you. Thank you. Our next question is from Michael Goldberg, Desjardins Securities. Please go ahead. Thank you. Good morning. Could you give us some idea of what your rank and market share will be in key MSAs that you enter or where you will have a combined presence with M&I, and what would those key MSAs be? Well, Michael, it is Bill. If you go to page 6 in the deck, it has a list of the key markets and deposit size. Quickly, in the cities in Wisconsin, we have a dominant market share, in Madison, in Milwaukee, in Green Bay. That is where there is a very significant uptick would be, and that would be a very large market share. In Indiana, where we have a strong share in Northwest Indiana, but a very light presence in Indianapolis, this is going to add significantly to our branch count. I cannot remember where we would be, but it moves us up in the ranking so that we have the opportunity over time to become much more significant. In Missouri and Kansas, as I said earlier, it is really a small contribution. I think the big moves clearly are a much stronger presence in the state of Wisconsin and a significant improvement in Indiana. Is it fair to say, given the transition that will take place in the loan book, that the acquisition of this presence in the MSAs and the clients that you get and the core deposits is really the key driver in this transaction? Yeah, I think that's fair to say. I think that's a good summary. I'm sorry, like everybody else, I haven't really had a chance to review this information. But these deposits that you're talking about here, to what extent are they core deposits? A good majority of the deposits are core deposits generated from the customers in the business. Can you quantify that at all? Let us get back to you. I have got a number in mind, but I am not certain that it is right, so we will get back to you. But they have got some wholesale CDs on the balance sheet. But the strong majority of the deposit base comes from the customer base. Okay. On the question that was asked earlier about year one dilution, I think it would be good to get back on that to everybody. Well, I am glad you came back to it because I have now got it. Excluding the one-time cost that we will have as a result of the transaction, in year one, it is approximately -3%. Thanks very much. Thank you. Our next question is from Darko Mihelic from Cormark Securities. Please go ahead. Hi, good morning. I was hoping we could perhaps go over some of your assumptions with respect to how you get to cash accretion by year 2013. What I am sort of looking for is what is your base number of earnings from BMO in the year 2013? What is the earnings addition from Marshall & Ilsley? I am assuming that you are just using 12% growth, which was your target that you had announced when you reported earnings. I get to 6.67 of earnings per share for BMO in 2013. I wonder if you can just help me understand what the earnings you would get from M&I would be, and maybe just use that as a start, please. Okay. It's Tom. I'll describe the approach that we use, but we can't give you the specific income number that's coming from M&I. The starting numbers that we used for BMO were IBES. We started with the base Street estimate, and then we added to that the revenues and expenses and income that we expect to come from M&I, and factored in the phasing in of the synergies. We've excluded one-time costs that we'll have as we implement the integration plan, and we factored in the additional shares that will be issued in the transaction and the follow-on equity issue. It's basically the one plus two with the two reflecting the assumptions that we've got in the model and then factoring the synergies and the larger share count. Okay. Tom, the IBES estimate is somewhere around 594 for 2012. I don't see one for 2013, so I'm assuming you must have had some. Are you using a 12% growth rate? Okay. Yeah, sorry, no, we're not. We're using it's either a 5% or an 8% growth rate. We grew it. It's confirmed. It's a 5% growth rate. We grew it more at the growth rate reflected in the estimates as opposed to the 12% target. Okay. That's good. And the share count was about, from what I can tell, you're issuing 800 million. I don't know what the kind of number we're going to assume there, but let's say all in, we're issuing about 81 million shares. Is that about right? Yes, it is. Okay. How much accretion? Is it a penny or two? I know you can't tell me what M&I is, but some help on the accretion would be great. It would be, as we calculate it, around 2%. Okay. Final question, given what's happened last night with the changes in financial reform and some of the changes with respect to interchange, was that factored into your numbers? I don't know how explicitly. In terms of range, we think the interchange will be around. That could not be factored in because we didn't know until yesterday. Okay. It's around 25 million in each of Harris and M&I, the impact of that on revenue. Okay, and that's assuming that it happens today, 25 million in M&I and 25 million in Harris. Yep. Okay, great. That's very helpful. Thank you. Thank you. Our next question is from Sumit Malhotra from Macquarie Capital Markets. Please go ahead. Thank you. Good morning. First question in relation to the loan book at C&I think, or at M&I, thinking more on the revenue side. Obviously, this bank has the mid-market commercial focus that BMO has often talked about is your focus as well in the U.S. The book, like many U.S. banks, has been decreasing over the past couple of years. Just wanted to get your thoughts on the outlook for their lending business in terms of growth from where we stand right now in the cycle compared to what you've talked about with the BMO franchise, the Harris franchise. Thanks, Sumit. I think one of the benefits that's going to come from this transaction for M&I's client base is a much higher level of confidence. This bank in the Midwest has been a strong and very well-run commercial bank historically, and I'm excepting out the expansion of the real estate portfolio that took place in the last few years. But the customer relationships, and we're familiar with many of them because we compete in the market, are very strong. The combination of their account coverage teams, their client base, and ours, I think just advances very specifically our intent to be the commercial bank in the Midwest. If anything, I think it creates more growth opportunity than they've been able to experience in that core business the last two or three years because they've had a lot of distractions. Strategically, given that your U.S. franchise or footprint has been focused more on mid-market commercial to begin with, I know different opportunities in terms of what comes up and what the pricing is obviously going to affect the key factor. But was there any thinking that since you already have a similar focus there, that perhaps looking at something that was more consumer-oriented would be a better fit to diversify your portfolio? I think what is interesting about the question you just asked is that we had highlighted an intent to increase commercial. Going back in time, we would have thought of Harris Bank as being primarily a commercial bank. But in the last seven or eight years, with the expansion of the retail banking business, personal banking is becoming a larger and larger part of the company. I think that proportionally, the combination of the two businesses will be complementary, and I think going forward, given that there is going to be a business-led recovery, both the historic franchises are going to show strength in growth areas. The reputation that BMO has in commercial banking is very consistent in the market with what M&I has, and the leadership team that we have has already started work on getting together with the customer base. I don't think it is going to overweight the business, if that was your question, but I think it is going to play to a strength that we have. Then finally on revenue, I think it is about 12% of the revenue mix at M&I is coming from wealth management. That isn't something I have heard BMO talk too much about in the U.S. since you sold part of your franchise to E*TRADE a few years back. What is the thought process on that business and what it means for you going forward? There are a couple of components. We have spoken a little bit in the last little while about the increased focus we put on BMO Asset Management really as a global business. We have strengthened the leadership in Chicago of that business and put together really what is a global sales force. That is starting to show very good results. M&I has a really strong portfolio management group in institutional asset management. Once again, I think they have been hugely disadvantaged the last two or three years because of the other distractions in the bank. We can combine that portfolio management operation with our institutional asset management business. It pretty much doubles the size of it, and I think it accelerates growth. They have a good private bank, and we are expecting growth there. The only area that we'll have to do a little bit of examination of is the mutual fund business, and that really requires a bit of digestion. But I think we have a significant reputation in wealth management in the U.S. By combining these two businesses, I think we're going to get operating leverage that previously was just a little bit beyond our reach. Well, Bill, I thought you'd have something new to show us in April, and you were giving me the head fake a couple of weeks ago, but here we are. Well, I didn't intend for it to be a head fake, you know that. I just wasn't at liberty to talk about it. No, just kidding around. Congratulations. Okay. Thank you. Thank you. Our next question is from Mario Mendonca from Canaccord Genuity. Please go ahead. Good morning. Bill, can you hear me? I can hear you clearly. Thank you. I am just calling from overseas, so I was not sure. I do not have access to the presentation either, so I am not sure if you have answered this question yet. Is there a goodwill number? What I am trying to do is piece together the impact on the pro forma Basel III TCE ratio. About 110 basis points, I think, is the delta from what you described when you reported. What kind of goodwill number are we looking at in this deal? Hi, it is Tom. The goodwill number is around $2 billion. $2 billion. From a more philosophical perspective, and perhaps this is appropriate for Bill, how would you address investor concern that in the very near term, there are some real impacts here, the pro forma impact on the TCE, the dilution early on, and that it is a meaningful leap of faith to look at 2% accretion in three years' time. How do you address that concern? The bank seems to be giving up a lot here in the near term for what does not seem like very much, say, three years from now. I would see it just about the opposite. When you look at the underlying businesses and you separate out the non-performing loan portfolio, which we are going to put some very heavy resources on the reduction of, the combination, by giving us a much more material market presence in a number of the markets where we are competing, and really focusing on the strengths of the business, the emergence of much stronger revenue for the combined business comes relatively quickly. There is clearly some cost up front but we have confidence in our execution capability. We have done quite a significant number of acquisitions, many of them smaller. We have done a couple of larger ones. But our track record for getting the expense synergies has been excellent. I think out of almost 20 transactions that the bank has done, the vast majority of them, and I think all but one, we've extracted more synergies faster than we built into our base case. I think there are a number of areas that I'm looking at where I'm going to set objectives for people to beat the assumptions. Most particularly, I think as we get the first-year integration costs out of the way, we'll see expense levels return more perhaps to the historic levels that people were accustomed to seeing in M&I. M&I, very well-run bank, clearly caught in the real estate downdraft, but very good disciplines around expense. In some ways, getting to the size we are here, over 600 branches, is going to give us some efficiencies that were beyond our reach. I think we'll do a thorough job in breaking out as we go forward in breaking out the non-performing portfolio from the core operations, Mario, so you'll be able to see it, and I think you'll be able to see the emergence there. Thank you. Thank you. Our next question is from Brian Klock from KBW. Please go ahead. Good morning. Good morning. Tom, I guess with the pro forma capital ratios, I am not sure if you discussed this earlier, I am still jamming through the slides as well. The pro forma Basel III impact, obviously M&I is still Basel I in the States. There are about $43 billion in risk-weighted assets currently. Was there any change in that risk-weighted asset number coming in from M&I converting to Basel III, or is it basically still using that sort of Basel I risk-weighted asset number for M&I? As you know, they are on a Basel I system. We have given thought to how the Basel I number that they use will convert over time to the AIRB number. We have done work on that. But the ratios that you are seeing are based on the standardized Basel I approach. Okay. You mentioned the DTA earlier. It would appear that the purchase consideration is what the Section 382 annual realization of the DTA would be subject to. It seems, I think there was a billion-dollar DTA at M&I. Does that sound right? It's higher. 1.8, I think it is. 1.8. You're right, that's the section, the governing section. It will be our investment in M&I, though interestingly, the way it's structured the TARP amount as well will count as part of that investment, so the way it's structured. That'll be the limiting factor. The long-term municipal bond yield based on that investment drives the amount you can deduct each year, so it'll be a number of years to recover it, but we are confident we will recover it all. It sounds like you got, maybe it's 10 years, you could realize that, about half of the NOL carryforward period. Yeah. It could be a little longer than 10, actually. Okay. I guess maybe the last question for Tom Flynn, I guess. Obviously, you guys do trade at a lower tangible book multiple compared to your Canadian bank peers. It looks like you're going to be, what, $3.50 of dilution at tangible book up front from the goodwill. I guess, have you thought about how long it would take to earn that back when you put the combined companies together and I guess, how long would it take you to earn back that dilution from this transaction? I don't have that number in front of me, but we think the multiples themselves on the deal, if you'd look at a PE or what we're paying on there, price to tangible book, which is a little below the price to tangible book, are attractive and we think it's going to be positive earnings, and we'll grow the tangible book over time. Okay, thanks for taking my question. I just want to come back to one question that was asked earlier related to deposits, and excepting out jumbo CDs, about 80% or a little over 80% of the deposits are coming from the customer base. Thank you. Our next question is from Brad Smith from Stonecap Securities. Please go ahead. Mr. Smith, your line is now open. You may proceed with your question. Hearing no response, we will go to the next question, and it is our last question for today. Michael Goldberg, Desjardins Securities. Please go ahead. Thanks. Actually, just a couple of big-picture questions for you, Bill. I guess that in actually pulling the trigger on this, it is fair to say that you are increasingly confident that the worst is over in the U.S. Is that a fair point to make? I think we're increasingly confident that we will have steady growth as opposed to a reversal. Michael, I don't think we're going to have growth at capacity, and we said that we'll continue to have an economic expansion, and that's a positive environment. But we're not predicting, and the transaction wasn't predicated in a rapid economic recovery or a big step up in GDP growth. Okay. The other question that I have, and I haven't had a chance to look at the details for M&I, but would you feel that within, say, a few years, or are your assumptions based on return on assets getting back to pre-crisis levels? Or over what time period would you expect that that could be achieved? Well, without getting into the construction of your model, I think that net interest margins have expanded within our portfolios. I think that there's still some repricing to be done. I know M&I has a program that over time is designed to work specifically on net interest margin, and I expect that they'll make progress through the next couple of quarters prior to closing on that as well. So I don't think it's unreasonable to look at ROA numbers pre-crisis and say, "Well, what would we expect the bank to look like?" Even with respect to size and the relationship between expense and revenue, I think you can look back prior to 2007 and start to make some pretty good sense of how robust the economic model is. Thanks very much, and congratulations. Thank you very much. I want to just say thank you to everybody on the call. I know that it's a Friday before the wrap-up in the year. As I've always said, the best opportunities are really driven by availability, agreement among management and boards of directors. This transaction is entirely consistent with how we've talked about the strategy of the bank. From our perspective, to very significantly increase our deposit base, our distribution footprint, the mix of earnings, the increase of wealth management as a proportion of our business, and a balance of the weighting of personal and commercial and wealth relative to wholesale businesses in the bank is all positive. Speaking for the management team, I don't think we could be happier than we are this morning at the way that events have come together. I appreciate all the work that you've done in following this. I know you have quite a bit of work to do probably to get the reports out today. We'll let you go with that and say thanks very much. Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.