Please be advised that this conference call is being recorded. Good afternoon, and welcome to the BMO Financial Group's Third Quarter 2011 Conference Call for August 23, 2011. Your host for today is Viki Lazaris, Senior Vice President of Investor Relations. Ms. Lazaris, please go ahead.

Thank you. Good afternoon, everyone and thanks for joining us today. Our agenda for today's investor presentation is as follows: we will begin the call with remarks from Bill Downe, BMO's CEO; followed by presentations from Tom Flynn, the bank's Chief Financial Officer; and Surjit Rajpal, our Chief Risk Officer. 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 1 or 2 questions and then requeue. Also with us this afternoon to take questions are BMO's business unit heads. Tom Milroy from BMO Capital Markets; Gilles Ouellette from the Private Client Group; Frank Techar, Head of P&C Canada; and Mark Furlong from P&C U.S. At this time, I caution our listeners by stating the following on behalf of those speaking today. Forward-looking statements may be made during this call. They are subject to risks and uncertainties. Actual results could differ materially from forecasts, projections or conclusions in the forward-looking statements. Information about material factors that could cause results to differ and the material factors and assumptions underlying these forward-looking statements can be found in our annual MD&A and in our third quarter 2011 report to shareholders. With that said, I will hand things over to Bill.

Thank you, Viki, and good afternoon, everyone. As noted, my comments may include forward-looking statements. BMO's third quarter results were very good and consistent with the business performance we've been delivering this year. Our year-to-date adjusted net income has reached more than $2.4 billion, 16% ahead of last year. Investments we're making continue to contribute to top line growth and this remains our priority as we steadily introduced initiatives that further enhance the experience of our customers. In July 5, we closed the acquisition of Marshall & Ilsley. And the closing was successful, on time and efficient and we're making good progress on integration. We have a set of defined milestones that we're working towards, as well as a clear view of the business opportunities that are present. Notwithstanding the slower-than-expected U.S. economy, we remain confident about the future of our U.S. businesses and the results we'll generate and I'll speak more on this later in the call. Before moving to a review of the third quarter numbers, I'd like to thank Ellen Costello for her significant contributions at Harris over the 5-years leading up to our recent acquisition, and formally acknowledge Ellen's new position as CEO of BMO Financial Corp. In the role of U.S. country head for BMO Financial Group, Ellen is responsible for providing governance and regulatory oversight for all of BMO's U.S. businesses. She remains a key member of the BMO management and performance committees. Mark Furlong, President and CEO of BMO Harris Bank joins us on the call today and as Viki mentioned, is with us to participate in the Q&A session. Mark leads our U.S. Personal and Commercial business and we're pleased to welcome him on BMO's management team. Tom will provide detail on the Q3 results in a moment, but let me touch…

Thanks, Bill, and good afternoon. Some of my comments may be forward-looking. Please note the caution regarding forward-looking statements at the beginning of the presentation. I'll start with the financial highlights on Slide 8. Adjusted net income was $843 million, up 24% from last year. Adjusted EPS was $1.36, up 19% from a year ago. Last quarter, we introduced adjusted results to better position us for reporting core performance after the acquisition of M&I. Net adjustments this quarter totaled $50 million after tax or $0.09 per share. Adjustments all on an after-tax basis include integration cost for M&I of $32 million, amortization of acquisition-related intangible assets of $12 million, and a charge for revenue for hedging -- a charge to revenue for hedging FX risk on the M&I acquisition of $6 million. Except for the amortization of intangibles, all adjustments were booked in corporate. Reported net income of $793 million was up 18% from last year and return on equity was 14.7%. Current quarter financials reflects 26 days of M&I results. M&I added $117 million of revenue and $32 million to adjusted net income. On a reported basis, there was a loss of $10 million given the integration cost. The provision for credit losses was down year-over-year by $40 million and relatively stable versus last quarter. BMO's capital position and ROE remain strong. Our common equity ratio is 9.1% and our Tier 1 ratio is 11.5%. Turning to Slide 9. I'll touch briefly on revenue growth. Total revenue was $3.3 billion, an increase of 13% year-over-year. x M&I, revenue was up 8.6%. Net interest income was $1.7 billion, up $121 million or 7.7% year-over-year, with M&I contributing $69 million of that. Non-interest revenue was $1.6 billion, up $246 million or 18% from a year ago, with M&I contributing $48 million.…

Thanks, Tom, and good afternoon. Before I begin, I'd like to draw your attention to the caution regarding forward-looking statements. To begin, I note that we're pleased with our current performance this quarter with improvements again in both specific provisions and gross impaired loans. I'll spend some time today focusing on M&I, which clearly is a very significant development of BMO. In terms of risk integration of M&I, we are harmonizing risk processes and integrating BMO's strong credit discipline into the business culture. We are progressing well with this integration and embedding our risk framework toward the M&I organization. Looking now in more detail. I'll start with Slide 27, where we provide the breakdown of our loan portfolio. As expected, the geographic mix has changed with the purchase of M&I. 68% of our loans are in Canada and 28% in the U.S., a change from 78% and 17%, respectively, last quarter. P&C consumer represents 64% of the Canadian portfolio and is 87% secured. Our U.S. portfolio mix is 37% consumer with 95% of this secured. The remainder is largely commercial. In this quarter, we transferred $2.4 billion of stressed assets secured by real estate comprising of $1 billion from Harris and $1.4 billion or USD $1.5 billion from M&I to Corporate Services. It represents about 4% of the U.S. portfolio. This transfer will allow the business to better focus on customer relationships, while at the same time, leveraging the M&I experience in managing impaired assets. Turning to Slide 28. We provide details on the total U.S. loan portfolio. Our USD $23 billion consumer portfolio consists of 37% first mortgages and 35% real estate secured credit lines, with the remainder in auto and other consumer loans. The C&I portfolio of approximately USD $29 billion is well diversified across industries. But primarily…

[Operator Instructions] First question is from Mario Mendonca from Canaccord Genuity.

Maybe 2 quick questions. This whole issue about correction in Canadian housing has come up on a few occasions in the past and it's picking up a little bit of steam right now. So Surjit, could you take us through what your views are on what sort of housing price correction, and I don't mean any individual city. Just more broadly, would it take to create a scenario where residential mortgage PCLs or consumer loan PCLs in Canada generally move to uncomfortable levels. If you could just give us some sense to there.

You got to look at the residential mortgage issue more in the context of the structure we have. Between the insurance on higher rate mortgages and the low loan-to-value on the uninsured mortgages, that structure allows the real estate prices to fall quite considerably before having a material impact on the financials. To answer your question more specifically, we do conduct a number of stress tests. And stressing the price declines in the real estate does not have too material an impact because when you look at some of the numbers, we have the loan-to-value on average is a pretty robust number. It gives you enough of a cushion. The loan-to-value in the mid-60% gives you the ability to absorb a lot of losses. So I don't know whether that answers your question. But if you're look for stress that would cause you to lose a lot of money given the guaranteed structure, I think that would have to be quite material. Ballpark, I think if you have something like a 30% reduction in prices, your current rate of let's say between 1 and 2, in some cases 3 basis points, could go up to 10, 12 basis points. That's about it. I'm just giving you a ballpark number.

That's helpful. My second question more generally is on the expense line. If I look at expenses this quarter, and even if I take out the $53-or-so million associated with the integration, I take that expense level and again, then make another adjustment for the $75 million related to M&I. It looks like expenses on a total bank basis from one quarter to the next has actually declined, which is a little bit surprising given the 3 fewer days in the previous quarter. Is there anything you can tell us about expense levels this quarter, BMO standalone or moving M&I for a moment, why would expenses have been so light this quarter?

It's Tom, Mario, I'll respond to that. On Page 10, we provide a detail on our expenses. And in the chart on the right, you see the expense is x M&I, which is an attempt to show you a pure core expense level excluding both the onetime costs associated with M&I and the additional mix that goes with the acquisition. And as you pointed out, the expenses are down about 1% quarter-over-quarter, up about 3.9% year-over-year. There isn't anything particularly unique going on here other than I would say greater attention being paid to managing expenses carefully in an environment that feels like it's going to deliver less revenue growth than we expected. Every quarter, there are items that move around but there's nothing really significant this quarter for us.

Our next question is from John Reucassel from BMO Capital Markets.

And a question maybe for Surjit. I was just want to understand. The last data point we have for M&I loans was March 31, 2011, about $35.2 billion. And it looks like we're now -- M&I is about $30 billion now. So including the market, it's about a $4 billion reduction in the loans in the last 4 or 5 months. Could you talk about how much has been sold or attrition or what's happened there in the loan book in M&I since March 31?

It's a combination of factors. There was some sales. There was a reduction in some of the indirect auto loans of about, I think, about $1 billion or so. There were lower utilization in some of the clients. And I think between those 2 major factors, I think that would explain a lot of the reduction. And yes, there was some loans there as well, but not materially enough to warrant any comment.

So with the $4 billion reduction, the lower utilization, is that other competitors pricing your customers out there or are you concerned about that or how should we look about that decline in the loans?

It's Tom Flynn, John. The biggest reason for the $4 billion is the credit market, which is as Surjit said about $3.5 billion, so that's a big driver. Excluding that, the balance is still down, reflects some lower utilization. Some sales, not that significant, but some sales of impaired assets and some reduction in commercial real estate assets generally. Our hope would be that given some seasonality in parts of the portfolio, we'll see a bit of a pickup in the C&I over the balance of the year.

Tom, and just for you. Two quick questions. Those -- the commercial real estate loans that are going to the Corporate Services, I assume those aren't runoff, just want to be clear on that. And then the expected loss on the M&I was $18 million in the quarter. Does that mean on a regular quarter it's $50 million? And that would imply I guess on a $30 billion loan book about 70 basis points. Are those numbers right or are those too high?

I'll let Surjit speak to the expected loss. But the answer to the question about whether or not the real estate that was moved into corporate is on runoff is that it is. The intention is to work it out using our special asset management group and to take that down to 0 over time.

On the expected loss, the way we've looked at it is we have taken exactly what we had in the legacy Harris book and adjusted for the business mix in coming up with the expected loss number. And as you know, the expected loss number is really a performance management tool. And so the number you'll see there is reflective of how we've been measuring Harris in the past.

How about the calculation?

But the 70 basis points, my understanding is you were looking at a 40 to 50 basis point expected loss on M&I. Maybe that's over time, not right away. And it looks like you're running about 70 basis points is that right, Surjit?

The 70 basis points is the right number you're looking at. The longer-term number would be lower than that. So it depends on which point of the cycle you're looking at it. The expected loss number is varied depending on where you are in the business cycle.

Our next question is from Robert Sedran from CIBC.

Just 2 questions. The first one is for Frank Techar, actually. Frank, there was concern after the last quarter about the ongoing margin pressure, in fact, intensifying margin pressure. So I guess the 1 basis point decline seems like a positive result. Can you talk about whether you were protecting the margin and maybe ceding some share, or whether things just settled a little bit during the quarter? And perhaps the outlook over the next few, if you can.

A little bit of context before I get to your answer. Going back to 2010, our NIM increased by 13 basis points. And even with the declines we've seen over the last couple of quarters, year-to-date, we're up 1 basis point over 2010. So even given the competitive pressure and the continuing low rate environment, the business continues to perform well. And I have to say is in much better shape than it was 18 months ago from a business mix perspective. There is no doubt that the outlook on NIM going forward is for continuing pressure. Competitive pressure remains and the low rate environment is putting pressure on deposit margins. So in Q3, those 2 pressures, both competition and the low rates that we continue to see, those 2 pressures were offset for us by some positive mix shift. You might have noticed in the quarter that our deposits grew by more than our loans and we did see a little higher growth in our retail and commercial card businesses, which you know are high spread. So we saw some positive mix offsetting to some degree the pressures that we are continuing to see. So my expectation as we go through the next quarter is more downside risk on margins for the same reasons that we are seeing right now.

That's helpful. Thanks, Frank. And just the second question, I guess. Both Bill and Tom mentioned that the integration on M&I is moving forward as planned. I guess I'd just like of a little bit more detail on those plans in terms of I'm seeing the synergies roll into the results. I mean at least $300 million is expected on an annualized basis when you're done. Is it reasonable to assume $150 million in 2012? Is that number high, low? Should we expect more in 2013 and beyond, please.

It's Tom, I'll respond to that. The total expectation is for synergies to be in excess of $300 million. We would expect to have all of that on a run rate basis at the end of '13. So not in the reported numbers over the full year, but on the run rate at the very end of the year. The '13 on a reported basis, we'd expect something like 75%. And in 2012, in the order of 30%, 35%.

Our next question is from Steve Theriault from Bank of America Merrill Lynch.

First question for Frank Techar, please. Frank, there was a large credit card deal announced last week, and I think it's fair to say there was a belief that BMO might have been interested in those receivables. So maybe you can update us on your card strategy and provide your perspective on why that business would or would not have been a good fit for BMO.

Thanks, Steve. I won't comment specifically on the deal, but will make a couple of comments about our business. Both the personal and commercial card businesses are important products for us and will continue to be important products in the future. And our strategy is pretty simple in those segments. We're focusing on opportunities to leverage our core customers and build core customers where we have the opportunity to build strong share-of-wallet. And our focus is to promote our cards as payment products, not credit products. And I think over time, you've seen at least with the MasterCard acceptance brand, we've had the strongest net retail sales by far in the segment. And our objective would be to continue that, and I think you've also seen that we've managed our losses near the low end of our Canadian peers and we've been leading the industry with lowest losses for many years. So we're focused on net retail sales and we're focused on continuing to manage a high-quality portfolio with the ability to grow the business with our core customers. So that's going to be our focus going forward. I think you saw us execute against that strategy when we made the Diners acquisition. We're very confident that, that acquisition is going to continue to bear fruit as it has from the time we've closed. And now in particular with the M&I acquisition and the U.S., we have a larger commercial customer base to sell those products to. So that's going to be the focus in this segment for us, and we'll look at opportunities as they come up.

Another one, if I might. Interest rates have clearly been falling, but I haven't seen any reduction in posted mortgage rates. So may be a follow-up to Rob's question. Could we see any signs of margin tailwinds in Q4 if rates remain at current levels or as you know, is that benefit likely to be competed away in your view, Frank?

Yes. I think I'll just stick with the comment I made a bit earlier that I think there's more downside risk in Q4 and Q1 than there is upside for sure.

And last one, if I might, for Mark Furlong. You indicate there somewhere in the MD&A where you talk about a USD $40 million pretax impact from the new interchange rules in U.S. P&C. So can you talk to us a bit about how much of a mitigation impact you're expecting, and also what sorts of strategies are you expecting to implement and what does the timing look like for that?

The mitigation right now is just a few million dollars. So there's still more work underway. But it's right around that number, so we still have progress to make on that.

And are there changes to the fee structure coming down the pipe anytime soon or that's something you're ready to talk about today?

Well, I mean there will be. There's some of the things like debit rewards will go away. You've seen all the major banks take those away. But for things like that, all have $2 million or $3 million each, none were standout differentiators on their own. So they're all little pieces like that.

Our next question is from Andre Hardy from RBC Capital Markets.

One for Tom Milroy and one for Tom Flynn. So for Tom Milroy, it'd be real helpful if you could elaborate on Bill Downe's comment that capital market revenues will be more subdued near term. And Tom Flynn, with organic revenue growth potentially slower in the next few quarters and perhaps longer. Can you help us understand how much flexibility you have on expenses, i.e. under what types of revenue growth scenarios you should be able to get positive operating leverage and under what type of scenarios would it become more difficult?

Okay, Andre, it's Tom Milroy. So maybe I will kick that off first. First of all, as you have seen, we had a quarter that was pretty consistent with what we had done in Q2 and the bottom line benefited from a tax recovery and some lower expenses. But when we look forward, obviously we're not oblivious to all of the stresses that have come from the recent extreme volatility in the market. And when you look at that, there's obviously some negative net volatility, negative to some of the positions that we would be carrying. It also importantly sends clients to the sidelines, and so that's going to have some pressure. But if we get back to a place where we get some sense of economic growth and confidence back in the markets that we're operating, I mean I think we'll see opportunities. And if volatility comes down from the extreme levels but remains elevated, that's actually good across a bunch of our different businesses. We should see better spreads and better trading opportunities. And with confidence back in the market, we should see some of the transactions and business that we have in our pipelines actually get done. So we're right now, I imagine like you are, watching closely and looking for signs of some return to normalcy after August ends and we get into the second month.

Are you willing to share with us just how bad August was, or you'll hold off until the next call?

Yes. I mean, I think like everyone else there's some pressure, but we'll talk to you about that in 3 months time.

Andre, it's Tom Flynn. On your question, it's hard to be specific about the level of revenue growth that would result in a given level of operating leverage or positive operating leverage. But what I can tell you is that we recognize that there is currently caution around the growth outlook. We are looking to manage expenses in a more disciplined way as a result. At the same time, as we've talked about the last few years, we do want to invest in the business in areas and are continuing to do that although the bar is higher on those investments. Just to give you a few numbers. In P&C Canada this quarter, the revenue growth was about 3% and the expense growth was about 3%. The rounding gave a negative operating leverage of 0.5, but that shows a pretty tight relationship to the expenses to the revenues. Next quarter, in P&C Canada just given what we see coming down the pipe from a project perspective, operating leverage is likely to be somewhat negative. But the bigger message, I think, is that there needs to be an appropriate relationship between revenue and expense growth and we're focused on that.

Our next question is from Peter Rutledge [ph] from National Bank Financial.

Just a follow-up from Andre's question for Tom Milroy on trading revenues. Tom, I looked at about a year ago, the earnings transcript. And you explained the dip in trading revenues at that time is tied to some negative marks on non-core legacy positions, and the rationale is they went up to prior quarter and they came back down in the third quarter of 2010. So if I look at Slide 33 on the daily trading revenues, you see some pretty significant gains at the end of each month, May, June, July. So I guess the first question would be are we seeing a bit of a replay of some positive marks in the last quarter on those legacy positions? And then I guess the second part of the question would be how much spread narrowing in terms of BMO's credit spread versus counterparties, how much of a tailwind was that to this quarter's trading revenues?

I think in terms of -- 2 parts. I think when you look at that slide, I think what you're really seeing as indicated there is the impact by and large of credit valuation adjustments on top of what would be the normal trading activity. So I wouldn't read a lot into that. When we look forward to the impact of the first couple of weeks of August is one of the things that happened across the industry was that the marks that we used for credit valuation adjustments gapped out. And so that will have an impact, and those are marks that can come back to you over time. And so part of the reason that I wasn't prepared to get into a sense of where we are and where we're going to be at the end of the quarter is simply 2 weeks don't a quarter to make. And we've seen and had other situations where you get off to a rough start for one reason or another. And then as the business comes back, we have the opportunity to continue to perform and end up if not where we want to be, at least better than it might look in the point in time.

So the CVA adjustments were general across the portfolio weren't necessarily related just to the legacy positions?

No, and I would say that they were related as much to our active positions.

Okay. And then just a question on the rise in formations. Consumer credit in Canada looked to deteriorate at least just based on the rise in formations. Is that an early warning signal for weakening in the household sector generally? And secondly, the other explanation for the rise in formations was commercial real estate in the U.S. Is there any reason to think your marks on your CRE loans might be too low if you had a real stress in the U.S. CRE market?

So let me start with the P&C Canada comment you made on consumer. I think when you're looking at the formations, the variation is not so much on consumer as it is from the large commercial portfolios that we have. And the formations really, the last quarter we had hardly anything coming from the large end of the commercial portfolio. And anything from that sector generally is lumpy. So we've seen some larger accounts coming into the formation numbers from commercial, so it doesn't have much consumer. And I think from a stress standpoint, I think we do understand that a strong Canadian dollar will have some impact on those formations on industry is that -- do depend on exports over the prices aligned with the U.S. dollar. And so I think that's more the reason for the increase in commercials for the formations in Canada. With respect to your comments on real estate in the U.S., we are very satisfied that the marks at this point in time is very appropriate now.

Would you call it conservative?

I would characterize it as somewhat conservative, yes. And of course, you never know. But the market is down quite considerably in the U.S. already. And as I said, it's probably bobbing at the bottom. And unless something catastrophic happens and the market comes on much more than it has, we'd be very comfortable with that mark.

Your next question is from John Aiken from Barclays Capital.

On the U.S. side of the operations, you're actually quite deposit rich. Is there any indications that in the immediate term or near term you might be able to comfortably deploy those deposits on a risk-adjusted basis, or are we looking for growth in the U.S. operations largely to come from the synergies expected from your M&I transaction?

Okay, this is Marc Furlong. To think through the excess liquidity there, I think if you look at the loan portfolio and say in the near term, consumer loans probably declined and the construction and commercial real estate probably declined, so that's not going to be used for it. At this point, both of the former Harris and the former M&I C&I line utilization a little below 50%. Former Harris, a little above 50% former M&I, but both are down now. There's some seasonality in those numbers up. We have a pretty good size auto dealer portfolio, and this is the ramp down period of time where you saw the 2011 models about 2 or 3 months from now, the lots begin to fill up with 2012. So you'll see line utilization increase. Those can have pretty big swings from as much as 25% or 30% utilization to 75% or 80%. On the x side, another big portfolio as you empty grain out of terminals and start to look at empty terminals that fill up in the fall. Again, we'll have utilization there and could swing as much as 0 to 10% utilization all the way up to 80% to 90%. So I think that as we look at loan growth, we think it's probably in the all-in portfolio. Probably later into 2012, there will be some aspects of the portfolio that will show some increase of just the normal seasonal stuff that occurs in the fall. Another piece I'd tell you in there is that the former Harris portfolio in the C&I side has had some nice increase. And a lot of that came in the third quarter, the third fiscal quarter. And that really is due to really Harris team that really kept their eye on the ball despite all the work that was going out in the integration. And they had some nice growth in this portfolio and it's really across several sectors, including on the dealer side, actually growing the dealer -- the auto dealer business. But then looking across diversified and looking across other segments, they had some growth. So I think there's a chance we can you some of that liquidity over that -- over the course of loan growth. It's just probably going to take a couple of quarters.

Our next question is from Michael Goldberg from Desjardins Securities.

First, maybe just kind of big picture. What comfort can you give us about liquidity of European banks? What are you doing to protect yourself, and what BMO's exposure on balance sheet and derivative?

Michael, that was a multipart question and Surjit is making a small adjustment to the paper in front of him so he can give you a complete answer.

Yes. Let me start out by telling you that we've been looking at Europe for the past several months, and direct exposure to the European banks that are under stress is very, very miniscule. That's how I would characterize it. So when you look at it from any credit risk that we've taken on the European bank, it's nominal. And to the extent that it's some, it's largely and very sharply updated trade finance. And cumulatively, it's a very, very small number like I'm talking about if you look at the stressed European banks, it would add up to less than $300 million. I'm approximating over here, but it would be that small a number. With respect to the European exposures in some of our off balance sheet, structured vehicles again, that's again very small. For example, in the case of our lease in Parkland, the only exposure we have there is a small exposure to government guaranteed Irish bank senior debt. And there's really no exposure to the other stressed countries at all. So in FX again there's a very small piece, fractions of percentages in countries which are in the euro periphery, so again not material. In our trading books, there is exposure to European countries, but it is largely AAA rated and to those that are not rated. The not rated securities are under $200 million to European countries. So it's a very small number. We have been working on this for a while, and so we feel very comfortable with the exposure on that front. Tom, you have anything to add to that from a trading perspective?

Yes, the only thing I would add is that our counterparty exposure to these countries is very low. And the European exposure outside of those countries are in most cases collateralized under CSAs with low or no threshold, so we feel pretty comfortable with where we are.

Okay. And I just wonder if you can -- if it's fair to synthesize the comments made by Bill initially about expecting Capital Markets contribution to moderate and then the comment about the credit valuation adjustments that contributed to trading in the third quarter. Should we take this together as looking like you're probably not going to match the $269 million of trading revenue if things continue as they are in the fourth quarter?

Michael, since it was my comment that gave rise to your question, I think it's very early in the quarter. As you look across the history of trading revenues in every quarter, the variability is quite high and we're not complete one month yet. So I think its way premature to try to call a quarter and I would not presume to do that.

Our next question is from Cheryl Pate from Morgan Stanley.

Just a quick question for Mark Furlong on the net interest margin in the U.S. P&C business. If we strip out the contribution from M&I during this quarter, looks like the legacy Harris portfolio is up 6 basis points sequential quarter. I'm just wondering if any color you can give on the driver there. I would assume more coming from growth on the deposit side, given sort of industry pressures on the C&I and auto lending portfolios. But if there's anything else you can give in terms of yield to margins on the lending side that may be positively contributing there as well. And as well sort of the outlook for the margin over the next couple of quarters.

Sure. Actually, you answered the question pretty well. I'll just add one piece. So deposit growth is pretty good. That's occurred a little more on the commercial side than personal side. But another piece that's occurred is the wind down of low spread loans that has continued to move off the balance sheet with a concerted effort. So that has been a kind of a positive factor as well, too, and really a good mix of deposits in the franchise, at the former Harris franchise. Looking forward, as we continue to wind down some of the commercial real estate construction that would be lower spread, lower all-in spread, in some cases that would be a positive to margin. However, really when you look at as you said the competitive pressures in the market, flat to slightly down would be more of the pressure you'd probably see on the margin going forward. And the M&A margin is a little bit lower than the Harris margin. A lot of that has to do with, as you put the franchise together, a lot of that has to do with deposit mix so that will also weight down the margin a little bit. Between the 2 organizations, Harris is about -- the former Harris franchise is about $3 billion more of DDA. The former M&I franchise had about $2 billion more money market and $1 billion more on time. And so that will weight it down a little bit, too. But all in all, while there are competitor pressures out there, the spreads are holding up okay at this point in time.

Our last question is from Brad Smith from Stonecap Securities.

My questions relate more to the capital position of the bank at the end. I believe, Bill, at the beginning, you mentioned that M&I contributed $45 billion I think you said to the risk weighted assets. I note that the risk weighted assets themselves are up 33%, 34% or $53 billion. I'm trying to reconcile that $45 billion number with first off, the $35 billion that the banking entity M&I reported at June 30 and that was $35 billion. And then at the original acquisition date, it looked more like the expectation was that it would add $30 billion. So it seems to be a rather large increase, so I was wondering if there was something that's changed there that you could provide some color on.

It's Tom Flynn, Brad. A few things. The RWA number came in pretty much came in line with the expectation that we had at the time that we announced the deal. So no big change there. The difference between the loan portfolio and the RWA number reflects a few things, including a higher risk weighting on the lower rated loans that come from M&I. So the parts of the portfolio that are lower rated are risk weighted under the standardized approach at 150%. And so there's meaningful gross up from the base loan level that results from that. And there are also RWAs associated with the other assets that come from the M&I business and an increase in operational risk just picking up the revenue that comes from the business. So overall, in line with what we expected and I think the biggest driver of the difference between the reported balance sheet and the RWA number would be the higher risk weighted or the higher risk weighting for the lower quality assets.

So I mean to be clear then, if the risk weighted amount at the end of October was expected to be $30 billion, Tom, and M&I was reporting $40 billion of risk weighted assets, there was sort of an implied $10 billion sort of saving coming out of that and now we're $15 billion the other way. It still seems to be a very large swing factor relative to where you say expectations were. I think in your original presentation, you said 170 basis point contraction assuming an $800 million equity raise which I believe is now 0, and the contraction was 230 basis points just quarter-to-quarter what we saw here.

Yes. Your $30 billion number is not right. So I'm not sure where you're getting it, but that's not the right number. And the big driver of the increase is the one that I mentioned related to the risk weighting of the lower risk weighted assets.

Okay. Then just one follow-up question. In the again dealing with the capital, the exposure at default in the bank line on Page 23 is I believe $55 billion. That's up about $9 billion quarter-to-quarter and yet, there really is no material change in the risk assets opposite that. Can you just talk to that? What would cause that large a change in the EAD with no corresponding change in the risk weighted asset?

It's Tom, Brad. We'll confirm this to get back to you. But I'm pretty sure that's repo activity with bank counterparties that gave rise to the gross exposure but a lower RWA.

Right. So the bulk of that, that was attracting RWA is somehow different than what happened this quarter.

Right.

Thank you. There are no further questions registered at this time, I would like to turn the meeting back over to Ms. Lazaris.

Great. Thanks very much for joining us today and we'll take any further questions you have down in the Investor Relations office. Thanks, and have a great day.

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