Filed by Bank of Montreal
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 under the
Securities Exchange Act of 1934
Subject Company: Marshall & Ilsley Corporation
Commission File No.: 1-33488
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12 under the
Securities Exchange Act of 1934
Subject Company: Marshall & Ilsley Corporation
Commission File No.: 1-33488
This filing, which includes this Bank of Montreal conference call transcript, may contain
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 and comparable “safe harbour” provisions of applicable Canadian legislation, including, but
not limited to, statements relating to anticipated financial and operating results, the companies’
plans, objectives, expectations and intentions, cost savings and other statements, including words
such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “will,” “should,” “may,”
and other similar expressions. Such statements are based upon the current beliefs and expectations
of our management and involve a number of significant risks and uncertainties. Actual results may
differ materially from the results anticipated in these forward-looking statements. Such factors
include, but are not limited to: the possibility that the proposed transaction does not close when
expected or at all because required regulatory, shareholder or other approvals and other conditions
to closing are not received or satisfied on a timely basis or at all; the terms of the proposed
transaction may need to be modified to satisfy such approvals or conditions; the anticipated
benefits from the proposed transaction such as it being accretive to earnings, expanding our North
American presence and synergies are not realized in the time frame anticipated or at all as a
result of changes in general economic and market conditions, interest and exchange rates, monetary
policy, laws and regulations (including changes to capital requirements) and their enforcement, and
the degree of competition in the geographic and business areas in which M&I operates; the ability
to promptly and effectively integrate the businesses of M&I and BMO; reputational risks and the
reaction of M&I’s customers to the transaction; diversion of management time on merger-related
issues; increased exposure to exchange rate fluctuations; and those other factors set out on pages
29, 30, 61 and 62 of BMO’s 2010 Annual Report. A significant amount of M&I’s business involves
making loans or otherwise committing resources to specific companies, industries or geographic
areas. Unforeseen events affecting such borrowers, industries or geographic areas could have a
material adverse effect on the performance of our integrated U.S. operations.
Additional factors that could cause BMO Financial Group’s and Marshall & Ilsley Corporation’s
results to differ materially from those described in the forward-looking statements can be found in
the 2010 Annual Report on Form 40-F for BMO Financial Group and the 2009 Annual Report on Form 10-K
of Marshall & Ilsley Corporation filed with the Securities and Exchange Commission and available at
the Securities and Exchange Commission’s Internet site (http://www.sec.gov).
In connection with the proposed merger transaction, BMO will file with the Securities and Exchange
Commission a Registration Statement on Form F-4 that will include a Proxy Statement of M&I, and a
Prospectus of Bank of Montreal, as well as other relevant documents concerning the proposed
transaction. Shareholders are urged to read the Registration Statement and the Proxy
Statement/Prospectus regarding the merger when it becomes available and any other relevant
documents filed with the SEC, as well as any amendments or supplements to those
documents, because they will contain important information. A free copy of the Proxy
Statement/Prospectus, as well as other filings containing information about BMO and M&I, may be
obtained at the SEC’s Internet site (http://www.sec.gov). You will also be able to obtain these
documents, free of charge, from BMO at www.BMO.com under the tab “About BMO — Investor Relations”
and then under the heading “Frequently Accessed Documents”, from BMO Investor Relations, Senior
Vice-President at 416-867-6656, from M&I by accessing M&I’s website at www.MICorp.com under the
tab “Investor Relations” and then under the heading “SEC Filings”, or from M&I at (414) 765-7814.
BMO and M&I and certain of their directors and executive officers may be deemed to be participants
in the solicitation of proxies from the shareholders of M&I in connection with the proposed merger.
Information about the directors and executive officers of BMO is set forth in the proxy statement
for BMO’s 2010 annual meeting of shareholders, as filed with the SEC on Form 6-K on February 26,
2010. Information about the directors and executive officers of M&I is set forth in the proxy
statement for M&I’s 2010 annual meeting of shareholders, as filed with the SEC on a Schedule 14A on
March 12, 2010. Additional information regarding the interests of those participants and other
persons who may be deemed participants in the transaction may be obtained by reading the Proxy
Statement/Prospectus regarding the proposed merger when it becomes available. Free copies of this
document may be obtained as described in the preceding paragraph.
BMO Financial Group to acquire Marshall & Ilsley Corporation (M&I)
CORPORATE PARTICIPANTS
Viki Lazaris
Bank of Montreal
SVP of IR
Bill Downe
Bank of Montreal
President and CEO
Tom Flynn
Bank of Montreal
EVP and CRO
Bank of Montreal
SVP of IR
Bill Downe
Bank of Montreal
President and CEO
Tom Flynn
Bank of Montreal
EVP and CRO
CONFERENCE
CALL PARTICIPANTS
Gabriel Dechaine
Credit Suisse
Analyst
Brad Smith
Stonecap Securities
Analyst
John Reucassel
BMO Capital Markets
Analyst
Andre Hardy
RBC Capital Markets
Analyst
Michael Goldberg
Desjardins Securities
Analyst
Darko Mihelic
Coremark Securities
Analyst
Sumit Malhotra
Macquarie Capital
Analyst
Mario Mendonca
Canaccord Genuity
Analyst
Brian Klock
KBW
Analyst
CALL PARTICIPANTS
Gabriel Dechaine
Credit Suisse
Analyst
Brad Smith
Stonecap Securities
Analyst
John Reucassel
BMO Capital Markets
Analyst
Andre Hardy
RBC Capital Markets
Analyst
Michael Goldberg
Desjardins Securities
Analyst
Darko Mihelic
Coremark Securities
Analyst
Sumit Malhotra
Macquarie Capital
Analyst
Mario Mendonca
Canaccord Genuity
Analyst
Brian Klock
KBW
Analyst
Caution Regarding Forward-Looking Statements
Bank of Montreal’s public communications often include written or oral forward-looking
statements. Statements of this type are included in this document, and may be included in other
filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in
other communications. All such statements are made pursuant to the “safe harbour” provisions of,
and are intended to be forward-looking statements under, the United States Private Securities
Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking
statements may involve, but are not limited to, statements with respect to the acquisition of M&I,
plans for the acquired business and the financial impact of the acquisition and are typically
identified by words such as “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plan”,
“will”, “should”, “may”, “could” and other similar expressions.
By their nature, forward-looking statements require us to make assumptions and are subject to
inherent risks and uncertainties. Such statements are based upon the current beliefs and
expectations of our management and involve a number of significant risks and uncertainties. There
is significant risk that predictions, forecasts, conclusions or projections will not prove to be
accurate, that our assumptions may not be correct and that actual results may differ materially
from such predictions, forecasts, conclusions or projections. We caution readers of this document
not to place undue reliance on our forward-looking statements as a number of factors could cause
actual future results, conditions, actions or events to differ materially from the targets,
expectations, estimates or intentions expressed in the forward-looking statements.
Such factors include, but are not limited to: the possibility that the proposed transaction does
not close when expected or at all because required regulatory, shareholder or other approvals and
other conditions to closing are not received or satisfied on a timely basis or at all; the terms of
the proposed transaction may need to be modified to satisfy such approvals or conditions; the
anticipated benefits from the proposed transaction such as it being accretive to earnings,
expanding our North American presence and synergies are not realized in the time frame anticipated
or at all as a result of changes in general economic and market conditions, interest and exchange
rates, monetary policy, laws and regulations (including changes to capital requirements) and their
enforcement, and the degree of competition in the geographic and business areas in which M&I
operates; the ability to promptly and effectively integrate the businesses of M&I and BMO;
reputational risks and the reaction of M&I’s customers to the transaction; diversion of management
time on merger-related issues; increased exposure to exchange rate fluctuations; and those other
factors set out on pages 29, 30, 61 and 62 of BMO’s 2010 Annual Report. A significant amount of
M&I’s business involves making loans or otherwise committing resources to specific companies,
industries or geographic areas. Unforeseen events affecting such borrowers, industries or
geographic areas could have a material adverse effect on the performance of our integrated U.S.
operations.
In calculating certain pro-forma impacts of the transaction and the $800 million in additional
common equity on our Tier 1 capital ratio and common equity ratio we have assumed our
interpretation of the proposed rules announced by the Basel Committee on Banking Supervision (BCBS)
prior to December 16 and our models used to assess those requirements are consistent with the final
requirements that will be promulgated by BCBS and the Office of the Superintendent of Financial
Institutions Canada (OSFI). We have also assumed that the proposed changes affecting capital
deductions, risk-weighted assets, the regulatory capital treatment for non-common share capital
instruments (i.e. grandfathered capital instruments) and the minimum regulatory capital ratios are
adopted as proposed by BCBS and OSFI. We also assumed that existing capital instruments that are
non-Basel III compliant but are Basel II compliant can be fully included in such estimate. Our
estimates of expected RWA and capital deductions for M&I at closing are based on anticipated
balances outstanding and credit quality at closing and our estimate of their fair value. It also
reflected our assessment of goodwill, intangibles and deferred tax asset balances that would arise
at closing. The full impact of the Basel III proposals has been quantified based on our financial
and risk positions at October 31, 2010 or as close to October 31, 2010 as was practical. The Basel
rules are not yet finalized and are subject to change, which may impact the results of our
analysis.
Assumptions about current and expected capital requirements, M&I’s revenues and expenses, potential
for earnings growth as well as costs associated with the transaction, and expected synergies were
material factors we considered in estimating the internal rate of return to BMO and our estimate of
the acquired business being accretive to BMO’s earnings in 2013.
Assumptions about our integration plan, the efficiency and duration of integration and the
alignment of organizational responsibilities were material factors we considered in estimating
transaction and integration costs.
BMO does not undertake to update any forward-looking statement, whether written or oral, that may
be made, from time to time, by the organization or on its behalf, except as required by law.
Non-GAAP Measures
Bank of Montreal uses both GAAP and non-GAAP measures to assess performance. Readers are cautioned
that earnings and other measures adjusted to a basis other than GAAP do not have standardized
meanings under GAAP and are unlikely to be comparable to similar measures used by other companies.
Reconciliations of GAAP to non-GAAP measures as well as the rationale for their use can be found in
Bank of Montreal’s Fourth Quarter 2010 Earnings Release and Bank of Montreal’s 2010 Management’s
Discussion and Analysis, all of which are available on our website at
www.bmo.com/investorrelations.
Examples of non-GAAP amounts or measures include: cash earnings per share and cash productivity;
revenue and other measures presented on a taxable equivalent basis (teb); amounts presented net of
applicable taxes, earnings which exclude the impact of provision for credit losses and taxes, and
core earnings which exclude non recurring items such as acquisition integration costs.
Bank of Montreal provides supplemental information on combined business segments to facilitate
comparisons to peers.
PRESENTATION
Welcome to the BMO Bank of Montreal conference call which was held on Friday, December 17,
2010, at 8.00 a.m. Eastern Time hosted by Ms. Viki Lazaris. (Operator Instructions).
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.
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 presentation, we will have a short question-and-answer period where we’ll take
questions from prequalified analysts. To give everyone an opportunity to participate, please keep
it to one or two questions and then please requeue.
Also with us this morning are BMO’s Chief Financial Officer, Russ Robertson; Simon Fish, BMO’s
General Counsel; and Ellen Costello, from our US Personal and Commercial business.
At this time I’d 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 forecast, 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’ve 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’s a stock-based transaction to purchase Marshall & Ilsley Corporation for US$4.1
billion.
This is a very exciting opportunity for BMO Financial Group and it is clearly transformational for
our US operations. The combination of our two organizations crystallizes BMO’s strategy of
expanding our North American footprint and positions us for future growth.
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It transforms and strengthens our US operations and allows us to pull the best from both
organizations and 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 US 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 US P&C business. Some of you 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 US
Country Head. With governance oversight for our US operations, Ellen will play an important
leadership role in our US businesses and in the integration efforts of combining Harris Bank and
M&I.
Today’s announcement meets all of the criteria we set for assessing potential acquisitions, the
ones we have discussed with you over the years: a strategic, financial and cultural fit. And 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 three, combining M&I with our US operations represents an opportunity that
is consistent with our strategy, will be accretive in three years, has an internal rate of return
in excess of 15%.
Slide four provides a summary of the transaction. As I said earlier, it is a stock-based
transaction with a total purchase price of $4.1 billion and Tom Flynn is going to take you through
the transaction details in a couple of minutes.
Turning to slide five, 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 bolstered our concentration of commercial and retail strength in the
US and 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 US operations and better position us in new markets.
Turning to slide seven, our combined operations will create the 15th largest banking group by
assets in the US. 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.
And 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 one.
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I will start back on slide four 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 $4.1 dollars 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 over three years phased in over this period.
The transaction’s economics are attractive with an IRR calculated at above 15%, accretion in year
two, 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 eight 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 B-II common equity and Tier 1 ratios at October 31,
2010 are expected to be approximately 9.2% and 11.7% respectively.
On a B-III 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 nine, 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 US$12 billion with the developer portfolio
being about 9% of the overall portfolio or slightly over $3.5 billion. The developer portfolio has
steadily declined from three 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 US risk
management group on site for the due diligence and involved many people from our Toronto group. We
reviewed over 2500 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 two 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 $3.5 billion today. Overall, based on the work that we’ve done, we are
confident that we have prudently provided for the credit risk in the portfolio.
And with that, I will turn it back to Bill.
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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 US,
doubles our customer base in personal and commercial banking, 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 US Wealth Management business and our Private Client Group.
We have began 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.
And with that, Viki, let’s move to questions.
Sure, let’s take some questions now.
QUESTION AND ANSWER
Thank you. Gabriel Dechaine, Credit Suisse.
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 that 7% core Tier 1. Is
this a regulatory driven kind of decision?
And my next question is on the branch network. I know there is a fairly substantial presence in
Arizona, what are you planning on doing with those? And then 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 US?
It’s Tom Flynn. I will take the first part of the question related to the form of
consideration. The transaction is all stock as we’ve said and 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 you see in that deck.
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,
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around 50 branches. We have to do a little more work on looking at the match-up between our
locations and those locations. And I think it is a little bit, in a sense, it is early days.
And I would separate the way that we look at Arizona from the retail branch footprint and the
workout loan portfolio. I think what we are planning to do is segregate those workout loans so that
we can focus on the underlying retail and commercial operations. It is 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 natural for us to think
about Missouri and Kansas and the size of the branch network in those two states, Kansas is really
a toehold, and Missouri is the beginning of a presence. Once again, it is early days.
From our perspective, this solidifies our position in Wisconsin and Indiana, really strengthens
that part of the footprint. And I think Missouri and Kansas is a little bit of a bonus.
Okay. And then just the purchase price adjustment for future credit losses that is going to
take place post close. Beyond that, how should we think about your PCLs in 2012? 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. So specific provisions are reduced on this
portfolio for a period of time because in effect they have 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.
Brad Smith, Stonecap Securities.
Great, thanks very much. I had two quick questions. First of all, I didn’t 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.
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As you noted, Bill, at the beginning we haven’t 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 million coming
from in terms of coming out of physical plant, branch closers, what ever? Thank you.
Hi, Brad, this is 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 are 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 have 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. And the savings will come really from many
parts of the organization. They will come from the functions in the head office, from management
across the business units and from putting together the Technology & Operations areas of the two
organizations.
And we have 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 am just curious, if I
look at the nine-month results for M&I, noninterest expense is running at $1.1 billion, revenues
running at $620 million. Can you help me out understanding, is there something unusual in that $1.1
billion number that is just immediately going away?
I mean I would’ve expected the synergies to be much higher than what you are indicating unless
there is something unusual in M&I’s run rate expenses already.
No, I don’t think there is 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. And so we like
that, in fact, because it expands our distribution footprint. But there won’t can be any
significant branch network synergies resulting from the transaction.
So just, I will leave it here but would you say that this is a revenue synergy driven
transaction than from the perspective of BMO?
Well, I guess I would say to us, we are going to work hard to deliver what we think is a
significant number at $250 million. And secondly, we have not factored into the numbers that we
have 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.
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So we think there’s a good opportunity there but it’s not reflected in the numbers.
Terrific, thanks so much.
John Reucassel, BMO Capital Markets.
Thank you. Tom Flynn, just a quick question of clarification. The $4.7 billion that you have
on slide 10, that is the number that is 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. And also less the Company’s allowance.
Okay. So the number is probably even closer to $4 billion or $4.5 billion?
Well, it will be a lot lower than that. The provision is a little over $1 billion and the run
rate specific provision number on an annualized basis is rough numbers in the order of $1.5 billion
to $1.6 billion. That is for a full year so we won’t have that full amount before close.
Okay, thanks for that. This loan book the losses in this are a lot different than what BMO
historically experiences. So when you talk about synergies and accretion, I assume this loan book
is going to have to change.
And you had a question on what the PCL should look like going forward. But if we are trying to
estimate the potential earnings benefit year four or five, I think historical credit experience at
M&I is probably not a good indication of future credit experience. Is that a fair statement, Tom?
Yes, that would be absolutely a fair statement. And 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.
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Sorry, two last questions. The C&I, how much of the $16 billion is secured by real estate? How
much of it secured, if any? And 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. I don’t have it at my fingertips.
Okay. Thank you.
Andre Hardy, RBC Capital Markets.
Thank you. Just a few questions around the IRR. First, what do you think is a right
denominator? Is it adding the common being issued so that would be $4.9 billion plus the $1.7
billion?
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’s
more based on a fundamental economic analysis of required capital than the capital that we are
issuing in the transaction itself.
And how different is that number from the $6.6 billion that is being issued?
We are not issuing $6.6 billion. We are issuing the $4.1 billion to the shareholders plus
approximately $800 million in common. The TARP repayment will be made by using existing liquidity
that we have got. So it is about $4.9 billion. And the economic number would be in the order of $2
billion higher.
Okay. And how do you account for the big deferred tax asset that is in Marshall & Ilsley?
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The deferred tax asset is relating to timing differences and from loan losses and from loss carry
forwards. And our analysis has shown that with profitability going forward, that it will be
recoverable over time, Andre, and it will take several years due to some of the limitations in US
tax law. But over time, we will be able to recover that deferred tax asset.
Okay, but it will take quite a while?
It will take a number of years, yes.
Thank you.
Michael Goldberg, Desjardins Securities.
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’s Bill. If you go to page six in the deck, it has a list of the key markets
and deposit size. Quickly in the cities of Wisconsin, we have a dominant market share in Madison,
in Milwaukee, in Green Bay, and 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 can’t 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.
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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?
Yes, I think that’s fair to say. I think that is a good summary.
Okay. And I’m sorry, like everybody else, I haven’t really had a chance to review this
information. But these deposits that you are talking about here, to what extent are they core
deposits?
You know, 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 [TBE’s] 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’m glad you came back to it because I have now got it. And excluding the one-time cost
that we will have as a result of the transaction, in year one, it is approximately minus 3%
Thanks very much.
Darko Mihelic, Cormark Securities.
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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. So what I’m sort of looking for is what is your base
number of earnings from Bank of Montreal in the year 2013? And then what is the earnings addition
from Marshall & Ilsley? And I am assuming that you are just using 12% growth which was your target
that you’d announced when you reported earnings and so I get to $0.67 of earnings per share for BMO
in 2013.
And then so I wonder if you can just help me understand what the earnings you’d get from M&I would
be and maybe just use that as a start, please?
Okay, it’s Tom. I will 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. So 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 will have as we implement the integration plan. And we factored in
the additional shares that will be issued in the transaction in the follow-on equity issue.
So it is basically the one plus two with the two reflecting the assumptions that we have got in the
model and factoring the synergies and the larger share count.
Okay, so, Tom, the IBES estimate is somewhere around $5.94 for 2012? I don’t see one for 2013.
So I am assuming are you using a 12% growth rate?
Okay, sorry, no we are not. We are using a 5% growth rate. So we grew it more at the growth
rate reflected in the estimate as opposed to the 12% target.
Okay, so that is good. And the share count, what is it? From what I can tell, you are issuing
$800 million, I don’t know what kind of number we are going to assume there, but let’s say all in
we are issuing about 81 million shares. Is that about right?
Yes it is.
Okay. And 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.
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It would be as we calculate it around 2%.
Okay. And final question, given what has happened last night with the changes in financial
reform and some of the changes with respect to interchange, was that factored into your numbers?
Russ Robertson - Bank of Montreal — CFO
I don’t know how explicitly in terms of range we think the interchange will be around — so
that could not be factored in as we didn’t know until yesterday. It is around 25 million in each of
Harris and M&I, the impact of that on revenue.
Okay, and that’s like — that’s assuming that it happens today, 25 million in M&I and 25
million in Harris?
Yes.
Darko Mihelic - Coremark Securities — Analyst
Okay, great. That is very helpful. Thank you.
Sumit Malhotra, Macquarie Capital Markets.
Thank you, good morning. First question in relation to the loan book at M&I. I’m thinking
more on the revenue side. obviously this bank has the midmarket commercial focus that BMO has often
talked about as your focus as well in the US. The book, like many US 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 have
talked about with the BMO franchise or the Harris franchise?
Thanks, Sumit. I think one of the benefits that is going to come from this transaction for
M&I’s client base is a much higher level of confidence. This bank has been in the Midwest, has been
a strong and very
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well-run commercial bank historically and I’m exiting out the expansion of the real estate
portfolio that took place in the last few years.
But the customer relationships and we are familiar with many of them because we compete in the
market are very strong. And 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.
And if anything I think it creates more growth opportunity than they have been able to experience
in that core business the last two or three years as they have had a lot of distractions.
And strategically I mean given that your US franchise or footprint has been focused more on
midmarket commercial to begin with, different opportunities in terms of what comes up and what the
pricing is is obviously going to affect whatever 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?
You know, I think the — 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.
So I think that proportionately 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. So I don’t think it’s going to overweight the business if that was your question.
But I think it is going to play to a strength that we have.
And 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 US since you
sold part of your franchise to eTrade a few years back. What is the thought process on that
business and what it means for you going forward?
Yes 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 as it really has a global business. It
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. And we can combine that portfolio management operation with our
institutional asset
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management business. It pretty much doubles the size of it and I think it accelerates growth. And
they have a good private bank and we are expecting growth there.
And the only area that we will 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 US. By combining these two businesses I think we are going to get
operating leverage that previously was just a little bit beyond our reach.
Well, Bill, I thought you would have something new to show us in April and you were giving me
the head fake a couple of weeks ago and here we are.
Well, I didn’t intend for it to be a head fake, you know that. I just wasn’t at a liberty to
talk about it.
No, just kidding around. Congratulations.
Okay, thank you.
Mario Mendonca, Canaccord Genuity.
Good morning. Bill, can you hear me?
I can hear you clearly.
Thank you. I’m just calling from overseas so I wasn’t sure. I don’t have access to the
presentation either so I’m 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 TC ratio.
That 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?
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Hi, it’s Tom. The goodwill number is around $2 billion.
Mario Mendonca - Canaccord Genuity — Analyst
$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 the bank, there were some real
impacts here, the pro forma impact on the TCE, the dilution early on. And then it is a rather, 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 doesn’t seem like very much say three years from now.
No, I would see it just about the opposite. When you look at the underlying businesses and you
separate out the nonperforming 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 have extracted more synergies
faster than we built into our base case.
So I think there are a number of areas that I am looking at where I’m going to set objectives for
people to beat the assumptions. And most particularly, I think as we get the first-year integration
costs out of the way, we will see expense levels return more perhaps to the historic levels that
people are accustomed to seeing in M&I.
M&I is a very well-run bank, I’m clearly caught in the real estate down draft but very good
disciplines around expense. And 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.
So I think we will do a thorough job in breaking out as we go forward in breaking out the
nonperforming portfolio from the core operations, Mario, so you will be able to see it. And I think
you will be able to see the emergence there.
Thank you.
Brian Klock, KBW.
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Brian Klock - KBW — Analyst
Good morning. I guess, Tom, with the pro forma capital ratios, I’m not sure if you discussed
this earlier. I’m still jamming through the slides as well. The pro forma Basel III impact
obviously M&I is still Basel I in the States. Was there any change, 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 and so we have done work on that. But the
ratios that you are seeing are based on the standardized Basel I approach.
Okay, and you mentioned the DTA earlier, so it would appear that the purchase consideration is
what the section 382 annual realization of the DTA would be subject to. So I think there was a $1
billion DTA at M&I. Does that sound right?
It is higher, $1.8 billion I think it is —.
The $1.8 billion?
You are right. That is the section, the governing section. So it will be our investment in M&I
though interesting the way it is structured, the TARP amount as well will count as part of that
investment. So the way it is structured. But that will be the limiting factor, the long-term
municipal bond yield will — based on that investment, drives the amount we can deduct each year so
it will be a number of years to recover it. But we are confident we will recover it all.
So it sounds like you’ve got — maybe it is 10 years you could realize that so about half of
the NOL carryforward period?
Yes, and it could be a little longer than 10 actually.
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Okay. And I guess maybe the last question for Tom I guess. Obviously you guys do trade at a
lower tangible book multiple compared to your Canadian bank peers. So it looks like you are 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 much you can — 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 deals if
you’d look at a PE or what we are paying on their 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 turnings and we
will grow the tangible book over time.
Okay, thanks for taking my questions.
I just want to come back to one question that was asked earlier related to deposits. And
excluding jumbo CDs, about 80% or a little over 80% of the deposits are coming from the customer
base.
And it is our last question for today, Michael Goldberg, Desjardins Securities.
Thanks. So 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 US. Is that a fair point to make?
I think we are increasingly confident that we will have steady growth as opposed to a
reversal. Michael, I don’t think we are going to have growth at capacity and we said that we will
continue to have an economic expansion and that is a positive environment. But I don’t — we are
not predicting and the transaction wasn’t predicated in a rapid economic recovery or a big step up
in GDP growth.
Okay. And 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?
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Well, without getting into the construction of your model, I think that — I think that net
interest margins have expanded within our portfolio. So I think that there is 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 will make progress through the next couple of quarters
prior to closing on that as well.
So I don’t think it is unreasonable to look at ROI 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. And 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. And as I have 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 have talked about the strategy of the bank and
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.
And 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. And I appreciate all the work that you have done in
following this and I know you have quite a bit of work to do probably to get reports out today. So
we will let you go with that and say thanks very much.
Thank you. The conference is not ended. Please disconnect your lines at this time. We thank
you for your participation.
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