Sharon Marie Haward-Laird William A. Downe - Chief Executive Officer, President and Director Thomas E. Flynn - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Surjit S. Rajpal - Chief Risk Officer and Executive Vice-President Franklin J. Techar - Chief Executive Officer of Personal & Commercial Banking for Canada Bmo and President of Personal & Commercial Banking for Canada Bmo Mark F. Furlong - Chairman, Chief Executive Officer, President, Treasurer of M&I Capital Markets Group Llc, Vice President of M&I Capital Markets Group Llc, Chief Executive Officer of M&I Marshall & Ilsley Bank, Chairman of M&I Marshall & Ilsley Bank, Director of M&I Marshall & Ilsley Bank, Director of M&I Capital Markets Group Llc and Director of Marshall & Ilsley Trust Company Thomas V. Milroy - Chief Executive Officer Gilles G. Ouellette - Chief Executive Officer of Private Client Group and President of Private Client Group

Peter D. Routledge - National Bank Financial, Inc., Research Division Darko Mihelic - Cormark Securities Inc., Research Division Andre-Philippe Hardy - RBC Capital Markets, LLC, Research Division John Aiken - Barclays Capital, Research Division Gabriel Dechaine - Crédit Suisse AG, Research Division John Reucassel - BMO Capital Markets Canada Michael Goldberg - Desjardins Securities Inc., Research Division Robert Sedran - CIBC World Markets Inc., Research Division Sumit Malhotra - Macquarie Research Steve Theriault - BofA Merrill Lynch, Research Division Mario Mendonca - Canaccord Genuity, Research Division

Please be advised that this conference call is being recorded. Good afternoon, and welcome to BMO Financials Group Second Quarter 2012 Conference Call for May 23, 2012. Your host for today is Ms. Sharon Haward-Laird, Head - Investor Relations. 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 prequalified analysts. [Operator Instructions] 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 our second quarter report to shareholders. With that said, I will hand things over to Bill.

Okay. Thank you, Sharon, and good afternoon, everyone. Before I begin, I'd like to note that this is Sharon's first call as our new Head of Investor Relations. She's well known to all of us around the table and was most recently Vice President and Deputy General Counsel for our Capital Markets business. Sharon's taking over the IR function from Viki Lazaris, who's done an outstanding job for BMO, and I know Sharon's looking forward to working with all of you to continue in the same fashion. As noted, my comments may include forward-looking statements. BMO produced another quarter of very strong results, bringing our U.S. -- bringing U.S. 2 point -- $2 billion, rather, of net income in the first half of the year. Our businesses are delivering strong operating performance, grounded in our consistent focus on customers and their success. We also have made a number of strategic investments in our wealth management business, which I'll touch on later. Since 2011, with a clear line of sight around market adjustments and regulatory reform and the objective of continuing to set a new standard for our customers, business models in every part of the bank have been under review. So is the relationship between revenue and the expenses incurred to generate each dollar earned. And so, contributing to our performance is a long-term effort to increase the competitiveness of the bank and enhance our return on equity. It's work that's well underway. We have been and continue to simplify structures and processes everywhere in the company, and we're encouraged by the improvements we're seeing. In fact, every month, we're becoming a more efficient bank as we simplify processes that deliver exceptional customer experience and generate high-quality earnings. This progress is consistent with our long-term productivity plans, which I've referenced…

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 on Slide 7. BMO had another strong quarter, with good operating group performance. Reported net income of $1,028,000,000 was up 27% from last year. Adjusted net income was $982 million, up 28%, and adjusted EPS was $1.44, up 15%. Adjusted ROE was 15.4%, and our capital position strengthened nicely in the quarter. Looking quickly at operating groups. P&C Canada net income was up 8%. P&C U.S. income more than doubled, lifted by acquisitions. PCG had its best quarter in 2 years, with adjusted net income of $150 million. And capital markets delivered good earnings in the quarter of $225 million. Provisions for credit losses were down significantly year-over-year and up $60 million on an adjusted basis quarter-over-quarter. And lastly, the tax rate was down in the quarter. Items removed to arrive at adjusted income were similar in character to prior quarters and decreased income by $46 million, or $0.07 per share. Slide 11 shows the details on the adjusted items. Moving now to Slide 8. Adjusted revenue was $3.7 billion, up 15% year-over-year, with growth in all retail businesses and the benefit of acquisitions. Quarter-over-quarter, adjusted revenue was relatively unchanged as PCG and Capital Markets revenue growth was offset by the impact of fewer days and reduced margins. As shown in the graph on the right, adjusted total bank margin, excluding trading, was 210 basis points, down 11 basis points sequentially. Q1 NIM was elevated, as we said last quarter, due to an unusually strong contribution from PCG, which had an impact of 3 to 4 basis points. NIM in the P&C businesses was lower in Q2 due to low rates, the competitive…

Thanks, Tom, and good afternoon. Before I begin, I'd like to draw your attention to the caution regarding forward-looking statements at the beginning of this presentation. As in previous quarters, I'll focus my comments on a few key areas of interest. I'll start with the provision for credit losses. Our total provision for the quarter is $195 million, or $151 million on an adjusted basis. In order to provide you with the context on the overall portfolio, I will comment separately on the performance of the acquired versus the legacy portfolios. Over time, as we renew and integrate the acquired portfolio into our practices, this distinction will be less relevant. In the legacy portfolio, the current quarter provision for credit loss is $268 million compared with $233 million in Q1. Capital Markets contributed to the change, with a net loss in this quarter compared to net recovery positions in prior quarters. Some variability is not unusual in this portfolio. As I mentioned last quarter, our legacy portfolio provision is broadly at pre-recession levels, if I could say that. On the purchased credit-impaired portfolio, there was a recovery again this quarter of $117 million compared to a recovery of $142 million in the first quarter. The recovery reflects our proactive management of this segment of the purchased portfolio, including active sales. A sizable portion of this recovery is from the commercial real estate book, which has been an area of management focus. We do expect variability in this segment of the portfolio as we book through these loans. The loan loss in the purchased performing portfolio was $44 million during the quarter, primarily in the consumer portfolio. As we noted in the past, there'll be timing differences between when losses in the purchased performing portfolio occur and when we recognize them…

[Operator Instructions]

Prior to the question period, I'd just like to acknowledge that the slides that are showing on the webcast are from last year. We are correcting the problem. Anticipate the correct slides will be up in a moment. Once again, we apologize for the error.

Our first question is from Peter Routledge from National Bank Financial.

A question for Frank, just on the P&C Canada performance. You see -- or we see deposit balances declining, but also falling deposit spreads, which suggest you've got some price competition. So maybe you can just give us a backdrop on some of the competitive pressures on deposits in your business.

Just a couple of -- or a couple of comments on the quarter, if I can, before I get to your answer -- or your question, the answer to your question. Overall, we had a good quarter. Revenue growth of 2.4% in this environment feels pretty good. And our expenses, we managed really tightly. As Tom mentioned, no growth year-over-year and a really strong operating leverage. I think you'll recall, last quarter, when I talked, I said we were working really hard towards positive operating leverage and look forward to that in the second half of the year. And we got there a little faster maybe than I anticipated in Q2. So feel really good about the quarter. We had good growth across many products. And I'm optimistic based on what I'm seeing in the months of March and April, relative to some of the growth patterns we're seeing in some of our product categories. So overall, a good quarter, and we feel like we're on track to have a better second half than a first half. Relative to your question about deposits and spreads in general, the real issue with deposits is the low interest rate environment. And that's just putting continued pressure on our spreads as we earn less on those deposits. And we expect that to continue for at least 2 or 3 more quarters. In addition to that, the competitive pressures we're really seeing on our term deposits. And depending upon the product and the term and the channel, there is pretty severe competition for term deposits at this point in time. So those are the 2 reasons: the low interest rate environment and competitive pressure for term.

Are you competing on price? Or are you sort of holding your ground?

Well, we're trying to complete -- compete selectively, I would say, is the strategy based on our share performance. Our share's been declining. So maybe others are competing a little more aggressively than we are.

And then just finally, stepping back, if I look on Page 19, I don't want to overstate it, but there is some deterioration, minor deterioration in some market share line items. And there's a thesis that BMO will struggle in a slow growth environment in Canada because it's smaller, and it'll be competing against bigger, more aggressive peers. I mean, how do you respond to that?

Well, I think 2 things. It is a fact. We have a smaller distribution network, and we're not going to change that overnight. But we think we can compete with anybody. And selectively, we think we're doing that at this point in time. We have a little different point of view, and that is that we're not going to sell all products to all people. We're in the business of talking to our customers about products that are in their best interest, and I think the best example of that is our mortgage offer that Bill mentioned just a minute ago. This was good for our customers, and it's been good for us. And so we're going to see that as we go through the next few quarters. And I'm optimistic about that. And I'd also just add to that, we're #2 in commercial market share, and we've been 2 for a long time with a distribution network that is arguably smaller. So we think we can compete in any climate and any marketplace. But we're not going to push on products that we don't think are in our customers' best interest.

Our next question is from Darko Mihelic from Cormark Securities.

Actually, just a follow-up on that, Frank. Why is 2% revenue growth good in this environment?

Well, I'd like it to be a little higher, Darko, obviously. But I was talking about it from a relative perspective than the last -- in the last few quarters. But if you go back to what I just said about deposit spreads in this low rate environment, we're just all under pressure because our deposits are not earning as much for us. And until that changes, that opportunity for us is going to be much more difficult. And so we're just faced with a situation where we've got to grow our balance sheet faster. Competition is strong. And the combination of those 2 factors leads me to believe that if we can grow our revenues in the low- to medium-single digits in this environment, that I'll take it.

Okay, fair enough. And just to -- I want to hammer away on the margin thing. You mentioned there's some small items impacting the quarter that are not expected to recur. What are those items? And how much of an impact did they have in the quarter?

Yes. If you look at the margin decline this quarter, it was 9 basis points. And just really simply, 4 to 5 basis points of that is what I would consider core. In Q1, as I mentioned, we had a couple of non-core items worth a few basis points that went in our favor. We talked about that last quarter. And in Q2, we had a couple of non-core items worth a few basis points that went against us. So the core decline this quarter is 4 to 5 basis points. And the decline, as I already had mentioned, was primarily due to lower deposit spreads in the low interest rate environment. And our loan spreads were relatively stable in Q2. Even though the competition is fierce, we're holding firm on our loan spreads, and we feel pretty good about that. So I'm not going to talk about the non-core items. I think it's just a level that's too granular for the conversation. Just suffice it to say that 4 to 5 basis points -- when I look out into Q3, I'm expecting that our margin is going to be flat to marginally down from our reported 281 this quarter. And for the remainder of the year, I'm expecting smaller declines than the first half of the year. And Darko, I just might mention, relative to our 5-year fixed-rate mortgage that Bill mentioned, there might be a question about has that affected our margin. And in this quarter, Q2, we've seen less than 1 basis point as a result of the activity around that mortgage offer. And relative to the spreads in our overall mortgage book, that offer has carried spreads less than 10 basis points lower than our overall book. So as Bill said, this is profitable business for us. It's not having a material impact on our net interest margin, nor do we anticipate it's going to have a material impact in the future.

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

A quick one for Surjit. Can you help us size your exposure to residential construction in Canada, particularly condo construction?

Our residential high-rise condo exposure is about $600 million.

With the bulk of that being in Toronto, I presume?

In Toronto, in Vancouver and, typically, as I said before, in areas where there's condo construction really. So those 2 geographies, mainly.

Our next question is from John Aiken from Barclays.

Bill, in your opening comments, you talked about a strategic review of your business segments and focusing on revenues and the expenses that drive those revenues. I was wondering if you might be able to give us a little bit of color on how regulatory capital fits into that. And under what other -- under those various frameworks that you've been using, what businesses have, I guess, more fallen out of favor?

Well, John, thanks for the question. I think the focus in every one of the businesses -- and I would say, there are no standout businesses. When we run the lines of business through the assumptions we have for the future and the impact of regulation, there are no obvious outliers. And I think part of the reason for that is the way most of those businesses were being conducted. They weren't aggressive with respect to the regulatory environment. So there are no obvious outliers. But I think that what the analysis is showing us is that in some segments of our business, we're going to have to fix or make changes in the cost structure, the cost to deliver. And in that sense, business models are going to change. And I think there's a number of historic examples where that's taken place. If you look at the foreign exchange business, which used to be much more people-intensive, the element of online and self-serve for commercial clients through our treasury products is much higher. And I think you've seen the same thing with interest rate products, the emerging existence of models that more reflect the direct brokerage model, if you like, for wholesale customers. I talked about the amount of time that we're spending with our customers in personal banking around value-added activities like financial planning, making better choices around all the dimensions of saving and borrowing, investing. And in that sense, many of the things that are going on in that business are designed to shift more of the available hours to people in the branch to work directly with customers and take as much as possible -- and continue to take as much as possible, of the processing out and put it in much more efficient environments. And we're seeing some great opportunities there, the reorganization of mid-offices and back offices in ways that, under old business models, may not have been necessary. And I think across all of our businesses, that type of examination is turning up ways to do things more productively. And I might add that one of the benefits we've seen is that if it is more productive for us, it's typically more convenient for our customers. So we've been able to drive efficiency both to the customer and to ourselves, and it's starting to show up in the individual parts of the business. I cited 2 examples in my opening comments.

Our next question is from Gabriel Dechaine from Crédit Suisse. Gabriel Dechaine - Crédit Suisse AG, Research Division: A couple of questions here. First, on the recovery on purchased credit-impaired loans. How much of that was sold versus, I guess, resolved in a normal way? And is it possible that we're seeing some sort of adverse selection effect so that -- such that the early experience is much more beneficial than what's coming? Like you can't sell loans that are still impaired, that are still on your books now? Second one is on expense guidance. If I strip out M&I, it looks like 2% year-over-year expense growth for the total bank. Is that a sustainable level? Or are you targeting even lower than that? And then last one, I'll just sneak this one in here. But other real estate owned expenses in the U.S., how big of a number is that in the U.S.? And where do you see that trending over the next 12 months or so?

Yes, I’m going to suggest that Surjit take #1 and #3 together.

So the recoveries that we've had from our portfolio are largely a result of very proactive management and resolution of that portfolio, which have included some level of loan sales. But I wouldn't suggest that, that's a very big piece of it. We have been mindful in our strategy of value maximization, as well as taking into account our client relationships as well, in managing that portfolio. So to answer your question, I don't have a specific number for loan sales, nor do I want to share that exact number on the loan sales element of it. But it's a small percentage. Most of it is through -- as I said, working through with clients and getting paid off prior to maturity. Gabriel Dechaine - Crédit Suisse AG, Research Division: Okay. But, I guess, to the same point, though, is it possible that the early experience is just -- you’re going through the easier stuff now? Or is that not the case?

Not necessarily. For example, when we sell, we are not necessarily selling the easier part. We are either putting it together with a difficult part to sell or, in some cases -- in fact, right now, we'll try to sell some of the more difficult parts. So I don't think you can make a generalization that the best part is being sold at this stage. But as I said -- and that's why I call this a value maximization strategy. We're under no pressure to sell if we can work it out. And so the timing will depend on that strategy. Gabriel Dechaine - Crédit Suisse AG, Research Division: Okay. So there's no expectation of a big drop-off, I guess. So you want -- in the recoveries in the next few quarters?

I wouldn't say there's any expectation of a big drop-off, nor would there be a lift-off. Because it'll all depend on how well and how quickly we manage through this portfolio. Gabriel Dechaine - Crédit Suisse AG, Research Division: Got you. And the OREO?

Can you repeat the question on the OREO? Gabriel Dechaine - Crédit Suisse AG, Research Division: The cost of other real estate owned. U.S. banks break that out. I'm just wondering if you can quantify that and where you see it heading over the next 12 months.

We have a really small OREO book, and we constantly look at what we should -- whether it's worth our while to hold on, or whether it's -- or to sell expeditiously. I don't have the cost numbers offhand, but suffice to say, there's always a cost associated with keeping that portfolio on the books. But the portfolio is small, so the costs are not material.

Okay. On the question on expense growth, you said year-over-year, excluding M&I, you thought it was up around 2%. As Bill said in response to the last question and in his comments, we're focused on managing expenses and managing productivity. You saw that clearly in the P&C Canada results this quarter, with good operating leverage at 2.2% and the productivity ratio down to 51% and the expenses flat year-over-year, with revenue growth being produced. So I'd say that we're happy with the numbers this quarter. We're focused on both managing expenses in the short term but also getting after more fundamental process improvements that will take some time. And if revenue is growing like we've seen for the last little while, we would be looking to manage expense growth down in the very low single-digit level.

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

A question for Tom or Bill. Just to clarify, when you -- in your annual report, you talked about 8% to 10% EPS growth. And if we try and establish a base for that, would that include or exclude these purchased credit-impaired loans that you're getting over the last couple of quarters, if you're looking out over the medium term?

It's Tom, John. It would include the recoveries there, because we include the recoveries in our adjusted earnings, and the guidance was off of an adjusted earnings kind of a number. And as you said in posing the question, the guidance is medium-term guidance, not guidance related to any particular shorter-term period like the first couple of quarters of this year.

Okay, so I just -- again, it would be on the $1.44 for -- or whatever that adjusted number is for -- ultimately ends up being for 2012. The medium-term guidance?

Correct. And when we issued the guidance, we issued it off of the results that we reported last quarter, looking ahead to a 3-year-ish kind of a term. So I think the short answer to your question is yes. The longer answer is that's a little precise if you're annualizing off one quarter, which isn't to take away from how we feel about the quarter. But just to reinforce it, it's a midterm target.

Okay, okay. And then just another -- one last, on clarification. On Slide 20 and 21 for Mark, there's a bunch of slides here with -- or tables or -- with loans and deposits. And I'm just trying to get an understanding of what you would consider core loans and core deposits. So it looks like loans in U.S. P&C were down $1.5 billion from the first quarter. And if I look at your runoff loans, they were down about $200 million. So is that saying that the core loan growth was down $1 billion or so in the second quarter versus the first quarter?

So you're getting that $1.5 billion from -- like Page 8 of the supplement?

The supplement, that's right. Taking the average. I know these are ending balances on Slide 20 and 21, but I'm taking the average from the Page 8 of the supplement.

Okay. So on Page 8 at the top, that's Canadian, and there's exchange rate differences in there. I think Tom Flynn would take that one, if you want. If you want me to talk about 20 and 21, I can. You want me to do that? And then if you want Tom Flynn to follow up, he'll do the other piece. So what's on Page 20, first, is -- so that would show you the Commercial portfolio. So I'd say, pretty much, as we thought, that core C&I portfolio has shown very robust growth and has been across the geographies, across industries. No one has overtaken any of the others. So it has been very robust growth. Commercial real estate, as you can see there, down a little bit, and I suspect that'll come down a little bit maybe again, although it'll stabilize. I feel really good about that core C&I portfolio. The runoff portfolio that you see in the third chart there in the left-hand corner, that's about 80% commercial real estate. And that will continue, probably, to push its way down. But feel really good about what's going on there. I would also mention that the -- in this quarter, we -- a lot of our commercial bankers, business bankers, small business bankers, they did some of the conversion of the underwriting process. So forms and process from prior pre-merger to BMO. So a fair amount of distraction. Despite that distraction, they actually doubled the loan pipeline for commercial in the quarter. So a lot of work that went into the first quarter obviously benefited the second quarter. So I think we feel very good about where that portfolio and where that business stands today. On the bottom -- sorry, I should say on Page 21, on the…

Yes, just very quickly on Page 8 of the sup pack, we showed the P&C U.S. segment. The top chart is in Canadian dollars. It shows the average loans down about $1.4 billion. The bottom chart has U.S. dollars, and the loans are down just $200 million. And Mark has given the color around that. But a portion of the decline related to the currency, and the better numbers to look at are the U.S. dollars.

Our next question is from Michael Goldberg from Desjardins Securities.

My first question's for Bill. At $0.70, your payout is in the lower half of both your reported and adjusted earnings per share. So why no dividend increase yet? And just as a clarification, is the payout objective on reported or adjusted earnings? And then I'll come with my second question.

The target is on reported in the long run, Michael. And over time, these numbers are going to converge when we have the integration behind us. And not to be repetitive, we're looking forward to continued top line and bottom line growth, and we’re now in the middle of the range, using a 4-quarter view of payout relative to earnings. And I remain positive and optimistic with respect to the future.

So why would the board have held back at this point, now that you're at that midpoint, from moving ahead with the dividend?

Michael, honestly, I answer this question every quarter. I try to answer it consistently in the same way, and I don't have much more to add.

Okay. My second question is about U.S. loan quality. And it's certainly encouraging to see the release of the original mark on performing M&I loans and recoveries on the nonperforming loans. But at the same time, Marshall & Ilsley, the purchase loan, nonperforming loan formations, rose significantly during the quarter. When do you expect these formations to tail off? And what's the prognosis for recently classified loans that gives you comfort that the remaining mark is adequate?

That's a good question, Michael. Let me give you a little bit of background into what these formations are. The formations that we've had this quarter relate to small accounts, accounts that generally are smaller than $5 million. And what we had done at the time of acquisition was some of these smaller accounts were assessed on a sample basis. And what we did was we looked at the sample, and it indicated a higher probability of impairment than was being recognized by M&I. And at that time, we factored that into the determination of our credit mark. So anything that we are moving now to impaired is more than adequately protected by the credit mark. So in some ways, it's a -- and I don't want to sound glib but, in some ways, it's relabeling exercise. It’s not going to have any impact on the performance. Now your question in terms of when is this going to stop? We have reviewed a lot -- most of the accounts now that are done on a sample basis. So even the very small accounts, we've started looking at and have looked at more specifically as opposed to on a sample basis. And my expectation is that this is going to moderate. And as I said before, this is not a reflection on the quality. The quality is exactly where we expected it to be because that was reflected in the credit mark. Does that satisfy your question?

So just to clarify then, what you're saying is that in going from sort of a smaller sample to a larger sample, that accounts for the bulk of the increase in the purchased loan formations?

No, no. Let me clarify. The very small loans were valued on a statistical basis, let me put it that way, as opposed to on a specific basis. A small account, let's say a $500,000 account, wasn't looked at. You couldn't look at thousands of $500,000 accounts in setting the mark. So that part of it was looked at on a sample basis, and a mark was applied to it statistically. And that statistical mark that was applied was based on the fact that we recognize that the impairments would be higher, and that was factored into our computation of the credit mark. So as we go through these accounts on a specific basis, looking at them name by name, we are comfortable that those that have migrated to the label of formations, for most part, have been dealt with this quarter. And so I would think that this is going to moderate in the next quarter.

Our next question is from Robert Sedran from CIBC.

Just want to come back to the issue of margin for a moment. And Frank, I just want to make sure I understood you correctly because, I guess, there were unusual items that artificially depressed the margin this quarter. But then your forward-looking statement was -- so I guess you're not allowed to make those. But this comment you made about Q3 basically said flat to down. So it sounds like margin pressure is accelerating just generally, I mean, versus flattish for the past 4 or 5 quarters, and now it's starting to pick up a little bit. Is that a correct view? And is it still the deposit side that's going to be the problem?

Yes. Just in answer to the second part of your question, the deposit side is still going to be the problem, at least until we go into 2013. Let me see if I can do this another way. Q1, our margin was 290. Noncore items were positive in the quarter to the tune of a couple of basis points. The 281 in this quarter, again, we had a couple of noncore items that, in this case, were negative to us for a couple of basis points. So if you back those out, we'd be at 283-ish. And what I'm saying is, for Q3, my expectation is we're going to be flat to the 281. So we're continuing to see, from a core perspective, 2 or 3 to 4 basis points of spread compression in our margin as we look out over the next couple of quarters. I don't know how much more precise I can get.

No, that's helpful. I just wanted -- I was trying to understand that -- it felt like another 4 or 5 basis points coming this quarter, but I understand your comment now. And on the U.S. side, is -- Mark, I guess it's hard to read anything into the margin because you’re sort of simultaneously growing and shrinking different parts of the loan book. And so, ultimately, business mix is as big a driver as anything when we see the margin moving there?

I'd try and give that answer here too, but nobody's believing it. So let me go with -- I mean, that is actually what's happening. But I think that we're probably a little closer to stable now and -- because I think some of the runoff has slowed down quite a bit. There is certainly some good intense pressure out there on spreads, as you know, in the U.S. market, with the lack of kind of broad asset growth going on. So that said, I think the quarters where we have the 8- or 9-basis-point drops, I don't think that's what I see in the next 2 or 3 quarters. The demand is probably 2 to 4 one way or the other, probably a little more downward pressure than upward, but you could get a little interest recovery here that neutralize that or something like that. So I think demand is a little tighter the next couple of quarters.

Okay. And just a quick one for Surjit. Is there any good -- or quick explanation for why the interest rate VAR on Slide 27 seemed to bounce around a little bit in April?

Yes. The explanation for that is in March, what we did was we announced our model to be more responsive to sudden increases in volatility. That's in keeping with the market-risk amendment. And in April, what we did was we made further improvements to the model in preparation for the implementation of the debt-specific risk charge and synchronized some data sources. So those are the 2 things that caused it. So in some ways, I think we've said it was basically model enhancements that caused it.

Okay. So you can't really compare the first half of that line to the second half of that line?

No. So I would say, it smoothens out. As you know, it dipped and then went back up.

Our next question is from Sumit Malhotra from Macquarie Capital Markets.

I'll try and get through this quickly. First off, back on Slide 20 and 21 in the presentation for Mark Furlong, first off, thanks for the increased disclosure on how much of the commercial portfolio is actually in runoff. That's helpful. But looking at the personal balances, the mortgages and home equity loans, you gave some explanations in a previous answer. But when I look at the results and hear the conference calls from some of your regional peers, it certainly sounds like the housing refinance trade has been very beneficial to residential real estate-related loan growth. Why are you not seeing the same phenomenon at this point?

Well, we are seeing a little bit of that, and mortgage revenues are up $8 million or $9 million in the quarter. The -- but we're also kind of converting from one system in one market to the Harris system. So instead of -- you don't do all the conversions at year end, you do -- or at conversion date. You do some kind of during the process. So we obviously have some distraction internally, but that reduces risk at the back end when we come to conversion date. So there's a little bit of that ongoing, but we are seeing some contraction. We have a pipeline like everyone else. The pipeline has had -- is full, and we're continuing to hire mortgage bankers to fill that pipeline. We’ve seen a little bit of spread widening in terms of what we sell. And remember, we're selling about 70% of what we originate. So you just -- you don't get -- put as much on the balance sheet. And again, why are we selling if the spreads on what we can sell are wider than the return we can get if you use kind of that 5- or 6-year NPV? So that's why I think the mortgage balances -- if we just portfolio [ph], of course, they'd grow, but we don't see that as the right return at this point in time. So that's the mortgage side. The home equity side, the stuff I've looked at from our peers, it doesn't seem that most of their portfolios are growing. In fact, it seems several of them are shrinking, but you may have some data that proves otherwise, but not the stuff I've seen. They are originating on the home equity side, just -- we're just not -- portfolio is still coming down a little bit.

And the second one related to the U.S. bank, either for yourself or for Tom Flynn. Expenses in the segment. If I remember, last quarter, Tom gave some detail on the litigation provision that was in the $15 million to $20 million range. So if I was looking at this on an apples-to-apples basis, expenses were down slightly. I believe you previously mentioned to us that the next significant phase of the integration will be later this year. When that occurs, if I look at the $470 million or so in expenses this quarter, do we see a defined step down? Or is it more that you're expecting expenses to stay rather stable while revenue starts to pick up?

It's Tom. A few things. So firstly, just on the quarter-over-quarter expenses, in Q1, we did have a litigation expense. And if you back that out, expenses were basically flat for the P&C U.S. segment quarter-over-quarter. Looking ahead on the synergy side, we've talked about doing the large systems conversion for the integration in the fall. And after that, the synergies will accelerate. It takes a little while for you to, number one, complete the conversion; number two, have the reductions in the staffing levels that follow; and then number three, have those fully baked into the run rate numbers. And so you'll see a little bit of a tick-up in the fourth quarter, but a bigger pickup and, really, the more meaningful pickup starting in Q1 of next year. And that will be a step function kind of a change. We've talked about synergies in total, more than $300 million, with $100 million-plus coming this year and the balance being fully in the run rate by the end of next year. So that's sort of the big picture. And there will be a sharp pickup, some of which will show up in this segment and some of which will show up in corporate early next year.

Last question for Tom Milroy. Pretty good quarter for your group, and obviously, the world feels a lot different since the end of April or maybe from when April started in terms of conditions. I'll try and make this quick. The mining franchise for BMO has long been a source of pride. And clearly, we've had some difficult conditions in that particular sector. Can you talk about, especially when we look at the underwriting advisory business, how important mining has been to the revenue you've been able to produce and what your outlook is in that business for the second half of the year?

Yes, absolutely. Let me start by saying you're right. We did have a good quarter. We feel very positive about it. In terms of the mining, mining has been an important part of our franchise. But it's just only one component of it. And I would actually expand that to say the mining and the other resource businesses have -- like the other Canadian banks, it's a big part of our market. So it's a big piece of it. That being said, I think that we benefit from both the existing business we have in Canada, which was fairly diversified, and then the U.S. business that we have. So while it's a material part, it isn't the only part. And while we've seen, especially in the metals area, we've seen some deterioration in the commodity prices, we continue to see a desire for people to do transactions. So we're somewhat optimistic about what may come out of that going forward. In terms of the overall outlook, I think you're right in recognizing that markets of late have been a little volatile, really in response to the eurozone crisis and weaker data relating to the U.S. economic recovery. That being said, we think we're really well positioned. And as recent experience has shown us, as marketing conditions improve, we'll be able to deliver good results.

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

First, just a quick follow-up for Frank. Frank, when I look at the -- you gave some great information earlier on a number of fronts. When I look at mortgage loan growth, it does still look on the weaker side at about 2.5%. But you are at almost 5% for the total consumer book. So what's doing particularly well there? Is it the HELOC book at the end of the day?

Yes. Just -- if you go back over the last year, our consumer lending products have been growing pretty rapidly, and our share has been expanding over that period as well. There's 3 product categories that we would have in there. One would be our auto loans, two would be our HELOC loans, and the third would be our unsecured lines of credit. So if you just kind of look over that period of time, both auto and home equities have been growing pretty strongly. Unsecured lines of credit have been shrinking, partially because of management action, partially because of consumer preference. And so we're still seeing nice growth. But as I said earlier on the call, we're not talking to our customers nearly as strongly about home equity products at this point in time because we just don't see them as being the right ones for them in this market environment. And we've been putting our time and energy and attention focused on fixed rate, shorter amortization mortgage products. And to some degree, these products have been substitutions over time. So that's where the growth has come historically in our consumer lending book, and it's slowed rather materially from what it was a year ago. On the mortgage front, we haven't seen the growth yet. But all I can tell you is, if you look at March and April, we're starting to see the momentum pick up as a result of the offers we've had in the marketplace and some of the other things that we're engaged with, with the business. So I'm optimistic that the mortgage growth is going to start to improve as we go through the second half of the year.

And then for Gilles, if I could, before I wrap up here. Interest rates have come down quarter to date, as we're all aware. If the quarter ended today, can you give us any sort of sense of what kind of hit the insurance business would take? Would it be somewhere in the range of the $45 million or $50 million we saw in Q1? And then separately, last quarter, I think there was a $20 million gain in the noninsurance component, but you matched that earnings of $98 million again this quarter. Can you talk a bit about what drove the earnings for us, please?

Yes, the bulk of the earnings growth in the second quarter came from the brokers businesses being stronger. As you know, a large part of our revenue comes from fees, and the markets were stronger in the second quarter than they were in the first quarter, and also in transaction. So it was pretty -- the business was pretty straightforward. With respect to the interest rates, the interest rates this month are off, but not to the extent that you have mentioned. But -- I mean, this is not -- this wouldn't be the first quarter where things changed very, very quickly from one week to the next. So...

That's fair enough.

The last question is from Mario Mendonca from Canaccord Genuity.

A question for Frank. Commercial mortgage growth in Canada was particularly good, especially given where it has been over the last few quarters. A few quarters ago, you talked about the bank possibly seeing slower commercial loan growth relative to your peers because of the bank's exposure to commercial real estate. What specifically drove the growth in commercial this quarter? And is it something we can expect to continue?

Yes. On the commercial side, Mario, we're still in the same position we were a year ago, relative to commercial real estate. We're approaching that segment very cautiously. I'd say that, just for your -- relative to your general question, commercial loan growth of 3.2% in this quarter should be the low point for us. Our lending pipelines are up significantly over last year. And as I said, relative to the mortgage business, sequentially, the March and April year-over-year loan growth rates were stronger than January and February. So we're starting to see momentum build in the commercial loan book. And relative to any particular area or segment, it's broad-based, but not focused on commercial real estate.

What I was getting at by the improvement, and I think you kind of addressed it by referring to March and April, was the quarter-over-quarter in commercial was better than I've seen in 3 quarters. So that's consistent, I presume, with what you're suggesting about March and April then?

Yes, we're starting to see momentum pick up.

And it's not commercial real estate?

It's not commercial real estate.

Thank you. I'd now like to turn the meeting back over to Mr. Bill Downe.

Well, thank you very much, everyone. We recognized that we were the only bank reporting today, and we were able to go a little bit longer. And I appreciate your staying with us. To wrap up, we delivered $2 billion in adjusted net income in the first half of 2012. And in the context of slow economic growth, we're pleased by the performance of our operating groups, which are executing effectively against our strategic agendas. Matching customer needs to the most efficient ways we can meet them is a top priority for BMO and fundamental to the continued expansion of our top line. Each of our businesses continue be well positioned, and we remain confident in our ability to produce consistent, profitable long-term growth. Thank you for participating, and we look forward to seeing you on June 26. Thanks, operator.

Thank you. The conference call has now ended. Please disconnect your lines at this time. And we thank you for your participation.