Bank of Montreal 2002 Annual Report Download - page 27

BMO FINANCIAL GROUP ANNUAL REPORT 2002 23
BMO continues to focus on its expense management program,
which is intended to reduce expense growth. The program’s
guidelines are intended to protect customer-related expenses
that are essential to increased sales, to protect strategic initiatives
designed to promote future growth and to reduce other discretion-
ary costs. BMO also continued to invest in strategic initiatives,
which included the expansion of our North American distribu-
tion network and U.S. wealth management capabilities, as well
as the costs of implementing Pathway Connect, the new personal
and commercial banking technology platform.
Effective for fiscal 2002, GAAP no longer requires amortization
of goodwill, but instead requires that goodwill be subject to a
periodicimpairmentreviewtoensureitsfairvalueisequaltoor
greater than its book value. The change in accounting increased
net income by $56 million in fiscal 2002 relative to 2001.
In 2003, BMO will begin recognizing compensation expense
for new stock options granted after October 31, 2002. Stock
option expense is expected to be in the range of $10 million to
$20 million in fiscal 2003. If BMO had recorded compensation
expense related to all outstanding stock options this year,
reported net income would have been $47 million lower.
In 2003, pension expense is expected to increase by approxi-
mately $70 million. This is due to lower than expected returns
on pension assets in 2002 and a reduction in our expected long-
term rate of return on pension assets to 7.0% from 7.5%, offset
in part by a planned contribution to our pension plan.
2001 Compared with 2000
The 2001 expense-to-revenue ratio of 64.0% was 329 basis
points higher than in 2000. Excluding non-recurring items, the
expense-to-revenue ratio was 65.1%, compared with 62.8% in
2000. Expense growth from normal operations was 7%, while
revenue growth was 3%. The adoption of a new accounting
standard for pensions and other future employee benefits in
2001 increased costs by approximately $69 million. Acquired
businesses and the expenses of increased front-line staffing
added to costs, while performance-based compensation costs
declined modestly. Premises and equipment costs rose due to
business growth and project costs. Other expenses in 2001
included $155 million of items processing costs that would
have been allocated across expense categories using prior year
allocation methods.
Provision for Income Taxes
The provision for income taxes reflected in the consolidated
statement of income is based upon transactions recorded in
income regardless of when such transactions are subject to
income taxes, with the exception of the repatriation of retained
earnings from foreign subsidiaries. Non-recurring items and
income taxes thereon are outlined on page 18.
On a taxable equivalent basis, the effective tax rate was 26.4%
in 2002, compared with 29.1% in 2001. Excluding non-recurring
items, the effective rate for the year was 26.7%, an improvement
from 31.6% in 2001. The year-over-year improvements related
to a reduction of 2 percentage points in statutory tax rates and
incremental tax benefits. The tax benefits are generally reflected
in Corporate Support in the year they arise. The components of
variances between the effective and Canadian statutory tax rates
are outlined in Note 18 on page 84 of the financial statements.
The sustainable income tax rate for 2003 is estimated to be
31%. We anticipate that the actual tax rate will approximate
28% to 29% due to realization of tax benefits in 2003 that are not
expected to be sustainable.
Total assets increased $13.5 billion or 6% from last year to
$252.9 billion at October 31, 2002. The increase was primarily
due to a $6.0 billion increase in securities and a $4.8 billion in-
crease in net loans and acceptances.
Summary Balance Sheet ($ millions)
As at October 31 2002 2001 2000 1999 1998
Assets
Cash resources 19,305 17,656 18,508 24,036 19,730
Securities 43,715 37,676 46,463 43,273 43,465
Net loans and
acceptances 149,596 144,765 142,447 144,754 136,635
Other assets 40,248 39,312 25,978 18,552 22,760
Total 252,864 239,409 233,396 230,615 222,590
Liabilities and Shareholders’ Equity
Deposits 161,838 154,290 156,697 156,874 143,983
Other liabilities 75,338 69,763 59,847 58,048 63,208
Subordinated debt 3,794 4,674 4,911 4,712 4,791
Share capital
Preferred 1,517 1,050 1,681 1,668 1,958
Common 3,459 3,375 3,173 3,190 3,095
Retained earnings 6,918 6,257 7,087 6,123 5,555
Total 252,864 239,409 233,396 230,615 222,590
Balance Sheet
Securities
Trading securities rose $6.2 billion to $22.4 billion due to higher
holdings of equities and corporate and Government of Canada
bonds. The fixed income increase is a result of asset mix
changes that reflect opportunities and trading strategies at
the time. Higher levels of equities are attributable to new prod-
uct offerings.
Investment securities at $21.3 billion were down slightly from
2001. The fair value of BMO’s investment portfolio exceeded
book value by $321 million at October 31, 2002, compared with
an excess of $244 million in 2001.
Note 3 on page 72 of the financial statements provides further
details on securities.
Securities ($ millions)
As at October 31 2002 2001 2000 1999 1998
Investment securities 21,271 21,470 24,469 26,027 24,313
Trading securities 22,427 16,200 21,994 17,246 18,791
Loan substitute securities 17 6 –– 361
Total 43,715 37,676 46,463 43,273 43,465