Bank of Montreal 2004 Annual Report Download

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In 2004
We delivered record net income and
increased our quarterly dividends to shareholders by 26%.
We focused on providing our clients with personalized
service and relevant financial solutions to meet their
individual needs at every point of contact.
We continued to be an employer of choice, recognized
for our ongoing commitment to providing our
people with a workplace that is equitable and supportive.
We gave back to our communities, through corporate
donations, sponsorships and the passionate commitment
of our employees, to help make a real difference in
the cities and towns where we do business.
W
hat’s
N
ext
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187th Annual Report 2004

Table of contents

  • Page 1
    In 2004 We delivered record net income and increased our quarterly dividends to shareholders by 26%. We focused on providing our clients with personalized service and relevant financial solutions to meet their individual needs at every point of contact. We continued to be an employer of choice, ...

  • Page 2
    ... Chicago area and wealth management offices across the United States, as well as Harris Nesbitt, a leading mid-market investment and corporate bank. 2004 Financial Highlights For the year ended October 31 2004 Target 2004 2003 2002 Income Statement Highlights (Canadian $ in millions) Total revenue...

  • Page 3
    ...half million customers across Canada and the United States with fully integrated personal and commercial banking solutions. These include deposit accounts, loans and credit cards, insurance products and personal investment products. Our products and services are delivered by a highly skilled team of...

  • Page 4
    ... bank charter within the next 12 months, which over time will help us improve customer service, move towards a more efficient business model and lower our costs. Canadian Operations • BMO Harris Private Banking named best private bank in Canada by Euromoney Magazine. • BMO Nesbitt Burns...

  • Page 5
    ... both organically and through acquisitions. Grow net income in Canada through operational efficiency and improved market share, accelerating our growth in commercial banking and wealth management. Build a high-performance organization by developing our people, living our values and being an employer...

  • Page 6
    ... Chairman More details on our governance policies and initiatives can be found in the Corporate Governance section beginning on page 124, as well as in our Notice of Annual Meeting of Shareholders and Proxy Circular, online at www.bmo.com/investorrelations. 2 BMO Financial Group Annual Report 2004

  • Page 7
    ... in the best returns for shareholders. When I speak of delivering the best client experience, I'm talking about developing relationships with customers that will flourish over a lifetime. As I have stated in past annual reports, in a mature, highly competitive financial services marketplace like...

  • Page 8
    ... to clients and generate revenues. Some kinds of red tape, alas, are more resilient than others, but I can say with confidence that the customer-focused, sales-and-service mindset is taking hold across BMO Financial Group, and with it the growing conviction that 4 BMO Financial Group Annual Report...

  • Page 9
    ...continued retail banking acquisitions. Our growth strategy is working as intended, our transformation into a customer-driven sales-and-service organization is well advanced, our short-term targets are realistic and, as our strong performance in 2004 attests, BMO Financial Group is on the way up. In...

  • Page 10
    ... Officer Year in Review 2004 was an extremely successful year for BMO Financial Group. We attribute our achievements to our superior credit management, our ongoing focus on improving productivity and our growth strategy. $2,351 million net income - an increase of 29% 20% total shareholder return...

  • Page 11
    ...% basis points cash productivity ratio improvement 2005 Target: improve cash productivity ratio by 150-200 basis points BMO Share Price ($) Last Trading Day of Fiscal Year (1999-2004) 57.55 49.33 38.10 35.25 28.33 33.86 1999 2000 2001 2002 2003 2004 BMO Financial Group Annual Report 2004 7

  • Page 12
    ...personal credit rating and overall financial situation, with less emphasis on their business financial statements. Mosaik® MasterCard®2 Rewards Customers Faster The new Gold WestJet 1/$15 Air Miles®3 Reward Option from Mosaik MasterCard partners BMO Bank of Montreal, the Air Miles Reward Program...

  • Page 13
    ... accessible and secure request forms for online mortgage, loan and credit card applications, integration of investment information, and better links between customers' bank cards and their accounts. Best Private Bank in Canada BMO Harris Private Banking, which serves the needs of high net worth...

  • Page 14
    ... in 2004. Purchase price Date Acquisition (Canadian $ in millions) Continued Expansion Expanding our reach allows us to provide added convenience for existing Harris personal and business banking customers while giving new customers access to our broad range of excellent products and services. Last...

  • Page 15
    ...services to institutional clients. In 2004, Harrisdirect was: Focus on Comprehensive Solutions Through Harris Private Bank, we offer comprehensive wealth management solutions for high net worth and ultrahigh net worth clients. We continue to expand in existing high-growth, affluent markets in order...

  • Page 16
    ... to employee development and our leadership in training. Last year, we conducted a full assessment of our entire training curriculum and then made improvements to ensure that our learning programs continue to directly align with our business strategy. 12 BMO Financial Group Annual Report 2004

  • Page 17
    ... BMO Financial Group its Corporate Spirit Award in recognition of enterprise-wide Human Resources/ People Management Best Practices. In February 2004, the Canadian Council for Aboriginal Business honoured BMO with a Progressive Aboriginal Relations award for initiating Aboriginal community economic...

  • Page 18
    ... Conrad Sauvé, National Director of Fund Development at CRC. For many more examples of our commitment to our communities, please see our Corporate Social Responsibility Report including our Public Accountability Statement online at www.bmo.com/community. 14 BMO Financial Group Annual Report 2004

  • Page 19
    ... by the Financial Times and the London Stock Exchange, the Index recognizes the performance of companies that meet globally recognized corporate responsibility standards according to the criteria of environmental sustainability, social betterment, good stakeholder relations and the protection...

  • Page 20
    ... the largest financial services providers in North America, offering comprehensive retail banking, wealth management and investment banking products, services and solutions. Canadian clients are served through BMO Bank of Montreal, our personal and commercial banking business, and BMO Nesbitt Burns...

  • Page 21
    ...term life and commercial loan life insurance. • A new Canadian Tire® 9 Commercial MasterCard for commercial customers. • Our Homeowner ReadiLine personal line of credit that provides customers with easier access to credit. • The attractiveness of our personal banking and credit card offerings...

  • Page 22
    ... in 2004 and was higher in each of our client operating groups. • The lower Canadian/U.S. dollar exchange rate, net of the incremental effect of acquired businesses, lowered revenue growth by 1.6 percentage points. • Higher net investment securities gains increased revenue growth while lower net...

  • Page 23
    ... in 2003. • Liquidity remains sound and continues to be supported by broad diversification of deposits. Cash and Securities-to-Total Assets (%) • BMO's ratio of 25.8% was below the 29.1 25.8 27.8 24.9 23.1 Canadian peer group average of 30.5% and the North American peer group average of 39...

  • Page 24
    ...second best of Canada's major banks. In 2005, we are targeting a further 150 to 200 bps improvement in cash productivity. BMO's provision for credit losses represented (7) bps of average net loans and acceptances, the second best of our Canadian peer group. The top-ranked bank in 2004 had a fiveyear...

  • Page 25
    ...position in the commercial market, gaining mar- Senior Executive Vice-President, Human Resources ket share in the rapidly growing high net worth market and increasing our share of and Head, Office of Strategic Management our clients' investment banking business by delivering our full offering to our...

  • Page 26
    .... Equity markets retained their sharp gains of the previous year, supporting BMO's brokerage businesses and underwriting activity. Economic Outlook for 2005 The Canadian economy is expected to grow at a moderate pace in 2005. Personal spending will continue to benefit from historically low, albeit...

  • Page 27
    ... Shareholder Return BMO's governing objective is to maximize the total return to our shareholders and generate, over time, first-quartile total shareholder return (TSR) relative to our Canadian and North American peer groups. The five-year average annual TSR is a key measure of shareholder value...

  • Page 28
    ...of reduced card fees and lower net interest margin in the competitive low interest rate environment. Private Client Group net income was up $87 million or 60%, and Investment Banking Group net income rose $135 million or 19%. Both groups benefited from the more favourable capital markets environment...

  • Page 29
    ... only major North American bank to meet this test of earnings consistency. The 19.4% return was above our annual target of 16% to 18% because of higher net income earned in the year. The return in 2004 was also higher than our medium-term financial objective of 18% to 19% ROE, over time. Table 3 on...

  • Page 30
    ... margin (teb) annualized (1) (%) ((d / average assets) x 100) EPS (uses net income) ($) Cash EPS (1) (uses cash net income) ($) (1) These are non-GAAP amounts or non-GAAP measures. (2) Also referred to as productivity ratio and cash productivity ratio. 26 BMO Financial Group Annual Report 2004

  • Page 31
    ... Net income Cash net income Business acquired Revenue Expense Personal and Commercial Client Group New Lenox State Bank Acquired June 2004 for $314 million Lakeland Community Bank Acquired March 2004 for $49 million Total purchases of $363 million Incremental effects on results for: 2004 Private...

  • Page 32
    ... ($ millions) Change 2004 2003 $ % Net interest margin (in basis points) 2004 2003 Change P&C Canada P&C United States Personal and Commercial Client Group (P&C) Private Client Group (PCG) Investment Banking Group (IBG) Corporate Support, including Technology and Solutions Total nm - not meaningful...

  • Page 33
    ...term investment products, which are liabilities. Investment Banking Group net interest income fell because of lower corporate lending volumes, as well as compressed spreads in the group's interest-rate-sensitive businesses associated with rising short-term interest rates that increased funding costs...

  • Page 34
    ...Growth in our equity trading business also contributed to the improvement in equity trading income. Foreign exchange revenues rose due to improved trading opportunities. The Market Risk section on page 62 provides further information on trading-related revenues. Trading-related revenues include net...

  • Page 35
    ...quality data. Looking forward, we expect the credit environment to remain strong in 2005, an outlook supported by low corporate default rates, low levels of impaired loan formations and an expectation of moderate to strong economic activity in North America. Accordingly, we expect the 2005 provision...

  • Page 36
    ... on page 27, the lower Canadian/U.S. dollar exchange rate reduced costs in 2004 by $177 million (-2.8%). Higher performance-based compensation costs, associated with BMO's 29% increase in net income, increased expenses by $90 million (1.4%), and higher pension costs increased expenses by $30 million...

  • Page 37
    ...254 million. Refer to the Consolidated Statement of Changes in Shareholders' Equity on page 85 of the financial statements for further details. Table 8 on page 73 details the $1,717 million of total government levies and taxes incurred by BMO in 2004. MD&A 33 BMO Financial Group Annual Report 2004

  • Page 38
    ... offset by the lower exchange rate. Canadian growth was primarily in the personal banking segment, where retail deposits, card services and residential mortgages were particularly strong. Private Client Group revenue rose on improving market fundamentals and stronger performance in direct and full...

  • Page 39
    ..., Net Income and Average Assets by Operating Group and by Location ($ millions, except as noted) Personal and Commercial Client Group For the year ended October 31 Private Client Group Investment Banking Group Corporate Support, including Technology and Solutions Total Consolidated 2004 2003...

  • Page 40
    ... that place greater demands on our resources. Key Performance Drivers Deposit growth Loan growth* Cash productivity ratio Revenue growth *Includes acceptances and securitized loans (%) 2004 2003 2002 9.1 7.0 60.1 1.5 8.1 6.7 61.0 7.1 21.4 7.6 62.3 2.6 36 BMO Financial Group Annual Report 2004

  • Page 41
    ...term life and commercial loan life insurance. • A new Canadian Tire® 9 Commercial MasterCard for commercial customers. • Our Homeowner ReadiLine personal line of credit that provides customers with easier access to credit. • The attractiveness of our personal banking and credit card offerings...

  • Page 42
    ... increasing operational efficiency and optimizing our sales effectiveness. Our Lines of Business Chicagoland Banking offers a full range of consumer loan and deposit products, including deposit and investment services, mortgages, consumer credit, business lending, cash management and other services...

  • Page 43
    ... high-growth markets. We are targeting 192 locations by the end of fiscal 2005, with a goal of 200 branches in Chicago by 2007. • Provide more seamless customer service and achieve cost efficiencies through the consolidation of our bank charter structure. BMO Financial Group Annual Report 2004...

  • Page 44
    ...% of total Personal and Commercial Client Group net income for the year, compared with 10% for fiscal 2003. BMO's corporate banking operations in the United States are concentrated among mid-market corporate clients, which BMO manages and reports in our Investment Banking Group operations because of...

  • Page 45
    ... acquisition and new branch opening costs were partially offset by the effects of the lower exchange rate. The group's productivity ratio improved 100 basis points to 62.8%; however, excluding the card fees adjustment, the productivity ratio improved 190 bps. BMO Financial Group Annual Report 2004...

  • Page 46
    ...term investor. We work with our partners in BMO Financial Group to enhance overall client relationships. Strengths • Award-winning product offerings and industry-recognized leadership in client service. • Strategic foothold in selected high-growth wealth markets in the United States. • Access...

  • Page 47
    .../U.S. dollar exchange rate. Productivity improved sharply in 2004 and 2003. Net income reached record levels in 2004. Market share increased each year. 2004 Objectives and Achievements Pursue opportunities that focus on deepening client relationships and building momentum in the high-growth...

  • Page 48
    ... affected the net interest margin earned in term investment products, resulted in a decline in net interest income. The lower Canadian/U.S. dollar exchange rate reduced revenue growth by $48 million, particularly in the group's direct investing and global private banking businesses. Non-interest...

  • Page 49
    ... to corporate clients. • Improving our brand recognition outside the U.S. Midwest market. • Rising interest rates, the strengthening Canadian dollar and high crude oil prices negatively affecting economic growth. Key Performance Drivers Equity value block trading ranking Equity research ranking...

  • Page 50
    ... Nesbitt, providing an enhanced integrated service offering. • Leveraged the cross-border capabilities of BMO Nesbitt Burns and Harris Nesbitt in all product areas to deliver unique, effective solutions to clients. • Expansion of the U.S. Securitization team with the addition of a team of term...

  • Page 51
    ... lower Canadian/U.S. dollar exchange rate. The group's productivity ratio improved by 100 basis points to 50.5%, as revenue growth exceeded expense growth. Net income from U.S. operations represented 40% of IBG's net income in 2004, consistent with a year ago. Our U.S. investment banking operations...

  • Page 52
    ... Support, including Technology and Solutions MD&A Technology and Solutions Group Description Technology and Solutions (T&S) manages and maintains information technology, processing, real estate and sourcing for BMO Financial Group. We provide governance in these four areas, focusing on enterprise...

  • Page 53
    ... Group Description Corporate Support includes the corporate units that provide expertise and governance support to BMO Financial Group in areas such as strategic planning, law, finance, internal audit, risk management, corporate communications, economics, human resources and learning. Our operating...

  • Page 54
    ... $4.1 billion. The decrease reflects the reduction in cash resources and securities. Further details on the composition of deposits are provided in Note 14 on page 105 of the financial statements and in the Liquidity and Funding Risk section on page 64. 50 BMO Financial Group Annual Report 2004

  • Page 55
    ... regulatory ratios; supports our internal assessments of required capital; results in targeted credit ratings; funds our selected operating group business strategies; and builds long-term shareholder value. Our approach includes establishing limits, goals and performance measures for management of...

  • Page 56
    ... the risk management models and systems to calculate regulatory capital, we will review our process for assessing overall capital adequacy in relation to our risk profile. This assessment will be subject to review by OSFI. 52 BMO Financial Group Annual Report 2004 Tier 1 Capital ($ millions) 2004...

  • Page 57
    ... assets. We earn fees for providing structuring advice related to the securitizations as well as administrative fees for supporting the ongoing operations of the vehicles. For the year ended October 31, 2004, these fees were approximately $96 million. MD&A 53 BMO Financial Group Annual Report 2004

  • Page 58
    ... 58 to 67 of this MD&A Further information on how we determine the fair value of financial instruments is included in the Financial Instruments Measured at Fair Value discussion in the Critical Accounting Estimates section on the next page of the MD&A. 54 BMO Financial Group Annual Report 2004

  • Page 59
    ... purchase price recorded in our Consolidated Balance Sheet. Additional information concerning accounting for securitizations, including sensitivity analysis for key assumptions, is included in Note 7 on page 95 of the financial statements. Pensions and Other Employee Future Benefits Our pensions...

  • Page 60
    ...exceeded fair value for 12 months or more. Additional information regarding our accounting for investment securities is included in Note 3 on page 88 of the financial statements. Income Taxes The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in...

  • Page 61
    ... recorded in net income. The ultimate impact of this change depends on future changes in fair value and cannot be determined at this time. The carrying amount of investments subject to this accounting change was approximately $550 million as at October 31, 2004. BMO Financial Group Annual Report...

  • Page 62
    ...-taking activities. Risk limits, which define BMO's risk appetite, are reviewed and approved annually by Risk Review Committee for: • credit and counterparty risk - limits on country, industry, portfolio products/segments, group and single name exposures; • market risk - limits on Market Value...

  • Page 63
    ... 31, 2004 Credit 38% Market 24% Operational 22% Business 16% IBG 49% P&C 39% PCG 8% Corp 4% Credit risk is the largest contributor to CaR. CaR by operating group was relatively unchanged in 2004, with Investment Banking Group having the largest CaR. BMO Financial Group Annual Report 2004 59

  • Page 64
    ... environment. Application characteristics and past performance are used to predict the credit performance risk of new accounts. Past performance is used to identify likely future behaviour of existing accounts for ongoing credit risk management purposes. BMO utilizes an enterprise-wide risk rating...

  • Page 65
    ... the book value and the market value or realizable value of loans, if default occurs; and • effects of economic and industry cycles on asset quality and loan values. Credit derivative products are increasingly important tools used to enhance the management of BMO's portfolio of credit risk assets...

  • Page 66
    ... ended October 31, 2004 (Pre-tax Canadian equivalent) Year-end Average ($ millions)* High Low Commodity VaR Equity VaR Foreign exchange VaR Interest rate VaR (mark-to-market) Correlation effect Comprehensive VaR Interest rate VaR (accrual) Credit spread VaR Total VaR *One-day measure using a 99...

  • Page 67
    ... by purchasing options or through a dynamic hedging process. Structural foreign exchange risk arises primarily from translation risk associated with the net investment in our U.S. operations, and from transaction risk associated with our U.S. dollar net income. Translation risk is managed by funding...

  • Page 68
    ... and U.S. deposits with other banks in response to expectations of rising interest rates. Cash and securities totalled $68.5 billion at the end of the year, down from $74.7 billion in 2003, while total assets increased $8.7 billion to $265.2 billion. 64 BMO Financial Group Annual Report 2004

  • Page 69
    ...processes and control programs. To ensure that all operational risks to which a line of business is exposed are adequately managed, specialized functions such as Finance, Taxation, Legal, Compliance, Privacy, Human Resources and Systems and Information Management are also involved in the measurement...

  • Page 70
    ... to work with government, industry and all relevant constituencies to support environmental issues. We are committed to open dialogue with all relevant constituencies including governments, customers, employees, shareholders and the public at large. 66 BMO Financial Group Annual Report 2004

  • Page 71
    ... benefited from more activity in capital markets and higher equity valuations, and higher earnings in Personal and Commercial Client Group related to higher volumes. Improved results in Corporate Support were largely due to lower provisions for credit losses. BMO Financial Group Annual Report 2004...

  • Page 72
    .../U.S. dollar exchange rate. Higher mutual fund revenues, lending fees and investment securities gains were offset by lower trading and securitization revenue and lower card fees due to higher reward redemption rates. Non-interest revenue declined $61 million in Corporate Support, primarily related...

  • Page 73
    ...Investment Banking Group Corporate Support, including T&S BMO Financial Group net income Information per Common Share ($) Dividends declared Earnings Basic Diluted Cash earnings Basic Diluted Book value Market price High Low Close Financial Measures (%) (1) Five-year average annual total shareholder...

  • Page 74
    ... annual return One-year return Common Share Information Number outstanding (in thousands) End of period Average basic Average diluted Number of shareholder accounts Book value per share ($) Total market value of shares ($ billions) Price-to-earnings multiple (based on diluted EPS) Price-to-cash...

  • Page 75
    ... As at October 31 2004 2003 2002 2001 2000 Canadian Dollar Liquid Assets Deposits with other banks Other cash resources Securities Total Canadian dollar liquid assets U.S. Dollar and Other Currencies Liquid Assets Deposits with other banks Other cash resources Securities Total U.S. dollar and other...

  • Page 76
    ...and payment service charges Trading revenues Lending fees Card fees Investment management and custodial fees Mutual fund revenues Securitization revenues Underwriting and advisory fees Investment securities gains (losses) Foreign exchange, other than trading Insurance income Other revenues Total non...

  • Page 77
    ... Performance-based compensation Employee benefits Total employee compensation Premises and equipment Rental of real estate Premises, furniture and fixtures Property taxes Computers and equipment Total premises and equipment Other expenses Communications Business and capital taxes Professional fees...

  • Page 78
    ... and other personal Credit cards Businesses and governments (1) Total loans Other non-interest bearing assets Total U.S. dollar and other currencies Total All Currencies Total assets and interest income Liabilities Canadian Dollar Deposits Banks Businesses and governments Individuals Total deposits...

  • Page 79
    ...31 Assets Canadian Dollar Deposits with other banks Securities Loans Residential mortgages Non-residential mortgages Consumer instalment and other personal Credit cards Businesses and governments Total loans Other non-interest bearing assets Change in Canadian dollar interest income U.S. Dollar and...

  • Page 80
    ..., commercial and corporate categories are stated net of specific allowances only. (4) Loans and acceptances returning to performing status, sales and repayments. (5) Excludes ACL for off-balance sheet exposure of $6 million in 2003. NA - not available 76 BMO Financial Group Annual Report 2004

  • Page 81
    ...07) Net Impaired Commercial and Corporate Loans (2) Commercial mortgages Commercial real estate Construction (non-real estate) Retail trade Wholesale trade Agriculture Communications Manufacturing Mining Oil and gas Transportation Utilities Forest products Service industries Financial institutions...

  • Page 82
    ....7 63.6 50.0 31.6 57.5 100.0 34.8 34.0 na 44.3 na 24.6 na 68.5 na 59.2 na 34.0 44.3 24.6 68.5 59.2 (1) There are no impaired securities purchased under resale agreements and no related allowances. NA - not available na - not applicable 78 BMO Financial Group Annual Report 2004

  • Page 83
    ... real estate Construction (non-real estate) Retail trade Wholesale trade Agriculture Communications Manufacturing Mining Oil and gas Transportation Utilities Forest products Service industries Financial institutions Other Total specific allowance for credit losses on commercial and corporate loans...

  • Page 84
    ... % 2004 Riskweighted balance 2003 Riskweighted balance Balance Balance sheet items Cash resources Securities Mortgages Other loans and acceptances Other assets Total balance sheet items Off-balance sheet items Guarantees and standby letters of credit Securities lending Documentary and commercial...

  • Page 85
    ... 1,924 1,745 5,638 - - 77,145 - 77,145 2,395 1,182 175,190 1,745 180,512 (1) Includes fixed maturity deposits of $17.7 billion that are redeemable at the customers' option under certain conditions. (2) Represents Innovative Tier 1 capital instruments. BMO Financial Group Annual Report 2004 81

  • Page 86
    ... system of internal control and conduct their work to the extent that they consider appropriate. The Board of Directors, based on recommendations from its Audit and Conduct Review Committees and its Risk Review Committee, reviews and approves the financial information contained in the Annual Report...

  • Page 87
    ... are an integral part of these statements. Certain comparative figures have been reclassified to conform with the current year's presentation. $ 265,194 F. Anthony Comper President and Chief Executive Officer Jeremy H. Reitman Chairman, Audit Committee BMO Financial Group Annual Report 2004 83

  • Page 88
    ... 3,735 Net Interest Income Provision for credit losses (Note 4) Net Interest Income After Provision for Credit Losses Non-Interest Revenue Securities commissions and fees Deposit and payment service charges Trading revenues Lending fees Card fees Investment management and custodial fees Mutual fund...

  • Page 89
    ... Balance at End of Year Total Shareholders' Equity The accompanying notes to consolidated financial statements are an integral part of these statements. Certain comparative figures have been reclassified to conform with the current year's presentation. BMO Financial Group Annual Report 2004 85

  • Page 90
    ... Net income Adjustments to determine net cash flows provided by (used in) operating activities Write-down of investment securities Net gain on sale of investment securities Net increase in trading securities Provision for credit losses Gain on sale of securitized loans Change in derivative financial...

  • Page 91
    ... Risk Share Capital Employee Compensation - Stock-Based Compensation Employee Compensation - Employee Future Benefits Income Taxes Earnings Per Share Operating and Geographic Segmentation Related Party Transactions Contingent Liabilities Fair Value of Financial Instruments Reconciliation of Canadian...

  • Page 92
    ... are initially recorded at cost. This amount is adjusted for dividends and our proportionate share of the corporation's net income or loss from the date of acquisition, and is recorded in our Consolidated Statement of Income in interest, dividend and fee income. Investment securities are reviewed at...

  • Page 93
    ... issuers. Management has determined that the unrealized losses are temporary in nature. Trading securities are securities that we purchase for resale over a short period of time. We report these securities at their market value and record the mark-to-market adjustments and any gains (Canadian $ in...

  • Page 94
    ...) (322) $ $ $ $ $ (146) $ 10 $ 1,711 $ 1,625 $ 1,480 (1) Included in write-downs for the years ended October 31, 2004, 2003 and 2002 were nil, nil and $103 million, respectively, related to our equity investments in collateralized bond obligations. 90 BMO Financial Group Annual Report 2004

  • Page 95
    ... Provision for Credit Losses Changes in the value of our loan portfolio due to credit-related losses or recoveries of amounts previously provided for/written-off are included in the provision for credit losses in our Consolidated Statement of Income. Notes 91 BMO Financial Group Annual Report 2004

  • Page 96
    ... 2004 Net amount 2003 Residential mortgages Credit card, consumer instalment and other personal loans Business and government loans Securities purchased under resale agreements Subtotal Customers' liability under acceptances Total By geographic region (1): Canada United States Other countries Total...

  • Page 97
    ... the Superintendent of Financial Institutions Canada. The risk-weighted equivalent value is used in the ongoing assessment of our capital adequacy ratios. Notes Credit Instruments Standby letters of credit and guarantees Securities lending Documentary and commercial letters of credit Commitments to...

  • Page 98
    ..., 2004 or 2003 related to these indemnifications. Credit Enhancement Credit enhancement protects investors in asset-backed commercial paper in the event that the assets' cash flows are insufficient to retire its commercial paper notes upon maturity. The amount and type of credit enhancement support...

  • Page 99
    ... Consumer instalment and other personal loans 2004 2003 (Canadian $ in millions) Credit card loans 2004 2003 2004 Total 2003 Retained interests Investment in securitization vehicles Deferred purchase price Cash deposits with securitization vehicles Servicing liability $ - 134 12 34 $ - 102...

  • Page 100
    ... (Canadian $ in millions) Total loans Impaired loans 2004 Net write-offs (1) Total loans Impaired loans 2003 Net write-offs (1) Residential mortgages Consumer instalment and other personal loans Credit card loans Business and government loans Securities purchased under resale agreements Total loans...

  • Page 101
    ...associated with these instruments arise from the possible inability of over-the-counter counterparties to meet the terms of the contracts and from movements in commodities prices, securities values, interest rates and foreign exchange rates, as applicable. BMO Financial Group Annual Report 2004 97

  • Page 102
    ... Statement of Income. A portion of the income derived from marking derivatives to market reflects credit, model and liquidity risks, as well as administrative costs. An estimate of this amount is deferred and recognized in trading revenues over the term of the derivative contract. Unrealized...

  • Page 103
    ... Sheet are as follows: (Canadian $ in millions) 2004 Assets 2003 2004 Liabilities 2003 Fair value of trading derivatives Book value of hedging derivatives Total $ 24,914 534 $ 25,448 $ 20,878 338 $ 21,216 $ 23,741 232 $ 23,973 $ 20,375 340 $ 20,715 BMO Financial Group Annual Report 2004 99

  • Page 104
    ... million as at October 31, 2004 ($48 million in 2003) related to the Managed Futures Certificates of Deposit Program. Risk exposures represented by the assets in this program are traded on behalf of customers, with all gains and losses accruing to them. 100 BMO Financial Group Annual Report 2004

  • Page 105
    ...no potential for credit exposure as they are settled net with each exchange. (Canadian $ in millions) Terms used in the credit risk table below are as follows: Replacement cost represents the cost of replacing all contracts that have a positive fair value, using current market rates. It represents...

  • Page 106
    ... the replacement cost of contracts from customers in the following industries: (Canadian $ in millions) Interest rate contracts 2004 2003 Foreign exchange contracts 2004 2003 Commodity contracts 2004 2003 2004 Equity contracts 2003 2004 Credit contracts 2003 Financial institutions Other Total $ 11...

  • Page 107
    ... provider of customized investment and wealth management services to high net worth individuals and families, for total cash consideration of $61 million. The results of myCFO, Inc.'s operations have been included in our consolidated financial statements since that date. The acquisition of myCFO...

  • Page 108
    ...31, 2004 and 2003 is as follows: Personal and Commercial Client Group Retail and Commercial Banking Retail Investment Products Private Client Group Investment Banking Group (Canadian $ in millions) Other Total Client Investing Private Banking Total Investment Banking Technology and Solutions...

  • Page 109
    ...of these obligations are recorded in interest, dividend and fee income - securities, in our Consolidated Statement of Income. Securities Sold under Repurchase Agreements Securities sold under repurchase agreements represent short-term funding transactions where we sell securities that we already own...

  • Page 110
    .... Our estimate of the number of points to be redeemed is based on many factors, including a review of past behaviour of cardholders and future expected growth. The costs of our loyalty program are recorded as a reduction in card fees in the Consolidated Statement of Income. The liability is included...

  • Page 111
    ... at different points in time, we are exposed to interest rate risk. Canadian Dollar Assets Cash resources Securities Securities purchased under resale agreements Loans Other assets Total assets Liabilities and Shareholders' Equity Deposits Securities sold but not yet purchased Securities sold under...

  • Page 112
    ...other short-term market rates are reported in the zero to three months category. Note 18 Share Capital Outstanding (Canadian $ in millions, except as noted) 2004 Dividends declared per share Fixed rate and non-interest bearing assets with no defined maturity are reported based upon expected account...

  • Page 113
    ...closing prices of the Bank's common shares on the Toronto Stock Exchange based on the last five trading days prior to the last business day of the month or purchased Note 19 Employee Compensation - Stock-Based Compensation Stock Option Plan We maintain a Stock Option Plan for designated officers and...

  • Page 114
    ...per share if we had always recorded stock option expense based on the fair value of all of our outstanding stock options on their grant date is as follows: (Canadian $ in millions, except as noted) 2004 2003 2002 Stock option expense included in employee compensation expense Net income, as reported...

  • Page 115
    ... real rate of return over the long term, while limiting performance volatility. We also have a retirement compensation arrangement that partially funds supplemental pension benefits in Canada. However, pension payments related to this plan are paid directly by the Bank. Retirement benefits for...

  • Page 116
    ... of the benefit liability Expected return on plan assets Annual benefit expense Canada and Quebec pension plan expense Defined contribution expense Total annual pension and other employee future benefit expenses recognized in the Consolidated Statement of Income The impact on annual benefits expense...

  • Page 117
    ... exchange Benefit liability at end of year Weighted-average assumptions used to determine benefit liability Discount rate at end of year Rate of compensation increase Assumed overall health care cost trend rate Fair value of plan assets Fair value of plan assets at beginning of year Actual return...

  • Page 118
    ... Premises and equipment Pensions Intangible assets Other Total future income tax liabilities Net future income tax asset (liability) $ 431 184 148 111 874 (316) (410) (112) (47) (885) $ (11) $ 500 159 148 136 943 (307) (360) (80) (50) (797) $ 146 114 BMO Financial Group Annual Report 2004

  • Page 119
    ... $ 2,351 (76) $ 1,825 (82) $ 1,743 496,208 $ 3.51 $ 1,417 (79) $ 1,338 490,816 $ 2.73 Net income available to common shareholders $ 2,275 Average number of common shares outstanding (in thousands) (Canadian $) 501,656 $ 4.53 Basic earnings per share BMO Financial Group Annual Report 2004 115

  • Page 120
    ... includes Technology and Solutions ("T&S") and the Corporate units that provide expertise and governance support in areas such as strategic planning, law, finance, internal audit, risk management, corporate communications, economics, corporate marketing, human resources and learning. Operating...

  • Page 121
    ...049 $ 5,453 $ 136,451 $ 4,037 $ 247,990 $ 247,990 $ 152,612 $ 79,107 $ 16,271 (1) Corporate Support includes Technology and Solutions. Prior years are restated to give effect to the current year's organization structure and presentation changes. BMO Financial Group Annual Report 2004 117

  • Page 122
    ... Statements Note 24 Related Party Transactions We provide banking services to our joint ventures and equityaccounted investees on the same terms that we offer to our customers. Effective September 1, 1999, new loans and mortgages to executive officers were no longer available at preferred rates...

  • Page 123
    ... to fair value are made for early redemptions based on client behaviour history. â- For deposits with no defined maturities, we consider fair value to equal book value based on book value being equivalent to the amount payable on the reporting date. BMO Financial Group Annual Report 2004 119

  • Page 124
    ... value Fair value of hedging derivatives (1) 2003 Fair value over (under) book value Book value Fair value Book value Fair value Assets Cash resources Securities Loans and customers' liability under acceptances, net of the allowance for credit losses Derivative financial instruments - trading...

  • Page 125
    ...November 1, 2003 these fees were deferred and amortized to income over the average remaining term of the related mortgages under Canadian GAAP. Effective November 1, 2003, we adopted a new Canadian accounting standard on sources of GAAP that eliminated this BMO Financial Group Annual Report 2004 121

  • Page 126
    ... market rates. Under Canadian GAAP, prior to November 1, 2000, pension benefits were recorded in our Consolidated Statement of Income in the period services were provided by our employees, with the corresponding obligation valued using management's best estimate of the long-term rate of return...

  • Page 127
    ...S.A. BMO Service Inc. Bank of Montreal Ireland plc Bank of Montreal Mortgage Corporation BMO Capital Corporation BMO Investments Inc. BMO InvestorLine Inc. BMO Ireland Finance Company BMO Life Insurance Company BMO Nesbitt Burns Equity Partners Inc. BMO Trust Company Guardian Group of Funds Ltd. BMO...

  • Page 128
    ... objective of enhancing shareholder value. Among its many specific duties, the Board approves strategic plans and objectives, provides advice and counsel to the Chief Executive Officer (CEO), oversees the ethical, legal and social conduct of the organization, and reviews BMO's financial performance...

  • Page 129
    ... to maintaining and building upon our reputation as a leader in corporate governance practices, recognizing that the interests of shareholders and our business are advanced by a commitment to sound principles of corporate governance. BMO Financial Group Annual Report 2004 125 Corporate Governance

  • Page 130
    ... Officer BMO Financial Group Ronald H. Farmer Markham, Ontario Managing Director Mosaic Capital Partners Toronto David A. Galloway Toronto, Ontario Chairman of the Board Bank of Montreal Eva Lee Kwok Vancouver, British Columbia Chair and Chief Executive Officer Amara International Investment Corp...

  • Page 131
    ... Operating Officer BMO Nesbitt Burns Ellen M. Costello Vice-Chair, Harris Nesbitt New York and Head Securitization and Credit Investment Management David R. Hyma Vice-Chair, BMO Nesbitt Burns and Head, Capital Markets Marnie J. Kinsley Executive Managing Director and Co-Head Cash Management Services...

  • Page 132
    ... by management to fully provide for impairment in loans and acceptances and other credit instruments, given the composition of the portfolios, the probability of default, the economic environment and the allowance for credit losses already established. 128 BMO Financial Group Annual Report 2004

  • Page 133
    ...Toronto, Ontario M5X 1A1, or visit our web site at www.bmo.com. (On peut obtenir sur demande un exemplaire en français.) Type: Moveable Inc. Market for Securities of Bank of Montreal The common shares of Bank of Montreal are listed on the Toronto and New York stock exchanges. The preferred shares...

  • Page 134
    ...our Notice of Annual Meeting of Shareholders and Proxy Circular. Filings are accessible on the Canadian Securities Administrators' web site at www.sedar.com, and on the EDGAR section of the SEC's web site at www.sec.gov. Corporate Information This BMO Financial Group 2004 Annual Report is available...